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, 1997
Commission file number: 0-20824
COMPUTER OUTSOURCING SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3252333
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
360 West 31st Street New York, New York 10001
(Address of principal executive offices)
(212) 564-3730
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 3,789,850 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of June 11, 1997.
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
April October
31, 1997 31, 1996
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including
short-term, interest bearing invest-
ments of $781,801 and $316,346 ............ $ 794,719 $ 1,083,545
Trade accounts receivable, net of allowance
for doubtful accounts of $361,145 and
$305,874 .................................. 3,960,882 3,716,343
Refundable income taxes ..................... 45,204 62,988
Prepaid expenses ............................ 844,841 699,005
Other current assets ........................ 170,058 125,850
---------- ----------
5,815,704 5,687,731
---------- ----------
PROPERTY and EQUIPMENT, net ................... 2,983,314 3,132,847
---------- ----------
OTHER ASSETS:
Deferred software costs, net ................ 2,191,108 1,912,505
Intangibles, net ............................ 7,807,277 7,764,535
Due from related parties, net ............... 96,066 106,472
Security deposits and other non-current
assets .................................... 453,074 705,307
---------- ----------
10,547,525 10,488,819
---------- ----------
TOTAL ASSETS .................................. $ 19,346,543 $ 19,309,397
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 2 of 14
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
April October
31, 1997 31, 1996
------------- -------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................ $ 1,693,179 $ 1,535,816
Current portion of long-term debt ........... 878,291 1,054,352
Current portion of capitalized lease
obligations ............................... 198,627 195,979
Accrued expenses and taxes .................. 1,831,535 1,757,355
Customer deposits and other current
liabilities ............................... 223,603 282,075
---------- ----------
4,825,235 4,825,577
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt .............................. 1,258,621 1,629,234
Capitalized lease obligations ............... 243,079 284,775
Deferred income taxes ....................... 880,322 837,219
Stock option obligation ..................... - 133,146
---------- ----------
2,382,022 2,884,374
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000
shares authorized, none issued ............ - -
Common stock, $0.01 par value; 7,000,000
shares authorized; shares issued and out-
standing, 3,789,848 and 3,734,848.......... 37,898 37,348
Additional paid-in capital .................. 9,445,669 9,233,952
Retained earnings ........................... 2,673,285 2,363,278
Deferred costs arising from a financing
and consulting agreement .................. (17,566) (35,132)
---------- ----------
12,139,286 11,599,446
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 19,346,543 $ 19,309,397
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 3 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
April 30, April 30,
1997 1996 1997 1996
-------------------------- --------------------------
REVENUES ........... $ 16,171,062 $ 14,317,091 $ 7,988,961 $ 7,209,976
---------- ---------- ---------- ----------
COSTS and EXPENSES:
Data processing
costs .......... 10,749,481 8,833,068 5,357,301 4,462,754
Selling and
promotion costs 1,328,559 1,356,594 676,458 647,019
General and
administrative
expenses ....... 3,400,972 3,635,788 1,597,753 1,807,902
Interest expense,
net of interest
income ......... 142,049 181,245 67,935 87,319
---------- ---------- ---------- ----------
15,621,061 14,006,695 7,699,447 7,004,994
---------- ---------- ---------- ----------
INCOME BEFORE
PROVISION FOR
INCOME TAXES ..... 550,001 310,396 289,514 204,982
PROVISION FOR INCOME
TAXES ............ 220,400 153,985 106,400 94,593
---------- ---------- ---------- ----------
NET INCOME ......... $ 329,601 $ 156,411 $ 183,114 $ 110,389
========== ========== ========== ==========
INCOME PER COMMON
SHARE AND SHARE
EQUIVALENTS ...... $ 0.08 $ 0.04 $ 0.04 $ 0.03
========== ========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES AND SHARE
EQUIVALENTS
OUTSTANDING ...... 3,895,610 3,775,917 3,937,936 3,791,192
========== ========== ========== ==========
See Notes to Consolidated Interim Financial Statements
Page 4 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended April 30,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................... $ 329,601 $ 156,411
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ............... 1,123,178 964,390
Deferred income taxes ....................... 43,103 81,191
Decrease/(increase) in:
Trade accounts receivable ................. (269,734) 42,387
Refundable taxes .......................... 17,784 34,062
Prepaid expenses .......................... (145,836) (166,720)
Other current assets ...................... (44,208) 84,435
Security deposits and other noncurrent
assets .................................. 36,410 47,703
Increase/(decrease) in:
Accounts payable .......................... 157,363 393,056
Accrued expenses and taxes ................ 97,574 (385,715)
Customer deposits and other current
liabilities ............................. (58,472) (15,222)
---------- ----------
Net cash provided by operating activities ... 1,286,763 1,235,978
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......... (300,673) (359,569)
Disposal of equipment ....................... 2,074 60,993
Settlement of contingencies relating to
acquisitions ............................. (39,425) (90,539)
Increase in deferred software costs ......... (489,138) (503,213)
----------- -----------
Net cash used in investing activities ....... $ (827,162) $ (892,328)
----------- -----------
Continued on Next Page
See Notes to Consolidated Interim Financial Statements
Page 5 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Continued)
Six Months Ended April 30,
1997 1996
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................. $ (635,373) $ (808,479)
Proceeds from issuance of long-term debt .... - 227,255
Repayments of amounts by related
parties, net .............................. 10,406 14,335
Repayments of capital leases ................ (123,460) (99,063)
----------- -----------
Net cash used in financing activities ....... (748,427) (665,952)
----------- -----------
Net decrease in cash and cash equivalents ... (288,826) (322,302)
Cash and cash equivalents at the beginning
of the period.............................. 1,083,545 1,406,016
---------- ----------
Cash and cash equivalents at the end of the
period..................................... $ 794,719 $ 1,083,714
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................. $ 173,444 $ 216,572
========== ==========
Income taxes .............................. $ 51,215 $ 1,356
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
New capitalized leases for data processing
equipment ................................. $ 90,612 $ 135,202
========== ==========
For the six months ended April 30, 1997 and 1996, $19,594 and $23,406 (net
of tax benefits), respectively, were accreted through a charge to retained
earnings in connection with a stock option.
See Notes to Consolidated Interim Financial Statements
Page 6 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED APRIL 30, 1997
(Unaudited)
Deferred
Costs in
Connection
with a
Financing/
Common Par Paid in Retained Consulting
Shares Value Capital Earnings Agreement Total
------------------------------------------------------------------
Balances,
October 31,
1996 ..... 3,734,848 $37,348 $9,233,952 $2,363,278 $(35,132) $11,599,446
Common Stock
issued in
connection
with a
covenant
not to
compete .. 15,000 150 54,225 54,375
Exercises
of stock
option ... 40,000 400 157,492 157,892
Amortization
of
deferred
costs in
connection
with a
financing
and
consulting
agreement 17,566 17,566
Accretion in
connection
with stock
option
obligation,
net ...... (19,564) (19,564)
Net income . 329,601 329,601
------------------------------------------------------------------
Balances,
April 30,
1997 ..... 3,789,848 $37,898 $9,445,669 $2,673,285 $(17,566) $12,139,286
==================================================================
See Notes to Consolidated Interim Financial Statements
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 April 30, 1997, and the Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the six
month periods ended April 30, 1997 and 1996, have been prepared by the Company
without audit. In the opinion of management, all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows for the periods indicated have
been made.
The results of operations for the periods ended April 30, 1997 and 1996 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 financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1996.
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. DEBT
At April 30, 1997, the Company was indebted to a bank for three term loans
under a Term Loan Agreement ("Agreement") originally aggregating $2,620,000.
The proceeds of these loans were used for acquisitions. The Agreement
provides for monthly principal and interest payments in varying amounts
through May 2000, with interest computed at the bank's prime rate. As last
amended on March 20, 1997, the term loans bear interest, at the Company's
option, at either the Adjusted Eurodollar Rate (as defined) plus 2.25%, or
the bank's prime rate. An aggregate of $1,212,087 was outstanding at
April 30, 1997 under this facility. Substantially all of the assets of the
Company are pledged as collateral for this indebtedness.
In March 1997, the Company and the bank entered into an additional agreement
for a line of credit whereby the Company may borrow up to an additional
$1,500,000. Interest on these borrowings, when made, may be at either of the
rates discussed above. No amounts were owing on this line at April 30, 1997.
The line of credit expires on April 30, 1998.
3. ACQUISITION OF CUSTOMER LIST
Effective as of March 1997, the Company acquired the customer list and certain
fixed assets from a client for whom the Company had been performing processing
services. Consideration of $346,742 was given, consisting primarily of the
forgiveness of approximately $240,500 of long-term notes receivable from the
Page 8 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
3. ACQUISITION OF CUSTOMER LIST (Continued)
client and cash payments of $2,800 per month for 36 months. The processing
agreement between the Company and the client was terminated
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 these options been determined using the
Black-Scholes option-pricing model described in FASB Statement 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 record aggregate compensation expense of
approximately $155,331 which would be expensed over the options' vesting period
as follows:
Fiscal Years Ended
October 31,
------------------
1997 $69,474
1998 33,802
1999 33,802
2000 9,126
2001 9,127
--------
$155,331
========
The assumptions used in the option-pricing model include a risk-free interest
rate of 6.5%, expected lives of three to five years, and expected volatility of
45%. The pro forma impact of following the provisions of FASB Statement 123 on
the Company's net income and net income per share would be as follows:
Six Months Ended
April 30, 1997
----------------
Net income - as reorted $329,601
========
- pro forma $314,435
========
Net income per common share - as reported $0.08
=====
- pro forma $0.08
=====
Net income per common share has been calculated using the weighted average
number of shares of common stock outstanding during the period.
Page 9 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, SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1996
During the period ended April 30, 1997, revenues increased $1,854,000 to
$16,171,000, an increase of 13% over the period ended April 30, 1996. The
Company's Information Processing Division recorded a revenue increase of
$1,137,000 and the Pay USA Division recorded an increase of $717,000, primarily
due to contracts entered into in the prior fiscal year.
Data processing costs increased $1,916,000 to $10,749,000 (66% of revenues)
during the current period compared to $8,833,000 (62% of revenues) in the prior
year's period. The Information Processing Division's data processing costs
increased $1,530,000 to $8,232,000, compared to $6,702,000 in the prior period.
The increase as a percentage of revenues is attributable to the mix of services
provided in the current period compared to the prior year's period. The
Pay USA's data processing costs increased $386,000 to $2,517,000. The Company
continued the process of standardizing the Pay USA Division into one processing
system and consolidating the computer operations of the Information Processing
Division. Until the total integration of operations is completed, including
payroll system standardization, the Company will continue to experience higher
costs due to the cost of the conversion effort and the duplication of
facilities and personnel.
Selling and promotion costs decreased $28,000 to $1,329,000, a decrease of 1%
as a percentage of revenues. A decrease of $182,000 in the Information
Processing Division was partially offset by an increase of $154,000 in the Pay
USA division. The decrease as a percentage of revenues resulted from the
consolidation of the sales and marketing efforts in each of the divisions.
General and administrative expenses decreased $235,000 to $3,401,000 in the
current period, a decrease of 4% as a percentage of revenues, as the Company
was successful in holding down administrative costs while growing its
businesses. Net interest expense decreased $39,000 to $142,000 in the current
period primarily as a result of a decreased level of outstanding debt.
For the period ended April 30, 1997, the provision for income taxes was
$220,000, an effective tax rate of 40%. For the comparable period of the
prior year, the provision for income taxes was $154,000, a 50% effective tax
rate. The decrease in the effective tax rate is the result of the amortization
of nondeductible goodwill having less of an impact on a higher level of
earnings, coupled with the increased investment in high quality, low risk tax
exempt securities.
The Company recorded a profit of $330,000 ($0.08 per share) for the period
ended April 30, 1997 compared to a profit of $156,000 ($0.04 per share)
for the period ended April 30, 1996.
Page 10 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS, QUARTERS ENDED APRIL 30, 1997 AND 1996
During the quarter ended April 30, 1997, revenues increased $779,000 to
$7,989,000, an increase of 11% over the quarter ended April 30, 1996. The
Company's Information Processing Division recorded a revenue increase of
$417,000 and the Pay USA Division recorded an increase of $362,000.
Data processing costs increased $895,000 to $5,357,000 (67% of revenues) during
the current quarter compared to $4,463,000 (62% of revenues) in the prior
year's quarter. The Information Processing Division's data processing costs
increased $714,000 and the Pay USA division's data processing costs increased
$180,000. The increases in revenues and data processing costs were as a result
of factors noted in the six month discussion above.
Selling and promotion costs increased $29,000 to $676,000, a decrease, however,
of 1% as a percentage of revenues. An increase of $127,000 in the Pay USA
Division was partially offset by a decrease of $98,000 in the Information
Processing division, as that division undergoes a consolidation of its
marketing efforts.
General and administrative expenses decreased $210,000 to $1,598,000 in the
current quarter, a decrease of 5% as a percentage of revenues. Net interest
expense decreased $19,000 to $68,000 in the current quarter.
For the quarter ended April 30, 1997, the provision for income taxes was
$106,000, an effective tax rate of 37%. For the comparable quarter of the
prior year, the provision for income taxes was $95,000, a 46% effective tax
rate. The decreases in general and administrative expenses, net interest
expense, and the tax provision resulted from the same factors noted in the six
month discussion above.
The Company recorded a profit of $183,000 ($0.04 per share) for the quarter
ended April 30, 1997 compared to a profit of $110,000 ($0.03 per share)
for the quarter ended April 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended April 30, 1997, the Company provided $1,287,000
from operations principally by generating $1,496,000 in net income before
deductions for depreciation, amortization, and deferred taxes. The Company
invested $301,000 for the purchase of equipment and spent $489,000 for product
enhancements. In its financing activities, the Company used $759,000 to repay
long-term debt and capital leases. In the aggregate, the Company's investing
and financing activities used $1,575,000. As a result of these factors, the
Company's cash and cash equivalents decreased by $289,000.
As of April 30 1997, the Company had cash and cash equivalents of $795,000 and
working capital of $990,000. Its current ratio (i.e., the ratio of current
assets to current liabilities) was 1.21 to 1, and its debt to equity ratio was
0.59 to 1.
Page 11 of 14
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (Continued)
At April 30, 1997, the Company was indebted to a bank for three term loans
under a Term Loan Agreement ("Agreement") originally aggregating $2,620,000.
The proceeds of these loans were used for acquisitions. The Agreement provides
for monthly principal and interest payments in varying amounts through
May 2000, with interest computed at the bank's prime rate. As last amended on
March 20, 1997, the term loans bear interest, at the Company's option, at
either the Adjusted Eurodollar Rate (as defined) plus 2.25%, or the bank's
prime rate. An aggregate of $1,212,087 was outstanding at April 30, 1997
under this facility. Substantially all of the assets of the Company are
pledged as collateral for this indebtedness.
In March 1997, the Company and the bank entered into an additional agreement
for a line of credit whereby the Company may borrow up to an additional
$1,500,000. Interest on these borrowings, when made, may be at either of the
rates discussed above. No amounts were owing on this line at April 30, 1997.
The line of credit expires on April 30, 1998.
Management believes that its cash flow from operations and its available line
of credit will be sufficient to fund the Company's operations for at least the
coming year. The Company continues to seek acquisition opportunities that fit
the Company's long-term strategy. Any material acquisitions may require
funding in excess of the level of current and projected operating cash flows,
and would require additional debt and/or equity funding.
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:
10.1A Satisfaction of Security Agreement dated April 16, 1997
made to Datafast, Inc. by the Company.
10.1B Asset Purchase Agreement as of April 16, 1997 made
between Datafast, Inc. and the Company.
10.1C Termination Agreement as of April 25, 1997, made
between Datafast, Inc. and the Company.
10.1D Promissory Note dated as of March 1, 1997 made to
Datafast, Inc. by the Company.
(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, thereunto
duly authorized.
COMPUTER OUTSOURCING SERVICES, INC.
June 11, 1997 Zach Lonstein
Principal Executive Officer
June 11, 1997 Laurence L. Carpenter
Acting Principal Accounting Officer
Page 14 of 14
<PAGE>
SATISFACTION OF SECURITY AGREEMENT
----------------------------------
KNOW EVERYONE BY THESE PRESENTS, THAT
COMPUTER OUTSOURCING SERVICES, INC.,
having a principal place of business located at 360 West 31st Street, New York,
New York 10001 does hereby certify that the following Security Agreement IS
PAID and satisfied and does hereby consent that the same be discharged of
record.
SECURITY AGREEMENT dated December 4, 1992 made by DATAFAST, INC., with a
principal place of business located at 571A White Plains Road, Eastchester,
New York 10709 to COMPUTER OUTSOURCING SERVICES, INC., with a principal place
of business located at 360 West 31st Street, New York, New York 10001.
Said Security Agreement being in the principal amount of TWO HUNDRED THOUSAND
DOLLARS ($200,000.00) and which Security Agreement has not been assigned of
record.
Dated: New York, New York
March , 1997
COMPUTER OUTSOURCING SERVICES, INC.
By: Zach Lonstein/Chairman
--------------------------------
Name/Title
State of New York
County of New York
On the 16th day of April, 1997 before me personally came
to me known, who, being by me duly sworn, did depose and say that he resides at
and that he is the Chairman of COMPUTER OUTSOURCING SERVICES, INC.,
the corporation foregoing instrument; that he knows the foregoing instrument;
that he knows the seal of said corporation; that the seal corporate seal; that
it was so affixed that it was so affixed by order of the board of directors of
said corporation and that he signed his name thereto by like order.
- --------------------------------
Notary Public
Michael Carmody
Notary Public, State of New York
No. 02CA5024046
Qualified in Westchester County
Commission Expires Feb. 22, 1998
ASSET PURCHASE AGREEMENT
------------------------
This Agreement is entered into on this 16th day of April 1997
by and between DATAFAST, INC., a New York Corporation with a principal place of
business located at 571A White Plains Road, Eastchester, NY 10709 (hereinafter
referred to as "DFI") and COMPUTER OUTSOURCING SERVICES, INC., a New York
Corporation with a principal place of business located at 360 West 31st Street,
New York, NY 10001 (hereinafter referred to as "COSI").
WHEREAS, DFI and COSI are or were parties to that certain
Processing Agreement dated December 4, 1992, (The "Processing Agreement"); and
WHEREAS, pursuant to the Processing Agreement, DFI relocated to
COSI its data processing operations to COSI's offices and facilities located at
360 West 31st Street, New York, NY, and did convert all of its operating and
application software and all data files to operate on COSI's mainframe
computers and further delivered to COSI its customer lists, computer equipment
and furniture to COSI; and
WHEREAS, pursuant to the Processing Agreement, COSI exclusively
performed all data processing services for those DFI customers and accounts
transferred to COSI, billed and received accounts payable and maintained books
and records in connection therewith, and did and still does possess all of the
computer equipment and software, customer lists and furniture transferred or
relocated to COSI pursuant to the Processing Agreement; and
WHEREAS, pursuant to the Processing Agreement, COSI advanced to
DFI the aggregate sum of $200,000.00 and DFI executed two promissory notes to
the benefit of COSI in the aggregate principal amount of two hundred thousand
dollars ($200,000.00) which obligated DFI to repay to COSI said advanced sums,
<PAGE>
plus interest as set forth in the Promissory Notes, (the "Promissory Notes");
and
WHEREAS, DFI now wishes to sell to COSI and COSI now wishes to
purchase from DFI all of the assets of DFI which were delivered to COSI
pursuant to the Processing Agreements;
NOW THEREFORE, in consideration of the mutual undertakings,
promises and covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
DFI and COSI do hereby agree as follows:
1. DFI hereby irrevocably transfers to COSI all of its
rights, title and interest in or to (i) all computer processing service
accounts and customers and customer lists which DFI formerly serviced and
which, pursuant to the Processing Agreement were or are currently being
serviced by COSI; (ii) all property and equipment of whatever kind, nature and
description, which was transferred and/or delivered to COSI from DFI pursuant
to the Processing Agreement.
2. COSI shall take title to all such property transferred
hereunder in its current location and condition "AS IS" and COSI further
acknowledges that DFI is making no warranties or representations of any kind
as to the current condition or value of the service accounts and customer lists
transferred hereunder including, but not limited to, income, expenses, accounts
payable, accounts receivable nor any other matter concerning the accounts and
operation of DFI, the same having been serviced and managed exclusively by COSI
since the inception of the Processing Agreement. COSI shall, in a timely
manner, file and tax returns and pay any taxes which may be required or due as
a result of the transfer of assets hereunder.
<PAGE>
3. In exchange for the property transferred and sold to
COSI pursuant to this Agreement, COSI shall:
(a) Pay to DFI the sum of One hundred thousand,
eight hundred dollars ($100,800.00) which shall be paid to DFI in thirty-six
equal monthly installments of $2,800.00 each, commencing on March 1, 1997 and
continuing thereafter on the first of each month for the next thirty-five
successive months and as set forth in the Promissory Note annexed and attached
hereto as Exhibit A;
(b) As of the date of this agreement and pursuant
to this agreement, forgive the entire debt, including principal and interest
thereon due from DFI to COSI pursuant to the Promissory Notes executed in
accordance with the Processing Agreement. In connection with the forgiveness
of the debt referred to in this paragraph 3(b) COSI shall deliver to DFI
simultaneously with the execution of this Agreement, the original Promissory
Notes referred to herein and a Satisfaction Instrument, along with the Original
Security Agreement, if any, and any UCC-III termination Statements for each
UCC-I filing made pursuant thereto, if any.
(c) A copy of the corporate resolution of COSI,
authorizing the execution of this Asset Purchase Agreement and the Promissory
Note referred to in paragraph 3(a) above.
4. DFI expressly represents, warrants and covenants that:
(i) it has not transferred, assigned, pledged, encumbered or hypothecated its
right to any of the assets which are being transferred to COSI pursuant to this
Agreement and (ii) that it has the lawful right, power, capacity and authority
to transfer the assets which are being transferred to COSI pursuant to this
Agreement and (iii) that signatory is authorized to execute this Agreement on
its behalf.
<PAGE>
5. This Agreement may not be modified, altered, amended,
waived or revoked orally, but only by a writing signed by each of the parties
or their respective representatives. The foregoing represents the entire
Agreement between the parties and supersedes and replaces all prior
understandings, discussions, representations and agreements between them,
including without limitation, the Processing Agreement, on any and all
subjects, whether written or oral. The Parties represent and acknowledge that,
in executing this Agreement they have not relied upon any promises, inducements
representations, understandings or agreements other than those specifically
set forth herein.
6. This agreement shall be binding upon and shall inure
to the benefit of each party and its successors and/or assigns.
7. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without reference
to its conflict of laws provisions.
<PAGE>
Entered into as of the date and year first written above.
DATAFAST, INC. COMPUTER OUTSOURCING SERVICES, INC.
By: James E. Dellarmi/President-CEO By: Zach Lonstein/Chairman
-------------------------------- -------------------------------
Name/Title Name/Title
State of New York State of New York
County of Westchester ss: County of New York
On the 16th day of April, 1997 On the 16th day of April, 1997
before me personally came before me personally came
to me known, who, being by me duly to me known, who, being by me duly
sworn, did depose and say that he sworn, did depose and say that he
resides at 571A White Plains Road, resides at
Eastchester, N.Y. 10709
and that he is the President of and that he is the of
DATAFAST, Inc., the corporation COMPUTER OUTSOURCING SERVICES, INC.,
described in and which executed the the corporation described in and
foregoing instrument; that he knows which executed the foregoing
the seal of said corporation; that instrument; that he knows the seal
the seal affixed to said instrument of said corporation; that the seal
is such corporate seal; that it was affixed to said instrument is such
so affixed by order of the board of seal; that it was so affixed by
directors of said corporation and order of the board of directors of
that he signed his name thereto by said corporation and that he signed
like order. his name thereto by like order.
By: Anthony S. Colavita By: Michael Carmody
- ---------------------------------- -----------------------------------
Notary Public Notary Public
Anthony S. Colavita Michael Carmody
Notary Public, State of New York Notary Public, State of New York
No. 4868135 No. 02CA5024046
Qualified in Westchester County Qualified in Westchester County
Term Expires August 18, 1998 Commission Expires Feb. 22, 1998
TERMINATION AGREEMENT
----------------------
This Termination Agreement is made and entered into on
this 25th day of April 1997 by and between DATAFAST, INC., a New York
Corporation with a principal place of business located at 571A White Plains
Road, Eastchester, NY 10709 (hereinafter referred to as "DFI") and COMPUTER
OUTSOURCING SERVICES, INC., a New York Corporation with a principal place
of business located at 360 West 31st Street, New York, NY 10001 (hereinafter
referred to as "COSI").
WHEREAS, DFI and COSI are parties to that certain Processing
Agreement dated December 4, 1992, a copy of which is annexed and attached
hereto as "Exhibit A" (The "Processing Agreement"); and
WHEREAS, pursuant to and in accordance with said Processing
Agreement, COSI advanced and delivered to DFI the sum of $200,000 and DFI
executed two Promissory Notes each in the principal amount of $100,000.00 and
evidencing DFI's obligation to repay the advanced sums, plus interest at the
rates set forth in said Promissory Notes (the "Notes"); and
WHEREAS; DFI and COSI have recently, prior to the date of this
Termination Agreement, entered into an Asset Purchase Agreement whereby COSI
purchased from DFI and DFI transferred to COSI (i) all computer processing
service accounts and customers and customer lists which DFI formerly serviced
and which, pursuant to the Processing Agreement were or are currently being
serviced by COSI; (ii) all property and equipment of whatever kind, nature and
description, which was transferred and/or delivered to COSI from DFI pursuant
to the Processing Agreement; and
<PAGE>
WHEREAS, part of the consideration paid by COSI to DFI pursuant
to the Asset Purchase Agreement was COSI's forgiveness of all of DFI's
remaining debt and obligations under and pursuant to the Promissory Notes; and
WHEREAS, DFI and COSI now wish to terminate the Processing
Agreement in accordance with and on the terms set forth herein;
NOW THEREFORE, in consideration of the sum of $10.00, each to
the other in hand paid, and of the mutual undertakings, promises and covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, DFI and COSI do hereby agree as
follows:
1. The Processing Agreement is as of the date first
written above terminated and neither party shall have any further rights,
liabilities or, obligations pursuant to, related to or in connection with
the Processing Agreement.
2. DFI, on behalf of itself and its parents, subsidiaries,
affiliates, officers, successors, assigns, predecessors in interest, past and
present officers, directors, shareholders, employees, attorneys, accountants,
representatives, and agents does hereby release COSI and, its parents,
subsidiaries, affiliates, officers, successors, assigns, predecessors and
successors in interest, past and present officers, directors, shareholders,
employees, attorneys, accountants, representatives, and agents, of and from
any and all manner of actions, causes of action (at law or in equity), suits,
claims, counterclaims, demands, agreements, obligations, promises, liability,
damages, costs and expenses of any nature whatsoever, liquidated or
unliquidated which DFI had, now has or may hereinafter accrue, or which DFI
may hereafter claim to have or which DFI may hereafter discover, against COSI
<PAGE>
or against any other such person, entity or beneficiary above enumerated,
upon or by reason of any matter, cause or thing whatsoever from the beginning
of time to the date hereof, including, but not limited to, (i) any and all
claims and/or counterclaims which were set forth in, arise from or relate to
the Arbitration Proceeding commenced by DFI on or about November 10, 1995 by
filing a Demand with the Arbitration Association of America and which
Arbitration Proceeding was designated as case number 19-117-0101-95; (ii) any
further performance, obligation or liability whatsoever arising from or related
to the Processing Agreement.
3. COSI, on behalf of itself and its parents,
subsidiaries, affiliates, officers, successors, assigns, predecessors in
interest, past and present officers, directors, shareholders, employees,
attorneys, accountants, representatives, and agents does hereby release DFI
and, its parents, subsidiaries, affiliates, officers, successors, assigns,
predecessors and successors in interest, past and present officers, directors,
shareholders, employees, attorneys, accountants, representatives, and agents,
of and from any and all manner of actions, causes of action (at law or in
equity), suits, claims, counterclaims, demands, agreements, obligations,
promises, liability, damages, costs and expenses of any nature whatsoever,
liquidated or unliquidated which COSI had, now has or may hereinafter accrue,
or which COSI may hereafter claim to have or which COSI may hereafter discover,
against DFI or against any other such person, entity or beneficiary above
enumerated, upon or by reason of any matter, cause or thing whatsoever from
the beginning of time to the date hereof, including, but not limited to,
(i) any and all claims and/or counterclaims which were set forth in, arise
<PAGE>
from or relate to the Arbitration Proceeding commenced by DFI on or about
November 10, 1995 by filing a Demand with the Arbitration Association of
America and which Arbitration Proceeding was designated as case number
19-117-0101-95; (ii) any further performance, obligation or liability
whatsoever arising from or related to the Processing Agreement.
4. Each of the parties expressly represents, warrants and
covenants that : (i) it has not transferred, assigned, pledged, encumbered or
hypothecated its right to assert any claim, demand, action, cause of action,
suit, liability, indebtedness, duty, obligation or responsibility which is
released in this Agreement; (ii) that it has the lawful right, power,
capacity and authority to release such claims, demands, actions, cause of
action, suits, liabilities, indebtedness, duties, obligations, and
responsibilities in accordance with the terms herein; (iii) that there are no
parties related or otherwise, that have any right, power, authority, capacity,
or standing to assert any claim, demand, action, cause of action, suit or
liability, indebtedness, duty, obligation or responsibility that it has
released in this Agreement. Each party further represents that its signatory
is authorized to execute this Agreement and the Release embodied herein on
its behalf.
5. This agreement shall be binding upon and shall inure
to the benefit of each party and its successors and/or assigns.
6. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without reference
to its conflict of laws provisions.
<PAGE>
Entered into as of the date and year first written above.
DATAFAST, INC. COMPUTER OUTSOURCING SERVICES, INC.
By: James E. Dellarmi/President-CEO By: Zach Lonstein/Chairman
-------------------------------- -----------------------------------
Name/Title Name/Title
State of New York State of New York
County of Westchester ss: County of New York
On the 25th day of April, 1997 On the 25th day of May, 1997 before
before me personally came me personally came
James E. Dellarmi Zach Lonstein
to me known, who, being by me duly to me known, who, being by me duly
sworn, did depose and say that he sworn, did depose and say that he
resides at 571A White Plains Road, resides at 360 W. 31st St.,
Eastchester, N.Y. 10709 NYC.
and that he is the President of and that he is the President/Chairman
DATAFAST, Inc., the corporation of COMPUTER OUTSOURCING SERVICES,
described in and which executed the Inc., the corporation described in and
foregoing instrument; that he knows which executed the foregoing
the seal of said corporation; that instrument; that he knows the seal of
the seal affixed to said instrument said corporation; that the seal
is such corporate seal; that it was affixed to said instrument is such
so affixed by order of the board of seal; that it was so affixed by order
directors of said corporation and of the board of directors of said
that he signed his name thereto by corporation and that he signed his
like order. name thereto by like order.
By: Anthony S. Colavita By: Michael Carmody
- ---------------------------------- -------------------------------------
Notary Public Notary Public
Anthony S. Colavita Michael Carmody
Notary Public, State of New York Notary Public, State of New York
No. 4868135 No. 02CA5024046
Qualified in Westchester County Qualified in Westchester County
Term Expires August 18, 1998 Commission Expires Feb. 22, 1998
<PAGE>
PROCESSING AGREEMENT dated December 4, 1992 between COMPUTER
OUTSOURCING SERVICES, INC., a New York corporation with its chief office and
principal place of business located at 360 West 31st Street, New York, New
York 10001 ("COSI"), and DATAFAST, INC., a New York corporation with its chief
office and principal place of business located at 132 Montgomery Street,
Scarsdale, New York 10583 ("DFI").
WHEREAS, COSI owns and operates a computer service business in
The City of New York which provides both on-line and batch data processing
services; and
WHEREAS, DFI owns and operates a computer service business in
Scarsdale, New York which provides accounts receivable batch data processing
services; and
WHEREAS, DFI desires to subcontract to COSI DFI's data
processing requirements on the terms and conditions hereinafter set forth; and
WHEREAS, COSI and DFI are willing to perform their respective
obligations hereunder on the terms and conditions hereinafter set forth.
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
COSI and DFI hereby agree as follows:
1. Concurrently with the execution and delivery of this
Processing Agreement (this "Agreement"), COSI is advancing to DFI the sum of
$100,000 by delivering to DFI its certified check in such amount payable to
DFI's order. To evidence such advance, DFI is concurrently delivering to COSI
its promissory note (the "First Advance Note") in the principal amount of
$100,000. The First Advance Note shall be in the form annexed hereto as
Annex A.
2. Promptly after the execution and delivery of this
Agreement, DFI will, at its own expense, relocate DFI's data processing
operations to COSI's office located at 360 West 31st Street, New York,
New York. COSI and DFI will attempt to accommodate such relocated operations
of DFI within COSI's existing leased offices at such location, and, if COSI's
existing offices are too small to fully accommodate such relocated operations,
COSI will procure a short term rental of such additional space as may be
required from time to time (any such required lease of additional space being
hereinafter referred to as the "Additional Lease").
3. COSI and DFI will cooperate with each other by making
their respective employees available without charge to convert all of the
operating and application software and all of the data files used by DFI in
its computer service business to run on COSI's IBM mainframe computers and
peripheral equipment. COSI and DFI will use their respective best efforts
to complete this conversation as soon as reasonably practicable, and in any
case before January 30, 1993. The date on which such conversion is completed
to the mutual satisfaction of COSI and DFI is hereinafter referred to as the
"Commencement Date".
<PAGE>
4. On the Commencement Date, COSI will advance to DFI the
additional sum of $100,000 by delivering to DFI its certified check in such
amount payable to DFI's order. To evidence such additional advance, on the
Commencement Date DFI will deliver to COSI its promissory note (the "Second
Advance Note") in the principal amount of $100,000. The Second Advance Note
shall have the same terms as the First Advance Note except that it shall be
called the Second Advance Note and shall be dated the Commencement Date. The
First Advance Note and the Second Advance Note are hereinafter collectively
referred to as the "Notes".
5. During the four-year period commencing on the Commencement
Date (the "Initial Term") and, if the Initial Term is extended as hereinafter
provided in Section 10, during the Additional Term (the Initial Term together
with the Additional Term, if any, being hereinafter collectively referred to
as the "Term"), COSI will perform its services under this Agreement through a
newly-created division (the "Division").
6. Prior to the Commencement Date, the Division will offer to
hire selected employees of DFI whose services will be necessary to the
operation of the Division. All employees of DFI hired by the Division will
receive a base salary as indicated on the Division Budget for the first year
of the Inital Term annexed hereto as 'Annex B'. In addition, all of such hired
employees will participate in all COSI plans and receive all other benefits
which other newly-hired employees of COSI are entitled to participate in and
to receive. No less than 30 days prior to the beginning of each year after
the first year during the Term, DFI and COSI shall agree to a Division Budget
for the coming year which new Division Budget shall be substituted as 'Annex B'
hereto for the year covered thereby.
7. All DFI employees hired by the Division other than Joseph
Sudul will be "at will" employees of the Division and will not be entitled to
any written employment agreement. Joseph Sudul will be offered a written
employment agreement by the Division to be its Operations Manager for a term
coextensive with the Initial Term.
8. During the Term, COSI will perform all data processing
services required by DFI except those permitted to be offered or performed by
DFI pursuant to Section 11. During the Term, the Division will bill all
clients of DFI for all data processing services and disbursements and expenses
incurred in rendering such services and collect on behalf of DFI all accounts
receivable so generated. On a quarterly basis COSI will provide DFI with
copies of all programs and data files used by the Division in connection with
the data processing services performed by the Division for DFI's clients
(collectively, the "Division Software"). During the Term, DFI will continue
to perform all selling and customer service functions in connection with the
data processing services performed by the Division for DFI's clients and may,
subject to Section 11, solicit new clients for data processing services. DFI
represents and warrants that during the calendar year ending december 31,
1992, the excess of its gross billings for data processing services over the
billed-through amounts included in such gross billings for such things as
postage, forms, outside messenger service, telephone toll charges and sales
or use taxes imposed by any jurisdiction, will exceed $1,000,000.
<PAGE>
9. COSI will keep the books and records of the Division in
accordance with generally accepted accounting principles consistently applied
and will determine the Division's Adjusted Gross Revenues, Pass Through
Billings and Permitted Expenses promptly after the end of each Measuring
Month. Such books and records and determinations of Adjusted Gross Revenues,
Pass Through Billings and Permitted Expenses shall be final and binding on all
parties hereto in the absence of manifest error. DFI shall have the right
during normal business hours to examine the books and records of the Division
in respect of each Measuring Month. As used herein, the terms
"Measuring Month" means any month during the Term in respect of which Adjusted
Gross Revenues, Pass Through Billings and Permitted Expenses are to be
determined; "Adjusted Gross Revenues" means the excess of the gross billings
generated by the Division during the Measuring Month over the Pass Through
Billings of the Division during the Measuring Month; "Pass Through Billings"
means the billed-through amounts included in gross billings generated by the
Division for such things as postage, forms, outside messenger service,
telephone toll charges and sales or use taxes imposed by any jurisdiction on
the services performed by COSI under this Agreement; and "Permitted Expenses"
means the sum of: (i) all bad debt expense of the Division during the Measuring
Month, whether for the creation of an initial reserve of 5% for doubtful
accounts or for adjustment of such reserve from Measuring Month to Measuring
Month based on an increase in the level of accounts receivable of the Division
or the experience of the Division in collecting its accounts receivable;
(ii) the incremental out-of-pocket expenses incurred by COSI during the
Measuring Month for such things as rent under the Additional Lease and payroll
expense for all employees of the Division which would not have been incurred
by COSI during the Measuring Month except for the operation of the Division;
and (iii) the excess, if any, of the Permitted Expenses of the Division during
the month immediately preceding the Measuring Month over the Adjusted Gross
Revenues of the Division during such immediately preceding month. COSI shall
operate the Division so that the Permitted Expenses of the Division during
each year of the Term do not exceed 105% of the amounts budgeted therefor on
the Division Budget for such year unless otherwise agreed to in writing by DFI
and COSI. Within 20 days after the end of each Measuring Month, COSI shall
determine and advise DFI of the respective amounts of Adjusted Gross Revenues,
Pass Through Billings and Permitted Expenses for such Measuring Month. Within
25 days after the end of each Measuring Month, COSI will cause the Division to
distribute amounts equal to the Adjusted Gross Revenues and Pass Thgough
Billings for such Measuring Month in the following strict order of priority to
the maximum extent possible:
(a) with respect to each of the first twelve Measuring Months
during the Initial Term and also with respect to each
other Measuring Month during the Term as to only those
Adjusted Gross Revenues attributable to new clients:
'first', an amount equal to the sum of the Pass Through
Billings and the Permitted Expenses for such Measuring
Month shall be distributed to COSI to reimburse it for
its out-of-pocket costs of performing its services under
this Agreement; 'second', an amount equal to 8% of the
Adjusted Gross Revenues for such Measuring Month shall be
distributed to COSI as its base fee for performing its
<PAGE>
services under this Agreement; 'third', an amount equal
to 20% of the Adjusted Gross Revenues for such Measuring
Month shall be distributed to DFI except that out of such
distribution to DFI an amount equal to 5% of the Adjusted
Gross Revenues for such Measuring Month shall be applied
by COSI to pay on behalf of DFI principal and/or interest
on the Notes so long as the Notes remain unpaid; and
'fourth', if the Adjusted Gross Revenues for such
Measuring Month exceed the distributions pursuant to
clauses "second" and "third" above, an amount equal to
such excess shall be distributed to COSI as the balance of
its fee for performing its services under this Agreement;
and
(b) with respect to each of the Measuring Months in the
second, third and fourth years of the Initial Term and
each of the Measuring Months in the Additional Term, if
any, except for any Adjusted Gross Revenues for such
Measuring Month attributable to new clients and included
in the calculation made pursuant to Section 9(a) with
respect to such Measuring Month: 'first', an amount equal
to the sum of the Pass Through Billings and the Permitted
Expenses for such Measuring Month shall be distributed to
COSI to reimburse it for its out-of-pocket costs of
performing its services under this Agreement; 'second', an
amount equal to 8% of the Adjusted Gross Revenues for such
Measuring Month shall be distributed to COSI as its base
fee for performing its services under this Agreement;
'third', an amount equal to 15% of the Adjusted Gross
Revenues for such Measuring Month shall be distributed to
DFI except that out of such distribution to DFI an amount
equal to 5% of the Adjusted Gross Revenues for such
Measuring Month shall be applied by COSI to pay on behalf
of DFI principal and/or interest on the Notes so long as
the Notes remain unpaid; and 'fourth', if the Adjusted
Gross Revenues for such Measuring Month exceed the
distributions pursuant to clauses "second" and "third"
above, an amount equal to such excess shall be distributed
to COSI as the balance of its fee for performing its
services under this Agreement.
10. As collateral security for the prompt payment when due of
the principal of and interest on the Notes, DFI hereby grants to COSI a
continuing 'first priority security' interest in all of its general
intangibles consisting of its client lists, trade name, operating and
application software and all of the data files used by DFI in its computer
service business (collectively, the "Collateral"). In the event that DFI
<PAGE>
shall fail to pay in full the principal of and all accrued interest on the
Notes on the last day of the Initial Term after COSI has made demand for such
payment, COSI shall have the option in its sole and absolute discretion of
extending the Initial Term for such minimum length of time (the "Additional
term") as may be necessary for the principal of and interest on the Notes to
be paid in full by applying all amounts that would otherwise be payable to DFI
during the Additional Term pursuant to Section 9(b) to the payment of the
principal of and interest on the Notes. Such option may be exercised by COSI
at any time prior to 120 days prior to the end of the Initial Term by
delivering written notice of its election to DFI. If DFI shall have paid in
full the principal of and all accrued interest on the Notes on or prior to the
last day of the Initial Term, the Term of this Agreement shall end on the
fourth anniversary of the Commencement Date. COSI shall have all of the
rights and remedies of a secured party in and to the Collateral provided by
Article 9 of the New York Uniform Commercial Code. DFI hereby authorizes COSI
to file Uniform Commercial Code financing statements, amendments thereto and
continuations thereof with regard to the Collateral without signature of DFI,
to the extent permitted by applicable law. In addition, DFI does hereby
further irrevocably make, constitute and appoint COSI or any officer or
designee thereof its true and lawful attorney-in-fact in the name of DFI or in
the name of COSI to execute any such financing statements, amendment thereto
or continuation thereof.
11. DFI hereby agrees during the Term not to offer to, or
perform data processing services for, any client or prospective client of the
Division unless the data processing services are to be performed by the
Division. For purposes of this Section 11, a "prospective client of the
Division" means any entity requiring data processing services of the type now
rendered by DFI or rendered by the Division during the Term. In addition, if
DFI shall hereafter offer any new types of data processing services, DFI hereby
agrees to offer COSI a right of first refusal to have the Division perform
under this Agreement the data processing services for all of their permitted
clients.
12. COSI will use due care in processing all work delegated to
it by DFI. COSI will cause the Division to use its best efforts to promptly
respond to immediate problems brought to its attention.
13. COSI shall not be liable for any failure to perform its
obligations under this Agreement if prevented from doing so by a cause or
causes beyond its control, such as acts of God, war, fire, electrical failure,
explosion, earthquake, flood, weather, governmental order or regulation, acts
of public enemies, shortage of suitable parts, materials and/or manpower not
under COSI's control, and transportation accidents, labor disputes, postal
delays, strikes and lockouts.
14. Nothing in this Agreement to the contrary withstanding
shall relieve any party to this Agreement from liability for its own gross
negligence or willful misconduct.
<PAGE>
15. Neither COSI nor DFI will divulge any information learned
by it concerning the other party or its clients without the prior written
consent of the other party unless it learned such information prior to the
date of this Agreement under circumstances not requiring confidentiality or
such other party makes the information available to the general public. COSI
will utilize computer industry standards for data security. Promptly after
the end of the Term, COSI will deliver to DFI all copies of the Division
Software and all client lists, telephone lists and other written information
concerning DFI's clients in its possession or under its control, and will
destroy all stationery, billing materials and other materials including the
"Datafast" name in its possession or under its control. COSI hereby
acknowledges that the name "Datafast" is and shall remain the sole property of
DFI. COSI agrees for a period of two years following the Term not to solicit
any data processing business from, or provide any data processing services to,
any client of DFI for whom the Division performed any data processing services
at any time during the Term.
16. At the end of the Term, COSI will assist DFI in moving
its data processing operations to another location specified by DFI. In
connection therewith, COSI will make available to DFI without charge up to
50 hours of systems and programming time and at 50% of COSI's standard rates
for any additional systems and programming assistance requested by DFI to
convert and/or modify all of the Division Software for use by DFI.
17. This Agreement and the Notes constitute the entire
understanding between COSI and DFI with respect to subject matter hereof and
thereof and supersede and cancel all prior written and oral understandings
and agreements with respect to such matters. Except as specifically set forth
in this Agreement, COSI makes no representations or warranties, express or
implied, including without limitation any warranty of merchantability or
fitness for a particular purpose. However, COSI shall be responsible for
providing maintenance of all computer hardware and peripherals and all software
used by the Division.
18. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person or forty-eight (48) hours
after deposit thereof in the U.S. mails, postage prepaid, for delivery as
certified or registered mail, return receipt requested, addressed as set forth
in the heading of this Agreement, or to such other address as the party to be
notified may specify by notice to the other party.
19. COSI will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of its business and/or assets, by agreement in form and
substance satisfactory to DFI, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that COSI would be required
to perform it if no such succession had taken place. Except as provided in
the foregoing sentence, neither COSI nor DFI may assign its rights nor
delegate its duties under this Agreement without obtaining the prior written
consent of the other party hereto, such consent not to be unreasonably
withheld. This Agreement and all rights of the parties hereunder shall inure
to the benefit of and be enforceable by the successors and permitted assigns
of the parties hereto.
<PAGE>
20. No Provisions of this Agreement or the Annexes hereto may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing both COSI and DFI. No waiver by COSI or DFI
at any time of any breach by the other, or of compliance with, any condition or
provision of this Agreement to be performed by the other shall be deemed a
waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.
21. Any controversy or claim arising out of this Agreement,
the Notes, or the breach hereof or thereof, shall be settled by arbitration in
the County of Westchester in accordance with the Commercial Arbitration Rules
of the American Arbitration Association. The dispute shall be heard by a panel
of three arbitrators, with DFI designating one arbitrator, COSI designating
one arbitrator and the two arbitrators so designated selecting the third
arbitrator. Judgment upon the award rendered by the arbitration panel may be
entered in any court having jurisdiction thereof. Such arbitration shall be a
condition precedent to any suit upon or by reason of such controversy or claim
except a suit commenced to compel arbitration in accordance with this
Section 21. Both COSI and DFI shall be bound to perform their obligations
under this Agreement and the Notes during the pendency of the dispute.
22. COSI and DFI shall pay their own respective expenses in
connection with the negotiation, execution and delivery of this Agreement and
the Notes and shall indemnify and hold each other harmless from any claims of
finders or brokers in connection with the transactions contemplated by this
Agreement and the Notes.
23. This Agreement may be executed in two or more counterparts
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
24. This Agreement is governed by and is to be construed and
enforced in accordance with the laws of the State of New York.
COMPUTER OUTSOURCING SERVICES, INC.
By: Zach Lonstein
--------------------------------
Zach Lonstein, President
DATAFAST, INC.
By: James E. Dellarmi
--------------------------------
James E. Dellarmi, President
and Chief Executive Officer
PROMISSORY NOTE
----------------
$100,800.00 New York, New York March 1, 1997
FOR VALUE RECEIVED, COMPUTER OUTSOURCING SERVICES, INC., a New York
Corporation with its principal place of business located at 360 West 31st
Street, New York, New York 10001 hereinafter referred to as Maker, promises to
pay to the order of DATAFAST, INC. with its principal place of business located
571A White Plains Road, Eastchester, New York 10709 hereinafter referred to as
Payee or Note Holder, the sum of One Hundred Thousand Eight Hundred and No/100
($100,800.00) Dollars payable as follows:
Beginning on the first day of March, 1997 and on the first day of each
month and each and every month thereafter, for a total period of thirty-six
(36) consecutive months in equal monthly installments in the sum of Two
Thousand Eight Hundred and No/100 ($2,800.00) Dollars until maturity on
February 1st, 2000 at which time the remaining principal balance shall be
payable to the Payee.
The Maker shall pay the monthly installments due hereunder by check
made payable to Payee or Holder hereof at the address set forth above for
Payee or at such other place as the Payee or Holder hereof may from time to
time designate in writing to the Maker.
Should any payment due pursuant to this Note not be received by the
Payee by the 10th day of the month in which same is due, the Maker shall pay
a penalty of five (5%) percent of the amount of said payment. This provision
however shall no way limit the Holder's further rights contained herein.
The Payee or any subsequent Holder of this Note may declare the
principal of and accrued interest on this Note immediately due and payable
upon the occurrence of any of the following conditions or events which shall
be deemed a default:
(a) If any installment of principal or other amounts payable
hereunder remains unpaid for a period of thirty (30) days
after becoming due; or
(b) The failure of Maker to perform any of its covenants as
set forth herein; or
(c) The failure of Maker to perform any term, covenant or
condition set forth in the Asset Purchase Agreement
executed between the Payee and Maker herein; or
(d) Any other obligation or indebtedness of the Maker is not
paid when due, or is in default; or
<PAGE>
(e) Maker shall become insolvent or bankrupt (voluntarily or
involuntarily or fail to pay its debts as they mature or
any judgments shall be rendered against the Maker or the
commencement of any proceeding, procedure or other remedy
supplemental to the enforcement of a judgment against
the Maker or Maker commences a dissolution proceeding
or Maker hereunder shall make an assignment for the
benefit of creditors or a trustee or receiver or
liquidator shall be appointed for the Maker for a
substantial part of the corporate assets or a bankruptcy
reorganization, arrangement, insolvency or other similar
proceeding shall be instituted by the Maker or the Maker
indicates consent to, approval of, or acquiesces in the
same and within ninety days after the appointment of such
trustee, receiver or liquidator same shall have not been
vacated or such proceeding shall not have been dismissed;
or
In the event of a default Maker expressly waives notice of presentment
for payment, notice of dishonor, protest, notice of protest or further notice
of any other kind.
In the event of a default herein interest shall accrue upon the unpaid
and remaining principal balance at a rate of ten (10%) per centum per annum
until the obligations of Maker to Payee are satisfied.
In the event that is necessary for the Payee or a Holder hereof to
commence any legal action to collect any monies due pursuant to this
Promissory Note, then and in such event, the Payee or a Holder hereof shall be
entitled to recover the cost, and disbursements, and resonable attorney's fees
incurred in any such proceeding or in the preparation of said proceeding.
This Promissory Note may be prepaid, in whole or in part, at any time,
without penalty, provided that the Payee or a Holder hereof is notified in
writing by the Maker of the Maker's intention to prepay this Promissory Note.
If a law, which applies to this Promissory Note which sets the maximum
loan charges, is finally interpreted so that the interest or other loan charges
collected or to be collected in connection with this Promissory Note exceed the
permitted limits, then any such interest or other loan charge shall be reduced
by the amount necessary to reduce the charge to the permitted limits and any
sums already collected from the Maker which exceeded permitted limits will be
refunded to the Maker. The Payee or a Holder hereof may choose to make this
refund by reducing the principal owed under this Promissory Note or by
Making a direct payment to the Maker. If a refund reduces the principal, the
reduction will be treated as a partial prepayment.
Should the Payee or a Holder hereof not declare the entire principal of
and interest due on this Promissory Note immediately due and payable upon the
occurrence of any of the conditions or events of default specified herein,
same shall not be deemed a waiver of the Payee's or Holder's rights hereunder
<PAGE>
and the Payee or a Holder hereof shall retain the right to do so should any of
the aforementioned conditions or events continue or occur at a later time.
Any notice that must be given to the Maker pursuant to this Promissory
Note or pursuant to applicable law, shall be given to the Maker by delivering
it or by mailing it by First Class Mail to the Maker at the address stated
above unless the Maker gives the Payee or a Holder hereof written notice of a
different address.
By : Zach Lonstein
------------------------------
MAKER
STATE OF NEW YORK )
COUNTY OF NEW YORK ) ss:
On this day of March, 1997 before me personally came
Zack Lonstein to me known, who being by me duly sworn, did depose and say
that he resides at 360 West 31st Street, New York, New York that he is the
Chairman of Computer Outsourcing Services, Inc. the Corporation described
in and which executed the foregoing instrument; that he knows the Seal of
said Corporation; that the Seal affixed to said instrument is such Corporate
Seal; that it was so affixed by order of the Board of Directors of said
Corporation, and that he signed his name thereto by like order.
By : Michael Carmody
------------------------------
NOTARY PUBLIC
Michael Carmody
Notary Public, State of New York
No. 02CA5024046
Qualified in Westchester County
Commission Expires Feb. 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED APRIL 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 794,719
<SECURITIES> 0
<RECEIVABLES> 4,322,027
<ALLOWANCES> 361,145
<INVENTORY> 0
<CURRENT-ASSETS> 5,815,704
<PP&E> 7,771,916
<DEPRECIATION> 4,788,602
<TOTAL-ASSETS> 19,346,543
<CURRENT-LIABILITIES> 4,825,235
<BONDS> 2,578,618<F1>
0
0
<COMMON> 37,898
<OTHER-SE> 12,101,388
<TOTAL-LIABILITY-AND-EQUITY> 19,346,543
<SALES> 0
<TOTAL-REVENUES> 16,171,062
<CGS> 0
<TOTAL-COSTS> 10,749,481
<OTHER-EXPENSES> 4,729,531
<LOSS-PROVISION> 124,252
<INTEREST-EXPENSE> 162,039
<INCOME-PRETAX> 550,001
<INCOME-TAX> 220,400
<INCOME-CONTINUING> 329,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329,601
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<FN>
<F1>INCLUDES CURRENT PORTION OF 1,076,918
</FN>
</TABLE>
