U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Exchange Act Rule 14a-11 or 14a-12
COMPUTER OUTSOURCING SERVICES, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Board of Directors of Computer Outsourcing Services, Inc.
---------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
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[X] No fee required.
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1) Title of each class of securities to which transaction applies:________
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):_____________
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5) Total fee paid:________________________________________________________
[ ] Fee paid previously with preliminary materials.
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:________________________________________________
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4) Date Filed:____________________________________________________________
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 5, 1997
________________________
The Annual Meeting of Stockholders of Computer Outsourcing Services, Inc. will
be held at the offices of the Company, 360 West 31st Street, 11th Floor, New
York, NY 10001 at 10:00AM on Monday, May 5, 1997, for the following purposes:
1. To elect eight Directors of the Company for a term of one year.
2. To act upon a proposal to amend the Company's 1992 Stock Option and
Stock Appreciation Rights Plan to increase the number of shares of
Common Stock available for grant from 700,000 to 1,200,000.
3. To transact such other business as may properly come before the Annual
Meeting.
Only stockholders of record at the close of business on April 1, 1997 will be
entitled to vote at the Annual Meeting.
You are cordially invited to attend the Annual Meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING.
THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE YOUR PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF YOU ATTEND AND WISH TO VOTE IN PERSON, YOUR PROXY WILL NOT BE
USED.
By Order of the Board of Directors,
/s/
Jeffrey Millman
Secretary
April 1, 1997
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC.
360 WEST 31ST STREET
NEW YORK, NY 10001
(212) 564-3730
________________________________
PROXY STATEMENT
For the Annual Meeting of Stockholders to be held on May 5, 1997
________________________________
GENERAL INFORMATION
The enclosed Proxy is solicited on behalf of the Board of Directors of Computer
Outsourcing Services, Inc. (the "Company") for use at the Annual Meeting of
Stockholders of the Company (the "Meeting") to be held at the offices of the
Company, 360 West 31st Street, 11th Floor, New York, New York - on May 5, 1997
(the "Meeting Date"), and at any adjournment thereof.
The authority granted by an executed Proxy may be revoked at any time before its
exercise (a) by filing with the Secretary of the Company a written revocation,
(b) by submitting a new duly-executed Proxy bearing a later date, or (c) by
voting in person at the Meeting. Shares represented by valid Proxies will be
voted at the Meeting in accordance with the specifications in the Proxies. If
no specifications are made in properly executed Proxies concerning Directors or
the Proposal to amend the 1992 Stock Option and Stock Appreciation Rights Plan
(the "Plan"), such Proxies will be voted FOR (1) electing the Directors
nominated by the Board and (2) amending the Plan as described in this Proxy
Statement.
Only stockholders of record at the close of business on April 1, 1997 (the
"Record Date") will be entitled to vote at the Meeting, either in person or by
Proxy. On April 1, 1997, the Company had outstanding 3,764,850 shares of Common
Stock, $0.01 par value, each entitled to one vote. The Company's Common Stock
is its only class of voting stock outstanding. A majority in interest of the
outstanding Common Stock, represented at the Meeting in person or by Proxy,
constitutes a quorum for the transaction of business.
The Company will bear the cost of this solicitation of Proxies including, upon
request, reimbursement of brokerage companies and other nominees for their
reasonable expenses in forwarding solicitation materials to beneficial owners of
Common Stock. In addition to the use of the mails, employees of the Company may
devote part of their time to the solicitation of Proxies by telephone,
facsimile, or in person, but no additional compensation will be paid to them.
The approximate date on which this Proxy Statement and accompanying Proxy are
first being sent or given to stockholders is April 1, 1997.
<PAGE>
SHARE OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 1, 1997 by (a) all current
directors and nominees for director of the Company, (b) the Chief Executive
Officer and the four most highly compensated executive officers of the Company
whose salary exceeded $100,000 in the most recent fiscal year (together, the
"Named Executives"), (c) all directors and executive officers as a group, and
(d) any other person known by the Company to be the beneficial owner of more
than 5% of its Common Stock. Beneficial ownership includes shares which the
beneficial owner has the right to acquire within sixty days of the above date
from the exercise of options, warrants, or similar obligations. If no address
is shown, the address of the beneficial owner is in care of the Company.
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
- -------------------------------------------------------------------------------
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class
- ------------------------------------ ------------------ ----------
Zach Lonstein (1) 1,707,288 44%
Anton P. Donde (2) 288,864 8%
Robert B. Wallach (3) 101,500 3%
Roger Kaufman (4) 93,223 3%
Eugene Monosson (5) 48,731 1%
James D. Gerson (6) 45,250 1%
Jeffrey Millman (7) 9,500 *
John C. Platt (8) 7,500 *
Richard A. Krantz (9) 7,350 *
Howard Waltman - - -
All Directors, Nominees and Executive (10) 2,309,206 56%
Officers as a group (11 persons)
* Less than 1% of Class
<PAGE>
Notes to Table of Beneficial Ownership:
(1) Includes 34,367 shares of Common Stock held by Mr. Lonstein as custodian
for the benefit of his children under the New York Uniform Gift to Minors
Act, as to which shares Mr. Lonstein disclaims beneficial ownership.
Includes 155,000 shares of Common Stock issuable upon exercise of options
held by Mr. Lonstein. Also includes 310,000 shares pledged as a
guarantee of the Company's obligations to the seller of MCC Corporation
in June 1995 (See "Certain Transactions").
(2) Includes 248,864 shares of Common Stock held by Mr. Donde as Trustee of
the Anton and Detta Donde Trust dated November 21, 1988. Also includes
40,000 shares of Common Stock issuable upon exercise of options held by
Mr. Donde.
(3) Includes 100,000 shares of Common Stock issuable upon exercise of an
option held by Mr. Wallach.
(4) Includes 5,000 shares of Common Stock issuable upon exercise of an option
held by Mr. Kaufman. Mr. Kaufman resigned from the Company effective
January 31, 1997.
(5) Includes 20,000 shares of Common Stock issuable upon exercise of an
option held by Mr. Monosson.
(6) Includes 11,250 shares of Common Stock issuable upon exercise of options,
and 19,000 shares of Common Stock issuable upon exercise of warrants held
by Mr. Gerson.
(7) Includes 9,500 shares of Common Stock issuable upon exercise of options
held by Mr. Millman.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of options
held by Mr. Platt.
(9) Includes 6,250 shares of Common Stock issuable upon exercise of options
held by Mr. Krantz.
(10) Includes 354,500 shares of Common Stock issuable upon exercise of options
and 19,000 shares of Common Stock issuable upon exercise of warrants
collectively held by all directors, nominees for director, and executive
officers of the Company.
<PAGE>
PROPOSAL I -ELECTION OF DIRECTORS
---------------------------------
The Board of Directors has fixed the number of Directors at eight for the coming
year. The persons named in the table below have been nominated for election at
the Meeting as Directors of the Company to serve until the next Annual Meeting
of Stockholders or until their respective successors are duly elected and
qualified. Each has consented to being named a nominee in this Proxy Statement
and has agreed to serve as a Director if elected at the Meeting. Unless
otherwise directed, the persons named in the Proxy intend to vote for the
election of these nominees. If any nominee becomes unable to serve prior to the
Meeting, Proxies will be voted for such other candidates as may be nominated by
the Board of Directors.
Directors will be elected by a plurality of the votes properly cast at the
Meeting. Abstentions and broker non-votes will not be treated as votes cast for
this purpose.
The name, principal occupation of, and certain information concerning each of
the nominees for Director are set forth in the table below. Also set forth,
following the table, is certain additional information regarding the nominees,
one additional Executive Officer and a current Director who is not standing for
re-election.
Director
Name Positions with the Company Age Since
- -------------- ------------------------------------- ---- --------
Zach Lonstein Chairman of the Board of Directors and 53 1984
Chief Executive Officer
Robert B. Wallach President and a Director 57 1992
James D. Gerson Director 53 1993
Howard Waltman Nominee for Director 65 -
Jeffrey Millman Executive Vice President, Secretary and 45 1992
a Director
John C. Platt Vice President, Treasurer, and a Director 42 1996
Anton P. Donde President of the Pay USA Division and a 41 1994
Director
Eugene Monosson Vice President of a Subsidiary of the 64 1995
Company and a Director
<PAGE>
Zach Lonstein has been the Company's Chairman of the Board and Chief Executive
Officer since he organized the Company in 1984, and President from 1984 to May,
1996. From 1981 to 1984, Mr. Lonstein was Vice President and General Manager of
the Commercial On-Line division of Informatics General Corporation
("Informatics" - subsequently renamed Sterling Federal Systems, Inc.), a
computer software and services company listed on the New York Stock Exchange.
In 1970, Mr. Lonstein was a founder and President of Transportation Computing
Services Corp. ("TCS"). In 1981, TCS was sold to Informatics and eventually
became the basis for the Commercial On-Line division, which the Company
purchased in 1984.
Robert B. Wallach was appointed President of the Company on May 1, 1996, has
been Vice President of MCC Corporation since the Company acquired it as of June
1, 1995, and has been a Director of the Company since 1992. Prior to June 1995,
he was sole proprietor of Horizons Associates, a consulting firm he founded in
1985. Mr. Wallach has over 20 years of operating experience including senior
management positions with Boeing Computer Services from 1970 to 1972 and
Informatics from 1972 to 1982 and, from 1982 to 1985, as President of the
Financial Information Services Group/Strategic Information division of Ziff
Communications, which provided computer services to companies in the financial
industry.
James D. Gerson has been Senior Vice President of Fahnestock & Co., Inc. since
1993, and Portfolio Manager of the Hudson Capital Appreciation Fund since
October 1995. From January 1992, Mr. Gerson served as Senior Vice President and
Managing Director of Corporate Finance at Reich & Co., Inc., an investment
banking and brokerage firm which served as the Company's underwriter for its
initial public offering completed in January 1993. Mr. Gerson is also a member
of the Boards of Directors of Ag Services of America, Inc., American Power
Conversion Corporation, Conceptronic, Inc., Energy Research Corporation, and
Hilite Industries, Inc.
Howard Waltman is Chairman of Express Scripts, Inc. ("ESI"), a company he formed
in 1986 as a subsidiary of Sanus Corp., a national Health Maintenance
Organization of which he was also the founder and former Chairman. Sanus Corp
was acquired by New York Life Insurance Company in 1987. ESI, which provides
mail order pharmacy services and pharmacy claims processing services, was spun
out of Sanus Corp and taken public in June, 1992. Mr. Waltman also founded
Bradford National Corp., which was sold to McDonnell Douglas Corporation, and is
Special Fund Advisor to the General Partner of the Galen III Partnerships.
Mr. Waltman also serves on the Board of Directors of qmed, Inc., and several
privately-held companies.
Jeffrey Millman has been Executive Vice President since 1988, Secretary since
1992, and has been with the Company since 1983, previously holding positions of
Vice President and Director of Systems and Programming. From 1979 to 1983,
Mr. Millman was Director of Theatrical Computer Systems for Columbia Pictures
Industries, Inc.
<PAGE>
John C. Platt has been an employee of the Company since it was formed in 1984,
and has been a Vice President of the Company since 1986, and its Treasurer since
1992. Prior to that time, Mr. Platt held various positions with Informatics and
TCS.
Anton P. Donde is a Vice President of the Company, and President of the Pay USA
Division of the Company. From 1985 to 1994, Mr. Donde was a founder of and
principal in Daton Pay USA, Inc., a corporation acquired by the Company in 1994.
Eugene Monosson is Vice President of Key-ACA, Inc., a corporation acquired by
the Company as of May 1, 1995. Prior to the acquisition, Mr. Monosson had been
President of Key-ACA, Inc. since 1987. Mr. Monosson also has 18 years of
experience with ADP, Inc. in various capacities, the last of which was as Vice
President of Operations, Northeast Division.
David N. Levine, 43, was appointed Vice President of Finance on February 1,
1997, and has been with the Company since May 1996. From November 1993 to May
1996, Mr. Levine was Director of Business Affairs for the New York division of
Unitel Video, Inc., a publicly-held provider of studio, production, and
post-production services. From February 1992 through November 1993, Mr. Levine,
a CPA, consulted with companies primarily in the telecommunications industry.
Formerly, Mr. Levine had been Controller of Graphic Scanning Corp., a
publicly-held telecommunications company.
Richard A. Krantz, 49, was elected as a Director of the Company in 1996, and has
decided not to stand for re-election. Mr. Krantz has been a partner in the law
firm of Robinson & Cole, which acts as SEC and general counsel to the Company,
since 1995. Prior to this time, Mr. Krantz was a principal of the law firm of
Cohen and Wolf, P.C., which acted as general counsel to the Company.
<PAGE>
Meetings and Committees of the Board of Directors
- -------------------------------------------------
The Board of Directors held six meetings during the fiscal year ended October
31, 1996, including two held by written consent. The Company has standing Audit
and Compensation Committees of the Board of Directors. The Company does not
have a nominating committee. Each Director attended at least 75% of all
meetings of the Board and all meetings of committees of the Board on which he
served which were held during the last fiscal year, or for such shorter period
during which the Director served.
During fiscal 1996, the Audit Committee consisted of Messrs. Wallach, Gerson
and, beginning in June 1996, Mr. Lonstein. The Audit Committee can meet
periodically with management and the Company's independent certified public
accountants to discuss their evaluation of internal accounting controls, the
quality of financial reporting, and related matters. The independent auditors
have free access to the Audit Committee without the presence of management, if
necessary, to discuss the results of their audits. The Board of Directors, upon
the Audit Committee's recommendation, approves the extent of non-audit services
provided by the independent auditors, giving due consideration to the impact of
those services on the auditors' independence. The Audit Committee did not meet
during the fiscal year ended October 31, 1996, as all matters for that year were
addressed by the full Board.
During fiscal 1996, the Compensation Committee consisted of Messrs. Gerson and
Krantz. The Compensation Committee's primary responsibilities are to recommend
levels of executive compensation, to consider and recommend the establishment of
various compensation plans for the Company, and to administer the Company's 1992
Stock Option and Stock Appreciation Rights Plan. The Compensation Committee
held two meetings during the fiscal year.
<PAGE>
Compensation of Directors and Executive Officers
- ------------------------------------------------
The Summary Compensation Table below includes, for each of the fiscal years
ended October 31, 1996, 1995, and 1994, individual compensation for services to
the Company and its subsidiaries as paid to the Chief Executive Officer and the
Named Executives.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation - Awards
------------------- ------------
Securities All Other
Name and Fiscal Salary Bonus Underlying Compensation
Principal Position Year ($) ($) Options (#) ($)
- ---------------------- ------ ---------- --------- ----------- -------------
Zach Lonstein, Chief 1996 $ 230,023 - 25,000 $ 30,000 (a)
Executive Officer and 1995 250,000 - 25,000 8,333 (a)
Chairman of the Board 1994 250,000 - 25,000 -
of Directors
Robert Wallach, 1996 166,667 $ 35,000 - -
President 1995 62,500 - 150,000 -
1994 - - - -
Roger Kaufman, Chief 1996 150,000 - 25,000 -
Financial Officer 1995 149,153 - - -
through January 31, 1994 118,446 - 50,000 -
1977
Jeffrey Millman, 1996 106,923 - - -
Executive Vice 1995 115,000 - - -
President and Secretary 1994 118,446 - 2,500 -
Anton P. Donde, President 1996 125,000 - - -
of the Pay USA Division 1995 125,000 - - -
of the Company 1994 51,216 - 100,000 -
(a) Fee relating to Mr. Lonstein's guarantee of the Company's obligations
relating to the purchase of MCC. (See "Certain Transactions")
<PAGE>
Option/SAR Grants in the Last Fiscal Year
- -----------------------------------------
The following table sets forth, for the Chief Executive Officer and the Named
Executives, all grants of stock options made during the fiscal year ended
October 31, 1996. Executives not listed did not receive grants of stock options
during the fiscal year. The Company did not award any stock appreciation rights
or reprice any stock options during fiscal 1996.
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year ($/share) Date
- --------------------- ----------- ------------ ---------- ------------
Zach Lonstein 25,000 23% $4.680 Dec 31, 2000
Roger Kaufman 25,000 23% $3.625 Jun 01, 2005
Aggregated Option Exercises and Fiscal Year-End Option Values
- -------------------------------------------------------------
The following table contains information concerning the unexercised stock
options held by the Chief Executive Officer and the Named Executives as of
October 31, 1996. No stock appreciation rights are held by any of the Named
Executives and no stock options were exercised by any of the Named Executives
during fiscal 1996. Executives not listed held no stock options at the end of
the fiscal year.
AGGREGATED FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------
Number of Securities Under- Value of Unexercised
lying Unexercised Options at In-the-Money Options at
October 31, 1996 (#) October 31, 1996 ($) (1)
---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------- ----------- ------------- ----------- -------------
Zach Lonstein 130,000 45,000 $ 330,250 $ -
Robert Wallach 100,000 50,000 $ 6,250 $ 3,125
Roger Kaufman 40,000 35,000 $ - $ -
Jeffrey Millman 7,000 5,500 $ - $ -
Anton P. Donde 40,000 60,000 $ - $ -
(1) The amounts shown represent the aggregate excess of the market value
of shares of common stock underlying options at October 31, 1996 over
the exercise price of those options.
<PAGE>
Compensation of Directors
- -------------------------
During fiscal year 1996, each of the two members of the Board of Directors who
were not full-time employees of the Company were granted non-qualified options
to purchase 1,250 shares of the Company's Common Stock for each meeting
attended.
Agreements with Certain Executive Officers
- ------------------------------------------
In 1992, Mr. Lonstein entered into an employment agreement with the Company.
This agreement was renewed on January 1, 1995 for a term of five years, is
subject to further renewal annually, and provides for a base annual salary of
$250,000 and an annual bonus equal to 5% of the amount by which the Company's
yearly pre-tax net income (as defined therein) exceeds 150% of the pre-tax net
income for the fiscal year ended October 31, 1992. Additionally, beginning on
January 1, 1995, and on each of the four succeeding anniversaries, the Company
agreed to grant an option to Mr. Lonstein to purchase 25,000 shares of the
Company's Common Stock at an exercise price equal to 110% of the market value of
the stock on that date, in accordance with the 1992 Stock Option and Stock
Appreciation Rights Plan. As of the date of this Proxy Statement, three such
grants have been made. In addition, the agreement requires that the Company
provide Mr. Lonstein a current model automobile, pay for all repairs,
maintenance, and business related expenses thereon, and to also purchase a
health club membership for Mr. Lonstein and pay related expenses. The Company
is the beneficiary of a $1,000,000 "key-man" life insurance policy which it
maintains on Mr. Lonstein.
The Company and Mr. Millman entered into an employment agreement dated November
1, 1992. This agreement has a term of five years, and provides for a base
annual salary of $115,000, with adjustments for increases in the cost of living
index subject to a review by the Compensation Committee of the Board of
Directors.
During fiscal 1996, both Mr. Lonstein and Mr. Millman voluntarily elected to
reduce their annual compensation below the amounts called for in their
employment agreements.
The Company and Mr. Kaufman entered into an employment agreement dated January
7, 1994 pursuant to which Mr. Kaufman served as Chief Financial Officer of the
Company and General Manager of Tru-Check Computer Systems, Inc., a subsidiary of
the Company. This agreement had a term of three years and provided for a base
annual salary of $150,000. The Agreement expired January 10, 1997. Also,
pursuant to an amendment dated July 1995, the company granted Mr. Kaufman an
option to purchase 25,000 shares of the Company's Common Stock with an exercise
price of $3.625 per share, and further agreed to reimburse Mr. Kaufman for the
cost of any such exercises. As of the date of this Proxy Statement, Mr. Kaufman
has purchased 10,000 shares in accordance with that amendment. On January 31,
1997, Mr. Kaufman resigned his positions with the Company.
In 1994, the Company and Mr. Donde entered into a five-year employment agreement
which provides for an annual base salary of $125,000 and the use, at the
Company's expense, of a current model automobile.
<PAGE>
Certain Transactions
- --------------------
As of October 31, 1996, Mr. Lonstein was indebted to the Company in the amount
of $100,352. This indebtedness is payable on demand and bears interest at the
prime rate plus 1% per annum.
In connection with the Company's acquisition of MCC Corporation ("MCC"), the
Company gave the sellers a note for $840,645, (the "Purchase Note") to be repaid
at stated times with interest over two years. In addition, net amounts totaling
$753,544 due by MCC to the sellers were combined into a second note (the "Second
Note"), which was repaid in equal monthly amounts over one year without
interest. As collateral for the notes, Mr. Lonstein pledged and placed in
escrow 310,000 shares of the Company's common stock owned by him. As
compensation for providing this collateral, Mr. Lonstein was granted a per annum
fee of 5% of the value of such shares ($1,000,000 on the date of the purchase)
for such period as the guarantee is in effect. The guarantee fee is being paid
to Mr. Lonstein in the form of a monthly reduction in his indebtedness to the
Company. In April 1996, the payment dates of the Purchase Note were extended by
the seller of MCC through 1999. Effective for fiscal year 1996 and subsequent
fiscal years, Mr. Lonstein and the Company agreed to reduce the annual guarantee
fee to 3%, payable on the same terms as above.
In connection with the acquisition by the Company of Tru-Check Computer Systems,
Inc. ("Tru-check") in January 1994, Mr. Kaufman received $428,281 and 82,060
shares of the Company's Common Stock, and the opportunity to earn contingent
payments based on the earnings of Tru-Check (as defined) for a two-year period.
As a result of this contingent payment arrangement, Mr. Kaufman received
$217,348 and 35,346 shares of the Company's Common Stock for the two year period
ended December 1995. The Company has guaranteed a market value for the shares
issued to Mr. Kaufman and the other seller of Tru-Check at no less than $6.40
per share on January 1, 1999.
In connection with the acquisition by the Company of Daton Pay USA, Inc.
("Daton") in June 1994, the Anton and Detta Donde Trust ("the Trust"), of which
Mr. Donde is trustee, received 264,084 shares of the Company's Common Stock.
Also, the Company repaid a $670,000 loan owed by Daton to Mr. Donde. In
addition, Mr. Donde has the opportunity to earn contingent payments based on the
earnings of the Pay USA Division (as defined) for a five-year period. As of
October 31, 1996, no contingent payments had been earned.
Also as a result of the acquisition of Daton, the Trust has the right to receive
a payment equal to 1% of any consideration paid by the Company to purchase any
company not engaged in providing payroll services. Such payment is to be made
in the Company's Common Stock at a value of $5.00 per share. Pursuant to this
provision, and in connection with the acquisition by the Company of MCC
Corporation in June 1995, the Company issued 2,052 shares of Common Stock to the
Trust. The Company has guaranteed that the market value of the shares issued to
Mr. Donde, the Trust, and the other sellers of Daton will be no less than $5.00
per share on July 31, 2000.
<PAGE>
As a result of the acquisition by the Company of Key-ACA, Inc. ("ACA") as of May
1, 1995, Mr. Monosson received $157,391 and 28,616 shares of the Company's
Common Stock, as well as the opportunity to earn contingent payments based on
the earnings of ACA (as defined) for five years. As of October 31, 1996, no
contingent payment had been earned. The Company has guaranteed the market value
of the shares issued to Mr. Monosson and the other sellers of ACA will be no
less than $5.50 on May 1, 2000.
The Company and Mr. Waltman have agreed that, on the date of his election to
the Company's Board of Directors, the Company will issue to Mr. Waltman a
Warrant to purchase 50,000 shares of the Company's Common Stock at 120% of the
fair market value on that date. Further, Mr. Waltman has agreed to purchase an
additional 25,000 shares of the Company's Common Stock in the open market, and
also to purchase 25,000 restricted shares from Mr. Lonstein.
PROPOSAL II - APPROVAL OF AMENDMENT TO THE COMPANY'S
1992 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
----------------------------------------------------
On February 10, 1997, the Board of Directors adopted a resolution, subject to
shareholder approval, to amend the 1992 Stock Option and Stock Appreciation
Rights Plan, as previously amended (the "Plan"), to increase the number of
shares available for grant under the Plan from 700,000 to 1,200,000. This
amendment is being submitted to shareholders for approval to comply with Rule
16b-3 under the Securities Exchange Act of 1934.
The Board of Directors believes that stock options are valuable tools for the
recruitment, retention and motivation of qualified employees, including
officers, and other persons who can materially contribute to the Company's
success. As of April 1, 1997, none of the 700,000 shares originally
available for issuance under the Plan remained available and, in addition, the
Company has granted options for an additional 47,800 shares subject to the
adoption of the proposed amendment to the Plan. Further, the Company may wish
to make additional grants to existing employees, new employees gained through
normal growth or future business acquisitions (although the Company has no
definitive plans for any such acquisitions at this time), or for other purposes.
The Board of Directors believes that it is important to have additional shares
available under the Plan to provide adequate incentives to the Company's
workforce.
The material features of the Plan, including the proposed amendment, are
outlined below. The following summary is qualified in its entirety by reference
to the full text of the Plan, a copy of which has been filed with the Securities
and Exchange Commission. Only the text of the amendment is included as
Appendix A to this Proxy Statement.
The affirmative vote of the holders of a majority of the shares of Common Stock
properly cast at the Meeting, in person or by proxy, is necessary for approval
of the amendment to the Plan and, unless this vote is received, the amendment to
the Plan will not become effective. Abstentions and broker non-votes will not
be treated as votes cast for this purpose.
<PAGE>
Purpose of Plan
- ---------------
The purpose of the Plan is to provide incentive to selected directors, officers,
employees and consultants of the Company and its subsidiaries, by providing them
with the opportunities to realize stock appreciation, by facilitating stock
ownership and by rewarding them for achieving a high level of corporate
performance. The Plan is also intended to facilitate recruiting and retaining
key personnel of outstanding ability.
Administration
- --------------
The Plan is administered by a committee (the "Committee") appointed by the
Company's Board of Directors. Except with respect to options granted to
Non-Employee Directors, the Committee has the exclusive power to grant options
under the Plan and to determine when and to whom options will be granted, and
the form, amount and other terms and conditions of each grant, subject to the
provisions of the Plan. The Committee has the authority to interpret the Plan
and any grant or agreement made under the Plan.
Eligibility
- -----------
The Plan provides for grants to all employees of the Company and its
subsidiaries of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, and for grants of non-qualified
options to employees, officers, directors and consultants of the Company and its
subsidiaries. Additionally, the Plan provides that each Non-Employee Director
shall automatically be granted a stock option covering 1,250 shares for each
meeting of the Board of Directors attended by that director during that fiscal
year.
Types of Grants
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The Company has discretion to determine whether an option grant shall be an
incentive stock option or a non-qualified option. Subject to certain
restrictions applicable to incentive stock options, options will be exercisable
by the recipients at those times as are determined by the Committee, but in no
event may the term of an option be longer than ten years after the date of
grant (five years with respect to an incentive option granted to an employee
holding 10% or more of the Company's stock). Both incentive and non-qualified
stock options may be granted to recipients at such exercise prices as the
Committee may determine, except that the exercise price of an incentive stock
option shall not be less than 100% of the fair market value of the stock on the
date of its grant (110% in the case of a grant to a 10% or greater shareholder)
and the exercise price of a non-qualified option granted to a Non-Employee
Director shall be the fair market value of the stock on the date of its grant.
The purchase price payable upon exercise of options may be paid in cash or by
delivering stock already owned by the holder (where the fair market value of the
shares delivered on the date of exercise is equal to the option price of the
stock being purchased), or a combination of cash and stock.
<PAGE>
Transferability
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During the lifetime of an employee to whom an option has been granted, only the
employee, or the employee's legal representative, may exercise an option. No
options may be sold, assigned, transferred, exchanged or otherwise encumbered
except to a successor in the event of an option holder's death.
Stock Appreciation Rights
- -------------------------
Options may be accompanied by either general or limited stock appreciation
rights. Upon exercising a stock appreciation right, a related option shall no
longer be exercisable, but the options shall be considered to have been
exercised to that extent for purposes of determining the number of shares
available for the grant of further options. Upon exercise of a right, the
holder receives the difference between the fair market value per share on the
date the right is exercised and the purchase price per share at which the option
is exercisable, multiplied by the number of shares with respect to which the
right is being exercised. A limited right, however, may be exercised only
during the period of a tender or exchange offer for the Company's shares.
Amendment or Termination
- ------------------------
The Board of Directors may amend or discontinue the Plan but no amendment or
termination shall be made that would impair the rights of any holder of any
option granted before the amendment or termination.
Federal Tax Considerations
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The Company has been advised by its counsel that the grants made under the Plan
generally result in the following tax events for United States citizens under
current United States Federal income tax laws.
Incentive Stock Options - A recipient will realize no taxable income, and the
Company will not be entitled to any related deduction, at the time an incentive
stock option is granted under the Plan. If certain statutory employment and
holding period conditions are satisfied before the recipient disposes of shares
acquired pursuant to the exercise of such an option, then no taxable income will
result from the exercise of an incentive stock option and the Company will not
be entitled to any deduction in connection with that exercise. Upon disposition
of the shares after expiration of the statutory holding periods, any gain or
loss realized by a recipient will be a capital gain or loss. The Company will
not be entitled to a deduction with respect to a disposition of the shares by a
recipient after the expiration of the statutory holding periods.
Except in the event of death, if shares acquired by a recipient upon the
exercise of an incentive stock option are disposed of by the recipient before
the expiration of the statutory holding periods, the recipient will be
considered to have realized, as compensation taxable as ordinary income in the
year of disposition, an amount, not exceeding the gain realized on the
<PAGE>
disposition, equal to the difference between the exercise price and the fair
market value of the shares on the date of exercise of the option. The Company
will be entitled to a deduction at the same time and in the same amount as the
recipient is deemed to have realized ordinary income. Any gain realized on the
disposition in excess of the amount treated as compensation or any loss realized
on the disposition will constitute capital gain or loss, respectively.
The foregoing discussion applies only for regular tax purposes. For alternative
minimum tax purposes, at the time of exercise of an incentive stock option, the
recipient would realize ordinary income.
Non-Qualified Stock Options - A recipient will realize no taxable income, and
the Company will not be entitled to any related deduction, at the time a
non-qualified stock option is granted under the Plan. At the time of exercise
of a non-qualified stock option, the recipient would realize ordinary income,
and the Company would be entitled to a deduction, equal to the excess of the
fair market value of the stock on the date of exercise over the option price.
Upon disposition of the shares, any additional gain or loss realized by the
recipient will be taxed as a capital gain or loss.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE AMENDMENT TO THE 1992 STOCK OPTION AND STOCK APPRECIATION RIGHTS
PLAN.
SECURITIES EXCHANGE ACT REPORTING
Section 16(a) of the Securities Exchange Act of 1934 requires the Executive
Officers and Directors of the Company, and persons who beneficially own more
than ten percent of the Company's Common Stock, to file reports of ownership of
Company securities and changes of ownership with the Securities and Exchange
Commission. Copies of those reports must also be furnished to the Company.
Based solely on a review of the copies of reports furnished to the Company or
representations of the Company's Directors and Executive Officers that no
additional reports were required, the Company believes that during the fiscal
year ended October 31, 1996 the Executive Officers, Directors, and other persons
beneficially owning more than ten percent of the Company's Common Stock complied
with all applicable Section 16(a) filing requirements, except as to Mr. Kaufman,
who failed to timely file five Form 4's. Mr. Kaufman has subsequently filed the
necessary reports.
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has appointed Deloitte & Touche, LLP as independent
auditors of the Company for the year ending October 31, 1997. A representative
of Deloitte & Touche, LLP is expected to be present at the Meeting, will have
the opportunity to make a statement if such representative desires to do so, and
is expected to be available to respond to appropriate questions.
<PAGE>
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
In order for a stockholder proposal to be considered for inclusion in the
Company's Proxy materials for the 1998 Annual Meeting, it must be received by
the Company at 360 West 31st Street, New York, NY 10001, Attention: Secretary,
no later than November 1, 1997.
OTHER BUSINESS
The Board of Directors knows of no other business to be acted upon at the
Meeting other than the matters described in this Proxy Statement. If other
business is properly presented for consideration at the Meeting, or at any
adjournment thereof, the enclosed Proxy shall be deemed to confer discretionary
authority on the persons named therein to vote the shares represented by such
Proxy as to any such matters.
The Board of Directors of the Company would appreciate the prompt return of the
enclosed Proxy, signed and dated.
ANNUAL REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED
OCTOBER 31, 1996 WILL BE PROVIDED WITHOUT CHARGE UPON WRITTEN REQUEST TO
COMPUTER OUTSOURCING SERVICES, INC., ATTN: INVESTOR RELATIONS, 360 WEST 31ST
STREET, NEW YORK, NEW YORK 10001.
<PAGE>
APPENDIX A
RESOLVED: That, subject to the approval of the Company's shareholders, the
Company's 1992 Stock Option and Stock Appreciation Rights Plan, as previously
amended, (the "Plan") is hereby amended in the following respect:
Section 2 of the Plan is hereby amended by changing the first
sentence of the third paragraph to read in its entirety as follows:
"The aggregate number of Shares which may be issued and sold
under the Plan shall not, except as such number may be adjusted
pursuant to Section 8 hereof, exceed 1,200,000 Shares, which may
be either authorized and unissued Shares or issued Shares
reacquired by the Company."
<PAGE>
APPENDIX B
FORM OF PROXY
-------------
COMPUTER OUTSOURCING SERVICES, INC.
Proxy for Annual Meeting on May 5, 1997
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Zach Lonstein and Jeffrey Millman proxies, each
with the power to appoint his substitute and with authority in each to act in
the absence of the other, to represent and to vote all shares of stock of
Computer Outsourcing Services, Inc., which the undersigned is entitled to vote
at the Annual Meeting of Stockholders of the Company to be held at the offices
of the Company, 360 West 31st Street, 11th Floor, New York, New York, on
Monday, May 5, 1997 at 10:00 AM, local time, and at any adjournments thereof,
as indicated on the proposals described in the Proxy Statement and all other
matters properly coming before the Meeting.
Dated:________________________, 1997
Signature:__________________________
Signature:__________________________
Please sign exactly as your name
or names appear above. For joint
accounts, both owners should sign.
When signing as executor,
administrator, attorney, trustee,
or guardian, etc., please give
your full title.
- -------------------------------------------------------------------------------
A vote FOR items 1 and 2 is recommended by the Baord of Directors
1. ELECTION OF DIRECTORS: [ ] FOR all nominees listed below
(except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all
nominees
Zach Lonstein, Jeffrey Millman, Anton P. Donde,
Robert B. Wallach, Eugene Monoson, James D. Gerson,
Howard Waltman, John C. Platt
INSTRUCTION: To withhold authority to vote for an individual nominee, write
that nominee's name in the following space.
___________________________________________________________________________
2. PROPOSAL TO AMEND THE COMPANY'S 1992 STOCK OPTION AND STOCK APPRECIATION
RIGHTS PLAN TO INCREASE THE NUMBER OF SHARES FOR WHICH OPTIONS MAY BE
GRANTED UNDER THE PLAN TO 1,200,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATIONS MADE. IF NO CHOICES
ARE INDICATED, THIS PROXY WILL BE VOTED "FOR" ITEMS 1 AND 2.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE
