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: January 31, 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 March 4, 1997.
Transitional Small Business Disclosure Form (check one); Yes [ ] No [X]
Page 1 of 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January October
31, 1997 31, 1996
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including
short-term, interest bearing invest-
ments of $304,424 and $316,346 ............ $ 649,749 $ 1,083,545
Trade accounts receivable, net of allowance
for doubtful accounts of $405,049 and
$305,874 .................................. 4,141,920 3,716,343
Refundable income taxes ..................... 45,204 62,988
Prepaid expenses ............................ 878,640 699,005
Other current assets ........................ 171,141 125,850
---------- ----------
5,886,654 5,687,731
---------- ----------
PROPERTY and EQUIPMENT, net ................... 3,112,031 3,132,847
---------- ----------
OTHER ASSETS:
Deferred software costs, net ................ 2,064,861 1,912,505
Intangibles, net ............................ 7,606,366 7,764,535
Due from related parties, net ............... 102,442 106,472
Security deposits and other non-current
assets .................................... 685,037 705,307
---------- ----------
10,458,706 10,488,819
---------- ----------
TOTAL ASSETS .................................. $ 19,457,391 $ 19,309,397
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 2 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
January October
31, 1997 31, 1996
------------- -------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................ $ 1,814,646 $ 1,535,816
Current portion of long-term debt ........... 952,771 1,054,352
Current portion of capitalized lease
obligations ............................... 183,734 195,979
Accrued expenses and taxes .................. 1,698,925 1,757,355
Customer deposits and other current
liabilities ............................... 251,394 282,075
---------- ----------
4,901,470 4,825,577
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt .............................. 1,520,484 1,629,234
Capitalized lease obligations ............... 246,232 284,775
Deferred income taxes ....................... 862,885 837,219
Stock option obligation ..................... 143,751 133,146
---------- ----------
2,773,352 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, 3,744,850 and 3,734,850.......... 37,448 37,348
Additional paid-in capital .................. 9,270,102 9,233,952
Retained earnings ........................... 2,501,368 2,363,278
Deferred costs arising from a financing
and consulting agreement .................. (26,349) (35,132)
---------- ----------
11,782,569 11,599,446
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 19,457,391 $ 19,309,397
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 3 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended January 31,
1997 1996
------------- -------------
REVENUES ...................................... $ 8,182,101 $ 7,107,115
---------- ----------
COSTS and EXPENSES:
Data processing costs ....................... 5,392,180 4,370,314
Selling and promotion costs ................. 652,101 709,575
General and administrative costs ............ 1,803,219 1,827,886
Interest expense, net of interest income ... 74,114 93,926
---------- ----------
7,921,614 7,001,701
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES ...... 260,487 105,414
PROVISION FOR INCOME TAXES .................... 114,000 59,392
---------- ----------
NET INCOME .................................... $ 146,487 $ 46,022
========== ==========
INCOME PER COMMON SHARE ....................... $ 0.04 $ 0.01
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . 3,839,991 3,760,975
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 4 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended January 31,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................... $ 146,487 $ 46,022
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ............... 555,033 482,367
Deferred income taxes ....................... 25,666 55,836
Decrease/(increase) in:
Trade accounts receivable ................. (425,577) (281,044)
Refundable taxes .......................... 17,784 (14,905)
Prepaid expenses .......................... (179,633) (164,031)
Other current assets ...................... (45,293) 95,333
Security deposits and other noncurrent
assets .................................. 51,155 11,347
Increase/(decrease) in:
Accounts payable .......................... 278,830 467,720
Accrued expenses and taxes ................ (56,221) (314,186)
Customer deposits and other current
liabilities ............................. (30,681) (15,942)
---------- ----------
Net cash provided by operating activities ... 337,550 368,517
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......... (225,631) (111,072)
Disposal of equipment ....................... 2,074 -
Settlement of contingencies relating to
acquisitions ............................. (5,472) (37,263)
Increase in deferred software costs ......... (269,037) (282,633)
---------- ----------
Net cash used in investing activities ....... $ (498,066) $ (430,968)
---------- ----------
Continued on Next Page
See Notes to Consolidated Interim Financial Statements
Page 5 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended January 31,
1997 1996
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................. $ (210,332) $ (278,380)
Repayments of amounts by related
parties, net .............................. 4,031 21,904
Repayments of capital leases ................ (66,979) (41,656)
---------- ----------
Net cash used in financing activities ....... (273,280) (298,132)
---------- ----------
Net decrease in cash and cash equivalents ... (433,796) (298,132)
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..................................... $ 649,749 $ 1,107,884
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................. $ 83,430 $ 93,395
========== ==========
Income taxes .............................. $ 51,215 $ 1,306
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
New capitalized leases for data processing
equipment ................................. $ 16,195 $ 135,204
========== ==========
For the three months ended January 31, 1997 and 1996, $8,397 and $11,703 (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 12
<PAGE>
<TABLE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1997
(Unaudited)
<CAPTION>
Deferred
Costs in
Connection
with a
Financing/
Par Paid in Retained Consulting
Shares Value Capital Earnings Agreement Total
--------- -------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1996 ....... 3,734,850 $ 37,348 $ 9,233,952 $ 2,363,278 $ (35,132) $ 11,599,446
Stock issued in connection with
a covenant not to compete ....... 10,000 100 36,150 36,250
Amortization of deferred costs
in connection with a financing
and consulting agreement ....... 8,783 8,783
Accretion in connection with a
stock option obligation, net ... (8,397) (8,397)
Net income ...................... 146,487 146,487
--------- -------- ----------- ----------- ---------- ------------
Balances, January 31, 1997 ....... 3,744,850 $ 37,448 $ 9,270,102 $ 2,501,368 $ (26,349) $ 11,782,569
========= ======== =========== =========== ========== ============
See Notes to Consolidated Interim Financial Statements
Page 7 of 12
</TABLE>
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Consolidated Balance Sheet as of January 31, 1997, and the Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the three
month periods ended January 31, 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 January 31, 1997 and 1996 are
not necessarily indicative of the operating results for the full fiscal years.
Certain reclassifications have been made to the prior period to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-KSB for October 31, 1996.
The consolidated financial statements include the accounts of Computer Out-
sourcing Services, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated.
2. DEBT
At January 31, 1997, the Company was indebted to a bank for three term loans
under a Term Loan Agreement ("Agreement") orignally aggregating $2,620,000, the
proceeds of which 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 plus 1.5%. An aggregate
$1,399,170 was outstanding at January 31, 1997 under this facility. Substan-
tially all of the assets of the Company are pledged as collateral for this
indebtedness.
As last amended on March 20, 1997, the Company and the bank agreed to, among
other things, change certain financial covenants in the Agreement, reduce the
interest rate on the outstanding debt, and replace one of the loans which had a
balance of $1,218,750 at January 31, 1997. The replacement term loan is in the
same principal amount and has generally the same terms except as to the reduced
interest rate. This new term loan bears interest, at the Company's option, at
either the Adjusted Eurodollar Rate (as defined in the agreement) plus 2.25%, or
the Prime Rate. The Company is in compliance with the amended covenants.
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. The line of credit expires on April 30, 1998.
Page 8 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
3. RELATED PARTY TRANSACTIONS
In December 1996, in connection with the expiration of the employment agreement
of an officer of the Company, the officer and the Company entered into a non-
competition agreement whereby the officer agreed not to compete for a period of
two years in return for 25,000 shares of the Company's Common Stock, to be
granted in various amounts and at various times over the two year period. As
of January 31, 1997, the Company had issued 10,000 shares of Common Stock
pursuant to this agreement. Compensation associated with this arrangement will
be amortized over the life of the non-compete agreement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
During the quarter ended January 31, 1997, revenues increased $1,075,000 to
$8,182,000, an increase of 15.1% over the quarter ended January 31, 1996.
The Company's Information Processing Division recorded a revenue increase of
$721,000 (15% of divisional revenues), primarily due to contracts entered into
in the prior fiscal year. The Pay USA Division recorded a revenue increase of
$354,000 (16% of divisional revenues).
Data processing costs increased $1,022,000 to $5,392,000 (65.9% of revenues)
during the current quarter compared to $4,370,000 (61.5% of revenues) in the
prior year's quarter. The Information Processing Division's data processing
costs increased $816,000 to $4,109,000 (50.2% of divisional revenues), compared
to $3,294,000 (46.3% of revenues) in the prior quarter. The increase as a
percentage of revenues is attributable to the mix of services provided in the
current quarter compared to the prior year's quarter. Pay USA's data
processing costs increased $206,000 to $1,283,000 (15.7% of divisional
revenues). Payroll processing and tax filing costs aggregated $1,077,000 (15.1%
of revenues) in the prior year. The Company continued the process of standard-
izing 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 standardiza-
tion, 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 $57,000 to $652,000, a decrease of 2.0% as
a percentage of revenues. A decrease of $84,000 in the Information Processing
Division was partially offset by in increase of $27,000 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 $25,000 to $1,803,000 in the
current year's quarter, a decrease of 3.7% as a percentage of revenues, as the
Company was successful in holding down administrative costs while growing its
businesses. Net interest expense decreased $20,000 to $74,000 in the current
year's quarter primarily as a result of a decreased level of outstanding debt.
Page 9 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
Results of Operations - (Continued)
- -----------------------------------
For the quarter ended January 31, 1997, the provision for income taxes was
$114,000, an effective tax rate of 43.8%. For the comparable quarter of the
prior year, the provision for income taxes was $59,000, a 56.3% 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 of collected but unremitted
funds into high quality, low risk tax exempt securities.
The Company recorded a profit of $146,000 ($.04 per share) for the quarter ended
January 31, 1997 compared to a profit of $46,000 ($.01 per share) for the
quarter ended January 31, 1996.
Liquidity and Capital Resources
- -------------------------------
On January 27, 1993, the Company completed its initial public offering of
1,150,000 shares of Common Stock, which yielded net proceeds of $4,927,000 to
the Company. Prior to the offering, the Company had financed its operations,
capital expenditures, and acquisitions through internally generated funds and
consequently the number and size of potential acquisitions had been limited.
Proceeds from the offering, as well as certain borrowings discussed below, have
enabled the Company to achieve significant growth through the acquisition of a
number of companies in both the payroll processing and information processing
markets.
During the quarter ended January 31, 1997, the Company provided $338,000 from
operations principally by generating $728,000 in net income before deductions
for depreciation, amortization, and deferred taxes. It invested $226,000 for
the purchase of equipment and spent $269,000 for product enhancements. In the
aggregate, the Company's investing activities used $498,000. In its financing
activities, the Company used $273,000 principally to repay long-term debt. As
a result of these factors, the Company's cash and cash equivalents decreased by
$434,000.
As of January 31, 1997, the Company had cash and cash equivalents of $650,000
and working capital of $985,000. Its current ratio (i.e., the ratio of current
assets to current liabilities) was 1.20 to 1, and its debt to equity ratio was
0.65 to 1.
At January 31, 1997, the Company was indebted to a bank for three term loans
under a Term Loan Agreement ("Agreement") orignally aggregating $2,620,000, the
proceeds of which 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 plus 1.5%. An aggregate
$1,399,170 was outstanding at January 31, 1997 under this facility. Substan-
tially all of the assets of the Company are pledged as collateral for this
indebtedness.
Page 10 of 12
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
Liquidity and Capital Resources (Continued)
- -------------------------------------------
As last amended on March 20, 1997, the Company and the bank agreed to, among
other things, change certain financial covenants in the Agreement, reduce the
interest rate on the outstanding debt, and replace one of the loans which had a
balance of $1,218,750 at January 31, 1997. The replacement term loan is in the
same principal amount and has generally the same terms except as to the reduced
interest rate. This new term loan bears interest, at the Company's option, at
either the Adjusted Eurodollar Rate (as defined in the agreement) plus 2.25%, or
the Prime Rate, and is expected to save the Company approximately $30,000 in
interest costs over the term of the loan. The Company is in compliance with
the amended covenants.
In March 1997, the Company and the bank entered into an additional agreement for
a line of credit agreement 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. 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.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Fourth Amendment dated as of February 1, 1997 to the Standby
Credit and Term Loan Agreement, as amended, among the Company
and its subsidiaries and The Chase Manhattan Bank (formerly
Chemical Bank) ("Chase")
10.2 1996 (Replacement) Term Note, dated as of February 1, 1997 by the
Company to the order of Chase in the amount of $1,218,750.
10.3 Promissory Note dated February 26, 1997, evidencing a line of
credit advanced by Chase to the Company.
10.4 Fifth Amendment dated as of March 20, 1997 to the Standby Credit
and Term Loan Agreement, as amended, among the Company and its
subsidiaries and Chase.
(b) Reports on Form 8-K:
None
Page 11 of 12
<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.
/s/
March 21, 1996 -----------------------------
Zach Lonstein
Principal Executive Officer
/s/
March 21, 1996 -----------------------------
David N. Levine
Principal Financial Officer
Page 12 of 12
<PAGE>
FOURTH AMENDMENT dated as of February 1, 1997 to the STANDBY CREDIT AND
TERM LOAN AGREEMENT dated as of April 5, 1994, as amended ("Credit Agreement")
among COMPUTER OUTSOURCING SERVICES, INC., a New York corporation (the
"Borrower"), NEDS, INC., a New York corporation, DATON PAY USA, INC., a
California corporation, PAY USA OF NEW JERSEY, INC., a New York corporation,
ACA ACQUISITION CORP., a New York corporation and MCC CORPORATION, a New York
Corporation (each, a "Guarantor" and collectively, the "Guarantors") and THE
CHASE MANHATTAN BANK (formerly Chemical Bank"), a New York banking corporation
(the "Bank").
The Borrower desires to amend the Credit Agreement in order to
(i) provide for a Eurodollar Rate option (as hereinafter defined) on the 1996
Term Loan and (ii) reduce the interest on Term Loans that are Prime Loans.
Subject to the terms and conditions hereof, the Borrower, the Guarantors and
the Bank are prepared to agree to such amendment. Unless otherwise defined
herein, all capitalized terms used herein which are defined in the Credit
Agreement shall have the same meanings herein as therein defined.
Therefore, the Borrower, the Guarantors and the Bank agree as follows:
1. The Credit Agreement shall be amended accordingly:
(a) Section 1.01, 'Definitions' shall be amended by
(1) adding a definition of "Eurodollar Loan" as follows:
"Eurodollar Loan" means any term loans advanced in accordance
with the 1996 (Replacement) Term Note bearing interest, at the
Borrower's option, at the Adjusted Eurodollar Rate plus 2.25%,
subject to the terms, conditions and limitations of the 1996
(Replacement) Term Note (as hereinafter defined) which terms,
conditions and limitations are expressly incorporated herein
by reference with the same force and effect and to the same
extent, as if such terms, conditions and limitations were
stated in the Credit Agreement. No more than three (3)
Eurodollar Loans may be outstanding at any one time.
(2) expressly incorporating herein by reference the definitions of:
"Adjusted Eurodollar Rate", "Business Day", "Interest Period" and
"Statutory Reserves", as such terms relate to any Eurodollar Loan and
are set forth in the 1996 (Replacement) Term Note with the same force
and effect and to the same extent, as if such definitions were stated
in the Credit Agreement.
(b) Article II, 'Loans' shall be amended by:
(i) deleting the last sentence of Section 2.02(b) and substituting
therefor:
"The 1996 Term Loan may be, effective February 1, 1997, made in any
combination of Eurodollar Loan(s) or Prime Loan(s) at the Borrower's
option in accordance with and subject to the conditions of the 1996
(Replacement) Term Note and Article V hereof."
<PAGE>
(ii) deleting Section 2.03(b) in its entirety and substituting therefor:
"(b) The 1996 Term Loan will be evidenced by a restated and
amended term note in the form of Exhibit "D-1" hereto (the "1996
(Replacement) Term Note" and together with the 1994 Term Notes, the
"Term Notes" and sometimes each referred to as a "Term Note"). The
1996 (Replacement) Term Note shall be duly executed and delivered by
the Borrower dated as of the date hereof, and payable as to principal
in thirty-nine (39) equal consecutive monthly installments on the first
of each month commencing March 1, 1997 and shall bear interest, at the
Borrower's option at the Adjusted Eurodollar Rate plus 2.25% or the
Alternate Base Rate. If the Term Loan is a Eurodollar Loan, it shall
bear interest at the rate per annum computed in accordance with the
1996 (Replacement) Term Note. If the Term Loan is a Prime Loan, it
shall bear interest at the rate per annum computed in accordance with
the 1996 (Replacement) Term Note and also as set forth in Section 2.05
hereof. Interest shall be paid as provided in the 1996 (Replacement)
Term Note."
(3) deleting "plus 1-1/2%" from the last line of Section 2.05,
'Interest on Prime Loans', thereby amending the interest payable on Prime
Loans (that are Term Loans) to the Alternate Base Rate.
(4) adding a new subsection 2.06(d), 'Optional Prepayment of
Loans', as follows:
"(d) If a Eurodollar Loan is paid on a day other than the last
day of an Interest Period, the Borrower shall reimburse
the Bank on demand for any loss incurred or to be
incurred by it in the reemployment of the funds released
by any prepayment."
(5) expressly incorporating herein by reference the provisions in
the 1996 (Replacement) Term Note entitled "Indemnity" and "Change in
Legality" as new Sections 2.15 and 2.16 respectively of the Credit
Agreement, with the same force and effect and to the same extent as if
such provisions were stated in the Credit Agreement.
2. The Borrower and each Guarantor jointly and severally represent
and warrant that the Credit Agreement together with this Fourth Amendment and
the 1996 (Replacement) Term Note, when delivered hereunder, will be legal,
valid and binding obligations of each of them, as appropriate, and enforceable
against each of them, as appropriate, in accordance with their respective
terms. The Borrower and each Guarantor further represent and warrant that the
representations and warranties set forth in Article III of the Credit Agreement
shall be deemed restated and are true and correct, all as of the date hereof
and that no Event of Default, as set forth in Article VIII of the Credit
Agreement, exists and that no event which upon notice or lapse of time or both,
would constitute an Event of Default has occurred and is continuing.
<PAGE>
3. On or prior to the effectiveness of this Fourth Amendment, the
Bank shall have received the following in form and substance satisfactory to
it:
i) The 1996 (Replacement) Term Note duly executed by the Borrower;
and
ii) Legal Processing Fee; and
iii) Evidence of merger of Tru-Check Computer Systems, Inc. with and
into the Borrower.
4. Upon the effectiveness of this Fourth Amendment, each reference
in the Credit Agreement to "this Agreement", "hereunder", "herein" or words of
like import shall mean and be a reference to the Credit Agreement, as affected
and amended hereby.
5. The Credit Agreement, as amended by this Fourth Amendment, and
each other document executed in connection therewith shall remain in full force
and effect and are hereby ratified and confirmed, except as specifically
amended hereby.
6. This Amendment shall be governed by and construed in accordance
with the laws of the State of New York and shall be binding upon the Borrower,
each Guarantor, the Bank and their respective successors and assigns.
IN WITNESS WHEREOF, the Borrower, each Guarantor and the Bank have
caused this Fourth Amendment to be duly executed by their duly authorized
officers, all as of the day and year first above written.
COMPUTER OUTSOURCING SERVICES, INC.
/s/-----------------------------------
President
NEDS, INC.
/s/-----------------------------------
President
DATON PAY USA, INC.
/s/-----------------------------------
President
<PAGE>
PAY USA OF NEW JERSEY, INC.
/s/-----------------------------------
President
ACA ACQUISITION CORP.
/s/-----------------------------------
President
MCC CORPORATION
/s/-----------------------------------
President
THE CHASE MANHATTAN BANK
/s/-----------------------------------
Vice President
<PAGE>
1996 (REPLACEMENT) TERM NOTE
$1,218,750 New York, New York
As of February 1, 1997
FOR VALUE RECEIVED, COMPUTER OUTSOURCING SERVICES, INC. the
"Borrower"), HEREBY PROMISES TO PAY to the order of THE CHASE MANHATTAN BANK
(the "Bank"), at its offices located at 1411 Broadway, New York, New York
10018, or at such other place as the Bank or any holder hereof may from time to
time designate, the principal sum of ONE MILLION TWO HUNDRED AND EIGHTEEN
THOUSAND SEVEN HUNDRED AND FIFTY DOLLARS ($1,218,750), in lawful money of the
United States, in immediately available funds in thirty-nine (39) equal
consecutive monthly installments of $31,250 payable on the first of each month
commencing on March 1, 1997 with the final installment due on May 1, 2000 (the
"Maturity Date")(or earlier as hereinafter referred to), and to pay interest in
like money at such office or place from the date hereof on the unpaid principal
balance of each Loan (as hereinafter defined) made hereunder at a rate equal to
the Applicable Interest Rate (as hereinafter defined) for such Loan, which
shall be payable on the Interest Payment Date relating to such Loan (as
hereinafter defined) until such Loan shall be due and payable (whether at
maturity, by acceleration or otherwise) and thereafter, on demand. Interest
after maturity shall be payable at a rate four percent (4%) per annum above the
Applicable Rate in effect from time to time which rate shall be computed for
actual number of days elapsed on the basis of a 360-day year and shall be
adjusted as of the date of each such change, but in no event higher than the
maximum permitted under applicable law.
Interest/Grid Schedule
----------------------
The Bank is authorized to enter on the Grid Schedule attached hereto
(i) the amount of each Loan made from time to time hereunder, (ii) the date on
which each Loan is made, (iii) the applicable Interest Period for each Loan
which in no event shall be later than the Maturity Date, (iv) the interest rate
agreed between the Borrower and the Bank as the interest rate to be paid to the
Bank on each Loan (each such rate, an "Applicable Interest Rate"), which rate,
at the Borrower's option in accordance herewith, shall be at (a) the Alternate
Base Rate (as hereinafter defined)(the "Prime Rate Loan(s)") or (b) the
Adjusted Eurodollar Rate (as hereafter defined) plus 2.25% (the "Eurodollar
Loan"), (v) the amount of each payment made hereunder, and (vi) the outstanding
principal balance of the Loans hereunder from time to time, all of which
entries, in the absence of manifest error, shall be rebuttably presumed correct
and binding on the Borrower; PROVIDED HOWEVER, that the failure of the Bank
to make any such entries shall not relieve the Borrower from its obligation to
pay any amount due hereunder.
Prepayment
----------
The Borrower shall not have the right to prepay any Loan, other than
Loans based on the Prime Rate, prior to the last day of the applicable Interest
Period of such Loan. In the event the Borrower does prepay a Eurodollar Loan
prior to the last day of the applicable Interest Period, the Borrower shall
reimburse the Bank on demand for any loss incurred or to be incurred by it in
the reemployment of the funds released by any prepayment.
<PAGE>
Loans by the Bank
-----------------
The term loan hereunder may be made in any combination of loans (each a
"Loan" and collectively the "Loans") as may be requested by the Borrower
hereunder, which Loans shall in no event exceed the lesser of $1,218,750 or the
aggregate outstanding principal balance hereunder. Any Eurodollar Loan shall
be in a minimum principal amount of $500,000 and in increments of $100,000.
Each such request for a Loan shall be made by any officer of the Borrower or
any person designated in writing by any such officer, all of which are hereby
designated and authorized by the Borrower to request Loans and agree to the
terms thereof (including, without limitation the Applicable Interest Rate and
Interest Period with respect thereto). The Borrower shall give the Bank notice
at least three (3) Business Days prior to the date hereof and the end of each
Interest Period (as hereafter defined) specifying whether the Loan shall bear
interest at the Eurodollar Rate and the Interest Period applicable thereto.
Same day notice by noon is required for Prime Loans. No more than three (3)
Eurodollar Loans may be outstanding at any one time. In the event the Borrower
shall fail to provide such notice, the Loan shall be deemed to bear interest at
the applicable Prime Rate and shall have an Interest Period of one month.
The Borrower shall have the right at any time upon the prior
irrevocable written notice to the Bank required above to continue at the end of
the then prevailing Interest Period any Prime Rate Loan or Eurodollar Loan or
portion thereof into a subsequent Interest Period and at the end of the then
prevailing Interest Period to convert any Loan or portion thereof into a Prime
Rate Loan or Eurodollar Loan, subject to the selection of Interest Periods in
accordance with the definition thereof and to the following conditions :
(a) no Eurodollar Loan maybe continued as such and no Prime Rate
Loan may be converted to a Eurodollar Rate Loan if an Event of
Default under the Standby Credit and Term Loan Agreement dated
as of April 5, 1994, as amended among the Borrower, the Bank
and certain guarantors named therein ("Credit Agreement") or,
any event which upon notice or lapse of time or both would
constitute an Event of Default thereunder, shall have occurred
and be continuing at the time of such continuation or
conversion;
(b) in the case of a continuation of or conversion of less than all
of a Loan, the principal amount of each Eurodollar Loan
continued or into which another Type of Loan has been converted
shall not be less than $500,000 and shall be in an integral
multiple of $100,000;
(c) each conversion shall be effected by the Bank by applying the
proceeds of the new Prime Rate Loan or Eurodollar Loan to the
Loan (or portion thereof) being converted, and accrued interest
on the Loan (or portion thereof) being converted shall be paid
by the Borrower at the time of conversion;
<PAGE>
(d) if the last day of an Interest Period with respect to a Loan
that is to be converted to a Eurodollar Loan is not a Business
Day, then such conversion shall be made on the next succeeding
Business Day and during the period from the last such day of an
Interest Period to such succeeding Business Day such Loan shall
bear interest as if it were a Prime Rate Loan;
(e) a Eurodollar Loan may be converted to another Type of Loan only
on the last day of its Interest Period; and
(f) any portion of a Eurodollar Loan that cannot be converted or
continued as a Eurodollar Loan by reason of prepayment
penalties thereon automatically shall be converted at the end
of the prevailing Interest Period to a Prime Rate Loan.
Increased Cost
--------------
If at any time after the date hereof, the Board of Governors of the
Federal Reserve System or any political subdivision of the United States of
America or any other government, governmental agency or central bank shall
impose or modify any reserve or capital requirement on or in respect of loans
made by or deposits with the Bank or shall impose on the Bank or the Eurodollar
market any other conditions affecting Eurodollar Loans, and the result of the
foregoing is to increase the cost to (or, in the case of Regulation D, to
impose a cost on) the Bank of making or maintaining any Eurodollar Loans or to
reduce the amount of any sum receivable by the Bank in respect thereof, by an
amount deemed by the Bank to be material, then, within 30 days after notice and
demand by the Bank, the Borrower shall pay to the Bank such additional amounts
as will compensate the Bank for such increased cost or reduction; 'provided',
that the Borrower shall not be obligated to compensate the Bank for any
increased cost resulting from the application of Regulation D as required by
the definition of Adjusted Eurodollar Rate. Any such obligation by the
Borrower to the Bank shall not be due and owing until the Bank has delivered
written notice to the Borrower. Failure by the Bank to provide such notice
shall not be deemed a waiver of any of its rights hereunder. A certificate of
the Bank claiming compensation hereunder and setting forth the additional
amounts to be paid to it hereunder and the method by which such amounts were
calculated shall be conclusive in the absence of manifest error.
Capital Adequacy
----------------
If the Bank shall have determined that the applicability of any law,
rule, regulation or guideline adopted pursuant to or arising out of the July
1988 report of the Basle Committee on Banking Regulations and Supervisory
Practices entitled "International Convergence of Capital Measurement and
Capital Standards", or the adoption after the date hereof of any other law,
rule regulation or guideline regarding capital adequacy, or any change in any
of the foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by
<PAGE>
the Bank (or any lending office of the Bank) or the Bank's holding company with
any request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on the Bank's capital or
on the capital of the Bank's holding company, if any, as a consequence of its
obligations hereunder to a level below that which the Bank or the Bank's
holding company could have achieved but for such adoption, change or compliance
(taking into consideration the Bank's policies and the policies of such Bank's
holding company with respect to capital adequacy) by an amount deemed by the
Bank to be material, then from time to time the Borrower shall pay to the Bank
such additional amount or amounts as will compensate the Bank or the Bank's
holding company for any such reduction suffered.
Indemnity
---------
The Borrower shall indemnify the Bank against any loss or expense which
the Bank may sustain or incur as a consequence of the occurrence of any Event
of Default or any loss or reasonable expense sustained or incurred in
liquidating or employing deposits from third parties acquired to effect or
maintain any Eurodollar Loan or any part thereof which the Bank may sustain or
incur as a consequence of any default in payment of the principal amount of the
Loan or any part thereof or interest accrued thereon. The Bank shall provide
to the Borrower a statement, supported where applicable by documentary
evidence, explaining the amount of any such loss or expense, which statement
shall be conclusive absent manifest error.
Change In Legality
------------------
(a) Notwithstanding anything to the contrary contained elsewhere in
this Note, if any change after the date hereof in any law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof shall make it unlawful (based on the opinion of any
counsel, whether in-house, special or general, for the Bank) for the Bank to
make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written
notice to the Borrower by the Bank, the Bank may require that all outstanding
Eurodollar Loans made hereunder be converted to Prime Loans, whereupon all such
Eurodollar Loans shall be automatically converted to Prime Loans as of the
effective date of such notice as provided in paragraph (b) below.
(b) For purpose of this Section, a notice to the Borrower by the Bank
pursuant to paragraph (a) above shall be effective, if lawful and if any
Eurodollar shall then be outstanding, on the last day of the then current
Interest Period; otherwise, such notice shall be effective on the date of
receipt by the Borrower.
Events of Default
-----------------
This promissory note is the 1996 (Replacement) Term Note referred to in
the Credit Agreement and is subject to prepayment, acceleration of maturity and
other terms and conditions as set forth therein.
<PAGE>
Set-Off
-------
The Borrower hereby gives to the Bank a lien on, security interest in
and right of set-off against all moneys, securities and other property of the
Borrower and the proceeds thereof, now or hereafter delivered to, remaining
with or in transit in any manner to the Bank, its correspondents, affiliates
(including Chase Securities Inc.) or its agents from or for the Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise
or coming into possession, control or custody of the Bank in any way, and also,
any balance of any deposit accounts and credits of the Borrower with, and any
and all claims of the Borrower against the Bank at any time existing, as
collateral security for the payment of this Note and of all other liabilities
and obligations now or hereafter owed by the Borrower to the Bank, contracted
with or acquired by the Bank, whether joint, several, absolute, contingent,
secured, unsecured, matured or unmatured (all of which are hereafter
collectively called "Liabilities"), hereby authorizing the Bank at any time or
times, without prior notice, to apply such balances, credits or claims, or any
part thereof, to such Liabilities in such amounts as it may select, whether
contingent, unmatured or otherwise and whether any collateral security therefor
is deemed adequate or not. The collateral security described herein shall be
in addition to any collateral security described in any separate agreement
executed by the Borrower in favor of the Bank.
Definitions
-----------
A. Adjusted Eurodollar Rate
------------------------
"Adjusted Eurodollar Rate" shall mean, with respect to any
Eurodollar Loan for any Interest Period, an interest rate per annum
(rounded upwards, if necessary, to the next 1/8 of 1%) equal to the
product of (i) the Eurodollar Rate in effect for such Interest
Period and (ii) Statutory Reserves.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Loan
for any Interest Period, the rate (rounded upwards, if necessary,
to the next 1/8 of 1% at which dollar deposits approximately equal
in principal amount to the Bank's Eurodollar Loan and for the
maturity equal to the applicable Interest Period are offered by the
Bank in immediately available funds in an Interbank Market for
Eurodollars at approximately 11:00 a.m., New York City time, two
Business Days prior to the commencement of such Interest Period.
B. Alternate Base Rate
-------------------
"Alternate Base Rate" shall mean, for any day, a rate per annum
(rounded upwards to the next highest 1/8 of 1% if not already an
integral multiple of 1/8 of 1%) equal to the greater of (a) the
Prime Rate (computed on the basis of the actual number of days
elapsed over a year of 360 days) in effect on such date, or
(b) the Federal Funds Effective Rate in effect on such date plus
1%.
<PAGE>
"Federal Funds Effective Rate" shall mean, for any period, a
fluctuating interest rate per annum equal for each day during such
period to the weighted average of the rates on overnight Federal
Funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business
Day) by the Federal Reserve Bank of New York, or, if such rate is
not so published for any day which is a Business Day, the average
of the quotations for such day on such transactions received by the
Bank from three Federal funds brokers of recognized standing
selected by it. For purposes of this Agreement, any change in the
Alternate Base Rate due to a change in the Federal Funds Effective
Rate shall be effective on the effective date of such change in the
Federal Funds Effective Rate. If for any reason the Bank shall
have determined (which determination shall be conclusive absent
manifest error) that it is unable to ascertain the Federal Funds
Effective Rate for any reason, including, without limitation, the
inability or failure of the Bank to obtain sufficient bids or
publications in accordance with the terms thereof, the Alternate
Base Rate shall be the Prime Rate until the circumstances giving
rise to such inability no longer exist.
B. Business Day
------------
A "Business Day" shall mean any day other than a Saturday, Sunday
or other day on which the Bank is authorized or required by law or
regulation to close, and which is a day on which transactions in
dollar deposits are being carried out in London, England for
Eurodollar Loans and New York City for Prime Loans.
C. Interest Payment Date
---------------------
"Interest Payment Date" means (a) as to any Eurodollar Rate Loans
or Prime Rate Loans at the end of each month following such Loan
and (b) as to all Loans, the respective Maturity Date.
D. Interest Period
---------------
(i) For Eurodollar Loans, "Interest Period" shall mean the
period commencing on the date of such Loan and ending 1, 3,
6 and 12 months subject to availability (as selected by the
Borrower and recorded on the grid attached hereto) after the
date of such Loan 'provided, however,' such Interest Period
shall not extend past the Maturity Date.
(ii) For Prime Loans, "Interest Period" shall mean the period
agreed to by the parties hereto, however, the Interest
Period shall not extend past the Maturity Date.
If any Interest Period would end on a day which shall not be a
Business Day, such Interest Period shall be extended to the next
succeeding Business Day.
<PAGE>
E. Prime Rate
----------
"Prime Rate" shall mean the rate of interest as is publicly
announced at the Bank's principal office from time to time as its
Prime Rate.
F. Statutory Reserves
------------------
"Statutory Reserves" shall mean a fraction (expressed as a decimal,
the numerator of which is the number one and the denominator of
which is the number one minus the aggregate of the maximum reserve
percentages (including, without limitation, any marginal, special
emergency or supplemental reserves) expressed as a decimal
established by the Board of Governors of the Federal Reserve System
and any other banking authority to which the Bank is subject,
(a) with respect to the Adjusted Certificate of Deposit Rate, for
new negotiable time deposits in dollars of over $100,000 with
maturities approximately equal to the applicable Interest Period,
and (b) with respect to the Adjusted Eurodollar Rate, for
Eurocurrency Liabilities as defined in Regulation D. Eurodollar
Loans shall be deemed to constitute Eurocurrency Liabilities and as
such shall be deemed to be subject to such reserve requirements
without benefit of or credit for proration, exceptions or offsets
which may be available from time to time to the Bank under such
Regulation D. Statutory Reserves shall be adjusted automatically
on and as of the effective date of any change in any reserve
percentage.
Miscellaneous
-------------
The Borrower hereby waives diligence, demand, presentment, protest and
notice of any kind, and assents to extensions of the time of payment, release,
surrender or substitution of security, or forbearance or other indulgence,
without notice.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the party to be charged and consented to
in writing by the party hereof.
In the event the Bank or any holder hereof shall refer this Note to an
attorney for collection, the Borrower agrees to pay, in addition to unpaid
principal and interest, all the costs and expenses incurred in attempting or
effecting collection hereunder, including reasonable attorney's fees, whether
or not suit is instituted.
The Bank reserves the right to sell participations in the Loans or the
Note and to provide any participant or prospective participant with information
of the Borrower previously received by the Bank.
<PAGE>
In the event of any litigation with respect to this Note, THE BORROWER
WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to
interpose counter-claims and cross-claims. The Borrower hereby irrevocably
consents to the jurisdiction of the courts of the State of New York and of any
Federal court located in such State in connection with any action or proceeding
arising out of or relating to this Note. The execution and delivery of this
Note has been authorized by the Board of Directors and by any necessary vote or
consent of the stockholders of the Borrower. The Borrower hereby authorizes
the Bank to complete this Note in any particulars according to the terms of the
loan evidenced hereby. This Note shall be governed by and construed in
accordance with the laws of the State of New York applicable to contract made
and to be performed in such State, and shall be binding upon the successors and
assigns of the Borrower and inure to the benefit of the Bank, its successors,
endorsees and assigns.
If any term or provision of this Note shall be held invalid, illegal
or unenforceable the validity of all other terms and provisions hereof shall in
no way be affected thereby.
COMPUTER OUTSOURCING SERVICES, INC.
/s/-------------------------------
Chairman & CEO
<PAGE>
GRID SCHEDULE
--------------
APPLICABLE AMOUNT OF
TYPE AMOUNT INTEREST PRINCIPAL MATURITY
DATE OF LOAN OF LOAN RATE REPAID DATE
- ---- ------- ------- ---------- --------- --------
<PAGE>
PROMISSORY NOTE
$1,500,000.00 February 26, 1997
- ------------- -----------------
FOR VALUE RECEIVED, 'Computer Outsourcing Services, Inc.' (the
"Borrower"), HEREBY PROMISES TO PAY to the order of THE CHASE MANHATTAN BANK
(the "Bank"), at its offices located at '1411 Broadway - Fifth Floor, N.Y.,
N.Y. 10018', or at such other place as the Bank or any holder hereof may from
time to time designate, the principal sum of 'One Million Five Hundred Thousand
and 00/00 DOLLARS ($1,500,000.00)', or such lesser amount as may constitute the
outstanding balance hereof, in lawful money of the United States, on the
Maturity Date (as hereinafter defined) set forth on the Grid Schedule (or
earlier as hereinafter referred to), and to pay interest in like money at such
office or place from the date hereof on the unpaid principal balance of each
Loan (as hereinafter defined) made hereunder at a rate equal to the Applicable
Interest Rate (as hereinafter defined) for such Loan, which shall be payable on
the last day of the Interest Period relating to such Loan and, if such Interest
Period is greater than three (3) months, at three (3) month intervals after
such Loan is made, until such Loan shall be due and payable (whether at
maturity, by acceleration or otherwise) and thereafter, on demand. Interest
after maturity shall be payable at a rate four percent (4%) per annum above the
Bank's Prime Rate which rate shall be computed for actual number of days
elapsed on the basis of a 360-day year and shall be adjusted as of the date of
each such change, but in no event higher than the maximum permitted under
applicable law. "Prime Rate" shall mean the rate of interest as is publicly
announced at the Bank's principal office from time to time as its Prime Rate.
Interest/Grid Schedule
----------------------
The Bank is authorized to enter on the Grid Schedule attached hereto
(i) the amount of each Loan made from time to time hereunder, (ii) the date on
which each Loan is made, (iii) the date on which each Loan shall be due and
payable to the Bank which in no event shall be later than 'April 30, 1998' (the
"Maturity Date"), (iv) the interest rate agreed between the Borrower and the
Bank as the interest rate to be paid to the Bank on each Loan (each such rate,
the "Applicable Interest Rate"), which rate, at the Borrower's option in
accordance herewith, shall be at (a) the Prime Rate (the "Prime Rate Loan(s)"),
or (b) the Adjusted Eurodollar Rate (as hereafter defined) plus '2 1/4%' (the
"Eurodollar Loan"), (v) the amount of each payment made hereunder, and
(vi) the outstanding principal balance of the Loans hereunder from time to
time, all of which entries, in the absence of manifest error, shall be
rebuttably presumed correct and binding on the Borrower; 'provided, however',
that the failure of the Bank to make any such entries shall not relieve the
Borrower from its obligation to pay any amount due hereunder.
<PAGE>
Prepayment
----------
The Borrower shall not have the right to prepay any Loan, other than
Loans based on the Prime Rate, prior to the Maturity Date of such Loan. In the
event the Borrower does prepay a Eurodollar Loan prior to the Maturity Date,
the Borrower shall reimburse the Bank on demand for any loss incurred or to be
incurred by it in the reemployment of the funds released by any prepayment.
Discretionary Loans by the Bank
-------------------------------
The Bank my lend, in its sole discretion in each instance, such amounts
(each a "Loan" and collectively the "Loans") as may be requested by the
Borrower hereunder, which Loans shall in no event exceed '$1,500,000.00' in
aggregate principal amount outstanding at any time. Any Eurodollar Loan shall
be in a minimum principal amount of $500,000 and in increments of $100,000.
Each such request for a Loan shall be made by any officer of the Borrower or
any person designated in writing by any such officer, all of which are hereby
designated and authorized by the Borrower to request Loans and agree to the
terms thereof (including without limitation the Applicable Interest Rate and
Maturity Date with respect thereto). The Borrower shall give the Bank notice
at least three (3) Business Days prior to the date hereof and the end of each
Interest Period (as hereafter defined) specifying whether the Loan shall bear
interest at the Prime Rate or the Eurodollar Rate and the Interest Period
applicable thereto. In the event the Borrower shall fail to provide such
notice, the Loan shall be deemed to bear interest at the applicable Prime Rate
and shall have an Interest Period of one month. The principal amount of each
Loan shall be prepaid on the earlier to occur of the Maturity Date applicable
thereto, or the date upon which the entire unpaid balance hereof shall
otherwise become due and payable.
Increased Cost
--------------
If at any time after the date hereof, the Board of Governors of the
Federal Reserve System or any political subdivision of the United States of
America or any other government, governmental agency or central bank shall
impose or modify any reserve or capital requirement on or in respect of loans
made by or deposits with the Bank or shall impose on the Bank or the Eurodollar
market any other conditions affecting Eurodollar Loans, and the result of the
foregoing is to increase the cost to (or, in the case of Regulation D, to
impose a cost on) the Bank of making or maintaining any Eurodollar Loans or to
reduce the amount of any sum receivable by the Bank in respect thereof, by an
amount deemed by the Bank to be material, then, within 30 days after notice and
demand by the Bank, the Borrower shall pay to the Bank such additional amounts
as will compensate the Bank for such increased cost or reduction; 'provided',
that the Borrower shall not be obligated to compensate the Bank for any
increased cost resulting from the application of Regulation D as required by
the definition of Adjusted Eurodollar Rate. Any such obligation by the
Borrower to the Bank shall not be due and owing until the Bank has delivered
<PAGE>
written notice to the Borrower. Failure by the Bank to provide such notice
shall not be deemed a waiver of any of its rights hereunder. A certificate of
the Bank claiming compensation hereunder and setting forth the additional
amounts to be paid to it hereunder and the method by which such amounts were
calculated shall be conclusive in the absence of manifest error.
Capital Adequacy
----------------
If the Bank shall have determined that the applicability of any law,
rule, regulation or guideline adopted pursuant to or arising out of the July
1988 report of the Basle Committee on Banking Regulations and Supervisory
Practices entitled "International Convergence of Capital Measurement and
Capital Standards", or the adoption after the date hereof of any other law,
rule regulation or guideline regarding capital adequacy, or any change in any
of the foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by
the Bank (or any lending office of the Bank) or the Bank's holding company
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate of return on the Bank's capital
or on the capital of the Bank's holding company, if any, as a consequence of
its obligations hereunder to a level below that which the Bank or the Bank's
holding company could have achieved but for such adoption, change or compliance
(taking into consideration the Bank's policies and the policies of such Bank's
holding company with respect to capital adequacy) by an amount deemed by the
Bank to be material, then from time to time the Borrower shall pay to the Bank
such additional amount or amounts as will compensate the Bank or the Bank's
holding company for any such reduction suffered.
Indemnity
---------
The Borrower shall indemnify the Bank against any loss or expense which
the Bank may sustain or incur as a consequence of the occurrence of any Event
of Default or any loss or reasonable expense sustained or incurred in
liquidating or employing deposits from third parties acquired to effect or
maintain any Eurodollar Loan or any part thereof which the Bank may sustain or
incur as a consequence of any default in payment of the principal amount of the
Loan or any part thereof or interest accrued thereon. The Bank shall provide
to the Borrower a statement, supported where applicable by documentary
evidence, explaining the amount of any such loss or expense, which statement
shall be conclusive absent manifest error.
change In Legality
------------------
(a) Notwithstanding anything to the contrary contained elsewhere in
in this Note, if any change after the date hereof in any law or regulation or
<PAGE>
in the interpretation thereof by any governmental authority charged with the
administration thereof shall make it unlawful (based on the opinion of any
counsel, whether in-house, special or general, for the Bank) for the Bank to
make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written
notice to the Borrower by the Bank, the Bank may require that all outstanding
Eurodollar Loans made hereunder be converted to Prime Loans, whereupon all such
Eurodollar Loans shall be automatically converted to Prime Loans as of the
effective date of such notice as provided in paragraph (b) below.
(b) For purposes of this Section, a notice to the Borrower by the
Bank pursuant to paragraph (a) above shall be effective, if lawful and if any
Eurodollar Loans shall then be outstanding, on the last day of the then current
Interest Period; otherwise, such notice shall be effective on the date of
receipt by the Borrower.
Events of Default
----------------
If the Borrower shall default in the punctual payment of any sum
payable with respect to, or in the observance or performance of any of the
terms and conditions of, this Note, or any other agreement with or in favor of
the Bank, or if a default or event of default that is accelerated shall occur
for any reason under any such agreement, or in the event of default in any
other indebtedness of the Borrower, or if the Bank shall, in its sole
discretion, consider any of the obligations of the Borrower hereunder insecure,
or if any warranty, representation or statement of fact made in writing to the
Bank at any time by an officer, agent or employee of the Borrower is false or
misleading in any material respect when made, or if the Borrower shall be
dissolved or shall fail to maintain its existence in good standing, or if the
usual business of the Borrower shall be suspended or terminated, or if any
levy, execution, seizure, attachment or garnishment shall be issued, made or
filed on or against any material portion of the property of the Borrower, or if
the Borrower shall become insolvent (however defined or evidenced), make an
assignment for the benefit of creditors or make or send a notice of intended
bulk transfer, or if a committee of creditors is appointed for, or any petition
or proceeding for any relief under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, receivership, liquidation or dissolution law
or statute now or hereafter in affect (whether at law or in equity) is filed or
commenced by or against the Borrower or any material portion of its property,
or if any trustee or receiver is appointed for the Borrower or any such
property - then and in any such event, in addition to all rights and remedies
of the Bank under applicable law and otherwise, all such rights and remedies
cumulative, not exclusive and enforceable alternatively, successively and
concurrently, the Bank may, at its option, declare any and all of the amounts
owing under this Note to be due and payable, whereupon the maturity of the then
unpaid balance hereof shall be accelerated and the same, together with all
interest accrued hereon, shall forthwith become due and payable.
<PAGE>
Definitions
-----------
A. Adjusted Eurodollar Rate
------------------------
"Adjusted Eurodollar Rate" shall mean, with respect to any
Eurodollar Loan for any Interest Period, an interest rate per
annum (rounded upwards, if necessary, to the next 1/8 of 1%)
equal to the product of (i) the Eurodollar Rate in effect for
such Interest Period and (ii) Statutory Reserves.
"Eurodollar Rate" shall mean, with respect to any Eurodollar
Loan for any Interest Period, the rate (rounded upwards, if
necessary, to the next 1/8 of 1% at which dollar deposits
approximately equal in principal amount to the Bank's
Eurodollar Loan and for the maturity equal to the applicable
Interest Period are offered by the Bank in immediately
available funds in an Interbank Market for Eurodollars at
approximately 11:00 a.m., New York City time, two Business Days
prior to the commencement of such Interest Period.
B. Business Day
------------
A Business Day shall mean any day other than a Saturday, Sunday
or other day on which the Bank is authorized or required by law
or regulation to close, and which is a day on which
transactions in dollar deposits are being carried out in
London, England for Eurodollar Loans and New York City for
Prime Loans.
C. Interest Period
---------------
(i) For Eurodollar Loans, Interest Period shall mean the
period commencing on the date of such Loan and ending 1, 2, 3
or 6 months (as selected by the Borrower and recorded on the
grid attached hereto) after the date of such Loan.
(ii) For Prime Loans, Interest Period shall mean the period
agreed to by the parties hereto, however, the Interest Period
shall not extend past the Maturity Date.
If any Interest Period would end on a day which shall not be a
Business Day, such Interest Period shall be extended to the
next succeeding Business Day.
D. Statutory Reserves
------------------
Statutory Reserves shall mean a fraction (expressed as a
decimal, the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of
the maximum reserve percentages (including, without limitation,
<PAGE>
any marginal, special emergency or supplemental reserves)
expressed as a decimal established by the Board of Governors of
the Federal Reserve System and any other banking authority to
which the Bank is subject, (a) with respect to the Adjusted
Certificate of Deposit Rate, for new negotiable time deposits
in dollars of over $100,000 with maturities approximately equal
to the applicable Interest Period, and (b) with respect to the
Adjusted Eurodollar Rate, for Eurocurrency Liabilities as
defined in Regulation D. Eurodollar Loans shall be deemed to
constitute Eurocurrency Liabilities and as such shall be deemed
to be subject to such reserve requirements without benefit of
or credit for proration, exceptions or offsets which may be
available from time to time to the Bank under such Regulation
D. Statutory Reserves shall be adjusted automatically on and
as of the effective date of any change in any reserve
percentage.
Set-Off
-------
The Borrower hereby gives to the Bank a lien on, security interest in
and right of set-off against all moneys, securities and other property of the
Borrower and the proceeds thereof, now or hereafter delivered to, remaining
with or in transit in any manner to the Bank, its correspondents, affiliates
(including Chemical Securities Inc.) or its agents from or for the Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise
or coming into possession, control or custody of the Bank in any way, and also,
any balance of any deposit accounts and credits of the Borrower with, and any
and all claims of the Borrower against the Bank at any time existing, as
collateral security for the payment of this Note and of all other liabilities
and obligations now or hereafter owed by the Borrower to the Bank, contracted
with or acquired by the Bank, whether joint, several, absolute, contingent,
secured, unsecured, matured or unmatured (all of which are hereafter
collectively called "Liabilities"), hereby authorizing the Bank at any time or
times, without prior notice, to apply such balances, credits or claims, or any
part thereof, to such Liabilities in such amounts as it may select, whether
contingent, unmatured or otherwise and whether any collateral security therefor
is deemed adequate or not. The collateral security described herein shall be
in addition to any collateral security described in any separate agreement
executed by the Borrower in favor of the Bank.
<PAGE>
Miscellaneous
-------------
The Borrower hereby waives diligence, demand, presentment, protest and
notice of any kind, and assents to extensions of the time of payment, release,
surrender or substitution of security, or forbearance or other indulgence,
without notice.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the party to be charged and consented to
in writing by the party hereof.
In the event the Bank or any holder hereof shall refer this Note to an
attorney for collection, the Borrower agrees to pay, in addition to unpaid
principal and interest, all the costs and expenses incurred in attempting or
affecting collection hereunder, including reasonable attorney's fees, whether
or not suit is instituted.
The Bank reserves the right to sell participations in the Loans or the
Note and to provide any participant or prospective participant with information
of the Borrower previously received by the Bank.
In the event of any litigation with respect to this Note, THE BORROWER
WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to
interpose counter-claims and cross-claims. The Borrower hereby irrevocably
consents to the jurisdiction of the courts of the State of New York and of any
Federal court located in such State in connection with any action or proceeding
arising out of or relating to this Note. The execution and delivery of this
Note has been authorized by the Board of Directors and by any necessary vote or
consent of the stockholders of the Borrower. The Borrower hereby authorizes
the Bank to complete this Note in any particulars according to the terms of the
loan evidenced hereby. This Note shall be governed by and construed in
accordance with the laws of the State of New York applicable to contract made
and to be performed in such State, and shall be binding upon the successors and
assigns of the Borrower and inure to the benefit of the Bank, its successors,
endorsees and assigns.
If any term or provision of this Note shall be held invalid, illegal or
unenforceable the validity of all other terms and provisions hereof shall in no
way be affected thereby.
Computer Outsourcing Services, Inc.
/s/--------------------------------
<PAGE>
GRID SCHEDULE
--------------
APPLICABLE AMOUNT OF
TYPE AMOUNT INTEREST PRINCIPAL MATURITY
DATE OF LOAN OF LOAN RATE REPAID DATE
- ---- ------- ------- ---------- --------- --------
<PAGE>
FIFTH AMENDMENT dated as of March 20, 1997 to the STANDBY CREDIT AND
TERM LOAN AGREEMENT dated as of April 5, 1994, as amended ("Credit Agreement")
COMPUTER OUTSOURCING SERVICES, INC., a New York corporation (the "Borrower"),
NEDS, INC., a New York corporation, DATON PAY USA, INC., a California corpora-
tion, PAY USA OF NEW JERSEY, INC., a New York corporation, ACA ACQUISITION
CORP., a New York corporation and MCC CORPORATION, a New York Corporation,
(each, a "Guarantor" and collectively, the "Guarantors") and THE CHASE MANHATTAN
BANK (formerly Chemical Bank"), a New York banking corporation (the "Bank").
The Borrow desires to amend the Credit Agreement in order to revise cer-
tain financial covenants as herein set forth. Subject to the terms and condi-
tions hereof, the Borrower, the Guarantors, and the Bank are prepared to agree
to such amendment. Unless otherwise defined herein, all capitalized term used
herein which are defined in the Credit Agreement shall have the same meanings
herein as therein defined.
Therefore, the Borrower, the Guarantors, and the Bank agree as follows:
1. The Credit Agreement shall be amended accordingly:
(a) Section 1.0 "Definitions" shall be amended by deleting
the current definition of Cash Flow Coverage Ratio and
replacing it with the following:
"Cash Flow Coverage Ratio" shall mean, with respect to
the Borrower, the ratio of (i) the sum of Excess Cash
Flow (as hereinafter defined) for the four most recent
consecutive quarters ending on or prior to the date of
determination to (ii) (x) the aggregate interest expense
of such Person for such four quarter period plus (y) the
current portion of long term Indebtedness outstanding on
the date of determination plus (z) the current portion
of Contingent Earnouts on the date of determination.
(b) Section 7.08 "Consolidated Current Assets to Consolida-
ted Current Liabilities" shall be amended by deleting it
in its entirety and substituting therefor:
SECTION 7.08 "Consolidated Current Assets to Consolida-
ted Current Liabilities" With respect to the Borrower,
permit the ratio of Consolidated Current Assets to Con-
solidated Current Liabilities to be less than 1.15:1.00
until 10/30/97 and 1.25:1.00 thereafter.
(c) Section 7.10 "Cash Flow Coverage Ratio" shall be amended
by deleting it in its entirety and substituting there-
for:
<PAGE>
SECTION 7.10 "Cash Flow Coverage Ratio" Permit the Cash
Flow Coverage Ratio on a consolidated basis for each
period specified below to be less than the ratio speci-
fied below for such period:
Period Ratio
______ _____
For the four previous consecutive
quarters (taken as a whole)
ending on each quarterly date
until 10/30/97 1.25:1.00
For the four previous consecutive
quarters (taken as a whole)
ending on each quarterly date
on or after 10/31/97 1.50:1.00
2. The Borrower and each Guarantor jointly and severally represent and
warrant that the Credit Agreement together with this Fifth Amendment, when de-
livered hereunder, will be legal, valid and binding obligations of each of them,
as appropriate, and enforceable against each of them, as appropriate, in accor-
dance with their respective terms. The Borrower and each Guarantor further rep-
resent and warrant that the representations and warranties set forth in Article
III of the Credit Agreement shall be deemed restated and are true and correct,
all as of the date hereof and that no Event of Default, as set forth in Article
VIII of the Credit Agreement, and that no event which upon notice or lapse of
time or both, would constitute an Event of Default has occurred and is continu-
ing.
3. On or prior to the effectiveness of this Fifth Amendment, the Bank
shall have received the following in form and substance satisfactory to it:
(i) the amendment fee of $1,000.
4. Upon the effectiveness of this Fifth Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "herein" or words of
like import shall mean and be a reference to the Credit Agreement, as affected
and amended hereby.
5. The Credit Agreement, as amended by this Fifth Amendment, and each
other document executed in connection therewith shall remain in full force and
effect and are hereby ratified and confirmed, except as specifically amended
hereby.
6. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York and shall be binding on the Borrower, each
Guarantor, the Bank and their respective successors and assigns.
IN WITNESS WHEREOF, the Borrower, each Guarantor and the Bank have caused this
Fifth Amendment to be duly executed by their duly authorized officers, all as of
the day and year first above written.
COMPUTER OUTSOURCING SERVICES, INC.
By /s/
Zach Lonstein
Title: CEO
<PAGE>
NEDS, INC.
By /s/
Zach Lonstein
Title: CEO
DATON PAY USA, INC.
By /s/
Zach Lonstein
Title: CEO
PAY USA OF NEW JERSEY, INC.
By /s/
Zach Lonstein
Title: CEO
ACA ACQUISITION CORP.
By /s/
Zach Lonstein
Title: CEO
MCC CORPORATION
By /s/
Zach Lonstein
Title: CEO
THE CHASE MANHATTAN BANK
By /s/
Denise G. Thomas
Vice President
<PAGE>
<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 JANUARY 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 649,749
<SECURITIES> 0
<RECEIVABLES> 4,546,969
<ALLOWANCES> 405,049
<INVENTORY> 0
<CURRENT-ASSETS> 5,886,654
<PP&E> 7,619,455
<DEPRECIATION> 4,507,424
<TOTAL-ASSETS> 19,457,391
<CURRENT-LIABILITIES> 4,901,470
<BONDS> 2,903,221<F1>
0
0
<COMMON> 37,448
<OTHER-SE> 11,745,121
<TOTAL-LIABILITY-AND-EQUITY> 19,457,391
<SALES> 0
<TOTAL-REVENUES> 8,182,101
<CGS> 0
<TOTAL-COSTS> 5,392,180
<OTHER-EXPENSES> 2,455,320
<LOSS-PROVISION> 99,175<F2>
<INTEREST-EXPENSE> 84,390
<INCOME-PRETAX> 260,487
<INCOME-TAX> 114,000
<INCOME-CONTINUING> 146,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,487
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>INCLUDES CURRENT PORTION OF $1,136,505
<F2>ALSO INCLUDED IN OTHER EXPENSES
</FN>
</TABLE>
