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, 1998
Commission file number: 0-20824
COMPUTER OUTSOURCING SERVICES, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-3252333
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
360 West 31st Street New York, New York 10001
-------------------------------------------------
(Address of principal executive offices)
(212) 564-3730
---------------------------
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
There were 3,934,377 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of March 10, 1998.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, October 31,
1998 1997
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................... $ 10,369,340 $ 972,459
Trade accounts receivable, net of allowance
for doubtful accounts of $200,815 and
$111,577 .................................. 4,875,157 3,990,630
Prepaid income taxes ........................ 559,700 -
Net assets of discontinued operations (Note 2) - 6,071,333
Prepaid expenses and other current assets ... 884,142 1,223,759
---------- ----------
16,688,339 12,258,181
---------- ----------
PROPERTY and EQUIPMENT, net ................... 2,691,440 2,578,071
---------- ----------
OTHER ASSETS:
Deferred software costs, net ................ 1,558,633 1,545,935
Intangibles, net ............................ 2,659,159 2,715,993
Due from related parties, net ............... 114,252 176,295
Notes receivable (Note 2) ................... 780,000 30,000
Security deposits and other non-current
assets .................................... 466,823 493,797
---------- ----------
5,578,867 4,962,020
---------- ----------
TOTAL ASSETS .................................. $ 24,958,646 $ 19,798,272
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 2 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
January 31, October 31,
1998 1997
------------- -------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................ $ 1,341,051 $ 1,246,516
Current portion of long-term debt ........... 464,404 2,297,546
Current portion of capitalized lease
obligations ............................... 23,226 23,034
Accrued expenses and taxes .................. 4,877,307 1,779,672
Customer deposits and other current
liabilities ............................... 489,074 231,699
---------- ----------
7,195,062 5,578,467
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt .............................. 245,024 252,577
Capitalized lease obligations ............... 13,687 19,414
Deferred income taxes ....................... 589,621 645,910
Unearned portion of covenant not to compete . 1,360,000 -
Deferred lease credits ...................... 776,766 762,841
---------- ----------
2,985,098 1,680,742
---------- ----------
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, 3,862,227 and 3,826,104 ......... 38,622 38,261
Additional paid-in capital .................. 9,803,901 9,595,789
Retained earnings ........................... 4,935,963 2,905,013
---------- ----------
14,778,486 12,539,063
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 24,958,646 $ 19,798,272
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 3 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended January 31,
1998 1997
------------- -------------
REVENUES ...................................... $ 7,216,595 $ 5,899,895
---------- ----------
COSTS and EXPENSES:
Data processing costs ....................... 4,620,995 4,277,101
Selling and promotion costs ................. 299,905 319,521
General and administrative expenses ......... 1,512,387 1,145,460
Interest (income)/expense, net .............. (91,576) 65,674
----------- ----------
6,341,711 5,807,756
----------- ----------
Income from continuing operations before
provision for income taxes .................. 874,884 92,139
Income tax provision .......................... 384,346 40,300
---------- ----------
Income from continuing operations ............. 490,538 51,839
Income/(loss) from discontinued operations,
net of income tax (Note 2) .................. (60,509) 94,648
Gain on the sale of the Payroll Division, net
of income taxes (Note 2) .................... 1,600,921 -
----------- ----------
NET INCOME .................................... $ 2,030,950 $ 146,487
=========== ==========
Earnings per Common Share (Note 3):
Basic earnings per share:
Income from continuing operations ............. $ 0.13 $ 0.01
Income/(loss) from discontinued operations .... (0.02) 0.03
Gain on the sale of the Payroll Division ...... 0.42 -
------------ ----------
Net income .................................... $ 0.53 $ 0.04
============ ==========
Weighted average number of common shares
outstanding ................................. 3,829,895 3,740,285
============ ==========
Diluted earnings per share:
Income from continuing operations ............. $ 0.11 $ 0.01
Income/(loss) from discontinued operations .... (0.01) 0.03
Gain on the sale of the Payroll Division ...... 0.36 -
------------ ----------
Net income .................................... $ 0.46 $ 0.04
============ ==========
Weighted average number of common shares and
share equivalents outstanding ............... 4,429,484 3,839,991
============ ==========
See Notes to Consolidated Interim Financial Statements
Page 4 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended January 31,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations ............. $ 490,538 $ 51,839
Adjustments to reconcile income from continuing
operations to cash provided by operating
activities:
Depreciation and amortization ............... 339,088 348,267
Current tax provision ....................... 435,134 40,300
Increase/(reduction) in deferred income taxes (50,788) 23,935
Decrease/(increase) in:
Trade accounts receivable ................. (884,527) (236,243)
Prepaid income taxes ...................... (559,700) 17,784
Prepaid expenses and other current assets . 339,617 (233,423)
Security deposits and other noncurrent
assets .................................. 1,700 33,046
Increase/(decrease) in:
Accounts payable .......................... 94,535 213,962
Accrued expenses and taxes ................ (974,053) (149,289)
Customer deposits and other current
liabilities ............................. 257,375 (14,486)
Deferred lease credits .................... (18,385) -
------------- -------------
Net cash provided by operating activities ... (529,466) 95,692
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......... (312,098) (113,101)
Disposal of equipment ....................... 14,960 2,074
Proceeds from the sale of the Pay USA
Division .................................. 10,710,000 -
Proceeds from a covenant not to compete ..... 1,440,000 -
Settlement of contingencies relating to
acquisitions ............................. - (35,472)
Increase in deferred software costs ......... (133,599) (136,393)
----------- -----------
Net cash (provided by)/used in investing
activities ................................ $ 11,719,263 $ (282,892)
---------- -----------
Continued on Next Page
See Notes to Consolidated Interim Financial Statements
Page 5 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended January 31,
1998 1997
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................. $ (1,840,693) $ (202,083)
Proceeds from the exercise of options and
warrants .................................. 208,473 -
Repayments of amounts by related
parties, net .............................. 62,043 6,716
Repayments of capital leases ................ (5,535) (20,671)
----------- -----------
Net cash used in financing activities ....... (1,575,712) (216,038)
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income/(loss) from discontinued operations .. (60,509) 94,648
Adjustments to reconcile income/(loss) from
discontinued operations to cash (used in)/
provided by discontinued operations:
Depreciation and amortization ............. 151,118 206,766
Increase in net assets of discontinued
operations .............................. (307,813) (261,319)
----------- -----------
Net cash (used in)/provided by discontinued
operations ................................ (217,204) 40,095
----------- -----------
Net increase/(decrease) in cash and cash
equivalents ............................... 9,396,881 (363,143)
Cash and cash equivalents at the beginning
of the period.............................. 972,459 857,204
----------- -----------
Cash and cash equivalents at the end of the
period..................................... $ 10,369,340 $ 494,061
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................. $ 49,868 $ 73,006
========== ==========
Income taxes .............................. $ 559,700 $ 51,215
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note received for a portion of the sale price
of the Pay USA Division (Note 2) ............ $ 750,000 $ -
========== ==========
For the three months ended January 31, 1997, $8,397 (net of tax benefits) was
accreted through a charge to retained earnings in connection with a stock
option.
See Notes to Consolidated Interim Financial Statements
Page 6 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JANUARY 31, 1998
(Unaudited)
Common Par Paid in Retained
Shares Value Capital Earnings Total
--------- --------- --------- ---------- -----------
Balances, October
31, 1997 ....... 3,826,102 $38,261 $9,595,789 $2,905,013 $12,539,063
Exercises of
warrants ....... 24,225 242 152,376 152,618
Exercises of
stock options .. 11,900 119 55,736 55,855
Net income ....... 2,030,950 2,030,950
--------- --------- ---------- ---------- -----------
Balances, January
31, 1998 ....... 3,862,227 $38,622 $9,803,901 $4,935,963 $14,778,486
========= ========= =========== ========== ===========
See Notes to Consolidated Interim Financial Statements
Page 7 of 13
<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, 1998, and the consolidated
statements of income and cash flows for the three month periods ended January
31, 1998 and 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows for the periods indicated have been made.
The results of operations for the periods ended January 31, 1998 and 1997 are
not necessarily indicative of the operating results for the full fiscal years.
Certain reclassifications have been made to the prior periods to conform to
the current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. These consolidated interim financial statements should be read
in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal
year ended October 31, 1997.
The consolidated financial statements include the accounts of Computer
Outsourcing Services, Inc. and its wholly-owned subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated.
2. Sale of the Payroll Division
----------------------------
On December 19, 1997, the Company consummated the sale (the "Sale") of all the
outstanding capital stock of Daton Pay USA, Inc., NEDS, Inc., Pay USA of
New Jersey, Inc. and Key-ACA, Inc., each a wholly-owned subsidiary of the
Company, and together comprising the Payroll Division ("Pay USA"), to Zurich
Payroll Solutions, Ltd. ("Zurich" or the "Buyer"). At closing, the Company
received $12,900,000, of which $12,150,000 was in cash and $750,000 was in
the form of a note from the Buyer. The note is due on July 15, 1999 and
requires quarterly payments of interest at 8.5% per annum. The amount
received at closing included $1,440,000 for a three-year covenant not to
compete and $500,000 in connection with a services agreement.
The terms of the Sale also provide for an additional payment by the Buyer of
up to $1,500,000, which amount is contingent on the revenue of Pay USA for
the three months following the Sale, and is also subject to adjustment based
on a final determination of the amounts of assets and liabilities transferred
at December 19, 1997.
The Company has recognized a pretax gain of approximately $3,099,000 after
recording various costs of the transaction amounting to approximately
$2,133,000. These costs include, among other things, the assumption of
certain contractual obligations related to the original acquisitions, and
payments and accruals relating to certain employment agreements. Income
related to the $1,440,000 covenant not to compete will be recognized over
the three-year term. Any contingent payment received from the Buyer will be
recognized as income in the period received.
Page 8 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
2. Sale of the Payroll Division (cont'd)
----------------------------
Of the cash received at the closing, $1,713,509 was used to repay a bank for a
term loan and the outstanding balance on a line of credit (including interest
accrued).
During the eight-week period ended December 19, 1997 and the three month
period ended Janaury 31, 1997, revenues relating to the discontinued
operations approximated $1,117,000 and $2,409,000, and pretax operating
results approximated a loss of $137,000 and income of $81,000, respectively.
3. Basic and Diluted Earnings per Common Share
-------------------------------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128"), which establishes new
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock such as
employee stock options. SFAS 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per share and also
requires, among other things, a dual presentaion of basic and diluted earnings
per share for all entities with complex capital structures. Basic earnings
per share excludes dilution and is computed by dividing the components of net
income by the weighted-average number of shares outstanding for each period
presented. Diluted earnings per share is computed by dividing the components
of net income by the weighted-average number of shares outstanding plus
dilutive potential common shares which would result from the exercise of stock
options and warrants. The prior period has been restated to reflect the
requirements of SFAS 128.
The following is a reconciliation of the weighted-average shares used in the
computations of basic and dilutive earnings per share.
January 31,
------------------------
1998 1997
---------- ----------
Weighed-average common shares outstanding used
for basic earnings per share ................... 3,829,895 3,740,285
Weighted-average number of shares resulting from
imputed exercises of dilutive stock options and
warrants, computed using the treasury-stock
method ......................................... 599,589 99,706
---------- ----------
Weighted-average common shares outstanding used
for dilutive earnings per share ................ 4,429,484 3,839,991
========== ==========
Total number of options and warrants excluded from
the calculation of diluted earnings per share
because they are anti-dilutive ................. 25,000 998,040
========== ==========
Page 9 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations, Three Month Periods Ended January 31, 1998 and 1997
On December 19, 1997, the Company sold the four subsidiaries comprising the
Payroll Division. In the accompanying financial statements, all revenues and
expenses of the Payroll Division have been classified as discontinued
operations. The following discussion relates only to continuing operations.
During the period ended January 31, 1998, revenues from continuing operations
increased $1,317,000 to $7,217,000, an increase of 22% over the period ended
January 31, 1997. This increase is the result of several new Information
Services contracts, including those for Year-2000 testing.
Data processing costs increased $344,000 to $4,621,000 (64% of revenues)
during the current period compared to $4,277,000 (72% of revenues) in the
prior year's period. The improvement in margin is derived from economies
of scale and improved margins on a contract-by-contract basis.
Selling and promotion costs decreased $20,000 to $300,000, and decreased 1.2%
as a percentage of revenues. The decrease as a percentage of revenues
resulted from the consolidation of the sales and marketing efforts in the
Information Processing Division.
General and administrative expenses increased $367,000 to $1,512,000 in the
current period, an increase of 1.6% as a percentage of revenues, primarily due
to increased rent and utility costs connected with the Company's new computer
center in New Jersey.
The Company recorded net interest income of $92,000 in the current period, as
compared to a net interest expense of $66,000 in the prior period. The
Company repaid substantially all of its bank debt, and invested significant
cash balances obtained from the proceeds of the sale of the Payroll Division.
The Company recorded income from continuing operations of $491,000 ($0.13 and
$0.11 per share for basic and diluted shares, respectively) for the period
ended January 31, 1998, a ninefold increase compared to the profit of $52,000
($0.01 per share - basic and diluted) for the period ended January 31, 1997.
Results from discontinued operations declined from net income of $95,000 for
the period ended January 31, 1997 to a loss of $61,000 for the period ended
December 19, 1997, which was primarily the result of excluding revenues after
the date of the sale. The month of January historically provided the highest
revenues among the three months of the Payroll Division's first quarter.
Page 10 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
During the three months ended January 31, 1998, the Company used approximately
$529,000 in operating activities. This amount is net of depreciation and
amortization of $339,000 and includes, among other things, an increase in
accounts receivable of $885,000 and payment of $974,000 in accrued expenses.
The Company generated cash from investing activities of approximately
$11,719,000 during the period ended January 31, 1998, principally from
the proceeds of the sale of the Payroll Division and $1,440,000 received for
a related covenant not to compete.
In investing activities for the period, the Company used cash of approximately
$1,576,000, including $1,841,000 to repay long term debt, net of $208,000
generated from the exercises of stock warrants and employee stock options.
As of January 31, 1998, the Company had cash and cash equivalents of
$10,369,000 and working capital of $9,493,000. Its current ratio (i.e., the
ratio of current assets to current liabilities) was 2.32 to 1, and the
ratio of total liabilities to equity was 0.69 to 1.
In March 1997, the Company and a bank entered into an agreement for a revolving
line of credit whereby the Company may borrow up to $1,500,000. Interest on
borrowings, when made, may be at either the Adjusted Eurodollar Rate (as
defined) plus 2.25%, or the bank's prime rate. No amounts were outstanding
on this line at January 31, 1998. The line of credit expires on April 30,
1998.
Management believes that its cash on hand and its anticipated cash flow from
operations will be sufficient to fund the Company's operations for at least
the next twelve months. The Company continues to seek acquisition
opportunities that are consistent with the Company's long-term strategy.
Forward-looking statements in this report that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that forward-looking statements may be subject to certain risks
and uncertainties, including but not limited to, continued acceptance of the
Company's products and services in the marketplace, competitive factors, new
products, technological changes, the Company's dependence on third-party
suppliers, intellectual property rights and other risks detailed from time to
time in the Company's periodic report filings with the Securities and Exchange
Commission. Accordingly, the actual results of the Company could differ
materially from such forward-looking statements.
Page 11 of 13
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule, filed electronically only.
(b) Reports on Form 8-K:
A Form 8-K was filed on January 5, 1998, and amended January 23, 1998,
reporting the sale of the Payroll Division on December 19, 1997.
Page 12 of 13
<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 16, 1998 -------------------------------------
Zach Lonstein
Principal Executive Officer
/s/
March 16, 1998 -------------------------------------
Laurence L. Carpenter - Controller and
Acting Principal Accounting Officer
<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, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 10,369,340
<SECURITIES> 0
<RECEIVABLES> 5,075,972
<ALLOWANCES> 200,815
<INVENTORY> 0
<CURRENT-ASSETS> 16,688,339
<PP&E> 7,099,161
<DEPRECIATION> 4,407,721
<TOTAL-ASSETS> 24,958,646
<CURRENT-LIABILITIES> 7,195,062
<BONDS> 746,341<F1>
0
0
<COMMON> 38,622
<OTHER-SE> 14,739,864
<TOTAL-LIABILITY-AND-EQUITY> 24,958,646
<SALES> 0
<TOTAL-REVENUES> 7,216,595
<CGS> 0
<TOTAL-COSTS> 4,620,995
<OTHER-EXPENSES> 1,812,292
<LOSS-PROVISION> 89,570
<INTEREST-EXPENSE> 48,500
<INCOME-PRETAX> 874,884
<INCOME-TAX> 384,346
<INCOME-CONTINUING> 490,538
<DISCONTINUED> (60,509)<F2>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,030,950
<EPS-PRIMARY> 0.53<F3>
<EPS-DILUTED> 0.46
<FN>
<F1>CURRENT PORTION OF LONG TERM DEBT = 487,630
<F2>IN ADDITION, THERE IS A GAIN ON THE SALE OF THE PAYROLL DIVISION IN THE AMOUNT
OF $1,600,921.
<F3>THIS IS BASIC EPS.
</FN>
</TABLE>
