UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1997
Commission file number: 0-20824
COMPUTER OUTSOURCING SERVICES, INC.
(Exact name of the registrant as specified in its Charter)
New York 13-3252333
(State of Incorporation) (IRS Employer I.D. number)
360 West 31st Street, New York, New York 10001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 564-3730
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days: [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [x].
For the fiscal year ended October 31, 1997, registrant's consolidated revenues
from continuing operations were $24,395,644.
On January 16, 1998, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the registrant was approximately
$17,235,102.
On January 16, 1998, 3,835,727 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
This amendment is for the purpose of adding Items 9 through 12 of Part III.
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS;
COMPLIANCE WITH SECTION 16(a) OF
THE SECURITIES EXCHANGE ACT
--------------------------------
The name, principal occupation of, and certain information concerning each of
the Executive Officers and Directors of the Company are set forth in the table
below. Also set forth, following the table, is certain additional information
regarding these individuals.
Director
Name Positions with the Company Age Since
- ------------------------------------------------------------------------------
Zach Lonstein Chairman of the Board of Directors
and Chief Executive Officer 53 1984
Robert B. Wallach President and a Director 58 1992
James D. Gerson Director 54 1993
Howard Waltman Director 65 1997
Jeffrey Millman Executive Vice President, Secretary
and a Director 45 1992
John C. Platt Vice President, Treasurer, and
a Director 44 1996
Eugene Monosson Vice President of a subsidiary of the
Company and a Director 65 1995
Anton P. Donde Vice President of the Company and a
Director 42 1994
Zach Lonstein has been the Company's Chairman of the Board and Chief Executive
Officer since he organized the Company in 1984, and President from 1984 to
May 1996. From 1981 to 1984, Mr. Lonstein was Vice President and General
Manager of the Commercial On-Line division of Informatics General Corporation
("Informatics" - subsequently renamed Sterling Federal Systems, Inc.), a
computer software and services company listed on the New York Stock Exchange.
In 1970, Mr. Lonstein was a founder and President of Transportation Computing
Services Corp. ("TCS"). In 1981, TCS was sold to Informatics and eventually
became the basis for the Commercial On-Line division, which the Company
purchased in 1984.
Robert B. Wallach was appointed President of the Company on May 1, 1996, and
has been a Director of the Company since 1992. Prior to June 1995, he was
sole proprietor of Horizons Associates, a consulting firm he founded in 1985.
Mr. Wallach has more than 20 years of operating experience including senior
management positions with Boeing Computer Services from 1970 to 1972 and
Informatics from 1972 to 1982 and, from 1982 to 1985, as President of the
Financial Information Services Group/Strategic Information division of Ziff
Communications, which provided computer services to companies in the financial
industry.
<PAGE> Page 2 of 9
James D. Gerson has been Senior Vice President of Fahnestock & Co., Inc. since
1993, and Portfolio Manager of the Hudson Capital Appreciation Fund since
October 1995. From January 1992, Mr. Gerson served as Senior Vice President
and Managing Director of Corporate Finance at Reich & Co., Inc., an investment
banking and brokerage firm which served as the Company's underwriter for its
initial public offering completed in January 1993. Mr. Gerson is also a member
of the Boards of Directors of Ag Services of America, Inc., American Power
Conversion Corporation, Arguss Holdings, Inc., Energy Research Corporation,
and Hilite Industries, Inc.
Howard Waltman is Chairman of Express Scripts, Inc. ("ESI"), a Company he
formed in 1986 as a subsidiary of Sanus Corp., a national health maintenance
organization of which he was also the founder and former Chairman. Sanus Corp.
was acquired by New York Life Insurance Company in 1987. ESI, which provides
mail order pharmacy services and pharmacy claims processing services, was spun
out of Sanus Corp. and taken public in June 1992. Mr. Waltman also founded
Bradford National Corp., which was sold to McDonnell Douglas Corporation.
Mr. Waltman also serves on the Board of Directors of qmed, Inc., and several
privately-held companies.
Jeffrey Millman has been Executive Vice President since 1988, Secretary and a
Director since 1992, and has been with the Company since it was founded in
1984, previously holding positions of Vice President and Director of Systems
and Programming with Informatics beginning in 1983. From 1979 to 1983,
Mr. Millman was Director of Theatrical Computer Systems for Columbia Pictures
Industries, Inc.
John C. Platt has been an employee of the Company since it was founded 1984,
and has been a Vice President of the Company since 1986, its Treasurer
beginning in 1992, and a Director since 1996. Prior to 1984, Mr. Platt held
various positions with Informatics and TCS.
Eugene Monosson has been a Director of the Company and Vice President of
Key-ACA, Inc. ("ACA") since that corporation was acquired by the Company as of
May 1, 1995. ACA was sold as part of the Pay USA Division on December 19,
1997, and Mr. Monosson resigned as a Director at that time. Prior to the
acquisition, Mr. Monosson had been President of ACA since 1987. Mr. Monosson
also had 18 years of experience with ADP, Inc. in various capacities, the last
of which was as Vice President of Operations, Northeast Division.
Anton P. Donde is a Director and Vice President of the Company, and was
President of the Pay USA Division of the Company until it was sold on December
19, 1997. From 1985 to 1994, Mr. Donde was a founder of and principal in
Daton Pay USA, Inc., a corporation acquired by the Company in 1994.
Section 16(a) of the Securities Exchange Act -
Beneficial Ownership Compliance Reporting
----------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Executive
Officers and Directors of the Company, and persons who beneficially own more
than ten percent of the Company's Common Stock, to file reports of ownership
of Company securities and changes of ownership with the Securities and Exchange
Commission. Copies of those reports must also be furnished to the Company.
<PAGE> Page 3 of 9
Based solely on a review of the copies of reports furnished to the Company or
representations of the Company's Directors and Executive Officers that no
additional reports were required, the Company believes that during the fical
year ended October 31, 1997 the Executive Officers, Directors, and other
persons beneficially owning more than ten percent of the Company's Common Stock
complied with all applicable Section 16(a) filing requirements.
Item 10. EXECUTIVE COMPENSATION
----------------------
COMPENSATION OF DIRECTORS
During fiscal year 1997, each of the members of the Board of Directors who were
not full-time employees of the Company were granted non-qualified options to
purchase 1,250 shares of the Company's Common Stock for each meeting attended.
COMPENSATION OF EXECUTIVE OFFICERS
The Summary Compensation Table below includes, for each of the fiscal years
ended October 31, 1997, 1996, and 1995, individual compensation for services
to the Company and its subsidiaries as paid to the Chief Executive Officer and
all those executive officers of the Company whose salary exceeded $100,000 in
the most recent fiscal year (together, the "Named Executives").
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation - Awards
------------------- ------------
Securities All Other
Name and Principal Fiscal Salary Bonus Underlying Compensation
Position Year ($) ($) Options (#) ($)
- -------------------- ------ ---------- ------- ------------ ------------
Zach Lonstein, Chief 1997 $240,666 - 25,000 $30,000 (a)
Executive Officer 1996 230,023 - 25,000 30,000 (a)
& Chairman of the 1995 250,000 - 25,000 8,333 (a)
Board of Directors
Robert B. Wallach, 1997 200,000 $55,000 100,000 -
President 1996 166,667 35,000 - -
1995 62,500 - 150,000 -
Jeffrey Millman, 1997 124,628 - - -
Executive Vice 1996 106,923 - - -
President & Secretary 1995 115,000 - - -
Anton P. Donde, Vice 1997 125,000 - - -
President of the 1996 125,000 - - -
Company 1995 125,000 - - -
(a) Fee relating to Mr. Lonstein's guarantee of the Company's obligations
relating to the purchase of MCC Corporation. (See Item 12: "Certain
Relationships and Related Transactions")
<PAGE> Page 4 of 9
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
The following table sets forth, for the Chief Executive Officer and the Named
Executives, all grants of stock options made during the fiscal year ended
October 31, 1997. Executives not listed did not receive grants of stock
options during the fiscal year. The Company did not award any stock
appreciation rights or reprice any stock options during fiscal 1997.
OPTION GRANTS IN THE LAST FISCAL YEAR
- -------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year ($/share) Date
- ---------------- ---------- ------------ --------- ------------
Zach Lonstein 25,000 (1) 15% $3.781 Dec 31, 2001
Robert Wallach 50,000 (2) 30% $5.250 Aug 5, 2007
Robert Wallach 50,000 (3) 30% $3.250 Jun 1, 2005
(1) Become exercisable as to 5,000 shares in each of five years beginning
January 1, 1997.
(2) Become exercisable as to 16,666 shares in each of three years beginning
August 5, 1997.
(3) Become exercisable as to 20,000 shares on December 17, 1996 and become
exercisable as to 15,000 shares in each of two years beginning
December 17, 1997.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table contains information concerning the unexercised stock
options held by the Chief Executive Officer and the Named Executives as of
October 31, 1997. No stock appreciation rights have been granted by the
Company.
<TABLE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Securities Received from Number of Securities Under- Value of Unexercised
Exercise of Options during the lying Unexercised Options at In-the=Money Options at
Year ended October 31, 1997 October 31, 1997 (#) October 31, 1997 ($) (2)
------------------------------ ---------------------------- --------------------------
Net Value
Number of Received Un- Un-
Name Shares ($)(1) Exercisable exercisable Exercisable exercisable
- ---------------- --------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Zach Lonstein - - 155,000 45,000 $1,133,510 $ 217,315
Robert Wallach - - 201,666 48,334 1,138,952 214,298
Jeffrey Millman 2,052 $7,962 7,448 3,000 23,744 17,784
Anton P. Donde - - 60,000 40,000 247,380 164,920
</TABLE>
<PAGE> Page 5 of 9
(1) The amount shown represents the aggregate excess of the market value of
the shares of common stock as of the date of the exercise over the
exercise price paid.
(2) The amounts shown represent the aggregate excess of the market value of
shares of common stock underlying options at October 31, 1997 over the
exercise price of those options.
AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS
In 1992, Mr. Lonstein entered into an employment agreement with the Company.
This agreement was renewed on January 1, 1995 for a term of five years, will
be subject to further renewal annually beginning January 1, 2000, and provides
for a base annual salary of $250,000 and an annual bonus equal to 5% of the
amount by which the Company's yearly pretax net income (as defined therein)
exceeds 150% of the pretax net income for the fiscal year ended October 31,
1992. Additionally, beginning on January 1, 1995, and on each of the four
succeeding anniversaries thereof, the Company agreed to grant an option to
Mr. Lonstein to purchase 25,000 shares of the Company's Common Stock at an
exercise price equal to 110% of the market value of the stock on that date,
in accordance with the 1992 Stock Option and Stock Appreciation Rights Plan.
As of October 31, 1997, three such grants have been made. In addition, the
agreement requires that the Company provide Mr. Lonstein a current model
automobile, pay for all repairs, maintenance, and business related expenses
thereon, and to also purchase a health club membership for Mr. Lonstein and
pay related expenses. The Company is the beneficiary of a $1,000,000 "key-man"
life insurance policy which it maintains on Mr. Lonstein. During fiscal 1996
and 1997, Mr. Lonstein voluntarily elected to reduce his annual compensation
below the amount called for in his employment agreement.
The Company and Mr. Millman entered into an employment agreement dated November
1, 1992. This agreement had a term of five years, and provided for a base
annual salary of $115,000, with adjustments for increases in the cost of living
index subject to a review by the Compensation Committee of the Board of
Directors. This agreement was not renewed. During fiscal 1996, Mr. Millman
voluntarily elected to reduce his annual compensation below the amount called
for in his employment agreement.
In 1994, the Company and Mr. Donde entered into a five-year employment
agreement which provides for an annual base salary of $125,000 and the use, at
the Company's expense, of a current model automobile.
In May 1995, the Company and Mr. Monosson entered into a five-year employment
agreement which called for an annual base salary of $100,000, the use at the
Company's expense of a current model automobile, and the possibility of a bonus
based on ACA earnings, as defined. No bonus was earned for fiscal years ended
October 31, 1997 and 1996. The Company has agreed that the Company will pay
for any portion of the term of this agreement during which Mr. Monosson is not
employed by the buyers of the Pay USA division.
<PAGE> Page 6 of 9
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 31, 1997 by all current
Directors of the Company, the Chief Executive Officer and Named Executives, all
directors and executive officers as a group, and any other person known by the
Company to be the beneficial owner of more than 5% of its Common Stock.
Beneficial ownership includes shares which the beneficial owner has the right
to acquire within sixty days of the above date from the exercise of options,
warrants, or similar obligations. If no address is shown, the address of the
beneficial owner is in care of the Company.
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
- ------------------------------------------------------------------------------
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class
- -------------------------------------- ------------------ ----------
Zach Lonstein (1) 1,681,788 42%
Robert B. Wallach (2) 203,166 5%
Howard Waltman (3) 62,250 2%
James D. Gerson (4) 49,000 1%
Jeffrey Millman (5) 9,500 *
John C. Platt (6) 8,500 *
Eugene Monosson (7) 48,731 1%
Anton P. Donde (8) 308,864 8%
All Directors and Executive Officers
as a group (8 persons) (9) 2,371,799 55%
* Less than 1% of Class
(1) Includes 155,000 shares of Common Stock issuable upon exercise
of options held by Mr. Lonstein. Also, includes 34,367 shares
held by Mr. Lonstein as custodian for the benefit of one of his
children under the New York Uniform Gift to Minors Act, as to
which shares Mr. Lonstein disclaims beneficial ownership, and
310,000 shares pledged as a guarantee of the Company's
obligations to the seller of MCC Corporation in June 1995 (See
Item 12: "Certain Relationships and Related Transactions").
(2) Includes 201,666 shares of Common Stock issuable upon exercise
of an option held by Mr. Wallach.
(3) Includes 3,750 shares of Common Stock issuable upon exercise of
options held by Mr. Waltman.
<PAGE> Page 7 of 9
(4) Includes 15,000 shares of Common Stock issuable upon exercise
of options and 19,000 shares issuable upon exercise of a
warrant held by Mr. Gerson.
(5) Includes 7,448 shares of Common Stock issuable upon exercise of
options held by Mr. Millman.
(6) Includes 8,500 shares of Common Stock issuable upon exercise of
options held by Mr. Platt.
(7) Includes 20,000 shares of Common Stock issuable upon exercise
of options held by Mr. Monosson.
(8) Includes 248,864 shares of Common Stock held by Mr. Donde as
Trustee of the Anton and Detta Donde Trust dated November 21,
1988. Also includes 60,000 shares of Common Stock issuable
upon exercise of options held by Mr. Donde.
(9) Includes 471,364 shares of Common Stock issuable upon exercise
of options and 19,000 shares issuable upon exercise of
warrants collectively held by all directors and executive
officers of the Company.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
As of October 31, 1997, Mr. Lonstein was indebted to the Company in the amount
of $81,443. This indebtedness is payable on demand and bears interest at the
prime rate plus 1% per annum.
In connection with the Company's acquisition of MCC Corporation ("MCC") as of
June 1, 1995, the Company gave the sellers a note for $840,645 (the "Purchase
Note"), to be repaid at stated times with interest over two years, and a
second note for $753,544, which was repaid in equal monthly amounts over one
year without interest. As collateral for the notes, Mr. Lonstein pledged and
placed in escrow 310,000 shares of the Company's Common Stock owned by him.
As compensation for providing this collateral, Mr. Lonstein was granted a per
annum fee of 5% of the value of such shares ($1,000,000 on the date of the
purchase) for such period as the guarantee is in effect. The guarantee fee is
being paid to Mr. Lonstein in the form of a monthly reduction in his
indebtedness to the Company. In April 1996, the payment dates of the Purchase
Note were extended by the seller of MCC through 1999. Effective for fiscal
year 1996 and subsequent fiscal years, Mr. Lonstein and the Company agreed to
reduce the annual guarantee fee to 3%, payable in the same manner as above.
In connection with the acquisition of Key-ACA, Inc. ("ACA"), effective May 1,
1995, the Company was obligated to Eugene Monosson and the other sellers for
certain contingent payments based on earnings (as defined) of the Company's
two payroll operations in New England for five years. For the fiscal years
ended October 31, 1997 and 1996, no contingent payments were earned. The two
<PAGE> Page 8 of 10
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (cont'd)
----------------------------------------------
New England companies were included in the sale of the Payroll Division. On
December 24, 1997, the Company paid Mr. Monosson $75,540 as part of payments
aggregating $300,000 to the former stockholders of ACA in return for a release
from any further liability under the earnings contingencies. The Company also
guaranteed that the market value of the 113,636 shares of common stock issued
in connection with this acquisition will be at least $5.50 per share on
April 30, 2000.
In connection with the acquisition by the Company of Daton Pay USA, Inc.
("Daton") in June 1994, the Anton and Detta Donde Trust ("the Trust"), of which
Mr. Donde is trustee, received 264,084 shares of the Company's Common Stock.
Also, the Company repaid a $670,000 loan owed by Daton to Mr. Donde. In
addition, Mr. Donde had the opportunity to earn contingent payments based on
the earnings of the Pay USA Division (as defined) for a five-year period. As
of October 31, 1997, no contingent payments had been earned. On December 19,
1997, the Company sold the Pay USA Division.
Also as a result of the acquisition of Daton, the Trust has the right to
receive a payment equal to 1% of any consideration paid by the Company to
purchase any company not engaged in providing payroll services. Such payment
is to be made in shares of the Company's Common Stock at a value of $5.00 per
share. Pursuant to this provision, and in connection with the acquisition by
the Company of MCC Corporation in June 1995, the Company issued 2,052 shares
of Common Stock to the Trust.
The Company has guaranteed that the market value of the shares issued to
Mr. Donde, the Trust, and the other sellers of Daton will be no less than
$5.00 per share on July 31, 2000.
In connection with his initial election to the Company's Board of Directors,
Mr. Waltman agreed to, and subsequently did, purchase at least 25,000 shares
of the Company's Common Stock in the open market, and has also purchased
25,000 restricted shares from Mr. Lonstein.
SIGNATURES
In accordance with Section 13 or 15(d) 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/
February 28, 1998 ---------------------------------------
Zach Lonstein - Chief Executive Officer
<PAGE> Page 9 of 9
