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: July 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 4,255,115 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of September 1, 1998.
Transitional Small Business Disclosure Form (check one); Yes [ ] No [X]
Page 1 of 17
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July October
31, 1998 31, 1997
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including short-
term, interest bearing investments of
$11,406,245 and $782,583 .................. $ 11,515,762 $ 972,459
Trade accounts receivable, net of allowance
for doubtful accounts of $196,160 and
$111,577 .................................. 4,705,495 3,990,630
Net assets of discontinued operations (Note 2) - 6,071,333
Note receivable (Note 2) .................... 750,000 -
Prepaid expenses and other current assets ... 1,593,648 1,223,759
---------- ----------
18,564,905 12,258,181
---------- ----------
PROPERTY and EQUIPMENT, net ................... 3,198,532 2,578,071
---------- ----------
OTHER ASSETS:
Deferred software costs, net ................ 1,672,612 1,545,935
Intangibles, net ............................ 2,528,877 2,715,993
Due from related parties, net ............... 223,513 176,295
Security deposits and other non-current
assets .................................... 530,219 523,797
---------- ----------
4,955,221 4,962,020
---------- ----------
TOTAL ASSETS .................................. $ 26,718,658 $ 19,798,272
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 2 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
July October
31, 1998 31, 1997
------------- -------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................ $ 1,084,298 $ 1,246,516
Current portion of long-term debt ........... 450,664 2,297,546
Current portion of capitalized lease
obligations ............................... 22,272 23,034
Corporate income taxes payable .............. 2,076,947 243,342
Accrued expenses ............................ 2,636,185 1,536,330
Customer deposits and other current
liabilities ............................... 153,404 231,699
---------- ----------
6,423,770 5,578,467
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt .............................. 19,271 252,577
Capitalized lease obligations ............... 3,129 19,414
Deferred income taxes ....................... 605,057 645,910
Unearned portion of covenant not to compete . 1,120,000 -
Deferred lease credits ...................... 741,186 762,841
---------- ----------
2,488,643 1,680,742
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000
shares authorized, none issued ............ - -
Common stock, $0.01 par value; 10,000,000
shares authorized; shares issued and out-
standing, 4,251,915 and 3,826,104.......... 42,519 38,261
Additional paid-in capital .................. 11,253,717 9,595,789
Retained earnings ........................... 6,510,009 2,905,013
---------- ----------
17,806,245 12,539,063
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 26,718,658 $ 19,798,272
========== ==========
See Notes to Consolidated Interim Financial Statements
Page 3 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
July 31 July 31,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES ........... $ 22,751,227 $ 17,845,369 $ 7,617,026 $ 6,048,603
---------- ---------- ---------- ----------
COSTS and EXPENSES:
Data processing
costs .......... 14,819,111 12,692,903 5,027,780 4,177,121
Selling and promo-
tion costs ..... 992,652 925,712 358,466 292,806
General and
administrative
expenses ....... 4,664,770 3,223,343 1,517,492 1,033,246
Interest expense,
net of interest
income ......... (396,648) 193,263 (155,786) 68,898
----------- ---------- ----------- ----------
20,079,885 17,035,221 6,747,952 5,572,071
----------- ---------- ----------- ----------
Income from continu-
ing operations
before income tax
provision ........ 2,671,342 810,148 869,074 476,532
Provision for income
taxes ............ 1,097,846 324,100 297,076 190,500
----------- ---------- ---------- ----------
Income from continu-
ing operations ... 1,573,496 486,048 571,998 286,032
Income/(loss) from
discontinued
operations, net of
income taxes
(Note 2) ......... (60,509) 27,452 - (102,133)
Gain on sale of the
Payroll Division,
net of income
taxes (Note 2) ... 2,092,009 - 491,088 -
---------- ---------- ---------- ----------
NET INCOME ......... $ 3,604,996 $ 513,500 $ 1,063,086 $ 183,889
========== ========== ========== ==========
Continued on Next Page
Page 4 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
July 31, July 31,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
EARNINGS PER COMMON
SHARE (Note 3):
Basic earnings per
common share:
Income from continuing
operations ......... $ 0.40 $ 0.12 $ 0.14 $ 0.08
Income/(loss) from
discontinued
operations ......... (0.02) 0.01 - (0.03)
Gain on Sale of the
Payroll Division ... 0.52 - 0.11 -
----------- ---------- ---------- -----------
Net income ........... $ 0.90 $ 0.13 $ 0.25 $ 0.05
=========== ========== ========== ===========
Weighted average number
of common shares
outstanding ........ 3,985,296 3,769,354 4,177,866 3,789,849
========== ========== ========== ==========
Diluted earnings per
common share:
Income from continuing
operations ......... $ 0.36 $ 0.12 $ 0.13 $ 0.08
Income/(loss) from
discontinued
operations ......... (0.01) 0.01 - (0.03)
Gain on Sale of the
Payroll Division ... 0.48 - 0.10 -
----------- ---------- ---------- -----------
Net income ........... $ 0.83 $ 0.13 $ 0.23 $ 0.05
=========== ========== ========== ===========
Weighted average
number of common
shares and other
dilutive securities
outstanding ........ 4,360,804 3,929,188 4,571,900 3,980,807
========== ========== ========== ==========
See Notes to Consolidated Interim Financial Statements
Page 5 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended July 31,
------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations ............. $ 1,573,496 $ 486,048
Adjustments to reconcile income from continuing
operations to cash (used in)/provided by
operating activities:
Depreciation and amortization ............... 1,010,635 1,098,900
Increase/(reduction) in deferred income taxes (35,355) 175,545
Decrease/(increase) in:
Trade accounts receivable ................. (714,865) (730,271)
Prepaid expenses and other current assets . (369,889) (289,759)
Security deposits and other noncurrent
assets .................................. (48,992) (184,453)
Increase/(decrease) in:
Accounts payable .......................... (162,218) 96,767
Income taxes payable ...................... 120,092 (27,939)
Accrued expenses .......................... (1,832,096) 34,853
Customer deposits and other current
liabilities ............................. (78,295) (58,152)
Deferred lease credits ...................... (53,965) -
---------- ----------
Net cash (used in)/provided by operating
activities .............................. (591,450) 601,539
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......... (1,227,425) (281,976)
Disposal of equipment ....................... 14,960 2,074
Proceeds from the sale of the Payroll
Division .................................. 12,210,000 -
Proceeds from a covenant not to compete ..... 1,440,000 -
Settlement of contingencies relating to
acquisitions .............................. - (423,938)
Increase in deferred software costs ......... (603,311) (353,772)
----------- -----------
Net cash provided by/(used in) investing
activities .............................. $ 11,834,224 $ (1,057,612)
----------- -----------
Continued on Next Page
See Notes to Consolidated Interim Financial Statements
Page 6 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Continued)
Nine Months Ended July 31,
------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................. $ (2,080,188) $ (789,928)
Proceeds from the exercise of options and
warrants .................................. 1,662,186 -
Proceeds from longterm debt ................. - 500,000
Repayments from/(borrowings by) related
parties, net .............................. (47,218) 22,735
Repayments of capital leases ................ (17,047) (77,935)
----------- ----------
Net cash used in financing activities ..... (482,267) (345,128)
----------- ----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income/(loss) from discontinued operations .. (60,509) 27,452
Adjustments to reconcile income/(loss) from
discontinued operations to cash (used in)/
provided by discontinued operations:
Depreciation and amortization ............. 151,118 627,380
Increase in net assets of discontinued
operations .............................. (307,813) (459,701)
----------- -----------
Net cash (used in)/provided by discontinued
operations .............................. $ (217,204) $ 195,131
----------- -----------
Net increase/(decrease) in cash and cash
equivalents ............................. 10,543,303 (606,070)
Cash and cash equivalents at the beginning
of the period ........................... 972,459 857,204
----------- -----------
Cash and cash equivalents at the end of the
period .................................. $ 11,515,762 $ 251,134
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................. $ 110,622 $ 205,906
=========== ===========
Income taxes .............................. $ 1,013,106 $ 91,958
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capitalized leases for data processing
equipment ............................... - 81,312
========== ===========
Note received in connection with the sale
of the Payroll Division (Note 2) ........ $ 750,000 $ -
========== ===========
For the nine months ended July 31, 1997, $19,594 (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 7 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JULY 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 stock
options ......... 283,848 2,838 831,479 834,317
Exercises of
warrants ........ 141,965 1,420 826,449 827,869
Net income ........ 3,604,996 3,604,996
-----------------------------------------------------------
Balances,
July 31, 1998 .. 4,251,915 $ 42,519 $11,253,717 $6,510,009 $17,806,245
===========================================================
See Notes to Consolidated Interim Financial Statements
Page 8 of 17
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The Consolidated Balance Sheet as of July 31, 1998, and the Consolidated
Statements of Income and the Consolidated Statements of Cash Flows for the
nine month periods ended July 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 July 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. (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 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 note is due on July 15, 1999, is subject to acceleration pro-rata if
certain contingent liabilities of the Buyer were satisfied in whole or part,
and requires quarterly payments of interest at 8.5% per annum. At July 31,
1998, the contingent liabilities were satisfied, and the Note became due. On
August 14, 1998, the Buyer paid $601,607 plus interest, and asserted
approximately $150,000 in charge-backs under the Sale Agreement as payment of
the remainder of the Note. The chargebacks have not yet been agreed to by the
Company.
Page 9 of 17
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
The terms of the Sale also provided for an additional payment by the Buyer of
up to $1,500,000, which amount was contingent on the revenue of Pay USA for
the three months following the Sale, and was also subject to adjustment based
on a final determination of the net amount of assets and liabilities
transferred to the Buyer on December 19, 1997. On June 1, 1998, the Company
received the $1,500,000 contingent payment.
Including the contingent payment, the Company has recognized a pretax gain of
approximately $3,820,700 after recording various costs of the transaction
amounting to approximately $2,926,700. These costs include, among other
things, the assumption of certain contractual obligations related to the
Company's original acquisitions of the companies comprising Pay USA, and
payments and accruals relating to certain employment agreements. Income
related to the $1,440,000 covenant not to compete is being recognized over the
three-year term of the agreement.
Of the cash received at the closing, $1,713,509 was used to repay a term loan
and the outstanding balance on a line of credit.
During the nine month period ended July 31, 1998 and the nine and three month
periods ended July 31, 1997, revenues relating to the discontinued operations
of Pay USA approximated $1,117,000, $6,731,000, and $2,129,000, respectively,
and pretax operating results approximated a loss of $137,000, income of $46,000,
and a loss of $170,000, 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 presentation 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.
Page 10 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of the weighted-average shares used in the
computations of basic and dilutive earnings per share.
Nine Months ended July Three Months ended July
---------------------- -----------------------
31, 1998 31, 1997 31, 1998 31, 1997
-------- -------- -------- --------
Weighed-average common
shares outstanding used
for basic earnings per
share ................... 3,985,296 3,769,354 4,177,866 3,789,849
Weighted-average number of
shares from assumed
exercises of dilutive
options and warrants,
computed by the treasury-
stock method ............ 375,508 159,834 394,034 190,958
--------- --------- --------- ---------
Weighted-average common
shares outstanding used
for dilutive earnings per
share ................... 4,360,804 3,929,188 4,571,900 3,980,807
========= ========= ========= =========
Total number of options and
warrants excluded from the
calculation of diluted
earnings per share because
they are anti-dilutive .. 63,900 271,402 27,500 273,902
========= ========= ========= =========
4. STOCK OPTIONS
-------------
The Company applies the provisions of APB Opinion 25 and related Interpreta-
tions in accounting for its stock options. Accordingly, no compensation cost
has been recognized for stock options granted. The excess, if any, of the fair
market value of shares on the measurement date over the exercise price is
charged to operations each year as the options become exercisable. Had compen-
sation cost for options granted since November 1, 1995 been determined using
the Black-Scholes option-pricing model described in Statement of Financial
Accounting Standards No. 123("FASB 123") (which permits, but does not require,
companies to recognize as expense over the vesting period the fair value of
all stock-based awards, measured as of the date of grant), the Company would
have recorded aggregate compensation expense of approximately $1,508,669 which
would be expensed over the options' vesting period as follows:
Fiscal Years Ended October 31,
------------------------------
1998 $ 75,433
1999 301,731
2000 301,731
2001 246,312
2002 186,148
2003 38,141
----------
$1,149,496
==========
Page 11 of 17
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
The assumptions used in the option-pricing model include a risk-free interest
rate of 6.5%, expected lives of between six months and five years, and
expected volatility of 48.6%. The pro forma impact of following the
provisions of FASB 123 on the Company's reported net income and net income
per share would be as follows:
Nine Months Ended Nine Months Ended
July 31, 1998 July 31, 1997
------------------ -----------------
Net income - as reported $ 3,604,996 $ 513,500
============ ===========
- pro forma $ 3,416,838 $ 434,742
============ ===========
Basic earnings per
share - as reported $ 0.90 $ 0.13
============ ===========
- pro forma $ 0.86 $ 0.11
============ ===========
Diluted earnings per
share - as reported $ 0.83 $ 0.13
============ ===========
- pro forma $ 0.78 $ 0.11
============ ===========
Net income per common share has been calculated using the weighted average
number of shares of common stock outstanding during the period.
Page 12 of 17
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On December 19, 1997, the Company sold 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. Unless otherwise noted, the following discussion relates only to
the results from continuing operations.
RESULTS OF OPERATIONS, NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997
During the nine month period ended July 31, 1998 (the "current period"),
revenues from continuing operations were $22,751,000, an increase of 28% over
the $17,845,000 recorded in the nine month period ended July 31, 1997 (the
"prior period"). This increase is the result of several new Information
Services contracts, as well as approximately $1,127,000 in income from the
covenant not to compete and service contracts with the Buyer of the Payroll
Division.
Data processing costs increased $2,126,000 to $14,819,000 (65% of revenues)
during the current period compared to $12,693,000 (71% of revenues) in the
prior year's period. The improvement in margin arises from increases in
revenue and improved margins on a contract-by-contract basis.
Selling and promotion costs increased slightly, to $993,000, but decreased
1% as a percentage of revenues. General and administrative expenses increased
$1,441,000 to $4,665,000 in the current period, an increase of 2% as a
percentage of revenues, primarily due to increased rent and utility costs
related to the Company's new computer center in New Jersey.
The Company recorded net interest income of $397,000 in the current period, as
compared to net interest expense of $193,000 in the prior period. The Company
repaid substantially all of its bank debt on December 19, 1997, and has
invested the cash obtained from the proceeds of the sale of the Payroll
Division.
The Company recorded income from continuing operations of $1,573,000 ($0.40
and $0.36 per share for basic and diluted shares, respectively) for the period
ended July 31, 1998, a threefold increase compared to the profit of $486,000
($0.12 per share, basic and diluted) for the period ended July 31, 1997.
In connection with the sale of the Payroll Division, the Company recognized a
gain of approximately $2,092,000 after taxes and after various costs of the
transaction amounting to approximately $2,926,700. These costs include, among
other things, the assumption or settlement of certain contractual obligations
related to the Company's original acquisitions of the companies comprising
Pay USA, and payments and accruals relating to certain employment agreements.
Page 13 of 16
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS, QUARTERS ENDED JULY 31, 1998 AND 1997
During the three month period ended July 31, 1998 (the "current quarter"),
revenues from continuing operations were $7,617,000, an increase of 26% over
the $6,049,000 recorded for the three month period ended July 31, 1997 (the
"prior year's quarter"). This increase is the result of several new
Information Services contracts, as well as approximately $231,000 in income
from the covenant not to compete and service contracts with the Buyer of the
Payroll Division.
Data processing costs increased $851,000 to $5,028,000 (66% of revenues)
during the current quarter compared to $4,177,000 (69% of revenues) in the
prior year's quarter. The improvement as a percentage of revenues arises
from the increase in revenue and improved margins on a contract-by-contract
basis.
Selling and promotion costs increased $66,000 to $358,000, but remained the
same as a percentage of revenues. General and administrative expenses
increased $484,000 to $1,517,000 in the current quarter, an increase of 3%
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 $156,000 in the current quarter,
as compared to a net interest expense of $69,000 in the prior period. The
Company repaid substantially all of its bank debt on December 19, 1997, and
has invested the cash obtained from the proceeds of the sale of the Payroll
Division.
The Company recorded income from continuing operations of $572,000 ($0.14 and
$0.13 per share for basic and diluted shares, respectively) for the current
quarter, double the profit of $286,000 ($0.08 per share - basic and diluted)
for the prior year's quarter.
In connection with the sale of the Payroll Division, the Company received a
contingent payment of $1,500,000 in the current quarter and recognized a gain
of approximately $491,100 after taxes and after various additional costs of the
transaction amounting to approximately $794,000. These costs include, among
other things, the settlement of certain contractual obligations related to the
Company's original acquisitions of the companies comprising Pay USA.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended July 31, 1998, the Company used approximately
$591,000 in continuing operations. This amount is net of depreciation and
amortization of $1,011,000 and includes, among other things, a $1,832,000
increase in accrued taxes, primarily as a result of the sale of the Payroll
Division.
The Company generated cash from investing activities of approximately
$11,834,000 during the period ended July 31, 1998, principally from the
proceeds from the sale of the Payroll Division and $1,440,000 for a related
covenant not to compete. This amount is net of purchases of fixed assets of
$1,227,000 and software cost deferrals of $603,000.
Page 14 of 17
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In financing activities for the period, the Company used cash of approximately
$482,000, including $2,097,000 to repay long term debt and capital leases,
offset by $1,662,000 generated from the exercises of stock warrants and
employee stock options.
As of July 31, 1998, the Company had cash and cash equivalents of $11,516,000
and working capital of $12,141,000. Its current ratio (i.e., the ratio of
current assets to current liabilities) was 2.89 to 1, and the ratio of total
liabilities to equity was 0.50 to 1.
In March 1997, the Company and a bank entered into an agreement for a
revolving line of credit whereby the Company could borrow up to $1,500,000.
Interest on borrowings would have been at either the Adjusted Eurodollar Rate
(as defined) plus 2.25%, or the bank's prime rate. The line of credit
expired 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 15 of 17
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on June 3,
1998, at which the following actions were taken:
(1) Five directors of the Company were elected for terms of one
year, or until their respective successors are duly elected and
qualified. The following table lists the name of each candidate for
director, and the number of shares voted for or withheld from each
candidate:
Shares Voted Shares
Nominee For Election Withheld
----------------- ------------ --------
Zach Lonstein 3,111,483 251,064
Jeffrey Millman 3,111,483 251,064
Robert B. Wallach 3,111,483 251,064
Howard Waltman 3,111,483 251,064
John C. Platt 3,111,483 251,064
(2) The Company amended Article 4.1 in the Company's Restated
Certificate of Incorporation to provide that the total number of
shares of stock which the Corporation shall have authority to issue
is 11,000,000, consisting of 1,000,000 shares of preferred stock, par
value $0.01 per share ("Preferred Stock)", and 10,000,000 shares of
common stock, par value $0.01 per share ("Common Stock"). The
shareholders approved this amendment by a vote of 3,088,693 for,
250,954 against, and 22,900 abstaining.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
Page 16 of 17
<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/
-----------------------------------
September 11, 1998 Zach Lonstein
Principal Executive Officer
/s/
-----------------------------------
September 11, 1998 Laurence L. Carpenter
Acting Principal Accounting Officer
Page 17 of 17
<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 JULY 31, 1998,
AND IS QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 11,515,762
<SECURITIES> 0
<RECEIVABLES> 4,901,655
<ALLOWANCES> 196,160
<INVENTORY> 0
<CURRENT-ASSETS> 18,564,905
<PP&E> 8,014,488
<DEPRECIATION> 4,815,956
<TOTAL-ASSETS> 26,718,658
<CURRENT-LIABILITIES> 6,423,770
<BONDS> 495,336<F1>
0
0
<COMMON> 42,520
<OTHER-SE> 17,763,725
<TOTAL-LIABILITY-AND-EQUITY> 26,718,658
<SALES> 0
<TOTAL-REVENUES> 22,751,227
<CGS> 0
<TOTAL-COSTS> 14,819,111
<OTHER-EXPENSES> 5,657,422
<LOSS-PROVISION> 94,930
<INTEREST-EXPENSE> 93,362
<INCOME-PRETAX> 2,671,342
<INCOME-TAX> 1,097,846
<INCOME-CONTINUING> 1,573,496
<DISCONTINUED> (60,509)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,604,996<F2>
<EPS-PRIMARY> 0.90<F3>
<EPS-DILUTED> 0.83
<FN>
<F1>INCLUDES CURRENT PORTION OF 472,936
<F2>INCLUDES GAIN ON SALE OF PAYROLL DIVISION OF 2,092,009
<F3>ACTUALLY EPS BASIC
</FN>
</TABLE>
