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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant[x]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e) (2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Computer Outsourcing Services, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
<PAGE>
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement no.:
3) Filing Party:
4) Date Filed:
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 23, 1999
--------------------------
The Annual Meeting of Stockholders will be held at 9:00 AM on Wednesday, June
23, 1999, at the offices of the Company at 2 Christie Heights Street, Leonia, NJ
07605, for the following purposes:
1. To approve a plan to reincorporate the Company in Delaware;
2. To elect six nominees to serve on the Company's Board of Directors;
3. To act on a proposal to amend the Company's 1992 Stock Option and Stock
Appreciation Rights Plan increasing the total number of shares of common
stock for which options may be granted from 1,200,000 to 1,700,000, and
permitting the cashless exercise of options; and
4. To transact such other business as may properly come before the Annual
Meeting.
Only stockholders of record at the close of business on May 14, 1999 will be
entitled to vote at the Annual Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING.
THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE YOUR PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF YOU DO ATTEND THE ANNUAL MEETING AND WISH TO VOTE IN PERSON,
YOUR PROXY WILL NOT BE USED.
By order of the Board of Directors,
Nicholas J. Letizia
Corporate Secretary
May 15, 1999
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COMPUTER OUTSOURCING SERVICES, INC.
2 CHRISTIE HEIGHTS STREET
LEONIA, NEW JERSEY 07605
(201) 840-4700
----------------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 23, 1999
--------------------------------
GENERAL INFORMATION
-------------------
The enclosed Proxy is solicited on behalf of the Board of Directors of Computer
Outsourcing Services, Inc. (the "Company") for use at the Annual Meeting of
Stockholders of the Company (the "Meeting") to be held at 9:00 AM on Wednesday,
June 23, 1999 (the "Meeting Date") at the offices of the Company at 2 Christie
Heights Street, Leonia, NJ 07605.
The authority granted by an executed Proxy may be revoked at any time before its
use by (a) filing a written revocation with the Secretary of the Company, (b)
submitting a new, duly-executed Proxy bearing a later date, or (c) voting in
person at the Meeting. Shares represented by valid Proxies will be voted at the
Meeting in accordance with the specifications in the Proxies. If no
specifications are made, properly executed Proxies will be voted in the way
recommended by the Board of Directors in this Proxy Statement.
Only stockholders of record at the close of business on May 14, 1999 (the
"Record Date") will be entitled to vote at the Meeting, either in person or by
Proxy. On the Record Date, the Company had outstanding ___________ shares of
common stock, $0.01 par value, each entitled to one vote. The Company's common
stock is its only class of voting stock outstanding. A majority in interest of
the outstanding common stock, represented at the Meeting either in person or by
Proxy, constitutes a quorum for the transaction of business.
The Company will bear the cost of this solicitation of Proxies including, upon
request, reimbursement of brokerage companies and other nominees for their
reasonable expenses in forwarding solicitation materials to beneficial owners of
common stock. In addition to the use of the mails, employees of the Company may
devote part of their time to the solicitation of Proxies by telephone,
telegraph, or in person, but no additional compensation will be paid to them.
The approximate date on which this Proxy Statement and accompanying Proxy are
first being sent or given to stockholders is May 15, 1999.
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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 May 14, 1999 by (a) all current
Directors of the Company, (b) 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"), (c) all directors and
executive officers as a group and (d) any other person known by the Company to
be the beneficial owner of more than 5% of its Common Stock. Beneficial
ownership includes shares which the beneficial owner has the right to acquire
within sixty days of the above date from the exercise of options, warrants, or
similar obligations. If no address is shown, the address of the beneficial owner
is in care of the Company.
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
------------------------------------------------------------------------------
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class
------------------------------------------ --------------------- -----------
Zach Lonstein (1) 1,624,421 33.9%
Warren Ousley (2) 300,000 6.4%
Robert B. Wallach (3) 262,083 5.3%
Howard Waltman (4) 68,500 1.5%
Joseph Lynaugh (5) 22,500 *
Thomas Laudati (6) 16,500 *
John C. Platt (7) 7,500 *
All Directors and Executive
Officers as a group (8 persons) (2)(8) 2,301,504 45.2%
Enterprise Technology Group, Incorporated
1 Harmon Plaza
Secaucus, NJ 07094 300,000 6.4%
Cahill, Warnock Strategic Partners Fund, L.P.
1 South Street - Suite 2150
Baltimore, MD 21202 358,864 7.6%
* Less than 1% of Class
(1) Includes 75,000 shares of Common Stock issuable upon exercise of vested
options held by Mr. Lonstein.
(2) Includes the 300,000 shares of Common Stock owned by Enterprise
Technology Group, Incorporated, of which Mr. Ousley is majority
stockholder and a director.
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(3) Includes 255,333 shares of Common Stock issuable upon exercise of
vested options held by Mr. Wallach.
(4) Includes 10,000 shares of Common Stock issuable upon exercise of
non-qualified options held by Mr. Waltman.
(5) Includes 12,500 shares of Common Stock issuable upon exercise of
non-qualified options held by Mr. Lynaugh.
(6) Includes 16,500 shares of Common Stock issuable upon exercise of vested
options held by Mr. Laudati.
(7) Includes 7,500 shares of Common Stock issuable upon exercise of vested
options held by Mr. Platt.
(8) Includes 376,833 shares of Common Stock issuable upon exercise of
vested options collectively held by all directors and executive
officers of the Company.
PROPOSAL I - REINCORPORATING IN DELAWARE
----------------------------------------
On March 31, 1999, the Board of Directors adopted a plan, subject to approval by
the Stockholders, to reincorporate the Company under the laws of the State of
Delaware. The Company was incorporated under the laws of New York State on
October 22, 1984, but the Board believes Delaware corporate law will better
serve the Stockholders' interests and provide the Company with advantages not
available under New York corporate law. Therefore, the Company will ask
Stockholders at the Annual Meeting to approve the form of the Merger Agreement
which appears as an Exhibit at the end of this Proxy Statement. Such a
transaction is commonly called a "reincorporation."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "IN FAVOR OF" THE PLAN TO
REINCORPORATE THE COMPANY IN DELAWARE.
The Company will continue to be called "Computer Outsourcing Services, Inc."
after the reincorporation. To explain the proposal, however, this Proxy
Statement will call the Company that exists today as a New York corporation
either the "Company" or "COSI-New York," and for convenience "COSI-Delaware" is
what we will call the new Delaware corporation that we will organize as a
wholly-owned subsidiary of COSI-New York. If the holders of at least two-thirds
of all outstanding shares of the Common Stock of COSI-New York approve the
Merger Agreement, COSI-New York will be merged into COSI-Delaware. The effective
date will be when the necessary documents have been filed in both New York and
Delaware. COSI-Delaware will be the surviving corporation, and the charter and
by-laws of the new corporation will be substantially the same as those of
COSI-New York today, except as described below.
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REASONS FOR THE CHANGE. For many years, Delaware has encouraged incorporation in
that state by adopting modern, comprehensive and flexible corporate laws, and it
periodically updates and revises them to meet changing business needs. The
Delaware General Corporation Law is considered a sophisticated statute, highly
conducive to business. That is why many corporations choose Delaware initially
as their place of incorporation, and why many others have reincorporated in
Delaware by means of transactions like the one now proposed. Because of
Delaware's policy of encouraging incorporation and its preeminence as the most
popular state of incorporation for major corporations, the courts of Delaware
have developed considerable expertise in dealing with corporate issues. As a
result, Delaware's case law interpreting its corporate laws is more developed
than that of any other state. This gives Delaware corporate law an extra measure
of predictability that is useful and often crucial in our precedent-based
judicial system.
For the board and the management of a Delaware corporation, these features of
Delaware law allow greater certainty in managing the corporation. The state's
court system also provides for relatively prompt resolution of most corporate
disputes. For example, Delaware has a specialized Court of Chancery which hears
cases involving corporate law. The Court of Chancery has no jurisdiction over
most other kinds of cases, and therefore its dockets are not as backlogged as
many other states. In addition, the Supreme Court of Delaware hears and decides
important corporate appeals quickly.
The Board of Directors of the Company considered the predictability and
flexibility of Delaware law and the efficiency of its judicial process when it
recommended the present proposal. The Board also recognized the possibility that
choosing to be governed by the corporate law of Delaware, as so many other
corporation have done, may further enhance the reputation of the Company.
CONTINUITY OF BUSINESS AND OTHER FACTORS. The Company has carried on its
business under the Computer Outsourcing Services name continuously since 1993.
The merger into COSI-Delaware will not break this continuity. COSI-Delaware will
have its principal corporate offices in Leonia, New Jersey at COSI-New York's
current address, and will appoint a registered agent to represent it in
Delaware. Reincorporation in Delaware will not change the business plan,
management, assets, liabilities, net worth, capitalization or employee benefit
plans of the Company. Furthermore, each incentive stock option that would be, or
later become, exercisable for shares of the Company's common stock will
automatically be, or later become, as the case may be, exercisable for the same
number of shares of the common stock of COSI-Delaware on the same terms and
conditions.
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AUTHORIZED SHARES OF CAPITAL STOCK. After the reincorporation, the authorized
capital stock of COSI-Delaware will consist of 10,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. These figures are the same as those currently authorized
for COSI-New York. COSI-Delaware will not issue any common stock or preferred
stock in connection with the reincorporation, other than the shares into which
the old shares will convert. The Board of Directors of COSI-Delaware will have
authority to issue preferred stock in series, just as the Board of COSI-New York
may do today. The Board will determine the voting powers, designations,
preferences and relative rights, qualifications, limitations and restrictions on
any preferred stock it may issue.
CONVERSION OF SHARES. As soon as the reincorporation becomes effective,
COSI-Delaware will issue a press release announcing that the transaction has
occurred. At the same time, the holders of the old shares of Common Stock
COSI-New York will become holders of the new shares of common stock
COSI-Delaware. Shares of Common Stock COSI-New York will automatically convert
into shares of common stock COSI-Delaware, on these terms:
o The conversion will be on a one-for-one basis.
o Each share of the old Common Stock of COSI-New York which is
outstanding at the effective date will become one share of the new
common stock, par value $.01 per share, of COSI-Delaware.
o Each share of the old Common Stock held in the treasury of COSI-New
York will become a share of treasury stock in COSI-Delaware.
STOCKHOLDER RIGHTS PLAN. Special "rights" will be attached to the new shares of
COSI-Delaware pursuant to a Rights Agreement to be entered into among
COSI-Delaware and [the Bank] after the approval of the merger and the
reincorporation. Those rights have not been attached to the shares of COSI-New
York. Pursuant to the Rights Agreement the following will occur:
For each share of common stock of COSI-Delaware outstanding, one Right to
purchase 0.01 share of preferred stock (a "Right") will be issued as a dividend
payable on the effective date of the reincorporation (the "Vesting Date").
Each Right will entitle its holder to purchase from COSI-Delaware .01 shares of
a Participating Preferred Stock (the "Preferred Stock"), par value $.01 per
share, of COSI-Delaware at a price of $4.00 per .01 shares of Preferred Stock
(the "Price"), subject to certain adjustments to be further set out in the
Rights Agreement.
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The Preferred Stock will be evidenced only by the common stock certificates of
COSI-Delaware along with the Rights Agreement until an exercise date (the
"Exercise Date") which will be the earlier to occur of (i) 10 days following the
public announcement that a person or group of affiliated people or otherwise
associated people or persons (other than Mr. Lonstein) (individually or
together, herein referred to as "Bidders") have acquired beneficial ownership of
20% or more of the common stock of COSI-Delaware or (ii) 10 business days (or
such later date as the Board of Directors of COSI-Delaware may decide) following
the commencement of or announcement of an intention to make, a tender offer or
exchange offer which would result in the ownership of 20% or more of the common
stock of COSI-Delaware by any person or group of affiliated people or otherwise
associated people (the events in subparagraphs (i) and (ii) to be referred to
herein as "Tender Events").
Until the Exercise Date (i) the Rights may be transferred only with the common
stock of COSI-Delaware and (ii) notwithstanding earlier redemption or expiration
of the Rights, (A) any new certificates for common stock of COSI-Delaware shall
bear a legend incorporating the Rights Agreement by reference; and (B) the
surrender for transfer of any certificates for shares of common stock of
COSI-Delaware outstanding as of the Vesting Date will also constitute the
transfer of the Rights associated with the shares of common stock represented by
such certificate.
As soon as practicable following the Exercise Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the common stock of COSI-Delaware as of the close of business on the Exercise
Date and such separate Right Certificates alone will evidence the Rights. The
Rights are not exercisable until the Exercise Date. The Rights will expire on
June 1, 2009 (the "Final Expiration Date"), unless the Final Expiration Date is
extended or unless the Rights are earlier redeemed or exchanged by
COSI-Delaware, in each case as described below.
The Price payable, and the number of shares of Preferred Stock or other
securities or property issuable, upon exercise of the Rights will be subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights
or warrants to subscribe for or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with a conversion price, less than
the then-current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends or dividends payable in
Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding Rights will also be subject to adjustment in the event
of a stock split of the common stock of COSI-Delaware or a stock dividend on the
common stock of COSI-Delaware payable in shares of common stock of COSI-Delaware
or subdivisions, consolidations or combinations of the common stock of
COSI-Delaware occurring, in any such case, prior to the Exercise Date.
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Shares of Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. Each share of Preferred Stock will be entitled, when, as and if
declared, to a minimum preferential quarterly dividend payment of $1 per share
but will be entitled to an aggregate dividend of 100 times the dividend declared
per share of Common Stock. In the event of liquidation, the holders of the
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $100 per share (plus any accrued but unpaid dividends) but will be entitled
to an aggregate payment of 100 times the payment made per share of common stock
of COSI-Delaware. Each share of Preferred Stock will have 100 votes, voting
together with the common stock of COSI-Delaware. Finally, in the event of any
merger, consolidation or other transaction in which shares of common stock of
COSI-Delaware are converted or exchanged, each share of Preferred Stock will be
entitled to receive 100 times the amount received per share of Common Stock.
These rights are protected by customary antidilution provisions. Because of the
nature of the Preferred Stock's dividend, liquidation and voting rights, the
value of the one one-hundredth interest in a share of Preferred Stock
purchasable upon exercise of each Right should approximate the value of one
share of common stock of COSI-Delaware.
If a Tender Event occurs, (i) each holder of a Right, other than Rights
beneficially owned by a Bidder (which will thereupon become void), will
thereafter have the right to receive upon exercise of a Right at the then
current exercise price of the Right, that number of shares of Common Stock
having a market value of two times the exercise price of the Right; and (ii) in
the further event COSI-Delaware is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold, proper provision will be made so that each holder of a Right
(other than Rights beneficially owned by a Bidder which will have become void)
will thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the person with whom COSI-Delaware has engaged in the foregoing transaction (or
its parent), which number of shares at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after a Tender Event and prior to the acquisition by a Bidder of 50%
or more of the outstanding shares of common stock of COSI-Delaware or the
occurrence of an event described in the prior paragraph, the Board of Directors
of COSI-Delaware may exchange the Rights (other than Rights owned by a Bidder
which will have become void), in whole or in part, at an exchange ratio of one
share of common stock, or one one-hundredth of a share of Preferred Stock (or of
a share of a class or series of COSI-Delaware's preferred stock having
equivalent rights, preferences and privileges), per Right (subject to
adjustment).
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With certain exceptions, no adjustment in the Price will be required until
cumulative adjustments require an adjustment of at least 1% in such Price. No
fractional shares of Preferred Stock will be issued (other than fractions which
are integral multiples of one one-hundredth of a share of Preferred Stock, which
may, at the election of COSI-Delaware, be evidenced by depositary receipts) and
in lieu thereof, an adjustment in cash will be made based on the market price of
the Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to the time a Bidder becomes such, the Board of Directors of
COSI-Delaware may redeem the Rights in whole, but not in part, at a price of
$.01 per Right (the "Redemption Price"). The redemption of the Rights may be
made effective at such time, on such basis and with such conditions as the Board
of Directors in its sole discretion may establish. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, COSI-Delaware may, except with
respect to the redemption price, amend the Rights in any manner. After the
Rights are no longer redeemable, COSI-Delaware may, except with respect to the
redemption price, amend the Rights in any manner that does not adversely affect
the interests of holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of COSI-Delaware, including, without limitation, the right to vote
or to receive dividends.
This description of the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement, once entered into and as
the same may be amended from time to time, which is hereby incorporated herein
by reference.
THIS MEANS THAT, BEGINNING ON THE EFFECTIVE DATE, EACH COSI-NEW YORK STOCK
CERTIFICATE WHICH WAS OUTSTANDING JUST BEFORE THE REINCORPORATION WILL
AUTOMATICALLY REPRESENT THE SAME NUMBER OF COSI-DELAWARE SHARES. THEREFORE,
STOCKHOLDERS OF COSI-NEW YORK NEED NOT EXCHANGE THEIR STOCK CERTIFICATES FOR NEW
COSI-DELAWARE STOCK CERTIFICATES. LIKEWISE, STOCKHOLDERS SHOULD NOT DESTROY
THEIR OLD CERTIFICATES AND SHOULD NOT SEND THEIR OLD CERTIFICATES TO THE
COMPANY, EITHER BEFORE OR AFTER THE EFFECTIVE DATE OF REINCORPORATION.
TRADING OF THE STOCK. After reincorporation, those who were formerly
Stockholders of COSI-New York may continue to make sales or transfers using
their COSI-New York stock certificates. COSI-Delaware will issue new
certificates representing shares of COSI-Delaware common stock for transfers
occurring after the effective date. On request, COSI-Delaware will issue new
certificates to anyone who holds COSI-New York stock certificates. Any request
for new certificates will be subject to normal requirements including proper
endorsement, signature guarantee, if required, and payment of applicable taxes.
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Stockholders whose shares of COSI-New York were freely tradable before the
reincorporation will own shares of COSI-Delaware which are freely tradable after
reincorporation. Similarly, any Stockholders holding securities with transfer
restrictions before reincorporation will hold shares of COSI-Delaware which have
the same transfer restrictions after reincorporation. For purposes of computing
the holding period under Rule 144 of the Securities Act of 1933, as amended,
those who hold COSI-Delaware stock certificates will be deemed to have acquired
their shares on the date they originally acquired their shares in COSI-New York.
After the reincorporation, COSI-Delaware will continue to be a publicly held
company. COSI-Delaware intends to continue listing its common stock on NASDAQ.
It will also file with the Securities and Exchange Commission and provide to its
stockholders the same types of information that COSI-New York has previously
filed and provided.
VOTE REQUIRED FOR APPROVAL. Approval of the form of the Merger Agreement and
reincorporation in Delaware will require the affirmative vote of the holders of
two-thirds of the outstanding Common Stock. As of the record date for the Annual
Meeting, the current Directors and Officers of the Company have the right to
vote 1,924,671 shares, representing 40.8% of the outstanding Common Stock, and
have advised the Company that their present intent is to vote in favor of the
proposal to reincorporate in Delaware.
NO RIGHT TO DISSENT. New York law provides that, because the Company's Common
Stock is included on the NASDAQ National Market System, no Stockholder has a
right to dissent from the reincorporation if the holders of two-thirds of the
outstanding stock approve it.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following is a brief summary of the
principal federal income tax consequences of reincorporation under current law
to holders of the Company's Common Stock. This summary is for general
information only. It does not address potential legislative changes that may
affect these consequences, and it does not address any state, local or foreign
tax consequences of reincorporation. The Company has not obtained, and does not
intend to obtain, a ruling from the Internal Revenue Service to the effect that
the reincorporation is nontaxable.
Neither the Company nor its Stockholders will recognize any gain or loss by
reason of the reincorporation. The tax basis of COSI-Delaware common stock
received by a Stockholder of COSI-New York through the reincorporation will be
the same as the tax basis of COSI-New York Common Stock prior to
reincorporation. A Stockholder of COSI-New York who holds the stock as a capital
asset should include the period he or she has held the Common Stock in
determining the holding period for his or her COSI-Delaware stock.
STOCKHOLDERS SHOULD CONSULT THEIR PERSONAL TAX ADVISERS TO DISCUSS THEIR OWN TAX
SITUATIONS AND ANY POTENTIAL CHANGES IN FEDERAL, STATE AND LOCAL LAWS AND OTHER
APPLICABLE TAX MATTERS RELATING TO REINCORPORATION.
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ABANDONMENT. If the Board of Directors decides not to proceed with the
reincorporation at any time before the reincorporation becomes effective, the
Board will have the right to abandon the Merger Agreement and take no further
action towards reincorporating the Company in Delaware.
COMPARISON OF THE NEW YORK AND DELAWARE CORPORATE LAWS. If this Proposal is
approved by the holders of at least two-thirds of the Company's outstanding
Common Stock, and if the Company reincorporates in Delaware as outlined above,
then the Stockholders of COSI-New York will become stockholders of the new
Delaware corporation, "COSI-Delaware." There are differences between the
Business Corporation Law of New York ("BCL") and the General Corporation Law of
Delaware ("DGCL") which will affect the rights of Stockholders in certain
respects. Some of these differences define the particular provisions a
corporation may choose to put into its certificate of incorporation, commonly
called the "charter," and other differences may not affect the Company.
The following summary is not a substitute for direct reference to the statutes
themselves or for professional interpretation of them.
AMENDMENT OF CHARTER. Both the BCL and the DGCL allow a board of directors to
recommend a charter amendment for approval by stockholders, and a majority of
the shares entitled to vote at a stockholders' meeting are normally enough to
approve that amendment. Both laws require that a majority of the holders of any
particular class of stock must approve the amendment if it would have an adverse
effect on the holders of that class. In addition, both laws allow a corporation
to require a vote larger than a majority on special types of issues.
AMENDMENT OF BY-LAWS. Under both the BCL and the DGCL, the board may amend,
adopt or repeal by-laws only if permitted by the charter. The charter of
COSI-Delaware will specifically permit amendment of the by-laws by the board as
did the charter of COSI-New York. Additionally, both the BCL and the DGCL allow
stockholders to further amend or repeal by-laws adopted or amended by the board.
SPECIAL MEETINGS OF STOCKHOLDERS. Under both the BCL and the DGCL, the board of
directors or anyone authorized in the charter or by-laws may call a special
meeting of stockholders. Currently, the by-laws of COSI-New York allow only the
Board to call a special meeting or the holders of one or more classes of
preferred stock of the Company, who have the right, voting separately as a class
or series, to elect directors, to call, pursuant to the terms of a resolution of
the board setting forth the rights and preferences of the preferred stock,
special meetings of holders of preferred stock pursuant of the Company. The
provision in the by-laws of COSI-Delaware will be comparable.
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CORPORATE ACTION WITHOUT STOCKHOLDERS' MEETING. The BCL and DGCL differ about
whether corporate action can be taken by written consent and without a
stockholders' meeting. Under the BCL, the holders of at least the minimum number
of votes required to authorize such an action may take the action if the
corporation's charter allows this, but otherwise the consent must be unanimous.
The DGCL, on the other hand, lets stockholders take action by the written
consent of at least the minimum number of votes required to act at a
stockholders' meeting, unless the charter forbids it. The COSI-Delaware charter,
however, will provide that stockholders may take corporate action only at a
stockholders' meeting and not by written consent.
INSPECTION OF STOCKHOLDERS LIST. The BCL limits the right of a stockholder to
inspect the list of record stockholders depending on the number of shares held
and the length of ownership. But under the DGCL, any stockholder may inspect the
stockholders' list for any purpose reasonably related to the person's interest
as a stockholder. In addition, for at least ten days prior to each stockholders'
meeting, a Delaware corporation must make available for examination a list of
stockholders entitled to vote at the meeting.
VOTE REQUIRED FOR CERTAIN TRANSACTIONS. Until February 1998, the BCL required
the holders of two-thirds of the outstanding stock of a New York corporation to
approve certain mergers, consolidations or sales of all or substantially all the
corporation's assets that may occur outside the ordinary course of business.
Since February 1998, however, a New York corporation may provide in its charter
that the holders of a majority of the outstanding stock may approve such
transactions, although the Company has not adopted such a charter provision.
Under the DGCL, on the other hand, holders of a majority of the outstanding
stock entitled to vote on such transactions have the power to approve a merger,
consolidation or sale of all or substantially all the assets without a special
provision in the charter, unless the charter provides otherwise. Furthermore, in
the case of a merger under the DGCL, stockholders of the surviving corporation
do not have to approve the merger at all, unless the charter provides otherwise,
if these three conditions are met:
o No amendment of the surviving corporation's charter is made by the merger
agreement; and
o Each share of the surviving corporation's stock outstanding or in the
treasury immediately prior to the effective date of the merger is to be an
identical outstanding or treasury share of the surviving corporation after
the effective date; and
o The merger results in no more than 20% increase in its outstanding common
stock.
Special vote requirements may apply to certain business combinations with
interested stockholders. See the discussion of these below under the heading
"BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS."
14
<PAGE>
CLASSIFICATION OF DIRECTORS. Both laws permit "classified" boards of directors,
which means the directors have staggered terms that do not all expire at once.
The BCL permits as many as four classes, the DGCL only three. The Company now
has one class of directors, but COSI-Delaware will have three classes of
directors pursuant to its charter with each class having a three year term and
no more than one-third of the directors terms expiring in any one year. The
charter of the Delaware corporation will further state that any change in the
classification of the board will require a two-thirds vote of the stockholders.
These provisions may help to prevent unwarranted removal of directors, as
discussed below under the heading "Removal of Directors", and thereby give
stockholders of COSI-Delaware more protection against hostile takeover attempts
than was afforded COSI-New York under its charter.
REMOVAL OF DIRECTORS. Under the BCL, directors may be removed by the
stockholders for cause, or by either the stockholders or the directors if the
charter so provides. The Company's present charter provides that directors may
be removed only by stockholders with or without cause. In a Delaware corporation
with a classified board under the DGCL , directors can be removed only for
cause. Therefore, the charter of COSI-Delaware will be written so as to give
more protection than is currently provided in the charter of COSI-New York, and
any attempt to remove directors will require cause and a two-thirds vote of the
stockholders.
LIMITATION OF DIRECTORS' LIABILITY. Both states permit the limitation of a
director's personal liability while acting in his or her official capacity.
Under the BCL, a director is not liable to the corporation or to its
stockholders for monetary damages if the director has acted in good faith and
with that degree of care which an ordinarily prudent person in a like position
would use in similar circumstances. The DGCL, on the other hand, requires a
charter provision in order to limit a director's liability for breach of his or
her fiduciary duty to the corporation. The Company's current charter eliminates
personal liability of directors of the Company to the fullest extent permitted
by the BCL. The charter of COSI-Delaware will limit the liability of directors
to the fullest extent permitted by the DGCL.
But, in some cases, directors may be liable despite these limitations. Under the
BCL, for example, a director is not immune from liability if he or she violates
applicable statutes which expressly make directors liable. The DGCL forbids any
limitation of liability if the director breached his or her duty of loyalty to
the corporation or its stockholders, or if he or she failed to act in good
faith, received an improper personal benefit from the corporation, or authorized
a dividend or stock repurchase that was forbidden by the DGCL.
15
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS; AND INSURANCE. With some variations,
both the BCL and the DGCL allow a corporation to "indemnify," that is, to make
whole, any person who is or was a director, officer, employee or agent of the
corporation if that person is held liable for something he or she did or failed
to do in an official capacity. Besides covering court judgments, out-of-court
settlements, fines and penalties, both laws also allow the corporation to
advance certain reasonable expenses the person will incur or to reimburse the
person's expenses after he or she incurs them, even if liability is not actually
proven. The right to indemnification under both laws does not normally exclude
other rights of recovery the indemnified person may have.
Additionally, each of the two laws permits a corporation to purchase insurance
for its directors, officers, employees and agents against some or all of the
costs of such indemnification or against liabilities arising from actions and
omissions of the insured person, even though the corporation may not have power
to indemnify the person against such liabilities. The BCL, however, restricts
the kinds of claims that may be made under insurance purchased by the
corporation against these liabilities. For example, there would be no insurance
coverage if the person to be indemnified was guilty of deliberate dishonesty and
that dishonesty was material to the event that produced the claim, or if the
person gained some financial profit or other advantage that he or she was not
entitled to.
The by-laws of COSI-New York currently indemnify to substantially the extent
permitted by the BCL and the by-laws of COSI-Delaware will indemnify as fully as
the DGCL allows. However, neither the BCL nor the DGCL permit indemnification of
a director, officer, employee or agent if a court finds the person liable to the
corporation itself, unless the court determines otherwise. Furthermore, if the
corporation sues the person because of some act or omission, the corporation
does not need to indemnify the person unless a court determines the person was
not liable. Furthermore, the DGCL generally requires that the person to be
indemnified must have acted in good faith and in a manner he or she reasonable
believed was consistent with the best interests of the corporation.
If this Proposal is approved by the Company's Stockholders, the DGCL
indemnification provisions will not apply to acts and omissions that occurred
before the effective date of the reincorporation. The BCL will govern these.
LOANS AND GUARANTEES OF OBLIGATIONS FOR DIRECTORS. Under the BCL, the holders of
a majority of the shares entitled to vote, excluding any shares of the director
who is the proposed borrower, are required to approve any loans to, or
guarantees of obligations of, a director. Under the DGCL, a board of directors
may authorize loans or guarantees of indebtedness to employees, officers and
directors.
16
<PAGE>
ISSUANCE OF RIGHTS AND OPTIONS TO DIRECTORS, OFFICERS AND EMPLOYEES. Under the
BCL, the issuance of any stock rights or stock options, as well as plans to
issue rights or options, to directors, officers or employees must be approved by
a majority of votes cast at a stockholders' meeting. The DGCL does not require
stockholder approval of such transactions. However, the rules of the NASD Stock
Exchange, where the Company's stock is listed and where the stock of
COSI-Delaware will be listed, require stockholder approval of option plans in
certain circumstances.
CONSIDERATION FOR SHARES. Under the BCL, obligations for future services or
payments are not considered payment or partial payment for shares of a
corporation. Stock certificates cannot be issued until full payment has been
made, except for shares purchased under a stock option plan permitting
installment payments. Under the DGCL, however, a corporation can receive cash,
services, personal or real property, leases of real property or any combination
of these as payment in full or in part for the shares. A purchaser of shares
under the DGCL may pay an amount equal to or greater than the par value of such
shares if the corporation receives a binding obligation of the purchaser to pay
the balance of the purchase price.
DIVIDENDS, AND REDEMPTION OF STOCK. Subject to its charter provisions, a
corporation may generally pay dividends, redeem shares of its stock or make
other distributions to stockholders if the corporation is solvent and would not
become insolvent because of the dividend, redemption or distribution. The assets
applied to such a distribution may not be greater than the corporation's
"surplus."
The BCL defines surplus as the excess of net assets over stated capital, and
lets the board adjust stated capital. The DGCL, on the other hand, defines
surplus as the excess of net assets over capital, and lets the board adjust
capital. If there is no surplus, the DGCL allows the corporation to apply net
profits from the current or preceding fiscal year, or both, unless the
corporation's net assets are less than the capital represented by issued and
outstanding stock which has a preference on any distribution of assets.
Regarding redemptions, both the BCL and the DGCL permit them only when the
corporation has outstanding shares of at least one class of voting stock which
is not subject to the redemption.
APPRAISAL RIGHTS. Generally, "appraisal rights" entitle dissenting stockholders
to receive the fair value of their shares in the merger or consolidation of a
corporation or in the sale of all or substantially all its assets. The BCL also
extends appraisal rights to an exchange of a corporation's shares.
The BCL provides that dissenting stockholders have no appraisal rights if their
shares are listed on the a national securities exchange or designated as a
national market system security on an inter-dealer quotation system by the
National Association of Securities Dealers, Inc. But in the case of shares not
listed on an exchange, appraisal rights under the BCL allow any stockholder of a
New York corporation, with various exceptions, to receive fair value for his or
her shares in such transactions. Regardless of listing on an exchange, appraisal
rights are available under the BCL in a merger between a parent
17
<PAGE>
corporation and its subsidiary where only one of them is a New York corporation,
or in a merger between a parent and subsidiary where both are New York
corporations and the parent owns at least 90% of the subsidiary. Also, appraisal
rights are available to stockholders who are not allowed to vote on a merger or
consolidation and whose shares will be cancelled or exchanged for cash or
something else of value other than shares of the surviving corporation or
another corporation. When appraisal rights are available, the stockholder may
have to request the appraisal and follow other required procedures.
Similarly, under the DGCL, appraisal rights are not available to a stockholder
if the corporation's shares are listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or held by more
than 2,000 stockholders of record, or if the corporation will be the surviving
corporation in a merger which does not require the approval of the surviving
corporation's stockholders. But, regardless of listing on an exchange, a
dissenting stockholder in a merger or consolidation has appraisal rights under
the DGCL if the transaction requires him or her to exchange shares for anything
of value other than one or more of the following:
o Shares of stock of the surviving corporation or of a new corporation which
results from the merger or consolidation.
o Shares of another corporation which will be listed on a national securities
exchange or held by more than 2,000 stockholders of record after the merger
or consolidation occurs.
o Cash instead of fractional shares of the surviving corporation or another
corporation.
The Company's Common Stock is currently listed on NASDAQ, and COSI-Delaware will
also list its common stock on NASDAQ.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. Provisions in both laws may
help to prevent or delay changes of corporate control. In particular, both the
BCL and the DGCL restrict or prohibit an interested stockholder from entering
into certain types of business combinations unless the board of directors
approves the transaction in advance.
18
<PAGE>
Under the BCL, an interested stockholder is generally prohibited from entering
into certain types of business combinations with a New York corporation for a
period of five years after becoming an interested stockholder, unless the board
of directors approved either the business combination or the acquisition of
stock by the interested stockholder before the interested stockholder acquired
his or her shares. An "interested stockholder" under the BCL is generally a
beneficial owner of at least 20% of the corporation's outstanding voting stock.
"Business combinations" under the BCL include mergers and consolidations between
corporations or with an interested stockholder; sales, leases, mortgages or
other dispositions to an interested stockholder of assets with an aggregate
market value which either (1) equals 10% or more of the corporation's
consolidated assets or outstanding stock, or (2) represents 10% or more of the
consolidated earning power or net income of the corporation; issues and
transfers of stock with an aggregate market value of at least 5% in relation to
the outstanding stock of the corporation; liquidation or dissolution of the
corporation proposed by or in connection with an interested stockholder;
reclassification or recapitalization of stock that would increase the
proportionate stock ownership of an interested stockholder; and the receipt by
an interested stockholder of benefit from loans, guarantees, pledges or other
financial assistance or tax benefits provided by the corporation.
After the five-year period referred to in the BCL, the law allows such business
combinations if either the board of directors or a majority of the outstanding
voting stock not owned by the interested stockholder before the interested
stockholder acquired his or her shares. Business combinations are also permitted
when certain statutory "fair price" requirements are met.
One section of the DGCL, Section 203, generally prohibits an interested
stockholder from entering into certain types of business combinations with a
Delaware corporation for three years after becoming an interested stockholder.
An "interested stockholder" under the DGCL is any person other than the
corporation and its majority-owned subsidiaries who owns at least 15% of the
outstanding voting stock, or who owned at least 15% within the preceding three
years, and this definition includes affiliates of the corporation.
Briefly described, the prohibited combinations include:
o Mergers or consolidations.
o Sales, leases, exchanges or other dispositions of 10% or more of (1) the
aggregate market value of all assets of the corporation or (2) the
aggregate market value of all the outstanding stock of the corporation.
o Issuances or transfers by the corporation of its stock that would increase
the proportionate share of stock owned by the interested stockholder.
o Receipt by the interested stockholder of the benefit of loans, advances,
guarantees, pledges or other financial benefits provided by the
corporation.
19
<PAGE>
o Any other transaction, with certain exceptions, that increases the
proportionate share of the stock owned by the interested stockholder.
A Delaware corporation may choose not to have Section 203 of the DGCL apply.
COSI-Delaware will, however, utilize the protections of Section 203, and
therefore the charter of COSI-Delaware will not waive those protections.
Nevertheless, Section 203 will not apply in the following cases:
o If, before the stockholder became an interested stockholder, the board
of directors approved the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder.
o If, after the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, subject to technical calculation rules.
o If, on or after the time the interested stockholder became an
interested stockholder, the board of directors approved the business
combination, and at least two-thirds of the outstanding voting stock
which is not owned by the interested stockholder also ratified the
business combination at a stockholders' meeting.
20
<PAGE>
PROPOSAL II - ELECTION OF DIRECTORS
The Board of Directors has fixed the number of Directors at six for the coming
year. Subject to stockholder approval of Proposal I, the Board is divided into
three classes. Class A nominees will be elected at the Meeting for a term of one
year, Class B nominees will be elected for a term of two years, and Class C
nominees will be elected for a term of three years. Each Director is to serve
until his successor is duly elected and qualified. At future annual meetings of
stockholders, only the Class of Directors whose term expires during that year
will be voted upon for election. At future annual meetings of stockholders, each
Director will be nominated for a three year term. In the event that Proposal I
is not approved by the shareholders at the Meeting, each of the nominees listed
below will be elected for a one year term.
The name, principal occupation with the Company, and certain information
concerning each of the nominees for Director are set forth in the table below.
Also set forth following the table is certain additional information regarding
each individuals' business experience. Each person named in the table below has
consented to being named a nominee in this Proxy Statement and has agreed to
serve as a Director if elected at the Meeting. Unless otherwise indicated, the
persons named in the Proxy intend to vote their shares for the election of these
nominees. If any nominee becomes unable to serve prior to the meeting, Proxies
will be voted for such other candidates as may be nominated by the Board of
Directors.
Directors will be elected by a plurality of the votes properly cast at the
meeting. Abstentions and broker non-votes will not be treated as votes cast for
this purpose.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TERM EXPIRING AT
THE ANNUAL
MEETING OF
STOCKHOLDERS TO DIRECTOR
NAME POSITIONS WITH THE COMPANY BE HELD IN AGE SINCE
- ----------------------------- --------------------------------------------- ------------------- ------ --------------
Zach Lonstein Chairman of the Board of Directors
and Chief Executive Officer 2002 54 1984
Robert B. Wallach President and a Director 2002 59 1992
Joseph Lynaugh Director 2001 59 1998
Howard Waltman Director 2000 66 1997
Warren Ousley President of a Subsidiary of the Company
and a Director 2000 54 1999
John C. Platt Vice President, Treasurer, and a Director 2001 45 1996
</TABLE>
21
<PAGE>
ZACH LONSTEIN has been the Company's Chairman of the Board and Chief Executive
Officer since he organized the Company in 1984, and President from 1984 to May
1996. From 1981 to 1984, Mr. Lonstein was Vice President and General Manager of
the Commercial On-Line division of Informatics General Corporation
("Informatics" - subsequently renamed Sterling Federal Systems, Inc.), a
computer software and services company listed on the New York Stock Exchange. In
1970, Mr. Lonstein was a founder and President of Transportation Computing
Services Corp. ("TCS"). In 1981, TCS was sold to Informatics and eventually
became the basis for the Commercial On-Line division, which the Company
purchased in 1984.
ROBERT B. WALLACH has been President of the Company since 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.
JOSEPH LYNAUGH was elected to the Board of Directors on September 23, 1998. Mr.
Lynaugh was President and Chief Executive Officer of NYLCare Health Plans, Inc.
("NYLCare") from its formation in January 1996 until his retirement following
its acquisition by Aetna US Healthcare. Prior to the formation of NYLCare, Mr.
Lynaugh was President of Sanus Corporation Health Systems ("Sanus"), a national
health maintenance organization of which he was a founder in 1983.
HOWARD WALTMAN is Chairman of Express Scripts, Inc. ("ESI"), a Company he formed
in 1986 as a subsidiary of Sanus, of which he was also a founder and former
Chairman. Sanus 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 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.
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.
22
<PAGE>
WARREN OUSLEY is President of ETG, Inc. ("ETG"), a subsidiary of the Company. He
is president and a director of Enterprise Technology Group, Incorporated
("Enterprise"), an information technology consulting company he founded in March
1994. In December 1998, ETG purchased the business and certain assets of
Enterprise, and Mr. Ousley became President of ETG. On March 31, 1999, Mr.
Ousley became a Director of the Company. Prior to founding Enterprise, Mr.
Ousley was Managing Director of the Technology Services Center of Bankers Trust.
The name, principal occupation with the Company, and certain additional
information concerning the executive officers of the Company who are not
nominees for Director are set forth below.
THOMAS LAUDATI, 41, has been a Senior Vice President of the Company since 1997
and a Vice President of the Company since 1995, when the Company purchased MCC
Corp. Mr. Laudati joined MCC Corp in 1988 as a senior analyst, and was promoted
to Vice President of Technical Services in April 1991. Prior to joining MCC
Corp., Mr. Laudati held positions in the programming departments of Horizons
Bancorp and Colonial Life Insurance Company.
HOWARD LIEBMAN, 54, has been a Vice President since June 1996. Prior to that
time, he was President of Advanced Interchange Technologies, a company he
founded in 1992 which provided electronic data interchange ("EDI") and bar-code
printing services to manufacturers. Before 1992, Mr. Liebman was vice president
of operations for Oak Hill Corporation, an apparel manufacturer.
GARY LAZAREWICZ, 49, has been a Vice President of the Company since June 1995,
when the Company purchased MCC Corp. Mr. Lazarewicz, who oversees all corporate
research and development, joined MCC Corp. in 1979, and was promoted to Vice
President in 1985. From 1971 through 1979, he was employed at Global Terminal
and Computer Services, where his last position was Director of MIS.
NICHOLAS J. LETIZIA, 47, has been the Company's Chief Financial Officer and
Secretary since November 1998. Prior to that time, he was Chief Financial
Officer of InterEquity Capital Corporation ("InterEquity"), a Small Business
Investment Company headquartered in New York City. Before joining Interequity in
November 1997, he was Vice President of, and later a consultant to Helmstar
Group, Inc. from 1987 until November 1997. Mr. Letizia is a Certified Public
Accountant and a member of the New Jersey Bar.
23
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
- -------------------------------------------------
The Board of Directors held eight meetings during the fiscal year ended October
31, 1998, including actions taken by written consent. The Company has standing
Audit and Compensation Committees of the Board of Directors. The Company does
not have a nominating committee. Each Director attended all meetings of the
Board and all meetings of committees of the Board on which he served which were
held during the fiscal year, or for such shorter period during which the
Director served.
Subsequent to the Annual Meeting held on June 3, 1998, the Audit Committee
consisted of Messrs. Lonstein, Wallach, and Waltman. The Audit Committee may
meet periodically with management and the Company's independent certified public
accountants to discuss their evaluation of internal accounting controls, the
quality of financial reporting, and related matters. The independent auditors
have free access to members of the Audit Committee without the presence of
management, if necessary, to discuss the results of their audits. The Board of
Directors, subject to the recommendation of the Audit Committee, may approve the
extent of non-audit services provided by the independent auditors, giving due
consideration to the impact of those services on the auditors' independence.
During the fiscal year ended October 31, 1998, the Audit Committee did not meet,
as all audit-related actions were addressed by the full Board.
Subsequent to the Annual Meeting held on June 3, 1998, the Compensation
Committee consisted of Messrs. Lonstein, Wallach, and Waltman. The Compensation
Committee's primary responsibilities are to recommend levels of executive
compensation, to consider and recommend the establishment of various
compensation plans for Company employees, and to administer the Company's 1992
Stock Option and Stock Appreciation Rights Plan (the "Plan"). The Compensation
Committee held one meeting during fiscal 1998. Matters relating to the Plan were
handled by the full Board.
24
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------------
The Summary Compensation Table below includes, for each of the fiscal years
ended October 31, 1998, 1997, and 1996, 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 $100,000 in the
most recent fiscal year (together, the "Named Executives").
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
--------------------------------------- ------------------
Securities All Other
Fiscal Underlying Compensation ($)
Name and Principal Position Year Salary ($) Bonus ($) Options (#)
--------- ------------------ ---------------- ------------------ ----------------
- ----------------------------------
Zach Lonstein, Chief 1998 $285,913 $75,000 25,000 $30,000 (a)
Executive Officer and 1997 240,666 - 25,000 30,000 (a)
Chairman of the Board 1996 230,023 - 25,000 30,000 (a)
Robert B. Wallach, 1998 241,667 100,000 150,000 -
President 1997 200,000 55,000 100,000 -
and Chief Operating 1996 166,667 35,000 150,000 -
Officer
Jeffrey Millman, Executive 1998 128,555 - - -
Vice President and 1997 124,628 - - -
Secretary (b) 1996 106,923 - - -
Thomas Laudati, Senior 1998 125,833 25,000 - -
Vice President 1997 104,315 8,500 12,500 -
1996 98,667 - 5,000 -
</TABLE>
(a) Fee relating to Mr. Lonstein's guarantee of the Company's obligations
relating to the purchase of MCC Corporation (see "Certain Relationships
and Related Transactions").
(b) Mr. Millman resigned his positions in November 1998.
25
<PAGE>
The following table sets forth all grants of stock options made to the Named
Executives during the fiscal year ended October 31, 1998. Executives not listed
did not receive grants of stock options during the fiscal year. The Company did
not award any stock appreciation rights or reprice any stock options during
fiscal 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OPTION GRANTS IN THE LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN FISCAL EXERCISE
OPTIONS GRANTED YEAR PRICE EXPIRATION DATE
NAME ($/SHARE)
- ---------------------------- ------------------ --------------------- -------------- -------------------
Zach Lonstein 25,000 (1) 12% $10.8625 Jan 2, 2003
Robert B. Wallach 150,000 (2) 69% $8.250 Feb 18, 2008
</TABLE>
(1) Become exercisable as to 5,000 shares in each of five years
beginning January 2, 1998.
(2) Become exercisable as to 30,000 shares in each of five years
beginning February 18, 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------
The following table contains information concerning the stock options held by
the Named Executives during the fiscal year ended October 31, 1998. No stock
appreciation rights have been granted by the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
AGGREGATED OPTION EXERCISES DURING THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Received from Exercise Number of Securities Underlying Value of Unexercised
of Options during the Year ended Unexercised Options at October In-the-Money Options at
October 31, 1998 31, 1998 (#) October 31, 1998 ($) (2)
------------------------------------- ----------------------------------- -------------------------------
Net Value
Number of Received Un- Un-exercisable
Name Shares ($)(1) Exercisable exercisable Exercisable
- ---------------------- -------------- --------------- -------------- ---------------- --------------- --------------
Zach Lonstein 100,000 $ 992,750 75,000 50,000 $ 260,100 $ 129,150
Robert Wallach - - 218,333 181,667 1,079,582 170,418
Jeffrey Millman 2,948 11,142 7,000 500 18,375 2,000
Thomas Laudati - - 16,500 11,000 70,906 38,625
</TABLE>
(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.
26
<PAGE>
(2) The amounts shown represent the aggregate excess of the market value of
shares of common stock underlying options at October 31, 1998 over the
exercise price of those options.
COMPENSATION OF DIRECTORS
- -------------------------
During fiscal year 1998, 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.
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, annual increases of 5%, 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, 1998, four 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.
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("Enterprise") for
$4,000,000 in cash and 300,000 shares of the Company's common stock. Certain
additional consideration in the form of cash and common stock may be payable, at
various times, based upon the future performance of the acquired business over
the period ending December 31, 2001. Mr. Ousley is a majority stockholder in
Enterprise, and as such would receive a proportionate share of any additional
consideration paid as described above. On December 28, 1998, the subsidiary
changed its name to ETG, Inc ("ETG").
The purchase agreement also provided, among other things, that Mr. Ousley should
be appointed to the Company's Board of Directors, and further, that he is to be
nominated as a member of the slate of Directors at this and the two subsequent
annual meetings. Messrs. Lonstein and Wallach have agreed to vote their shares
for his election at each of
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the meetings, as long as Mr. Ousley remains an employee of the Company or any of
its subsidiaries.
28
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Mr. Ousley has an employment and non-competition agreement with the Company.
This agreement, which expires November 30, 2001, provides for an annual salary
of $268,000 with increases and annual bonuses to be determined by the Board of
Directors. The non-competition provisions of the agreement extend for one year
after the termination of the agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------
As of October 31, 1998, Mr. Lonstein was indebted to the Company in the amount
of $63,079. This indebtedness is payable on demand and bears interest at the
prime rate plus 1% per annum.
As compensation for providing a personal guarantee of certain acquisition
indebtedness to the selling shareholder of MCC Corporation in 1995, Mr. Lonstein
was granted an annual fee of 3% of the $1,000,000 original value of such
guarantee for the period during which the guarantee remains in effect. Such fee
is being paid in the form of a monthly reduction in the Chief Executive
Officer's existing indebtedness to the Company. On February 1, 1999, the Company
made the final payment on the above indebtedness, and Mr. Lonstein's guarantee
terminated as of that date.
PROPOSAL III - APPROVAL OF AMENDMENT TO THE COMPANY'S
1992 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
----------------------------------------------------
On March 31, 1999, the Board of Directors adopted a resolution, subject to
shareholder approval, to amend the 1992 Stock Option and Stock Appreciation
Rights Plan, as previously amended (the "Plan"), to increase the number of
shares available for grant under the Plan from 1,200,000 to 1,700,000, and to
permit the cashless exercise of options.
The proposed amendment to the plan would permit a holder of a stock option to
exercise vested options by paying the Option exercise price with either (a)
cash, (b) shares having a fair market value at least equal to the Option
exercise price, or (c) a cashless exercise whereby the Option holder forfeits
unexercised Options and uses the difference between the fair market value of the
shares and the exercise price of the forfeited options or (d) any combination of
the foregoing.
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The Board of Directors believes that stock options are valuable tools for the
recruitment, retention and motivation of qualified employees, including
officers, and other persons who can materially contribute to the Company's
success. As of May 14, 1999, 45,898 shares remained available and the Company
has contingent contractual obligations to grant options for an additional 72,000
shares at various times and subject to certain conditions. Further, the Company
may wish to make additional grants to existing employees, new employees gained
through normal growth or future business acquisitions (although the Company has
no definitive plans for any such acquisitions at this time), or for other
purposes. The Board of Directors believes that it is important to have
additional shares available under the Plan to provide adequate incentives to the
Company's workforce.
The material features of the Plan, including the proposed amendment, are
outlined below. The following summary is qualified in its entirety by reference
to the full text of the Plan, a copy of which will be filed with the Securities
and Exchange Commission. Only the text of the amendment is included as an
appendix to this Proxy Statement.
The affirmative vote of the holders of a majority of the shares of Common Stock
properly cast at the Meeting, in person or by proxy, is necessary for approval
of the amendment to the Plan and, unless this vote is received, the amendment to
the Plan will not become effective. Abstentions and broker non-votes will not be
treated as votes cast for this purpose.
PURPOSE OF PLAN
- ---------------
The purpose of the Plan is to provide incentive to selected directors, officers,
employees and consultants of the Company and its subsidiaries, by providing them
with the opportunities to realize stock appreciation, by facilitating stock
ownership and by rewarding them for achieving a high level of corporate
performance. The Plan is also intended to facilitate recruiting and retaining
key personnel of outstanding ability.
ADMINISTRATION
- --------------
The Plan is administered by a committee (the "Committee") appointed by the
Company's Board of Directors. Except with respect to options granted to
Non-Employee Directors, the Committee has the exclusive power to grant options
under the Plan and to determine when and to whom options will be granted, and
the form, amount and other terms and conditions of each grant, subject to the
provisions of the Plan. The Committee has the authority to interpret the Plan
and any grant or agreement made under the Plan.
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ELIGIBILITY
- -----------
The Plan provides for grants to all employees of the Company and its
subsidiaries of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, and for grants of non-qualified
options to employees, officers, directors and consultants of the Company and its
subsidiaries. Additionally, the Plan provides that each Non-Employee Director
shall automatically be granted a stock option covering 1,250 shares for each
meeting of the Board of Directors attended by that director during that fiscal
year.
TYPES OF GRANTS
- ---------------
The Company has discretion to determine whether an option grant shall be an
incentive stock option or a non-qualified option. Subject to certain
restrictions applicable to incentive stock options, options will be exercisable
by the recipients at those times as are determined by the Committee, but in no
event may the term of an option be longer than ten years after the date of grant
(five years with respect to an incentive option granted to an employee holding
10% or more of the Company's stock). Both incentive and non-qualified stock
options may be granted to recipients at such exercise prices as the Committee
may determine, except that the exercise price of an incentive stock option shall
not be less than 100% of the fair market value of the stock on the date of its
grant (110% in the case of a grant to a 10% or greater shareholder) and the
exercise price of a non-qualified option granted to a Non-Employee Director
shall be the fair market value of the stock on the date of its grant.
The purchase price payable upon exercise of options may be paid in cash, by
delivering stock already owned by the holder (where the fair market value of the
shares delivered on the date of exercise is equal to the option price of the
stock being purchased), by forfeiting options owned by the holder (where
differences between the fair market value of the shares and the exercise price
of the forfeited options is equal to the option price of the stock being
purchased), or a combination of cash, stock and forfeited options.
TRANSFERABILITY
- ---------------
During the lifetime of an employee to whom an option has been granted, only the
employee, or the employee's legal representative, may exercise an option. No
options may be sold, assigned, transferred, exchanged or otherwise encumbered
except to a successor in the event of an option holder's death.
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STOCK APPRECIATION RIGHTS
- -------------------------
Options may be accompanied by either general or limited stock appreciation
rights. Upon exercising a stock appreciation right, a related option shall no
longer be exercisable, but the options shall be considered to have been
exercised to that extent for purposes of determining the number of shares
available for the grant of further options. Upon exercise of a right, the holder
receives the difference between the fair market value per share on the date the
right is exercised and the purchase price per share at which the option is
exercisable, multiplied by the number of shares with respect to which the right
is being exercised. A limited right, however, may be exercised only during the
period of a tender or exchange offer for the Company's shares.
AMENDMENT OR TERMINATION
- ------------------------
The Board of Directors may amend or discontinue the Plan but no amendment or
termination shall be made that would impair the rights of any holder of any
option granted before the amendment or termination.
FEDERAL TAX CONSIDERATIONS
- --------------------------
The Company has been advised by its counsel that the grants made under the Plan
generally result in the following tax events for United States citizens under
current United States Federal income tax laws.
Incentive Stock Options - A recipient will realize no taxable income, and the
Company will not be entitled to any related deduction, at the time an incentive
stock option is granted under the Plan. If certain statutory employment and
holding period conditions are satisfied before the recipient disposes of shares
acquired pursuant to the exercise of such an option, then no taxable income will
result in the exercise of an incentive stock option and the Company will not be
entitled to any deduction in connection with that exercise. Upon disposition of
the shares after expiration of the statutory holding periods, any gain or loss
realized by a recipient will be a capital gain or loss. The Company will not be
entitled to a deduction with respect to a disposition of the shares by a
recipient after the expiration of the statutory holding periods.
Except in the event of death, if shares acquired by a recipient upon the
exercise of an incentive stock option are disposed of by the recipient before
the expiration of the statutory holding periods, the recipient will be
considered to have realized, as compensation taxable as ordinary income in the
year of disposition, an amount, not exceeding the gain realized on the
disposition, equal to the difference between the exercise price and the fair
market value of the shares on the date of exercise of the option. The Company
will be entitled to a deduction at the same time and in the same amount as the
recipient is deemed to have realized ordinary income. Any gain realized on the
disposition in excess of the amount treated as compensation or any loss realized
on the disposition will constitute capital gain or loss, respectively.
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The foregoing discussion applies only for regular tax purposes. For alternative
minimum tax purposes, at the time of exercise of an incentive stock option, the
recipient would realize ordinary income.
Non-Qualified Stock Options - A recipient will realize no taxable income, and
the Company will not be entitled to any related deduction, at the time a
non-qualified stock option is granted under the Plan. At the time of exercise of
a non-qualified stock option, the recipient would realize ordinary income, and
the Company would be entitled to a deduction, equal to the excess of the fair
market value of the stock on the date of exercise over the option price. Upon
disposition of the shares, any additional gain or loss realized by the recipient
will be taxed as a capital gain or loss.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL
OF THE AMENDMENT TO THE 1992 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN.
SECURITIES ACT REPORTING
-------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Executive
Officers and Directors of the Company, and persons who beneficially own more
than ten percent of the Company's Common Stock, to file reports of ownership of
Company securities and changes of ownership with the Securities and Exchange
Commission. Copies of those reports must also be furnished to the Company.
Based solely on a review of the copies of reports furnished to the Company or
representations of the Company's Directors and Executive Officers that no
additional reports were required, the Company believes that during the fiscal
year ended October 31, 1998 the Executive Officers, Directors, and other persons
beneficially owning more than ten percent of the Company's Common Stock complied
with all applicable Section 16(a) filing requirements, except as to the
Company's Controller, who had not timely filed a Form 3 and one Form 4. This
individual has since filed the required forms.
33
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INFORMATION CONCERNING INDEPENDENT AUDITORS
-------------------------------------------
Changes In and Disagreements with
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------
On September 29, 1998, the Company notified Deloitte & Touche LLP ("D&T") that
the Company's Board of Directors had voted not to engage D&T to perform the
Company's audits. On October 29, 1998, the Company retained Ernst & Young LLP to
perform the audit of the year ended October 31, 1998.
D&T's Report on the financial statements for the years ended October 31, 1997
and 1996 did not contain an adverse opinion, disclaimer of opinion, nor any
qualification or modification as to uncertainty, audit scope, or accounting
principles.
During the audits of the two previous fiscal years, and through the date of
termination, there were no disagreements with D&T on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
During the audits of the two previous fiscal years, and through the date of
termination, there were no reportable events as defined in Regulation S-B, Item
304(a)1(v).
REPRESENTATION AT THE MEETING
- -----------------------------
A representative of Ernst & Young, LLP is expected to be present at the Meeting,
will have an opportunity to make a statement if such representative desires to
do so, and is expected to be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
---------------------------------------------
In order for a stockholder proposal to be considered for inclusion in the
Company's Proxy Materials for the 2000 Annual Meeting, it must be received by
the Company's Secretary at 2 Christie Heights Street, Leonia, NJ 07605, no later
than December 31, 1999.
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OTHER BUSINESS
--------------
The Board of Directors knows of no other business to be acted upon at the
Meeting other than the matters described in this Proxy Statement. If other
business is properly presented for consideration at the Meeting, or any
adjournment thereof, the enclosed Proxy shall be deemed to confer discretionary
authority on the persons named therein to vote the shares represented by such
Proxy as to such other business.
The Board of Directors would appreciate the prompt return of the enclosed Proxy,
signed and dated.
ANNUAL REPORT
-------------
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
FISCAL YEAR ENDED OCTOBER 31, 1998 WILL BE PROVIDED WITHOUT
CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY
AT 2 CHRISTIE HEIGHTS STREET, LEONIA, NJ 07605.
35
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), made this ____ day of
__________, 1999, by and between Computer Outsourcing Services, Inc., a New York
corporation ("COSI-New York"), and Computer Outsourcing Services, Inc., a
Delaware corporation and a wholly-owned subsidiary of COSI-New York
("COSI-Delaware") (the two corporate parties hereto being sometimes collectively
referred to as the "Constituent Corporations").
WITNESSETH:
WHEREAS, the Boards of Directors of COSI-New York and COSI-Delaware have
determined that the proposed merger (the "Merger") of COSI-New York with
COSI-Delaware upon the terms hereinafter set forth is advisable and in the best
interests of the shareholders of such corporations, and the Boards of Directors
of COSI-New York and COSI-Delaware have adopted and approved this Agreement and
both such Boards of Directors have directed that this Agreement be submitted to
the shareholders of COSI-New York and COSI-Delaware for their approval; and
WHEREAS, the Merger is intended to constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986; and
WHEREAS, COSI-New York and COSI-Delaware, as appropriate, intend to take all
such action as may be necessary or appropriate as and when required by the
provisions of this Agreement in order to consummate the Merger;
WHEREAS, the authorized capital stock of COSI-New York consists solely of (i)
10,000,000 shares of common stock, par value $.01 per share, of which _____
shares are issued and outstanding as of the date hereof and (ii) 1,000,000
shares of preferred stock, par value $.01 per share, of which no shares are
issued and outstanding as of the date hereof; and
WHEREAS, the authorized capital stock of COSI-Delaware consists solely of (i)
10,000,000 shares of common stock, par value $.01 per share, of which 100 shares
are issued and outstanding as of the date hereof, all of which shares are owned
by COSI-New York and (ii) 1,000,000 shares of preferred stock, par value $.01
per share, of which no shares are issued and outstanding as of the date hereof;
NOW, THEREFORE, the Constituent Corporations do hereby agree to merge on the
terms and conditions herein provided, as follows:
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<PAGE>
ARTICLE I
GENERAL
1.1 AGREEMENT TO MERGE. The parties to this Agreement agree to effect the
Merger herein provided for, subject to the terms and conditions set forth
herein.
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall be effective in
accordance with the laws of the States of New York and Delaware. The date and
time the Merger becomes effective is referred to as the "Effective Time of the
Merger."
1.3 SURVIVING CORPORATION. At the Effective Time of the Merger, COSI-New
York shall be merged with and into COSI-Delaware, and COSI-Delaware shall be the
surviving corporation, governed by the laws of the State of Delaware
(hereinafter sometimes called the "Surviving Corporation"). The name of the
Surviving Corporation will be Computer Outsourcing Services, Inc.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS. At the Effective Time of the
Merger, the Certificate of Incorporation and Bylaws of COSI-Delaware in effect
immediately prior to the Effective Time of the Merger shall be the Certificate
of Incorporation and Bylaws of the Surviving Corporation, subject always to the
right of the Surviving Corporation to amend its Certificate of Incorporation and
Bylaws in accordance with the laws of the State of Delaware and the provisions
of the Certificate of Incorporation.
1.5 DIRECTORS. The directors of COSI-New York in office at the Effective
Time of the Merger shall be and constitute the directors of the Surviving
Corporation, each holding the same directorship in the Surviving Corporation as
he or she held in COSI-New York for the terms elected and/or until their
respective successors shall be elected or appointed and qualified. The directors
of the Surviving Corporation shall continue to be members of the same class of
directors as they were in COSI-New York, and the time for election of each class
of directors for the Surviving Corporation shall be the same as it was for the
corresponding class of directors of COSI-New York.
1.6 OFFICERS. The officers of COSI-New York in office at the Effective
Time of the Merger shall be and constitute the officers of the Surviving
Corporation, each holding the same office in the Surviving Corporation as he or
she held in COSI-New York for the terms elected and/or until their respective
successors shall be elected or appointed and qualified.
1.7 EFFECT OF THE MERGER. On and after the Effective Time of the Merger,
the separate existence of COSI-New York and COSI-Delaware shall cease and the
Surviving Corporation shall succeed, without further action, to all the
properties and assets of COSI-New York and COSI-Delaware of every kind, nature
and description and to COSI-New York's and COSI-Delaware's business as a going
concern. The Surviving Corporation shall also succeed to all rights, title and
interests to all real estate and other property
37
<PAGE>
owned by COSI-New York or COSI-Delaware without reversion or impairment, without
further act or deed, and without any transfer or assignment having occurred, but
subject to any existing liens thereon. All liabilities and obligations of
COSI-New York or COSI-Delaware shall become the liabilities and obligations of
the Surviving Corporation, and any proceedings pending against COSI-New York or
COSI-Delaware will be continued as if the Merger had not occurred.
1.8 FURTHER ASSURANCES. COSI-New York hereby agrees that at any time, or
from time to time, as and when requested by the Surviving Corporation, or by its
successors and assigns, it will execute and deliver, or cause to be executed and
delivered in its name by its last acting officers, or by the corresponding
officers of the Surviving Corporation, all such conveyances, assignments,
transfers, deeds or other instruments, and will take or cause to be taken such
further or other action and give such assurances as the Surviving Corporation,
its successors or assigns may deem necessary or desirable in order to evidence
the transfer, vesting of any property, right, privilege or franchise or to vest
or perfect in or confirm to the Surviving Corporation, its successors and
assigns, title to and possession of all the property, rights, privileges,
powers, immunities, franchises and interests referred to in this Article I and
otherwise to carry out the intent and purposes thereof.
ARTICLE II
CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
2.1 COSI-NEW YORK CAPITAL STOCK. At the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of COSI-New York,
COSI-Delaware or the holders of any of the common stock ("COSI-New York Common
Stock") of COSI-New York, each issued and outstanding share of COSI-New York
Common Stock, and each share of Common Stock of COSI-New York, held in the
treasury of COSI-New York, shall be converted into one share of COSI-Delaware
Common Stock.
2.2 COSI-DELAWARE CAPITAL STOCK. At the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of COSI-New York,
COSI-Delaware or the holders of any of the common stock ("COSI-Delaware Common
Stock") of COSI-Delaware, each issued and outstanding share of COSI-Delaware
Common Stock shall be cancelled.
ARTICLE III
TERMINATION AND AMENDMENT
3.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time of the Merger, whether before or after action
thereon by the shareholders of the Constituent Corporations, by the mutual
written consent of the Boards of Directors of COSI-New York and COSI-Delaware.
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<PAGE>
3.2 CONSEQUENCES OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to the provisions of Section 3.1 hereof,
this Agreement shall be of no further force or effect.
3.3 MODIFICATION, AMENDMENT, ETC. Any of the terms or conditions of this
Agreement may be waived at any time, whether before or after action thereon by
the shareholders of the Constituent Corporations, by the party entitled to the
benefits thereof, and this Agreement may be modified or amended at any time,
whether before or after action thereon by the shareholders of the Constituent
Corporations, to the full extent permitted by the corporate laws of the States
of New York and Delaware. Any waiver, modification or amendment shall be
effective only if reduced to writing and executed by the duly authorized
representatives of the Constituent Corporations.
ARTICLE IV
MISCELLANEOUS
4.1 EXPENSES. The Surviving Corporation shall pay all expenses of
carrying this Agreement into effect and accomplishing the Merger herein provided
for.
4.2 HEADINGS. Descriptive headings are for convenience only and shall not
control or affect the meaning or construction of any provisions of this
Agreement.
4.3 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original instrument, and all such counterparts together shall constitute only
one original.
4.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of laws principles thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed on its behalf by an officer duly authorized thereunto as of the date
first above written.
COMPUTER OUTSOURCING SERVICES, INC., COMPUTER OUTSOURCING SERVICES, INC.,
a New York corporation a Delaware corporation
By ___________________________________ By ________________________________
Its___________________________________ Its ________________________________
39
<PAGE>
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
COMPUTER OUTSOURCING SERVICES, INC.
1. NAME. The name of the corporation (hereinafter, the "CORPORATION") is
Computer Outsourcing Services, Inc.
2. PURPOSE. The purposes for which the Corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law ("DCGL").
3. REGISTERED AGENT AND REGISTERED OFFICE FOR SERVICE OF PROCESS. The
Secretary of State of the State of Delaware is designated as the agent of the
Corporation upon whom process against it may be served, and the Registered Agent
at its post office address, which shall be the Registered Office of the
Corporation, to which the Secretary of State shall mail a copy of such process
served upon him is:
The Corporation Trust Company
1209 Orange Street
Wilmington, DE
4. CAPITAL STOCK.
4.1 AUTHORIZED CAPITAL STOCK. 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 $.01 per share,
("PREFERRED STOCK") and 10,000,000 shares of Common Stock, par value $.01 per
share ("COMMON STOCK").
4.1.1 PREFERRED STOCK. Authority is hereby expressly
granted to the Board of Directors (the "BOARD") from time to time to issue the
Preferred Stock as Preferred Stock of one or more series and in connection with
the creation of any such series to fix by the resolution or resolutions
providing for the issue of shares thereof the designation, voting powers,
preferences, and relative, participating, optional, or other special rights of
such series, and the qualifications, limitations, or restrictions thereof. Such
authority of the Board with respect to each such series shall include, but not
be limited to, the determination of the following:
4.1.1.1 the distinctive designation of, and the number
of shares comprising, such series, which number may be increased (except where
otherwise
40
<PAGE>
provided by the Board in creating such series) or decreased (but not
below the number of shares thereof then outstanding) from time to time by like
action of the Board;
4.1.1.2 the dividend rate or amount for such series, the
conditions and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other class or
classes or any other series of any class or classes of stock, and whether such
dividends shall be cumulative, and if so, from which date or dates for such
series;
4.1.1.3 whether or not the shares of such series shall
be subject to redemption by the Corporation and the times, prices and other
terms and conditions of such redemption;
4.1.1.4 whether or not the shares of such series shall
be subject to the operation of a sinking fund or purchase fund to be applied to
the redemption or purchase of such shares and if such a fund be established, the
amount thereof and the terms and provisions relative to the application thereof;
4.1.1.5 whether or not the shares of such series shall
be convertible into or exchangeable for shares of any other class or classes, or
of any other series of any class or classes, of stock of the Corporation and if
provision be made for conversion or exchange, the times, prices, rates
adjustments, and other terms and conditions of such conversion or exchange;
4.1.1.6 whether or not the shares of such series shall
have voting rights, in addition to the voting rights provided by law, and if
they are to have such additional voting rights, the extent thereof;
4.1.1.7 the rights of the shares of such series in the
event of any liquidation, dissolution, or winding up of the Corporation or upon
any distribution of its assets; and
4.1.1.8 any other powers, preferences, and relative,
participating, optional, or other special rights of the shares of such series,
and the qualifications, limitations, or restrictions thereof, to the full extent
now or hereafter permitted by law and not inconsistent with the provisions
hereof.
4.2 DIVIDENDS, ETC. Subject to any provisions of this Certificate of
Incorporation, so long as any shares of Common Stock are outstanding, holders of
Common Stock shall be entitled to receive such dividends and other distributions
in cash, stock of any corporation other than the Corporation or property of the
Corporation as may be declared thereon by the Board from time to time out of
assets or funds of the Corporation legally available therefor and shall share
equally on a per share basis in all such dividends and other distributions.
41
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4.3 VOTING.
4.3.1 ONE VOTE PER SHARE. Each holder of record of Common
Stock shall have one vote for each share outstanding in his or her name on the
books of the Corporation and entitled to vote. Cumulative voting shall not be
permitted.
4.3.2 CLASS VOTING. The holders of Common Stock and other
classes and designations of stock as shall be determined by the Board, shall
vote together as a single class unless otherwise determined by the Board.
4.3.3 QUORUM. The holders of a majority of all of the
issued and outstanding shares eligible to vote, present in person or represented
by proxy, shall constitute a quorum for the transaction of any business at any
meeting of shareholders.
4.3.4 ACTION WITHOUT MEETING. Except as may be otherwise
specifically provided by law, whenever by any provision of law or of this
Certificate of Incorporation the vote of shareholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action, the
meeting and vote of shareholders may be dispensed with and such action may be
taken if holders of at least the minimum number of shares required to authorize
such action if such meeting were held and all shares entitled to vote thereon
were present in person or by proxy, consent in writing to such action.
5. BOARD OF DIRECTORS.
5.1 NUMBER. The number of directors ("DIRECTORS") shall be determined
by the Board. The Board shall have three classifications of Directors, namely
Class A, Class B and Class C, and each class shall have an equal number of
Directors to the greatest extent possible.
5.2 ELECTION OF BOARD. The Board shall be elected in accordance with
the by-laws and the DGCL.
5.3 TERM. Each Director shall serve for a term of three years
continuing until the meeting of the shareholders at which the election of the
Class of Directors of which he or she is a member is in the regular order of
business and until his successor is duly elected and qualified, or until his
earlier death, resignation or removal. Notwithstanding the foregoing, the terms
of members of the initial Board shall be one year for Class A Directors, two
years for Class B Directors and three years for Class C Directors.
5.4 REMOVAL AND VACANCIES. Unless otherwise provided in this
Certificate of Incorporation, the holders of a majority of the shares of
outstanding Common Stock shall have the right to remove any one or more of the
Directors at any time, but only with cause, and to concomitantly elect, by
plurality vote, a successor or successors to fill any vacancy on the Board
caused by the removal of any Director. Any vacancy caused by the death,
disability, or resignation of any Director or failure by the holders of a
majority of the shares of outstanding Common Stock to concomitantly fill a
vacancy on the Board caused by the removal of a Director for cause shall be
filled by a vote of a majority of the
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remaining Directors then in office even
though such number may constitute less than a quorum; PROVIDED that if no
Directors remain, then vacancies shall be filled by plurality vote of the
holders of the outstanding Common Stock. Any Director so appointed to fill a
vacancy shall serve for the remainder of this term and until his successor is
duly elected and qualified.
5.5 QUORUM. Not less than three Directors shall constitute a quorum
for the transaction of business at any duly called meeting of the Board.
5.6 ACTION BY THE BOARD. A majority vote of Directors present at
a meeting of Directors at which a quorum is present shall be required to effect
any action by the Board with respect to any matter.
6. AMENDMENTS TO CERTIFICATE OF INCORPORATION. The Corporation reserves
the right at any time and from time to time to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, as the same may be
amended, and other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted, in the manner now or hereafter
prescribed by law; and all rights, preferences and privileges of whatsoever
nature conferred upon shareholders, directors or any other persons whomsoever by
and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Section 6.
7. BY-LAWS. The Board is hereby authorized to adopt, amend or repeal the
by-laws of the Corporation.
8. DURATION. The duration of the Corporation is to be perpetual.
9. INDEMNIFICATION. The Directors shall have the authority to provide in
the by-laws for the indemnification of directors and officers to the fullest
extent permitted by law.
10. PERSONAL LIABILITY OF DIRECTORS. The personal liability of the Directors is
hereby eliminated to the fullest extent permitted by the provisions of the DGCL
as the same may be amended and supplemented, or any successor provision thereto.
11. NO PREEMPTIVE RIGHTS. No holder of any share of the Corporation shall,
because of his ownership of shares, have a preemptive or other right to
purchase, subscribe for or take any part of any shares or any part of the notes,
debentures, bonds or other securities convertible into or carrying options or
warrants to purchase shares of the Corporation issued, optioned or sold by the
Corporation after its incorporation, whether the shares be authorized by this
Certificate of Incorporation or be authorized by an amended certificate duly
filed and in effect at the time of the issuance or sale of such shares or such
notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase shares of the Corporation. Any part of the
shares authorized by this Certificate of Incorporation or by an amended
certificate duly filed, and any part of the notes, debentures, bonds or other
securities convertible into or carrying options or warrants to
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purchase shares of the Corporation may at any time be issued, optioned for sale
and sold or disposed of by the Corporation pursuant to resolution of the Board
to such persons and upon such terms and conditions as may, to the Board, seem
proper and advisable without first offering to existing shareholders the said
shares or the said notes, debentures, bonds or other securities convertible into
or carrying options or warrants to purchase shares of the Corporation or any
part of any thereof.
12. SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of the shareholders may
be called only by the Chairman of the Board, the President of the Corporation or
by the majority vote of the Directors on the Board. Notwithstanding the
foregoing, whenever the holders of one or more classes or series if Preferred
Stock shall have the right, voting separately as a class or series, to elect
Directors, such holders may call, pursuant to the terms of the resolution or
resolutions adopted by the Board, special meetings of holders of Preferred
Stock.
13. The name and address of the sole incorporator is Richard A. Krantz, Robinson
& Cole LLP, 695 East Main Street, Stamford, CT 06904.
The undersigned has signed this Certificate of Incorporation on
_____________, 1999.
_______________________
Richard A. Krantz
Sole Incorporator
44
<PAGE>
AMENDMENT
TO THE
COMPUTER OUTSOURCING SERVICES, INC.
1992 STOCK OPTION AND
STOCK APPRECIATION RIGHTS PLAN
The Computer Outsourcing Services, Inc. 1992 Stock Option and Stock
Appreciation Rights Plan ("Plan") is hereby amended, effective ______________,
1999 pursuant to Section 12 thereof, as follows:
I.
The second paragraph of Section 7 of the Plan is amended in its
entirety as follows:
The Option price shall be paid in: (i) cash; (ii) Shares
having a fair market value at least equal to the Option price; (iii) in
a cashless exercise whereby the Optionee forfeits Options and uses the
difference between the fair market value of the Shares and the exercise
price under the forfeited Options to exercise other Options; or (iv) in
a combination of (i) (ii) and (iii). Payment of the Option price in any
form other than cash shall require the approval of the Committee (which
may be withheld in its sole discretion), and the fair market value of
Shares under such alternative payment forms shall be determined by the
Committee. Shares purchased through the exercise of an Option and paid
in Shares having a fair market value at least equal to the Option price
(alternative (ii)) may be used to pay for the exercise of additional
Options, and those Shares so purchased may be used to pay for the
exercise of additional Options, and so on, in a pyramiding fashion,
until as many Options as the Optionee may desire to exercise are
exercised through the exchange of Shares in a cashless exercise as
permitted under the Federal Reserve Board's Regulation T. In addition,
with the approval of the Committee (which may be withheld in its sole
discretion), the Option price may be effected wholly or in part by
monies borrowed from the Company pursuant to repayment terms and
conditions as shall be determined from time to time by the Committee,
in its discretion, separately with respect to each exercise of Options
and each Optionee; PROVIDED, that each such method and time for payment
and each such borrowing and terms and conditions of repayment shall
then be permitted by and be in compliance with applicable law. An
Option may not be exercised for a fraction of a Share. No holder of any
Option or legal representative, legatee or distributee of such holder,
as the case may be, will be, or will be deemed to be, a holder of any
Shares covered by an Option unless and until certificates for the
Shares are issued to the
<PAGE>
Optionee or representative, legatee or distributee under the Plan.
II.
In the third paragraph of Section 2 of the Plan, the reference to
1,200,000 Shares shall be replaced with 1,700,000 Shares.
III.
If there shall be any discrepancy between the provisions of the Plan
and this Amendment, this Amendment shall control.
Amendment executed this _______ day of May, 1999.
COMPUTER OUTSOURCING SERVICES, INC.
By ______________________________
Its
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<PAGE>
COMPUTER OUTSOURCING SERVICES, INC.
PROXY FOR THE ANNUAL MEETING ON JUNE 23, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Zach Lonstein and Robert Wallach proxies, each
with the power to appoint his substitute and with authority in each to act in
the absence of the other, to represent and to vote all shares of stock of
Computer Outsourcing Services, Inc. (the "Company"), which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company to be held
at the offices of the Company, 2 Christie Heights Street, Leonia, New Jersey, on
Wednesday, June 23, 1999 at 9:00AM local time, and at any adjournments thereof,
(the "Meeting") as indicated on the proposals described in the Proxy Statement
and all other matters properly coming before the Meeting.
DATED:________________________________, 1999
Signature: ________________________________
Signature: ________________________________
Please sign exactly as your name or names
appear to the left. For joint accounts, both
owners must sign. When signing as executor,
administrator, attorney, trustee or
guardian, etc., please give your full title.
<PAGE>
A VOTE FOR ALL ITEMS IS RECOMMENDED BY THE BOARD OF DIRECTORS
1. PROPOSAL TO APPROVE A PLAN TO REINCORPORATE THE COMPANY IN DELAWARE.
|_| FOR |_| AGAINST |_| ABSTAIN
2. ELECTION OF DIRECTORS:
|_| FOR all nominees listed below (except as marked to the contrary)
|_| WITHHOLD AUTHORITY to vote for ALL nominees Zach Lonstein, Robert
B. Wallach, Joseph Lynaugh, Howard Waltman, Warren Ousley, John C.
Platt
INSTRUCTION: To withhold authority to vote for an individual
nominee, write that nominee's name in the following space:
- --------------------------------------------------------------------------------
3. PROPOSAL TO AMEND THE COMPANY'S 1992 STOCK OPTION AND STOCK APPRECIATION
RIGHTS PLAN TO INCREASE THE NUMBER OF SHARES FOR WHICH OPTIONS MAY BE GRANTED TO
1,700,000, AND TO PERMIT CASHLESS EXERCISES.
|_| FOR |_| AGAINST |_| ABSTAIN
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE. IF NO
CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR ITEMS 1, 2, AND 3.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE
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