UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1998
Commission file number: 0-20824
COMPUTER OUTSOURCING SERVICES, INC.
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(Exact name of registrant as specified in its Charter)
New York 13-3252333
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(State of Incorporation) (IRS Employer I.D. number)
2 Christie Heights Street Leonia, NJ 07605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 840-4700
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days: /X/ Yes / / No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB / /.
For the fiscal year ended October 31, 1998, registrant's consolidated revenues
from continuing operations were $30,403,381.
On January 15, 1999, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the registrant was approximately
$34,571,000.
On January 15, 1999, 4,616,115 shares of the registrant's Common Stock, $0.01
par value, were outstanding.
A schedule of Exhibits filed herewith or incorporated by reference appears in
Item 13 beginning on page 23.
Transitional Small Business Disclosure Format: / / Yes /X/ No
Page 1 of 52
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PART I
Item 1. Description of Business
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General
Computer Outsourcing Services, Inc. (together with its subsidiaries, the
"Company"), organized as a New York corporation in October 1984, provides
information technology services in the form of data center and business process
solutions to companies, institutions, and government agencies. The Company has
grown through strategic acquisitions as well as business development.
The Company's core business is providing information technology, outsourcing
solutions to large- and medium-size enterprises. It provides information
processing services in a customized environment to a broad array of clients in a
variety of industries. Due to rapid changes and increasing complexities in
information technology, outsourcing is an efficient solution for many
businesses.
The Company expanded its information technology services to include leading edge
infrastructure management consulting to Global 2000 companies through the
acquisition of the business and certain assets of Enterprise Technology Group,
Inc. on December 18, 1998. The Company conducts this activity through a new
wholly-owned subsidiary, ETG, Inc. ("ETG").
Additionally, the Company had been in the business of providing comprehensive
payroll processing and tax filing services. In December 1997, the Company
consummated the sale (the "Sale") of all the outstanding capital stock of Daton
Pay USA, Inc., NEDS, Inc., Pay USA of New Jersey, Inc., and Key-ACA, Inc., each
a wholly-owned subsidiary of the Company, and together comprising the Payroll
Division ("Pay USA"), to Zurich Payroll Solutions, Ltd. ("Zurich" or the
"Buyer"). At closing, the Company received $11,460,000, of which $10,710,000 was
in cash and $750,000 was in the form of a note from the Buyer bearing interest
at 8.5% per annum. The terms of the Sale also provided for an additional payment
by the Buyer of up to $1,500,000, which amount was contingent on the revenue of
Pay USA for the three months following the sale. An additional payment of
$1,500,000 was received in June 1998. The Company recognized a gain, net of tax,
of approximately $1,700,000 in its fiscal year ended October 31, 1998, as a
result of the sale of Pay USA.
Pursuant to the terms of the sale, the Company agreed to provide the Buyer with
processing services in connection with the continuing operations of Pay USA. The
Company agreed to provide these services through December 31, 1999 for an
initial payment of $500,000, a fixed monthly fee of $16,000 (plus a fixed amount
for telephone line charges), and other monthly fees based on the level of
services provided. The Buyer also paid the Company $1,440,000 at closing for the
Company's agreement to refrain from (1) directly or indirectly competing with
Pay USA, except as permitted in the agreement; (2) providing processing services
to third parties if such processing services permitted those parties to compete
with Pay USA in certain payroll processing and related activities; (3)
disclosing information about Pay USA's customers; and (4) engaging in any
activity that could be materially detrimental to Pay USA's business or
reputation. The $1,440,000 is being amortized over the term of the agreement.
The amortization of such income is included in income from continuing
operations.
Page 2 of 52
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The Computer Outsourcing Industry
The outsourcing of computer services, whereby a client company obtains all or
part of its information processing requirements (including systems design,
software management and hardware, communications, training, maintenance, and
support) from an information technology provider such as the Company, continues
to be a growing trend. The Company believes that it is generally 10% to 50% more
cost-effective and efficient for its clients to outsource information processing
services to the Company than it would be to provide equivalent services for
themselves by purchasing or leasing in-house systems and hiring or contracting
for service and support personnel.
Outsourcing provides clients with the following benefits:
- The refocus of personnel, financial and technological resources on
core business and client-related activities;
- Access to highly skilled personnel and technology resources;
- Access to resources that support technological reengineering;
- Access to experienced resources to perform selected information
processing functions;
- Reduction of operating costs; and o Reduction of future investment in
infrastructure not directly related to the core business activity.
Business Strategy
The Company's objective is to provide a comprehensive computer outsourcing
alternative to meet all or part of its clients' information technology
requirements. The Company's strategy includes the following key elements:
Information Technology Services
The Company's Information Technology Services allow clients to effectively
process and manage core business applications such as general ledger, accounts
payable, accounts receivable, order processing, and inventory. The Company
provides skilled personnel, secure processing environments, high service levels
and state of the art and emerging technologies to meet client information
processing requirements Clients utilize the Company's information systems in
order to focus on their core business and customer related activities while
significantly reducing their operating costs. The Company has developed industry
specific experience in markets which include publishing, financial services,
apparel, consumer products, and health care. Its clients in these markets rely
on the Company to combine its in-depth industry knowledge with information
technology solutions that uniquely meet their business objectives and
information processing requirements.
Typically, the Company enters into contracts with clients providing for
automatic renewal unless prior written notice is given. The contracts have
varying terms typically ranging from one to five years. The contracts specify
the rates for the Company's services. Such rates vary according to factors such
as the volume and types of services used by a particular client. In some
instances, a client may terminate a contract early by paying a penalty. In 1997,
the Company received notice from its largest publishing client that it was
exercising an option to cancel after June 30, 1999 by paying a cash penalty.
Page 3 of 52
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Computer Facilities Management Services
The Company provides Computer Facilities Management Services at its state
of the art data center to medium and large companies that outsource all or
part of their Information Processing functions. These services include the
Company's core Information Processing and Communications/Network Management
Services which operate 24 hours per day, each day of the year. Such
services are provided from a secure environment with critical back-up and
safeguard systems.
Electronic Commerce
The Company has also developed an electronic data interchange ("EDI")
subsystem. This subsystem allows a vendor to receive orders and floor
selling information from a retailer electronically and transmits invoices
back to the retailer electronically. This subsystem also enables the vendor
to satisfy the requirement of some chain stores to maintain an electronic
product catalog accessible to the chain. The Company's EDI subsystem
provides reports and on-line inquiry into orders and shipments, along with
comprehensive floor selling reports. The EDI subsystem also provides
automated Advance Ship Notices and interfaces with a stand-alone scanning
system. The EDI subsystem allows a small apparel manufacturer or importer to
conform to the EDI requirements of various large retail chains and to
continue as an approved vendor of those chains without having to acquire its
own data processing and interchange capability
Year 2000 Testing Services
The Company's Year 2000 Solution Center provides a customized production
testing environment, technical production assistance, and operational
support for the full range of Year 2000 testing compliance. This service
allows a client to continue to run its business without impacting its
internal data processing systems.
Business Process Outsourcing Services
The Company provides a variety of customized data processing services
designed to specific client requirements. These services include the
development of proprietary software utilized to solve the information
processing requirements of particular clients. The Company provides the
information processing services and retains ownership of the software it
develops.
Industry-specific outsourcing applications and services are developed, so
that the Company's in-depth knowledge of a particular industry can be
applied to servicing multiple clients in that field. The Company currently
provides outsourcing services to approximately 480 clients in such diverse
fields as financial services, publishing, home health care, apparel, and
consumer products.
Enterprise Infrastructure Consulting
ETG's principal expertise is analyzing large data center operations to maximize
operating performance and to minimize operating costs. Consulting services by
this new subsidiary covers hardware; automation; disaster recovery planning;
systems management; storage management; and performance reporting. ETG
concentrates on aligning a client's information systems with the client's
business focus to strengthen the client's technology infrastructure to enable a
client to increase its competitiveness and business opportunities.
Page 4 of 52
<PAGE>
ETG's consultants perform analytical studies to identify areas of improvement.
The consultants then develop a transformation plan, manage the implementation
process, and monitor the results. ETG's clients include major financial and
health care institutions.
Customer Service and Support
The Company believes that close attention to customer service and support has
been, and will continue to be, crucial to its success. The Company provides a
high degree of customer service and support, including customized training and
rapid response to customer needs, which the Company believes generally exceeds
industry standards. Because of its attention to customer service, the Company's
client relationships have tended to be long-term with very low turnover,
generating recurring and predictable revenues.
System Flexibility
The Company attempts to maximize utilization of its products and services by
offering a wide range of services to each client. The Company's products are
designed to work either on a stand-alone modular basis or as fully integrated
systems. Clients can easily expand the range of services provided by the Company
by adding modules as the client's needs and capacity to use them expand, thereby
making an orderly transition from partial to full reliance on the Company's
services. In addition, clients can increase or decrease the volume of services
provided by adjusting the number of "on-line" terminals installed in their
offices.
Customer Support and Training
The Company provides a high degree of initial and continuing customer service
and support, at a level which, the Company believes, generally exceeds industry
standards. The Company believes that its focus on customer service and support
has been, and will continue to be, a key factor in its high level of customer
retention and growth in revenues. The Company seeks to develop close,
collaborative relationships with each client and to respond quickly to each
client's needs.
The client is linked to the Company's systems by leased data circuits. The
Company assigns a service representative to each customer to supervise
installation and to provide on-site training and continuing support. Upon
installation, the Company provides initial training at the clients' business
location and comprehensive user manuals. To maintain client proficiency, the
Company offers refresher training periodically, according to customer needs.
Support is available at the customer site, or by telephone during business hours
for system-related questions and general problem solving. Because many clients'
terminals are on-line with the Company's computers, support personnel are able
to communicate directly with them to diagnose errors, solve software and
hardware problems, and make software upgrades at any time. The Company maintains
a quality assurance program which includes periodic testing of the Company's
systems and services.
Marketing and Sales
The Company currently targets its principal marketing efforts to medium-size
companies or divisions of large companies in industries such as financial
services, publishing, apparel, and health care. No single client is responsible
for 10% or more of the Company's revenue. The Company uses a direct-sales
marketing approach in which its sales representatives solicit client
appointments and make sales calls.
Page 5 of 52
<PAGE>
Initial contact is made by a variety of methods, including seminars, mailings,
telemarketing, and attendance at industry conventions and trade shows. The
Company's sales representatives and marketing support staff analyze clients'
requirements and prepare product demonstrations. Recently, the Company has
broadened its customer base beyond the New York Metropolitan Area. In addition
to internal sales efforts, the Company has formed strategic alliances to
generate additional sales. ETG has entered into agreements with certain
companies and individuals that would be entitled to receive compensation for
their assistance in procuring consulting engagements.
Product Development
Since the computer industry is characterized by rapid change in hardware and
software technology, the Company continually enhances its services to meet
client requirements. In each of the past two years the Company has spent between
2% and 3% of its gross revenues on software development costs. The Company is
committed to maintaining its product offerings at a very high level of
technological proficiency and believes that it has developed a reputation for
providing innovative solutions to client requirements. Where possible, the
Company seeks to develop products characterized by a high degree of recurring
usage, so that clients come to depend on the Company's services. Product
development is performed by the Company's employees and, in limited instances,
by outside consultants.
Competition
Although the Company is not aware of other companies which provide as wide a
range of services and customer support as the Company does, other companies do
provide one or more of the Company's services. The Company's current and
potential competition includes other independent computer services companies and
divisions of diversified enterprises, as well as the ability of existing and
potential clients to install and operate their own computer equipment. The
Company knows of no reliable statistic by which it can determine the number of
companies which provide computer outsourcing services. Among the best known of
the Company's competitors are Affiliated Computer Services, Inc., Computer
Sciences Corp., Electronic Data Systems Corporation, IBM Corporation, and Perot
Systems. Aside from such major companies, the outsourcing services are
fragmented, with numerous companies offering services in limited geographic
areas, vertical markets, or product categories. Many of the Company's
competitors have substantially greater financial and other resources than the
Company, and there can be no assurance that the Company will be able to compete
effectively in the future.
Technological Changes
Although the Company is not aware of any pending or prospective technological
changes that would adversely affect its business, new developments in technology
could have a material adverse effect on the development or sale of some or all
of the Company's services or could render its services noncompetitive or
obsolete. There can be no assurance that the Company will be able to develop or
acquire new and improved services or systems which may be required in order for
it to remain competitive. The Company believes, however, that technological
changes do not present a material risk to the Company's business because the
Company expects to be able to adapt to and acquire any new technology more
easily than its existing and potential clients. In addition, technological
change increases the risk of obsolescence to potential clients which might
otherwise choose to maintain an in-house computer system rather than use the
Company's services, thus potentially creating selling opportunities for the
Company.
Page 6 of 52
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Intellectual Property Matters
The Company's systems and processes are not protected by patents or any
registered copyrights, trademarks, trade names, or service marks. To protect its
proprietary products and software from illegal reproduction, the Company relies
on certain mechanical techniques in addition to trade secret laws, restrictions
in certain of its customer agreements with respect to use of the Company's
products and disclosure to third parties, and internal non-disclosure
safeguards, including confidentiality restrictions with certain employees. In
spite of the Company's efforts, it may be possible for competitors or clients to
copy aspects of the Company's trade secrets.
The Company believes that because of the rapid pace of technological change in
the computer industry, copyright and other forms of intellectual property
protection are of less significance than factors such as the knowledge and
experience of the Company's management and other personnel, and the Company's
ability to develop, enhance, market, and acquire new systems and services. The
Company's business is not dependent upon any single license or group of
licenses.
The Company is experienced in handling confidential and sensitive client
information, and maintains numerous security procedures to help ensure that the
confidentiality of client data is maintained.
Compliance with Environmental Laws
The primary environmental laws applicable to the Company relate to the recycling
of paper, with which laws the Company believes it is in compliance.
Employees
As of January 15, 1999, the Company had approximately 302 full-time and 22
part-time employees. None of the Company's employees is represented by a labor
organization and the Company is not aware of any activities seeking
organization. The Company considers its relationship with its employees to be
satisfactory.
Insurance
The Company maintains insurance coverage that management believes is reasonable,
including errors and omissions coverage, business interruption insurance to fund
its operations in the event of catastrophic damage to any of its operations
centers, and insurance for the loss and reconstruction of its computer systems.
The Company also maintains extensive data backup procedures to protect both
client and Company data.
Item 2. Description of Property
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The Company leases a facility, containing approximately 67,000 square feet in
Leonia, NJ for its headquarters and data center. The lease expires on December
31, 2008. Currently, a subtenant occupies approximately 5,750 square feet of
this facility.
Page 7 of 52
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The Company leases office space of approximately 37,200 square feet in a New
York City building where the Company has had a location since 1985. A primary
lease with the landlord covers 31,500 square feet and a sublease covers the
balance of 5,700 square feet. The primary lease expires on December 31, 2008,
and the sublease expires on December 31, 2009. The Company has subleased the
space subject to the primary lease to a subtenant under a sublease
expiring on December 30, 2008, a day before the expiration of the primary lease.
Currently, the Company primarily utilizes the New York space for data entry
operations.
The Company also maintains a data entry center of approximately 5,700 square
feet in Aberdeen, NJ pursuant to a lease expiring on June 30, 2000. It also
leases 11,510 square feet of office space in Charlotte, NC pursuant to a lease
that expires on January 31, 2002, and maintains a 2,000 square foot sales office
in Hartford, CT under a lease expiring on February 1, 2001.
ETG maintains offices of approximately 3,950 square feet in Secaucus, NJ and
1,050 square feet in Glendale, CA. These leases expire on September 30, 2001 and
June 30, 2003, respectively.
The Company generally leases its equipment under standard commercial leases, in
some cases with purchase options which the Company exercises from time to time.
The Company's equipment is generally covered by standard commercial maintenance
agreements.
The Company believes its current facilities are in good condition and will be
adequate to accommodate its current volume of business plus anticipated
increases.
Item 3. Legal Proceedings
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Computer Outsourcing Services, Inc. v. Anton P. Donde, et al.
In February 1998, the Company filed a lawsuit in the Federal District Court for
the Southern District of New York, 98 Civ. 0956 (RLC), against Anton P. Donde
and a trust controlled by Anton and Detta Donde. Anton Donde was formerly a
director and vice president of the Company and was responsible for its Payroll
Division. In December 1997, that division was sold to Zurich . In the lawsuit,
the Company alleged that Mr. Donde intentionally attempted to interfere with
such sale thereby causing damages to the Company. The Company's Board of
Directors subsequently terminated Mr. Donde's employment, and Mr. Donde resigned
as a director.
In April 1998, Mr. Donde and the trust filed an answer denying the Company's
claims, a counter claim against the Company, and third party claims alleging
substantial damages against the Company and its current and former directors,
including wrongful termination, breach of contract, breach of the duty of good
faith, fraud, and RICO violations.
In May 1998, this litigation was settled. The impact of such settlement was
reflected in the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
Page 8 of 52
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PART II
Item 5. Market for Registrant's Common
Stock and Related Stockholder Matters
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The Company's common stock is traded on the NASDAQ Stock Market under the symbol
COSI. For the periods reported below, the following table sets forth the high
and low bid quotations for the common stock as reported by NASDAQ-NMS.
BID
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High Low
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For the year ended October 31, 1997:
1st Quarter (November 1, 1996 - January 31, 1997) $4.500 $2.875
2nd Quarter (February 1, 1997 - April 30, 1997) 6.000 3.750
3rd Quarter (May 1, 1997 - July 31, 1997) 5.500 3.938
4th Quarter (August 1, 1997 - October 31, 1997) 9.500 4.875
For the year ended October 31, 1998:
1st Quarter (November 1, 1997 - January 31, 1998) 10.875 7.250
2nd Quarter (February 1, 1998 - April 30, 1998) 12.125 7.500
3rd Quarter (May 1, 1998 - July 31, 1998) 11.250 8.250
4th Quarter (August 1, 1998 - October 31, 1998) 10.938 7.250
The closing price of the Company's common stock on NASDAQ-NMS on January 15,
1999 was $12.75 per share. The Company has approximately 94 stockholders of
record. In addition, the Company believes that there are approximately 1,000
beneficial owners holding their shares in "street name."
The Company has not paid dividends to its stockholders since its inception and
does not plan to pay dividends on its common stock in the foreseeable future.
The Company intends to retain earnings to finance growth.
Page 9 of 52
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During the prior three years, the Company sold or issued its common stock,
exempt from registration as private placements pursuant to Section 4(2) of the
Securities Act of 1933, as shown in the following table.
<TABLE>
<CAPTION>
AMOUNT OF CASH OR
NUMBER OF DATE(S) OF THE EXPLANATION OF THE CONSIDERATION
TO WHOM ISSUED COMMON SHARES TRANSACTION TRANSACTION RECEIVED
<S> <C> <C> <C> <C>
NON-CASH ISSUANCES:
Exercises of the option by means
Five exercises of an offset against an obligation
Holder of a pre-IPO between 12/95 of the Company to the option-
non-qualified option 123,445 and 3/97 holder $ 487,282
Issuance of common stock as
Outside counsel 22,000 9/97 payment for legal services rendered $ 89,375
Settlement of a portion of
Seller of a subsidiary to contingent consideration as called
the Company 23,906 4/96 for in the Agreement of Sale $ 153,000
Settlement of a portion of
Seller of assets to the consideration as called for in the
Company 20,000 9/98 Purchase Agreement $ 180,000
ISSUANCES FOR CASH:
Holder of a pre-IPO
non-qualified option 100,000 5/98 Exercise of the option for cash $ 1,000
Five exercises Exercises for cash of warrants
The Underwriter(s) for the between 1/98 and given in connection with the IPO
Company's IPO 66,725 2/98 $ 420,368
Exercises for cash of warrants
A consultant to the Company given in connection with a
75,240 3/98 consulting agreement $ 407,500
</TABLE>
Page 10 of 52
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Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
On December 19, 1997, the Company sold the four subsidiaries comprising the
Payroll Division at a gain of approximately $1,700,000, net of income taxes
($0.38 per share, diluted). In the accompanying financial statements, all
revenues and expenses of the Payroll Division have been classified as
discontinued operations. The following discussion focuses on continuing
operations.
Fiscal Year 1998 as Compared to Fiscal Year 1997
For the year ended October 31, 1998, revenues increased $6,007,000 (24.6%) to
$30,403,000 from $24,396,000 recorded in the year ended October 31, 1997. This
increase resulted primarily from new contracts at higher levels than previously
experienced.
Data processing costs increased $2,757,000 to $19,829,000 (65.2% of revenues)
during the current year, compared to $17,072,000 (70.0% of revenues) in the
prior year. The dollar increase is associated with greater sales volume. As a
percentage of revenues, however, data processing costs declined significantly,
reflecting a more efficient utilization of resources due to the consolidation of
operations.
Selling and promotion costs increased $119,000 to $1,385,000, (4.6% of revenues)
during the current year compared to $1,266,000 (5.2% of revenues) in the prior
year. The dollar increase is associated with the rise in revenues. As a
percentage of revenues, however, selling and promotion costs declined in the
current year because of efficiencies of scale.
General and administrative expenses increased $1,341,000 to $5,964,000 (19.6% of
revenues) in the current year as compared to $4,623,000 (18.9% of revenues) in
the prior year. At the end of fiscal 1997, the Company moved its New Jersey
operations into a larger facility. During 1998, the Company has been
consolidating computer and customer service operations into the new facility.
The rise in expenses is principally due to increased rent and utilities for the
new facility, as well as approximately $140,000 in moving costs.
In continuing operations, the Company recorded a loss of $2,237,000 in 1998
from subletting substantially all of its office space in New York City. This
one-time charge equals the undiscounted, out-of-pocket rent expense, net of
sublease income, which will continue to be paid over the 10-year term of
the sublease. In addition, the amount includes direct subleasing costs as
well as the write-off of leasehold improvements associated with the subleased
space. The total loss was $3,022,000, however, since the sale of the Payroll
Division permitted the Company to reduce substantially its New York
City space requirements, approximately 26% of the loss, or $786,000, was
charged against the gain on the sale of the Payroll Division. Subletting the
space permitted the Company to complete the consolidation of its operations in
its Leonia, New Jersey facility. The consolidation will allow the Company to
operate more efficiently and reduce future occupancy and other operating costs
by approximately $720,000 in fiscal 1999. Although sublease receipts will
be less than disbursements in future periods, the expense associated there-
with will be charged against the accrual created by recording the sublease loss
in 1998. The sublease loss, net of income tax benefit, resulted in a reduction
of approximately $0.28 per share in diluted earnings from continuing opera-
tions and $0.11 per share on the gain from the sale of the Payroll Division.
Page 11 of 52
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Net interest expense was $206,000 in 1997. For 1998, interest income exceeded
interest expense by $548,000. The net change was $754,000. As a result of the
sale of the Payroll Division and higher income from continuing operations, the
Company had significantly higher cash and interest-earning assets in 1998 than
in 1997. Since the Company repaid substantially all of its bank debt following
the sale of the Payroll Division, total interest expense declined dramatically
in 1998.
The effective tax rate from continuing operations for fiscal 1998 was 30%
primarily as a result of research and development tax credits.
After the provision for income taxes, the Company recorded a 56.8% increase in
income from continuing operations, from $688,000 ($0.17 per diluted share) for
the year ended October 31, 1997, to $1,079,000 ($0.24 per diluted share) for the
year ended October 31, 1998.
With respect to discontinued operations, the loss decreased from $127,000 in
1997 to $76,000 in 1998. The loss per diluted share from discontinued operations
was $0.03 in 1997 and $0.01 in 1998.
Fiscal Year 1997 as Compared to Fiscal Year 1996
For the year ended October 31, 1997, revenues increased $3,174,000 (15.0%) to
$24,396,000 from $21,222,000 recorded in the year ended October 31, 1996. This
increase resulted primarily from new contracts with higher contractual amounts
than previously experienced.
Data processing costs increased $2,836,000 to $17,072,000 (70.0% of revenues)
during the current year, compared to $14,236,000 (67.1% of revenues) in the
prior year. Approximately half of this increase can be attributed to
approximately $369,000 less software costs deferred in 1997 versus 1996. In
addition, the servicing of some of the revenues mentioned above is more
labor-intensive, resulting in a decrease in the overall profit margins. During
fiscal 1998, the Company plans to consolidate certain of its data processing
operations in an effort to improve profit margins.
Selling and promotion costs decreased $247,000 to $1,266,000, (5.2% of revenues)
during the current year compared to $1,513,000 (7.1 % of revenues) in the prior
year. The decrease resulted from the consolidation of the sales and marketing
efforts.
General and administrative expenses increased $277,000 to $4,623,000 (19.0% of
revenues) in the current year as compared to $4,346,000 (20.5% of revenues) in
the prior year. During 1997, the Company provided additional accounts receivable
reserve of $228,000 due to the default of a large processing client. In
addition, during the fourth quarter of 1997, the Company moved its principal New
Jersey location to a facility in Leonia, NJ, incurring approximately $140,000 in
moving costs. Excluding these two unusual events, general and administrative
expenses would have decreased by approximately $90,000, primarily from $136,800
in reductions in professional fees and $112,500 in corporate administrative
salaries.
Net interest expense decreased $91,000 to $206,000 in the current year,
primarily due to $828,000 in principal payments during the year on various
long-term debts, partially offset by interest paid on amounts borrowed late in
the year under the Company's line of credit.
Page 12 of 52
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After the provision for income taxes, the Company recorded a 38.1% increase in
profit from continuing operations from $498,000 ($0.12 per share) for the year
ended October 31, 1996, to $688,000 ($0.17 per share) for the year ended October
31, 1997. Had the Company not needed to provide the $228,000 reserve as
discussed above, income per share from continuing operations would have been
approximately $0.20 per share.
In discontinued operations, the pretax loss increased from $217,000 in 1996 to
$291,000 in 1997. However, primarily as the result of the tax effect of
increased income from non-taxable investments of client trust funds, the net
loss from discontinued operations declined 23% from $165,000 ($0.04 per share)
in the prior year to a loss of $127,000 ($0.03) in the current year.
Liquidity and Capital Resources
During the year ended October 31, 1998, the Company generated net cash of
$2,522,000 from continuing operations principally by generating $2,346,000 in
income from continuing operations before deductions for depreciation and
amortization.
The Company's investing activities provided $6,590,000, primarily from the sale
of the Payroll Division, net of related costs and the investment of a portion of
the proceeds in marketable debt securities. The Company also invested $1,501,000
for the purchase of equipment, new software products, and other fixed assets and
$892,000 for product development and enhancement. In financing activities, the
Company used $2,321,000 to repay long-term debt and capital leases and received
$1,725,000 generated from exercises of stock warrants and employee stock
options.
As of October 31, 1998, the Company had cash and equivalents and highly liquid,
short-term investments aggregating approximately of $12,621,000. In December
1998, the Company acquired the business and certain assets of Enterprise
Technology Group, Incorporated. A portion of the purchase price included cash of
$4,000,000 paid at the closing. In addition, in January 1999, the Company made
income tax payments of approximately $2,711,000 relating to its tax year ended
October 31, 1998.
The Company believes that its cash, other liquid assets, operating cash flow,
and potential borrowing capacity will provide adequate resources to fund its
ongoing operating requirements.
Other Matters
Certain of the Company's computer systems may need to be reprogrammed to correct
what is known as the Year 2000 Problem ("Y2K"). This is a condition whereby a
program does not properly interpret a two-digit year, reading "00" as 1900
rather than 2000. As a result, nearly all computer systems, except for the most
recent software and hardware versions, may produce computing errors or fail to
function after December 31, 1999.
The Company is also at risk from Y2K failures on the part of its major business
counterparts, including suppliers, distributors, licensees, and manufacturers,
as well as potential failures in public and private infrastructure services,
including electricity, water, gas, transportation, and communications. Failures
resulting from the Y2K problem could adversely affect the Company's ability to
service its clients.
Page 13 of 52
<PAGE>
The Company has appointed a senior officer, reporting directly to the President,
as the Y2K Compliance Coordinator. He works closely with the operations
managers, senior management, and the Company's vendors.
The Company has developed a multi-phased approach to resolve the Y2K issues that
are reasonably within its control. The Company's approach to and the anticipated
timing of each phase are described below:
Phase One - Identification. The first phase entailed identifying the technical
areas, business units, and infrastructure that might be affected by the Y2K
problem. The identification resulted in three primary classifications. The first
is the computer and communications hardware and non-application software the
Company obtains from vendors. This category consists of processing for all
client and internal Company applications. The second classification is the
Company's applications used to service Clients and internal users. The third
classification relates to all non-direct computer ("Non-IT") associated issues
such as elevators, phone systems, security access systems, as well as services
provided by non-computer related vendors such as utility companies. Phase One
has been completed.
Phase Two - Inventory. The second phase entails an inventory of all hardware and
software (including business and operational applications, operating systems,
and third party products) that may be at risk, and identification of key third
party business which might most significantly impact the Company if such third
parties had Y2K failures. The non-application inventory process (Classification
One) has been completed, and the inventories of key third party businesses and
internal non-IT systems (Classification Three) are expected to be completed by
March 31, 1999. The inventories for applications (Classification Two) are
expected to be completed by April 30, 1999.
Phase Three - Assessment. Once each at-risk application has been identified, it
will be determined how critical the application is to client and business
operations and the potential impact of failure. Applications are classified as
"critical", "important," or "non-critical". A "critical" system is one that, if
not operational, would cause the shutdown of all or a portion of a business unit
within two weeks, while an "important" system is one that would cause such a
shutdown within two months. The assessment process is 80% completed. It is
expected to be finalized by March 31, 1999.
Phase Four - Strategy. For applications, this phase entails the assessment of
each application system (Classification Two). The application's ability to
perform in Y2K, estimated cost to make Y2K compliant, availability of
replacement alternatives, and for applications used for clients, the total
annual revenue and expenses, are evaluated. The assessment will result in a plan
to upgrade the current application, migrate to a replacement Y2K-compliant
application, or cease processing of an application that produces a marginal
profit. Phase Four - Classification Two is expected to be completed by February
28, 1999. For non-IT Classification Three, this phase involves the development
of appropriate remedial strategies. Phase Four for Classification Three is
expected to be completed by April 30, 1999.
Page 14 of 52
<PAGE>
Phase Five - Remediation. The remediation phase involves creating project plans;
acquiring necessary resources; implementing new hardware, software, and
applications; and executing the strategies developed in Phase Four. Testing and
certification is also included within this phase. For non-application systems
(Classification One), Phase Five is approximately 55% completed. The delivery of
Y2K-compliant products by third -party vendors will have an effect on the final
completion date. For application systems, (Classification Two), Phase Five is
approximately 25% completed. For non-IT systems (Classification Three), Phase
Five is approximately 20% completed. Testing for non-IT systems has been
initiated; however, due to the Company's reliance on third party vendors for
these systems, the Company cannot estimate precisely when this phase will be
completed. The Company has initiated written and telephonic communications with
key third party businesses. Communications with public and private providers of
infrastructure services, to ascertain and evaluate their efforts in addressing
Y2K compliance, will be initiated by February 28, 1999.
Phase Six - Contingency Planning. This phase entails developing an emergency
plan in the event non-IT (Classification Three) or non-application systems
(Classification One) malfunction or are not functional at the start of the Year
2000. The use of a "backup" computer maintained by an independent third party,
alternative communications carriers, and backup generators, are some of the
contingencies being explored. The Company estimates that all of these plans will
be completed by December 1999. Based upon its efforts to date, the Company
believes that the vast majority of both its computer and its non-IT systems,
including all critical and important systems, will remain up and running after
January 1, 2000. Internal and external costs specifically associated with Y2K
modifications for computer software used for internal purposes will be expensed
when incurred. Currently, the Company estimates that such costs will approximate
$300,000.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. As such, final results
could differ from estimates or expectations due to factors such as incomplete or
preliminary information or changes in government regulation and policies. For
any of these factors, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, as amended.
New Financial Accounting Standards
During 1997, the Financial Accounting Standards Board issued the following
pronouncements: Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"), Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of and Enterprise and
Related Information" ("SFAS 131"). The Company has adopted the provisions of
SFAS 128 in fiscal year 1998, and the presentation of prior year financial
information has been conformed to this pronouncement. The Company will adopt
SFAS 130 and SFAS 131 in the fiscal year beginning November 1, 1998. Adoption of
these pronouncements is not expected to have a significant impact on the
Company.
Page 15 of 52
<PAGE>
Item 7. Financial Statements
--------------------
The Financial Statements and Notes thereto are set forth beginning at page 27 of
this Report.
Item 8. 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-K, Item
304(a)1(v).
PART III
Item 9. Directors and Executive Officers
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
The name, principal occupation of, and certain information concerning each of
the Executive Officers and Directors of the Company as of October 31, 1998 are
set forth in the table below. Also set forth, following the table, is certain
additional information regarding each individuals' business experience.
<TABLE>
<CAPTION>
Director Since
Name Positions with the Company Age
- --------------- --------------------------------------------------- --------- ---------------
<S> <C> <C> <C>
Zach Lonstein Chairman of the Board of Directors and Chief
Executive Officer 54 1984
Robert B. Wallach President and a Director 59 1992
Joseph Lynaugh Director 59 1998
Howard Waltman Director 66 1997
Jeffrey Millman Executive Vice President, Secretary and a Director 46 1992
John C. Platt Vice President, Treasurer, and a Director 45 1996
Thomas Laudati Senior Vice President 41 -
Howard Liebman Vice President 54 -
Gary Lazarawicz Vice President 49 -
</TABLE>
Page 16 of 52
<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 was appointed President of the Company on May 1, 1996, and has
been a Director of the Company since 1992. Prior to June 1995, he was sole
proprietor of Horizons Associates, a consulting firm he founded in 1985. Mr.
Wallach has more than 20 years of operating experience including senior
management positions with Boeing Computer Services from 1970 to 1972 and
Informatics from 1972 to 1982 and, from 1982 to 1985, as President of the
Financial Information Services Group/Strategic Information division of Ziff
Communications, which provided computer services to companies in the financial
industry.
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.
Jeffrey Millman has been Executive Vice President since 1988, Secretary and a
Director since 1992, and has been with the Company since it was founded in 1984,
previously holding positions of Vice President and Director of Systems and
Programming with Informatics beginning in 1983. From 1979 to 1983, Mr. Millman
was Director of Theatrical Computer Systems for Columbia Pictures Industries,
Inc. On November 6, 1998, Mr. Millman resigned his positions with the Company
and from the Company's Board to pursue other interests.
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.
Thomas Laudati 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 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.
Page 17 of 52
<PAGE>
Gary Lazarewicz 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
Section 16(a) of the Securities Exchange Act - Beneficial
Ownership Reporting Compliance
-------------------------------------
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.
Item 10. Executive Compensation
----------------------
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.
Compensation of 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 $100,000 in the
most recent fiscal year (together, the "Named Executives").
Page 18 of 52
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation -
Annual Compensation Awards
--------------------------------------- ------------------
Securities All Other
Fiscal Underlying Compensation ($)
Name and Principal Position Year Salary ($) Bonus ($) Options (#)
- ------------------------------ --------- ----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Zach Lonstein, Chief 1998 $ 285,913 $ 75,000 25,000 $ (a) 30,000
Executive Officer and 1997 240,666 - 25,000 (a) 30,000
Chairman of the Board 1996 230,023 - 25,000 (a) 30,000
- ------------------------------ ---------------------------------------------------------------------------------------------------
Robert B. Wallach, President 1998 241,667 100,000 150,000 -
and Chief Operating Officer 1997 200,000 55,000 100,000 -
1996 166,667 35,000 150,000 -
- ------------------------------ ---------------------------------------------------------------------------------------------------
Jeffrey Millman, Executive 1998 128,555 - - -
Vice President and Secretary 1997 124,628 - - -
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 Item 12: "Certain
Relationships and Related Transactions")
The following table sets forth, for the Chief Executive Officer and the Named
Executives, all grants of stock options made during the fiscal year ended
October 31, 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>
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)
- ---------------------------- ------------------ --------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Zach Lonstein 25,000 (1) 12% $10.8625 Jan 2, 2003
Robert B. Wallach 150,000 (2) 69% $8.250 Feb 18, 2008
</TABLE>
(1) Become exercisable as to 5,000 shares in each of five years beginning
January 2, 1998.
(2) Become exercisable as to 30,000 shares in each of five years beginning
February 18, 1998.
Page 19 of 52
<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Values
- -------------------------------------------------------------
The following table contains information concerning the stock options held by
the Chief Executive Officer and the Named Executives during the fiscal year
ended October 31, 1998. No stock appreciation rights have been granted by the
Company.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------------------
Securities Received from Exercise Number of Securities Underlying Value of Unexercised
of Options during the Year ended Unexercised Options at October 31, In-the-Money Options at
October 31, 1998 1998 (#) October 31, 1998 ($) (2)
--------------------------------- -------------------------------- ------------------------------------
Net Value
Number of Received Un- Un-exercisable
Name Shares ($)(1) Exercisable exercisable Exercisable
- ------------------- -------------- -------------- --------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
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.
(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.
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.
Page 20 of 52
<PAGE>
The Company and Mr. Millman entered into an employment agreement dated November
1, 1992. This agreement had a term of five years, and provided for a base annual
salary of $115,000, with adjustments for increases in the cost of living index
subject to a review by the Compensation Committee of the Board of Directors.
This agreement was not renewed. During fiscal 1996, Mr. Millman voluntarily
elected to reduce his annual compensation below the amount called for in his
employment agreement. On November 6, 1998, Mr. Millman voluntarily resigned.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 31, 1998 by all current
Directors of the Company, the Chief Executive Officer and Named Executives, all
directors and executive officers as a group, and any other person known by the
Company to be the beneficial owner of more than 5% of its Common Stock.
Beneficial ownership includes shares which the beneficial owner has the right to
acquire within sixty days of the above date from the exercise of options,
warrants, or similar obligations. If no address is shown, the address of the
beneficial owner is in care of the Company.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
- -----------------------------------------------------------------------------------------------------
Number of Shares Percentage
Name and Address of Beneficial Owner Beneficially Owned of Class
- ----------------------------------------------------------------------------------- --------------
<S> <C> <C> <C>
Zach Lonstein (1) 1,599,421 36.7%
Robert B. Wallach (2) 221,083 4.9%
Howard Waltman (3) 64,750 1.5%
Joseph Lynaugh 10,000 *
Jeffrey Millman (4) 7,000 *
John C. Platt (5) 7,000 *
Thomas Laudati (6) 16,500 *
All Directors and Executive Officers as a group (7) 1,940,254 41.9%
(9 persons)
Cahill, Warnock Strategic Partners Fund, L.P. (8) 358,864 8.4%
* Less than 1% of Class
</TABLE>
(1) Includes 75,000 shares of Common Stock issuable upon exercise of
vested options held by Mr. Lonstein. Also, includes 310,000
shares pledged as a guarantee of the Company's obligations to the
seller of MCC Corporation in June 1995 (See Item 12: "Certain
Relationships and Related Transactions").
(2) Includes 218,333 shares of Common Stock issuable upon exercise of
vested options held by Mr. Wallach.
(3) Includes 6,250 shares of Common Stock issuable upon exercise of
options held by Mr. Waltman.
(4) Includes 7,000 shares of Common Stock issuable upon exercise of
vested options held by Mr. Millman.
Page 21 of 52
<PAGE>
(5) Includes 7,000 shares of Common Stock issuable upon exercise of
vested options held by Mr. Platt.
(6) Includes 16,500 shares of Common Stock issuable upon exercise of
vested options held by Mr. Laudati.
(7) Includes 339,583 shares of Common Stock issuable upon exercise of
vested options collectively held by all directors and executive
officers of the Company.
(8) Based on a Form 13G filed June 24, 1998 by Cahill, Warnock
Strategic Partners Fund, L.P. and five related Reporting Persons,
and a Form 4 filed October 9, 1998 by Mr. Lonstein.
Item 12. 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 ("MCC") acquired in
1995, Mr. Lonstein was granted a per annum 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.
During 1998, the Company engaged in litigation with Anton Donde, a former
director and vice president of the Company. This litigation and its outcome are
described above in Item 3, Legal Proceedings.
In connection with his initial election to the Company's Board of Directors, Mr.
Waltman purchased at least 25,000 shares of the Company's Common Stock in the
open market, and has also purchased 25,000 restricted shares from Mr. Lonstein.
At the time of his election to the Company's Board of Directors, Mr. Lynaugh
purchased 10,000 shares of the Company's common stock from Mr. Lonstein.
Page 22 of 52
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) The exhibits required to be filed as a part of this Annual Report
are listed below. The exhibits marked with an asterisk (*) are
incorporated by reference to the Company's Registration Statement on
Form SB-2 (No. 33-53888NY).
Exhibit No. Description
3.1A * Restated Certificate of Incorporation
3.1B Certificate of Amendment to the Certificate of Incorporation
of the Company, dated June 3, 1998
3.2 * Amended and Restated By-Laws
10.1 * Option Agreement dated May 10, 1990 between the Company,
Zach Lonstein ("Lonstein"), and Stanley Berger ("Berger").
10.2 * Option Agreement dated June 15, 1990 between the Company
and Lonstein and Annex to Option Agreement, and Letter
Agreement dated December 11, 1992 amending the Option
Agreement.
10.3 * $150,000 Promissory Note dated October 2, 1992 to the
order of Robert D. Goldstein.
10.4 Employment Agreement dated as of January 1, 1995 between the
Company and Lonstein, incorporated by reference to the
Company's Annual Report on Form 10-KSB for October 31, 1995.
10.5A * Consulting Agreement dated November 1, 1992 between the
Company and Berger.
10.5B Consulting Agreement Amendment dated as of October 31, 1994
between the Company and Berger, incorporated by reference to
the Company's Annual Report on Form 10-KSB for October 31,
1995.
10.6A * Lease dated January 14, 1991 between the Company and G-H-G
Realty Company.
10.6B Agreement of Sublease between the Company as Sublessor and
RSL Com USA, Inc. as Subtenant, dated as of July 31, 1998.
10.7 Agreement of Sublease between NMU Pension Plans as
Sublandlord, and the Company as Subtenant, dated as of
September 21, 1998.
10.8A Lease dated June 2, 1997 between the Company and Leonia
Associates, LLC, incorporated by reference to the Company's
Annual Report on Form 10-KSB for October 31, 1997.
Page 23 of 52
<PAGE>
Exhibit No. Description
10.8B First Amendment of Lease between Leonia Associates, LLC and
the Company, dated January 16, 1998.
10.9 1992 Stock Option and Stock Appreciation Rights Plan, as
amended by the stockholders of the Company at the Annual
Meeting held on May 5, 1997, incorporated by reference to
the Company's Registration Statement filed on Form S-8,
filed on July 17, 1997.
10.10 Merger Agreement dated May 4, 1993 between the Company, New
England Data Services, Inc. ("NEDS") and certain of its
stockholders, as amended June 22, 1993 - Incorporated by
reference to the Company's Current Report on Form 8-K filed
on August 26, 1993.
10.11 Merger Agreement dated May 18, 1994 by and among the
Company, Daton Data Processing Services, Inc. ("Daton"),
Anton P. Donde, and Anton and Detta L. Donde as Trustees
Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended October 31, 1995.
10.13 Asset Purchase Agreement dated April 27, 1995 by and among
the Company, Key-ACA Inc. ("ACA"), Eugene B. Monosson, and
Earl G. Phillips, Jr. - Incorporated by reference to a
Current Report on Form 8-K filed by the Company on May 10,
1995.
10.14 Stock Purchase Agreement dated as of May 31, 1995 by and
among the Company and "K" Line America, Inc. ("K-Line")
Incorporated by reference to a Current Report on Form 8-K
filed by the Company on June 22, 1995.
10.15 Escrow Agreement dated June 8, 1995 between the Company,
K-Line, Lonstein, and Chemical Bank, incorporated by
reference to the Company's Annual Report on Form 10-KSB for
October 31, 1995.
10.16 Letter agreement between the Company and K-Line, amending
the terms of the Stock Purchase Agreement and associated
Note, incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for April 30, 1996.
10.17 Agreement of Sale between the Company, Zurich Payroll
Solutions, Ltd, Daton, NEDS, ACA, and Pay USA of New Jersey,
Inc., dated December 19, 1997, incorporated by reference to
a Current Report on Form 8-K filed by the Company on January
5, 1998, and amended January 23, 1998.
10.18 Payroll Services Conversion Agreement between the Company
and ADP, Inc.
Page 24 of 52
<PAGE>
Exhibit No. Description
21 List of Subsidiaries of the Company
23.A Consent of Deloitte & Touche LLP
23.B Consent of Ernst & Young LLP
27 Financial Data Schedule - included in EDGAR filing only.
(b) Reports on Form 8-K
-------------------
On October 6, 1998 (amended November 19, 1998), the Company reported
the termination of Deloitte & Touche LLP as its auditor.
On October 29, 1998, the Company reported that it had retained Ernst &
Young LLP to audit the Company's financial statements.
Page 25 of 52
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTER OUTSOURCING SERVICES, INC.
February 12, 1999 /s/ Zach Lonstein
---------------------------------------------
Zach Lonstein - Chief Executive Officer
February 12, 1999 /s/ Nicholas J. Letizia
---------------------------------------------
Nicholas J. Letizia - Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
February 12, 1999 /s/ Zach Lonstein
--------------------------------------------
Zach Lonstein - Chairman of the Board of
Directors
February 12, 1999 /s/ Robert B. Wallach
--------------------------------------------
Robert B. Wallach - Director
February 12, 1999 /s/ John C. Platt
--------------------------------------------
John C. Platt - Director
February 12, 1999 /s/ Howard Waltman
--------------------------------------------
Howard Waltman - Director
February 12, 1999 /s/ Joseph Lynaugh
--------------------------------------------
Joseph Lynaugh - Director
Page 26 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page No.
--------
<S> <C>
Reports of Independent Auditors 28
Consolidated Balance Sheets - October 31, 1998 and 1997 30
Consolidated Statements of Income - Years ended October 31, 1998 and 1997 32
Consolidated Statements of Cash Flows - Years ended October 31, 1998 and 1997 33
Consolidated Statements of Stockholders' Equity - Years ended October 31, 1998
and 1997 35
Notes to Consolidated Financial Statements 36
</TABLE>
Page 27 of 52
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders of
Computer Outsourcing Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Computer
Outsourcing Services, Inc. and subsidiaries as of October 31, 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Computer
Outsourcing Services, Inc. and subsidiaries at October 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
- ----------------------------
ERNST & YOUNG, LLP
New York, New York
January 11, 1999
Page 28 of 52
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders of
Computer Outsourcing Services, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Computer
Outsourcing Services, Inc. and subsidiaries as of October 31, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of October 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
- -----------------------------
DELOITTE & TOUCHE, LLP
New York, New York January 9, 1998 (January 26, 1998 as to note 6(a) in the
financial statements for the year ended October 31, 1997)
Page 29 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents (Notes 1 and 2) $ 9,403,006 $ 972,459
Marketable debt securities, at cost which
approximates market value (Notes 1 and 2) 3,218,170 --
Trade accounts receivable, net of allowance for
doubtful accounts of $216,659 and $111,577 4,452,117 3,990,630
Net assets of discontinued operations (Note 13) -- 6,071,333
Deferred income taxes - current (Note 9) 603,627 107,710
Net assets held for sale (Note 1) 229,289 --
Prepaid expenses and other current assets 1,179,539 1,223,759
----------- -----------
19,085,748 12,365,891
----------- -----------
PROPERTY and EQUIPMENT, net (Note 3) 2,508,875 1,815,230
----------- -----------
OTHER ASSETS:
Deferred software, net (Note 4) 1,803,013 1,545,935
Intangibles, net (Note 5) 2,221,842 2,715,993
Due from related parties, net (Note 6) 89,313 176,295
Deferred income taxes (Note 9) 718,341 --
Security deposits and other non-current assets 521,404 523,797
----------- -----------
5,353,913 4,962,020
----------- -----------
TOTAL ASSETS $26,948,536 $19,143,141
=========== ===========
See Notes to Consolidated Financial Statements
Page 30 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,029,406 $ 1,246,516
Current portion of long-term debt
(Note 7) 241,150 2,297,546
Current portion of capitalized lease
obligations (Note 8) 19,127 23,034
Income taxes payable (Note 9) 2,468,747 243,342
Current portion of accrued loss on
office sublease 365,495 --
Accrued expenses 2,000,355 1,536,330
Customer deposits and other current
liabilities 202,787 231,699
----------- -----------
6,327,067 5,578,467
LONG-TERM LIABILITIES:
Long-term debt (Note 7) 11,223 252,577
Capitalized lease obligations
(Note 8) 287 19,414
Accrued loss on office sublease
(Note 12) 2,016,606 --
Deferred income taxes (Note 9) -- 753,620
Deferred income from a non-competition,
confidentiality, and conduct of
business agreement (Note 13) 1,000,000 --
----------- -----------
3,028,116 1,025,611
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Note 10):
Preferred stock, $0.01 par value;
1,000,000 shares authorized, none
issued -- --
Common stock, $0.01 par value;
10,000,000 shares authorized;
shares issued and outstanding,
4,285,715 and 3,826,102 42,857 38,261
Additional paid-in capital 11,946,837 9,595,789
Retained earnings 5,603,659 2,905,013
----------- -----------
17,593,353 12,539,063
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $26,948,536 $19,143,141
=========== ===========
See Notes to Consolidated Financial Statements
Page 31 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31,
-------------------------
1998 1997
----------- -----------
REVENUES $30,403,381 $24,395,644
----------- -----------
COSTS and EXPENSES:
Data processing costs 19,828,954 17,071,706
Selling and promotion costs 1,384,557 1,266,047
General and administrative costs 5,964,215 4,623,478
One-time charge for loss on office sublease 2,236,583 --
Interest (income)/expense, net (547,499) 206,330
----------- -----------
28,866,810 23,167,561
----------- -----------
Income from continuing operations
before provision for income taxes 1,536,571 1,228,083
Provision for income taxes (Note 8) 457,621 539,700
----------- -----------
Income from continuing operations 1,078,950 688,383
Loss on discontinued operation, net of income
tax benefits of $60,079 and $163,600
(Notes 9 and 13) (76,464) (127,054)
Gain on sale of discontinued operation, net of
income tax provision of $1,399,569
(Notes 9 and 13) 1,696,160 --
----------- -----------
NET INCOME $ 2,698,646 $ 561,329
=========== ===========
BASIC EARNINGS PER SHARE (Note 1):
Income from continuing operations $ 0.27 $ 0.17
Loss from discontinued operation (0.02) (0.03)
Gain on sale of discontinued operation 0.42 --
----------- -----------
Net income $ 0.67 $ 0.14
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,058,376 3,777,089
=========== ===========
DILUTED EARNINGS PER SHARE (Note 1):
Income from continuing operations $ 0.24 $ 0.17
Loss from discontinued operation (0.01) (0.03)
Gain on sale of discontinued operation 0.38 --
----------- -----------
Net income $ 0.61 $ 0.14
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,427,921 3,995,879
=========== ===========
See Notes to Consolidated Financial Statements
Page 32 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED OCTOBER 31,
-------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,078,950 $ 688,383
Adjustments to reconcile net income/(loss)
to cash provided by operating activities:
Depreciation and amortization 1,267,072 1,491,527
Accrued loss on office sublease 1,789,969 --
Deferred income taxes (1,962,378) 31,462
Decrease/(increase) in:
Trade accounts receivable (461,488) (852,604)
Refundable taxes -- 62,989
Prepaid expenses and other current assets 44,220 (631,040)
Security deposits and other noncurrent
assets (51,505) (133,714)
Increase/(decrease) in:
Accounts payable (217,110) 196,910
Income taxes payable 1,276,429 --
Accrued expenses (213,383) 607,608
Customer deposits and other current
liabilities (28,912) (34,182)
----------- -----------
Net cash provided by operating activities 2,521,864 1,427,339
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,500,680) (409,708)
Disposal of equipment 14,960 2,074
Purchases of investments in marketable debt
securities (3,218,170) --
Proceeds from sale of the Payroll Division 14,400,000 --
Payment of expenses related to sale of
the Payroll Division (2,239,367) --
Deposit received from buyer for assets
held for sale 25,000 --
Settlement of contingencies relating to
acquisitions -- (83,322)
Increase in deferred software costs (892,010) (458,517)
----------- -----------
Net cash provided by/(used in) investing
activities $ 6,589,733 $ (949,473)
=========== ===========
Continued on next page.
See Notes to Consolidated Financial Statements
Page 33 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
YEARS ENDED OCTOBER 31,
-------------------------
1998 1997
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $(2,297,746) $(1,305,474)
Repayments by/(advances to) related
parties, net 86,982 (23,473)
Exercises of stock options and warrants 1,725,055 61,106
Proceeds from borrowings of long term
debt -- 1,100,000
Repayments of capital leases (23,034) (71,716)
----------- -----------
Net cash used in financing activities (508,743) (239,557)
----------- -----------
Net cash provided by continuing operations 8,602,854 238,309
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations (76,464) (127,054)
Adjustments to reconcile loss from discontinued operations to cash provided by
discontinued operations:
Depreciation and amortization 151,118 961,870
Increase in net assets of discontinued
operations (246,961) (957,870)
----------- -----------
Net cash used in discontinued operations (172,307) (123,054)
----------- -----------
Net increase in cash and equivalents 8,430,547 115,255
Cash and equivalents at the beginning of
the year 972,459 857,204
----------- -----------
Cash and equivalents at the end of the year $ 9,403,006 $ 972,459
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for
Interest expense $ 129,635 $ 323,550
=========== ===========
Income taxes $ 1,092,061 $ 91,958
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
New capitalized leases for data processing
equipment $ -- $ 34,222
=========== ===========
Common stock issued for the purchase of
software $ 180,000 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Tax benefit associated with the exercise of
non-qualified options $ 450,593 $ --
=========== ===========
During 1997, $19,594 (net of tax benefits) was accreted through a charge to
retained earnings in connection with a stock option (Note 12).
See Notes to Consolidated Financial Statements
Page 34 of 52
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deferred Costs
in Connection
with a
Financing/
Common Par Paid in Retained Consulting
Shares Value Capital Earnings Agreement Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 3,734,848 $37,348 $9,233,952 $2,363,278 ($35,132) $11,599,446
Stock issued for services 22,000 220 89,155 89,375
Exercises of stock options
(Notes 10 and 12) 69,254 693 272,682 273,375
Amortization of deferred
costs in connection with
a financing and
consulting agreement
(Note 6) 35,132 35,132
Accretion in connection
with stock option
obligation, net
(Note 12) (19,594) (19,594)
Net income 561,329 561,329
--------------------------------------------------------------------------------------------
Balance, October 31, 1997 3,826,102 $38,261 $9,595,789 $2,905,013 -- $12,539,063
Stock issued for the
purchase of assets 20,000 200 179,800 180,000
Exercises of stock options
and warrants (Note 10) 439,613 4,396 1,720,659 1,725,055
Tax benefit associated
with the exercise of non-
qualified options 450,589 450,589
Net income 2,698,646 2,698,646
--------------------------------------------------------------------------------------------
Balance, October 31, 1998 4,285,715 $42,857 $11,946,837 $5,603,659 -- $17,593,353
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
Page 35 of 52
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business and Significant Accounting Policies
Business - Computer Outsourcing Services, Inc. and its wholly-owned subsidiaries
("the Company") provides information technology services in the form of data
center and business process solutions to companies, institutions, and government
agencies. On December 19, 1997, the Company sold its payroll processing division
(the "Payroll Division") (Note 13).
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and significant intercompany transactions have been eliminated.
Cash and Equivalents and Marketable Debt Securities - Cash and equivalents
include all cash, demand deposits, money market accounts, and debt instruments
purchased with an original maturity of three months or less. Marketable debt
securities are debt instruments purchased with maturities of between three and
six months. The Company's investments in debt securities, including those
included in cash equivalents, are classified as securities held-to-maturity and
are carried at cost, which approximates market value.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with high credit standing. Credit
risk on trade receivables is minimized as a result of the large and diverse
nature of the Company's customer base. Ongoing credit evaluations of customers'
financial condition are performed. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management's
expectations.
Property and Equipment - Property and equipment is stated at cost except for
assets acquired under capital leases, which are recorded at the lesser of their
fair market value at the date of the lease or the net present value of the
minimum lease commitments. Depreciation is provided using the straight-line
method over their estimated useful lives. Leasehold improvements and assets
acquired under capital leases are amortized over the shorter of the lease term
or their estimated useful lives.
Software - Software that has been purchased is included in Property and
Equipment and is amortized using the straight line method over five years. The
cost of internally developed software and product enhancements, not reimbursed
by customers, is capitalized as Deferred Software Costs. Such costs are
amortized using the straight-line method over the life of the related customer
contract or three to five years, whichever is shorter.
Assets Held for Sale - Assets held for sale are primarily net intangibles
relating to a processing activity for a small group of clients. The assets were
sold after year end.
Page 36 of 52
<PAGE>
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") is amortized using the straight-line method over their estimated
lives, typically no more than twenty years. Other intangible assets, primarily
customer lists, are amortized using the straight-line method over their
estimated lives, typically no more than ten years. The carrying value of
intangibles is evaluated periodically in relation to the operating performance
and future undiscounted cash flows of the underlying businesses.
Revenue Recognition - The Company's services are provided under a combination of
fixed monthly fees and time and materials billings. Contracts with clients
typically range from one to five years. Revenues are recognized monthly as
billed, and costs (principally salaries) are expensed monthly as incurred. For
those few contracts with other than monthly billing schedules, revenues are
recognized on the percentage of completion method.
Income Taxes - Income tax expense is based on pre-tax accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Deferred tax benefits are recognized to
the extent that realization of such benefits are more likely than not.
Earnings per Share - During the year ended October 31, 1998, the Company adopted
the provisions of Statements of Accounting Standards No. 128 - "Earnings per
Share" ("SFAS 128"). SFAS 128 replaces the presentation of primary and fully
diluted earnings per share ("EPS") with a presentation of basic and diluted EPS.
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed using the weighted average number of common shares plus the
dilutive effect of common stock equivalents. Income from continuing operations
per share and net income per share for the year ended October 31, 1997 has been
adjusted to reflect $19,594 in accretion (net of income tax benefit) arising in
connection with an option (Note 11). Stock options and warrants which are
anti-dilutive are excluded from the computation of weighted average shares
outstanding. All prior period EPS data has been restated to conform to SFAS 128.
Certain options which are currently anti-dilutive may be dilutive in the future.
Fair Value of Financial Instruments - The following disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgement is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a sale.
Page 37 of 52
<PAGE>
The carrying amounts and estimated fair values of financial instruments at the
end of the respective years are summarized as follows:
<TABLE>
<CAPTION>
October 31, 1998 October 31, 1997
<S> <C> <C> <C> <C>
-------------------------------------- ----------------------------------------
Carrying Amount Estimated Fair Carrying Amount Estimated Fair
Value Value
-------------------------------------- ----------------------------------------
Assets:
Cash and equivalents $ 9,403,006 $ 9,403,006 $ 972,459 $ 972,459
Marketable debt
securities (Note 2) 3,218,170 3,217,095 - -
Trade accounts
receivable, net 4,452,117 4,452,117 3,990,630 3,990,630
Liabilities:
Accounts payable, accrued
expenses, income taxes
payable, customer
deposits and other
current liabilities 5,701,295 5,701,295 3,257,887 3,257,887
Notes payable, bank - - 968,750 968,750
Acquisition note 210,160 209,636 630,483 625,778
Revolving line of credit - - 850,000 850,000
Other borrowings 42,213 42,325 100,890 100,158
</TABLE>
The following methods and assumptions were used to estimate the fair value of
the financial instruments presented above:
Cash and equivalents - The carrying amount is a reasonable approximation of
fair value.
Marketable debt securities - Fair value is based upon quoted market prices,
including accrued interest, and approximate their carrying value due to
their short maturities.
Trade accounts receivable, accounts payable, accrued expenses, income taxes
payable, and customer deposits and other current liabilities - The fair
value of receivables and payables are assumed to equal their carrying value
because of their short maturities.
Notes payable, bank - Fair value is estimated by discounting the future
stream of payments using the incremental borrowing rate of the Company,
which represents its primary source of recourse financing.
Acquisition Note, revolving line of credit, and other borrowings - Interest
rates that are currently available to the Company for issuance of debt with
similar terms and remaining maturities are used to estimate fair value for
those debt issues for which no market quotes are available.
Page 38 of 52
<PAGE>
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Reclassifications - Certain reclassifications were made to the 1997 financial
statements to conform with the current year presentation.
2. Cash Equivalents and Marketable Debt Securities
The following is a summary of the Company's held-to-maturity securities at
October 31, 1998, which are classified as either cash equivalents or marketable
debt securities based on a maturity of less than or more than three months,
respectively (Note 1):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Cash equivalents:
Commercial paper $ 5,921,373 $ - $ - $ 5,921,373
---------------- ---------------- ----------------- ----------------
Marketable debt
securities:
Commercial paper 1,963,817 - - 1,963,817
Corporate obligations 1,254,353 260 (1,335) 1,253,278
---------------- ---------------- ----------------- ----------------
Subtotal 3,218,170 260 (1,335) 3,217,095
---------------- ---------------- ----------------- ----------------
Total $ 9,139,543 $ 260 $ (1,335) $ 9,138,468
================ ================ ================= ================
</TABLE>
Page 39 of 52
<PAGE>
3. Property and Equipment
Property and equipment consists of the following:
Depreciable
Lives
October 31, (Years)
----------------------------
1998 1997
------------- ------------- ------------
Computer equipment $ 3,699,955 $ 3,456,316 5
Computer equipment held under
capital leases (Note 8) 1,278,669 1,278,669 5
Furniture and office equipment 882,199 489,434 7
Leasehold improvements 403,609 284,411 *
Purchased software 991,928 450,498 5
Vehicles 32,146 17,318 3
------------- -------------
7,288,506 5,976,646
Less accumulated depreciation
and amortization, including
$1,140,161 in 1998 and
$1,037,972 in 1997
attributable to capital leases (4,779,631) (4,161,416)
------------- -------------
$ 2,508,875 1,815,230
============= =============
* Shorter of the useful life or the length of the lease.
Depreciation and amortization in continuing operations was $768,753 and $798,691
for the years ended October 31, 1998 and 1997, respectively.
4. Deferred Software Costs
Deferred software costs consist of the following:
October 31,
-----------------------------------
1998 1997
--------------- -----------------
Costs of internally-developed software
and enhancements $ 3,623,368 $ 2,731,358
Accumulated amortization (1,820,355) (1,185,423)
--------------- -----------------
$ 1,803,013 $ 1,545,935
=============== =================
Amortization of deferred software costs charged to continuing operations for the
years ended October 31, 1998 and 1997 were $634,932 and $411,794, respectively.
Page 40 of 52
<PAGE>
5. Intangibles
Intangible assets consist of the following:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Excess of cost of investments over
net assets acquired $ 1,820,925 $ 2,058,592
Customer lists 1,180,488 1,280,48
---------------- ----------------
3,001,413 3,339,080
Less accumulated amortization (779,571) (623,087)
---------------- ----------------
$ 2,221,842 $ 2,715,993
================ ================
Amortization charged to continuing operations was $249,489 and $235,859 for the
years ended October 31, 1998 and 1997, respectively.
6. Related Party Transactions
Due from/(to) related parties consists of the following:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Due from the Chairman & Chief executive
Officer and controlling shareholder,
bearing interest at prime plus 1% per
annum, repayable on demand $ 63,079 $ 81,443
Due from consultant (Note 12) 26,234 39,352
Due from the President, bearing
interest at prime, repayable on demand -
repaid in December 1997 - 55,500
---------------- ----------------
$ 89,313 $ 176,295
================ ================
The Company is the beneficiary of a $1,000,000 life insurance policy which it
maintains on its Chief Executive Officer.
As compensation for providing a personal guarantee of certain acquisition
indebtedness to the selling shareholder of a company acquired in 1995, the
Company's Chief Executive Officer was granted a per annum 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
(Note 7).
Page 41 of 52
<PAGE>
A former director had loaned the Company $150,000. This note was repaid at its
maturity on October 1, 1997. As an inducement for such former director to
provide the loan, the Company's controlling stockholder and another employee
sold an aggregate of 65,550 shares of common stock to the former director for
$54,928, or $0.838 per share. This transaction gave rise to a deferred charge of
$174,496, representing the difference between the selling price of the shares
and management's estimate of the fair value at the time of the transaction. This
deferred charge was amortized over the five year period ended October 31, 1997
on a straight-line basis.
7. Long-term Debt
Long-term debt consists of the following:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Term loan (a)(d) $ - $ 968,750
Revolving line of credit (b)(d) - 850,000
Note payable issued in
connection with an
acquisition (c) 210,160 630,483
Notes payable, other 42,213 100,890
---------------- ----------------
252,373 2,550,123
Less current portion (241,150) (2,297,546)
---------------- ----------------
$ 11,223 $ 252,577
================ ================
(a) The Company was indebted to a bank for a term loan as part of an agreement
under which three loans aggregating $2,620,000 were used for acquisitions.
The agreement provided for monthly principal and interest payments through
May 2000. The loan interest rate in effect at October 31, 1997 was 8.5%.
Substantially all of the assets of the Company were pledged as collateral
for this indebtedness.
(b) In March 1997, the Company and the bank entered into an additional
agreement for a revolving line of credit whereby the Company was entitled
to borrow up to an additional $1,500,000. Interest on the outstanding
balance was 8.5% at October 31, 1997. The line of credit expired on April
30, 1998.
(c) In connection with an acquisition in June 1995, the Company became
obligated for a note of $840,645, payable in installments through February
1, 1999. Interest of 7.5% per annum is payable quarterly in arrears. This
note is collateralized by 310,000 shares of the common stock of the Company
which are personally owned by the Company's Chief Executive Officer (Note
6).
(d) On December 19, 1997, utilizing the proceeds from the sale of the Payroll
Division (Note 13), the Company repaid the term loan and the outstanding
balance on the line of credit.
Aggregate maturities of long-term debt are as follows:
Page 42 of 52
<PAGE>
Years Ending October 31,
------------------------
1999 $ 241,150
2000 11,223
--------------
$ 252,373
==============
8. Capitalized Lease Obligations
The Company generally leases its equipment under standard commercial leases with
purchase options which the Company exercises from time to time. Assets held
under capitalized lease agreements are reflected in property and equipment as
capital leases.
Minimum future lease payments under capitalized leases are as follows:
Years Ending October 31:
------------------------
1999 $ 20,026
2000 294
--------------
20,320
Less amount representing interest (906)
--------------
Present value of net minimum
lease payments 19,414
Less current maturities (19,127)
--------------
Long-term obligations under
capital leases $ 287
==============
9. Income Taxes
The provision for income taxes on continuing operations consists of:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Current:
Federal $ 1,119,789 $ 381,405
State and local 576,424 126,833
Deferred (benefit)/provision (1,238,592) 31,462
---------------- ----------------
$ 457,621 $ 539,700
================ ================
Page 43 of 52
<PAGE>
A reconciliation of income taxes computed at the Federal statutory rate to
amounts provided is as follows:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Tax provision computed at statutory rate $ 522,434 $ 417,548
Increase/(decrease) in taxes resulting from:
State and local income taxes, net
of federal income taxes 38,851 83,710
Amortization of excess of cost
over net assets of acquired
companies 44,076 30,100
Benefit of tax credits (179,960) -
Other, net 32,220 8,342
---------------- ----------------
$ 457,621 $ 539,700
================ ================
Temporary differences which give rise to net deferred tax assets/(liabilities)
are as follows:
October 31,
-----------------------------------
1998 1997
---------------- ----------------
Deferred tax assets:
Accrued loss on office sublease $ 1,189,503 $ -
Deferred income from non-competition,
confidentiality, and conduct of
business agreement 461,800 -
Accrued liabilities 110,832 23,495
Allowance for doubtful accounts 96,392 54,055
Deferred rent 63,382 -
Intangibles 7,035 (5,046)
Deferred compensation - 52,159
Lease transactions 7,754 55,580
Other 253,704 -
---------------- ----------------
2,190,402 180,243
---------------- ----------------
Deferred tax liabilities:
Depreciation (76,142) (130,500)
Deferred software costs (782,793) (695,653)
Other (9,499) -
---------------- ----------------
(868,434) (826,153)
---------------- ----------------
Net deferred tax assets/(liabilities) $ 1,321,968 $ (645,910)
================ ================
Page 44 of 52
<PAGE>
10. Stockholders' Equity
Common Stock - The Company is authorized to issue up to 10,000,000 shares of
common stock, $0.01 par value. The holders of common stock are entitled to one
vote per share. There is no cumulative voting for the election of directors.
Subject to the prior rights of any series of preferred stock which may from time
to time be outstanding, holders of common stock are entitled to receive ratably
any dividends as may be declared by the Board of Directors of the Company out of
funds legally available therefor, and upon the liquidation, dissolution , or
winding up of the Company, are entitled to share ratably in all assets remaining
after the payment of liabilities, and payment of accrued dividends and
liquidation preferences on the preferred stock outstanding, if any.
Holders of common stock have no preemptive rights, and have no rights to convert
their common stock into any other security.
Preferred Stock - The Company is authorized to issue up to 1,000,000 shares of
preferred stock, $0.01 par value. The preferred stock may be issued in one or
more series, the terms of which may be determined by the Board of Directors
without further action by the stockholders, and may include voting rights
(including the right to vote as a series on certain matters), preferences as to
dividends and liquidation conversion, redemption rights, and sinking fund
provisions.
Warrants - The Underwriters of the Company's initial public offering were issued
warrants to purchase an aggregate of 100,000 shares of the Company's common
stock, at an exercise price per share of $6.30. During fiscal 1998, 66,725 of
these warrants were exercised. The remaining 33,275 warrants expired February
20, 1998, having been extended one month from the original expiration date by
the Company' Board of Directors.
In September 1994, in connection with a consulting arrangement, the Company
issued warrants to purchase, after giving effect to certain anti-dilutive
provisions, 50,000 shares at $5.00 per share and 25,240 shares at $6.24 per
share. These warrants were exercised in March 1998.
On June 27, 1995, in connection with a consulting agreement, the Company issued
a warrant to purchase 75,000 shares of common stock for $5.00 per share. The
warrant grants the holder certain "piggy-back registration" and other rights.
This Warrant expires on June 27, 2000.
The Underwriters and the consultants had the right to require the Company to
register their respective shares with the Securities and Exchange Commission. On
February 5, 1998, the Company registered these and other shares on Form S-3.
Page 45 of 52
<PAGE>
Stock Option Plan - In September 1992, the Company adopted the 1992 Stock Option
and Stock Appreciation Rights Plan ("the Plan") which provides for the granting
of options to employees, officers, directors, and consultants for the purchase
of up to 350,000 shares of common stock. On May 5, 1997, the Company's
shareholders approved an amendment to the Plan increasing the maximum number of
shares issuable thereunder to 1,200,000. Options granted may be either
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986, as amended ("the Code"), or non-qualified
options. Incentive stock options may be granted only to employees and officers
of the Company, while non-qualified options may be issued to directors and
consultants, as well as to officers and employees of the Company. The Plan is
administered by a committee consisting of two non-employee directors who
determine those individuals to whom options will be granted, the number of
shares of common stock which may be purchased under each option, and (when
necessary) the option exercise price. The committee also determines the
expiration date of the options (typically 10 years, except for 10% shareholders,
which expire in 5 years), and the vesting schedule of the options, which is
typically 20% per year over 5 years, beginning one year from the date of the
grant. Options have also been granted which vest over three years, or which were
vested when granted.
The per share exercise price of an incentive stock option may not be less than
the fair market value of the common stock on the date the option is granted. The
per share exercise price of a non-qualified option shall be determined by the
committee, except that the Company will not grant non-qualified options with an
exercise price lower than 50% of the fair market value of common stock on the
day the option is granted. In addition, any person who, on the date of the
grant, already owns, directly or indirectly, 10% or more of the total combined
voting power of all classes of stock outstanding, may only be granted an option
if the exercise price of such option is at least 110% of the fair market value
of the common stock on the date of the grant.
The committee may also grant "stock appreciation rights" ("SAR's") in connection
with specific options granted under the plan. Each SAR entitles the holder to
either: (a) cash (in an amount equal to the excess of the fair value of a share
of common stock over the exercise price of the related options); or (b) common
stock (the number of shares of which is to be determined by dividing the SAR's
cash value by the fair market value of a share of common stock on the SAR
exercise date); or (c) a combination of cash and stock. SAR's may be granted
along with options granted under the Plan, and to holders of previously granted
options. No SAR's have been granted under the Plan.
Page 46 of 52
<PAGE>
Activity during the past two years with respect to the Plan is as follows:
Weighted
Exercise Average
Number of Price Exercise
Options Range Price
----------- ------------- ----------
Options Outstanding, October 31, 1996 710,300 3.63 - 5.88 4.34
Options granted 226,300 3.25 - 7.88 4.23
Options exercised (29,254) 3.63 - 5.88 3.95
Options cancelled (57,448) 3.63 - 5.88 3.86
-----------
Options outstanding, October 31, 1997 849,898 3.25 - 7.88 4.42
Options granted 216,400 8.25 - 10.86 8.79
Options exercised (197,648) 3.63 - 7.88 4.52
Options cancelled (63,650) 3.88 - 9.56 4.83
-----------
Options outstanding, October 31, 1998 805,000 3.25 - 10.86 4.41
===========
Options available for future
grant, October 31, 1998 168,098
===========
Options exercisable, October 31, 1998 466,133
===========
Options exercisable, October 31, 1997 578,764
===========
At October 31, 1998, the weighted average remaining contractual life of all
options currently outstanding, whether vested or not, is approximately 6.6
years.
Page 47 of 52
<PAGE>
The Company accounts for options granted under the Plan in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock options. Accordingly, no compensation cost has been
recognized for stock option awards. Had the compensation cost been determined in
accordance with Statement of Financial Accounting Standard No. 123 "Accounting
for Stock-Based Compensation", the Company's pro forma income/(loss) and pro
forma income/(loss) per common share for fiscal 1998 and 1997, respectively,
would be as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ------------------------------------
Historical Pro Forma Historical Pro Forma
---------------- -------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Income from continuing
operations $ 1,078,950 $ 815,359 $ 688,383 $ 572,803
Loss from discontinued
operation (76,464) (76,464) (127,054) (127,054)
Gain on sale of
discontinued operation 1,696,160 1,696,160 - -
---------------- -------------------- ----------------- ----------------
Net income $ 2,698,646 $ 2,435,055 $ 561,329 $ 445,749
================ ==================== ================= ================
Income/(loss) per diluted common share:
Income from continuing
operations
$ 0.24 $ 0.18 $ 0.17 $ 0.14
Loss from discontinued
operation
(0.01) (0.01) (0.03) (0.03)
Gain on sale of
discontinued operation 0.38 0.38 - -
---------------- -------------------- ----------------- ----------------
Net income $ 0.61 $ 0.55 $ 0.14 $ 0.11
================ ==================== ================= ================
</TABLE>
All incentive stock options under the Plan, other than those granted to any
person holding more than 10% of the total combined voting power of all classes
of outstanding stock, are granted at the fair market value of the common stock
at the grant date. The weighted average fair value of the stock options granted
during fiscal 1998 and 1997 was $704,176 and $382,977, respectively. The fair
value of each stock option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: a risk-free interest rate of 6.5%; expected
lives ranging from six months to five years; and expected volatility of 48.6%.
In addition to options granted under the Plan, two non-qualified options
aggregating 290,000 shares were granted prior to the Company's initial public
offering of which 150,000 shares were exercised prior to October 31, 1996,
40,000 were exercised during the year ended October 31, 1997, and 100,000 were
exercised during the current fiscal year.
Page 48 of 52
<PAGE>
11. Retirement Plans
The Company maintains two 401(k) Savings Plans covering all eligible employees
who have attained the age of 21 years and worked at least 1,000 hours in a
one-year period. Plan participants may elect to contribute from 2% to 15% of
covered compensation each year. The Company may make matching contributions at
the discretion of the Board of Directors. For the years ended October 31, 1998
and 1997, the Company did not make any matching contributions.
12. Commitments and Contingencies
Contingent Acquisition Payments - In connection with an acquisition in 1990, the
Company issued an option to purchase up to 190,000 shares of the Company's
common stock for an aggregate purchase price of $1,900. The Company was further
required to purchase the option for $750,000, subject to adjustment for prior
partial exercises, in the event of a proposed sale of all or substantially all
of the Company's assets, or in event of the holder's death (the "Put"). The
difference between the present value of the option as originally recorded in
1990 and the Put amount was accreted through periodic charges to retained
earnings using the interest method. As of October 31, 1997, the holder had
exercised the option for all 190,000 shares, thereby terminating the Company's
obligation under the Put. For the year ended October 31, 1997, $19,594 was
accreted.
In connection with an acquisition in April 1993, the Company was obligated for
contingent payments based on revenues of the acquired company. For the fiscal
years ended October 31, 1998 and 1997, contingent payments were $26,055 and
$63,472, respectively. The obligations at October 31, 1998 and 1997 are included
in other current liabilities.
In connection with an acquisition in June 1993, the Company was obligated for
certain contingent payments based on the earnings of the acquired company for
five years, payable in a combination of cash and common stock. For the fiscal
years ended October 31, 1998 and 1997, no contingent payments were earned. This
company was included in the sale of the Payroll Division, and the Company's
obligations terminated in June 1998. The Company had also guaranteed the market
value of the 150,000 shares of common stock issued in connection with this
acquisition at $6.67 per share on June 30, 1998. As the market price of the
stock on that date was higher, no payment was required.
In January 1994, the Company guaranteed the market value of 158,812 shares of
common stock issued in connection with an acquisition at $6.40 per share on
January 1, 1999. Since the market price of the stock on January 1, 1999 was
higher, no payment was required.
In connection with an acquisition in June 1994, the Company was obligated for
contingent consideration based on the defined earnings of the Payroll Division
and certain other defined events. No contingent consideration had been earned on
operations through December 19, 1997, when this company was included in the sale
of the Payroll Division. As part of the settlement of a lawsuit, described
below, the Company fulfilled its obligation for any contingent consideration.
The Company had also guaranteed the market value of the 302,400 shares of common
stock issued in connection with this acquisition at $5.00 on July 31, 1999. On
July 31, 1998, a former officer sold the approximately 248,000 shares owned by
him, and therefore, only approximately 54,400 shares are subject to the
guarantee.
Page 49 of 52
<PAGE>
In connection with an acquisition in May 1995, the Company was obligated for
certain contingent payments based on defined earnings of the Company's two
payroll operations in New England for five years. No contingent payments were
earned for fiscal 1997 nor for the period ended December 19, 1997, when this
company was included in the sale of the Payroll Division. On December 24, 1997,
the Company made payments aggregating $300,000 to the former stockholders of the
acquired company in return for a release from any further liability under the
earnings contingencies. The Company also guaranteed that market value of the
113,636 shares of common stock issued in connection with this acquisition at
$5.50 per share on April 30, 2000.
At October 31, 1998, no contingent liability existed for stock price guarantees
relating to the foregoing acquisitions, since the market value of the Company'
stock on October 31, 1998 exceeded all of the minimum price guarantees. Actual
amounts that will ultimately be paid, if any, could change significantly
depending upon the price of the Company' common stock on the dates such amounts
are required to be settled, and upon the number of shares actually held by
obligees on those dates.
Employment Agreements - The Company is obligated under certain employment
agreements which expire at various times through October 31, 2000. Pursuant to
such agreements, the approximate annual minimum salary amounts payable are as
follows:
Years Ending
October 31,
------------
1999 760,200
2000 409,000
Consulting and Non-competition - In connection with an acquisition, the Company
entered into an agreement with the former owner of the acquired company. This
agreement, as amended in October 1994, expires on September 30, 2001, and
provides for annual payments of $267,500 through September 30, 2001. As a
partial incentive to enter into the amended agreement, the Company agreed to
forgive, on each anniversary date of the agreement, 12.5% of the consultant's
existing indebtedness to the Company ($26,234 at October 31, 1998 (Note 6)). The
consulting agreement imposes certain non-competition restrictions on the
consultant indebtedness to the Company will be amortized ratably over the term
of the amended agreement.
Litigation -There are no pending legal proceedings that, in the opinion of
management, would materially affect the financial condition or results of
operations of the Company.
In February 1998, the Company filed a lawsuit in the Federal District Court for
the Southern District of New York, 98 Civ. 0956 (RLC), against a former
officer-director of the Company and a trust controlled by such person and his
spouse ("Defendants"). The former officer-director was responsible for the
Company's Payroll Division, which was sold in December 1997 (Note 13). In the
lawsuit, the Company alleged that the former officer-director intentionally
attempted to interfere with that sale thereby causing damages to the Company.
This person's employment was terminated by the Company's Board of Directors and
subsequently, he resigned as a director.
Page 50 of 52
<PAGE>
In April 1998, Defendants filed an answer denying the Company's claims, a
counter claim against the Company, and third party claims, alleging substantial
damages against the Company and its current and former directors, including
wrongful termination, breach of contract, breach of the duty of good faith,
fraud, and RICO violations. In May 1998, this litigation was settled. The
impact of such settlement is reflected in the Company's financial statements.
Lease Obligations - Operating leases for facilities extend through December 31,
2009. The leases require the Company to pay certain expenses such as utilities
and real estate taxes. These leases require aggregate minimum monthly rental
payments of approximately $108,000 plus a proportionate share of certain of the
landlord's operating expenses. The Company's obligations under the two major
leases are secured by a cash deposit and a letter of credit, respectively,
aggregating $281,250. Total expense for occupancy costs, net of sublease income
in 1998, was approximately $1,872,000 and $1,284,000 during 1998 and 1997,
respectively.
During the fourth quarter of fiscal 1998, the Company completed the
consolidation of its data center and most of its administrative functions into
its Leonia facility. Effective as of August 1, 1998, the Company sublet
approximately 31,500 square feet in its New York City location. This sublease
and the related primary lease expire in 2008. Because the amount to be received
under the sublease (aggregating $6,210,675) is less than the amount the Company
must pay under the primary lease, a charge was taken of approximately
$3,022,000. The charge represents the total amount of the shortfall over the
life of the lease, and also includes the value of leasehold improvements
abandoned. Since the sale of the Payroll Division also permitted the Company to
reduce substantially its New York City space requirements, approximately
$786,000 was charged against the gain on sale of the Payroll Division.
Approximate minimum future real-estate lease payments, net of sublease income,
are as follows:
Years Ending
October 31,
------------
1999 $ 1,479,700
2000 1,500,100
2001 1,437,100
2002 1,281,300
2003 1,345,200
Thereafter 7,245,800
-----------------
$ 14,289,200
=================
Page 51 of 52
<PAGE>
13. Sale of the Payroll Division
On December 19, 1997, the Company consummated the sale (the "Sale") of all the
outstanding capital stock of Daton Pay USA, Inc.; NEDS, Inc.; Pay USA of New
Jersey, Inc.; and Key-ACA, Inc., each a wholly-owned subsidiary of the Company
and together comprising the Payroll Division ("Pay USA"), to Zurich Payroll
Solutions, Ltd. ("Zurich" or the "Buyer"). At closing, the Company received
$11,460,000, of which $10,710,000 was in cash and $750,000 was in the form of a
note from the Buyer. Note plus accrued interest was repaid in full in August
1998.
The terms of the Sale also provided for an additional payment by the Buyer of up
to $1,500,000, which amount was contingent on the revenue of Pay USA for the
three months following the sale. On June 1, 1998, the Company received the
entire $1,500,000 contingent payment.
The Company recognized a gain, net of tax, of approximately $1,700,000 in its
fiscal year ended October 31, 1998, as a result of the sale of Pay USA.
Pursuant to the terms of the sale, the Company agreed to provide the Buyer with
processing services in connection with the continuing operations of Pay USA. The
Company agreed to provide these services through December 31, 1999 for an
initial payment of $500,000, a fixed monthly fee of $16,000 (plus a fixed amount
for telephone line charges), and other monthly fees based on the level of
services provided. The Buyer also paid the Company $1,440,000 at closing for the
Company's agreement to refrain from (1) directly or indirectly competing with
Pay USA, except as permitted in the agreement; (2) providing processing services
to third parties if such processing services permitted those parties to compete
with Pay USA in certain payroll processing and related activities; (3)
disclosing information about Pay USA's customers; and (4) engaging in any
activity that could be materially detrimental to Pay USA's business or
reputation. The $1,440,000 is being amortized over the term of the agreement.
The amortization of such income is included in income from continuing
operations.
At October 31, 1997, and for the year then ended, the net assets and operating
losses (net of related tax benefits) of Pay USA have been recorded as a
discontinued operation. During the fiscal year ended October 31, 1997, revenues
relating to the discontinued operations approximated $8,828,000, and pretax
operating losses approximated $291,000. For the period from November 1, 1997
through the date of the Sale, revenues related to the discontinued operation
approximated $1,116,700 and pretax operating losses approximated $136,500.
14. Subsequent Event - Purchase of ETG, Inc.
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("ETG") 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. On December 28, 1998, the subsidiary changed
its name to ETG, Inc.
The Company used cash on hand for the payment of $4,000,000 at closing. The
assets acquired consist predominately of intangibles associated with the
business of providing information technology infrastructure management solutions
to large companies and institutions.
Page 52 of 52
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1B Certificate of Amendment to the Certificate of Incorporation of the
Company, dated June 3, 1998
10.6B Agreement of Sublease between the Company as Sublessor and RSL Com
USA, Inc. as Subtenant, dated as of July 31, 1998.
10.7 Agreement of Sublease between NMU Pension Plans as Sublandlord, and
the Company as Subtenant, dated as of September 21, 1998.
10.8B First Amendment of Lease between Leonia Associates, LLC and the
Company, dated January 16, 1998.
10.18 Payroll Services Conversion Agreement between the Company and ADP,
Inc.
21 List of Subsidiaries of the Company
23.A Consent of Deloitte & Touche LLP
23.B Consent of Ernst & Young LLP
27 Financial Data Schedule - included in EDGAR filing only.
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF
COMPUTER OUTSOURCING SERVICES, INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
WE THE UNDERSIGNED, Zach Lonstein and Jeffery Millman, being
respectively the Chairman of the Board and Chief Executive officer and
Secretary of Computer Outsourcing Services, Inc, hereby certify:
1.The original name of the corporation was Commercial On-Line Systems,
Inc. and the present name is Computer Outsourcing Services, Inc.
2.The certificate of incorporation of said corporation was filed by
the Department of State on October 22, 1984.
3.(a) The cerificate of incorporation is amended to increase the
number of authorized shares of common stock from 7,000,000 to
10,000,000 shares.
(b) To effect the foregoing, Article 4 of the cerificate of
incorporation is amended to read in its entirety as follows:
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 $0.01 per share ("Preferred Stock"), and 10,000,000
shares of common stock, par value $0.01 per share ("Commom
Stock")
4. The amendment was authorized in the following manner:
On February 11, 1998 the Board Of Directors unanimously adopted a
resolution approving the amendment and the shareholders of the
corporation approved the amendment by the requisite vote at the
1998 Annual Meeting of Stockholders of Computer Outsourcing
Services, Inc. held on June 3, 1998.
IN WITNESS WHEREOF, we have signed this certifcate on June 3, 1998
and we affirm the statements contained therein as true under the
penalties of perjury.
/s/
--------------------------
Zach Lonstein
Chairman of the Board and
Cheif Executive officer
/s/
--------------------------
Jeffery Millman
Secretary
AGREEMENT OF SUBLEASE
BETWEEN
COMPUTER OUTSOURCING SERVICES, INC.
AS
SUBLESSOR
AND
RSL COM U.S.A., INC.
AS SUBTENANT
DATED AS OF JULY, 1998
<PAGE>
AGREEMENT OF SUBLEASE
---------------------
THIS AGREEMENT (hereinafter referred to as the "Sublease") dated
as of the day of July, 1998, by and between COMPUTER OUTSOURCING
SERVICES, INC., a New York corporation, having an office at 360 West
31st Street, 21 Penn Plaza, 10th Floor, New York, New York 10001
(hereinafter referred to as the "Sublessor"), and RSL COM U.S.A, INC., a
Delaware corporation, having an office at 430 Park Avenue, New York, New
York 10022 (hereinafter referred to as the "Subtenant").
W I T N E S S E T H :
WHEREAS, Sublessor is the tenant under a certain agreement of
lease dated as of January 24, 1991, as amended, between Sublessor and
G-H-G Realty Company ("Landlord"), as landlord ("Overlease"), covering a
portion of the basement, a portion of the Tenth (10th) Floor and the
entire Eleventh (11th) Floor ("Overleased Premises") at 360 West 31st
Street, New York, New York ("Building");
WHEREAS, the Overlease covers the Overleased Premises in the
Building, upon and subject to the terms and conditions more particularly
set forth in the Overlease; and
WHEREAS, Subtenant desires to sublet from Sublessor the entire
Eleventh (11th) Floor of the Overleased Premises, consisting of
approximately 22,300 rentable square feet and part of the Tenth (10th)
floor of the Overleased Premises, consisting of approximately 9,200
rentable square feet (hereinafter referred to as the "Demised
Premises"), and Sublessor desires to sublet the same to Subtenant.
NOW, THEREFORE, in consideration of the mutual obligations of
the parties hereto, the parties for themselves, their successors and
assigns, hereby covenant and agree, as follows:
1. SUBLEASED PREMISES.
Sublessor hereby subleases to Subtenant and Subtenant
hereby hires from Sublessor the Demised Premises. The premises subleased
to Subtenant, together with all appurtenances, fixtures, improvements,
additions and other property attached thereto or installed therein at
the commencement of, or at any time during, the term of this Sublease,
are hereinafter collectively referred to as the "Subleased Premises."
Page 1 of 28
<PAGE>
2. TERM.
a. The Subleased Premises are subleased for a term
(hereinafter referred to as the "Term") of approximately ten years, five
months, to commence on 60 days from receipt by the parties hereto of
Landlord's Consent (defined hereinafter) (said date is hereinafter
referred to as the "Commencement Date") and to expire on December 30,
2008 (hereinafter referred to as the "Expiration Date"), or on such
earlier date upon which said term may expire or be canceled or
terminated pursuant to the provisions of Section 16 hereof, or such
other date upon which said term may expire or be canceled or terminated
pursuant to the other provisions of this Sublease or pursuant to law,
upon and subject to the covenants, agreements, terms and conditions
herein contained.
b. In the event that the Subleased Premises are not
surrendered by Subtenant upon the termination of this Sublease for any
reason whatsoever other than Sublessor's default, Subtenant hereby
indemnifies, holds harmless and agrees to defend Sublessor (including
paying Sublessor's reasonable counsel fees and disbursements) against
any and all liabilities resulting from delay by Subtenant in so
surrendering the Subleased Premises, including any claims made by any
succeeding tenant or prospective tenant founded upon such delay. In
addition to, and not in limitation of, the provisions set forth in the
immediately preceding sentence, in the event that Subtenant shall hold
over after the Expiration Date, Subtenant shall pay the rental due for
any such period under this Sublease, except that, in the event Subtenant
shall hold over for a period in excess of fifteen (15) days, Subtenant
shall pay a rental for each day Subtenant shall hold over in an amount
equal to two times the total gross rent and any penalties or other
charges due and payable by Sublessor pursuant to the Overlease on a pro
rated daily basis as of the last day of the term of this Sublease;
provided, however, that the preceding provisions set forth in this
sentence shall not apply to any period during which Subtenant is holding
over due solely to events of "force majeure" (as such term is
hereinafter defined); during any period in which Subtenant is holding
over due solely to events of force majeure, Subtenant shall pay a rental
for each such day in an amount equal to the rent due and payable on a
pro rated daily basis as of the last day of the term of this Sublease.
As used in this Sublease, the term "force majeure" shall mean the
following causes beyond Sublessor's or Subtenant's, as the case may be,
reasonable control: legal or governmental restrictions, regulations or
controls, labor disputes, mechanical breakdowns, inability to obtain
fuel, steam, water, electricity or materials through ordinary sources,
acts of God, enemy action, civil commotion, fire or other casualty.
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3. FAILURE TO GIVE POSSESSION.
In the event possession of the Subleased Premises is not
delivered by Sublandlord to Subtenant on or prior to the Commencement
Date, Sublandlord agrees to credit Subtenant's Base Rent when payable
hereunder in the amount of $3,750.00 per week or $541.67 per day, as the
case may be, until possession is delivered ("Delay Credit"). In the
event that with the consent of the Subtenant possession of part but not
all the Subleased Premises is delivered to Subtenant prior to the
remainder of the Subleased Premises, the Delay Credit shall be adjusted
pro rata based on the amount of square footage delivered for possession
and the amount remaining. Notwithstanding anything to the contrary
stated herein, in the event all of the Subleased Premises is not
delivered by 120 days after receipt of the Landlord's Consent, Subtenant
shall be entitled by written notice to Sublandlord to cancel this
Sublease and receive the Delay Credit from Sublandlord in certified or
wired funds. Subtenant shall also be entitled to cancel this Sublease by
written notice to Sublandlord if Sublandlord has not delivered all of
the Subleased Premises to Subtenant by 150 days after receipt of the
Landlord's Consent; in such event Sublandlord shall pay the Delay Credit
and an additional $55,000.00 to Subtenant by certified check or wired
funds. Sublandlord shall only be entitled to remain in the Subleased
Premises at such time if Sublandlord must do so for the good faith
conduct of Sublandlord's business operations.
4. OVERLEASE.
a. Annexed hereto as Exhibit A is a copy of the Overlease,
the terms and provisions of which, except as otherwise herein provided,
are hereby incorporated in and made a part hereof.
b. This Sublease is subject and subordinate to the
Overlease and to all amendments thereof heretofore and hereafter entered
into and to any termination caused by Sublessor's default thereof in
accordance with its terms and to all matters to which the Overlease is
or shall be subordinate and to the consent of the Landlord in accordance
with the terms of the Overlease. No amendment hereafter entered into by
Sublessor and Landlord will have any adverse effect on the rights or
obligations of Subtenant hereunder. Promptly after the execution of any
amendment of the Overlease, Sublessor shall mail a copy thereof to
Subtenant.
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<PAGE>
c. Subtenant covenants and agrees: (i) to perform and
observe all of the terms, covenants, conditions and agreements of the
Overlease on the part of Sublessor to be performed thereunder relating
to the Subleased Premises (other than the covenant to pay Base Rent and
Additional Rent and such other covenants that are to remain the
obligation of Sublessor hereunder) arising after the date hereof to the
extent that the same are not modified or amended by this Sublease; (ii)
not to do or not to suffer any act or thing to be done on, or with
respect to, the Subleased Premises which would constitute a default
under the Overlease or would cause the Overlease to be canceled,
terminated or forfeited by virtue of any rights of cancellation,
termination or forfeiture reserved or vested in Landlord under the
Overlease; and (iii) to indemnify, hold harmless and defend Sublessor
(including the payment of Sublessor's reasonable counsel fees and
disbursements) from and against any and all claims, liabilities, losses
and damages of any kind whatsoever that Sublessor may incur by reason
of, resulting from or arising out of any such cancellation, termination
or forfeiture.
d. Sublessor represents that as of the date hereof the
Overlease is in full force and effect. Sublessor represents that
Sublessor has not received as of the date hereof any notice of default
from the Landlord under the Overlease and has not, to the best of its
knowledge, done or suffered or caused to be done any acts which would
result in any cancellation, forfeiture, or termination of the Overlease.
Sublessor covenants that all rent and additional rent has been or will
be paid through the Commencement Date and thereafter on a timely basis,
and that Sublessor's interest in the Overlease is unencumbered.
e. To the extent that any provisions of the Overlease may
conflict or be inconsistent with the provisions of any Section of this
Sublease, whether or not such inconsistency is expressly noted herein,
the provisions of such Section of this Sublease shall prevail, provided,
however, that in no event shall any greater rights as against the
Landlord be conferred upon Subtenant hereunder than are conferred upon
Sublessor pursuant to the Overlease. Furthermore, it is understood that,
pursuant to the terms of the Overlease, certain work, services and
repairs to be furnished or made thereunder may in fact be furnished or
made by Landlord and not by Sublessor. Sublessor shall in no event be
liable to Subtenant nor shall the obligations of Subtenant hereunder be
impaired or the performance thereof excused because of any failure or
delay on the part of the Landlord in furnishing any such work or
services or in making any of such repairs. However, if the Landlord
shall default in any of Landlord's obligations to Sublessor with respect
to this Subleased Premises, Subtenant shall be entitled to participate,
at its own expense, with Sublessor in the enforcement of the rights
which Sublessor may have against Landlord, and Sublessor shall, at the
request of Subtenant, cooperate promptly and diligently with Subtenant,
including joining in any action or proceeding if necessary, to enforce
the rights of Subtenant, provided that Subtenant shall
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<PAGE>
pay or reimburse Sublessor for all costs and expenses incurred by
Sublessor in any such action or proceeding and shall indemnify, hold
harmless and defend Sublessor (including the payment of Sublessor's
reasonable counsel fees and disbursements) from any liability arising
from the taking of any such action at the request of Subtenant. In the
event Sublessor fails so to cooperate with Subtenant, Subtenant may act
in Sublessor's name to enforce its rights as aforesaid.
f. In the event of termination, re-entry or dispossess by
Landlord under the Overlease, unless the Landlord shall otherwise
provide, this Sublease shall automatically cease and terminate subject
to the foregoing. Landlord may, at its option, take over all of the
right, title and interest of Sublessor hereunder in and to the Subleased
Premises, and Subtenant shall, at Landlord's option, attorn to Landlord
pursuant to the then executory provisions of this Sublease, except that
Landlord shall not: (i) be liable for any previous act or omission of
Sublessor hereunder; (ii) be subject to any offset not expressly
provided in this Sublease which theretofore accrued to Subtenant against
Sublessor; or (iii) be bound by any previous modification of this
Sublease or by any previous prepayment of more than one (1) month's Base
Rent (as hereinafter defined), if any. If this Sublease is terminated or
if Landlord takes over Sublessor's interest hereunder by reason of
default under the Overlease which was not caused by a default of
Subtenant under this Sublease, then such termination or taking- over
shall not release Sublessor from liability to Subtenant hereunder.
5. INSURANCE; INDEMNIFICATION AND HOLD HARMLESS.
a. Subtenant covenants to provide on or before the
Commencement Date and to keep in force during the term of this Sublease
at its own cost and expense, the insurance coverage required to be
provided in paragraph 9 of the Overlease and the following insurance
coverage:
(i) A standard comprehensive policy of liability
insurance naming Sublessor and Landlord as additional insureds, as their
interest may appear, and protecting Sublessor, Landlord and Subtenant
against liability occasioned by accident on or about the Subleased
Premises or any appurtenances thereto. Such policy is to be written by
good and solvent insurance companies authorized to do business in the
State of New York and the limits of liability thereunder shall not be
less than the amount of Five Million ($5,000,000.00) Dollars in respect
of any one person, in the amount of Five Million ($5,000,000.00) Dollars
in respect of any one accident, and in the amount of Five Million
($5,000,000.00) Dollars in respect of property damages. Such insurance
may be carried under a blanket policy covering the Subleased Premises
and other locations of Subtenant, if any, provided that the protection
to be provided to Sublessor pursuant to this subsection shall not be
diminished by virtue of such blanket policy or the joinder of other
parties as insureds thereunder; and
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(ii) Workers' compensation insurance providing
statutory New York State benefits in connection with any work done on or
about the Subleased Premises by or at the direction of Subtenant.
b. All policies of insurance required hereunder shall
contain an endorsement or other provision pursuant to which such
insurance may not be modified or canceled, nor the amount thereof
reduced, except upon at least fifteen (15) days' prior notice to
Sublessor.
c. Subtenant shall not carry separate or additional
insurance concurrent in form or contributing in the event of any loss or
damage with any insurance required to be obtained by Subtenant under
this Sublease if the effect of such insurance would be to reduce the
protection or the payment to be made under the insurance required
hereunder, unless Sublessor is included as an insured thereunder.
Subject to the foregoing, Subtenant shall be permitted to carry separate
insurance on its furnishings, furniture, and equipment in the Subleased
Premises.
d. Prior to the time any insurance specified in this
Section is first required to be carried by Subtenant and thereafter, at
least fifteen (15) days prior to the expiration of any such policies,
Subtenant agrees to deliver to Sublessor either copies of the aforesaid
policies or certificates evidencing such insurance, provided that any
such certificate shall contain an endorsement that such insurance may
not be modified or canceled, nor the amount thereof reduced, except upon
the prior notice required under Section (b) of this Section 5.
e. (i) Sublessor and Subtenant shall each endeavor to
secure an appropriate clause in, or an endorsement upon, each fire or
extended coverage policy obtained by it and covering the Building, the
Subleased Premises or the personal property, fixtures and equipment
located therein or thereon, pursuant to which the respective insurance
companies waive subrogation or permit the insured, prior to any loss, to
agree with a third party to waive any claim it might have against said
third party. The waiver of subrogation or permission for waiver of any
claim hereinbefore referred to shall extend to the agents of each party
and its employees and, in the case of Subtenant, shall also extend to
all other persons and entities occupying or using the Subleased Premises
in accordance with the terms of this Sublease. If and to the extent that
such waiver or permission can be obtained only upon payment of an
additional charge then, except as provided in clauses (ii) and (iii) of
this Section 5(e), the party benefiting from the waiver or permission
shall pay such charge upon demand, or shall be deemed to have agreed
that the party obtaining the insurance coverage in question shall be
free of any further obligations under the provisions hereof relating to
such waiver or permission.
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<PAGE>
(ii) In the event that Sublessor shall be unable at
any time to obtain one of the provisions referred to above in any of its
insurance policies, Sublessor shall notify Subtenant thereof (and
include in such notice the amount of the additional premium, if any,
imposed for the inclusion of Subtenant as an insured party), and, at
Subtenant's option, Sublessor shall cause Subtenant to be named in such
policy or policies as one of the insureds, but if any additional premium
shall be imposed for the inclusion of Subtenant as such as an insured,
Subtenant shall pay such additional premium upon demand, or Sublessor
shall be excused from its obligations under this Section 5(e) with
respect to the insurance policy or policies for which such additional
premiums would be imposed. In the event that Subtenant shall have been
named as one of the insureds in any of Sublessor's policies in
accordance with the foregoing, Subtenant shall endorse promptly to the
order of Sublessor, without recourse, any check, draft or order for the
payment of money representing the proceeds of any such policy or any
other payment growing out of or connected with said policy, and
Subtenant hereby irrevocably waives any and all rights in and to such
proceeds and payment.
(iii) In the event that Subtenant shall be unable at
any time to obtain one of the provisions referred to above in any of its
insurance policies, Subtenant shall notify Sublessor thereof (and
include in such notice the additional premium, if any, imposed for the
inclusion of Sublessor as an insured party) and, at Sublessor's option,
Subtenant shall cause Sublessor to be named in such policy or policies
as one of the insureds, but if any additional premium shall be imposed
for the inclusion of Sublessor as an insured, Sublessor shall pay such
additional premium upon demand or Subtenant shall be excused from its
obligations under this Section 5(e) with respect to the insurance policy
or policies for which such additional premiums would be imposed. In the
event that Sublessor shall have been named as one of the insureds in any
Subtenant's policies in accordance with the foregoing, Sublessor shall
endorse promptly to the order of Subtenant, without recourse, any check,
draft or order for the payment of money representing the proceeds of any
such policy or any other payment growing out of or connected with said
policy and Sublessor hereby irrevocably waives any and all rights in and
to such proceeds and payment.
f. If, by reason of a failure of Subtenant to comply with
the provisions of Section 5(g) or Section 11 hereof, Sublessor is
required pursuant to the Overlease to pay to or reimburse Landlord for
all or any portion of any increased premiums for fire insurance and
extended coverage, Sublessor shall notify Subtenant thereof and
Subtenant shall reimburse Sublessor, on demand, for that portion of such
Sublessor's payment or reimbursement occasioned because of such failure
on the part of Subtenant.
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<PAGE>
g. Subtenant shall not violate, or permit the violation of,
any condition imposed by the standard fire insurance policy then issued
for office buildings in the Borough of Manhattan, City of New York, and
shall not do, or permit anything to be done, or keep or permit anything
to be kept in the Subleased Premises in violation of this Sublease or
the Overlease which would subject Landlord or Sublessor to any liability
or responsibility for personal injury or death or property damage, or
which would increase the fire or other casualty insurance rate on the
Building or the property therein over the rate which would otherwise
then be in effect or which would result in insurance companies of good
standing refusing to insure the Building or any of such property in
amounts reasonably satisfactory to Landlord and Sublessor.
h. In addition to the foregoing, upon failure of Subtenant
to procure, maintain or place such insurance and pay all premiums and
charges therefor, Sublessor may, upon fifteen (15) days' notice to
Subtenant, do so (but shall not be obligated to do so) and in such event
Subtenant agrees to pay the amount therefor, plus interest at the
Interest Rate (as such term is defined in Section 8(e) hereof), from the
date of such payment by Sublessor until payment in full by Subtenant, to
Sublessor on demand, as Additional Rent as hereinafter defined.
Notwithstanding the foregoing, if Subtenant shall fail to keep in force
and effect the insurance substantially as hereinabove set forth, then
Subtenant shall indemnify, save harmless and defend Landlord and
Sublessor (including the payment of Landlord's and Sublessor's counsel
fees and disbursements) from and against any and all liability and
damages, and from and against any and all suits, claims and demands of
every kind and nature, including reasonable attorneys' fees by or on
behalf of any person, firm, association or corporation arising out of or
based upon any accident, injury or damage, however occurring, which
shall or may happen in, on, at or about the Subleased Premises, and from
and against any matter or thing arising out of the condition,
maintenance, repair, alteration, use, occupation, or operation of the
Subleased Premises, except to the extent the same shall have been caused
by the negligent acts or omissions of Sublessor, its employees or
agents.
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<PAGE>
6. ASSIGNMENT AND SUBLETTING.
a. Subtenant shall not assign this Sublease or Subtenant's
rights in and to the Subleased Premises or sublet all or any part of the
Subleased Premises without consent of the Overlandlord pursuant to the
Overlease. If this Sublease is assigned or if the Subleased Premises or
any part thereof is underlet or occupied by anyone other than the
Subtenant, Sublessor may collect rent from the assignee, undertenant or
occupant and apply the net amount collected to the rents herein
reserved, but no such assignment, underletting, occupancy or collection
shall be deemed a waiver of this covenant or the acceptance of the
assignee, undertenant or occupant as tenant, or a release of Subtenant
from the further performance or observance by Subtenant of the covenants
herein contained. The consent to an assignment or underletting shall not
in anyway be construed to relieve Subtenant (or any assignee or
undertenant) from obtaining the express written consent of Sublessor to
any further assignment or underletting. Notwithstanding any assignment
or sublease which shall have been consented to by Sublessor, Subtenant
shall remain primarily liable on this Sublease and shall not be released
from performing and observing any of the terms, covenants and conditions
of this Sublease.
b. Any transfer of a 50% or greater interest in Subtenant
(whether stock, partnership interest or otherwise) shall be deemed to be
an assignment of this Sublease.
c. Every assignment hereunder is subject to the express
condition, and by accepting an assignment hereunder each assignee shall
be conclusively deemed to have agreed, that if this Sublease should be
terminated prior to the expiration date or if Sublessor should succeed
to Subtenant's estate in the Subleased Premises, then at Sublessor's
election, the assignee shall attorn to and recognize Sublessor as the
assignee's landlord and the assignee shall promptly execute and deliver
any instrument Sublessor may reasonably request to evidence such
attornment.
d. Subtenant shall furnish Sublessor with an executed
counterpart of any assignment made hereunder within ten (10) days after
the date of its execution. Subtenant shall remain fully liable for the
performance of all of Subtenant's obligations hereunder notwithstanding
any assignment provided for herein, and without limiting the generality
of the foregoing, shall remain fully responsible and liable to Sublessor
for all acts and omissions of any assignee or anyone claiming by,
through or under any assignee which shall be in violation of any of the
obligations of this Sublease and any such violation shall be deemed to
be a violation by Subtenant.
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e. Notwithstanding any assignment and assumption by the
assignee of the obligations of Subtenant hereunder, Subtenant herein
named, and each immediate or remote successor in interest of Subtenant
herein named, and any guarantor of this Sublease, shall remain liable
jointly and severally (as a primary obligor) with its assignee and all
subsequent assignees for the performance of Subtenant's obligations
hereunder, and, without limiting the generality of the foregoing, shall
remain fully and directly responsible and liable to Sublessor for all
acts and omissions on the part of any assignee subsequent to it in
violation of any of the obligations of this Sublease.
f. Notwithstanding anything to the contrary hereinabove set
forth, no assignment of this Sublease shall be binding upon Sublessor
unless the assignee shall execute and deliver to Sublessor an agreement,
whereby such assignee agrees, unconditionally, to be personally bound by
and to perform all of the obligations of Subtenant hereunder and further
expressly agrees that notwithstanding such assignment the provisions of
this Article shall continue to be binding upon such assignee with
respect to all future assignments and transfers. A failure or refusal of
such assignee to execute or deliver such an agreement shall not release
the assignee from its liability for the obligations of Subtenant
hereunder assumed by acceptance of the assignment of this Sublease.
g. If Sublessor shall decline to give its consent to any
proposed assignment, Subtenant shall indemnify, defend and hold harmless
Sublessor against and from any and all loss, liability, damages, costs
and expenses (including reasonable legal fees and disbursements)
resulting from any claims that may be made against Sublessor by the
proposed assignee or by any brokers or other persons claiming a
commission or similar compensation in connection with the proposed
assignment.
h. In the event that (i) Sublessor fails to exercise any of
its options under this Section and (ii) Subtenant fails to execute and
deliver the assignment or sublease to which Sublessor consented within
sixty (60) days after the giving of such consent, then, Subtenant shall
again comply with all of the provisions and conditions of this Section
before assigning this Sublease.
i. The consent by Sublessor to an assignment or to a
subletting shall not relieve Subtenant (or any successor thereto) from
obtaining the express written consent of Sublessor to any further
assignment or subletting.
7. USE AND OCCUPANCY.
Subtenant covenants and agrees to use the Subleased Premises
only for the uses permitted in the Overlease and for no other purpose.
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8. ANNUAL BASE RENT AND PAYMENT DATES.
a. Six months after the later of
(i) Commencement Date or delivery of the Subleased
Premises to Subtenant ("Free Rent Period") -
12/31/2001 $472,500 per annum
In the event a portion of the Subleased Premises is
delivered for Subtenant's possession prior to the
delivery of the remainder of the Subleased Premises
for Subtenant's possession, the Free Rent Period shall
be adjusted pro rata to reflect such staggered
delivery. Solely by way of example, if possession of
the 10th Floor is delivered to Subtenant 60 days after
receipt of Landlord's Consent while possession of the
11th Floor is delivered to Subtenant 90 days
thereafter, the Free Rent period shall expire for the
10th Floor eight months from said receipt and the 11th
Floor nine months from said receipt.
1/1/2002 - 12/31/2005 $535,500 per annum
1/1/2006 - 13/31/2008 $598,500 per annum
b. Subtenant shall pay to Sublessor the Base Rent in equal
monthly installments in advance on the first day of each and every
calendar month, commencing as stated in paragraph 8(a)(i) above. If the
Expiration Date occurs on a date other than the last day of a calendar
month, the Base Rent for such calendar month shall be pro rated.
c. (i) In addition to the Base Rent, Subtenant shall pay to
Sublessor, as additional rent (hereinafter referred to as "Additional
Rent"), without limitation or exception, all other sums of money as the
same shall become due and payable by Subtenant under this Sublease and
any specific Landlord charges imposed on Subtenant which may or may not
be billed to Sublessor (e.g. - overtime service charges).
(ii) In addition to the Base Rent and all other sums
specified herein, and as part of the total rent to be paid, Subtenant
shall pay Sublessor, as additional rent, without set-off or deduction,
the following Additional Rent:
(a) Taxes. If the Real Estate Taxes
applicable to the Building for any lease year during the term of this
lease shall exceed the Real Estate Taxes applicable to the Building for
real estate tax calendar year 1998 - 99 ("Base Lease Year"), then for
said lease year the Subtenant shall pay to the Sublessor as rent (in
addition to all other rent payable) 9.22% of the amount of such excess.
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The term "Real Estate Taxes" shall mean
all the real estate taxes and assessments, special, supplemental, or
otherwise, levied, assessed or imposed by federal, state or local
governments against or upon the buildings of which the Overleased
Premises forms a part and the land upon which the Building is located.
If at any time during the term of this Sublease the methods of taxation
prevailing at the commencement of the term hereof shall be altered so
that in lieu of or as an addition to or as a substitute for the whole or
any part of the taxes, assessments, levies, impositions or charges now
levied, assessed or imposed on real estate and the improvements thereon,
there shall be levied, assessed and imposed (i) a tax, assessment, levy,
imposition or charge wholly or partially as capital, levy, or otherwise
on the rents received thereof, or (ii) a tax, assessment, levy,
imposition or charge measured by or based in whole or in part upon the
Overleased Premises and imposed upon Landlord, or (iii) a license fee
measured by the rents payable by Subtenant to Sublessor, or the part
thereof so measured or based, shall be deemed to be included
within the
term "Real Estate Taxes" for the purpose hereof. Only Landlord or
Sublessor may institute tax reduction or other proceedings to reduce the
assessed valuation of the land and/or Building.
Sublessor's failure during the sublease
term to prepare and deliver any of the foregoing tax bills, statements
or bills, or Sublessor's failure to make a demand, shall not in any way
cause Sublessor to forfeit or surrender its rights to collect any of the
foregoing items of additional rent which may have become due during the
term of this sublease. Subtenant's liability for the amounts due under
this Article shall survive the expiration of the term.
As of the Commencement Date, Sublessor
shall estimate Subtenant's annual pro rata share of Real Estate Taxes
and one-twelfth (1/12) of the amount so estimated shall be paid on the
first day of each calendar month in advance. Within one hundred twenty
(120) days after the end of each calendar year Sublessor shall furnish
Subtenant a statement in reasonable detail of the actual Real Estate
Taxes prepared in accordance with sound accounting practices and
thereupon there shall be an adjustment between Sublessor and Subtenant,
with payment to or repayment by Sublessor, as the case may require, to
the end that owner shall receive the entire amount of Tenant's annual
pro rata share for such period.
(b) Wage Rate. If the Wage Rate for any Operating Year
shall be greater than the Base Wage Rate, then Subtenant shall in the
case of such an increase pay to Sublessor as additional rent for the
Subleased Premises an amount equal to the product obtained by
multiplying the difference between the Wage Rate for such Operating Year
and the Base Wage Rate, by the Wage Rate Multiple. All capitalized terms
used in this paragraph shall have the meanings ascribed to them in the
Overlease as
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amended except that the Base Wage Rate shall be deemed to mean the Wage
Rate for the calendar year 1998, the Operating Year shall mean the
calendar year in which the term of this Sublease commences and each
subsequent calendar year in which occurs any portion of the term of this
Sublease, the Wage Rate Multiple shall equal 31,500 and Wage Rate as
used in this Sublease shall be exclusive of the monetary value or cost
of all payments or benefits of every nature and kind (including those
required to be paid by the employer directly to taxing authorities or
others because of the employment) including, but not limited to, social
security, unemployment and other similar taxes, holiday and vacation
pay, absent fund, birthdays, jury duty, medical checkup, relief time and
other paid time off, incentive pay, sick pay, accident, health and
welfare insurance programs, pension plans, guaranteed payment plans, and
supplemental unemployment benefit programs of a similar or dissimilar
nature, irrespective of whether they may be required by any Legal
Requirement or otherwise.
d. Subtenant shall pay all Base Rent in lawful money of the
United States by check drawn on a bank or trust company branch located
in the United States, delivered or mailed to the office of Sublessor, or
such other place as Sublessor may designate in writing, without any
setoff or deduction whatsoever, except that Subtenant shall pay the
first full monthly installment of Base Rent equal to $39,375.00 upon
execution hereof.
e. If Subtenant shall fail to pay when due any installment
or payment of Base Rent within ten (10) days after the date on which
such installment or payment is due, provided Subtenant has received at
least five (5) days' notice thereof (except that no such notice shall be
required more than once any lease year), Subtenant shall pay interest
thereon at the Interest Rate, as hereinafter defined, from the date when
such installment or payment shall have become due to the date of the
payment thereof, and such interest shall be deemed Additional Rent,
payable simultaneously with the installment or payment for which such
interest shall have accrued. For purposes of the Sublease, "Interest
Rate" shall mean a rate which is four (4) points over the then prime
interest rate as published in the Wall Street Journal.
9. ELECTRICITY, OTHER UTILITIES AND CLEANING.
a. To the extent required by the Overlease, Subtenant shall
pay for, at its own cost and expense, all cleaning services, and all
utilities for the Overleased Premises (including gas, air conditioning,
water, sewerage, hot water and heat, electricity on a direct meter with
the utility for the 11th Floor and 10th Floor with the exception of
1,617 rentable square feet which Subtenant agrees to pay on a submetered
basis pursuant to the terms of the Overlease as amended, light, power,
telephone and other similar services), including the cost of
installation and maintenance of meters and any additional items required
by the Subtenant from the date Subtenant takes delivery of the Subleased
Premises.
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b. Subtenant agrees to maintain, repair and replace when
reasonably necessary, at Subtenant's own cost and expense, the heating,
air conditioning, electric lighting, electrical, and plumbing equipment
serving the Subleased Premises exclusively (including light bulbs and
tubes). All heating and air conditioning equipment remains the property
of the Sublessor.
10. SIGNS.
Subject to the consent of the Landlord, Tenant shall have
the privilege of placing on the Subleased Premises such signs as it
deems necessary and proper in the conduct of its business, provided
Tenant pays all permit and license fees which may be required to be paid
for the erection and maintenance of any and all such signs, and provided
the signs are legally permitted to be installed. Tenant agrees to
exonerate, save harmless, protect, and indemnify the Sublessor and the
Landlord from and against any and all losses, damages, claims, suits, or
actions for any damage or injury to person or property caused by the
erection and maintenance of the signs or parts thereof, and insurance
coverage for the signs shall be included in the public liability policy,
which Tenant is required to furnish under paragraph 5 hereof.
11. PERMITS; COMPLIANCE WITH LAWS.
Subtenant covenants that Subtenant will not use or suffer
or permit any person to use the Subleased Premises for any unlawful
purpose and that it will obtain and maintain at its sole cost and
expense all licenses and permits from any and all governmental
authorities having jurisdiction over the Subleased Premises which may be
necessary for the conduct of Subtenant's business thereon. Subtenant
further covenants to comply with all applicable laws, resolutions,
codes, rules and regulations of any department, bureau, agency or any
governmental authority having jurisdiction over the operation,
occupancy, maintenance and use of the Subleased Premises for the purpose
set forth herein to the extent required of Sublessor under the Overlease
or arising from Subtenant's use. Subtenant will indemnify, hold harmless
and defend Sublessor (including the payment of Sublessor's reasonable
counsel fees and disbursements if Sublessor is required to appear in any
action or proceeding) from and against any claims, penalties, loss,
damage or expense imposed by reason of a violation of any applicable law
or the rules and regulations of governmental authorities having
jurisdiction thereof relating to Subtenant's use and occupancy of the
Subleased Premises.
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12. CONDITION OF SUBLEASED PREMISES.
a. Subtenant represents that Subtenant has made a thorough
examination and inspection of the Subleased Premises and is familiar
with the condition thereof. Subtenant acknowledges that this Sublease
has been made without any representations or warranties by Sublessor as
to the present or future condition of the Subleased Premises or the
appurtenances thereto or any improvements therein. It is further agreed
that Subtenant does and will accept the Subleased Premises in its "as
is" condition and state of repair as of the date hereof, subject to
reasonable wear and tear between the date of execution hereof and the
Commencement Date and Sublessor's normal moving out of the Subleased
Premises. Sublessor shall have no obligation to perform any work or
provide any materials therein. Notwithstanding the foregoing, Sublessor
shall deliver the Subleased Premises to Subtenant broom clean and
vacant.
13. ALTERATIONS OR IMPROVEMENTS.
a. Subtenant shall not make any alterations or improvements
to the Subleased Premises without the express prior written consent of
Sublessor and Landlord in accordance with the provisions of the
Overlease in each instance first obtained. Sublessor agrees not to
unreasonably withhold or delay its consent to any nonstructural
alterations if the consent of Landlord is first obtained or if such
consent is not required. All alterations or improvements shall be made,
if at all, at the sole cost and expense of Subtenant, and shall be made
solely in accordance with the provisions and requirements of the
Overlease, and with respect thereto: (i) all obligations of and all acts
or things to be performed, done or observed on "Tenant's" part
thereunder, shall be the obligations of and shall be performed, done and
observed by Subtenant; and (ii) all references contained therein to
"Landlord" shall be deemed to include and shall include Sublessor
hereunder.
b. Any personal property which may be removed without
damage to the Subleased Premises shall remain the property of Subtenant,
and, except as provided below, all other personal property and
alterations and improvements shall become the property of Sublessor at
the expiration of the term of this Sublease. At Sublessor's request,
Subtenant shall be obligated, at Subtenant's sole cost and expense, to
remove all or any part of Subtenant's movable personal property and all
or any part of the alterations and improvements made by Subtenant or for
its account, at the expiration or earlier termination of Sublease and to
restore the Subleased Premises to the condition existing as of the
commencement of occupancy by Subtenant of the Subleased Premises, except
for ordinary wear and tear, and except for alterations made with the
express prior written consent of Sublessor.
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<PAGE>
14. BROKERS.
Each party warrants and represents to the other that each
party has not engaged and or dealt with any broker, finder or any person
acting in such capacity or similar capacity in connection with this
Sublease other than Sylvan Lawrence Company, Inc. and S.L. Green
Leasing, Inc. ("Broker"). This Sublease is consummated in reliance on
the foregoing representation, and each party agrees to indemnify, hold
harmless and defend the other from any and all losses, damages, costs,
expenses, claims and liabilities arising out of any inaccuracy of said
representations, including court costs and attorneys' fees and
disbursements. Sublessor agrees to pay Broker a commission pursuant to
separate agreement.
15. INDEMNIFICATION.
a. Subtenant agrees to indemnify, hold harmless and defend
Sublessor (including the payment of Sublessor's reasonable counsel fees
and disbursements) against and from all liabilities, obligations,
damages, penalties, claims, costs, charges, and expenses, which may be
imposed or asserted against Sublessor by reason of any of the following
occurring during the term hereof.
(i) Any wrongful act or omission by Subtenant or any
of its agents, contractors, servants, employees, licensees or invitees
arising out of Subtenant's use, occupancy, control, or management of the
Subleased or Demised Premises and any part thereof;
(ii) Any work or thing done by Subtenant in or about
the Subleased or Demised Premises or any part thereof, including, but
not limited to, work done pursuant to Article 13 hereof; or
(iii) Any failure on the part of Subtenant to perform
or comply with any of the covenants, agreements, terms or conditions
contained in this Sublease or the Overlease, on Subtenant's part to be
performed, after the expiration of any applicable notice and grace
periods.
b. In the event any action or proceeding is brought against
Sublessor by reason of any of the above, Subtenant upon written notice
from and requested by Sublessor shall, at Subtenant's sole cost and
expense, resist or defend any such action or proceeding, and shall pay
any judgment or perform any decree resulting therefrom which shall have
become final, provided that Sublessor will not settle any such action
without Subtenant's express prior written consent, provided that if such
consent is not forthcoming promptly after the request therefor,
Subtenant shall post a bond in the amount of the offered settlement.
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<PAGE>
c. Sublessor agrees to indemnify, hold harmless and defend
Subtenant (including the payment of Subtenant's reasonable counsel fees
and disbursements) against and from all liabilities, obligations,
damages, penalties, claims, costs, charges and expenses, which may be
imposed or asserted against Subtenant by reason of (i) any event
occurring prior to the term hereof or (ii) any failure of Sublessor to
make timely payment of rent and additional rent under the Overlease,
except to the extent that such failure results from Subtenant's failure
to pay rent or additional rent under this Sublease.
16. DEFAULT PROVISIONS AND REMEDIES.
a. If any one or more of the following events
(hereinafter referred to as "Events of Default" ) shall occur:
(i) If this Sublease or the estate of Subtenant
hereunder shall be transferred or assigned by Subtenant to any person,
firm corporation or other entity, whether by operation of law or
otherwise, except in a manner as may be herein expressly permitted; or
(ii) If default shall be made by Subtenant in the due
and punctual payment of any installment of Base Rent or any Additional
Rent payable under this Sublease within five (5) days after receipt of
notice that such Base Rent or Additional Rent is due; or
(iii) If (A) default shall be made by Subtenant in the
observance or performance of any covenant, agreement, term or condition,
other than those referred to in the foregoing subparagraphs (i) and (ii)
of this Section 16(a), and Subtenant shall fail to remedy such default
within ten (10) days after notice by Sublessor to Subtenant of such
default, unless (B) such default is of such a nature that it cannot be
completely remedied within such 10-day period, in which case it must be
remedied within such time after the date of the giving of said notice as
shall reasonably be necessary; or
(iv) If Subtenant shall abandon the Subleased Premises
or not perform its obligations hereunder; or
(v) If at any time during the term hereof, there shall
be filed by Subtenant in any court, pursuant to any statute, either of
the United States or any state, a petition in bankruptcy or insolvency,
or for the appointment of a receiver or Subtenant otherwise enters into
an arrangement under the United States Bankruptcy Act or under any law
of similar import; or
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<PAGE>
(vi) If at any time during the term hereof, there
shall be filed against Subtenant or any assignee of Subtenant in any
court pursuant to any statute either of the United States or of any
state a petition in bankruptcy or insolvency, or for reorganization, or
for the appointment of a receiver or trustee of or for Subtenant's
property, and if within sixty (60) days after the commencement of any
such proceeding against Subtenant the same shall not have been stayed or
dismissed; or
(vii) If any default declared by the Landlord under
the Overlease as to which there is no grace period shall be due to any
act or omission of Subtenant.
In any such event, Sublessor may serve a written notice of
cancellation and termination of this Sublease, and upon the expiration
of five (5) days from the receipt or attempted delivery thereof, this
Sublease and the term hereof shall end and expire as fully and
completely as if the date of expiration of such five (5) day period were
the day herein definitely fixed for the end and expiration of this
Sublease and the term hereof, and Subtenant shall then quit or surrender
to Sublessor the Subleased Premises and each and every part thereof, but
Subtenant shall remain liable for damages and all other sums payable
pursuant to the provisions of Section 16(b) below.
b. If this Sublease and the term hereof shall expire and
terminate as provided in Section 16(a) above:
(i) Subtenant will quit and peacefully surrender the
Subleased Premises to Sublessor, and Sublessor, upon or at any time
after any such expiration or termination, may without further notice,
enter upon and re-enter the Subleased Premises and possess and repossess
itself thereof, by force, summary proceedings, ejectment or otherwise,
may dispossess Subtenant and remove Subtenant and all other persons and
property from the Subleased Premises and may have, hold and enjoy the
Subleased Premises and the right to receive all rental income of and
from the same.
(ii) At any time or from time to time after any such
expiration or termination, Sublessor may relet the Subleased Premises or
any part thereof, in the name of Sublessor or otherwise, for such term
or terms (which may be greater or less than the period which would
otherwise have constituted the balance of the term of this Sublease) and
on such conditions (which may include concessions or free rent) as
Sublessor in its absolute discretion may determine, and Sublessor may
collect and receive the rent therefor.
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<PAGE>
(iii) No such expiration or termination of this
Sublease shall relieve Subtenant of Subtenant's liability and
obligations which shall survive any such expiration or termination. In
case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, (b) Sublessor may re-let the Subleased Premises or any part
or parts thereof, and agrees to use its best efforts to do so, either in
the name of Sublessor or otherwise, for a term or terms, which may at
Sublessor's option be less than or exceed the period which would
otherwise have constituted the balance of the term of this Sublease and
may grant concessions or free rent or charge a higher rental than that
in this Sublease, and/or (c) Subtenant or the legal representatives of
Subtenant shall also pay Sublessor as liquidated damages for the failure
of Subtenant to observe and perform said Subtenant's covenants herein
contained, any deficiency between the rent hereby reserved and/or
covenanted to be paid and the net amount, if any, of the rents collected
on account of the lease or leases of the Subleased Premises for each
month of the period which would otherwise have constituted the balance
of the term of this Sublease. The failure of Sublessor to re-let the
premises or any part or parts thereof shall not release or affect
Subtenant's liability for damages. In computing such liquidated damages
there shall be added to the said deficiency such reasonable expenses as
Sublessor may incur in connection with re-letting, such as legal
expenses, attorneys' fees, brokerage, advertising and for keeping the
Subleased Premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly
installments by Subtenant on the rent day specified in this Sublease and
any suit brought to collect the amount of the deficiency for any month
shall not prejudice in any way the rights of Sublessor to collect the
deficiency of any subsequent month by a similar proceeding. Sublessor,
in putting the Subleased Premises in good order or preparing the same
for re-rental may, at Sublessor's option, make such alterations,
repairs, replacements, and/or decorations in the Subleased Premises as
Sublessor, in Sublessor's reasonable judgment, considers advisable and
necessary for the purpose of re-letting the demised premises, and the
making of such alterations, repairs, replacements, and/or decorations
shall not operate or be construed to release Subtenant from liability
hereunder as aforesaid. Sublessor shall in no event be liable in any way
whatsoever for failure to re-let the demised premises. Sublessor shall
in no event be liable in any way whatsoever for failure to re-let the
Subleased Premises, or in the event that the Subleased Premises are
re-let, for failure to collect the rent thereof under such re-letting,
and in no event shall Subtenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Subtenant to
Sublessor hereunder. In the event of a breach or threatened breach by
Subtenant or Sublessor of any of the covenants or provisions hereof,
Sublessor and Subtenant shall
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<PAGE>
have the right of injunction and the right to invoke any remedy allowed
at law or in equity as if re-entry, summary proceedings and other
remedies were not herein provided for. Mention in this Sublease of any
particular remedy, shall not preclude Sublessor or Subtenant from any
other remedy, in law or in equity. Subtenant hereby expressly waives any
and all rights of redemption granted by or under any present or future
laws in the event of Subtenant being evicted or dispossessed for any
cause, or in the event of Sublessor obtaining possession of Subleased
Premises, by reason of the violation by Subtenant of any of the
covenants and conditions of this lease, or otherwise.
(iv) If Subtenant shall abandon the Subleased Premises
or not perform its obligations hereunder; or
(v) If at any time during the term hereof, there shall
be filed by Subtenant in any court, pursuant to any statute, either of
the United States or any state, a petition in bankruptcy or insolvency,
or for the appointment of a receiver or Subtenant otherwise enters into
an arrangement under the United States Bankruptcy Act or under any law
of similar import; or
(vi) If at any time during the term hereof, there
shall be filed against Subtenant or any assignee of Subtenant in any
court pursuant to any statute either of the United States or of any
state a petition in bankruptcy or insolvency, or for reorganization, or
for the appointment of a receiver or trustee of or for Subtenant's
property, and if within sixty (60) days after the commencement of any
such proceeding against Subtenant the same shall not have been stayed or
dismissed; or
(vii) If any default declared by the Landlord under
the Overlease as to which there is no grace period shall be due to any
act or omission of Subtenant.
In any such event, Sublessor may serve a written notice of
cancellation and termination of this Sublease, and upon the expiration
of five (5) days from the receipt or attempted delivery thereof, this
Sublease and the term hereof shall end and expire as fully and
completely as if the date of expiration of such five (5) day period were
the day herein definitely fixed for the end and expiration of this
Sublease and the term hereof, and Subtenant shall then quit or surrender
to Sublessor the Subleased Premises and each and every part thereof, but
Subtenant shall remain liable for damages and all other sums payable
pursuant to the provisions of Section 16(b) below.
b. If this Sublease and the term hereof shall expire and
terminate as provided in Section 16(a) above:
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<PAGE>
(i) Subtenant will quit and peacefully surrender the
Subleased Premises to Sublessor, and Sublessor, upon or at any time
after any such expiration or termination, may without further notice,
enter upon and re-enter the Subleased Premises and possess and repossess
itself thereof, by force, summary proceedings, ejectment or otherwise,
may dispossess Subtenant and remove Subtenant and all other persons and
property from the Subleased Premises and may have, hold and enjoy the
Subleased Premises and the right to receive all rental income of and
from the same.
(ii) At any time or from time to time after any such
expiration or termination, Sublessor may relet the Subleased Premises or
any part thereof, in the name of Sublessor or otherwise, for such term
or terms (which may be greater or less than the period which would
otherwise have constituted the balance of the term of this Sublease) and
on such conditions (which may include concessions or free rent) as
Sublessor in its absolute discretion may determine, and Sublessor may
collect and receive the rent therefor.
(iii) No such expiration or termination of this
Sublease shall relieve Subtenant of Subtenant's liability and
obligations which shall survive any such expiration or termination. In
case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, (b) Sublessor may re-let the Subleased Premises or any part
or parts thereof, and agrees to use its best efforts to do so, either in
the name of Sublessor or otherwise, for a term or terms, which may at
Sublessor's option be less than or exceed the period which would
otherwise have constituted the balance of the term of this Sublease and
may grant concessions or free rent or charge a higher rental than that
in this Sublease, and/or (c) Subtenant or the legal representatives of
Subtenant shall also pay Sublessor as liquidated damages for the failure
of Subtenant to observe and perform said Subtenant's covenants herein
contained, any deficiency between the rent hereby reserved and/or
covenanted to be paid and the net amount, if any, of the rents collected
on account of the lease or leases of the Subleased Premises for each
month of the period which would otherwise have constituted the balance
of the term of this Sublease. The failure of Sublessor to re-let the
premises or any part or parts thereof shall not release or affect
Subtenant's liability for damages. In computing such liquidated damages
there shall be added to the said deficiency such reasonable expenses as
Sublessor may incur in connection with re-letting, such as legal
expenses, attorneys' fees, brokerage, advertising and for keeping the
Subleased Premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly
installments by Subtenant on the rent day specified in this Sublease and
any
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<PAGE>
suit brought to collect the amount of the deficiency for any month shall
not prejudice in any way the rights of Sublessor to collect the
deficiency of any subsequent month by a similar proceeding. Sublessor,
in putting the Subleased Premises in good order or preparing the same
for re-rental may, at Sublessor's option, make such alterations,
repairs, replacements, and/or decorations in the Subleased Premises as
Sublessor, in Sublessor's reasonable judgment, considers advisable and
necessary for the purpose of re-letting the demised premises, and the
making of such alterations, repairs, replacements, and/or decorations
shall not operate or be construed to release Subtenant from liability
hereunder as aforesaid. Sublessor shall in no event be liable in any way
whatsoever for failure to re-let the demised premises. Sublessor shall
in no event be liable in any way whatsoever for failure to re-let the
Subleased Premises, or in the event that the Subleased Premises are
re-let, for failure to collect the rent thereof under such re-letting,
and in no event shall Subtenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Subtenant to
Sublessor hereunder. In the event of a breach or threatened breach by
Subtenant or Sublessor of any of the covenants or provisions hereof,
Sublessor and Subtenant shall have the right of injunction and the right
to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in
this Sublease of any particular remedy, shall not preclude Sublessor or
Subtenant from any other remedy, in law or in equity. Subtenant hereby
expressly waives any and all rights of redemption granted by or under
any present or future laws in the event of Subtenant being evicted or
dispossessed for any cause, or in the event of Sublessor obtaining
possession of Subleased Premises, by reason of the violation by
Subtenant of any of the covenants and conditions of this lease, or
otherwise.
(iv) To the extent permitted by applicable law,
Subtenant hereby waives service of any notice of intention to re-enter
provided for in any statute, law or regulation, and the service of
notice of the institution of legal proceedings to that end. To the
extent permitted by applicable law, Sublessor and Subtenant hereby waive
trial by jury in any action, proceeding or counterclaim brought by
either against the other on any matter whatsoever arising out of or in
any way connected with this Sublease, the relationship of Sublessor and
Subtenant, Subtenant's use or occupancy of the Subleased Premises,
including any claim of injury or damage. The terms "enter", "re-enter",
"entry" and "reentry" as used in this Sublease are not restricted to
their technical, legal meanings. The provisions of this Section shall
survive the termination of this Sublease.
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(v) The failure of Sublessor or Subtenant, as the case
may be, to insist in any one or more instances upon the strict
performance of any one or more of the obligations of this Sublease, or
to exercise any election herein contained, shall not be construed as a
waiver or relinquishment for the future of the performance of such one
or more obligations of this Sublease or of the right to exercise such
election, but the same shall continue and remain in full force and
effect with respect to any subsequent breach, act or omission. No
covenant, agreement, term or condition of this Sublease to be performed
or complied with by Sublessor or Subtenant, as the case may be, and no
breach thereof, shall be waived, altered or modified, and no attempt
shall be effective to change, modify, waive, release, discharge,
terminate or effect an abandonment of this Sublease, in whole or in
part, unless such waiver, alteration, modification, charge, release,
discharge, termination, abandonment or executory agreement is in
writing, refers expressly to this Sublease, and is signed by the party
against whom enforcement thereof is sought.
(vi) In the event of any breach or threatened breach
by Subtenant of any of the covenants, agreements, terms or conditions
contained in this Sublease, Sublessor shall be entitled to enjoin such
breach or threatened breach and shall have the right to invoke any right
and remedy allowed at law or in equity or by statute or otherwise as
though re-entry, summary proceedings, and other remedies were not
provided for in this Sublease.
(vii) Each right and remedy of Sublessor provided for
in this Sublease or in the Overlease shall be cumulative and shall be in
addition to every other right or remedy provided for in this Sublease or
Overlease as now or hereafter existing at law or in equity or by statute
or otherwise, and the exercise or beginning of the exercise by Sublessor
of any one or more of the rights or remedies provided for in this
Sublease or in the Overlease or now or hereafter existing at law or in
equity or by statute otherwise, shall not preclude the simultaneous or
later exercise by Sublessor of any or all other rights or remedies
provided for in this Sublease or in the Overlease now or hereafter
existing at law or in equity or by statute or otherwise.
(viii) Subtenant hereby agrees that, in the event
Sublessor commences a summary proceeding for possession of the Subleased
Premises, Subtenant will not interpose any permissive counterclaim of
any nature or description whatsoever in such proceeding, except that
Subtenant shall not be estopped in such action from alleging any
affirmative defense Subtenant elects to claim.
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17. REPARIS.
Subtenant shall, throughout the term hereof, take good care
of the Subleased Premises and the fixtures, appurtenances and personal
property of Subtenant therein, and make all repairs thereto which would
otherwise be required of Sublessor under the Overlease after the date
hereof, ordinary wear and tear excepted. In addition, all damage or
injury to the Subleased Premises or the Building caused by or resulting
from the use of the Subleased Premises by Subtenant, Subtenant's
tenants, employees, invitees or licensees, shall be repaired promptly by
Subtenant at Subtenant's sole cost and expense, to the reasonable
satisfaction of Sublessor.
18. WAIVER.
Subtenant, on its own behalf and on behalf of all persons
claiming through or under Subtenant, including all creditors, does
hereby waive any and all rights and privileges, so far as is permitted
by law, which Subtenant and all such persons might otherwise have under
any present or future law (a) to redeem the Subleased Premises, (b) to
re-enter or repossess the Subleased Premises, or (c) to restore the
operation of this Sublease after Subtenant shall have been dispossessed
by a judgment or by warrant of any court or judge; or after any re-entry
by Sublessor, or after any expiration or termination of this Sublease
and the term, whether such dispossess, re-entry, expiration or
termination shall be by operation of law or pursuant to the provisions
of this Sublease. The words "re-enter," "re-entry" and "re-entered" as
used in this Lease shall not be deemed to be restricted to their
technical legal meanings.
19. ANTICIPATORY BREACH.
In the event of any breach or threatened breach by
Subtenant or any persons claiming through or under Subtenant of any of
the agreements, terms, covenants or conditions contained in this
Sublease, Sublessor shall be entitled to enjoin such breach or
threatened breach and shall have the right to invoke any right and
remedy allowed at law or in equity or by statute or otherwise as if
re-entry, summary proceedings or other specific remedies were not
provided for in this Sublease.
20. NOTICES.
a. Any notice, statement, demand or other communication
required or permitted to be given, rendered or made by either party to
the other, pursuant to this Sublease or pursuant to any applicable law
or requirement of public authority, shall be in writing (whether or not
so stated
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elsewhere in this Sublease) and shall be given, rendered or made by
overnight courier services such as Federal Express, providing for a
receipt on delivery, or by certified or registered mail, return receipt
requested, addressed to the other party at the address hereinabove set
forth, and shall be deemed to have been given, rendered or made on the
second (2nd) business day following the day so mailed or sent by
overnight courier services, unless mailed outside of the State of New
York, in which case it shall be deemed to have been given, rendered or
made on the earlier of actual receipt, or the expiration of the normal
period of time for delivery of mail from the post office of origin to
the post office of destination. Either party may, by notice as
aforesaid, designate a different address or addresses for notice,
statements, demands or other communications intended for it.
b. If there occurs any interruption of registered mail
service lasting more than five (5) consecutive business days, notices
may be given by telegram, overnight courier service, or personal
delivery, but shall not be effective until personally received by an
executive officer of a party which is a corporation, or a managing
partner of a party which is a partnership or a principal of any other
entity.
21. END OF TERM.
Subtenant shall surrender the Subleased Premises to
Sublessor at the expiration or sooner termination of this Sublease in
the same order and condition as delivered to Subtenant, except for
reasonable wear and tear, damage by the elements and damages caused by
perils and condemnation excepted, and Subtenant shall remove all of its
property from the Subleased Premises. Sublessor may require Subtenant to
remove all or a portion of any structural alterations, improvements or
additions in and to the Subleased Premises made by Subtenant without
Sublessor's express prior written approval, to repair any damage caused
by such removal to Sublessor's satisfaction and to restore the Subleased
Premises to the condition existing as of the commencement of occupancy
by Subtenant of the Subleased Premises, excepting therefrom reasonable
wear and tear.
22. SECURITY.
Subtenant has deposited with Sublessor the sum of
$178,400.00 as security ("Security Deposit") for the faithful
performance and observance by Subtenant of the terms, provisions and
conditions of this Sublease; it is agreed that in the event Subtenant
defaults in respect of any of the terms; provisions and conditions of
this Sublease, including, but not limited to, the payment of rent and
additional rent, Sublessor may use, apply or retain the whole or any
part of the security so deposited to the extent required for the payment
of any rent and additional rent or any other sum as to which Subtenant
is in default or for any
Page 25 of 28
<PAGE>
sum which Sublessor may expend or may be required to expend by reason of
Subtenant's default in respect of any of the terms, covenants and
conditions of this Sublease, including but not limited to, any damages
or deficiency in the re-letting of the Subleased Premises, whether such
damages or deficiency accrued before or after summary proceedings or
other re-entry by Sublessor. In the event that Subtenant shall fully and
faithfully comply with all of the terms, provisions, covenants and
conditions of this Sublease, Sublessor shall: (i) return a portion of
the Security Deposit to Sublessee equal to the sum of $89,250.00 not
later than July 1, 2003 and (ii) the security shall be returned to
Subtenant after the date fixed as the end of the Sublease and after
delivery of entire possession of the Subleased Premises to Sublessor. In
the event of a sale of the land and building or leasing of the building,
of which the Subleased Premises form a part, Sublessor shall have the
right to transfer the security to the vendee or lessee and Sublessor
shall thereupon be released by Subtenant from all liability for the
return of such security; and Subtenant agrees to look to the new
Sublessor solely for the return of said security, and it is agreed that
the provisions hereof shall apply to every transfer or assignment made
of the security to a new Sublessor. Subtenant further covenants that it
will not assign or encumber or attempt to assign or encumber the monies
deposited herein as security and that neither Sublessor nor its
successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment or attempted encumbrance. In lieu of a
cash security deposit, Subtenant may deliver the Security Deposit to
Sublandlord in the form of a clean, irrevocable, non-documentary and
unconditional letter of credit in the amount of the Security Deposit
(the "Letter of Credit") issued by and drawable upon any commercial bank
which is a member of the New York Clearing House Association or other
bank satisfactory to Sublandlord, trust company, national banking
association or savings and loan association with offices for banking
purposes in the City of New York (the "Issuing Bank"), which has
outstanding unsecured, uninsured and unguaranteed), indebtedness, or
shall have issued a letter of credit or other credit facility that
constitutes the primary security for any outstanding indebtedness (which
is otherwise uninsured and unguaranteed, that is then rated, without
regard to qualification of such rating by symbols such as "+" or "-" or
numerical notation, "Aa" or better by Moody's Investors Service and "AA:
or better by Standard & Poor's Rating Service, and has combined capital,
surplus and undivided profits of not less than $500,000,000. The Letter
of Credit shall (a) name Sublandlord as beneficiary, (b) be in the
amount of the Security Deposit, (c) have a term of not less than one
year, (d) permit multiple drawings, (e) be fully transferable by
Sublandlord without the payment of any fees or charges by Sublandlord,
and (f) otherwise be in form and content satisfactory to Sublandlord. If
upon any transfer of the Letter of Credit, any fees or charges shall be
so imposed, then such fees or charges shall be payable solely by
Subtenant and the Letter of Credit shall so specify. The Letter
Page 26 of 28
<PAGE>
of Credit shall provide that it shall be deemed automatically renewed,
without amendment, for consecutive periods of one year each thereafter
during the term of this sublease unless the Issuing Bank sends a notice
(the "Non-Renewal Notice") to Sublandlord by certified mail, return
receipt requested, not less than 45 days next preceding the then
expiration date of the Letter of Credit stating that the Issuing Bank
has elected not to renew the Letter of Credit. Sublandlord shall have
the right, upon receipt of the Non-Renewal Notice, to draw the full
amount of the Letter of Credit, by sight draft on the Issuing Bank, and
shall thereafter hold or apply the cash proceeds of the Letter of Credit
pursuant to the terms of this Article. The Letter of Credit shall state
that drafts drawn under and in compliance with the terms of the Letter
of Credit will be duly honored upon presentation to the Issuing Bank at
an office location in Manhattan. The Letter of Credit shall be subject
in all respects to the Uniform Customs and Practice for Documentary
Credits (1993 revision), International Chamber of Commerce Publication
No. 500.
23. MISCELLANEOUS.
a. Section headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
b. This Agreement shall be interpreted and given effect in
accordance with the laws of the State of New York.
c. This Agreement expresses the whole agreement between the
parties, there being no representation, warranty or other agreement not
herein expressly set forth or provided for. No change, modification of
or addition to this Agreement shall be valid unless in writing and
signed by each of the parties hereto.
d. Each party hereto agrees that it will execute and
deliver such further instruments and will take such further action as
may be necessary to discharge or perform or carry out any of their
respective obligations and agreements hereunder. Each party hereto
represents to the other that each has full authority to enter into this
Sublease.
e. This Sublease shall not be recorded in the land records
of the County of New York.
f. Nothing contained in this Sublease shall be deemed or
construed to create any relationship between the parties hereto other
than sublandlord and subtenant, and the parties hereby acknowledge that
they are not, and shall not be deemed by this Sublease to be partners or
joint venturers.
Page 27 of 28
<PAGE>
g. The incorporation of the Overlease in this Sublease is
intended to clarify the rights of Landlord to which this Sublease is
subject and the limitations imposed on Subtenant's use and occupancy of
the Demised Premises and not to establish rights or obligations or
Sublessor or Subtenant which are not provided for in this Sublease.
h. This Sublease is subject to the consent of the Landlord
pursuant to the terms of the Overlease of the terms of this Sublease and
Sublessee's plans for the initial alterations of the Subleased Premises
as set forth in the plans annexed hereto as Exhibit B and made part
hereof ("Landlord Consent"). In the event the conditions contemplated in
this paragraph are not met, Sublessor shall promptly return to Subtenant
any monies paid hereunder and this Sublease and the rights and
obligations of the parties hereunder shall be terminated. If Landlord
Consent is not received within 30 days from the date of this Sublease,
Subtenant may cancel this Sublease by notice given after the expiration
of such 30-day period and prior to the granting of such consent, in
which case Sublessor shall promptly return to Subtenant any monies paid
hereunder and this Sublease and the rights and obligations of the
parties hereunder shall be terminated.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands this day of July, 1998.
RSL COM U.S.A, INC.
By: /S/
----------------------------------
Name: Edmond J. Thomas
Title: President
COMPUTER OUTSOURCING SERVICES, INC.
By: /S/
----------------------------------
Name: Zach Lonstein
Title: Chairman
<PAGE>
EXHIBIT A
-----------
Overlease
(see annexed Overlease)
<PAGE>
EXHIBIT B
-----------
Sublessee's Plans
(See Annexed)
AGREEMENT OF SUBLEASE
between
NMU PENSION PLAN,
Sublandlord
and
COMPUTER OUTSOURCING SERVICES, INC.,
Subtenant
Premises:
---------
Portion of the Tenth (10th) Floor
360 West 31st Street
New York, New York
PROSKAUER ROSE LLP
1585 Broadway
New York, New York 10036
(212) 969-3000
<PAGE>
TABLE OF CONTENTS
1. Subleasing of Premises ................................... 1
2. Term ..................................................... 1
3. Fixed Rent and Additional Rent ........................... 2
4. Subordination to and Incorporation of the Lease .......... 6
5. Alterations .............................................. 7
6. Covenants with Respect to the Lease ...................... 7
7. Services and Repairs ..................................... 8
8. Consents ................................................. 9
9. Termination of Lease ..................................... 10
10. Sublease, Not Assignment ................................. 10
11. Damage, Destruction, Fire and other Casualty; Condemnation 11
12. No Waivers ............................................... 11
13. Notices .................................................. 11
14. Indemnity ................................................ 12
15. Broker ................................................... 13
16. Condition of the Premises ................................ 13
17. Consent of the Prime Landlord to this Sublease ........... 13
18. Assignment, Subletting and Mortgaging .................... 14
19. Partnership Subtenant .................................... 15
20. Miscellaneous ............................................ 16
Exhibit "A"- Floor Plan of Subleased Premises
- i -
<PAGE>
AGREEMENT OF SUBLEASE (this "Sublease"), made as of the 21st day
of September, 1998, between NMU PENSION PLAN, an unincorporated
asociation, having an office at 360 West 31st Street, New York, New York
10019 ("Sublandlord"), and COMPUTER OUTSOURCING SERVICES, INC., a New
York corporation, having an office at 360 West 31st Street, New York,
New York 10019 ("Subtenant").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, by Agreement of Lease (the "Initial Lease"), dated
March, 1994, between G-H-G Realty Company (the "Prime Landlord"), as
landlord, and Sublandlord, as tenant, the Prime Landlord leased to
Sublandlord certain premises situated on the entire third (3rd) floor, a
portion of the tenth (10th) floor, and a portion of the basement level
(collectively, the "Initial Premises") as more particularly described in
the Lease and located at the building (the "Building") located at 360
West 31st Street, New York, New York; and
WHEREAS, by Amendment of Lease (the "First Amendment"), dated
November 15, 1994, between Prime Landlord, as landlord, and Sublandlord,
as tenant, the Prime Landlord leased to Sublandlord certain premises
situated on an additional portion of the tenth (10th) floor (the
"Additional Tenth Floor Premises") of the Building (collectively, the
Initial Lease and the First Amendment are referred to herein as the
Lease); and
WHEREAS, Sublandlord desires to sublease to Subtenant (i) that
portion of the Initial Premises consisting of a portion of the tenth
(10th) floor of the Building, and (ii) the Additional Tenth Floor
Premises (collectively, the "Subleased Premises"), as more particularly
described on Exhibit A attached hereto and made a part hereof, and
Subtenant desires to hire the Subleased Premises from Sublandlord on the
terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, it is mutually agreed as follows:
1. SUBLEASING OF PREMISES. Sublandlord hereby subleases to
Subtenant, and Subtenant hereby hires from Sublandlord, the Subleased
Premises, upon and subject to the terms and conditions hereinafter set
forth.
2. TERM. The term (the "Term") of this Sublease shall commence
on October 9, 1998 (the "Commencement Date") and shall terminate on
December 31, 2009 (the "Expiration Date"), or on such earlier date upon
which the Term shall expire or be canceled or terminated pursuant to any
of the conditions or covenants of this Sublease or pursuant to law.
<PAGE>
3. FIXED RENT AND ADDITIONAL RENT
3.1. Subtenant shall pay to Sublandlord, commencing on April 9,
1999 (the "Rent Commencement Date"), in currency which at the time of
payment is legal tender for public and private debts in the United
States of America, as fixed rent ("Fixed Rent") during the Term, three
(3) business days prior to the first (1st) day of each month during the
Term (it being agreed that since the Rent Commencement Date occurs on a
date other than the first (1st) day of a calendar month, the Fixed Rent
with respect to the month of April, 1999 shall be pro-rated on a per
diem basis)
(i) for the period commencing on the Rent Commencement Date
and ending on September 30, 1999, the sum of Ninety-Three Thousand Five
Hundred Eighty-Eight Dollars ($93,588.00) per annum, payable in equal
monthly installments of Seven Thousand Seven Hundred Ninety-Nine Dollars
($7,799.00),
(ii) for the period commencing on October 1, 1999 and
ending on September 30, 2000, the sum of Ninety-Six Thousand Four
Hundred Twenty-Four Dollars ($96,424.00) per annum, payable in equal
monthly installments of Eight Thousand Thirty-Five and 33/100 Dollars
($8,035.33),
(iii) for the period commencing on October 1, 2000 and
ending on September 30, 2001, the sum of Ninety-Nine Thousand Three
Hundred Sixteen and 72/100 Dollars ($99,316.72) per annum, payable in
equal monthly installments of Eight Thousand Two Hundred Seventy-Six and
39/100 Dollars ($8,276.39),
(iv) for the period commencing on October 1, 2001 and
ending on September 30, 2002, the sum of One Hundred Two Thousand Three
Hundred Twenty-Two and 88/100 Dollars ($102,322.88) per annum, payable
in equal monthly installments of Eight Thousand Five Hundred Twenty-Six
and 91/100 Dollars ($8,526.91),
(v) for the period commencing on October 1, 2002 and ending
on September 30, 2003, the sum of One Hundred Five Thousand Four Hundred
Forty-Two and 48/100 Dollars ($105,442.48) per annum, payable in equal
monthly installments of Eight Thousand Seven Hundred Eighty-Six and
87/100 Dollars ($8,786.87),
(vi) for the period commencing on October 1, 2003 and
ending on September 30, 2004, the sum of One Hundred Eight Thousand Six
Hundred Eighteen and 80/100 ($108,618.80) per annum, payable in equal
monthly installments of Nine Thousand Fifty-One and 57/100 Dollars
($9,051.57),
Page 2 of 17
<PAGE>
(vii) for the period commencing on October 1, 2004 and
ending on September 30, 2005, the sum of One Hundred Eleven Thousand
Nine Hundred Eight and 56/100 Dollars ($111,908.56) per annum, payable
in equal monthly installments of Nine Thousand Three Hundred Twenty-Five
and 71/100 Dollars ($9,325.71),
(viii) for the period commencing on October 1, 2005 and
ending on September 30, 2006, the sum of One Hundred Fifteen Thousand
Three Hundred Eleven and 76/100 Dollars ($115,311.76) per annum, payable
in equal monthly installments of Nine Thousand Six Hundred Nine and
31/100 Dollars ($9,609.31),
(ix) for the period commencing on October 1, 2006 and
ending on September 30, 2007, the sum of One Hundred Eighteen Thousand
Seven Hundred Seventy-One and 68/100 Dollars ($118,771.68) per annum,
payable in equal monthly installments of Nine Thousand Eight Hundred
Ninety-Seven and 64/100 Dollars
($9,897.64),
(x) for the period commencing on October 1, 2007 and ending
on September 30, 2008, the sum of One Hundred Twenty- Two Thousand Three
Hundred Forty-Five and 04/100 Dollars ($122,345.04) per annum, payable
in equal monthly installments of Ten Thousand One Hundred Ninety-Five
and 42/100 Dollars ($10,195.42),
(xi) for the period commencing on October 1, 2008 and
ending on September 30, 2009, the sum of One Hundred Twenty- Six
Thousand Thirty-One and 84/100 Dollars ($126,031.84) per annum, payable
in equal monthly installments of Ten Thousand Five Hundred Two and
65/100 Dollars ($10,502.65), and
(xii) for the period commencing on October 1, 2009 and
ending the Expiration Date, the sum of One Hundred Twenty- Nine Thousand
Eight Hundred Thirty-Two and 08/100 Dollars ($129,832.08) per annum,
payable in equal monthly installments of Ten Thousand Eight Hundred
Nineteen and 34/100 Dollars
($10,819.34).
3.2. (i) For each Tax Year during the Term, Subtenant shall pay
to Sublandlord as and for additional rent an amount (the "Sublease Tax
Payment") equal to nineteen and one-half percent (19.5%) ("Subtenant's
Percentage") of the amount by which the additional basic rental with
respect to Taxes payable by Sublandlord for such Tax Year, as computed
by the Prime Landlord pursuant to an Escalation Statement delivered to
Sublandlord in accordance with the Lease, exceeds the additional basic
rental with respect to Taxes payable by Sublandlord for the Tax Year
commencing July 1, 1998 and ending June 30, 1999 (the "Sublease Base Tax
Year").
Page 3 of 17
<PAGE>
(ii) At any time during or after the Term, Sublandlord
shall render to Subtenant a written statement or statements (a "Sublease
Tax Statement"), together with a reproduced copy of the Escalation
Statement received from the Prime Landlord for the current or next
succeeding Tax Year (if theretofore issued by the Prime Landlord),
showing (i) a comparison of the additional basic rental with respect to
Taxes payable by Sublandlord for the Tax Year with the additional basic
rental with respect to Taxes for the Sublease Base Tax Year and (ii) the
amount of the Sublease Tax Payment resulting from such comparison.
Subtenant shall pay to Sublandlord, in twelve (12) equal monthly
installments, in advance, five (5) business days prior to the date upon
which the corresponding payment is due and payable to the Prime Landlord
by Sublandlord, one-twelfth (1/12th) of the Sublease Tax Payment shown
on the Sublease Tax Statement, except that if at the time Sublandlord
delivers a Sublease Tax Statement to Subtenant, the Sublease Tax Payment
shall have accrued for a period prior to the delivery of the Sublease
Tax Statement, Subtenant shall pay such accrued portion of the Sublease
Tax Payment in full within fifteen (15) days after receipt of such
Sublease Tax Statement. If Sublandlord shall be required to pay any
additional basic rental with respect to Taxes on any other date or dates
than as presently required by the Lease, then the due date of the
installments of the Tax Payment shall be correspondingly accelerated or
revised so that the Sublease Tax Payment (or the applicable installment
thereof) is due five (5) days prior to the date the corresponding
payment is due to the Prime Landlord. Sublandlord's failure to render a
Sublease Tax Statement during or with respect to any Tax Year shall not
prejudice Sublandlord's right to render a Sublease Tax Statement during
or with respect to any subsequent Tax Year, and shall not eliminate or
reduce Subtenant's obligation to make Sublease Tax Payments pursuant to
this Section 3.2 for such Tax Year.
(iii) The Sublease Tax Payment shall be prorated for any
partial Tax Year in which the Term shall commence or end. If a Sublease
Tax Statement is furnished to Subtenant after the commencement of the
Tax Year in respect of which such Sublease Tax Statement is rendered,
Subtenant shall, within fifteen (15) days thereafter, pay to Sublandlord
an amount equal to the amount of any underpayment of the Sublease Tax
Payment with respect to such Tax Year and, in the event of an
overpayment, Sublandlord shall either pay to Subtenant or, at
Sublandlord's election, credit against the next installments of Fixed
Rent and payments of additional rent, the amount of Subtenant's
overpayment.
(iv) Only the Prime Landlord shall be eligible to institute
tax reduction or other proceedings to reduce the assessed valuation of
the Building. Should the Prime Landlord be successful in any such
reduction proceedings and obtain a rebate for any Tax Year for which
Subtenant has paid installments of the Tax Payment, Sublandlord shall
either pay to Subtenant, or at Sublandlord's election, credit against
the next installments of the Fixed Rent and payments of additional rent
payable under this
Page 4 of 17
<PAGE>
Sublease, an amount equal to Subtenant's Percentage of any such rebate
for which Sublandlord shall receive a credit from the Prime Landlord. In
the event that the assessed valuation which had been utilized in
computing the Taxes payable for the Sublease Base Tax Year is reduced
(as a result of settlement, final determination or legal proceedings or
otherwise) then (x) the Taxes for the Sublease Base Tax Year shall be
retroactively adjusted to reflect such reduction, (y) the installments
of Sublease Tax Payments shall be increased accordingly, and (z) all
retroactive additional rent resulting from such adjustment shall be
payable by Subtenant within seven (7) days after the rendition of a bill
therefor.
3.3. If Subtenant shall fail to pay when due any installment of
Fixed Rent or additional rent, Subtenant shall pay to Sublandlord, in
addition to such installment of Fixed Rent or additional rent, as the
case may be, as a late charge and as additional rent, a sum equal to
interest at the Applicable Rate (hereinafter defined) per annum on the
amount unpaid, commencing from the date such payment was due to and
including the date of payment. The "Applicable Rate" shall be the rate
equal to the lesser of (a) two (2) percentage points above the then
current rate publicly announced by The Chase Manhattan Bank, N.A. or its
successor as its "base rate" (or such other term as may be used by The
Chase Manhattan Bank, N.A. from time to time for the rate presently
referred to as its "base rate") or (b) the maximum rate permitted by
applicable law,
3.4. All Fixed Rent, additional rent, and all other costs,
charges and sums payable by Subtenant hereunder (collectively,
"Rental"), shall constitute rent under this Sublease, and shall be
payable to Sublandlord at its address as set forth in Article 13 hereof,
unless Sublandlord shall otherwise so direct in writing.
3.5. Subtenant shall promptly pay the Rental as and when the
same shall become due and payable without set-off, offset or deduction
of any kind whatsoever, except as expressly set forth herein, and, in
the event of Subtenant's failure to pay the same when due (subject to
grace periods provided herein), Sublandlord shall have all of the rights
and remedies provided for herein or at law or in equity, in the case of
non-payment of rent.
3.6. Sublandlord's failure during the Term to prepare and
deliver any statements or bills required to be delivered to Subtenant
hereunder, or Sublandlord's failure to make a demand under this Article
3 or under any other provisions of this Sublease shall not in any way be
deemed to be a waiver of, or cause Sublandlord to forfeit or surrender
its rights to collect any additional rent which may have become due
pursuant to this Article 3 during the Term. Subtenant's liability for
Fixed Rent and additional rent due under this Article 3 accruing during
the Term, and Sublandlord's obligation to refund overpayments of or
adjustments to Fixed Rent or additional rent paid to it by Subtenant,
shall survive the expiration or sooner termination of this Sublease.
Page 5 of 17
<PAGE>
3.7. Except as otherwise provided herein, in no event shall any
adjustment of any payments payable by Subtenant result in a decrease in
Fixed Rent, nor shall any adjustment of any item of additional rent
payable by Subtenant result in a decrease in any other item of
additional rent payable by Subtenant, it being understood and agreed
that the payment of any item of additional rent under this Article 3 is
an obligation supplemental to Subtenant's obligations to pay Fixed Rent
and any other item of additional rent.
3.8. If a Tax Year shall end after the expiration of this
Sublease, the additional rent payable by Subtenant in respect thereof
shall be prorated to correspond to that portion of such Tax Year
occurring within the Term.
4. SUBORDINATION TO AND INCORPORATION OF THE LEASE.
4.1. This Sublease is in all respects subject and subordinate to
the terms and conditions of the Lease (a true and complete copy of which
has been furnished by Sublandlord to Subtenant), and to all matters to
which the Lease is subject and subordinate. Subtenant shall indemnify
Sublandlord for, and shall hold it harmless from and against, any and
all losses, damages, penalties, liabilities, costs and expenses,
including, without limitation, reasonable attorneys' fees and
disbursements, which may be sustained or incurred by Sublandlord by
reason of Subtenant's failure to keep, observe or perform any of the
terms, provisions, covenants, conditions and obligations on
Sublandlord's part to be kept, observed or performed under the Lease to
the extent same shall have been incorporated herein, or otherwise
arising out of or with respect to Subtenant's use and occupancy of the
Subleased Premises from and after the Commencement Date.
4.2. Except as otherwise expressly provided in, or otherwise
inconsistent with, this Sublease, or to the extent not applicable to the
Subleased Premises, the terms, provisions, covenants, stipulations,
conditions, rights, obligations, remedies and agreements contained in
the Lease are incorporated in this Sublease by reference, and are made a
part hereof as if herein set forth at length, (i) except for the
references to "Landlord" in the specific sections of the Lease referred
to in Section 4.3 hereof, Sublandlord shall be substituted for all
references to the "Landlord" under the Lease to the extent that the
reference to Landlord is in its capacity as landlord under the Lease and
not in any other capacity, (ii) Subtenant shall be substituted for the
"Tenant" under the Lease, and (iii) Subleased Premises shall be
substituted for "demised premises" under the Lease, except that the
following provisions of the Lease and any references to such provisions
shall be deemed deleted therefrom and shall have no force and effect as
between Sublandlord and Subtenant:
Page 6 of 17
<PAGE>
(i) with respect to the Initial Lease: Article 1, Article
2, Section 3.01(b), Article 21, Article 24, Section 43.09,
Article 44, Schedule A, Schedule A-1, Schedule C, and
Schedule D; and (ii) with respect to the First Amendment:
Section 2, Section 3, Section 4, Section 5, Section 6,
Section 7, Section 8, Exhibit A, Exhibit B, and Exhibit C.
4.3. The references to "Landlord" in the Initial Lease in
Article 3, Article 4, Article 5, Article 6, Article 7, Article 8,
Article 10, Article 13, Article 14, Article 16, Section 22.01, Article
25, Article 31, Article 36, Article 39, Article 40, Article 42, Article
45, shall continue to refer to the Prime Landlord. The references to
"Landlord" in Article 9, Article 11, Article 15, Article 17, Article 18,
Article 19, Article 20, Article 26, Article 27, Article 28, Article 29,
Article 30, Article 32, Article 34, and Article 35 of the Initial Lease
shall be deemed to refer collectively to the Prime Landlord and
Sublandlord.
4.4. Sublandlord represents that as of the date hereof, the
Lease is in full force and effect. Sublandlord represents that
Sublandlord has not received as of the date hereof any notice of default
from the Landlord under the Lease, and has not, to the best of its
knowledge, done or suffered or caused to be done any acts which would
result in any cancellation, forfeiture, or termination of the Lease.
Sublandlord covenants that Sublandlord's interest in the Lease is
unencumbered.
5. ALTERATIONS. Subtenant shall not make any alterations,
installations, improvements, additions or other physical changes (other
than decorative modifications) in or about the Subleased Premises
("Subtenant Alterations") without first obtaining the consent of the
Prime Landlord with respect thereto. Sublandlord agrees to cooperate
with Subtenant, at no cost to Sublandlord, in order to obtain such
consent. Any Subtenant Alterations shall be performed by Subtenant, at
Subtenant's sole cost and expense, in accordance with the applicable
provisions of the Lease.
6. COVENANTS WITH RESPECT TO THE LEASE.
6.1. Subtenant shall not do anything that would constitute a
default under the Lease or omit to do anything that Subtenant is
obligated to do under the terms of this Sublease so as to cause there to
be a default under the Lease.
6.2. The time limits set forth in the Lease for the giving of
notices, making demands, performance of any act, condition or covenant,
or the exercise of any right, remedy or option, are changed for the
purpose of this Sublease, by lengthening or shortening the same in each
instance, as appropriate, so that notices may be given, demands made, or
any act, condition or covenant performed, or any right, remedy or
Page 7 of 17
<PAGE>
option hereunder exercised, by Sublandlord or Subtenant, as the case may
be (and each party covenants that it will do so), within three (3) days
prior to the expiration of the time limit, taking into account the
maximum grace period, if any, relating thereto contained in the Lease.
Each party shall promptly deliver to the other party copies of all
notices, requests or demands which relate to the Premises or the use or
occupancy thereof after receipt of same from the Prime Landlord.
7. SERVICES AND REPAIRS.
7.1. Notwithstanding anything to the contrary contained in this
Sublease or in the Lease, Sublandlord shall not be required to provide
any of the services that the Prime Landlord has agreed to provide,
whether or not specified in Article 21 of the Lease (or required by
law), or to furnish the electricity to the Subleased Premises that the
Prime Landlord has agreed to furnish pursuant to the Lease (or required
by law), or make any of the repairs or restorations that the Prime
Landlord has agreed to make pursuant to the Lease (or required by law),
or to comply with any laws or requirements of any governmental
authorities, or take any other action that the Prime Landlord has agreed
to provide, furnish, make, comply with, or take, or cause to be
provided, furnished, made, complied with or taken under the Lease, but
Sublandlord agrees to use all diligent efforts, at Subtenant's sole cost
and expense, to obtain the same from the Prime Landlord (provided,
however, that Sublandlord shall not be obligated to use such efforts or
take any action which might give rise to a default under the Lease), and
Subtenant shall rely upon, and look solely to, the Prime Landlord for
the provision, furnishing or making thereof or compliance therewith. If
the Prime Landlord shall default in the performance of any of its
obligations under the Lease, Sublandlord shall, upon request and at the
expense of Subtenant, timely institute and diligently prosecute any
action or proceeding which Subtenant, in its reasonable judgment, deems
meritorious, in order to have the Prime Landlord make such repairs,
furnish such electricity, provide such services or comply with any other
obligation of the Prime Landlord under the Lease or as required by law.
Subtenant shall indemnify and hold harmless Sublandlord from and against
any and all such claims arising from or in connection with such request,
action or proceeding. This indemnity and hold harmless agreement shall
include indemnity from and against any and all liability, fines, suits,
demands, costs and expenses of any kind or nature, including, without
limitation, reasonable attorneys' fees and disbursements, incurred in
connection with any such claim, action or proceeding brought thereon.
Subtenant shall not make any claim against Sublandlord for any damage
which may arise, nor shall Subtenant's obligations hereunder be
diminished, by reason of (i) the failure of the Prime Landlord to keep,
observe or perform any of its obligations pursuant to the Lease, unless
such failure is due to Sublandlord's negligence or misconduct, or (ii)
the acts or omissions of the Prime Landlord, its agents, contractors,
servants, employees, invitees or licensees. The provisions of this
Article 7 shall survive the expiration or earlier termination of the
Term hereof.
Page 8 of 17
<PAGE>
7.2. It is expressly understood and agreed that (i) Subtenant
shall obtain electricity (in accordance with the specifications set
forth in Article 4 of the Lease, except to the extent that such
electricity may be used by Sublandlord in other portions of the premises
demised to Sublandlord under the Lease) from the Prime Landlord, and
(ii) the consumption of electricity by Subtenant in the Subleased
Premises shall be submetered. Sublandlord shall furnish to Subtenant a
written statement (an "Electricity Statement") setting forth
Sublandlord's cost of the electricity consumed by Subtenant in the
Subleased Premises. Sublandlord's failure during the Term to deliver any
Electricity Statement or Sublandlord's failure to make a demand for
payment shall not in any way be deemed to be a waiver of, or cause
Sublandlord to forfeit or surrender, its rights to collect any portion
of the amount listed on the Electricity Statement which may have become
due during the Term. Subtenant's liability for the amount due pursuant
to this Section 7.2 shall survive the expiration or sooner termination
of this Sublease.
8. CONSENTS.
8.1. Sublandlord agrees that whenever its consent or approval is
required hereunder, or where something must be done to Sublandlord's
satisfaction, it shall not unreasonably withhold or delay such consent
or approval; provided, however, that whenever the consent or approval of
the Prime Landlord, the lessor under a superior lease, or the mortgagee
under a mortgage, as the case may be, is also required pursuant to the
terms of the Lease, if the Prime Landlord, the lessor under a superior
lease, or the mortgagee under a mortgage shall withhold its consent or
approval for any reason whatsoever, Sublandlord shall not be deemed to
be acting unreasonably if it shall also withhold its consent or
approval. If the Prime Landlord shall withhold its consent or approval
in connection with this Sublease or the Subleased Premises in any
instance where, under the Lease, the consent or approval of the Prime
Landlord may not be unreasonably withheld, Sublandlord, upon the request
and at the expense of Subtenant, shall either (i) timely institute and
diligently prosecute any action or proceeding which Subtenant, in its
reasonable judgment, deems meritorious, in order to dispute such action
by the Prime Landlord, or (ii) permit Subtenant, to the extent allowable
under the Lease, to institute and prosecute such action or proceeding in
the name of the Prime Landlord, provided that Subtenant shall keep
Sublandlord informed of its actions and shall not take any action which
might give rise to a default under the Lease.
Page 9 of 17
<PAGE>
8.2. If Subtenant shall request Sublandlord's consent and
Sublandlord has agreed, under the terms of this Sublease, that neither
its consent nor its approval shall be unreasonably withheld, and
Sublandlord shall fail or refuse to give such consent or approval, and
Subtenant shall dispute the reasonableness of Sublandlord's refusal to
give its consent or approval, Tenant may, at its option, as its sole and
exclusive remedy, submit such dispute to arbitration in the City of New
York under the Expedited Procedures provisions of the Commercial
Arbitration Rules of the American Arbitration Association ("AAA")
(presently Rules 53 through 57 and, to the extent applicable, Section
19); provided, however, that with respect to any such arbitration, (i)
the list of arbitrators referred to in Rule 54 shall be returned within
five (5) days from the date of mailing; (ii) the parties shall notify
the AAA by telephone, within four (4) days of any objections to the
arbitrator appointed and will have no right to object if the arbitrator
so appointed was on the list submitted by the AAA and was not objected
to in accordance with the second paragraph of Rule 54; (iii) the Notice
of Hearing referred to in Rule 55 shall be shall be four (4) days in
advance of the hearing; (iv) the hearing shall be held within seven (7)
days after the appointment of the arbitrator; (v) the arbitrator shall
have no right to award damages; (vi) the decision and award of the
arbitrator shall be final and conclusive on the parties; and (vii) the
losing party shall pay the reasonable fees and expenses, if any, of both
parties in connection with such arbitration, including the expenses and
fees of the arbitrator selected.
9. TERMINATION OF LEASE. If the lease is terminated by the Prime
Landlord pursuant to the terms thereof with respect to all or any
portion of the Subleased Premises prior to the Expiration Date for any
reason whatsoever, including, without limitation, by reason of casualty
or condemnation, this Sublease shall thereupon terminate with respect to
any corresponding portion of the Subleased Premises, and (unless such
termination of the Lease shall be as a result of Sublandlord's default
thereunder or a voluntary surrender of the Subleased Premises, other
than a surrender of the Subleased Premises permitted under the Lease
with respect to a termination of the Lease by reason of casualty to or
condemnation of the Subleased Premises or the Building) Sublandlord
shall not be liable to Subtenant by reason thereof. In the event of such
termination, Sublandlord shall return to Subtenant that portion of the
Rental paid in advance by Subtenant with respect to such portion of the
Subleased Premises, if any, prorated as of the date of such termination.
10. SUBLEASE, NOT ASSIGNMENT. Notwithstanding anything contained
herein, this Sublease shall be deemed to be a sublease of the Subleased
Premises and not an assignment, in whole or in part, of Sublandlord's
interest in the Lease.
Page 10 of 17
<PAGE>
11. DAMAGE, DESTRUCTION, FIRE AND OTHER CASUALTY: CONDEMNATION.
Notwithstanding any contrary provision of this Sublease or the
provisions of the Lease herein incorporated by reference, Subtenant
shall not have the right to terminate this Sublease as to all or any
part of the Subleased Premises, or be entitled to an abatement of Rent,
additional rent or any other item of Rental, by reason of a casualty or
condemnation affecting the Subleased Premises unless Sublandlord is
entitled to terminate the Lease or is entitled to a corresponding
abatement with respect to its corresponding obligation under the Lease.
If Sublandlord is entitled to terminate the Lease for all or any portion
of the Subleased Premises by reason of casualty or condemnation,
Subtenant may terminate this Sublease as to any corresponding part of
the Subleased Premises by written notice to Sublandlord given at least
five (5) business days prior to the date(s) Sublandlord is required to
give notice to the Prime Landlord of such termination under the terms of
the Lease.
12. NO WAIVERS. Failure by Sublandlord in any instance to insist
upon the strict performance of any one or more of the obligations of
Subtenant under this Sublease, or to exercise any election herein
contained, shall in no manner be or be deemed to be a waiver by
Sublandlord of any of Subtenant's defaults or breaches hereunder or of
any of Sublandlord's rights and remedies by reason of such defaults or
breaches, or a waiver or relinquishment for the future of the
requirement of strict performance of any and all of Subtenant's
obligations hereunder. Further, no payment by Subtenant or receipt by
Sublandlord of a lesser amount than the correct amount or manner of
payment of Rental due hereunder shall be deemed to be other than a
payment on account, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment be deemed to effect or
evidence an accord and satisfaction, and Sublandlord may accept any
checks or payments as made without prejudice to Sublandlord's right to
recover the balance or pursue any other remedy in this Sublease or
otherwise provided at law or equity.
13. NOTICES. Any notice, statement, demand, consent, approval,
advice or other communication required or permitted to be given,
rendered or made by either party to the other, pursuant to this Sublease
or pursuant to any applicable law or requirement of public authority
(collectively, "Communications") shall be in writing and shall be deemed
to have been properly given, rendered or made only if sent by personal
delivery, receipted by the party to whom addressed, or registered or
certified mail, return receipt requested, posted in a United States post
office station in the continental United States, addressed (i) to
Subtenant at its address first above written, Attention: Chief Operating
Officer, with a copy to Swidler Berlin Shereff Friedman, LLP, 919 Third
Avenue, New York, New York 10022, Attention: Michael J. Shapiro, Esq.,
and (ii) to Sublandlord at its address first above written, Attention:
Chief Operating Officer, with a copy to Proskauer Rose LLP, 1585
Broadway, New York, New York 10036, Attention: Martin J. Oppenheimer,
Esq. All such communications shall be deemed to
Page 11 of 17
<PAGE>
have been given, rendered or made when delivered and receipted by the
party to whom addressed, in the case of personal delivery, or three (3)
days after the day so mailed. Either party may, by notice as aforesaid
actually received, designate a different address or addresses for
communications intended for it.
14. INDEMNITY.
14.1. Subtenant shall not do or permit any act or thing to be
done upon the Subleased Premises which may subject Sublandlord to any
liability or responsibility for injury, dam ages to persons or property
or to any liability by reason of any violation of any requirement of
law, and shall exercise such control over the Subleased Premises as to
fully protect Subl andlord against any such liability. Subtenant shall
indemnify and save harmless Sublandlord, the Parties (hereinafter
defined) and the employees, agents and contractors of any of the
foregoing (collectively, the "Indemnitees") from and against (except if
due to the negligence, wilful act or omission of Sublandlord or the
Parties), (a) all claims of whatever nature against the Indemnitees
arising from any act, omission or negligence of Sub tenant, its
contractors, licensees, agents, servants, employees, invitees or
visitors, (b) all claims against the Indemnitees arising from any
accident, injury or damage whatsoever caused to any person or to the
property of any person and occurring during the Term in or about the
Subleased Premises, and (c) all claims against the Indemnitees arising
from any accident, injury or damage occurring outside of the Subleased
Premises but anywhere within or about the Real Property, where such
accident, injury or damage results or is claimed to have resulted from
an act, omission or negligence of Subtenant or Subtenant's contractors,
licensees, agents, servants, employees, invitees or visitors. This
indemnity and hold harmless agreement shall include indemnity from and
against any and all liability, fines, suits, demands, costs and expenses
of any kind or nature (including, without limitation, attorneys' fees
and disbursements) incurred in or in connection with any such claim or
proceeding brought thereon, and the defense thereof.
14.2. If any claim, action or proceeding is made or brought
against Sublandlord, which claim, action or proceeding Subtenant shall
be obligated to indemnify Sublandlord against pursuant to the terms of
this Lease, then, upon demand by the Sublandlord, Subtenant, at its sole
cost and expense, shall resist or defend such claim, action or
proceeding in the Sublandlord's name, if necessary, by such attorneys as
Sublandlord shall approve, which approval shall not be unreasonably
withheld or unduly delayed. Attorneys for Subtenant's insurer are hereby
deemed approved for purposes of this Section 14.2. Notwithstanding the
foregoing, Sublandlord may retain its own attorneys to defend or assist
in defending any claim, action or proceeding involving potential
liability of Five Million Dollars ($5,000,000) or more, and Subtenant
shall pay the reasonable fees and disbursements of such attorneys. The
provisions of this Section 14 shall survive the expiration or earlier
termination of the Term hereof.
Page 12 of 17
<PAGE>
15. BROKER. Each party hereto covenants, warrants and represents
to the other party that it has had no dealings, conversations or
negotiations with any broker other than S.L. Green Leasing, Inc.
("Broker") concerning the execution and delivery of this Sublease. Each
party hereto agrees to indemnify and hold harmless the other party
against and from any claims for any brokerage commissions and all costs,
expenses and liabilities in connection therewith, including, without
limitation, reasonable attorneys' fees and disbursements, arising out of
its respective representations and warranties contained in this Article
15 being untrue. Sublandlord shall pay any brokerage commissions due to
Broker pursuant to a separate agreement between Sublandlord and Broker.
The provisions of this Article 15 shall survive the expiration or
earlier termination of the Term hereof.
16. CONDITION OF THE PREMISES. Subtenant agrees to accept the
Subleased Premises in its "as is" condition on the date hereof,
reasonable wear and tear between the date hereof and the Commencement
Date excepted. Sublandlord has not made and does not make any
representations or warranties as to the physical condition of the
Subleased Premises, the use to which the Subleased Premises may be put,
or any other matter or thing affecting or relating to the Subleased
Premises, except as specifically set forth in this Sublease. Sublandlord
shall have no obligations whatsoever to alter, improve, decorate or
otherwise prepare the Subleased Premises for Subtenant's occupancy.
17. CONSENT OF THE PRIME LANDLORD TO THIS SUBLEASE. Consent of
the Prime Landlord to this Sublease Consent of the Prime Landlord to
this Sublease. Subtenant hereby acknowledges and agrees that this
Sublease is subject to and conditioned upon Sublandlord obtaining the
written consent (the "Consent") of the Prime Landlord as provided in the
Lease. Promptly following the execution and delivery hereof, Sublandlord
shall submit this Sublease to the Prime Landlord. Subtenant hereby
agrees that it shall cooperate in good faith with Sublandlord and shall
comply with any reasonable requests made of Subtenant by Sublandlord or
the Prime Landlord in the procurement of the Consent. In no event shall
Sublandlord or Subtenant be obligated to make any payment to the Prime
Landlord in order to obtain the Consent or the consent to any provision
hereof, other than as expressly set forth in the Lease. In the event
that the Prime Landlord shall not have executed and delivered the
Consent within forty-five (45) days after the date of this Sublease,
either party shall have the right to cancel this Sublease by written
notice given to the other at any time thereafter prior to the execution
and delivery of the Consent, and with the giving of such notice this
Sublease shall be deemed canceled and of no further force or effect and
neither party shall have any liability or obligation to the other in
respect thereof.
Page 13 of 17
<PAGE>
18. ASSIGNMENT, SUBLETTING AND MORTGAGING.
18.1. Subtenant shall not assign, sell, transfer (whether by
operation or law or otherwise), pledge, mortgage or otherwise encumber
this Sublease or any portion of its interest in the Subleased Premises,
nor sublet all or any portion of the Subleased Premises or permit any
other person or entity to use or occupy all or any portion of the
Subleased Premises, without the prior written consent of the Prime
Landlord. Provided that Subtenant shall comply with the provisions of
the Lease (including, without limitation, Section 11 thereof) and this
Sublease with respect to subletting, Sublandlord agrees that its consent
shall not be required to a subletting of all or any portion of the
Subleased Premises provided that the Prime Landlord shall consent to
such subletting. Upon the request of Subtenant, Sublandlord, at
Subtenant's sole cost and expense, shall request the consent of the
Prime Landlord and cooperate with Subtenant in obtaining any consent.
18.2. If this Sublease be assigned, or if the Subleased Premises
or any part thereof be sublet (whether or not Sublandlord and the Prime
Landlord shall have consented thereto), Sublandlord, after default by
Subtenant in its obligations hereunder, may collect rent from the
assignee or subtenant and apply the net amount collected to the Rental
herein reserved, but no such assignment or subletting shall be deemed a
waiver of the covenant set forth in this Article 18, or the acceptance
of the assignee or subtenant as a tenant, or a release of Subtenant from
the further performance and observance by Subtenant of the covenants,
obligations and agreements on the part of Subtenant to be performed or
observed herein. The consent by Sublandlord or the Prime Landlord to an
assignment, sale, pledge, transfer, mortgage or subletting shall not in
any way be construed to relieve Subtenant from obtaining the express
consent in writing, to the extent required by this Sublease or the
Lease, of Sublandlord and the Prime Landlord to any further assignment,
sale, pledge, transfer, mortgage or subletting.
18.3. Either a transfer (including the issuance of treasury
stock or the creation and issuance of new stock) of a controlling
interest in the shares of Subtenant (if Subtenant is a corporation,
other than a professional corporation, or trust) or a transfer of a
majority of the total interest in Subtenant (if Subtenant is a
partnership, including a limited liability partnership, or a limited
liability company) at any one time or over a period of time through a
series of transfers, shall be deemed an assignment of this Sublease and
shall be subject to all of the provisions of this Sublease, including,
without limitation, the requirements that Subtenant obtain Sublandlord's
prior consent thereto. The transfer of shares of Subtenant (if Subtenant
is a corporation or trust) for purposes of this Section 18.3 shall not
include the sale of shares by persons other than those deemed "insiders"
within the meaning of the Securities Exchange Act of 1934, as amended,
which sale is effected through the "over-the-counter market" or through
any recognized stock exchange.
Page 14 of 17
<PAGE>
19. PARTNERSHIP SUBTENANT. If Subtenant is a partnership
(including, without limitation, a limited liability partnership) or a
limited liability company or a professional corporation (or is comprised
of two (2) or more Persons, individually or as co-partners of a
partnership (including, without limitation a limited liability
partnership), as members of a limited liability company or as
shareholders of a professional corporation) or if Subtenant's interest
in this Lease shall be assigned to a partnership (including, without
limitation, a limited liability partnership) a limited liability company
or a professional corporation (or to two (2) or more Persons,
individually or as co-partners of a partnership, as members of a limited
liability company or shareholders of a professional corporation)
pursuant to this Sublease (any such partnership, professional
corporation and such Persons are referred to in this Article 19 as
"Partnership Subtenant"), the following provisions shall apply to such
Partnership Subtenant: (a) the liability of each of the parties
comprising Partnership Subtenant shall be joint and several; (b) each of
the parties comprising Partnership Subtenant hereby consents in advance
to, and agrees to be bound by (x) any written instrument which may
hereafter be executed by Partnership Subtenant or any successor entity,
changing, modifying, extending or discharging this Lease, in whole or in
part, or surrendering all or any part of the Subleased Premises to
Sublandlord, and (y) any notices, demands, requests or other
communications which may hereafter be given by Partnership Subtenant or
by any of the parties comprising Partnership Subtenant; (c) any bills,
state ments, notices, demands, requests or other communications given or
rendered to Partnership Subtenant or to any of such parties shall be
binding upon Partnership Subtenant and all such parties; (d) if
Partnership Subtenant shall admit new partners, shareholders or members,
as the case may be, Partnership Subtenant shall give Sublandlord notice
of such event not later than ten (10) Business Days prior to the
admission of such partner(s), shareholder(s) or member(s) together with
an assumption agreement in form and substance satisfactory to
Sublandlord pursuant to which each of such new partners, shareholders or
members, as the case may be, shall, by their admission to Partnership
Subtenant, agree to assume joint and several liability for the
performance of all of the terms, covenants and conditions of this Lease
(as the same may have been or thereafter be amended) on Subtenant's part
to be observed and performed; it being expressly understood and agreed
that each such new partner, shareholder or member (as the case may be)
shall be deemed to have assumed joint and several liability for the
performance of all of the terms, covenants and conditions of this Lease
(as the same may have been or thereafter be amended), whether or not
such new partner, shareholder or member shall have executed such
assumption agreement, and that neither Subtenant's failure to deliver
such assumption agreement nor the failure of any such new partner or
shareholder, as the case may be, to execute or deliver any such
agreement to Sublandlord shall vitiate the provisions of this clause (d)
of this Article 19).
Page 15 of 17
<PAGE>
20. MISCELLANEOUS.
20.1. This Sublease contains the entire agreement between the
parties and all prior negotiations and agreements are merged in this
Sublease. Any agreement hereafter made shall be ineffective to change,
modify or discharge this Sublease in whole or in part unless such
agreement is in writing and signed by the parties hereto. No provision
of this Sublease shall be deemed to have been waived by Sublandlord or
Subtenant unless such waiver be in writing and signed by Sublandlord or
Subtenant, as the case may be. The covenants and agreements contained in
this Sublease shall bind and inure to the benefit of Sublandlord and
Subtenant and their respective permitted successors and assigns.
20.2. In the event that any provision of this Sublease shall be
held to be invalid or unenforceable in any respect, the validity,
legality or enforceability of the remaining provisions of this Sublease
shall be unaffected thereby.
20.3. The paragraph headings appearing herein are for purposes
of convenience only and are not deemed to be a part of this Sublease.
20.4. Capitalized terms used herein shall have the same meanings
as are ascribed to them in the Lease, unless otherwise expressly defined
herein.
20.5. This Sublease is offered to Subtenant for signa ture with
the express understanding and agreement that this Sublease shall not be
binding upon Sublandlord unless and until Sublandlord shall have
executed and delivered a fully executed copy of this Sublease to
Subtenant.
20.6. Neither the partners comprising Sublandlord (if
Sublandlord is a partnership), nor the shareholders, partners, directors
or officers of Sublandlord or any of the foregoing (collectively, the
"Parties") shall be liable for the performance of Sublandlord's
obligations under this Sublease. Subtenant shall look solely to
Sublandlord to enforce Sublandlord's obligations hereunder and shall not
seek damages against any of the Parties. Subtenant shall look only to
the assets of Sublandlord for the satisfaction of Subtenant's remedies
for the collection of a judgment (or other judicial process) requiring
the payment of money by Sublandlord in the event of any default by
Sublandlord hereunder, and no property or assets of the Parties shall be
subject to levy, execution or other enforcement procedure for the
satisfaction of Subtenant's remedies under or with respect to this
Sublease, the relationship of Sublandlord and Subtenant hereunder or
Subtenant's use or occupancy of the Subleased Premises.
20.7. This Sublease shall be governed by and construed in
accordance with the laws of the State of New York.
Page 16 of 17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Sublease as of the day and year first above written.
NMU PENSION PLAN, Sublandlord
By: /S/
--------------------------------
Name: WJ DENNIS
Title: ADMINISTRATOR
COMPUTER OUTSOURCING SERVICES, INC.,
Subtenant
By: /S/
--------------------------------
Name: ZACH LONSTEIN
Title: CHAIRMAN/CEO
<PAGE>
EXHIBIT "A"
-----------
FLOOR PLAN OF SUBLEASED PREMISES
This floor plan is annexed to and made a part of this Agreement of
Sublease solely to indicate the Subleased Premises by outlining and
diagonal marking. All areas, conditions, dimensions and locations are
approximate.
FIRST AMENDMENT OF LEASE
------------------------
DATE: January 16th, 1998
LANDLORD: LEONIA ASSOCIATES, L.L.C.
a New Jersey Limited Liability Company
ADDRESS OF LANDLORD: c/o Sterling Management Corp.
72 Essex Street
Lodi, NJ 07644
TENANT: COMPUTER OUTSOURCING SERVICES, INC., a New
York Corporation,
ADDRESS OF TENANT: 2 Christie Heights
Leonia, New Jersey 07605
LEASE DATE: June 2, 1997
BUILDING: 2 Christie Heights
Leonia, NJ 07605
Landlord and Tenant, being bound unto a lease, dated the Lease Date,
for a portion of the Building (the "Lease"), hereby agree to modify and amend
the Lease in the following manner:
1. DEMISED PREMISES OR PREMISES. As of January 1, 1998 (the "Effective
Date"), Paragraph (7) of the Preamble to the Lease shall be deleted in its
entirety and the following is substituted therefor:
"(7) Demised Premises or Premises: Approximately SIXTY SEVEN
THOUSAND (67,000) gross rentable square feet on the First
(1st) and Second (2nd) Floors (the entire Building)
delineated on Exhibit A annexed hereto, which includes an
allocable share of the Common Facilities as defined in
Paragraph 42(c), which size is stipulated and agreed to by
the parties hereto."
2. EXHIBIT A. As of the Effective Date, Exhibit A annexed to the Lease
is hereby deleted in its entirety and revised Exhibit A annexed hereto shall be
substituted therefor for all purposes under the Lease.
3. FIXED BASIC RENT. Paragraph (9) of the Preamble to the Lease is
hereby modified to provide that Fixed Basic Rent for the remainder of the Term
shall be payable as follows:
I. Fixed Basic Rent for January 1, 1998 through March 31, 1998 shall
mean:
(A) Yearly Rate: SEVEN HUNDRED TWENTY FIVE THOUSAND AND 00/100
($725,000.00) DOLLARS plus an amount equal to twenty-five point four
(25.4%) percent of the Real Estate Taxes for the Building.
<PAGE>
(B) Monthly Installment: SIXTY THOUSAND FOUR HUNDRED SIXTEEN AND
66/100 ($60,416.00) DOLLARS plus an amount equal to twenty-five point
four (25.4%) percent of the Real Estate Taxes for the Building, which
shall be payable monthly on the first day of each month, in advance,
in the amount of $2,750.00. In the event the actual amount of the Real
Estate Taxes for the building for the first quarter of 1998 is greater
or less than that paid by Tenant pro rata for the Additional Space,
the appropriate adjustment shall be made by and between Landlord and
Tenant as soon as practicable after the final 1998 bill is issued.
II. Fixed Basic Rent for April 1, 1998 through June 30, 1998 shall
mean:
(A) Yearly Rate: SEVEN SIXTY SEVEN THOUSAND FIVE HUNDRED AND
00/00 ($767,500.00) DOLLARS plus an amount equal to twenty-five point
four (25.4%) percent of the Real Estate Taxes for the Building.
(B) Monthly Installment: SIXTY THREE THOUSAND NINE HUNDRED
FIFTY-EIGHT AND 33/100 ($63,958.33) DOLLARS plus an amount equal to
twenty-five point four (25.4%) percent of the Real Estate Taxes for
the Building, which shall be payable monthly on the first day of each
month, in advance, in the amount of $2,750.00. In the event the actual
amount of the Real Estate Taxes for the building for the second
quarter of 1998 is greater or less than that paid by Tenant pro rata
for the Additional Space, the appropriate adjustment shall be made by
and between Landlord and Tenant as soon as practicable after the final
1998 bill is issued.
III. Fixed Basic Rent for July 1, 1998 through September 30, 1998
shall mean:
(A) Yearly Rate: EIGHT HUNDRED TWENTY SEVEN THOUSAND AND 00/100
($827,000.00) DOLLARS plus an amount equal to twenty-five point four
(25.4%) percent of the Real Estate Taxes for the Building.
(B) Monthly Installment: SIXTY EIGHT THOUSAND NINE
HUNDRED
SIXTEEN AND 66/100 ($68,916.66) DOLLARS plus an amount equal to
twenty-five point four (25.4%) percent of the Real Estate Taxes for
the Building, which shall be payable monthly on the first day of each
month, in advance, in the amount of $2,750.00. In the event the actual
amount of the Real Estate Taxes for the building for the third quarter
of 1998 is greater or less than that paid by Tenant pro rata for the
Additional Space, the appropriate adjustment shall be made by and
between Landlord and Tenant as soon as practicable after the final
1998 bill is issued.
IV. Fixed Basic Rent for Four Years and Three Months, commencing
October 1, 1998 through December 31, 2002, shall mean THREE
MILLION EIGHT HUNDRED THREE THOUSAND SEVEN HUNDRED FIFTY AND
001/00 ($3,803,750.00) DOLLARS.
<PAGE>
(A) Yearly Rate: EIGHT HUNDRED NINETY FIVE
THOUSAND AND 00/100 ($895,000.OO) DOLLARS.
(B) Monthly Installment: SEVENTY FOUR THOUSAND
FIVE HUNDRED EIGHTY THREE AND 33/100 ($74,583.33) DOLLARS.
V. Fixed Basic Rent for Six Years, commencing January 1, 2003
through December 31, 2008 shall mean SIX MILLION ONE HUNDRED
SEVENTY FOUR THOUSAND AND 00/100 ($6,174,000.00) DOLLARS.
(A) Yearly Rate: ONE MILLION TWENTY NINE THOUSAND
AND 00/100 ($1,029,000.00) DOLLARS.
(B) Monthly Installment: EIGHTY FIVE THOUSAND
SEVEN HUNDRED FIFTY 00/100 ($85,750.00) DOLLARS.
4. TENANT'S PERCENTAGE. Commencing January 1, 1998, Paragraph (10) of
the Preamble to the Lease shall be deleted in its entirety and the following is
substituted therefor:
"(10) Tenant's Percentage: One hundred (100%)
percent, which percentage is stipulated
and agreed to by the parties hereto, subject
to adjustment as provided for in Paragraph 42(e)."
5. PARKING SPACES. As of the Effective Date, Paragraph 12 of the
Preamble of the Lease shall be deleted in its entirety and the following
substituted therefor:
"(12) Parking Spaces shall mean all of the parking
spaces reserved for the Building."
6. MONTHLY OPERATING COSTS ESTIMATES. Commencing January 1, 1998, the
amount of estimated monthly payments for Operating Costs paid by Tenant pursuant
to Paragraph 23(B)(b) of the Lease shall be changed from TEN THOUSAND and 00/100
($10,000.00) DOLLARS to THIRTEEN THOUSAND SEVEN HUNDRED FIFTY and 00/100
($13,750.00) DOLLARS.
7. LANDLORD'S WORK - Landlord agrees, that at Landlord's expense, it
will do substantially all of the work in the additional Seventeen Thousand
(17,000) gross rental square feet (the "Additional Space") to be occupied by
Tenant hereunder in accordance with Exhibit B, annexed hereto and made a part
hereof ("Landlord's Work"). Except as set forth in Exhibit B, Landlord shall
have no obligation to perform any other Landlord's Work in the Additional Space,
and Tenant specifically agrees that it will accept the Additional Space in its
current "as is" condition. In the event the cost of Landlord's Work, inclusive
of all hard and soft costs, is less than ONE HUNDRED EIGHTY FIVE THOUSAND
($185,000.00) DOLLARS, the amount of differential between Landlord's actual cost
and said amount will be paid to Tenant by Landlord in the form of a rent credit
to be applied to the Fixed Basic Rent for October 1998 or sixty (60) days after
the substantial completion of Landlord's Work, whichever is later.
<PAGE>
8. RENT CREDIT FOR CHECK METER. In lieu of the check meters to have
been provided by Landlord pursuant to Paragraph 22 of the Lease, prior to this
agreement, the Landlord grants Tenant a rent credit of TEN THOUSAND ($10,000.00)
DOLLARS to be applied to the monthly rent installment for Fixed Basic Rent for
the month of October 1998.
9. ACKNOWLEDGMENT OF PRIOR BUILDOUT CONTRIBUTION. Tenant acknowledges
receipt and payment of Landlord's obligation to contribute EIGHT HUNDRED
THOUSAND ($800,000.00) DOLLARS towards Tenant's buildout as provided in
Paragraph 27(b) of the Lease.
10. SCOPE OF CLEANING SERVICES. Anything contained in Paragraphs 20
and 22 to the contrary notwithstanding, the Tenant shall have the right, upon
written notice to the Landlord, to increase or decrease the scope of cleaning
services to be provided by Landlord, in which event the cost of same to be paid
by Tenant shall be adjusted accordingly.
11. BUILDING STANDARD ELECTRIC SERVICE.
I. Paragraph 22(a)(i) of the Lease is hereby deleted in its entirety
and the following substituted therefor:
"(a) Landlord agrees to redistribute Building Standard Office
Electrical Service (as hereinafter defined) to the Premises consistent with the
requirements as set forth in this Lease (not exceeding the present electrical
capacity at the Premises) upon the following terms and conditions:
(i) Tenant shall pay to Landlord all of the electrical power
consumed in the Demised Premises and Building as determined by the rate
structure then existing for the utility company supplying the electrical energy
to the Demised Premises and the Building, inclusive of common areas. Said
payments shall be due as Additional Rent with the next installment of Fixed
Basic Rent therefor becoming due."
II. Paragraph 22(b) of the Lease is hereby deleted in its entirety
and the following substituted therefor:
"(b) The "Building Standard Electric Service" shall, unless otherwise
provided by agreement in writing between the parties, be defined as the
provision by Landlord of electrical current for usual office requirements,
equipment and heating, ventilating and air-conditioning systems, twenty-four
(24) hours a day, seven (7) days a week. In no event shall Building Standard
Electric Service include electrical current for any computer room installation,
data processing center, or for any requirements needing greater than a 15-amp
line. All installments of electrical fixtures, appliances and equipment within
the Demised Premises shall be subject to Landlord's prior written approval which
approval shall not be unreasonably withheld or unduly delayed. Nothing herein
shall be construed as conferring on Landlord the right or option to cut off
electric service to the Building, except in instances requiring emergency or
necessary repairs, it being intended that electrical service to the elevators
and Demised Premises shall be available on a twenty-four (24) hours basis.
<PAGE>
III. The following provision is hereby added to Paragraph 22 of
the Lease:
(d) At Tenant's sole and exclusive cost and option, to be
exercised upon reasonable written notice to the Landlord and the utility company
furnishing electrical service and energy to the Building (the "Utility
Company"), the Tenant shall arrange to obtain all electric, energy and utility
service directly from the Utility Company, and may utilize the then existing
electric feeders, risers and wiring used for such purpose and only to the extent
of Tenant's then authorized connected load. In this event, (i) Landlord shall
not be obligated to supply or pay any part of any cost required for Tenant's
electric, energy and utility service; (ii) the Tenant shall provide Landlord
with proof of payment to the Utility Company of its monthly utility bill; (iii)
the failure by the Tenant to make payment in full of its monthly utility bill
from the Utility Company within thirty (30) days of the rendering of such bill
shall constitute a default under this Lease.
12. OPTION. Paragraph 56(a) of the Lease is hereby amended so that
"$1,183,350.00" is substituted for "$948,750.00" in the last line thereof.
13. DELETIONS. The following provisions of the Lease are hereby
deleted and deemed null and void and of no further force and effect:
(a) Paragraph 27 (a)
(b) Paragraph 47
(c) The last sentence of Paragraph 36.
(d) Paragraph 57 (b)
(e) Paragraph 59
14. INTERPRETATION. In the event of any inconsistencies between this
Amendment of Lease and the Lease, this Amendment of Lease shall govern and be
binding. All words and terms used in this Amendment of Lease shall be construed
without regard to any presumption or other rule requiring construction against
the party causing this instrument to be drafted, since the Tenant has been
afforded an opportunity to submit revisions to the text hereof.
15. COMPLETE AGREEMENT. This Agreement, together with instrument
modified hereby, constitute the complete agreement and understanding between the
parties hereto with respect to the matters set forth herein and therein, and
supersede and terminate any and all prior negotiations or understandings between
the parties hereto. No alteration, amendment or modification of any of the terms
and provisions of this Agreement and the instruments modified hereby shall be
valid unless made pursuant to an instrument in writing signed by each of the
parties hereto. The parties do not intend to confer any benefit hereunder on any
person, firm, corporation or other entity, other than the parties hereto.
16. RATIFICATION OF LEASE. Except as expressly modified and amended by
the Amendment of Lease, all of the terms, provisions and conditions of the Lease
are hereby ratified and confirmed by Landlord and Tenant.
<PAGE>
17. BINDING EFFECT. This Amendment of Lease shall inure to the benefit
of and be binding upon the parties hereto and their respective legal
representatives, successors and permitted assigns.
18. CORPORATE AGREEMENT. Each party represents and warrants to the
other that this Amendment of Lease has been duly authorized and approved by its
Board of Directors or Members, as the case may be. The undersigned officer and
representative of the corporation and Manager of the Limited Liability Company
executing this Agreement represent and warrant that they have authority to
execute this Amendment of Lease on behalf of their respective entities.
IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands
and seals as of the day and year above first written; the parties affixing their
signatures hereto warrant the one to the other that they possess the requisite
authority to enter into this transaction and to sign this instrument.
ATTEST: LEONIA ASSOCIATES, L.L.C
By: Jeffco Holding Ltd.
a NJ corporation, Manager
By: /s/
- ------------------------ -----------------------------------
Jeffrey E. Cole, President
COMPUTER OUTSOURCING SERVICES, INC.
a New York Corporation
By: /s/
- ------------------------ -----------------------------------
Robert Wallach, President
<PAGE>
EXHIBIT A
Page 1 of 2
(D R A W I N G)
<PAGE>
EXHIBIT A
Page 2 of 2
(D R A W I N G)
<PAGE>
EXHIBIT B
Landlord's Work
Page 1 of 3
Landlord shall, at Landlord's sole cost and expense:
1. Build space as per attached plan.
2. Landlord shall replace the components of the existing VAV boxes
located in the Additional Space with new components similar to
those currently existing in the Building.
3. Carpet and paint space to match existing installation.
4. Replace damaged ceiling tiles.
5. Re-arrange lighting as per mutually agreeable construction
drawings.
6. Add necessary electrical outlets as per a mutually agreeable
construction drawings.
7. Art work in lobby subject to Tenant's approval.
<PAGE>
EXHIBIT B
Page 2 of 3
(D R A W I N G)
<PAGE>
EXHIBIT B
Page 3 of 3
(D R A W I N G)
PAYROLL SERVICE CONVERSION AGREEMENT
PAYROLL SERVICE CONVERSION AGREEMENT dated as of 11/5/98 between
COMPUTER OUTSOURCING SERVICES, INC., whose principal place of business is
located at 360 W 31ST, New York, New York 10001 (the "Seller"), and ADP,
INC., whose principal offices are located at One ADP Boulevard, Roseland,
New Jersy 07068, with a branch office at 99 Jefferson Road.
Parsippany, New Jersy 07054 ("ADP").
In consideration of the Seller's desire to sell, and ADP's desire to
purchase, the exclusive right to convert the entire payroll services
client base of the Seller (the "Client Base"), as described on Exhibit A
which is a part of this Agreement, to ADP's payroll service, the Seller
and ADP agree as follows:
1. SALE AND PURCHASE OF THE SELLER'S CLIENT BASE.
(a) The seller hereby sells, assigns and transfers to ADP the exclusive
right to convert the Client base to ADP's payroll services. Each client
who agrees to convert tp ADP's payroll services by signing ADP's standard
form of Price Quotation prior to December 31, 1998 (the "Final Conversion
Date") is referred to in this Agreement as a "Converted Client".
(b) The purchase price for this exclusive right shall be paid by ADP to
the Seller as follows:
(i) upon the execution and delivery of this Agreement by each
party, an amount equal to $25,000 (the "Down Payment");
(ii) Within fifteen business days February 1 1999, an amount equal
to (x) 100% of the annualized aggregate amount of recurring payroll or
payroll-related processing fees and charges invoiced by ADP to the
Converted Clients for the month of January 1999, for those payroll
services that are the same as those provided by the Seller to such
Converted Clients, minus (y) the Down Payment (provided that if Down
Payment exceeds the actual amount calculated under clause (x) of this
Paragraph 1(b)(ii), the Seller shall reimburse ADP the amount of such
excess within 10 days); and
(iii) In the event any converted Client shall begin processing
after the month of January, 1999 but within 6 months of the final
Conversion Date, ADP shall within 15 days after the completion of the
first full month of processing for such Client pay the Seller in respect
of Client an amount calculated in accordance with Paragraph 1(b)(ii)
above.
For purposes of clarity, the annualized aggregate amount will not include
(i) fees derived from set-up, training, shipping, delivery and
installation, custom programming sale or rental of equipment,
maintenance, or the provision of checks, forms, or other supplies, (ii)
fees for official bank checks, W-2 forms, or tax reports, (iii) state and
local taxes, special one-time report fees and refundable deposits, or
(iv) thrid party pass-through charges. For purposes of Paragraph
1(b)(ii), the Seller understands that the processing fees and charges
invoiced by ADP to the Clients will be equal to the lesser of ADP's
standard rates for such services (as previoulsy disclosed to the Seller)
and the processing fees and charges reflected on Exhibit A.
2. CONVERSION OF THE CLIENT BASE.
(a) ADP shall commence, at its own expense, converting the Client Base
from the Seller's payroll services to ADP's payroll services. Only those
clients included in the Client Base that elect to convert to ADP will be
so converted.
(b) From the date of this Agreement through the Final Conversion Date
the Seller shall take all actions reasonably requested by ADP to maximize
the number of clients that elect to convert to ADP. The Seller shall, at
its own expense, cooperate with and assist ADP in converting the Client
Base to ADP, which shall include (i) accompanying ADP personnel on visits
to each client in order to facilitate the contemplated conversion of such
client to ADP's payroll services, and (ii) transferring to ADP all files
(including billing and pricing information) for each client that elects
to convert to ADP.
(c) From the date of this Agreement through the final Conversion Date
(or such earlier date on which a given client is coverted), the Seller
shall continue to perform all of its payroll services (and
payroll-related tax services, if any ) for each client in a reliable and
dependable manner in the same fashion as such payroll services (and
payroll related tax services, if any) are being performed by the Seller
on the date hereof. Thereafter, neither the Seller nor any entity which
is affiliated with the Seller may provide such clients with such payroll
services.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER.
The Seller and each of the individuals executing this Agreement on his
or her behalf with respect to this Paragraph 3 hereby represents and
warrants to ADP that: (i) Schedule A sets forth a complete list of all
clients in the Client Base; (ii) for each client in the Client Base, the
Seller is the payroll services provider to the client; (iii) the company
name and identifying number, special reports and delivery locations,
frequency of payroll (and related tax services,if any) processings and
the actual price per cycle (or if the actual price is not available, the
Seller's reasonable estimate of the price per cycle) for each client
included in the Client Base, are set forth on Exhibit A; and that all
information set forth on Exhibit A is true, accurate and complete as of
the date of this Agreement; (iv) none of the clients has canceled or
terminated, or made any threat to the Seller to cancel or terminate, its
payroll services (and/or related payroll tax services, if any)
relationship with the Seller; (v) this Agreement is a binding agreement
of the Seller; (vi) to the knowledge of the Seller, Seller is not
prohibited by any law or regulation from entering into this Agreement;
and (vii) the Seller has not used a boker or any other representative who
would be entitled to a broker's commission, finder's fee or similar
compensation in connection with this Agreement.
4. NO ASSUMPTION OF OBLIGATIONS AND LIABILITIES.
The Seller agrees that ADP is only purchasing the right to convert the
Client Base from the Seller's payroll service (and payroll related tax
services, if any) to ADP's payroll services pursuant to the terms and
conditions of this Agreement. ADP is not assuming any obligations or
liabilies whatsover of the Seller (including, without limitation, (i) the
hiring of any of the of the Seller's employees, (ii) any liabilities for
tax filings, if any, with respect to periods prior to the date a client
converts to ADP or (iii) any other obligation under any agreement or
commitment of the Seller with any of its past, present or future
clients), and the Seller agrees to indemnify ADP against al such
obligations and liabilities.
5. CONFIDENTIALITY; NON-COMPETITION
(a) The Seller agrees that Exhibit A and all information contained
therein, and all client lists and other client information relative to
the Client Base, if any , are confidential and that it will use all
reasonable precautions to keep such information confidential and secret,
including without limitation, restricting access to such information to
those employees of the Seller who have a need to know such information
(the "Permitted Persons"). The Seller agrees that it will use all
reasonable efforts (which reasonable efforts shall include, but not be
limited to, taking the same precautions the Seller takes to protect its
own confidential and/or proprietary information) to prohibit any of the
Permitted persons from divulging, using or publishing any of such
information to any person or entity whatsover, except in strict
accordance with the terms of this Agreement. If the Seller, any of the
Permitted Persons, or any of the Seller's other present or former
employees, agents or representatives shall attempt to divulge, use or
publish any of such information in any manner, ADP shall have the right
in addition to such other remedies which may be available to it, to
injunctive relief enjoining such acts or attempts, it being hereby agreed
and acknowledged that legal remedies are inadequate.
(b) (i) Except to the limited extent provided for in Paragraph 2(c)
above or as otherwise agreed in writing between the Seller and ADP,
between the date hereof and the date which is 2 1/2 years after the Final
Conversion Date (the "Non-Competition Period"), the Seller agrees that it
shall not,directly or indirectly, (A) provide payroll services (and /or
related payroll tax service) to any thrid person or entity whatsoever
(whether or not affiliated with the Seller), or (B) provide, sell,
license, or otherwise transfer any software, systems or documentation on,
through, or by which any payroll services (and /or related payroll tax
services) can be performed, to any third person or entity whatsover
(whether or not affiliated with the Seller).
(ii) During the Non-Competition period, the Seller not solicit or
refer any of the Client Base or any clients of the Seller whatsoever to
any other vender of payroll sevices (and/or related payroll tax
services), and/or of any software, systems or documentation on, through,
or by which such payroll services (and/or related payroll tax services)
could be performed, or otherwise intentionally interfere with or
interrupt ADP's payroll services relationships with the Converted Clients
or any other of its clients.
(c) Each of the individuals executing yhis Agreement on his or her own
behalf hereby agrees to be bound individually to the same extent as the
Seller by the provisions of this paragraph 5.
6. MISCELLANEOUS.
(a) This Agreement together with Exhibit A attached hereto, contains
the full understanding of the Seller and ADP with respect to its subject
matter and supersedes all existing agreements and all other oral, written
or other communications between them concerning its subject matter. This
Agreement may not be modified in any way except by a writing signed by
duly authorized representatives of ADP and the Seller. This Agreement may
not be assigned in whole or in part by the Seller without the prior
witten consent of ADP.
(b) All notices shall be in writing and shall be mailed by frist class
mail or personally delivered to the parties at the addresses set forth on
the first page of this Agreement or to any other address designated by
either party in writing to the other after the date hereof, and such
notices shall be effective three days after mailed or when personally
delivered. Any notice to ADP shall include a copy to ADP, Inc., One ADP
Boulevard, Roseland, New Jersey 07068, Attention: General Counsel.
(c) If any provision of this Agreement (including, without limitation
any provisions of Paragraph 5) shall be deemed unenforceable, the
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby and the provision in question shall be
enforced to the fullest extent permitted by law.
(d) The termination or expiration of this Agreement for any reason
shall in no way impair the right or obligations of the parties under
Paragraphs 4 and 5.
IN WITNESS WHEREOF, the Seller and ADP have caused this Agreement to be
executed as of the date first written above.
ADP,INC.
By: /s/
----------------------
Tim Maloney
Regional Controller
COMPUTER OUTSOURCING SERVICES
INC.
By: /s/
Name: John C. Platt
Title: Vice President
Accepted and Agreed as to Paragraphs 3 and 5 only:
/s/
-------------------------
John C. Platt
-------------------------
Accecpted and Agreed as to Paragraph 5 only:
/s/
-------------------------
John C. Platt
-------------------------
EXHIBIT 21
List of Subsidiaries of Computer Outsourcing Services, Inc.
As of October 31, 1998
MICR Corporate Services, a New York corporation.
MCC Key Services, Inc., a New Jersey corporation
The following four companies, comprising the Payroll Division, were sold on
December 19, 1997.
Daton Pay USA, Inc. (formerly Daton Data Processing Services, Inc.), a
California corporation.
NEDS, Inc. (formerly New England Data Services, Inc.), a New York
corporation.
Pay USA of New Jersey, Inc.(formerly Delta Acquisition, Inc.), a New York
corporation.
Key-ACA, Inc., a Delaware corporation.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Computer Outsourcing Services, Inc., on Form S-8 of our report dated January 9,
1998 (January 26, 1998 as to note 6a in the financial statements for the year
ended October 31, 1997) appearing in the Annual Report on Form 10-K of the
Registrant for the year ended October 31, 1998.
/s/ DELOITTE & TOUCHE, LLP
- -----------------------------
DELOITTE & TOUCHE, LLP
New York, New York
January 25, 1999
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of our report dated January 11, 1998 with respect to the consolidated
financial statements of Computer Outsourcing Services, Inc., included in the
Annual Report on Form 10-KSB for the year ended October 31, 1998.
/s/ ERNST & YOUNG, LLP
- -------------------------
ERNST & YOUNG, LLP
New York, New York
January 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10KSB FOR
THE PERIOD ENDED OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH REPORT.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997
<PERIOD-END> OCT-31-1998 OCT-31-1997<F1>
<CASH> 9,403,006 972,459
<SECURITIES> 3,218,170 0
<RECEIVABLES> 4,668,776 4,102,207
<ALLOWANCES> 216,659 111,577
<INVENTORY> 0 0
<CURRENT-ASSETS> 19,085,748 12,365,891
<PP&E> 7,288,506 5,976,646
<DEPRECIATION> 4,779,631 4,161,416
<TOTAL-ASSETS> 26,948,536 19,143,141
<CURRENT-LIABILITIES> 6,327,067 5,578,467
<BONDS> 271,787<F2> 2,592,571
0 0
0 0
<COMMON> 42,857 38,261
<OTHER-SE> 17,550,496 12,500,802
<TOTAL-LIABILITY-AND-EQUITY> 26,948,536 19,143,141
<SALES> 0 0
<TOTAL-REVENUES> 30,403,381 24,395,644
<CGS> 0 0
<TOTAL-COSTS> 19,828,954 17,071,706
<OTHER-EXPENSES> 9,585,355<F3> 5,889,525
<LOSS-PROVISION> 115,429 368,235
<INTEREST-EXPENSE> 108,402 318,560
<INCOME-PRETAX> 1,536,571 1,228,083
<INCOME-TAX> 457,621 539,700
<INCOME-CONTINUING> 1,078,950 688,383
<DISCONTINUED> (76,464) (127,054)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,698,646<F4> 561,329
<EPS-PRIMARY> 0.67 0.14
<EPS-DILUTED> 0.61 0.14
<FN>
<F1>1997 Amounts include reclasses to conform to the 1998 presentation. New FDS
information is accordingly provided herein.
<F2>Current portion equals $260,277 in 1998 and 2,320,580 in 1997.
<F3>Inlcudes a one-time sublease loss in 1998 of $2,236,583.
<F4>Includes after-tax gain in 1998 on sale of discontinued operation of $1,696,160.
</FN>
</TABLE>
