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, 1999
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 a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X].
For the fiscal year ended October 31, 1999, registrant's consolidated revenues
from continuing operations were $34,264,966.
On January 20, 2000, the aggregate market value of the outstanding shares of
voting stock held by non-affiliates of the registrant was approximately
$99,686,000.
On January 20, 2000, 4,815,615 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 17.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
Page 1 of 45
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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"), was organized as a New York corporation in October 1984, and
reincorporated in Delaware as of August 31, 1999. The Company delivers
information technology services, data center outsourcing, infrastructure
management consulting, and internet data center and colocation services. Its
customers include commercial companies, institutions, and government agencies.
The Company has grown through strategic acquisitions as well as business
development.
The Company's core activity is providing infrastructure, systems and network
outsourcing solutions to large- and medium-size enterprises. It provides data
center outsourcing services in a customized environment and infrastructure
management consulting service to a broad array of clients in a variety of
industries. With the rapid growth of the Internet, the Company recently formed
a subsidiary, Infocrossing, Inc., to meet the exploding requirements of
enterprises to outsource their Internet activities into facilities that provide
the highest degree of availability and security. The Company is providing
colocation, professional and managed services to dot-com companies and other
e-commerce enterprises. Due to rapid changes and increasing complexities in
information technology, outsourcing is an efficient solution for many
businesses.
In December 1997, the Company consummated the sale (the "Sale") of four wholly-
owned subsidiaries of the Company, 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 which was subsequently paid by
Zurich. The terms of the Sale also provided for an additional payment by the
Buyer of up to $1,500,000, which was received in full 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.
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 provided these services through December 31, 1999 for an initial
payment of $500,000, and fixed 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. Effective May 1999, Zurich and the Company amended the original
agreement to provide that the Company's obligations under the original agreement
would terminate on October 31, 1999. The $1,440,000 has been amortized over the
term of the amended agreement. The amortization of such income is included in
income from continuing operations.
Page 2 of 45
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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, network 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
- 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:
Data Center Outsourcing Services
The Company's Data Center Outsourcing Services allow clients to process and
manage core business applications. 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 services 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 healthcare. Its clients in these markets rely on the Company
to combine its in-depth industry knowledge with information technology
solutions that 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 rates for the
Company's services 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, for example, the
Company received notice from its largest publishing client that it was
exercising an option to cancel during fiscal 1999 by paying a cash penalty.
Substantially all processing ended for this client in 1999.
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Internet Data Center Services
The Company retooled a portion of its state-of-the-art data center into an
Internet Data Center from which the Company will offer colocation,
systems, and network management services to enterprises with mission-
critical Internet requirements. Infrastructure hosting for Internet-
dependent enterprises demands many of the same skills, procedures, and
physical requirements for mainframe and midrange environments. With the
rapid growth of the Internet and Internet-dependent enterprises, the
Company plans to develop multiple Internet Data Centers to maximize the
likelihood of uninterrupted access to the worldwide web. For
technological and business reasons, 'dot.com' companies require multiple
locations for their dedicated hardware to ensure continuous and efficient
accessibility by users of the worldwide web. Accordingly, it is
anticipated that many clients will choose to colocate dedicated hardware
in several Internet Data Centers.
Computer Facilities Management Services
The Company provides Computer Facilities Management Services either at its
state-of-the-art data center or at a client's location for medium and
large enterprises 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.
Enterprise Infrastructure Management Consulting
The Company's principal expertise is analyzing data center operations to
maximize operating performance and to minimize operating costs.
Consulting services include hardware selection; automation; disaster
recovery planning; systems management; storage management; and
performance reporting. The Company concentrates on aligning a client's
information systems with such client's business focus to strengthen the
client's technology infrastructure to enable it to increase its
competitiveness and business opportunities.
After performing analytical studies to identify areas of improvement, the
Company's professionals develop a transformation plan, manage the
implementation process, and monitor the results.
Electronic Data Interchange ("EDI")
The Company has developed an EDI subsystem that allows a vendor to receive
orders and floor selling information from a retailer electronically;
transmit invoices to a retailer electronically; maintain an electronic
product catalog accessible to a retailer; provide reports and on-line
inquiry into orders and shipments, along with comprehensive floor selling
reports; and generate automated Advance Ship Notices. The Company's EDI
subsystem allows a small vendor or importer to conform to the EDI
requirements of various large retailers and to continue as an approved
vendor of those retailers without having to acquire its own data
processing and interchange capability.
Page 4 of 45
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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.
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 client 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.
Marketing and Sales
The Company currently targets its principal marketing efforts to large and
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.
Initial contact is made by a variety of methods, including seminars, mailings,
telemarketing, referrals, and attendance at industry conventions and trade
shows. The Company's sales representatives and marketing support staff analyze
clients' requirements and prepare product demonstrations. In addition to
internal marketing efforts, the Company has formed strategic alliances to
generate additional sales. The Company also entered into agreements with
certain enterprises and individuals that would be entitled to receive
compensation for their assistance in procuring sales.
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. 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.
Page 5 of 45
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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 service 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
competitors. Among the best known of the Company's competitors are Affiliated
Computer Services, Inc., Computer Sciences Corp., Exodus Communications, Inc.
Electronic Data Systems Corporation, Globix Corp., IBM Corporation, and Level 3
Communications, Inc.
Aside from such major companies, the outsourcing service industry is 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 in-house systems rather than use the Company's
services, thus potentially creating selling opportunities for the Company.
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 services 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 services 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.
Page 6 of 45
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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 Company has incurred no significant expense in its compliance with Federal,
state and local environmental laws.
Employees
As of October 31, 1999, the Company had 292 full-time and 48 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 such
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 of approximately 67,000 square feet in Leonia, NJ
for its headquarters and data center. The lease expires on December 31, 2014.
The Company leases office space of approximately 37,200 square feet in a New
York City building where the Company has maintained 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 under an agreement expiring on December
30, 2008, a day before the expiration of the primary lease. Currently, the
Company primarily utilizes the remainder of the New York space for data
conversion operations.
The Company also leases 24,210 square feet of data conversion and office space
as follows:
Location Square Feet Lease Expiration Date
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Charlotte, NC 11,510 January 31, 2002
Aberdeen, NJ 5,700 June 30, 2000
Secaucus, NJ 3,950 September 30, 2001
New Haven, CT 2,000 February 1, 2000
Glendale, CA 1,050 June 30, 2003
Page 7 of 45
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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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None.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
Page 8 of 45
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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, 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
For the year ended October 31, 1999:
1st Quarter (November 1, 1998 - January 31, 1999) 16.000 8.750
2nd Quarter (February 1, 1999 - April 30, 1999) 12.125 7.000
3rd Quarter (May 1, 1999 - July 31, 1999) 12.250 8.500
4th Quarter (August 1, 1999 - October 31, 1999) 10.750 7.125
The closing price of the Company's common stock on NASDAQ-NMS on January 20,
2000 was $34.00 per share. The Company has approximately 125 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 45
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During the three years ended October 31, 1999, 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.
AMOUNT OF
NUMBER OF CASH OR OTHER
COMMON TRANSACTION EXPLANATION OF THE CONSIDERATION
TO WHOM ISSUED SHARES DATE(S) TRANSACTION RECEIVED
NON-CASH ISSUANCES:
Holder of a 40,000 Two Exercises by means
pre-IPO non- exercises of offsets against
qualified in 2/97 amounts due the
option and 3/97 optionholder $ 157,894
Outside counsel 22,000 9/97 Issuance as payment
for legal services
rendered $ 89,375
Seller of assets 20,000 9/98 Settlement of
to the Company a portion of
consideration as
called for in the
Agreement $ 180,000
Seller of assets 300,000 12/98 Settlement of a
to the Company portion of
consideration as
called for in the
Agreement $ 2,677,500
ISSUANCES FOR CASH:
Holder of a pre-IPO 100,000 5/98 Exercise of the
non-qualified option for cash
option $ 1,000
Underwriter(s) 66,725 Five Exercises of
for the exercises Warrants given
Company's IPO between in connection
1/98 and 2/98 with the IPO $ 420,368
A consultant to 75,240 3/98 Exercise of
the Company Warrants given
in connection
with a consulting
agreement $ 407,500
Page 10 of 45
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Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
Fiscal Year 1999 as Compared to Fiscal Year 1998
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 diluted share). The following discussions focus on continuing
operations.
On December 18, 1998, the Company acquired certain assets and the business of
Enterprise Technology Group, Inc. (the "Enterprise Purchase"). Enterprise
Technology Group provided information technology consulting services with a
focus on infrastructure management solutions.
For the year ended October 31, 1999, revenues increased $3,862,000 (12.7%) to
$34,265,000 from $30,403,000 recorded in the year ended October 31, 1998.The
Company's Year-2000 consulting revenues declined by approximately $1,665,000
from $1,972,000 for fiscal year 1998 to $307,000 for fiscal year 1999. Revenue
from a covenant not to compete was $1,000,000 in fiscal 1999 versus $440,000 for
fiscal 1998 as a result in an amendment to the non-compete agreement. Increased
revenues from other activities substantially exceeded the decline in Year-2000
consulting revenues.
Data processing costs increased $3,651,000 to $23,633,000 (69.0% of revenues)
during the current year, compared to $19,981,000 (65.7% of revenues) in the
prior year. Data processing costs rose as a result of higher sales and upgrades
in the Company's data center.
Selling and promotion costs increased $867,000 to $2,056,000, (6.0% of revenues)
during the current year compared to $1,189,000 (3.9% of revenues) in the prior
year. The increase is attributable to additional sales staff and increased
marketing initiatives.
General and administrative expenses increased $147,000 to $6,154,000 (18.0% of
revenues) in the current year as compared to $6,007,000 (19.8% of revenues) in
the prior year. Certain savings achieved by the Company were offset by expenses
related to the Enterprise Purchase and to the new offices in Charlotte, North
Carolina and New Haven, Connecticut.
Net interest income exceeded expense by $286,000 in fiscal 1999, and by $548,000
in fiscal 1998. The decrease in net interest income of $262,000 resulted from
lower cash balances after the Enterprise Purchase and the payment of income
taxes and costs related to the Sale of the Payroll Division.
The effective tax rate on income from continuing operations rose to 38.6% for
fiscal 1999 from 30% for fiscal 1998. The rate was lower in fiscal 1998 in part
because of tax credits that were utilized in such year.
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After the provision for income taxes, the Company recorded a 54% increase in
income from continuing operations, from $1,079,000 ($0.24 per diluted share) for
the year ended October 31, 1998, to $1,661,000 ($0.34 per diluted share) for the
year ended October 31, 1999.
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 $2,909,000 to $19,981,000 (65.7% of revenues)
during fiscal 1998, compared to $17,072,000 (70.0% of revenues) in fiscal 1997.
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 decreased $77,000 to $1,189,000, (3.9% of revenues)
during fiscal 1998 compared to $1,266,000 (5.2% of revenues) in the prior year.
As a percentage of revenues, however, selling and promotion costs declined in
fiscal 1998 because of efficiencies of scale.
General and administrative expenses increased $1,384,000 to $6,007,000 (19.8% of
revenues)in fiscal 1998 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 consolidated
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 therewith 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 operations and
$0.11 per share on the gain from the sale of the Payroll Division.
Page 12 of 45
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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 on income 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.
Liquidity and Capital Resources
During the year ended October 31, 1999, the Company used net cash of $64,000
in continuing operations.
The Company's investing activities used $5,417,000, including $4,284,000 for the
Enterprise Purchase and related costs. The Company also invested $1,848,000 for
the purchase of equipment, new software products, and other fixed assets and
$905,000 for product development and enhancement. In financing activities, the
Company used $253,000 to repay long-term debt and capital leases and received
$666,000 generated from exercises of employee stock options.
At the end of the second quarter of fiscal 1999, the Company began construction
of an Internet Data Center within its Leonia facility. A major portion of this
construction is represented by a contract aggregating approximately $2,788,000.
This construction is expected to be finished in the Company's first fiscal
quarter. As of October 31, 1999, there were payments of approximately
$1,733,000 remaining to be made on this contract.
In October 1999, the Company signed an agreement with a bank for a line of
credit of up to $5,000,000. Amounts drawn under this agreement, payable upon
demand, will accrue interest (at the Company's option) at either the Prime Rate
or 1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate will be fixed
during the period corresponding to the particular LIBOR rate selected. The line
of credit has no fixed term. The line is secured by a first lien on accounts
receivable and certain general intangibles.
Page 13 of 45
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As of October 31, 1999, the Company had cash and equivalents and highly liquid,
short-term investments aggregating approximately $3,264,000. The Company
believes that the combination of its cash and other liquid assets, potential
future operating cash flow, and potential borrowing capacity will provide
adequate resources to fund its ongoing operating requirements. The Company has
announced plans to build a total of twenty Internet Data Centers in the United
States and abroad. The Company would require external financing to effect such
a plan.
Other Matters
Certain of the Company's computer systems have needed 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, if not corrected, 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.
In 1998, the Company appointed a senior officer, reporting directly to the
President, as the Y2K Compliance Coordinator. He has worked closely with the
operations managers, senior management, and the Company's vendors.
During the month of December 1999, the Company completed Y2K remediation on the
three classification groups as previously designated by the Company.
Classification One included the computer and communications hardware and non-
application software programs the Company obtains from vendors. Classification
Two included the Company's applications used to service clients and internal
users. Classification three included all non-direct computer (Non-IT)
associated items such as elevators, phone systems, security access, as well as
services provided by non-computer related vendors such as utility companies.
A corporate contingency plan was also developed in the event serious Y2K
failures were encountered. The plan was put into effect the last week of
December. Major actions taken included:
1) Ordering and delivery of additional supplies to counter the possible
effect of Y2K related delivery problems during the first two weeks
of January.
2) Implementing plans for the processing of critical and other IT
systems before, during and immediately after January 1, 2000.
3) Creating Technical Response Support teams to be on site and on call
during the first week of the New Year.
4) Re-testing of all hardware, software and communications components
immediately after the start of the New Year.
Page 14 of 45
<PAGE>
The Company did not encounter any significant problems upon the rollover to the
new Millennium. The problems that were encountered were few and minor in
nature, and were resolved quickly with minimal or no impact on the Company's
ability to service the clients. At present, approximately 80% of the Company's
IT applications (Classification Two) have been successfully processed in the
year 2000.
The remaining 20% consists of monthly applications relating to January 2000 that
will be processed during the first two weeks of February. The Company does not
anticipate any significant Y2K problems with the remaining applications.
Internal and external costs specifically associated with Y2K modifications for
computer software used for internal purposes was expensed as it occurred. The
final cost for this activity totaled approximately $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
Derivatives - In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), the effective date of which was deferred for all
fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS No. 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts and for hedging activities. This statement is not expected
to have a significant impact on the Company's financial position or results of
operations.
Page 15 of 45
<PAGE>
Item 7. Financial Statements
--------------------
The Financial Statements and Notes thereto are set forth beginning at page 21 of
this Report.
Item 8. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure
--------------------------------------------------
None
PART III
Item 9. Directors and Executive Officers
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
Item 10. Executive Compensation
----------------------
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The foregoing four Items of Part III are incorporated by reference to the
Company's definitive Proxy Statement in connection with it Annual Meeting of
Stockholders, to be filed no later than February 28, 2000.
Page 16 of 45
<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
3.1 Restated Certificate of Incorporation
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 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 the year ended
October 31, 1995.
10.4 Employment Agreement dated as of December 18, 1998 between
the COSI Acquisition Corp ("ETG") and Warren E. Ousley,
incorporated by reference to a Form 8K filed January 14,
1999.
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 the year
ended 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,
incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended October 31, 1998.
10.7 Agreement of Sublease between NMU Pension Plans as
Sublandlord, and the Company as Subtenant, dated as of
September 21, 1998, incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
October 31, 1998.
Page 17 of 45
<PAGE>
Exhibit No. Description
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 the year ended October 31,
1997.
10.8B First Amendment of Lease between Leonia Associates, LLC and
the Company, dated January 16, 1998, incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the year ended October 31, 1998.
10.8C Second Amendment of Lease between Leonia Associates, LLC and
the Company, dated as of September 9, 1999.
10.9A 1992 Stock Option and Stock Appreciation Rights Plan, as
amended, (the "Plan") incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended
October 31, 1998.
10.9B Amendment to the Plan as approved by the Company's
Shareholders, incorporated by reference to the Company's
Proxy Statement for the Annual Meeting held June 23, 1999
10.10 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.
10.11 Payroll Services Conversion Agreement between the Company
and ADP, Inc., incorporated by reference to the Company's
Annual Report on Form 1KSB for the year ended October 31,
1998.
10.12 Asset Purchase Agreement dated as of December 16, 1998, by
and among the Company, COSI Acquisition Corp, EnterPrise
Technology Group, Inc.("Enterprise"), and certain stock-
holders of Enterprise, incorporated by reference to a
Current Report on Form 8-K filed by the Company on January
4, 1999.
10.13 Non-Competition and Non Solicitation Agreements dated as of
December 18, 1998 between COSI Acquisition Corp ("ETG")and
Enterprise, between ETG and Warren E. Ousley, and between
ETG and M. Peter Miller, incorporated by reference to a
Current Report on Form 8-K filed by the Company on January
4, 1999.
10.14 Credit and Security Agreement by and between the Company and
Fleet Bank, National Association dated October 29,1999 in
respect of a $5,000,000 Secured Committed Line of Credit
Note
Page 18 of 45
<PAGE>
Exhibit No. Description
21 List of Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27 Financial Data Schedule - included in EDGAR filing only.
(b) Reports on Form 8-K
None.
Page 19 of 45
<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.
January 28, 2000 /s/ Zach Lonstein
---------------------------------------------
Zach Lonstein - Chief Executive Officer
January 28, 2000 /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.
January 28, 2000 /s/ Zach Lonstein
--------------------------------------------
Zach Lonstein - Chairman of the Board of
Directors
January 28, 2000 /s/ Robert B. Wallach
--------------------------------------------
Robert B. Wallach - Director
January 28, 2000 /s/ John C. Platt
--------------------------------------------
John C. Platt - Director
January 28, 2000 /s/ Warren Ousley
--------------------------------------------
Warren Ousley - Director
January 28, 2000 /s/ Howard Waltman
--------------------------------------------
Howard Waltman - Director
January 28, 2000 /s/ Joseph Lynaugh
--------------------------------------------
Joseph Lynaugh - Director
January 28, 2000 /s/ Peter J. DaPuzzo
--------------------------------------------
Peter J. DaPuzzo - Director
Page 20 of 45
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Report of Independent Auditors 22
Consolidated Balance Sheets -
October 31, 1999 and 1998 23
Consolidated Statements of Income -
Years ended October 31, 1999 and 1998 25
Consolidated Statements of Cash Flows -
Years ended October 31, 1999 and 1998 26
Consolidated Statements of Stockholders' Equity -
Years ended October 31, 1999 and 1998 28
Notes to Consolidated Financial Statements 29
Page 21 of 45
<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 sheets of Computer
Outsourcing Services, Inc. and subsidiaries as of October 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the responsi-
bility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits 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 audits provide 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
- ----------------------------
ERNST & YOUNG, LLP
New York, New York
December 28, 1999
Page 22 of 45
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,590,223 $ 9,403,006
Marketable debt securities, at cost which
approximates market value 1,673,441 3,218,170
Trade accounts receivable, net of allowance for
doubtful accounts of $350,939 and $216,659 6,010,366 4,452,117
Prepaid income taxes 961,196 -
Deferred income taxes - current 591,178 603,627
Net assets held for sale - 229,289
Prepaid license fees 915,935 541,397
Prepaid expenses and other current assets 587,264 638,142
----------- -----------
12,329,603 19,085,748
----------- -----------
PROPERTY and EQUIPMENT, net 3,638,993 2,508,875
----------- -----------
OTHER ASSETS:
Deferred software, net 2,223,823 1,803,013
Intangibles, net 8,484,564 2,221,842
Due from related parties, net 132,314 89,313
Deferred income taxes 235,986 718,341
Security deposits and other non-current assets 508,800 521,404
----------- -----------
11,585,487 5,353,913
----------- -----------
TOTAL ASSETS $27,554,083 $26,948,536
=========== ===========
See Notes to Consolidated Financial Statements
Page 23 of 45
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-------------------------
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,237,479 $ 1,029,406
Current portion of long-term debt and
capitalized lease obligations 19,017 260,277
Income taxes payable - 2,468,747
Current portion of accrued loss on office sublease 256,429 365,495
Accrued expenses 1,514,514 2,000,355
Customer deposits and other current liabilities 137,208 202,787
----------- -----------
3,164,647 6,327,067
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt and capitalized lease obligations - 11,510
Accrued loss on office sublease 1,564,592 2,016,606
Deferred income from a non-competition,
confidentiality, and conduct of
business agreement - 1,000,000
----------- -----------
1,564,592 3,028,116
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000
shares authorized, none issued - -
Common stock, $0.01 par value; 10,000,000
shares authorized; shares issued 4,737,915
and 4,285,715 in 1999 and 1998, respectively 47,379 42,857
Additional paid-in capital 15,519,826 11,946,837
Retained earnings 7,264,952 5,603,659
----------- -----------
22,832,157 17,593,353
Less 1,000 shares of common stock held in
treasury, at cost (7,313) -
----------- -----------
22,824,844 17,593,353
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,554,083 $26,948,536
=========== ===========
See Notes to Consolidated Financial Statements
Page 24 of 45
<PAGE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31,
-------------------------
1999 1998
----------- -----------
REVENUES $34,264,966 $30,403,381
----------- -----------
COSTS and EXPENSES:
Data processing costs 23,632,609 19,981,231
Selling and promotion costs 2,056,260 1,189,424
General and administrative costs 6,154,404 6,007,071
One-time charge for loss on office sublease - 2,236,583
Interest income, net (285,973) (547,499)
----------- -----------
31,557,300 28,866,810
----------- -----------
Income from continuing operations
before provision for income taxes 2,707,666 1,536,571
Provision for income taxes 1,046,373 457,621
----------- -----------
Income from continuing operations 1,661,293 1,078,950
Loss on discontinued operation, net of income
tax benefit of $60,079 - (76,464)
Gain on sale of discontinued operation, net of
income tax provision of $1,399,569 - 1,696,160
----------- -----------
NET INCOME $ 1,661,293 $ 2,698,646
=========== ===========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.36 $ 0.27
Loss from discontinued operation - (0.02)
Gain on sale of discontinued operation - 0.42
----------- -----------
Net income $ 0.36 $ 0.67
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,636,525 4,058,376
=========== ===========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.34 $ 0.24
Loss from discontinued operation - (0.01)
Gain on sale of discontinued operation - 0.38
----------- -----------
Net income $ 0.34 $ 0.61
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,950,050 4,427,921
=========== ===========
See Notes to Consolidated Financial Statements
Page 25 of 45
<PAGE> COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED OCTOBER 31,
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,661,293 $ 1,078,950
Adjustments to reconcile net income to cash
provided by/(used in) operating activities:
Depreciation and amortization 1,893,081 1,707,072
Income from a non-competition,
confidentiality, and conduct of business
agreement (1,000,000) (440,000)
Accrued loss on office sublease - 2,236,581
Deferred income taxes 494,804 (1,962,378)
Decrease/(increase) in:
Trade accounts receivable (1,558,248) (461,488)
Prepaid expenses and other current assets (323,660) 44,220
Security deposits and other noncurrent
assets 45,410 (51,505)
Increase/(decrease) in:
Accounts payable 208,073 (217,110)
Income taxes payable (999,929) 1,276,429
Accrued expenses (3,568) (213,383)
Payments on accrued loss on office sublease (415,200) (330,492)
Customer deposits and other current
liabilities (65,579) (28,912)
----------- -----------
Net cash (used in)/provided by
operating activities (63,523) 2,637,984
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,848,267) (1,500,680)
Disposal of equipment - 14,960
Redemptions/(Purchases) of investments in
marketable debt securities 1,544,729 (3,218,170)
Proceeds from sale of the Payroll Division - 14,400,000
Amounts received from buyer for assets
held for sale 82,695 25,000
Payment for the purchase of certain assets
and the business of Enterprise Technology
Group, Inc. (the "Enterprise Purchase") (4,000,000) -
Payment of expenses related to the
Enterprise Purchase (283,701) -
Purchase of treasury stock (7,313) -
Increase in deferred software costs (905,070) (892,010)
----------- -----------
Net cash (used in)/provided by
investing activities $(5,416,927) $ 8,829,100
----------- -----------
Continued on next page
See Notes to Consolidated Financial Statements
Page 26 of 45
<PAGE> COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
YEARS ENDED OCTOBER 31,
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and
capitalized leases $ (252,770) $(2,320,780)
(Advances to)/repayments by related
parties, net (43,001) 86,982
Exercises of stock options and warrants 666,011 1,725,055
----------- -----------
Net cash provided by/(used in)
financing activities 370,240 (508,743)
----------- -----------
Net cash (used in)/provided
by continuing operations (5,110,210) 10,958,341
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations - (76,464)
Adjustments to reconcile loss from discontinued
operations to cash used in discontinued operations:
Depreciation and amortization - 151,118
Increase in net assets of discontinued
operations - (246,961)
Payment of taxes and other expenses related
to sale of the Payroll Division (2,556,693) (2,239,367)
Payments on portion of accrued loss on office
sublease relating to discontinued operation (145,880) (116,120)
----------- -----------
Net cash used in discontinued operations (2,702,573) (2,527,794)
----------- -----------
Net (decrease)/increase in cash and equivalents (7,812,783) 8,430,547
Cash and equivalents, beginning of the year 9,403,006 972,459
----------- -----------
Cash and equivalents, end of the year $ 1,590,223 $ 9,403,006
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 23,270 $ 129,635
=========== ===========
Income taxes $ 3,917,926 $ 1,092,061
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Common stock issued for the purchase of software $ - $ 180,000
=========== ===========
Common stock issued for the Enterprise Purchase $ 2,677,500 $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Tax benefit associated with the exercise of
non-qualified options $ 234,000 $ 450,593
=========== ===========
See Notes to Consolidated Financial Statements
Page 27 of 45
<PAGE> COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Par Paid in Retained Treasury
Shares Value Capital Earnings Stock Total
------------------------------------------------------------------
Balances,
October
31, 1997 3,826,102 $38,261 $9,595,789 $2,905,013 - $12,539,063
Stock issued
to purchase
assets 20,000 200 179,800 180,000
Exercises of
stock options
and warrants 439,613 4,396 1,720,659 1,725,055
Tax benefit
associated
with the
exercise of
nonqualified
options 450,589 450,589
Net income 2,698,646 2,698,646
------------------------------------------------------------------
Balances,
October
31, 1998 4,285,715 $42,857 $11,946,837 $5,603,659 - $17,593,353
Stock issued
for the
Enterprise
Purchase 300,000 3,000 2,674,500 2,677,500
Exercises
of stock
options 152,200 1,522 664,489 666,011
Purchased
1,000 shares
for treasury,
at cost (7,313) (7,313)
Tax benefit
associated
with the
exercise of
nonqualified
options 234,000 234,000
Net income 1,661,293 1,661,293
------------------------------------------------------------------
Balances,
October 31,
1999 4,737,915 $47,379 $15,519,826 $7,264,952 $(7,313) $22,824,844
==================================================================
See Notes to Consolidated Financial Statements
Page 28 of 45
<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
(collectively, the "Company") provide 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 11).
On December 18, 1998, the Company acquired certain assets and the business of
Enterprise Technology Group, Inc. (the "Enterprise Purchase"). Enterprise
Technology Group provided information technology consulting services with a
focus on infrastructure management solutions (Note 12).
In the fourth quarter of fiscal 1999, the Company formed a wholly-owned
subsidiary, Infocrossing, Inc., to provide colocation and related professional
services to companies wishing to outsource their Internet activities to full-
service Internet Data Centers (IDC's).
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 the estimated useful lives. Leasehold improvements and assets
acquired under capital leases are amortized over the shorter of the lease term
or the estimated useful lives. Construction in progress relates to the portion
of the Company's new Internet Data Center, being constructed in its Leonia, NJ
facility. (See Notes 3 and 10)
Page 29 of 45
<PAGE>
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 sale of
these assets was completed in the third quarter of fiscal 1999.
Intangible Assets - The excess of cost over net assets of acquired businesses
("goodwill") is amortized using the straight-line method over the estimated
lives, typically no more than twenty years. Other intangible assets, primarily
acquired customer lists, are amortized using the straight-line method over the
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 - The Company calculates earnings per share as required by
Statement of Accounting Standards No. 128 - "Earnings per Share" ("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. Stock options and warrants
which are anti-dilutive are excluded from the computation of weighted average
shares outstanding. Certain options which are currently anti-dilutive may be
dilutive in the future.
Segments - During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). The Company adopted the
provisions of SFAS No. 131 in the current fiscal year. The Company operates in
one industry segment, that being the providing of infrastructure, systems, and
network outsourcing solutions to its clients.
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). The Company did not have any
comprehensive income within the scope of SFAS 130.
Page 30 of 45
<PAGE>
Derivatives - In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), the effective date of which was deferred for all
fiscal quarters of fiscal years beginning after June 15, 2000 by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of SFAS No. 133. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts and for hedging activities. This statement is not expected
to have a significant impact on the Company's financial position or results of
operations.
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.
The carrying amounts and estimated fair values of financial instruments at the
end of the respective years are summarized as follows:
October 31, 1999 October 31, 1998
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------ ------------------------
Assets:
Cash and equivalents $ 1,590,223 $ 1,590,223 $ 9,403,006 $ 9,403,006
Marketable debt
securities (Note 2) 1,673,441 1,674,166 3,218,170 3,217,095
Trade accounts
receivable, net 6,010,366 6,010,366 4,452,117 4,452,117
Liabilities:
Accounts payable, accrued
expenses, income taxes
payable, customer
deposits and other
current liabilities 4,710,222 4,710,222 5,701,295 5,701,295
Acquisition note - - 210,160 209,636
Other borrowings 11,004 11,039 42,213 42,325
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.
Page 31 of 45
<PAGE>
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.
Acquisition Note 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.
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 dates of the financial
statements and the reported amounts of revenues and expenses during the periods.
Actual results could differ from those estimates.
Reclassifications - Certain reclassifications were made to the 1998 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, 1999 and 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):
As of October 31, 1999
--------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Cash equivalents:
Commercial paper $ 789,032 $ - $ - $ 789,032
----------- ----------- ----------- -----------
Marketable debt
securities:
Commercial paper 1,124,124 - - 1,124,124
Corporate obligations 549,317 725 - 550,042
----------- ----------- ----------- -----------
Subtotal 1,673,441 725 - 1,674,166
----------- ----------- ----------- -----------
Total $ 2,462,473 $ 725 $ - $ 2,463,198
=========== =========== =========== ===========
Page 32 of 45
<PAGE>
As of October 31, 1998
--------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
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
=========== =========== =========== ===========
3. Property and Equipment
Property and equipment consists of the following:
October 31, Depreciable
------------------------ Lives
1999 1998 (Years)
----------- ----------- -----------
Computer equipment $ 4,017,472 $ 3,699,955 5
Computer equipment held under
capital leases (Note 7) 1,278,669 1,278,669 *
Furniture and office equipment 970,842 882,199 7
Leasehold improvements 568,192 403,609 *
Construction in progress 1,206,052 - *
Purchased software 1,120,377 991,928 5
Vehicles 39,741 32,146 3
----------- -----------
9,201,345 7,288,506
Less accumulated depreciation
and amortization, including
$1,211,534 in 1999 and
$1,140,161 in 1998
attributable to capital leases (5,562,352) (4,779,631)
----------- -----------
$ 3,638,993 $ 2,508,875
=========== ===========
* Shorter of the useful life or the length of the lease.
Depreciation and amortization in continuing operations was $782,721 and $768,753
for the years ended October 31, 1999 and 1998, respectively.
Page 33 of 45
<PAGE>
4. Deferred Software Costs
Deferred software costs consist of the following:
October 31,
---------------------------
1999 1998
------------ ------------
Costs of internally-developed software
and enhancements, including software
under development $ 4,528,438 $ 3,623,368
Accumulated amortization (2,304,615) (1,820,355)
------------ ------------
$ 2,223,823 $ 1,803,013
============ ============
Amortization of deferred software costs charged to continuing operations for the
years ended October 31, 1999 and 1998 were $484,260 and $634,932, respectively.
5. Intangibles
Intangible assets consist of the following:
October 31,
---------------------------
1999 1998
------------ ------------
Excess of cost of investments over
net assets acquired (goodwill) $ 8,692,554 $ 1,820,925
Customer lists 1,180,488 1,180,488
------------ ------------
9,873,042 3,001,413
Less accumulated amortization (1,388,478) (779,571)
------------ ------------
$ 8,484,564 $ 2,221,842
============ ============
Amortization charged to continuing operations was $608,907 and $249,489 for the
years ended October 31, 1999 and 1998, respectively.
6. Related Party Transactions
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 for 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 remained in effect.
Such fee was being paid in the form of a monthly reduction in the Chief
Executive Officer's existing indebtedness to the Company. The personal
guarantee was terminated in February 1999 when the indebtedness was repaid
(Note 7).
Page 34 of 45
<PAGE>
Due from related parties consists of the following:
October 31,
-----------------------
1999 1998
---------- ----------
Due from the Chairman & Chief executive
Officer and controlling shareholder,
bearing interest at prime (8.25% and 8%
at October 31, 1999 and 1998,
respectively) plus 1% per
annum, repayable on demand $ 58,241 $ 63,079
Due from consultant (Note 10) 13,118 26,234
Due from the President, bearing
interest at prime, repayable on demand 60,955 -
---------- ----------
$ 132,314 $ 89,313
========== ==========
7. Long-term Debt and Capitalized Lease Obligations
Long-term debt consists of the following:
October 31,
-------------------------
1999 1998
----------- -----------
Note payable issued in
connection with an
acquisition (a) $ - $ 210,160
Notes payable, other 11,004 42,213
----------- -----------
11,004 252,373
Less current portion (11,004) (241,150)
----------- -----------
$ - $ 11,223
=========== ===========
(a) In connection with an acquisition in June 1995, the Company was obligated
to pay the seller $840,645 in installments through February 1, 1999,
with interest of 7.5% per annum payable quarterly in arrears. This
obligation was secured with a note that was collateralized by 310,000
shares of the common stock of the Company owned by the Company's Chief
Executive Officer. The note was paid on full on February 1, 1999 and the
collateral was released (Note 6).
In October 1999, the Company signed an agreement with a bank for a line of
credit of up to $5,000,000. Amounts drawn under this agreement, payable upon
demand, will accrue interest (at the Company's option) at either the Prime Rate
or 1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate will be fixed
during the period corresponding to the particular LIBOR rate selected. The line
of credit has no fixed term. The line is secured by a first lien on accounts
receivable and certain general intangibles.
Page 35 of 45
<PAGE>
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.
At October 31, 1999, there were $8,013 of payments remaining on capital leases,
all of which is due within the next year.
8. Income Taxes
The provision for income taxes on continuing operations consists of:
October 31,
---------------------------
1999 1998
------------ ------------
Current:
Federal $ 486,753 $ 1,119,789
State and local 64,816 576,424
Deferred (benefit)/provision 494,804 (1,238,592)
------------ ------------
$ 1,046,373 $ 457,621
============ ============
A reconciliation of income taxes computed at the Federal statutory rate to
amounts provided is as follows:
October 31,
---------------------------
1999 1998
------------ ------------
Tax provision computed at statutory rate $ 920,606 $ 522,434
Increase/(decrease) in taxes resulting from:
State and local income taxes, net
of federal income taxes 143,977 38,851
Non-deductible expenses 41,343 44,076
Benefit of tax credits (57,981) (179,960)
Other, net (1,572) 32,220
------------ ------------
$ 1,046,373 $ 457,621
============ ============
Page 36 of 45
<PAGE>
Temporary differences which give rise to net deferred tax assets/(liabilities)
are as follows:
October 31,
---------------------------
1999 1998
------------ ------------
Deferred tax assets:
Accrued loss on office sublease $ 956,891 $ 1,189,503
Deferred income from non-competition,
confidentiality, and conduct of
business agreement - 461,800
Accrued liabilities 459,146 110,832
Allowance for doubtful accounts 152,457 96,392
Deferred rent 121,612 63,382
Intangibles 75,128 7,035
Lease transactions 36,794 7,754
Other 300,921 253,704
------------ ------------
2,102,949 2,190,402
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (126,957) (76,142)
Deferred software costs (947,805) (782,793)
Other (201,023) (9,499)
------------ ------------
(1,275,785) (868,434)
------------ ------------
Net deferred tax assets $ 827,164 $ 1,321,968
============ ============
9. 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.
Page 37 of 45
<PAGE>
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 without
being exercised.
In connection with a consulting arrangement, the Company had 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.
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.
Stock Option Plan - Prior to its initial public offering, 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 common stock. On June 23, 1999, the Company's
shareholders approved an amendment to the Plan increasing the maximum number of
shares issuable subject to the Plan to 1,700,000. 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.
Page 38 of 45
<PAGE>
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.
Activity in the Plan during the past two years is as follows:
Weighted
Exercise Average
Number of Price Exercise
Options Range Price
--------- -------------- ----------
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 granted 152,750 $8.00 - $11.48 $10.03
Options exercised (152,200) $3.25 - $7.88 $4.38
Options cancelled (17,150) $4.50 - $9.56 $8.82
---------
Options outstanding, October 31, 1999 788,400 $3.25 - $11.48 $6.56
=========
Additional information regarding options
outstanding: 314,800 $3.25 - $4.68 $3.65
125,050 $5.25 - $7.88 $6.01
348,550 $8.00 - $11.48 $9.38
--------
788,400
========
There were 471,060 and 466,133 options exercisable at October 31, 1999 and 1998,
respectively. At October 31, 1999, there are 532,498 options available for
future grant.
At October 31, 1999, the weighted average remaining contractual life of all
options outstanding, whether vested or not, is approximately 6.4 years.
Page 39 of 45
<PAGE>
The Company accounts for options granted under the Plan in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for stock option awards.
Had compensation cost been determined in accordance with Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation", the
Company's income/(loss) and income/(loss) per common share for fiscal 1999 and
1998, respectively, would have been as follows:
1999 1998
------------------------ ------------------------
Historical Pro Forma Historical Pro Forma
----------- ----------- ----------- -----------
Income from continuing
operations $ 1,661,293 $ 1,278,261 $ 1,078,950 $ 815,359
Loss from discontinued
operation - - (76,464) (76,464)
Gain on sale of
discontinued operation - - 1,696,160 1,696,160
----------- ----------- ----------- -----------
Net income $ 1,661,293 $ 1,278,261 $ 2,698,646 $ 2,435,055
=========== =========== =========== ===========
Income/(loss) per diluted
common share:
Income from continuing
operations $ 0.34 $ 0.26 $ 0.24 $ 0.18
Loss from discontinued
operation - - (0.01) (0.01)
Gain on sale of
discontinued operation - - 0.38 0.38
----------- ----------- ----------- -----------
Net income $ 0.34 $ 0.26 $ 0.61 $ 0.55
=========== =========== =========== ===========
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 1999 and 1998 was $563,569 and $704,176, 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 1999: a risk-free interest rate of 5.75%;
expected lives ranging from six months to four years; and expected volatility of
49.5%. The assumptions used in 1998 included 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 year ended October 31, 1998.
Page 40 of 45
<PAGE>
10. Commitments and Contingencies
Construction Obligation:
At the end of the second quarter of fiscal 1999, the Company began construction
of an Internet Data Center within its Leonia facility. A major portion of this
construction is represented by a construction contract aggregating approximately
$2,788,000. This construction is expected to be finished in the Company's first
fiscal quarter. As of October 31, 1999, there were payments of approximately
$1,733,000 remaining to be made on this contract.
Contingent Acquisition Obligations:
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
year ended October 31, 1998, contingent payments were $26,055. The obligation
at October 31, 1998 was included in other current liabilities.
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 had 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 54,400
shares were subject to the guarantee. Since the market price of the stock on
July 31, 1999 exceeded $5.00, no payment was required.
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 through the period ended December 19, 1997, when these operations were
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, 1999, no liability was recorded for the remaining stock price
guarantee, since the market value of the Company's stock on October 31, 1999,
and for all of fiscal 1999, exceeded the minimum price guarantee. The actual
amount that will ultimately be paid, if any, could change significantly
depending upon the price of the Company's common stock on April 30, 2000, and
upon the number of shares actually held by obligees on that date.
Page 41 of 45
<PAGE>
Employment Agreements - The Company is obligated under certain employment agree-
ments which expire at various times through December 31,2001. Pursuant to
such agreements, the approximate annual minimum salary amounts payable are as
follows:
Years Ending
October 31,
------------
2000 806,146
2001 643,000
2002 72,333
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 that date. 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 ($13,118 at October 31, 1999 (Note 6)). The
consulting agreement imposes certain non-competition restrictions on the
consultant. The existing indebtedness to the Company is being 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, results of
operations, or cash flows of the Company.
Lease Obligations - Operating leases for facilities extend through December 31,
2014. These leases require aggregate minimum monthly rental payments of
approximately $127,000 plus a proportionate share of certain of the landlords'
operating expenses, such as utilities and real estate taxes. The Company's
obligations under certain of these leases are secured by cash deposits or
standby letters of credit, aggregating $305,000. Total expense for occupancy
costs, net of sublease income, was approximately $1,587,000 and $1,872,000
during fiscal 1999 and 1998, respectively.
During the fourth quarter of fiscal 1998, the Company completed the consolida-
tion of its data center and most 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 approximately $6,211,000) 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.
The Company leases certain of its data center equipment, various items of office
equipment, and vehicles under standard commercial operating leases. The Company
also has fixed-term obligations for software licenses.
Page 42 of 45
<PAGE>
Approximate minimum future lease payments for real estate and other leases, net
of sublease income, are as follows:
Years Ending
October 31,
------------
2000 $ 5,917,000
2001 4,585,000
2002 2,863,000
2003 1,660,000
2004 1,323,000
Thereafter 7,292,000
---------------
$ 23,640,000
===============
11. Sale of the Payroll Division
On December 19, 1997, the Company consummated the sale (the "Sale") of all the
capital stock of four wholly-owned subsidiaries of the Company, 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 which was subsequently repaid by Zurich. The terms of the Sale also
provided for an additional payment by the Buyer of up to $1,500,000, which was
received in full 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.
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 provided these services through December 31, 1999 for an initial
payment of $500,000, and fixed 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. In May 1999, Zurich and the Company amended the agreement to
provide that the Company's obligations thereunder would terminate on October 31,
1999. The $1,440,000 has been amortized over the term of the amended agreement.
The amortization of such income is included in income from continuing
operations.
For the period from November 1, 1997 through the date of the Sale, the net
operating losses (net of related tax benefits) of Pay USA were recorded as a
discontinued operation. For this period, revenue from the discontinued
operation approximated $1,117,000 and pretax operating losses approximated
$136,500.
Page 43 of 45
<PAGE>
12. Acquisition
On December 18, 1998, a subsidiary of the Company purchased certain assets and
the business of Enterprise Technology Group, Incorporated ("Enterprise") for
$4,000,000 in cash and 300,000 shares of the Company's common stock valued at
$2,677,500. Certain additional consideration in the form of cash and common
stock (up to $4,872,000 and 242,857 shares) 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 Enterprise Acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their fair values at the date of
acquisition. The assets acquired consist predominately of intangibles
associated with the business of providing information technology infrastructure
management solutions to large companies and institutions. No liabilities were
assumed. The results of operations of ETG, Inc. have been included in the
Company's consolidated results of operations from the date of the acquisition.
In connection with the acquisition, Enterprise and its principal shareholders
entered into non-competition and non-solicitation agreements with the Company.
A value of $50,000 was assigned to these agreements. The Company also recorded
$6,852,928 in excess of cost over net assets acquired (goodwill). The goodwill
is being amortized on a straight-line basis over 15 years, the two agreements
are being amortized over the terms of such agreements (approximately 61 months).
Page 44 of 45
<PAGE>
The following pro forma financial information shows the results of operations
for the fiscal years ended October 31, 1999 and 1998, assuming the acquisition
of certain assets and the business of Enterprise had occurred at the beginning
of each period presented:
Fiscal Years ended October 31,
------------------------------
1999 1998
----------- -----------
Revenues $34,716,000 $35,435,000
=========== ===========
Income from continuing operations $ 2,765,000 $ 1,149,000
Loss from discontinued operation - (76,000)
Gain on sale of discontinued operation - 1,696,000
----------- -----------
Net income $ 1,695,000 $ 2,769,000
=========== ===========
Basic earnings per share:
Income from continuing operations $ 0.36 $ 0.26
Loss from discontinued operation - (0.02)
Gain on sale of discontinued operation - 0.39
----------- -----------
Net income $ 0.36 $ 0.63
=========== ===========
Diluted earnings per share:
Income from continuing operations $ 0.34 $ 0.24
Loss from discontinued operation - (0.01)
Gain on sale of discontinued operation - 0.36
----------- -----------
Net income $ 0.34 $ 0.59
=========== ===========
13. 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, 1999
and 1998, the Company did not make any matching contributions. The
administrative costs of the Plans are borne by the Company. Asset Management
costs are deducted pro rata from participants' accounts.
Page 45 of 45
CERTIFICATE OF INCORPORATION
OF
COMPUTER OUTSOURCING SERVICES, INC.
1. NAME. The name of the corporation (hereinafter, the "CORPORATION") is
Computer Outsourcing Services, Inc.
2. PURPOSE. The purposes for which the Corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law ("DCGL").
3. REGISTERED AGENT AND REGISTERED OFFICE FOR SERVICE OF PROCESS. The
Secretary of State of the State of Delaware is designated as the agent of the
Corporation upon whom process against it may be served, and the Registered Agent
at its post office address, which shall be the Registered Office of the
Corporation, to which the Secretary of State shall mail a copy of such process
served upon him is:
The Corporation Trust Company
1209 Orange Street
Wilmington, DE
4. CAPITAL STOCK.
4.1 AUTHORIZED CAPITAL STOCK. The total number of shares of
stock which the Corporation shall have authority to issue is 11,000,000,
consisting of 1,000,000 shares of preferred stock, par value $.01 per share,
("PREFERRED STOCK") and 10,000,000 shares of Common Stock, par value $.01 per
share ("COMMON STOCK").
4.1.1 PREFERRED STOCK. Authority is hereby expressly
granted to the Board of Directors (the "BOARD") from time to time to issue the
Preferred Stock as Preferred Stock of one or more series and in connection with
the creation of any such series to fix by the resolution or resolutions
providing for the issue of shares thereof the designation, voting powers,
preferences, and relative, participating, optional, or other special rights of
such series, and the qualifications, limitations, or restrictions thereof. Such
authority of the Board with respect to each such series shall include, but not
be limited to, the determination of the following:
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<PAGE>
4.1.1.1 the distinctive designation of, and the number
of shares comprising, such series, which number may be increased (except where
otherwise provided by the Board in creating such series) or decreased (but not
below the number of shares thereof then outstanding) from time to time by like
action of the Board;
4.1.1.2 the dividend rate or amount for such series, the
conditions and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other class or
classes or any other series of any class or classes of stock, and whether such
dividends shall be cumulative, and if so, from which date or dates for such
series;
4.1.1.3 whether or not the shares of such series shall
be subject to redemption by the Corporation and the times, prices and other
terms and conditions of such redemption;
4.1.1.4 whether or not the shares of such series shall
be subject to the operation of a sinking fund or purchase fund to be applied to
the redemption or purchase of such shares and if such a fund be established, the
amount thereof and the terms and provisions relative to the application thereof;
4.1.1.5 whether or not the shares of such series shall
be convertible into or exchangeable for shares of any other class or classes, or
of any other series of any class or classes, of stock of the Corporation and if
provision be made for conversion or exchange, the times, prices, rates
adjustments, and other terms and conditions of such conversion or exchange;
4.1.1.6 whether or not the shares of such series shall
have voting rights, in addition to the voting rights provided by law, and if
they are to have such additional voting rights, the extent thereof;
4.1.1.7 the rights of the shares of such series in the
event of any liquidation, dissolution, or winding up of the Corporation or upon
any distribution of its assets; and
4.1.1.8 any other powers, preferences, and relative,
participating, optional, or other special rights of the shares of such series,
and the qualifications, limitations, or restrictions thereof, to the full extent
now or hereafter permitted by law and not inconsistent with the provisions
hereof.
4.2 DIVIDENDS, ETC. Subject to any provisions of this Certificate of
Incorporation, so long as any shares of Common Stock are outstanding, holders of
Common Stock shall be entitled to receive such dividends and other distributions
in cash, stock of any corporation other than the Corporation or property of the
Corporation as may be declared thereon by the Board from time to time out of
assets or funds of the Corporation legally available therefor and shall share
equally on a per share basis in all such dividends and other distributions.
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<PAGE>
4.3 VOTING.
4.3.1 ONE VOTE PER SHARE. Each holder of record of Common
Stock shall have one vote for each share outstanding in his or her name on the
books of the Corporation and entitled to vote. Cumulative voting shall not be
permitted.
4.3.2 CLASS VOTING. The holders of Common Stock and other
classes and designations of stock as shall be determined by the Board, shall
vote together as a single class unless otherwise determined by the Board.
4.3.3 QUORUM. The holders of a majority of all of the
issued and outstanding shares eligible to vote, present in person or represented
by proxy, shall constitute a quorum for the transaction of any business at any
meeting of shareholders.
4.3.4 ACTION WITHOUT MEETING. Except as may be otherwise
specifically provided by law, whenever by any provision of law or of this
Certificate of Incorporation the vote of shareholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action, the
meeting and vote of shareholders may be dispensed with and such action may be
taken if holders of at least the minimum number of shares required to authorize
such action if such meeting were held and all shares entitled to vote thereon
were present in person or by proxy, consent in writing to such action.
5. BOARD OF DIRECTORS.
5.1 NUMBER. The number of directors ("DIRECTORS") shall be determined
by the Board. The Board shall have three classifications of Directors, namely
Class A, Class B and Class C, and each class shall have an equal number of
Directors to the greatest extent possible.
5.2 ELECTION OF BOARD. The Board shall be elected in accordance with
the by-laws and the DGCL.
5.3 TERM. Each Director shall serve for a term of three years
continuing until the meeting of the shareholders at which the election of the
Class of Directors of which he or she is a member is in the regular order of
business and until his successor is duly elected and qualified, or until his
earlier death, resignation or removal. Notwithstanding the foregoing, the terms
of members of the initial Board shall be one year for Class A Directors, two
years for Class B Directors and three years for Class C Directors.
5.4 REMOVAL AND VACANCIES. Unless otherwise provided in this
Certificate of Incorporation, the holders of a majority of the shares of
outstanding Common Stock shall have the right to remove any one or more of the
Directors at any time, but only with cause, and to concomitantly elect, by
plurality vote, a successor or successors to fill any vacancy on the Board
caused by the removal of any Director.
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<PAGE>
Any vacancy caused by the death, disability, or resignation of any Director or
failure by the holders of a majority of the shares of outstanding Common Stock
to concomitantly fill a vacancy on the Board caused by the removal of a Director
for cause shall be filled by a vote of a majority of the remaining Directors
then in office even though such number may constitute less than a quorum;
PROVIDED that if no Directors remain, then vacancies shall be filled by
plurality vote of the holders of the outstanding Common Stock. Any Director so
appointed to fill a vacancy shall serve for the remainder of this term and until
his successor is duly elected and qualified.
5.5 QUORUM. Not less than three Directors shall constitute a quorum
for the transaction of business at any duly called meeting of the Board.
5.6 ACTION BY THE BOARD. A majority vote of Directors present at
a meeting of Directors at which a quorum is present shall be required to effect
any action by the Board with respect to any matter.
6. AMENDMENTS TO CERTIFICATE OF INCORPORATION. The Corporation reserves
the right at any time and from time to time to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, as the same may be
amended, and other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted, in the manner now or hereafter
prescribed by law; and all rights, preferences and privileges of whatsoever
nature conferred upon shareholders, directors or any other persons whomsoever by
and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Section 6.
7. BY-LAWS. The Board is hereby authorized to adopt, amend or repeal the
by-laws of the Corporation.
8. DURATION. The duration of the Corporation is to be perpetual.
9. INDEMNIFICATION. The Directors shall have the authority to provide in
the by-laws for the indemnification of directors and officers to the fullest
extent permitted by law.
10. PERSONAL LIABILITY OF DIRECTORS. The personal liability of the Directors is
hereby eliminated to the fullest extent permitted by the provisions of the DGCL
as the same may be amended and supplemented, or any successor provision thereto.
11. NO PREEMPTIVE RIGHTS. No holder of any share of the Corporation shall,
because of his ownership of shares, have a preemptive or other right to
purchase, subscribe for or take any part of any shares or any part of the notes,
debentures, bonds or other securities convertible into or carrying options or
warrants to purchase shares of the Corporation issued, optioned or sold by the
Corporation after its incorporation, whether the shares be authorized by this
Certificate of Incorporation or be authorized by an amended certificate duly
filed and in effect at the time of the issuance or sale of such shares or such
notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase shares of the Corporation. Any part of the
shares authorized by this Certificate of Incorporation or by an amended
certificate duly filed, and any part of the notes, debentures, bonds or other
securities convertible into or carrying options or warrants to
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<PAGE>
purchase shares of the Corporation may at any time be issued, optioned for sale
and sold or disposed of by the Corporation pursuant to resolution of the Board
to such persons and upon such terms and conditions as may, to the Board, seem
proper and advisable without first offering to existing shareholders the said
shares or the said notes, debentures, bonds or other securities convertible into
or carrying options or warrants to purchase shares of the Corporation or any
part of any thereof.
12. SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of the shareholders may
be called only by the Chairman of the Board, the President of the Corporation or
by the majority vote of the Directors on the Board. Notwithstanding the
foregoing, whenever the holders of one or more classes or series if Preferred
Stock shall have the right, voting separately as a class or series, to elect
Directors, such holders may call, pursuant to the terms of the resolution or
resolutions adopted by the Board, special meetings of holders of Preferred
Stock.
13. The name and address of the sole incorporator is Richard A. Krantz, Robinson
& Cole LLP, 695 East Main Street, Stamford, CT 06904.
The undersigned has signed this Certificate of Incorporation
on May 14, 1999.
/s/ Richard A. Krantz
---------------------
Richard A. Krantz
Sole Incorporator
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BY-LAWS
OF
COMPUTER OUTSOURCING SERVICES, INC.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 ........................................................ 1
Definitions ................................................ 1
ARTICLE 2 ........................................................ 1
Shareholders ................................................ 1
2.1 Place of Meetings ..................................... 1
2.2 Annual Meeting ........................................ 1
2.3 Special Meetings ...................................... 2
2.4 Fixing Record Date .................................... 2
2.5 Notice of Meetings of Shareholders .................... 2
2.6 Waivers of Notice ..................................... 3
2.7 List of Shareholders at Meeting ....................... 3
2.8 Quorum of Shareholders; Adjournment ................... 3
2.9 Voting; Proxies ....................................... 3
2.10 Selection and Duties of Inspectors at
Meeting of Shareholders ............................. 4
2.11 Organization .......................................... 4
2.12 Order of Business ..................................... 4
2.13 Notice of Business .................................... 4
2.14 Written Consent of Shareholders without a Meeting ..... 5
ARTICLE 3 ........................................................ 5
Directors ................................................... 5
3.1 General Powers ........................................ 5
3.2 Number; Qualification; Term of Office ................. 6
3.3 Nomination of Directors ............................... 6
3.4 Election .............................................. 7
3.5 Newly Created Directorships and Vacancies ............. 7
3.6 Resignations .......................................... 7
3.7 Removal of Directors .................................. 7
3.8 Compensation .......................................... 7
3.9 Place and Time of Meetings of the Board ............... 7
3.10 Annual Meetings ....................................... 7
3.11 Regular Meetings ...................................... 8
3.12 Special Meetings ...................................... 8
3.13 Adjourned Meetings .................................... 8
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3.14 Waivers of Notice of Meetings ......................... 8
3.15 Organization .......................................... 8
3.16 Quorum of Directors ................................... 9
3.17 Action by the Board ................................... 9
3.18 Written Consent In Lieu of Meeting of the Board ....... 9
3.19 Participation at Meetings by Telephone
Conference or Similar Communications ................ 9
ARTICLE 4 ........................................................ 9
Executive Committee and Other Committees .................... 9
4.1 How Constituted and Powers ............................ 9
4.2 General ............................................... 10
ARTICLE 5 ........................................................ 10
Officers .................................................... 10
5.1 Officers .............................................. 10
5.2 Removal of Officers ................................... 10
5.3 Resignations .......................................... 10
5.4 Vacancies ............................................. 10
5.5 Compensation .......................................... 11
5.6 Chairman of the Board ................................. 11
5.7 Chief Executive Officer ............................... 11
5.8 President and Chief Operating Officer ................. 11
5.9 Vice Presidents ....................................... 11
5.10 Secretary ............................................. 11
5.11 Treasurer ............................................. 12
5.12 Assistant Secretaries and Assistant Treasurers ........ 12
ARTICLE 6 ........................................................ 12
Contracts, Checks, Drafts, Bank Accounts, Etc. .............. 12
6.1 Execution of Contracts ................................ 12
6.2 Loans ................................................. 13
6.3 Checks, Drafts, Etc. .................................. 13
6.4 Deposits .............................................. 13
ARTICLE 7 ........................................................ 13
Shares and Dividends ........................................ 13
7.1 Certificates Representing Shares ...................... 13
7.2 Transfer of Shares .................................... 13
7.3 Transfer and Registry Agents .......................... 14
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7.4 Lost, Destroyed, Stolen and Mutilated Certificates .... 14
7.5 Regulations ........................................... 14
7.6 Shareholder Agreements ................................ 14
7.7 Dividends, Surplus, Etc. .............................. 14
ARTICLE 8 ........................................................ 15
Indemnification ............................................. 15
8.1 Indemnification of Officers and Directors ............. 15
8.2 Contract Rights ....................................... 15
8.3 Other Persons ......................................... 15
ARTICLE 9 ........................................................ 15
Books and Records ........................................... 15
9.1 Books and Records ..................................... 15
9.2 Inspection of Books and Records ....................... 16
ARTICLE 10 ....................................................... 16
Seal ........................................................ 16
ARTICLE 11 ....................................................... 16
Fiscal Year ................................................. 16
ARTICLE 12 ....................................................... 16
Voting of Shares Held ....................................... 16
ARTICLE 13 ....................................................... 16
Amendments .................................................. 16
iii
<PAGE>
BY-LAWS
OF
COMPUTER OUTSOURCING SERVICES, INC.
ARTICLE 1
Definitions
-----------
As used in these By-laws, unless the context otherwise requires,
the term:
1.1 "Board" means the Board of Directors of the Corporation.
1.2 "By-laws" means these By-laws of the Corporation, as amended from
time to time.
1.3 "Certificate of Incorporation" means the Certificate of
Incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.4 "Corporation" means Computer Outsourcing Services, Inc.
1.5 "Directors" means the directors of the Corporation.
1.6 "General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
1.7 "Office of the Corporation" means the executive office of the
Corporation as may be chosen from time to time by the Corporation's Board of
Directors.
1.8 "Shareholders" means holders of the outstanding capital stock of
the Corporation.
ARTICLE 2
Shareholders
------------
2.1 Place of Meetings. Every meeting of the shareholders shall be
held at the Office of the Corporation or at such other place within or without
the State of Delaware as shall be specified or fixed in the notice of such
meeting.
2.2 Annual Meeting. A meeting of shareholders shall be held annually
for the election of Directors and the transaction of other business as may
properly be brought before the meeting on the date fixed by the Board in
accordance with the provisions of this Section 2 and the Certificate of
Incorporation.
<PAGE>
2.3 Special Meetings. Special meetings of the Shareholders may be
called only by the Board. Notwithstanding the foregoing, whenever the holders
of one or more classes or series of preferred stock of the Corporation shall
have the right, voting separately as a class or serie s, to elect Directors,
such holders may call, pursuant to the terms of the resolution or resolutions
adopted by the Board pursuant to Section 5 of the Certificate of Incorporation,
special meetings of holders of preferred stock of the Corporation.
2.4 Fixing Record Date. For the purpose of determining the
Shareholders entitled to notice of or to vote at any meeting of Shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining Shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board may fix, in advance, a date as the record
date for any such determination of Shareholders. Such date shall not be more
than 50 nor less than 10 days before the date of such meeting, nor more than 50
days prior to any other action. If no such record date is fixed:
2.4.1 The record date for the determination of Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if no notice is given, the day on which the meeting is held; and
2.4.2 The record date for determining Shareholders for any
purpose other than that specified in Section 2.4.1 shall be at the close of
business on the day on which the resolution of the Board relating thereto is
adopted.
When a determination of Shareholders entitled to notice of or to
vote at any meeting of Shareholders has been made as provided in this Section
2.4, such determination shall apply to any adjournment thereof, unless the Board
fixes a new record date for the adjourned meeting.
2.5 Notice of Meetings of Shareholders. Except as otherwise provided
in Sections 2.3 and 2.6, whenever under the General Corporation Law or the
Certificate of Incorporation or the By-laws, shareholders are required or
permitted to take action at a meeting, written notice shall be given stating the
place, date and hour of the meeting and, unless it is the annual meeting,
indicating that it is being issued by or at the direction of the person or
persons calling the meeting. Notice of a special meeting shall also state the
purpose or purposes for which the meeting is called. If, at any meeting, action
is proposed to be taken which would, if taken, entitle Shareholders fulfilling
the requirements of Section 262 of the General Corporation Law to receive
payment for their shares, the notice of such meeting shall include a statement
of that purpose and to that effect. A copy of the notice of any meeting shall
be given, personally or by mail not less than 10 nor more than 50 days before
the date of the meeting, to each shareholder entitled to notice of or to vote
at such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, with postage thereon prepaid, directed to
the Shareholder at his address as it appears on the record of shareholders, or,
if he shall have filed with the Secretary of the Corporation a written request
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<PAGE>
that notices to him be mailed to some other address, then directed to him at
such other address. An affidavit of the Secretary or other person giving the
notice or of the transfer agent of the Corporation that the notice required by
this section has been given shall, in the absence of fraud, be prima facie
evidence of the facts therein stated. When a meeting is adjourned to another
time or place, it shall not be necessary to give any notice of the adjourned
meeting if the time and place to which the meeting is adjourned are announced
at the meeting at which the adjournment is taken, and at the adjourned meeting
any business may be transacted that might have been transacted at the meeting
as originally called. However, if after the adjournment the Board fixes a new
record date for the adjourned meeting, a notice of the adjourned meeting shall
be given to each Shareholder of record as of the new record date who is entitled
to notice.
2.6 Waivers of Notice. Notice of meeting need not be given to any
Shareholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any shareholder at a
meeting, in person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute a waiver of
notice by him.
2.7 List of Shareholders at Meeting. A list of Shareholders as of
the record date, certified by the officer of the Corporation responsible for its
preparation, or by a transfer agent, shall be produced at any meeting of
Shareholders upon the request thereat or prior thereto of any Shareholder. If
the right to vote at any meeting is challenged, the inspectors of election, or
person presiding thereat, shall require such list of Shareholders to be produced
as evidence of the right of the persons challenged to vote at such meeting, and
all persons who appear from such list to be shareholders entitled to vote
thereat may vote at such meeting.
2.8 Quorum of Shareholders; Adjournment. Except as otherwise
provided by law, the Certificate of Incorporation or the By-laws, the holders of
a majority of the issued and outstanding shares entitled to vote at any meeting
of shareholders, present in person or represented by proxy, shall constitute a
quorum for the transaction of any business at any such meeting. When a quorum
is once present to organize a meeting of shareholders, the meeting may continue
despite the subsequent withdrawal of any Shareholders or their proxies. The
holders of a majority of shares present in person or represented by proxy at
any meeting of Shareholders, including an adjourned meeting, whether or not a
quorum is present, may adjourn such meeting to another time and place.
2.9 Voting; Proxies. Except as otherwise provided in the Certificate
of Incorporation, every Shareholder of record shall be entitled at every meeting
of Shareholders to one vote for each share standing in his name on the record of
Shareholders determined in accordance with Section 2.4. The provisions of the
General Corporation Law shall apply in determining whether any shares may be
voted and the persons, if any, entitled to vote such shares; but the Corporation
shall be protected in treating the persons in whose names shares stand on the
record of Shareholders as owners thereof for all purposes.
At any meeting of Shareholders, a quorum being present, all matters,
except as otherwise provided by law or by the Certificate of Incorporation or by
the By-laws, shall be decided by a majority of the votes cast at such meeting by
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<PAGE>
the holders of shares present in person or represented by proxy and entitled to
vote thereon, voting as separate classes if so required by the Certificate of
Incorporation. In voting on any question on which a vote by ballot is required
by law or is demanded by any Shareholder entitled to vote, the voting shall be
by ballot, signed by the shareholder voting or by his proxy and stating the
number of shares voted. Every Shareholder entitled to vote at a meeting of
Shareholders or to express consent or dissent without a meeting may authorize
another person or persons to act for him by proxy. The validity and enforce-
ability of any proxy shall be determined in accordance with the General
Corporation Law.
2.10 Selection and Duties of Inspectors at Meeting of Shareholders.
The Board, in advance of any meeting of Shareholders, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. If inspectors are
not so appointed, the person presiding at such meeting may, and on the request
of any shareholder entitled to vote thereat shall, appoint one or more
inspectors. In case any person appointed fails to appear or act, the vacancy
may be filled by appointment made by the Board in advance of the meeting or at
the meeting by the person presiding thereat. Each inspector, before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of his ability. The inspector or inspectors shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote with fairness to
all shareholders. On request of the person presiding at the meeting or any
shareholder entitled to vote thereat, the inspector or inspectors shall make a
report in writing of any challenge, question or matter determined by him or them
and execute a certificate of any fact found by him or them. Any report or
certificate made by the inspector or inspectors shall be prima facie evidence
of the facts stated and of the vote as certified by him or them.
2.11 Organization. At every meeting of Shareholders, the Chairman
of the Board, if any, or in the absence of such Chairman of the Board, the
President, and in the absence of both the Chairman of the Board and the
President, that Vice President having the duty to do so by virtue of the order
of precedence prescribed pursuant to Section 5.8, shall act as Chairman of the
meeting. The Secretary, or in his absence one of the Assistant Secretaries,
shall act as Secretary of the meeting. In case none of the officers above
designated to act as Chairman or Secretary of the meeting, respectively, shall
be present, a Chairman or a Secretary of the meeting, as the case may be, shall
be chosen by a majority of the votes cast at such meeting by the holders of
shares present in person or represented by proxy and entitled to vote at the
meeting.
2.12 Order of Business. The order of business at all meetings of the
Shareholders shall be as determined by the Chairman of the meeting.
2.13 Notice of Business. At any meeting of the Shareholders, only
such business shall be conducted as shall have been brought before the meeting
(a) by or at the direction of the Board or (b) by any shareholder of the
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<PAGE>
Corporation who is a shareholder of record at the time of giving of the notice
provided for in this Section 2.13, who shall be entitled to vote at such meeting
and who complies with the notice procedures set forth in this Section 2.13. In
addition to any other applicable requirements, for business to be properly
brought before a shareholder meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days notice and prior public disclosure of the date of the
meeting is given or made to Shareholders, notice by the shareholder to be timely
must be received no later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made, whichever first occurs. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the meeting (a) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address, as they appear on the Corporation's books, of
the shareholder proposing such business, (c) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the shareholder
and (d) any material interest of the shareholder in such business. Notwith-
standing anything in the By-laws to the contrary, no business shall be conducted
at a shareholder meeting except in accordance with the procedures set forth in
this Section 2.13. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of the By-laws, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwith-
standing the foregoing provisions of this Section 2.13, a shareholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 2.13.
2.14 Written Consent of Shareholders without a Meeting. Whenever the
Shareholders are required or permitted to take any action by vote, such action
may be taken without a meeting on written consent, setting forth the action so
taken or to be taken, signed by the holders of all outstanding shares entitled
to vote thereon. Such consent shall have the same effect as a unanimous vote of
Shareholders.
ARTICLE 3
Directors
---------
3.1 General Powers. Except as otherwise provided in the Certificate
of Incorporation, the business of the Corporation shall be managed by the Board.
The Board may adopt such rules and regulations, not inconsistent with the
Certificate of Incorporation or the By-laws or applicable laws, as it may deem
proper for the conduct of its meetings and the management of the Corporation.
In addition to the powers expressly conferred by the By-laws, the Board may
exercise all powers and perform all acts which are not required, by the By-laws
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<PAGE>
or the Certificate of Incorporation or by law, to be exercised and performed by
the Shareholders. The Board may elect or appoint a Chairman of the Board.
3.2 Number; Qualification; Term of Office. The Board of Directors
shall have such classifications as are set forth in the Certificate of
Incorporation. The number of Directors shall be fixed by the action of the
Board; provided, that the number of Directors constituting the entire Board
shall not be less than three. Each Director shall be at least twenty-one years
of age and shall be elected to hold office until the annual meeting of
Shareholders three years hence following his election and until his successor in
the Class of Directors of which he is a member shall have been duly elected and
shall qualify, or until his earlier death, resignation or removal all in
accordance with the provisions of the Certificate of Incorporation.
3.3 Nomination of Directors. Only persons who are nominated in
accordance with the procedures set forth in these By-laws shall be eligible to
serve as Directors. Nominations of persons for election to the Board may be
made at a meeting of Shareholders (a) by or at the direction of the Board or (b)
by any shareholder of the Corporation who is a shareholder of record at the time
of giving of notice provided for in this Section 3.3, who shall be entitled to
vote for the election of Directors at the meeting and who complies with the
notice procedures set forth in this Section 3.3. Such nominations, other than
those made by or at the direction of the Board, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days notice and prior public disclosure of the date of the meeting
is given or made to Shareholders, notice by the shareholder to be timely must so
received not later than the close of business on the 10th day following the day
on which such notice of the date of the meeting or such public disclosure was
made, whichever first occurs. Such Shareholders' notice shall set forth (a) as
to each person whom the shareholder proposes to nominate for election or
reelection as a Director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a Director if
elected); and (b) as to the shareholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such shareholder and (ii)
the class and number of shares of capital stock of the Corporation which are
beneficially owned by such shareholder. At the request of the Board, any person
nominated by the Board for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee. No person shall be eligible
to serve as a Director of the Corporation unless nominated in accordance with
the procedures set forth in this By-law. The chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by these By-laws, and if
he should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing provisions of
this Section 3.3, a shareholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations thereunder with respect to the matters set forth in this Section.
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3.4 Election. Directors shall, except as otherwise required by law
or by the Certificate of Incorporation, be elected by plurality of the votes
cast at a meeting of Shareholders by the holders of shares entitled to vote in
the election.
3.5 Newly Created Directorships and Vacancies. Except as otherwise
provided by the Certificate of Incorporation, newly created Directorships
resulting from an increase in the number of Directors and vacancies occurring in
the Board for any reason, excluding the removal of Directors without cause, may
be filled by vote of a majority of the Directors then in office, although less
than a quorum, at any meeting of the Board or may be elected by a plurality of
the votes cast by the holders of shares entitled to vote in the election at a
special meeting of Shareholders called for that purpose. A Director elected to
fill a vacancy shall be elected to hold office until the annual meeting of
Shareholders next following his election and until his successor shall have been
elected and shall qualify, or until his earlier death, resignation or removal.
3.6 Resignations. Any director may resign at any time by written
notice to the Chairman of the Board, if any, the President or the Secretary.
Such resignation shall take effect at the time therein specified, and, unless
otherwise specified, the acceptance of such resignation shall not be necessary
to make it effective.
3.7 Removal of Directors. Subject to the provisions of the
Certificate of Incorporation and the General Corporation Law, any or all of the
Directors may be removed, only for cause, by vote of the Shareholders or by
action of the Board.
3.8 Compensation. Each Director, in consideration of his service as
such, shall be entitled to receive from the Corporation such amount per annum or
such fees for attendance at Directors' meetings, or both, as the Board may from
time to time determine, together with reimbursement for the reasonable expenses
incurred by him in connection with the performance of his duties. Each Director
who shall serve as a member of any committee of Directors in consideration of
his serving as such shall be entitled to such additional amount per annum or
such fees for attendance at committee meetings, or both, as the Board may from
time to time determine, together with reimbursement for the reasonable expenses
incurred by him in the performance of his duties. Nothing contained in this
section shall preclude any Director from serving the Corporation or its
subsidiaries in any other capacity and receiving proper compensation therefor.
3.9 Place and Time of Meetings of the Board. Meetings of the Board,
regular or special may be held at any place within or without the State of
Delaware. The times and places for holding meetings of the Board may be fixed
from time to time by resolution of the Board or (unless contrary to resolution
of the Board) in the notice of the meeting.
3.10 Annual Meetings. On the day when and at the place where the
annual meeting of Shareholders for the election of Directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purposes of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
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may be held at any other time and place specified in a notice given as provided
in Section 3.12 for special meetings of the Board or in a waiver of notice
thereof.
3.11 Regular Meetings. Regular meetings of the Board may be held
without notice at such times and places as may be fixed from time to time by the
Board. If any day fixed for a regular meeting of the Board shall not be a
business day at the place where such meeting is to be held, then such meeting
shall be held at the same hour at the same place on the first business day
thereafter.
3.12 Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board, if any, the President or the
Secretary or by any two or more Directors. Notice of each special meeting of
the Board shall be addressed to each Director at the address designated by him
for that purpose or, if none is designated, at his last known address. Such
notice shall be delivered by means designed to give effective notice at least
twenty-four hours prior to such meeting, and shall be deemed proper if mailed at
least five days before the date on which the meeting is to be held, or if such
notice shall be sent to each Director at such address by telegraph, telefax,
telex, cable, wireless, or similar means of communication, or be delivered to
him personally, not later than the day before the date on which such meeting is
to be held. Every such notice shall state the time and place of the meeting but
need not state the purposes of the meeting, except to the extent required by
law. If mailed, each notice shall be deemed given when deposited, with postage
thereon prepaid, in a post office or official depository under the exclusive
care and custody of the United States Post Office Department. Such mailing
shall be by first class mail.
3.13 Adjourned Meetings. A majority of the Directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Notice of any
adjourned meeting of the Board need not be given to any Director whether or not
present at the time of the adjournment. Any business may be transacted at any
adjourned meeting that might have been transacted at the meeting as originally
called.
3.14 Waivers of Notice of Meetings. Anything in these By-laws or in
any resolution adopted by the Board to the contrary notwithstanding, notice of
any meeting of the Board need not be given to any Director who submits a signed
waiver of such notice, whether before or after such meeting, or who attends such
meeting without protesting, prior thereto or at its commencement, the lack of
notice to him.
3.15 Organization. At each meeting of the Board, the Chairman of the
Board, if any, or in the absence of such Chairman of the Board, a person
designated by a majority of the members of the Board present at a meeting of the
Board shall preside. The Secretary shall act as Secretary at each meeting of
the Board. In case the Secretary shall be absent from any meeting of the Board,
an Assistant Secretary shall perform the duties of the Secretary at such
meeting; and in the absence from any such meeting of the Secretary and Assistant
Secretaries, the person presiding at the meeting may appoint any person to act
as Secretary of the meeting.
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3.16 Quorum of Directors. Except as otherwise provided in the
Certificate of Incorporation, a majority of the Directors then in office shall
constitute a quorum for the transaction of business or of any specified item of
business at any meeting of the Board.
3.17 Action by the Board. Except as provided in Section 3.18 all
corporate action taken by the Board shall be taken at a meeting of the Board.
Except as otherwise provided by the Certificate of Incorporation or by law, the
vote of a majority of the Directors present at the time of the vote, if a quorum
is present at such time, shall be the act of the Board.
3.18 Written Consent In Lieu of Meeting of the Board. Except as
otherwise provided by law, any action required or permitted to be taken by the
Board or any committee thereof may be taken without a meeting if all members of
the Board or of the committee, as the case may be, consent in writing to the
adoption of a resolution authorizing the action. The resolutions and the
consents thereto by the members of the Board or committee shall be filed with
the minutes of the proceedings thereof.
3.19 Participation at Meetings by Telephone Conference or Similar
Communications. Any one or more members of the Board or any committee thereof
may participate in a meeting of the Board or such committee by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at such meeting.
ARTICLE 4
Executive Committee and Other Committees
----------------------------------------
4.1 How Constituted and Powers. The Board, by resolution adopted
by a majority of the entire Board, may designate from among its members an
executive committee and other committees, each consisting of three or more
Directors, and each of which, to the extent provided in the resolution, shall
have all the authority of the Board, except that no such committee shall have
authority as to the following matters:
4.1.1 The submission to Shareholders of any matter that needs
Shareholders' approval;
4.1.2 The filling of vacancies in the Board or in any
committee;
4.1.3 The fixing of compensation of the Directors for serving
on the Board or on any committee;
4.1.4 The amendment or repeal of the By-laws, or the adoption
of new By-laws.
4.1.5 The amendment or repeal of any resolution of the Board
which by its terms shall not be so amendable or repealable.
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4.1.6 Any matter which would require the affirmative vote of
more than a majority of Directors pursuant to the Certificate of Incorporation.
4.2 General. Any committee designated by the Board pursuant to
Section 4.1, and each of the members and alternate members thereof, shall serve
at the pleasure of the Board. The Board may designate one or more Directors as
alternate members of any such committee, who may replace any absent member or
members at any meeting of such committee.
ARTICLE 5
Officers
--------
5.1 Officers. The Board may elect or appoint a Chief Executive
Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer and
such other officers as it may determine. All officers shall be elected or
appointed to hold office until the meeting of the Board following the next
annual meeting of Shareholders. The Board may designate one or more Vice
Presidents as Senior Vice Presidents, and may use descriptive words or phrases
to designate the standing, seniority or area of special competence of the Vice
Presidents elected or appointed by it. Each officer shall hold office for the
term for which he is elected or appointed, and until his successor shall have
been elected or appointed and qualified or until his death, resignation or
removal in the manner provided in Section 5.2. Any two or more offices may be
held by the same person, except the offices of President and Secretary. If all
of the issued and outstanding stock of the Corporation is owned by one person,
such person may hold all or any combination of offices. The Board may require
any officer to give a bond or other security for the faithful performance of his
duties, in such amount and with such sureties as the Board may determine. All
officers as between themselves and the Corporation shall have such authority and
perform such duties in the management of the Corporation as may be provided in
the By-laws or as the Board may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the
Board may be removed by the Board with or without cause. The removal of an
officer without cause shall be without prejudice to his contract rights, if any.
The election or appointment of an officer shall not of itself create contract
rights.
5.3 Resignations. Any officer may resign at any time in writing by
notifying the Board, the Chairman of the Board, if any, the President or the
Secretary. Such resignation shall take effect at the date of receipt of such
notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make it
effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in the By-laws for
the regular election or appointment to such office.
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5.5 Compensation. Salaries or other compensation of the officers may
be fixed from time to time by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is also a
Director.
5.6 Chairman of the Board. The Chairman of the Board, if any and if
present, shall preside at all meetings of the Shareholders and at all meetings
of the Board. In addition, he shall do and perform such other duties as from
time to time may be assigned to him by the Board.
5.7 Chief Executive Officer. The Chief Executive Officer shall have
such duties and responsibilities as shall be determined by the Board.
5.8 President and Chief Operating Officer. The President shall have
general supervision over the business of the Corporation, subject, however, to
the control of the Board and of any duly authorized committee of Directors. If
the Chairman of the Board is not present the President shall, if present,
preside at all meetings of the Shareholders and at all meetings of the Board.
He may, with the Secretary or the Treasurer or an Assistant Secretary or an
Assistant Treasurer, sign certificates of shares of the Corporation. He may
sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts and other instruments, except in cases where the signing and execution
thereof shall be expressly delegated by the Board or by the By-laws to some
other officer or agent of the Corporation, or shall be required by law otherwise
to be signed or executed, and, in general, he shall perform all duties incident
to the office of President and such other duties as from time to time may be
assigned to him by the Board.
5.9 Vice Presidents. At the request of the President or, in his
absence, at the request of the Board, the Vice Presidents shall (in such order
as may be designated by the Board or in the absence of any such designation in
order of seniority based on age) perform all of the duties of the President and
so acting shall have all the powers of and be subject to all restrictions upon
the President. Any Vice President may also, with the Secretary or the Treasurer
or an Assistant Secretary or an Assistant Treasurer, sign certificates for
shares of the Corporation; sign and execute in the name of the Corporation
deeds, mortgages, bonds, contracts or other instruments authorized by the Board,
except in cases where the signing and execution thereof shall be expressly
delegated by the Board or by the By-laws to some other officer or agent of the
Corporation, or shall be required by law otherwise to be signed or executed; and
perform such other duties as from time to time may be assigned to him by the
Board or by the President.
5.10 Secretary. The Secretary, if present, shall act as Secretary of
all meetings of the Shareholders and of the Board, and shall keep the minutes
thereof in the proper book or books to be provided for that purpose; he shall
see that all notices required to be given by the Corporation are duly given and
served; he may, with the President or a Vice President, sign certificates for
shares of the Corporation; he shall be custodian of the seal of the Corporation
and may seal with the seal of the Corporation or a facsimile thereof, all
certificates for shares of the Corporation and all documents the execution of
which on behalf of the Corporation under its corporate seal is authorized in
accordance with the provisions of the By-laws; he shall have charge of the share
records and also of the other books, records and papers of the Corporation
relating to its organization and management as a Corporation, and shall see that
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the reports, statements and other documents required by law are properly kept
and filed; and shall, in general, perform all the duties incidental to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Board or by the President.
5.11 Treasurer. The Treasurer shall have charge and custody of, and
be responsible for, all funds, securities and notes of the Corporation; receive
and give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these By-laws; against proper vouchers, cause such funds to be disbursed by
checks or drafts on the authorized depositories of the Corporation signed in
such manner as shall be determined in accordance with any provisions of the
By-laws, and be responsible for the accuracy of the amounts of all moneys so
disbursed; regularly enter or cause to be entered in books to be kept by him or
under his direction full and adequate account of all moneys received or paid by
him for the account of the Corporation; have the right to require, from time to
time reports or statements giving such information as he may desire with respect
to any and all financial transactions of the Corporation from the officers or
agents transacting the same; render to the Board, the Chairman of the Board, if
any, or the President whenever the Board, the Chairman of the Board, if any, or
the President shall require him so to do, an account of the financial condition
of the Corporation and of all his transactions as Treasurer; exhibit at all
reasonable times his books of account and other records to any of the Directors
upon application at the office of the Corporation where such books and records
are kept; and in general perform all the duties incidental to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or by the President; and he may sign with the President or a Vice
President certificates for shares of the Corporation.
5.12 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the President. Assistant Secretaries and Assistant Treasurers may,
with the President or a Vice President, sign certificates for shares of the
Corporation. Assistant Secretaries and Assistant Treasurers shall perform such
duties as shall be assigned to them by the Secretary or by the Treasurer,
respectively, or by the Board or by the President. Assistant Secretaries and
Assistant Treasurers may, with the President or a Vice President, sign
certificates for shares of the Corporation.
ARTICLE 6
Contracts, Checks, Drafts, Bank Accounts, Etc.
----------------------------------------------
6.1 Execution of Contracts. The Board may authorize any officer,
employee or agent, in the name and on behalf of the Corporation, to enter into
any contract or execute and satisfy any instrument, and any such authority may
be general or confined to specific instances, or otherwise limited.
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6.2 Loans. The President or any other officer, employee or agent
authorized by the By-laws or by the Board may effect loans and advances at any
time for the Corporation from any bank, trust company or other institutions or
from any firm, corporation or individual and for such loans and advances may
make, execute and deliver promissory notes, bonds or other certificates or
evidences of indebtedness of the Corporation, and when authorized so to do may
pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority
conferred by the Board may be general or confined to specific instances or
otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation in such
banks, trust companies or other depositories as the Board may select or as may
be selected by an officer, employee or agent of the Corporation to whom such
power may from time to time be delegated by the Board.
ARTICLE 7
Shares and Dividends
--------------------
7.1 Certificates Representing Shares. Subject to the Certificate
of Incorporation, the shares of the Corporation shall be represented by
certificates in such form (consistent with the provisions of Section 158 of the
General Corporation Law) as shall be approved by the Board. Such certificates
shall be signed by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be
sealed with the seal of the Corporation or a facsimile thereof. The signatures
of the officers upon a certificate may be facsimiles, if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
Corporation itself or its employee. In case any officer who has signed or whose
facsimile signature has been placed upon any certificate shall have ceased to be
such officer before such certificate is issued, such certificate may, unless
otherwise ordered by the Board, be issued by the Corporation with the same
effect as if such person were such officer at the date of issue.
7.2 Transfer of Shares. Transfers of shares shall be made only on
the books of the Corporation by the holders thereof or by such holder's duly
authorized attorney appointed by a power of attorney duly executed and filed
with the Secretary or a transfer agent of the Corporation, and on surrender of
the certificate or certificates representing such shares properly endorsed for
transfer and upon payment of all necessary transfer taxes. Every certificate
exchanged, returned or surrendered to the Corporation shall be marked
"Cancelled," with the date of cancellation, by the Secretary or an Assistant
Secretary or the transfer agent of the Corporation. A person in whose name
shares stand on the books of the Corporation shall be deemed the owner thereof
to receive dividends, to vote as such owner and for all other purposes as
respects the Corporation. No transfer of shares shall be valid as against the
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Corporation, its Shareholders and creditors for any purpose, except to render
the transferee liable for the debts of the Corporation to the extent provided by
law, until such transfer shall have been entered on the books of the Corporation
by an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to
time maintain one or more transfer offices or agents and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder
of any shares shall immediately notify the Corporation of any loss, destruction,
theft or mutilation of the certificate representing such shares, and the
Corporation may issue a new certificate to replace the certificate alleged to
have been lost, destroyed, stolen or mutilated. The Board may, in its
discretion, as a condition to the issue of any such new certificate, require the
owner of the lost, destroyed, stolen or mutilated certificate, or his legal
representatives, to make proof satisfactory to the Board of such loss,
destruction, theft or mutilation and to advertise such fact in such manner as
the Board may require, and to give the Corporation and its transfer agents and
registrars, or such of them as the Board may require, a bond in such form, in
such sums and with such surety or sureties as the Board may direct, to indemnify
the Corporation and its transfer agents and registrars against any claim that
may be made against any of them on account of the continued existence of any
such certificate so alleged to have been lost, destroyed, stolen or mutilated
and against any expense in connection with such claim.
7.5 Regulations. The Board may make such rules and regulations as it
may deem expedient, not inconsistent with the By-laws or with the Certificate of
Incorporation, concerning the issue, transfer and registration of certificates
representing shares.
7.6 Shareholder Agreements. If any two or more Shareholders or
subscribers for shares shall enter into any agreement whereby the rights of any
one or more of them to sell, assign, transfer, mortgage, pledge, hypothecate, or
transfer on the books of the Corporation, any or all of such shares held by them
shall be abridged, limited or restricted, and if a copy of such agreement shall
be filed with the Corporation and shall contain a provision that the
certificates representing shares subject to it shall bear a reference to such
agreement, then all certificates representing shares covered or affected by said
agreement shall have such reference thereto endorsed thereon; and such shares
shall not thereafter be transferred on the books of the Corporation except in
accordance with the terms and provisions of such agreement.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions
on the outstanding shares in such amounts and at such time or times as, in its
discretion, the condition of the affairs of the Corporation shall render
advisable;
7.7.2 May use and apply, in its discretion, any of the surplus
of the Corporation in purchasing or acquiring any shares of the Corporation, or
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purchase warrants therefor, in accordance with law, or any of its bonds,
debentures, notes, scrip or other securities or evidences of indebtedness;
7.7.3 May set aside from time to time out of such surplus or
net profits such sum or sums as, in its discretion, it may think proper, as a
reserve fund to meet contingencies, or for equalizing dividends or for the
purpose of maintaining or increasing the property or business of the
Corporation, or for any other purpose it may think conducive to the best
interests of the Corporation.
ARTICLE 8
Indemnification
---------------
8.1 Indemnification of Officers and Directors. The Corporation shall
indemnify any present or former officer or director of the Corporation or the
personal representatives thereof, to the fullest extent permitted by the General
Corporation Law.
8.2 Contract Rights. The foregoing provisions of this Article 8
shall be deemed to be a contract between the Corporation and each Director and
officer who serves in such capacity at any time while this Article 8 and the
relevant provisions of the General Corporation Law, if any, are in effect, and,
except to the extent otherwise required by law, any repeal or modification
thereof shall not affect any rights or obligations then existing or thereafter
arising with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought or threatened based
in whole or in part upon any such state of facts.
8.3 Other Persons. The Board in its discretion shall have power on
behalf of the Corporation to indemnify any person (including his heirs by
testate or intestate succession), other than a director or officer, made a party
to any action, suit or proceeding by reason of the fact that he is or was an
employee or agent of the Corporation.
ARTICLE 9
Books and Records
-----------------
9.1 Books and Records. The Corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of the Shareholders, Board and executive committee, if any. The Corporation
shall keep at the office designated in the Certificate of Incorporation or at
the office of the transfer agent or registrar of the Corporation, a record
containing the names and addresses of all Shareholders, the number and class of
shares held by each and the dates when they respectively became the owners of
record thereof. Any of the foregoing books, minutes or records may be in
written form or in any other form capable or being converted into written form
within a reasonable time.
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9.2 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts, books, minutes and
other records of the Corporation, or any of them, shall be open to the
inspection of the Shareholders.
ARTICLE 10
Seal
----
The Board may adopt a corporate seal which shall be in any form it
shall determine is appropriate.
ARTICLE 11
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined, and may be
changed, by resolution of the Board.
ARTICLE 12
Voting of Shares Held
---------------------
Unless otherwise provided by resolution of the Board, the Chief
Executive Officer or the President may, from time to time, appoint one or more
attorneys or agents of the Corporation, in the name and on behalf of the
Corporation, to cast the votes which the Corporation may be entitled to cast as
a shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation, or to consent in writing
to any action by any such other corporation, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the Corporation
and under its corporate seat or otherwise, such written proxies, consents,
waivers or other instruments as he may deem necessary or proper in the premises;
or the Chief Executive Officer or the President may himself attend any meeting
of the holders of the shares or other securities of any such other corporation
and thereat vote or exercise any or all other powers of the Corporation as the
holder of such shares or other securities of such other corporation.
ARTICLE 13
Amendments
----------
Except as otherwise provided by the Certificate of Incorporation, (a)
the By-laws may be altered, amended, supplemented or repealed, or new By-laws
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may be adopted, by vote of the holders of a majority of the shares entitled to
vote in the election of Directors, provided notice of the proposed amendment
shall have been contained in the notice of the meeting, and (b) the By-laws may
be altered, amended or new By-laws may be adopted, by the affirmative vote of
a majority of the Board. If any By-law regulating an impending election of
Directors is adopted, altered, amended, supplemented or repealed by the Board,
such By-law shall be set forth in the notice of the next meeting of Shareholders
for election of Directors, together with a concise statement of the changes
made.
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SECOND AMMENDMENT OF LEASE
DATE: as of September 9,1999
LANDLORD: LEONIA Associates, L.I.C.
a New Jersey limited liability company.
Tenant: Computer Outsourcing Services,Inc.
a New York corporation
ADDRESS OF TENANT: 2 Christie Heights
Leonia, New Jersey 07605
LEASE DATE: June 2, 1997
DATE OF PRIOR
AMENDMENTS: January 16, 1998
BUILDING: 2 Christie Heights
Leonia, New Jersey 07605
RECITALS
WHEREAS, Landlord and Tenant entered into a lease agreement dated
June 2, 1997 (the "Original Lease") wherein Tenant leased a portion of
the Building:
WHEAREAS, the first lease amendment dated January 16,1998("First Lease
("First Lease Amenment")provided for certain changes including an increase
in the square footage of the Premises and an increase in Fixed Basic Rent,
Additional Rent and number of parking spaces:
WHERAS, the parties now intend to further modify the Lease.
NOW,THEREFORE, in consideration of the mutual convenants herein
contained it is hereby agreed as follows:
1. The Lease, For the purpose of this Second Lease Amendment, the
term "Lease" shall be defined as the Original Lease as amended by the First
Lease Amendment. Unless otherwise defined herein, the capitalized terms
shall have the meaning ascribed to it in the Lease.
2. Tenant Renovations. Tenant desires to renovate the Premises and
landlord is willing to allow Tenant to do so. Tenant shall have the
right to perform the improvement indicated on Exhibit "A" attached hereto
("Tenant Renovations"), subject to Landlord's comments on Exhibit A-1.
Landlord must approve any material modification to the attached plans.
For the purposes of this paragraph, Tenant Renovations shall include all
work in Exhibit "A" and shall be performed in a workmanlike manner and in
compliance with all local and federal laws and ordiances.
<PAGE>
3. Tenant's Restoration of the Demised Premises. Notwithstanding
anything to the contary contained in this Amendment, Tenant hereby covenants
and argees that it shall, at its sole cost and expense, return the Demised
Premises to its original structurally sound condition, as per the attached
plans shown on Exhibit "B" prior to Tenant's performance of any Tenant
Renovations as same is set forth below, at such time, if at all, as the
Tenant should vacate the Building pursuant to the terms of the Lease
Agreement or otherwise, reasonable wear and tear exxpected. At Landlord's
option, Tenant shall pay to Landlord the cost of such restoration and
lANDLORD will be responsible to perform the necessary work. In the event,
Landlord will provide Tenant with two proposals comparable in scope of
work for the cost of such restoration and Tenant will obtain one
comparable bid proposal. The amount of the payment by Tenant to Landlord
shall be the lowest of three bids, provided same is comparable in scope of
work.Regardless of the amount of the lowest bid proposal obtained, the
maximum amount that the Tenant will be required to pay to Landlord is
$300,000. If the lease should be extended to December 31,2021 or beyond
and at the end of such period, Tenant is not in default under the Lease,
this paragraph shall be null and void.
4. Tenant Renovations Budget. Tenant Renovations to be made in the
aggregate amount of approximately $2,944,950 are set forth in Exhibit "C"
attached hereto. Upon the later of the completion of $2,000,000 of Tenant
Renovations of November 1,1999, Landlord shall pay for $2,000,000 of
Tenant's Renovations (including delivery,installation,and sales tax)
described in Exhibit "C" and be the owner of such items. The cost of the
remaining Tenant Renovations shall be borne by Tenant.
5. Term. Paragraph (15) and (16) of the Preamble to the Lease is
hereby modified to provide that the Term shall be extended and the
termination date shall be December 31,2014.
6. Fixed Basic Rent.
1. Paragraph 3, Section IV, of the First Amendment of Lease is hereby
modified to provide that Fixed Basic Rent for the period of
November 1,1999 through December 31,2002 shall mean THREE MILLION NINE
HUNDRED TWENTY FOUR THOUSAND FIVE HUNDREDFORTY-FIVE AND 76/100
($3,924,545.76) DOLLARS.
(A) Yearly Rate: ONE MILLION TWO HUNDRED THIRTY-NINE THOUSAND THREE
HUNDRED THIRTY AND 21/100 ($1,239,330.24) Dollars.
(B) Monthly Installment: ONE HUNDRED THREE THOUSAND TWO HUNDRED
SEVENTY-SEVEN AND 52/00 ($103,277.52) DOLLARS.
II. Paragraph 3, Section v, of the First Amendment of Lease is
hereby modified to provide that Fixed Basic Rent for the period of
January 1,2003 through December 31,2008, shall mean EIGHT MILLION TWO
HUNDRED THIRTY-NINE THOUSAND NINE HUNDRED EIGHTY-ONE AND 68/100
($8,239,981.68) Dollars.
2
<PAGE>
(A) Yearly Rate: ONE MILLION THREE HUNDRED SEVENTY-THREE THOUSAND
THREE HUNDRED THIRTY AND 28/100 ($1,373,330.28) DOLLARS.
(B) Monthly Installment: ONE HUNDRED FOURTEEN THOUSAND FOUR HUNDRED
FOURTY-FOUR AND 19/00 ($114,444.19) DOLLARS.
III. Fixed Basic Rent for the period of January 1,2009 through
October 31,2009, shall mean ONE MILLION TWO HUNDRED SEVENTY-THREE
THOUSAND SIXTY-SIX AND 90/100 ($1,273,066.90) DOLLARS.
(A) Yearly Rate: Not applicable.
(B) Monthly Installment: ONE HUNDRED TWENTY-SEVEN THOUSAND THREE
HUNDRED SIX AND 69/00 ($127,306.69) DOLLARS.
IV. Fixed Basic Rent for the period of November 1,2009 through
December 31,2014, shall mean SIX MILLION ONE HUNDRED THIRTEEN THOUSAND
NINE HUNDRED SEVENTY-FIVE AND 00/100 ($6,113,975.00) DOLLARS.
(A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE THOUSAND THREE
HUNDRED FIFTY AND 00/100 ($1,183,350.00) DOLLARS.
(B) Monthly Installment: NINETY EIGHT THOUSAND SIX HUNDRED TWELVE AND
50/00 ($98,612.50) DOLLARS.
7. Extension Fee: As an inducement and consideration to Landlord
to allow Tenant to extend the Term of the Lease and Landlord's payment
as described in Paragraph 4, Tenant agrees to pay to Landlord
$320,503.50 as follows:
Due Date Amount
11/1/99 $ 72,000.00
1/1/09 248,503.50
8. Option. Paragraph 12 of the First Amendment of Lease and
paragraph 56 (a)of the Lease are hereby null and void and deleted in
their entirety.
9. Successor-in-Interest, This Second 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.
3
<PAGE>
10 Broker, Landlord and Tenant represent and warrant to each other
than no broker except for MRH Real Estate Services,Inc. and Cushman &
Wakefield, Inc. brought about this transaction and Landlord and Tenant
agree to indemnify and hold each other harmless from any and all
claims of any broker arising out of or in connection with the
negotiations of or the entering into this Second Amendment of Lease by
the parties hereto. If such claim arises out of a breach of the
foregoing warranty to that end Landlord or Tenant shall indemnify the
other party for all loss, costs or damage including reasonable
attorney's fees arising therefrom. These representations and
warranties shall survive the termination of the Lease,as amended.
11. Definitions,Inconsistencies, In the event of any inconsistencies
between this Second Amendment of Lease and the Lease,the Second
AMENDMENT OF LEASE shall govern and be binding. All words and terms
used in this Second Amendment of Lease and not otherwise defined
herein shall have the respective meanings ascribed to them under the
Lease or unless the context clearly requires otherwise. This Second
Amendment of Lease was drafted by Landlord as a matter of convenience
and it shall be constructed for or against either party on that
account since Tenant had the opportunity to review same and make
changes thereto.
12. Ratification of Lease: Except as expressly modified and amended
by the Second Amendment of Lease, all of the terms,provisions and
conditions of the Lease are hereby ratified and confirmed by Landlord
and Tenant. Tenant hereby releases and discharges Landlord from any
and all claims or liability now arising out of the Lease prior to the
date hereof, including, but in no way limited to, any and all charges as
billed by Landlord to Tenant pursuant to the terms of the Lease.
This does not apply to any estimated billings charged to the Tenant.
In the event of a conflict between the terms of the Lease and the
terms of the Second Amendment,the terms of the Second Amendment
shall control.
13. Contingency.
(I) Paragraphs 4, 6, and 7 of the Second Amendment of Lease will
only be effective, if the following contingencies are met, otherwise
such paragraphs shall be deemed null and void at Landlord's option.
(i) Tenant shall not be in default of the Lease:
(ii) Landlord is able to close on additional financing in the
amount of $1,700,000 by November 1,1999, and
(iii) If landlord extends the foregoing contingency period on
written notice to Tenant all time periods and rental amounts
set forth in Paragraph 6 and the date in Paragraph 4 shall be
adjusted accordingly.
(II) In addition,if the contingencies are not met, Paragraph 3
of the First Amendment of Lease shall be modified to provide that
Fixed Basic Rent for the period of January 1,2009 through
December 31,2014 shall mean SEVEN MILLION ONE HUNDRED THOUSAND ONE
HUNDRED AND 00/100 ($7,100,100.00) DOllars.
4
<PAGE>
(A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE THOUSAND
THREE HUNDRED FIFTY AND 00/00 ($1,183,350.00) DOLLARS.
(B) Monthly Installment: NINETY-EIGHT THOUSAND SIX HUNDRED
TWELVE AND 50/100 ($98,612.50) DOLLARS.
IN WITNESS WHEREOF, the parties have set their hands and seals
the date above first written.
WITNESS: LEONIA ASSOCIATES,L.I.C.
By: Jeffco Holding Ltd.
its Managing Member
/s/ Dawn Mayer By: /s/ Jeffrey Cole
---------------------- ---------------------------------
Jeffrey E.Cole,President
WITNESS: COMPUTER OUTSOURCING SERVICES,INC.
By: Nicholas J. Letizia
---------------------- -------------------------------
Name: Nicholas J.Letizia
Title: CFO
5
EXECUTION
CREDIT AND SECURITY AGREEMENT
By and Between
COMPUTER OUTSOURCING SERVICES, INC.
as Borrower
and
FLEET BANK, NATIONAL ASSOCIATION
as Lender
Dated October 29, 1999
in respect of a
$5,000,000 Secured Committed Line of Credit Note
Lane & Mittendorf, LLP
New York, New York
<PAGE>
THIS CREDIT AND SECURITY AGREEMENT (this "Agreement") is entered
into and takes effect October 29, 1999 by and between COMPUTER OUTSOURCING
SERVICES, INC., a Delaware corporation (together with its successors and
assigns, the "Borrower"), and FLEET BANK, NATIONAL ASSOCIATION, (together with
its successors and assigns, the "Lender"). Capitalized terms used but not
otherwise defined herein have the meanings ascribed to them in Section 9.1
hereof.
RECITALS
WHEREAS, the Borrower desires to obtain from the Lender, from
time to time, a secured advised line of credit in the maximum principal amount
of $5,000,000 to finance working capital needs and for other corporate purposes;
and
WHEREAS, the Lender desires to provide the line of credit sought
by the Borrower, in each case on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises, and for other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. CREDIT FACILITY.
Section 1.1. Committed Line of Credit. (a) Subject to the
terms, covenants and conditions hereinafter set forth, the Lender hereby agrees
to hold available for the use of the Borrower, commencing on the effective date
hereof and continuing for so long as the Lender, in its sole discretion, may
agree, a secured committed line of credit in an aggregate principal amount of up
to $5,000,000 (the "Line of Credit").
Section 1.2 Issuance of the Line of Credit Note. The
Borrower shall issue, on the effective date hereof, a secured committed line of
credit promissory note in the form of Exhibit A hereto (the "Note") being in the
aggregate amount of $5,000,000. The Note shall be dated the date of issue, to
bear interest from the date of each Loan thereunder at either: (i) the Prime
Rate, or, subject to availability at the Lender from time to time in its sole
discretion, (ii) a rate of 1.25% per annum plus, at the Borrower's option at the
time the Loan is made, either 30-day, 60-day or 90-day LIBOR (the "Elected LIBOR
Rate") for an Interest Period of like term, payable monthly in arrears on the
outstanding principal balance (the "Principal") on the first day of each month
following the Closing Date and on the date the Principal shall be demanded by
the Lender to be paid (the "Demand Date"). The Note shall be subject to a late
fee on overdue Principal and overdue premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest, in each case commencing
fifteen (15) days after any such overdue payment became due, at a monthly rate
equal to five percent (5%) per annum, after the date due, and for so long as an
Event of Default shall exist or be continuing, to bear interest at the Line of
Credit Rate plus four percent (4%) per annum, until paid. Interest on each Loan
under the Note shall be computed on the basis of a 360-day year and paid for the
actual number of days elapsed. In case the due date of any payment falls on a
day that is not a Business Day, such payment shall instead be due on the next
succeeding Business Day, and interest shall continue to accrue. Upon the
termination of the Interest Period in respect any Loan subject to an Elected
LIBOR Rate, the same shall automatically become a Prime Rate Loan unless, at
least one (1) Business Day prior to the termination of the applicable Interest
Period the Borrower shall submit to the Lender a Borrowing Request (as defined
<PAGE>
below) referencing the Loan and requesting an Elected LIBOR Rate in respect of
the same. If the Lender does not grant the requested rate then the Loan shall
automatically become subject to the Prime Rate. The Note is subject to
repayment and reborrowing at the option of the Borrower on the terms and
conditions and in the amounts and with the premium, if any, set forth in Section
2 of this Agreement.
Section 1.3. Manner of Borrowing. (a) the manner of borrowing
shall be as follows:
(i) The Borrower shall give the Lender written notice
of its desire for an advance under the Line of Credit not later than 10:00 a.m.
New York City time on the date (which must be a Business Day) that shall be
three (3) Business Days prior to the date on which the Loan is requested to be
made (such notice, a "Borrowing Request"). Each Borrowing Request shall
contain: (A) the requested date for the making of the Loan, which shall be a
Business Day, (B) the amount of the Loan requested, and (C) a request that the
Loan bear interest at either the Prime Rate or at an Elected LIBOR Rate, in the
latter case specifying 30-day, 60-day or 90-day tenor in respect of such rate.
(ii) Upon receipt of a Borrowing Request the Lender
shall determine, in its sole judgment, whether each of the conditions to lending
set forth in Section 5.3 hereof have been satisfied or may, in the Lender's sole
discretion, be waived. If the Lender determines that the foregoing conditions
are satisfied or should be waived, and, if the requested rate is an Elected
LIBOR Rate, that such requested rate is available at the Lender, then the Lender
shall make the Loan in the amount requested. If the Borrowing request sets
forth a request for an Elected LIBOR Rate that is not available at the Lender
then the Lender shall promptly contact the Borrower so that the Borrower may
elect an available rate. If no Elected LIBOR Rate satisfactory to the Borrower
is then available then the Borrower may withdraw its Borrowing Request or
request a Prime Rate Loan.
Section 1.4. Closing Date. (a) Delivery of the Note on the
Closing Date will be made at the offices of Lane & Mittendorf LLP, 320 Park
Avenue, 10th floor, New York, New York 10022, together with this Agreement and
such other and further documentation as may be required by the Lender in its
sole discretion (the completion of such delivery, the "Closing"). Delivery of
the Note will be made at or prior to 5:00 p.m., New York time, on October 29,
1999 (the "Closing Date"), or such other date and time as the parties hereto may
agree. The Note delivered to the Lender on the Closing Date will be registered
in the Lender's name or in the name of the Lender's nominee, all as the Lender
may specify at any time prior to the date fixed for delivery. Thereafter, on
the date of each payment or prepayment of principal under the terms hereof and
under the Note, the Lender shall adjust its corresponding computer records with
respect to the Note to reflect such payment or prepayment of principal, as the
case may be, and shall make notations on the computer records from time to time
to reflect the accrual of interest and overdue interest thereon. Each such
notation on the computer records by the Lender shall be conclusive as to the
amount of principal and interest due by the Borrower to the Lender under the
Note from time to time, absent manifest error.
(b) The commitment of the Lender to make the Line of Credit
available is subject to satisfaction or waiver of the conditions set forth
herein and to receipt by the Lender, on or before the Closing Date, of a
nonrefundable facility fee in the amount of $15,000. The foregoing facility
fees shall be paid by electronic funds transfer to the account of the Lender or
as the Lender may otherwise direct.
<PAGE>
SECTION 2. PREPAYMENT OF NOTES.
Section 2.1. Repayment and Reborrowing. The Borrower may
repay and reborrow under the Line of Credit, in each case subject to the terms
of Section 5.3 hereof. Borrower may prepay a LIBOR Loan only upon at least
three (3) Business Days prior written notice to Bank (which notice shall be
irrevocable), and any such prepayment shall occur only on the last day of the
Interest Period for such LIBOR Loan. Borrower shall pay to Bank, upon request
of Bank, such amount or amounts as shall be sufficient (in the reasonable
opinion of Bank) to compensate it for any loss, cost, or expense incurred as a
result of: (i) any payment of a LIBOR Loan on a date other than the last day of
the Interest Period for such Loan; (ii) any failure by Borrower to borrow a
LIBOR Loan on the date specified by Borrower's written notice; (iii) any failure
by Borrower to pay a LIBOR Loan on the date for payment specified in Borrower's
written notice. Without limiting the foregoing, Borrower shall pay to Bank a
"yield maintenance fee" in an amount computed as follows: the current rate for
United States Treasury securities (bills on a discounted basis shall be
converted to a bond equivalent) with a maturity date closest to the term chosen
pursuant to the Elected LIBOR Rate as to which the prepayment is made, shall be
subtracted from the LIBOR in effect at the time of prepayment. If the result is
zero or a negative number, there shall be no yield maintenance fee. If the
result is a positive number, then the resulting percentage shall be multiplied
by the amount of the principal balance being prepaid. The resulting amount
shall be divided by 360 and multiplied by the number of days remaining in the
term chosen pursuant to the Elected LIBOR Rate as to which the prepayment is
made. Said amount shall be reduced to present value calculated by using the
above referenced United States Treasury securities rate and the number of days
remaining in the term chosen pursuant in the Elected LIBOR Rate as to which
prepayment is made. The resulting amount shall be the yield maintenance fee due
to Bank upon the payment of a LIBOR Loan. If by reason of an Event of Default,
Bank elects to declare the Note to be immediately due and payable, then any
yield maintenance fee with respect to a LIBOR Loan shall become due and payable
in the same manner as though the Borrower had exercised such right of
prepayment.
Section 2.2 Increased Costs. If in the determination of the
Lender (a) any Regulatory Change shall directly or indirectly (i) reduce the
amount of any sum received or receivable by the Lender with respect to any Loan
or the return to be earned by the Lender on any Loan, (ii) impose a cost on the
Lender or any Affiliate of the Lender that is attributable to the making or
maintaining of, or the Lender's commitment to make, any Loan, (iii) require the
Lender or any Affiliate of the Lender to make any payment on or calculated by
reference to the gross amount of any amount received by the Lender hereunder or
under the Note or (iv) reduce, or have the effect of reducing, the rate of
return on the capital of the Lender or any Affiliate of the Lender allocable to
any Loan or the Lender's commitment to make any Loan and (b) such reduction,
increased cost or payment shall not be fully compensated for by an adjustment in
the applicable rates of interest payable hereunder, then, within fifteen (15)
days after request by the Lender, the Borrower shall pay to the Lender such
additional amount or amounts as the Lender determines will, together with any
adjustment in the applicable rates of interest payable hereunder, fully
compensate for such reduction, increased cost or payment. The Lender will
promptly notify the Borrower of any Regulatory Change of which it has knowledge
that will entitle the Lender to compensation pursuant to this Section 2.2, but
the failure to give such notice shall not affect the Lender's right to such
compensation.
Section 2.3. Direct Payment. Notwithstanding anything to the
contrary contained in this Agreement or the Note, in the case of the Note, the
<PAGE>
Borrower shall punctually pay when due the principal thereof, interest thereon
and premium, if any, due with respect to said principal, without any presentment
thereof, directly to the Lender from an operating account with the Lender (the
"Operating Account"), which the Borrower shall have established prior to the
Closing Date as a condition to the Loans hereunder and which shall be maintained
until the Obligations (defined below) shall have been paid and performed in full
by the Borrower. The Borrower will make all payments due hereunder in lawful
money of the United States in immediately available funds.
SECTION 3. GRANT OF SECURITY INTEREST.
Section 3.1. Security Interest. As security for the prompt
payment in full by the Borrower of every amount due to the Lender under this
Agreement and under the Note and for the performance in full of every other
obligation of the Borrower hereunder and under the Note to the Lender
(collectively, the "Obligations"), the Borrower hereby irrevocably grants to the
Lender, a continuing security interest in and lien upon all of the Borrower's
Accounts Receivable (as such term is defined in the UCC) (the "Collateral")
whether now owned or existing or hereafter acquired, owned, existing or arising
(whether acquired by contract or operation of law) and wherever located, which
shall be retained by the Lender, until the Obligations have been indefeasibly
paid in full in cash and otherwise performed in full and this Agreement
terminated. The Borrower covenants and agrees that it shall procure that the
security interest granted hereunder in the Collateral shall at all times be a
valid, first-priority perfected security interest, enforceable against the
Borrower and all third parties in accordance with the terms hereof as security
for the Obligations. For the purposes of this Section 3, capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the UCC.
The definition of Collateral for the purposes hereof includes, without
limitation, the following property of the Borrower:
(a) All Receivables and Accounts, Chattel Paper,
Instruments, contract rights, General Intangibles (such term as used in this
Agreement to exclude all computer software, related documentation, and other
intellectual property arising therefrom) and all proceeds therefrom and all
other rights of the Borrower to the payment of money including, without
limitation, amounts due from Affiliates of the Borrower, tax refunds and
insurance proceeds; all rights of Borrower to enforce, collect and receive
payments on such Receivables, Accounts, Chattel Paper, Instruments, contract
rights and General Intangibles and the Borrower's rights thereunder, whether at
law or in equity, including, without limitation, any rights of the Borrower to
bring an action to enforce rights to repossess, sequester, replevy, seize and
foreclose upon the Equipment, Inventory, Goods, Chattel Paper or properties
whose sale, lease or use gave rise to, or is governed by, the Receivables,
Accounts, Chattel Paper, Instruments, contract rights and General Intangibles,
or which otherwise secure the performance of any obligation due and owing to the
Borrower under the Receivables, Chattel Paper, Accounts Receivable, Instruments,
contract rights and General Intangibles.
Section 3.2. Lender's Right of Set-off. The Borrower hereby
grants to the Lender, a lien, security interest and right of setoff as security
for the Obligations and for all other obligations of the Borrower to the Lender
whether now existing or hereafter arising, upon and against any and all deposits
or other sums at anytime credited by or due from the Lender to the Borrower and
any and all monies, securities and other property of the Borrower, and the
proceeds thereof now or hereafter held or received by or in transit to the
Lender or any entity under the control of Fleet Financial Group, Inc., from or
for the Borrower, whether for safekeeping, custody, pledge, transmission,
<PAGE>
collection or otherwise. At any time, without demand or notice, if permitted by
applicable law, the Lender may setoff all deposits, credits, collateral and
property, now or hereafter in the possession, custody, safekeeping or control of
the Lender or any of its Affiliates, or in transit to any of them, or any part
thereof and apply the same to any of the Obligations even though unmatured and
regardless of the adequacy of any other collateral securing the Obligations.
ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH
RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
Section 3.3. Borrower's Obligations and Collateral. The
Borrower assumes all liability and responsibility in connection with all
Collateral acquired by the Borrower; and the obligation of the Borrower to pay
and perform all Obligations shall in no way be affected or diminished by reason
of the fact that any such Collateral may be lost, destroyed, stolen, damaged or
for any reason whatsoever unavailable to the Borrower.
Section 3.4. Borrower's Covenants Concerning Collateral. The
Borrower shall take all action that may be necessary or desirable, or that the
Lender may reasonably request, so as to maintain the validity, perfection,
enforceability, and priority of the Lender's security interest in the
Collateral.
Section 3.5. Lender Appointed Attorney-in-Fact. The Borrower
hereby irrevocably appoints the Lender its attorney-in-fact and agent coupled
with an interest, with full authority in its place and stead and in its name or
otherwise, from time to time upon the occurrence and during the continuance of a
Default or an Event of Default or otherwise to the extent that the Lender shall
reasonably deem any action to be necessary in order to maintain its security
interest in the Collateral, in the Lender's discretion, to take any action and
to execute any instrument that may deem necessary or advisable to accomplish the
purposes of this Agreement, including, without limitation, to ask, demand,
collect, sue for, recover, compound, receive, and give acquittance and receipts
for moneys due and to become due under or in connection with the Collateral, to
receive, indorse, and collect any drafts or other instruments, documents, and
chattel paper in connection therewith, and to file any claims or take any action
or institute any proceedings that may be deemed to be necessary or desirable for
the collection thereof. The Lender shall promptly notify the Borrower of any
actions taken by the Lender pursuant to this Section; provided, however, that
the failure to provide such notice shall not affect the validity or binding
effect of any such action.
Section 3.6 The Lender May Perform. If the Borrower fails
to perform any agreement contained herein, then, upon ten (10) days prior
written notice, the Lender may itself perform, or cause performance of, such
agreement, and the reasonable and documented expenses of the Lender incurred in
connection therewith shall be payable by the Borrower.
Section 3.7. The Lender's Duties. The powers conferred on
the Lender hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers. Except for the
safe custody of any Collateral in its possession and the accounting for moneys
actually received by it hereunder, the Lender shall have no duty as to any
Collateral or as to the taking of any necessary steps to preserve rights against
prior parties or any other rights pertaining to any Collateral.
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.
To induce the Lender to enter into this Agreement and to make
the Loan pursuant to the terms hereof the Borrower hereby continuously
represents and warrants to the Lender as follows:
Section 4.1. Legal Existence. The Borrower is a corporation,
validly existing and is in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing as a foreign
entity in all other states where such qualification is required, and has all
necessary power and authority to enter into this Agreement, to execute, deliver
and perform each of the Loan Documents to which it is a party, to perform all of
its obligations hereunder and thereunder, and to operate its businesses.
Section 4.2. Business Name. Except as disclosed by the
Borrower to the Lender on or prior to the date hereof, or within ninety (90)
days after any change in respect thereof hereafter, the Borrower operates its
business only under its name as set forth in the preamble hereto and has not
used any assumed name for the operation of its business activities since its
organization.
Section 4.3. Authorization. The Borrower has taken all
requisite action to authorize the execution and delivery of, and performance of
the Borrower's obligations under, the Loan Documents. Each of the Loan
Documents to which Borrower is a party constitutes the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles related to enforceability.
Section 4.4. No Conflict. The execution, delivery and
performance by the Borrower of any of the Loan Documents does not and will not
conflict with or violate any provision of (i) any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to the Borrower; (ii) the Articles of Incorporation or
By-Laws of the Borrower, or (iii) any indenture or loan or credit agreement or
any other material agreement, lease or instrument to which the Borrower is a
party or by which the Borrower or any of its assets or properties may be bound.
Section 4.5. Consent. No consent, approval, license,
exemption of or filing or registration with, giving of notice to, or other
authorization of or by, any court, administrative agency, other governmental
authority or other Person is or will be required in connection with the
execution, delivery and performance by the Borrower of this Agreement and the
other Loan Documents or for consummation of the transactions contemplated
thereby, except for (i) those licenses that have been obtained and those
registrations that have been made as required by applicable law, (ii) those
consents that have been obtained, and (iii) the filing with appropriate
governmental authorities of financing statements necessary to perfect the
Lender's security interests hereunder.
Section 4.6. Taxes. The Borrower is not in default in the
payment of any material taxes, assessments or other governmental fees levied or
assessed against its respective incomes or any of its assets or properties,
except for (i) taxes being contested in good faith and by appropriate
proceedings for which adequate reserves have been established in conformity with
GAAP, and (ii) taxes paid immediately upon the Borrower becoming aware thereof.
The Borrower has filed all federal, state and local tax returns and other
reports, in respect of material tax liabilities, that it is required by law to
<PAGE>
file (which returns properly reflect the Borrower's income and taxes for the
periods covered thereby) and has paid, to the extent due and payable, all
material taxes, levies, assessments, charges, liens, claims or encumbrances upon
or relating to the Collateral, the Obligations, its employees, payroll, income,
and gross receipts, its ownership or use of any of its assets, and any other
aspect of its business.
Section 4.7. Solvency. After giving effect to the Loan, the
transactions contemplated by this Agreement and the other Loan Documents, and
the payment of all estimated legal, accounting and other fees related hereto and
thereto, the Borrower will be solvent as of the Closing Date.
Section 4.8. Statements and Omissions. No information
contained in this Agreement, the other Loan Documents, any financial statements
delivered hereunder or any written statement furnished by or on behalf of the
Borrower pursuant to the terms of this Agreement and which has previously been
delivered to the Lender by or on behalf of the Borrower, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading at the time and in
light of the circumstances under which made.
Section 4.9. Collateral. The Borrower has good, indefeasible
and merchantable title to and ownership of the Collateral, free and clear of all
Liens, except the Permitted Encumbrances.
Section 4.10. Locations. The Borrower's chief executive
office and principal place of business is located at the address of Borrower
described on the signature page hereof below Borrower's name. Borrower will not
commence or transact business (whether directly or through Affiliates) at other
locations or cease to do business at its current locations without providing the
Lender at least thirty (30) days' prior written notice thereof.
Section 4.11. Compliance. The Borrower is in compliance with
all laws, rules, regulations, orders and decrees that are applicable to the
Borrower or the Collateral or any of its properties or assets, including,
without limitation, and other labor and environmental laws and regulations and
all laws and regulations relating to the conduct of the Borrower's business and
is current and in good standing in all material respects with respect to all
governmental approvals, permits, certificates, inspections, consents and
franchises necessary to continue to conduct its business as heretofore
conducted, and to own or lease and operate the properties now owned or leased by
it. The Borrower is not in default in any material respect with respect to any
indenture, loan agreement, Mortgage, lease, deed or other similar agreement
relating to the borrowing of monies to which it is a party or by which it is
bound.
Section 4.12. Security Interest. The UCC-1 forms filed
pursuant to the UCC and in connection with the Loans completely and accurately
describe the Collateral, and will, when filed in the appropriate filing offices,
give the Lender a first-priority, perfected security interest in the Collateral.
Section 4.13. Licenses. The Borrower possesses adequate
assets, licenses, patents, patent applications, copyrights, trademarks,
trademark applications, service marks, service mark applications and trade names
to conduct its business.
Section 4.14. Pending Litigation. There are no material
actions, suits or proceedings pending, or, to the best of the Borrower's
knowledge, threatened against or affecting Borrower or any assets of the
<PAGE>
Borrower or the consummation of the transactions contemplated hereby, at law or
in equity or before or by any Governmental Authority or before any arbitrator of
any kind. The Borrower is not subject to any judgment, order, writ, injunction
or decree of any court or governmental agency. There is no proceeding pending
in which the Borrower is a party which, if adversely determined, would,
individually or in the aggregate with any other proceedings, have a material
adverse effect.
Section 4.15. Tax Returns. The Borrower has filed all United
States, state, local and foreign tax returns, in respect of material tax
liabilities, that are required to be filed by it, and has paid, or made
provision for the payment of, all taxes that have become due pursuant to said
returns or pursuant to any statement received by it, except such taxes, if any,
as are being contested in good faith and as to which adequate reserves have been
provided. Such tax returns properly reflect the Borrower's income and taxes for
the periods covered thereby.
SECTION 5. CONDITIONS TO CLOSING; CONDITIONS TO LENDING.
Section 5.1. Conditions to Closing. The obligation of the
Lender to make available the Line of Credit on the Closing Date and thereafter,
shall be subject to the performance by the Borrower of its agreements hereunder
and to the performance in full on or prior to the Closing Date of the following
further conditions precedent:
(a) Loan Documents. The Loan Documents shall have
been validly executed and delivered by each party thereto.
(b) Accountants. The Borrower shall have retained
accountants reasonably acceptable to the Lender.
(c) Financial Statements. On or prior to the
Closing Date, the Lender shall have received copies of the October 31, 1998
financial statements prepared by the accountants referenced in Section 5.1(b)
above, each certified by an officer of the Borrower to be true, correct and
complete, and each dated and in the form and substance as the Lender reasonably
shall require.
(d) Legal Fees. The Borrower shall pay on the
Closing Date, as set forth in an invoice rendered by the same, the documented
fees and disbursements of Lender's counsel, which fees shall be in the amount of
$5000.
(e) Other Financing Statements. There shall be no
Financing Statements in effect in any jurisdiction in respect of the Collateral
or any parts thereof that evidence a security interest prior in priority to that
of the Lender. Any such conflicting Financing Statement shall be terminated by
the Borrower prior to the Closing Date, or, in any event, prior to any borrowing
under the Line of Credit. Any conflicting Financing Statement in respect of the
Collateral that shall be discovered after the Closing Date shall be terminated
within thirty (30) days after the Borrower shall have notice of the same or the
Line of Credit shall thereafter be suspended by the Lender until such time as
the conflicting Financing Statement shall be terminated.
(f) Operating Account. The Borrower shall have
opened the Operating Account with the Lender.
(g) Satisfactory Proceedings. All proceedings
taken in connection with the transactions contemplated by this Agreement, and
<PAGE>
all documents necessary to the consummation thereof, shall be reasonably
satisfactory in form and substance to the Lender and the Lender's counsel, and
the Lender shall have received a copy (executed or certified as may be
appropriate) of all legal documents or proceedings taken in connection with the
consummation of said transactions.
Section 5.2. Failure to Deliver; Waiver of Conditions. If,
on the Closing Date, the conditions specified in Section 5.1 have not been
fulfilled, the Lender may thereupon elect to be relieved of all further
obligations under this Agreement. Without limiting the foregoing, if the
conditions specified in Section 5.1 have not been fulfilled on the Closing Date,
the Lender may waive compliance by the Borrower with any such condition to such
extent as the Lender may in its sole discretion determine and as it may agree.
Nothing in this Section 5 shall operate to relieve the Borrower of any of its
obligations hereunder or to waive the Lender's rights against the Borrower.
Section 5.3. Conditions to Line of Credit Loans. The making
of any Loan under the Line of Credit by the Lender is subject to the Lender's
sole discretion and the satisfaction in full of the following conditions in each
case:
(a) The delivery by the Borrower to the Lender of a
certificate executed by an officer of the Borrower, certifying the absence of a
Default or an Event of Default;
(b) The delivery by the Borrower of a Borrowing
Request;
(c) The Loan amount requested being equal to or less
than Availability;
(d) There being no Financing Statement then in
effect that conflicts with the Lender's first-priority security interest in the
Collateral.
SECTION 6. BORROWER COVENANTS.
Section 6.1. Affirmative Covenants. During the term of this
Agreement and so long as any of the Obligations remain unpaid or unperformed,
the Borrower agrees and covenants that it shall:
(a) Payment of Taxes, Debt and Charges. (i) timely
file all required tax returns; (ii) timely pay all taxes, assessments, and other
government charges or levies imposed upon it or upon its income, profits or
property, except for taxes being contested in good faith and by appropriate
proceedings for which adequate reserves have been established in conformity with
GAAP; (iii) pay all Debt owed by it on ordinary trade terms to vendors,
suppliers and other Persons providing goods and services used by it in the
ordinary course of its business; (iv) pay and discharge when due all other Debt
now or hereafter owed by it; (v) maintain appropriate accruals and reserves for
all of the foregoing Debt in accordance with GAAP; and (vi) pay, and cause its
Subsidiaries to pay, promptly when due, all of the charges, and promptly
discharge all Liens, encumbrances or other claims against the Collateral, except
for Permitted Encumbrances.
(b) Maintenance. Maintain, preserve and protect the
Collateral and its other properties and assets, including but not limited to,
the maintenance of insurance coverage customary to the Borrower's industry and
adequate for the particular risks presented.
<PAGE>
(c) Business. Carry on and conduct its business in
the same manner and in the same field of enterprise as it is currently engaged,
and do all things necessary to preserve the Borrower's existence, licenses,
standing or qualifications as a domestic corporation in the jurisdiction of its
organization and as a foreign corporation in every jurisdiction in which the
character of its assets or properties or the nature of the business transacted
by it at any time makes such qualification necessary.
(d) Transactions Among Affiliates. Ensure that all
transactions and courses of dealing between (or among) any of the Borrower and
its shareholders, officers, directors, Subsidiaries and Affiliates will be: (a)
in the ordinary course of business or (b) in an amount (in each case) not to
exceed $250,000; and on the terms and conditions which are fully disclosed to
the Lender and not more favorable than those prevailing in the marketplace
between (or among) businessmen dealing with each other at arm's length with
regard to like or similar transactions. Any loans, extensions of credit or
financial accommodations from any of the Borrower's officers, directors or
shareholders to the Borrower, whether now or hereafter existing, shall be
subordinated to the Obligations.
(e) Compliance with Laws. Comply in all material
respects with all federal, state and local laws, ordinances, governmental rules
and regulations to which it is subject to obtain and keep in force any and all
licenses, permits, franchises, or other governmental authorization necessary to
the ownership of its assets, prospects or to the conduct of its business, which
violation or failure to obtain could reasonably be expected to have a material
adverse effect.
(f) Collection of Receivables. At its sole cost and
expense, promptly and diligently collect and enforce, or cause its third party
billing agency to promptly and diligently collect and enforce, full payment of
all receivables in accordance with its collection practices, which shall at all
times be commercially reasonable, and Borrower will defend and hold the Lender
and its officers, directors, employees and agents harmless from any and all
loss, damage, penalty, fine or expense arising from such collection or
enforcement.
(g) Cash Balance Reconciliation. Maintain
procedures, satisfactory to Lender and in accordance with GAAP, to ensure that
cash is accurately reflected and reconciled to Borrower's general ledger on a
timely basis, which in no event shall be less often than once each month.
(h) Operating Account. The Borrower shall
maintain the Operating Account at all times such that the Lender may timely
debit the same for all amounts due hereunder from time to time.
(i) Annual 30-Day Clean Up. The Borrower shall
reduce the principal balance of the Note to zero for a thirty (30) consecutive-
day period at least once each year commencing on the Closing Date and continuing
as an annual obligation until the Demand Date.
(j) ERISA. (i) No fact, including, but not limited
to, any Reportable Event, exists in connection with any Plan which might
constitute grounds for the termination of any such Plan by the PBGC or for the
appointment by the appropriate United States district court of a trustee to
administer any such Plan; (ii) Borrower maintains no Plan which has an
"accumulated funding deficiency" (as defined in Section 412 of the Internal
Revenue Code), or has any material liability to the PBGC; (iii) Borrower has no
Plan with an actuarial present value of accrued plan benefits which exceeds the
<PAGE>
net assets available for such benefits (determined as of such Plan's most recent
actuarial valuation within the last twelve months); (iv) if Borrower is a party
to any Plan which is a Multi-Employer Plan, with respect to each such Plan of
Borrower which is a Multi-Employer Plan, Borrower has paid or accrued all
contributions pursuant to the terms of the applicable collective bargaining
agreement required to be paid or accrued by it in respect of its employees, and
there has been no complete or partial withdrawal by Borrower from any Multi-
Employer Plan within the contemplation of ERISA; and (v) neither Borrower, nor
any fiduciary designated by Borrower, has engaged in a "prohibited transaction"
within the meaning of Section 4975 of the Internal Revenue Code or Section 406
of ERISA with respect to any "employee benefit plan," as defined in Section 3
of ERISA. Capitalized terms used in this Section 6.1(j) shall, to the extent
not defined herein, have the meanings ascribed thereto in ERISA.
Section 6.2. Negative Covenants. During the term of this
Agreement and until the Obligations have been paid and performed in full, the
Borrower covenants and agrees that the Borrower shall not, without the Lender's
prior written consent, do, or permit any Subsidiary of Borrower to do, any of
the following:
(a) Liens. Incur or permit to exist any mortgage,
pledge, title retention lien or other lien, encumbrance or security interest
with respect to any of the Borrower's assets, including without limitation, the
Collateral, now owned or hereafter acquired by it, except Permitted
Encumbrances.
(b) Sale. Sell, transfer, lease, pledge or dispose
of any Collateral or any interest therein.
(c) Debt. Incur or assume any Debt other than (i)
the Obligations, (ii) unsecured trade accounts payable and contractual
obligations (including, without limitation, to suppliers and customers) incurred
in the ordinary course of business, and (iii) indebtedness in respect of leased
equipment in the ordinary course of business.
(d) Capital Structure. Create any Subsidiary
without fifteen (15) Business Days prior written notice to the Lender.
(e) Loans. Directly or indirectly loan to, invest
in, or guaranty the Debt of, any Person in an amount exceeding $250,000, other
than loans to, investments in, or guarantees of the Debt of any Subsidiary
provided that the same occurs in the ordinary course of business.
(f) Acquisitions. Acquire all or substantially all
of the assets or capital stock of another Person or merge or consolidate with
any Person where the cost of such transaction exceeds $1,000,000 or where the
surviving entity is not the Borrower.
(g) No Loss. Experience, in any fiscal quarter, a
material financial loss on an Operating Profit Basis (as defined in GAAP).
(h) Change of Fiscal Year. Change its fiscal year
from that in effect on the Closing Date.
(i) Change of Business. Except as disclosed on or
prior to the effective date hereof or thereafter on twenty (20) days' prior
written notice, enter into any new line of business or make any material change
in any of the Borrower's business objectives, purposes and operations, or
continue in operation.
<PAGE>
(j) Pledge Subsidiary Shares. Pledge the shares of
any Subsidiary, now existing or later formed, to secure the Debt of the Borrower
or any other Person, or permit any such shares to be subjected to any Lien,
excluding any Lien of the Lender.
Section 6.3 Reporting Requirements. The Borrower hereby
further covenants and agrees as follows:
(a) Accounting Practices. The Borrower will
maintain and will cause each of its Subsidiaries, if any, to maintain (i) a
system of accounting in accordance with GAAP, (ii) complete and accurate books
of account and records, and (iii) standard operating procedures applicable to
all of its locations with respect to the handling and disposition, of each cash
receipts on a daily basis, including the depositing thereof, aging of
Receivables on a monthly basis, record keeping and such other matters as the
Lender may request from time to time.
(b) Reports. The Borrower will furnish the
following statements and reports to the Lender at the Borrower's expense:
(i) Annual Statements. As soon as available
and in any event within 90 days after the end of each fiscal year of the
Borrower, a copy of the consolidated financial statements of the Borrower for
such year, including the consolidated and consolidating balance sheet,
statements of income and retained earnings and cash flows of the Borrower, each
such statement to be prepared in accordance with general accepted accounting
principles consistently applied and audited by a firm of independent certified
public accountants satisfactory to the Lender. The Borrower may satisfy the
requirements of this Section 6.3(b)(i) by submitting annually and within the
above time period its Form 10-K conforming to the requirements of the Securities
Exchange Act of 1934, as amended, (the " '34 Act").
(ii) Quarterly Financial Statements. As soon
as available and in any event within 45 days after the end of each quarter of
the Borrower, a copy of the financial statements of the Borrower for such
quarterly period, including the consolidated and consolidating balance sheet,
statements of income and retained earnings and cash flows of the Borrower, each
such statement to be prepared by the Borrower in accordance with generally
accepted accounting principles consistently applied and signed by the Borrower's
Chief Financial Officer. The Borrower may satisfy the requirements of this
Section 6.3(b)(ii) by submitting quarterly and within the above time period its
Form 10-Q conforming to the requirements of the '34 Act.
(iii) Aging Accounts Receivable Report. As
soon as available and in any event within twenty (20) days after the end of each
month, an aging of the Borrower's consolidated accounts receivable report in a
form satisfactory to the Lender.
(iv) Other Data. Promptly upon the Lender's
request such other statements and reports as shall be reasonably requested by
the Lender.
Each of the statements set forth in paragraphs (i) and (ii)
above shall be accompanied by a compliance certificate prepared by the Borrower
and signed by the Borrower's Chief Financial Officer which shall outline the
actual calculation of the financial covenant ratios and verifying the Borrower's
compliance with the same.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES.
<PAGE>
Section 7.1. Events of Default. Any one or more of the
following shall constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest
on the Note when the same shall have become due and such default shall continue
for more than ten (10) days; or
(b) Default shall occur in the making of any payment
of the principal of the Note or premium, if any, thereon on demand by the Lender
and such default shall continue for more than fifteen (15) days; or
(c) Default shall occur in the making of any other
payment due under this Agreement and such default shall continue for more than
fifteen (15) days after the day on which written notice thereof is given to the
Borrower by the Lender; or
(d) Default shall occur in the observance or
performance of any covenant or agreement contained in Section 6.2(d) through
Section 6.2(g); or
(e) Default shall occur in the observance or
performance of any other covenant or any other provision of this Agreement which
is not remedied within 30 days after the earlier of (i) the day on which the
Borrower first obtains knowledge of such default, or (ii) the day on which
written notice thereof is given to the Borrower by the Lender; or
(f) any representation or warranty made by the
Borrower herein, or made by the Borrower in any statement or certificate
furnished by the Borrower in connection with the consummation of the issuance
and delivery of the Note or furnished by the Borrower pursuant hereto, is untrue
in any material respect as of the date of the issuance or making or renewal
thereof; or
(g) final judgment or judgments for the payment of
money aggregating in excess of $200,000 is or are outstanding against the
Borrower or any Subsidiary or against any Property or assets of either and any
one of such judgments has remained unpaid, unvacated, unbonded or unstayed by
appeal or otherwise for a period of 30 days from the date of its entry; or
(h) a custodian, liquidator, trustee, administrator
or receiver is appointed for the Borrower or any Subsidiary or for the major
part of the Property of either and is not discharged within 30 days after such
appointment; or
(i) the Borrower or any Subsidiary becomes insolvent
or bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Borrower or any Subsidiary
applies for or consents to the appointment of a custodian, liquidator, trustee
or receiver for the Borrower or such Subsidiary or for the major part of the
Property of any thereof; or
(j) bankruptcy, reorganization, arrangement or
insolvency proceedings, or other proceedings for relief under any bankruptcy or
similar law or laws for the relief of debtors, are instituted by or against the
Borrower or any Subsidiary and, if instituted against the Borrower or any
Subsidiary, are consented to or are not dismissed within 60 days after such
institution;
Section 7.2 Notice to Lender. When any Event of Default
<PAGE>
described in the foregoing Section 7.1 has occurred, or if the Lender or the
holder of any other evidence of Debt of the Borrower gives any notice or takes
any other action with respect to a claimed default, the Borrower agrees to give
notice within five (5) Business Days of such event to the Lender, in the manner
set forth in Section 10.5.
Section 7.3 Acceleration of Maturity; Other Remedies. When
any Event of Default described in paragraph (a) through (h) of Section 7.1 has
occurred and is continuing, the Lender may, by notice to the Borrower, declare
the entire principal and all interest accrued on the Note to be, and the Note
shall thereupon become, forthwith due and payable, without any presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived. When any Event of Default described in paragraph (i), (j), or (k) of
Section 7.1 has occurred, then the Notes shall immediately become due and
payable without presentment, demand or notice of any kind. Upon the Notes
becoming due and payable as a result of any Event of Default as aforesaid, the
Borrower will forthwith pay to the Lender, the entire principal and interest
accrued on each Note. No course of dealing on the part of the Lender nor any
delay or failure on the part of the Lender to exercise any right shall operate
as a waiver of such right or otherwise prejudice the Lender's rights, powers and
remedies. The Borrower hereby acknowledges and agrees that the Lender retains
all default rights and remedies with respect to the Collateral provided to
secured parties under the UCC, except to the extent the same are expressly
modified by the terms hereof. The Borrower further agrees, to the extent
permitted by law, to pay to the Lender all documented expenses incurred by it in
the collection of the Notes upon any default hereunder or thereon, including all
documented fees and expenses of the Lender's attorneys for all services rendered
in connection therewith.
Section 7.4 Rescission of Acceleration. The provisions of
Section 7.3 are subject to the condition that if the principal of and accrued
interest on the Notes or either of them has been declared immediately due and
payable by reason of the occurrence of any Event of Default described in
paragraphs (a) through (h), inclusive, of Section 7.1, the Lender may, by
written instrument filed with the Borrower, rescind and annul such declaration
and the consequences thereof, provided that at the time such declaration is
annulled and rescinded:
(a) no judgment or decree has been entered for the
payment of any monies due pursuant to the Notes or this Agreement;
(b) all arrears of interest upon the Note and all
other sums payable under the Note and under this Agreement (except any
principal, interest or premium on the Note or either of them that has become due
and payable solely by reason of such declaration under Section 7.3) shall have
been duly paid; and
(c) each and every other Default and Event of
Default shall have been made good, cured or waived pursuant to Section 7; and
provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right consequent
thereto.
SECTION 8. AMENDMENTS, WAIVERS AND CONSENTS.
Section 8.1. Consent Required. Any term, covenant, agreement
or condition of this Agreement may, with the consent of the Borrower, be amended
or compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the Borrower shall have
<PAGE>
obtained the consent in writing of the Lender.
Section 8.2 Effect of Amendment or Waiver. Any such
amendment or waiver shall apply to the Lender and shall be binding upon it, upon
each successor or transferee thereof and upon the Borrower, whether or not the
Note shall have been marked to indicate such amendment or waiver. No such
amendment or waiver shall extend to or affect any obligation not expressly
amended or waived or impair any right consequent thereon.
SECTION 9. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 9.1 Definitions. Unless the context otherwise
requires or such term is otherwise defined herein, the terms hereinafter set
forth when used herein shall have the following meanings and the following
definitions shall be equally applicable to both the singular and plural forms of
any of the terms herein defined:
"Accountants" shall mean the Borrower's certified public
accountants, or any other firm of independent, certified public accounts of
recognized regional or national standing selected by Borrower subsequent to the
Closing Date to audit its financial statements, and approved by the Lender for
such purpose.
"Affiliate" shall mean any Person (other than a Subsidiary)
which directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Borrower. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of partners' equity, by contract or otherwise.
"Agreement" shall mean this Credit and Security Agreement.
"Availability" shall mean the dollar amount equal to the
unborrowed principal amount under the Line of Credit, from time to time.
"Borrower" shall mean Computer Outsourcing Services, Inc., a
Delaware corporation, and its successors and assigns.
"Borrowing Request" shall have the meaning set forth in
Section 1.5.
"Business Day" or "business day" shall mean any day on which
commercial banks are required or permitted by law to be open for business in New
York, New York.
"Closing" and "Closing Date" shall have the meaning set forth in
Section 1.6(a).
"Code" shall mean the U.S. Internal Revenue Code of 1986, as
amended from time to time.
"Collateral" shall have the meaning set forth in Section 3.1
hereof.
"Cost of Funds" shall mean the per annum rate of interest that
the Lender is required to pay, or is offering to pay, for wholesale liabilities
of like tenor, adjusted for reserve requirements and such other requirements as
may be imposed by federal, state, or local government and regulatory agencies,
as determined by the Lender.
<PAGE>
"Debt" of any Person shall mean (i) all obligations of such
Person for borrowed money (including, but not limited to, the Notes) or which
has been incurred in connection with the acquisition of assets and (ii) all
Guarantees by such Person of Debt of others.
"Default" shall mean any event or condition, the occurrence of
which would, with the lapse of time or the giving of notice, or both, constitute
an Event of Default.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended, and any successor statute of similar import, together with
the regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA shall be construed to also refer to any
successor sections.
"Event of Default" shall have the meaning set forth in
Section 7.1.
"GAAP" shall mean generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity operating in the United States as may be
approved by a significant segment of the accounting profession that are
applicable to the circumstances as of the date of determination, applied on a
consistent basis.
"Guarantee" shall mean a binding promise by the Borrower or any
Subsidiary to pay the obligations of another person, in each case as the context
requires.
"Interest Period" shall mean, in respect of any Prime Rate Loan,
the period from the making of such Loan until the next payment monthly date in
respect of the same, and in respect of any LIBOR Loan, shall mean the period
from the making of such Loan until the first monthly payment date that shall
follow the end of the term associated with the applicable Elected LIBOR Rate.
"Lender" shall mean Fleet Bank, National Association and its
successors and assigns.
"LIBOR" for any Interest Period means the London Inter Bank
Offered Rate, being the rate per annum (rounded upward, if necessary, to the
nearest 1/32 of one percent) as determined on the basis of the offered rates for
deposits in U.S. dollars, for such Interest Period which appears on the Telerate
page 3750 as of 11:00 a.m. London time on the day that is two (2) London Banking
Days preceding making of any LIBOR Loan and each payment date in respect thereof
hereunder; provided, however, if the rate described above does not appear on the
Telerate System on any applicable interest determination date, the LIBOR rate
shall be the rate (rounded upwards as described above, if necessary) for
deposits in dollars for a period substantially equal to such Interest Period on
the Reuters Page "LIBO" (or such other page as may replace the LIBO Page on that
service for the purpose of displaying such rates), as of 11:00 a.m. (London
Time), on the day that is two (2) London Banking Days prior to the beginning of
such Interest Period. "London Banking Day" shall mean any date on which
commercial banks are open for business in London. If both the Telerate and
Reuters system are unavailable, then the rate for that date will be determined
on the basis of the offered rates for deposits in U.S. dollars for a period of
time comparable to the LIBOR Loan which are offered by four major banks in the
London interbank market at approximately 11:00 a.m. London time, on the day that
<PAGE>
is two (2) London Banking Days preceding the first day of the LIBOR Loan as
selected by the Lender. The principal London office of each of the four major
London banks will be requested to provide a quotation of its U.S. dollar deposit
offered rate. If at least two such quotations are provided, the rate for that
date will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that date will be determined
on the basis of the rates quoted for loans in U.S. dollars to leading European
banks for a period of time comparable to such LIBOR Loan offered by major banks
in New York City at approximately 11:00 a.m. New York City time, on the day that
is two (2) London Banking Days preceding the making of the LIBOR Loan. In the
event that the Lender is unable to obtain any such quotation as provided above,
it will be deemed that LIBOR pursuant to the Loan cannot be determined. In the
event that the Board of Governors of the Federal Reserve System shall impose a
reserve percentage with respect to LIBOR deposits of the Lender (the "Reserve
Percentage") then for any period during which such Reserve Percentage shall
apply, LIBOR shall be equal to the amount determined above divided by an amount
equal to 1 minus the Reserve Percentage. "Reserve Percentage" shall mean the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) that is imposed on member banks of the Federal
Reserve System against "Euro-currency Liabilities" as defined in Regulation D.
"Lien" shall mean any interest in Property securing an
obligation owed to, or a claim by, a Person other than the owner of the
Property, whether such interest is based on the common law, statute or contract,
and including, but not limited to, the security interest lien arising from a
mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease,
consignment or bailment for security purposes. The term "Lien" shall include
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purposes of this Agreement, the Borrower or a
Subsidiary shall be deemed to be the owner of any Property which it has acquired
or holds subject to a conditional sale agreement, capitalized lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person for security purposes, and such retention or vesting
shall constitute a Lien.
"Line of Credit" shall have the meaning set forth in
Section 1.3.
"Loan" shall mean the Term Loan or a loan under the Line of
Credit, as the context may require.
"Loan Documents" shall mean this Agreement, the Notes, the
Subsidiary Security Agreement, and such other agreements and documents as the
Lender may require as a condition to Closing.
"Mortgage" shall mean any mortgage on real property granted or
held by the Borrower or any of its Subsidiaries.
"Note" shall mean that certain secured line of credit promissory
note issued by the Borrower to the Lender Pursuant to Section 1.4 and any note
delivered in exchange or replacement therefor pursuant to the terms hereof.
"Obligations" shall mean the meaning set forth in Section 3.1.
"Permitted Encumbrances" shall mean (i) Liens for current taxes,
assessments or governmental charges not delinquent or for taxes being contested
in good faith and by appropriate proceedings for which adequate reserves have
been set aside in conformity with GAAP; (ii) Liens arising in the ordinary
<PAGE>
course of business for sums not due or sums being contested in good faith and by
appropriate proceedings and not involving any deposits, advances or borrowed
money; (iii) Liens of landlords, carriers, warehousemen, mechanics, laborers or
materialman arising in the ordinary course of business for sums not due or sums
being contested in good faith and by appropriate proceedings; (iv) Liens in
respect of leases of equipment used in the ordinary course of the Borrower's
business; and (v) Liens in favor of the Lender.
"Person" shall mean an individual, partnership, (including,
without limitation, any limited liability partnership) corporation, trust,
limited liability company, joint venture, association, joint stock company or
unincorporated organization, and a government or agency or political subdivision
thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Prime Rate" shall mean the variable per annum rate of interest
so designated from time to time by the Lender as its prime rate. The Prime Rate
is a reference rate and does not necessarily represent the lowest or best rate
being charged to any customer. Changes in the rate of interest resulting from
changes in the Prime Rate shall take place immediately without notice or demand
of any kind.
"Property" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, and whether tangible or intangible.
"Regulatory Change" means any applicable law, interpretation,
directive, request or guideline (whether or not having the force of law), or any
change therein or in the administration or enforcement thereof, that becomes
effective or is implemented or first required or expected to be complied with
after the Closing Date, whether the same is (i) the result of an enactment by a
government or any agency or political subdivision thereof, a determination of a
court or regulatory authority, or otherwise or (ii) enacted, adopted, issued or
proposed before or after the Closing Date, including any such that imposes,
increases or modifies any tax (except any income, real property, sales and use,
franchise tax, or excise tax (other than any excise tax that shall be imposed
solely upon lending institutions)) reserve requirement, insurance charge,
special deposit requirement, assessment or capital adequacy requirement, but
excluding any such that imposes, increases or modifies any income or franchise
tax imposed upon the Bank by any jurisdiction (or any political subdivision
thereof) in which the Lender is located.
"Subsidiary" or "subsidiary" shall mean with respect to any
Person any other person directly or indirectly under the control of such person,
whether through voting stock or otherwise.
"Subsidiary Security Agreement" shall mean that certain security
agreement of even date herewith between each of the Subsidiaries and Fleet
securing the Borrower's Obligations.
"UCC" shall mean the Uniform Commercial Code in effect in the
State of New York on the Closing Date.
Section 9.2. Accounting Principles. Where the character or
amount of any asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, the same shall be done in accordance
with GAAP, to the extent applicable, except where such principles are
inconsistent with the requirements of this Agreement.
<PAGE>
Section 9.3. Directly or Indirectly. Where any provision in
this Agreement refers to action to be taken by any Person, or which such Person
is prohibited from taking, such provision shall be applicable whether the action
in question is taken directly or indirectly by such Person.
SECTION 10. MISCELLANEOUS.
Section 10.1. Transfer of Note. At any time and from time to
time, upon not less than ten days' notice to that effect given by the Lender,
upon surrender of the Note at its office, the Borrower will deliver in exchange
therefor, without expense to the Lender, except as set forth below, a Note or
Notes, for the same aggregate principal amount as the then unpaid principal
amount of the Note so surrendered and for the same aggregate amount of the
Commitment as the Note or Notes so surrendered, dated as of the date to which
interest has been paid on the Note so surrendered or, if such surrender is prior
to the payment of any interest thereon, then dated as of the date of issue,
registered in the name of such Person or Persons as may be designated by the
Lender, and otherwise of the same form and tenor as the Note so surrendered for
exchange. The Borrower may require the payment of a sum sufficient to cover any
stamp tax or governmental charge imposed upon such exchange or transfer.
Section 10.2. Loss, Theft, Etc. of Notes. Upon receipt of
evidence satisfactory to the Borrower of the loss, theft, mutilation or
destruction of the Note, and in the case of any such loss, theft or destruction
upon delivery of a bond of indemnity in such form and amount as shall be
reasonably satisfactory to the Borrower, or in the event of such mutilation upon
surrender and cancellation of the Note, the Borrower will make and deliver
without expense to the Lender a new Note, of like tenor, in lieu of such lost,
stolen, destroyed or mutilated Note.
Section 10.3. Expenses, Stamp Tax Indemnity.
(a) If the Closing does not occur, the Borrower
shall promptly pay all of the Lender's reasonable fees and other expenses
(including out-of-pocket costs and travel expenses) in connection with the
consideration, preparation, negotiation, execution or delivery of this Agreement
or of any amendments, waivers or consents pursuant to the provisions hereof,
including but not limited to the documented fees and disbursements of Lane &
Mittendorf LLP, counsel to the Lender.
(b) If the Closing does occur, the Borrower shall
promptly pay all of the Lender's reasonable fees and other expenses (including
out-of-pocket costs and reasonable travel expenses) in connection with the
consideration, preparation, negotiation, execution or delivery of this Agreement
and the transactions contemplated hereby, including but not limited to the
documented fees and disbursements of Lane & Mittendorf LLP, counsel to the
Lender, and all such reasonable expenses of the Lender relating to any
amendment, waivers or consents pursuant to the provisions hereof, including,
without limitation, any amendments, waivers, or consents resulting from any
work-out, renegotiation or restructuring relating to the performance by the
Borrower of its obligations under this Agreement and the Notes.
(c) The Borrower also agrees that it will pay and
hold the Lender harmless against any and all liability with respect to stamp and
other taxes, if any, which may be payable or which may be determined to be
payable in connection with the execution and delivery of this Agreement or the
Note, whether or not the Note is then outstanding, provided that the Lender
shall remain liable for any income tax in respect of the Note.
<PAGE>
(d) The Borrower agrees to protect and indemnify the
Lenders against any liability for any and all brokerage fees and commissions
payable or claimed to be payable to any Person in connection with the
transactions contemplated by this Agreement to the extent such fees or
commissions are being claimed through the Borrower.
(e) Without limiting the generality of the
foregoing, it is agreed and understood that the Borrower will, upon presentation
of a writing evidencing such amounts in reasonable detail, pay at the Closing
(if it shall occur) and upon receipt of any statement therefor, all of the
foregoing reasonable expenses arising in connection with or relating to this
Agreement. The obligations of the Borrower under this Section 10.3 shall
survive the termination of this Agreement.
Section 10.4. Powers and Rights Not Waived; Remedies
Cumulative. No delay or failure on the part of the Lender in the exercise of
any power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise thereof, or
the exercise of any other power or right, and the rights and remedies of the
Lender are cumulative to, and are not exclusive of, any rights or remedies the
Lender would otherwise have.
Section 10.5. Notices. All communications provided for
hereunder shall be in writing and, if to the Lender, delivered or mailed prepaid
by registered or certified mail or overnight air courier, or by facsimile
communication, in each case addressed to the Lender at its address appearing
beneath its signature at the foot of this Agreement or such other address as the
Lender may designate to the Borrower in writing, and if to the Borrower,
delivered or mailed by registered or certified mail or overnight air courier, or
by facsimile communication, to the Borrower at the address beneath its signature
at the foot of this Agreement or to such other address as the Borrower may in
writing designate to the Lender; provided, however, that a notice to the Lender
by overnight air courier shall only be effective if delivered to the Lender at a
street address designated for such purpose in accordance with this Section 10.5,
and a notice to the Lender by facsimile communication shall only be effective if
made by confirmed transmission to the Lender at a telephone number designated
for such purpose in accordance with this Section 10.5 and promptly followed by
the delivery of such notice by registered or certified mail or overnight air
courier, as set forth above.
Section 10.6. Successors and Assigns. This Agreement shall be
binding upon the Borrower and the Lender and their respective successors and
assigns and shall inure to the benefit of the Borrower and the Lender and their
respective successor and assigns.
Section 10.7. Survival of Covenants and Representations. All
covenants, representations and warranties made by the Borrower herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement and
the Note.
Section 10.8. Severability. Should any part of this Agreement
for any reason be declared invalid or unenforceable, such decision shall not
affect the validity or enforceability of any remaining portion, which remaining
portion shall remain in force and effect as if this Agreement had been executed
with the invalid or unenforceable portion thereof eliminated and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any such part,
parts or portion which may, for any reason, be hereafter declared invalid or
<PAGE>
unenforceable.
Section 10.9. Governing Law; Consent to Jurisdiction; Waiver of
Jury Trial. This Agreement and the Note issued and sold hereunder shall be
governed by and construed in accordance with the laws of the State of New York,
without reference to the laws thereof regarding conflicts of laws. Each of the
parties hereto submits irrevocably to the non-exclusive jurisdiction of the
United States District Court for the Southern District of New York, any court in
the State of New York located in the Borough of Manhattan, City of New York, and
any appellate court from any thereof, in any action, suit or proceeding brought
against it and related to or in connection with this Agreement, the Note, or the
transactions contemplated thereby. To the extent permitted by applicable law,
each party hereto hereby waives and agrees not to assert by way of motion, as a
defense or otherwise in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such courts, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Agreement, the Note or the subject
matter hereof or thereof may not be litigated in or by such courts. THE
BORROWER AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY, AND
INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY, AND THE BORROWER WAIVES THE
RIGHT TO INTERPOSE ANY SET-OFF OR COUNTERCLAIM, IN ANY LITIGATION IN RESPECT OF
ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN
CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR THE LENDER TO ACCEPT THIS AGREEMENT AND THE NOTE AND
EXTEND CREDIT TO THE BORROWER.
Section 10.10. Year 2000 Issues. This Agreement is subject to,
among the other conditions contained herein, the Borrower's demonstration to the
satisfaction of the Lender that (a) the Borrower has taken and is taking all
necessary and appropriate steps to ascertain the extent of and successfully
address business and financial risks facing the Borrower as a result of the Year
2000 Risk (that is the risk that computer applications used by Borrower and/or
by its suppliers, vendors and customers may be unable to recognize and perform
without error date-sensitive functions involving certain dates prior to and any
date after December 31, 1999) and (b) the Borrower's material computer
applications and those of its key vendors and suppliers will, on a timely basis,
adequately address the Year 2000 Risk in all material respects.
Section 10.11. Captions. The descriptive headings of the
various Sections or parts of this Agreement are for convenience only and shall
not affect the meaning or construction of any of the provisions hereof.
Section 10.12. Contract Created; Counterparts. The execution
hereof by the Lender shall constitute a contract between the Borrower and the
Lender for the uses and purposes hereinabove set forth. This Agreement may be
executed in any number of counterparts, each executed counterpart constituting
an original but all together only one agreement.
[Signature page follows.]
<PAGE>
IN WITNESS WHEREOF the parties hereto have duly executed this
Agreement on the date first above written.
COMPUTER OUTSOURCING SERVICES, INC.
By:_____________________________
Name:
Title:
Notices to the Borrower:
COMPUTER OUTSOURCING SERVICES, INC.
2 Christie Heights Street
Leonia, New Jersey 07605
Attention: Mr. Nicholas J. Letizia
Telefacsimile: (201) 840-7126
Confirmation: (201) 840-4726
FLEET BANK, NATIONAL ASSOCIATION
By:___________________________
Name:
Title:
EXHIBIT A
FORM OF LINE OF CREDIT NOTE
EXHIBIT 21
List of Subsidiaries of Computer Outsourcing Services, Inc.
As of October 31, 1999
MICR Corporate Services, a New York corporation.
MCC Key Services, Inc., a New Jersey corporation
ETG, Inc., a Delaware corporation
Infocrossing, Inc., a Delaware corporation
Imperit, Inc., an inactive Delaware corporation
COSI.com, Inc., an inactive Delaware corporation
Independent Auditors Consent
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of our report dated December 28, 1999 with respect to the consolidated
financial statments of Computer Outsourcing Serivces, Inc., included in the
Annual Report on Form 10-KSB for the year ended October 31, 1999.
/s/ Ernst & Young LLP
- ---------------------
New York, New York
January 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted fro the Company's
Annual Report on Form 10-KSB for the period ended October 31, 1999, and is
qualified in its entirety by reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,590,223
<SECURITIES> 1,673,441
<RECEIVABLES> 6,361,275
<ALLOWANCES> 350,939
<INVENTORY> 0
<CURRENT-ASSETS> 12,329,603
<PP&E> 9,201,345
<DEPRECIATION> 5,562,352
<TOTAL-ASSETS> 27,554,083
<CURRENT-LIABILITIES> 3,164,647
<BONDS> 19,017
0
0
<COMMON> 47,379
<OTHER-SE> 22,777,465
<TOTAL-LIABILITY-AND-EQUITY> 27,554,083
<SALES> 0
<TOTAL-REVENUES> 34,264,966
<CGS> 0
<TOTAL-COSTS> 23,632,609
<OTHER-EXPENSES> 8,210,664
<LOSS-PROVISION> 158,000
<INTEREST-EXPENSE> 19,297
<INCOME-PRETAX> 2,707,666
<INCOME-TAX> 1,046,373
<INCOME-CONTINUING> 1,661,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,661,293
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
