U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2000
Commission file number: 0-20824
COMPUTER OUTSOURCING SERVICES, INC.
------------------------------------------------
(Exact name of issuer as specified in its charter)
Delaware 13-3252333
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Christie Heights Street Leonia, New Jersey 07605
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(Address of principal executive offices)
(201) 840-4700
---------------------------
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
There were 4,889,687 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of March 15, 2000.
Transitional Small Business Disclosure Form (check one): Yes [ ] No [X]
Page 1 of 16
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 4,217,436 $ 1,590,223
Marketable debt securities, at cost which
approximates market value 549,318 1,673,441
Trade accounts receivable, net of
allowance for doubtful accounts of
$366,277 and $350,939 4,817,186 6,010,366
Prepaid and refundable income taxes 1,513,503 961,196
Deferred income taxes - current 591,178 591,178
Prepaid license fees 909,251 915,935
Prepaid expenses and other current assets 695,529 587,264
----------- -----------
13,293,401 12,329,603
----------- -----------
PROPERTY and EQUIPMENT, net 4,721,386 3,638,993
----------- -----------
OTHER ASSETS:
Deferred software, net 2,358,354 2,223,823
Intangibles, net 9,441,537 8,484,564
Due from related parties, net 134,142 132,314
Deferred income taxes 235,986 235,986
Security deposits and other
non-current assets 507,110 508,800
----------- -----------
12,677,129 11,585,487
----------- -----------
TOTAL ASSETS $ 30,691,916 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 2 of 16
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,547,553 $ 1,237,479
Current portion of long-term debt and
capitalized lease obligations 2,010,793 19,017
Current portion of accrued loss on
office sublease 257,497 256,429
Accrued expenses 1,665,265 1,514,514
Customer deposits and other current
liabilities 103,117 137,208
----------- -----------
5,584,225 3,164,647
----------- -----------
OTHER LIABILITIES:
Accrued loss on office sublease 1,546,996 1,564,592
----------- -----------
COMMITMENTS AND CONTINGENCIES
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
4,841,365 and 4,737,915, respectively 48,413 47,379
Additional paid-in capital 16,084,142 15,519,826
Common stock issuable (Note 2) 1,135,160 -
Retained earnings 6,412,037 7,264,952
----------- -----------
23,679,752 22,832,157
Less 5,608 and 1,000 shares of common
stock held in treasury at January 31,
2000 and October 31, 1999,
respectively, at cost (119,057) (7,313)
----------- -----------
23,560,695 22,824,844
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 30,691,916 $ 27,554,083
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 3 of 16
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months ended January 31,
-------------------------------
2000 1999
----------- -----------
REVENUES $ 7,114,803 $ 8,281,078
----------- -----------
COSTS and EXPENSES:
Processing costs 5,853,387 5,710,035
Selling and promotion costs 867,534 398,297
General and administrative expenses 1,827,184 1,348,262
Interest income, net (35,080) (121,357)
----------- -----------
8,513,025 7,335,237
----------- -----------
Income/(loss) from operations before
provision/(benefit) for income taxes (1,398,222) 945,841
Provision/(benefit) for income taxes (545,307) 387,795
----------- -----------
NET INCOME/(LOSS) $ (852,915) $ 558,046
=========== ===========
Basic earnings/(loss) per share $ (0.18) $ 0.13
=========== ===========
Weighted average number of
shares outstanding 4,767,198 4,431,723
=========== ===========
Diluted earnings/(loss) per share $ (0.18) $ 0.12
=========== ===========
Weighted average number of shares and
equivalents outstanding (Note 4) 4,767,198 4,845,108
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 4 of 16
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months ended January 31,
-------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (852,915) $ 558,046
Adjustments to reconcile net income to cash
provided by/(used in) operating activities:
Depreciation and amortization 523,823 457,590
Income from a non-competition,
confidentiality, and conduct of
business agreement - (120,000)
Deferred income taxes - 77,985
Decrease/(increase) in:
Trade accounts receivable 1,193,180 (2,009,739)
Prepaid and refundable taxes (552,307) (201,082)
Prepaid expenses and other current
assets (101,581) 349,001
Security deposits and other non-current
assets (749) -
Increase/(decrease) in:
Accounts payable 310,074 123,468
Accrued expenses 150,751 (158,953)
Payments on accrued loss on office
sublease (12,230) -
Customer deposits and other current
liabilities (34,090) 11,745
----------- -----------
Net cash provided by/(used in)
operating activities 623,956 (911,939)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,275,356) (228,944)
Redemption of investments in marketable
debt securities 1,124,123 348,935
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 - (153,078)
Increase in deferred software costs (284,767) (173,164)
----------- -----------
Net cash used in investing activities $ (436,000) $(4,206,251)
----------- -----------
Continued on next page.
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 5 of 16
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited - Continued)
Three Months ended January 31,
-------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit $ 2,000,000 $ -
Repayment of long-term debt and capital
leases (8,224) (11,424)
(Advances to)/repayments by
related parties, net (1,828) 6,825
Proceeds from the exercises of stock
options and warrants 453,606 154,223
----------- -----------
Net cash provided by financing activities 2,443,554 149,624
----------- -----------
CASH FLOWS FROM DISCONTINUED
OPERATION:
Payment of taxes on gain and other
expenses related to sale of the
Payroll Division - (2,295,771)
Payments on portion of accrued loss
on office sublease relating to
discontinued operation (4,297) -
----------- -----------
Net cash used in discontinued operation (4,297) (2,295,771)
----------- -----------
Net increase/(decrease) in cash
and equivalents 2,627,213 (7,264,337)
Cash and equivalents at the
beginning of the period 1,590,223 9,403,006
----------- -----------
Cash and equivalents at the end
of the period $ 4,217,436 $ 2,138,669
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 178 $ 14,230
=========== ===========
Income taxes $ 7,000 $ 2,711,550
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Stock issuable in 2000 and issued in 1999
for a portion of the Enterprise Purchase $ 1,135,160 $ 2,677,500
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Treasury shares received in payment
of a stock option exercise $ 111,744 -
=========== ===========
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 6 of 16
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<TABLE>
COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Par Paid in Shares Retained Treasury
Shares Value Capital Issuable Earnings Stock Total
--------- ------- ----------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
October
31, 1999 4,737,915 $47,379 $15,519,826 - $7,264,952 $ (7,313) $22,824,844
Exercises of
stock
options 78,450 784 439,566 440,350
4,608 shares
surrendered
for stock
option
exercise (111,744) (111,744)
Contingent
payment
relating to
purchase of
assets
(Note 2) 1,135,160 1,135,160
Exercise of
warrant 25,000 250 124,750 125,000
Net loss (852,915) (852,915)
--------- ------- ----------- ---------- ---------- --------- -----------
Balance,
January
31, 2000 4,841,365 $48,413 $16,084,142 $1,135,160 $6,412,037 $(119,057) $23,560,695
========= ======= =========== ========== ========== ========= ===========
</TABLE>
See Notes to Consolidated Interim Financial Statements (Unaudited).
Page 7 of 16
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COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated balance sheet as of January 31, 2000 and the consolidated
statements of income and cash flows for the three month periods ended January
31, 2000 and 1999 have been prepared by the Company without audit. In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows for the periods indicated have been made.
The results of operations for the periods ended January 31, 2000 and 1999 are
not necessarily indicative of the operating results for the full fiscal years.
Certain reclassifications have been made to the prior period to conform to the
current presentation.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated interim financial statements should be read in
conjunction with the Company's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1999.
The consolidated financial statements include the accounts of Computer
Outsourcing Services, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated.
2. 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. On
December 28, 1998, the subsidiary changed its name to ETG, Inc. The assets
acquired consist predominately of intangibles associated with the business of
providing information technology infrastructure management solutions to large
companies and institutions.
Certain additional consideration in the form of cash and common stock may be
payable, at various times, based upon the future performance of the acquired
business (and certain other defined events) over the period ending December 31,
2001. Effective as of December 31, 1999, $1,135,160 in additional consideration
became payable in the form of shares of the Company's common stock. This amount
has been added to intangible assets (goodwill), and is being amortized over the
remaining life assigned to this asset (168 months). On February 17, 2000,
36,471 shares of the Company's common stock were issued in payment of this
additional consideration.
3. DEBT
On October 29, 1999, the Company entered into an agreement with a bank for a
line of credit of up to $5,000,000. Amounts drawn under this line, payable upon
demand, will accrue interest (at the Company's option) at either the Prime Rate
Page 8 of 16
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or 1.25% over the 30, 60, or 90 day LIBOR rate. The interest rate will then be
fixed during the period corresponding to the particular LIBOR rate selected.
The line of credit does not have a fixed term, and is secured by a first lien on
the Company's accounts receivable and certain general intangibles. On December
27, 1999, the Company borrowed $2,000,000 under a 90-day note utilizing the
LIBOR rate option. The interest rate was 7.44% on an annualized basis.
4. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") requires the presentation of basic and diluted earnings per share
("EPS"). Basic EPS is computed by dividing income available to common stock-
holders 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. In determining the diluted loss per common share
for the three months ended January 31, 2000, common stock equivalents were
ignored since the effect of including such equivalents would have been anti-
dilutive.
5. STOCK OPTIONS
The Company accounts for options granted under the 1992 Stock Option and Stock
Appreciation Rights Plan, as amended, (the "Plan") in accordance with Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized for
stock option awards. Had the compensation cost been determined in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's pro forma income/(loss) and pro forma income/
(loss) per common share for the quarters ended January 31, 2000 and 1999 would
be as follows:
2000 1999
----------------------- -----------------------
Historical Pro Forma Historical Pro Forma
---------- ----------- ---------- ----------
Net income/(loss) $ (852,915) $(1,222,077) $ 558,046 $ 480,736
========== =========== ========== ==========
Net income/(loss)
per diluted common share $ (0.18) $ (0.26) $ 0.12 $ 0.10
========== =========== ========== ==========
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. Non-qualified options issued under the Plan have all been
granted at fair market value, although the Plan permits issuance of non-
qualified options at less than fair market value. The weighted average fair
value of the stock options granted during the quarters ended January 31, 2000
and 1999 was $1,368,7000 and $97,200, respectively. The fair value of each
stock option grant is estimated on the date of the grant using the Black-Scholes
Page 9 of 16
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option pricing model with the following weighted average assumptions used for
grants in 2000: a risk-free interest rate of 5.50%; expected lives of between
six months and three and one-half years; and expected volatility of 49.5%. The
following weighted average assumptions were used for grants in 1999: a risk-free
interest rate of between 4.65% and 4.77%; expected lives of four years; and
expected volatility of between 47.4% and 48.8%.
6. SUBSEQUENT EVENT
On February 23, 2000, a subsidiary of the Company closed a transaction with
three investors providing for a series of convertible notes. Each note will be
due February 25, 2001 and will bear interest at 6% for the first six months.
Thereafter, interest increases to 13% in the seventh month and rises 1% for each
subsequent month that the applicable note remains outstanding. The notes may be
prepaid by the Company without penalty. The notes are to be funded as follows:
$3 million at closing; $2 million upon signing the lease for the subsidiary's
second Internet Data Center ("IDC"); $2 million when the second IDC is 50%
complete; and an aggregate of $7 million based upon certain other events. The
notes are secured by a first lien on the assets, with certain exceptions, of the
subsidiary.
The notes are convertible into securities of the subsidiary issued in connection
with a subsequent funding, if any, of such subsidiary by an unrelated third
party. At the option of the holder, a note outstanding for more than 180 days
may be exchanged for the Company's common stock. An exchanging note holder
would receive shares valued at 90% of the average closing price for the ten
trading days prior to the exchange.
The agreement also provides, in certain instances, if the subsidiary is funded
with the proceeds from the issuance of common stock by the Company, the note
holders will receive warrants to acquire the Company's common stock at 110% of
the average closing price for the ten trading days preceding the issuance date
of the warrants.
The bank which provides the Company with the $5 million line of credit agreed
to release its lien on certain assets of the subsidiary as well as the
subsidiary's guarantee of the $5 million line of credit. Due to a restriction
against certain additional indebtedness, the bank's consent was necessary in
order to close the agreement with the three investors.
Page 10 of 16
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, THREE MONTH PERIODS ENDED JANUARY 31, 2000 and 1999
On December 18, 1998, the Company, through a wholly-owned subsidiary, acquired
certain assets and the business of Enterprise Technology Group, Incorporated
(the "Enterprise Purchase"). The Company's subsidiary, ETG, Inc. ("ETG"),
provides information technology consulting services with a focus on infra-
structure management solutions.
With the rapid growth of the Internet, the Company formed a subsidiary during
the fiscal year ended October 31, 1999 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 retooled a portion
of its state-of-the-art data center into an Internet Data Center ("IDC") from
which the Company will offer colocation as well as systems and network
management services (collectively, the "IDC Services") to companies with
mission-critical Internet requirements. Subject to the availability of
financing, the Company plans to develop twenty additional IDCs over the next
two years.
During the period ended January 31, 2000, revenues decreased $1,166,000 (14%) to
$7,115,000 from $8,281,000 for the period ended January 31, 1999. Since Year
2000 compliance was of paramount concern, many companies were reluctant to make
any changes with respect to their information technology functions. There was a
pronounced decline in requests for proposals ("RFPs") for major outsourcing
contracts. With Year 2000 concerns alleviated, there appears to be renewed
interest in outsourcing. The potential effect of this renewed interest may not
be realized, if at all, until later in the current fiscal year, due to the
lengthy sales cycle of a major outsourcing contract. Revenues also were
impacted negatively as a result of the redeployment of consultants from
providing services for fees to developing a comprehensive suite of IDC Services
to attract clients requiring mission-critical Internet solutions. The decline
also reflects the loss of a major publishing client and the absence of Year-2000
related revenues. As previously reported, the publishing client had given
notice in 1997 of its intention to exercise an option to cancel its contract
after June 30, 1999 by paying a cash penalty.
Data processing costs increased $143,000 to $5,853,000 (82% of revenues) during
the period ended January 31, 2000 compared with $5,710,000 (69% of revenues) in
the period ended January 31, 1999. The increase primarily consists of operating
costs of the new IDC and the development of IDC Services to be offered
throughout the planned network of IDCs.
Selling and promotion costs increased $470,000 to $868,000 (12% of revenues)
during the period ended January 31, 2000 compared with $398,000 (5% of revenues)
in the period ended January 31, 1999. The increase is attributable to a larger
sales staff needed to market the Company's IDC Services.
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General and administrative expenses increased $479,000 to $1,827,000 (26% of
revenues) for the period ended January 31, 2000 from $1,348,000 (16% of
revenues) for the three months ended January 31, 1999, reflecting higher costs
associated with the Company's IDC Services activities. Amortization of
intangibles acquired in connection with the Enterprise Purchase was $124,000 in
the current period versus $39,000 for the three months ended January 31, 1999.
The Company recorded net interest income of $35,000 in the current period,
compared with net interest income of $121,000 in the prior period. The
decrease of $86,000 reflects the reduction of interest income arising from a
lower average balance of interest earning assets during the period ended January
31, 2000 as well as interest expense in connection with a $2,000,000 borrowing
under the Company's bank line of credit.
The Company recorded a net loss of $853,000 in the period ended January 31, 2000
(($0.18) per share for both basic and diluted shares) versus net income of
$558,000 ($0.13 and $0.12 per share for basic and diluted shares, respectively)
for the period ended January 31, 1999. Common stock equivalents were ignored in
determining the net loss per share, since the inclusion of such equivalents
would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended January 31, 2000, the Company generated net cash
of approximately $624,000, primarily as a result of a decrease in accounts
receivable of $1,193,000, offset by a $461,000 increase in accounts payable and
accrued expenses.
The Company invested $1,275,000 for the purchase of equipment, construction of
the IDC, and other fixed assets, and $285,000 for product development and
enhancement. The Company also reduced short-term investments by $1,124,000.
The principal financing activities were the Company's borrowing of $2,000,000
from its line of credit with a bank and receiving proceeds of $454,000 from
exercises of a warrant and employee stock options.
On October 29, 1999, the Company entered into an agreement with a bank for a
line of credit of up to $5,000,000. Amounts drawn under this line, 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 then be
fixed during the period corresponding to the particular LIBOR rate selected.
The line of credit does not have a fixed term, and is secured by a first lien on
the Company's accounts receivable and certain general intangibles. On December
27, 1999, the Company borrowed $2,000,000 under a 90-day note utilizing the
LIBOR rate option. The interest rate was 7.44% on an annualized basis.
As of January 31, 2000, the Company had cash and equivalents and highly liquid,
short-term investments aggregating approximately $4,767,000.
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On February 23, 2000, a subsidiary of the Company closed a transaction with
three investors providing for a series of convertible notes. Each note will be
due February 25, 2001 and will bear interest at 6% for the first six months.
Thereafter, interest increases to 13% in the seventh month and rises 1% for each
subsequent month that the applicable note remains outstanding. The notes may be
prepaid by the Company without penalty. The notes are to be funded as follows:
$3 million at closing; $2 million upon signing the lease for the subsidiary's
second Internet Data Center ("IDC"); $2 million when the second IDC is 50%
complete; and an aggregate of $7 million based upon certain other events. The
notes are secured by a first lien on the assets, with certain exceptions, of the
subsidiary.
The notes are convertible into securities of the subsidiary issued in connection
with a subsequent funding, if any, of such subsidiary by an unrelated third
party. At the option of the holder, a note outstanding for more than 180 days
may be exchanged for the Company's common stock. An exchanging note holder
would receive shares valued at 90% of the average closing price for the ten
trading days prior to the exchange.
The agreement also provides, in certain instances, if the subsidiary is funded
with the proceeds from the issuance of common stock by the Company, the note
holders will receive warrants to acquire the Company's common stock at 110% of
the average closing price for the ten trading days preceding the issuance date
of the warrants.
The bank which provides the Company with the $5 million line of credit agreed
to release its lien on certain assets of the subsidiary as well as the
subsidiary's guarantee of the $5 million line of credit. Due to a restriction
against certain additional indebtedness, the bank's consent was necessary in
order to close the agreement with the three investors.
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 develop twenty additional IDCs in the United
States and abroad. The Company will require additional financing to effect this
plan.
OTHER MATTERS
Certain of the Company's computer systems were reprogrammed to correct what is
known as the Year 2000 Problem ("Y2K"). This is a condition whereby a program
does not properly interpret a two-digit year, reading "00" as 1900 rather than
2000. As a result, nearly all computer systems, except for the most recent
software and hardware versions, may have produced computing errors or failed to
function after December 31, 1999.
During December 1999, the Company completed its Y2K remediation compliance
procedures. Following December 31, 1999, the Company did not encounter any
significant problems due to Y2K. The problems that were encountered were few
and minor in nature, and were resolved quickly with minimal or no impact on the
Company.
Internal and external costs specifically associated with Y2K modifications for
internal purposes were expensed when incurred. The final cost for this
activity totaled approximately $300,000.
Page 13 of 16
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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.
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 risks and uncertainties
including, but not limited to: incomplete or preliminary information; changes in
government regulations and policies; continued acceptance of the Company's
products and services in the marketplace; competitive factors; new products;
technological changes; the Company's dependence on third party suppliers;
intellectual property rights; and other risks. 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.
Page 14 of 16
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PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation, incorporated by reference
to Exhibit 3.1 to the Company's Form 10-KSB for the period ended
October 31, 1999.
3.2 Amended and Restated By-Laws, incorporated by reference to Exhibit
3.2 to the Company's Form 10-KSB for the period ended October 31,
1999.
27 Financial Data Schedule, filed electronically only.
(b) Reports on Form 8-K:
None
Page 15 of 16
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPUTER OUTSOURCING SERVICES, INC.
March 16, 2000 ------------------------------------
Zach Lonstein
Chief Executive Officer
March 16, 2000 -------------------------------------
Nicholas J. Letizia
Chief Financial Officer
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 4,217,436
<SECURITIES> 549,318
<RECEIVABLES> 5,183,463
<ALLOWANCES> 366,277
<INVENTORY> 0
<CURRENT-ASSETS> 13,293,401
<PP&E> 10,476,703
<DEPRECIATION> 5,755,317
<TOTAL-ASSETS> 30,691,916
<CURRENT-LIABILITIES> 5,584,225
<BONDS> 2,010,793
0
0
<COMMON> 48,413
<OTHER-SE> 23,512,282
<TOTAL-LIABILITY-AND-EQUITY> 30,691,916
<SALES> 0
<TOTAL-REVENUES> 7,114,803
<CGS> 0
<TOTAL-COSTS> 5,853,387
<OTHER-EXPENSES> 2,694,718
<LOSS-PROVISION> 18,595
<INTEREST-EXPENSE> 14,632
<INCOME-PRETAX> (1,398,222)
<INCOME-TAX> (545,307)
<INCOME-CONTINUING> (852,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (852,915)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
