-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K7/4yAJi7qcLX4iuis35fKqEaVtCi7wgTGfDWhEhTDHYQYJkhqQIlR21R57lucoO j4IJZe89wCe6/DMVKD8Prw== 0000893816-00-000002.txt : 20000203 0000893816-00-000002.hdr.sgml : 20000203 ACCESSION NUMBER: 0000893816-00-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER OUTSOURCING SERVICES INC CENTRAL INDEX KEY: 0000893816 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133252333 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-20824 FILM NUMBER: 520114 BUSINESS ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 BUSINESS PHONE: 2018404700 MAIL ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 10KSB 1 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. ------------------------------------ (Exact name of registrant as specified in its Charter) New York 13-3252333 -------------- -------------------- (State of Incorporation) (IRS Employer I.D. number) 2 Christie Heights Street Leonia, NJ 07605 ------------------------------------ ----- (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 --------------------------------------- (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 PART I Item 1. Description of Business ----------------------- 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 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. Page 3 of 45 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 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 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 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 ----------------------- 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 -------------- ----------- --------------------- 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 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 ----------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Page 8 of 45 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ------------------------------------- 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 ----------------- High Low ------ ----- 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 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 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. Page 11 of 45 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-3.1 2 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: -1- 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. -2- 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. -3- 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 -4- 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 -5- EX-3.2 3 BY-LAWS OF COMPUTER OUTSOURCING SERVICES, INC. (a Delaware corporation) 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 i 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 ii 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 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. 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 - 2 - 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 - 3 - 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 - 4 - 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 - 5 - 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. - 6 - 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 - 7 - 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. - 8 - 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. - 9 - 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. - 10 - 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 - 11 - 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. - 12 - 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 - 13 - 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 - 14 - 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. - 15 - 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 - 16 - 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. - 17 - EX-10.8C 4 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. 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 (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 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 (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 EX-10.14 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 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 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. 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 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, 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. 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 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 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 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. (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 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. (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. 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 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 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. "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 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 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. 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. (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 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.] 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 EX-21 6 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 EX-23 7 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 EX-27 8
5 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. 12-MOS OCT-31-1999 OCT-31-1999 1,590,223 1,673,441 6,361,275 350,939 0 12,329,603 9,201,345 5,562,352 27,554,083 3,164,647 19,017 0 0 47,379 22,777,465 27,554,083 0 34,264,966 0 23,632,609 8,210,664 158,000 19,297 2,707,666 1,046,373 1,661,293 0 0 0 1,661,293 0.36 0.34
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