-----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, AS8/UjmDG4ytbZTN9LmREsKDZoockckMw7UrJZiWkryAw4+M0+ocAV3iIHDYxMQX +6tGE4nYJ8neWfS6rmD5IQ== 0000914317-99-000223.txt : 19990430 0000914317-99-000223.hdr.sgml : 19990430 ACCESSION NUMBER: 0000914317-99-000223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER HORIZONS CORP CENTRAL INDEX KEY: 0000023019 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 132638902 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07282 FILM NUMBER: 99584807 BUSINESS ADDRESS: STREET 1: 49 OLD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 BUSINESS PHONE: 9732994000 MAIL ADDRESS: STREET 1: 49 0LD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-7282 COMPUTER HORIZONS CORP. (Exact name of registrant as specified in its charter) New York 13-2638902 - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 49 Old Bloomfield Avenue Mountain Lakes, New Jersey 07046-1495 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (973) 299-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - - ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Par value $.10 per share) (Title of class) Series A Preferred Stock Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 22, 1999, was approximately $367,883,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 22, 1999: 31,476,647 shares. DOCUMENTS INCORPORATED BY REFERENCE There is incorporated herein by reference the registrant's (i) Annual Report to Shareholders for the year ended December 3l, l998, in Part II of this Report and (ii) Proxy Statement for the 1999 Annual Meeting of Shareholders, expected to be filed with the Securities and Exchange Commission on or before April 12, 1999, in Part III hereof. PART I Item 1. Business General The Company provides a wide range of information technology services and solutions to major corporations. Historically a professional services staffing firm, the Company has, over the past six years, developed the technological and managerial infrastructure to offer its clients value added services including CHC's Signature 2000(TM) solution for the millennium change, client/server systems development and migration, enterprise network management, document imaging practices, outsourcing and offshore software development and maintenance ("solutions"). The Company markets solutions to both existing and potential clients with the objective of becoming a preferred provider of comprehensive information technology services and solutions for such clients. Solutions engagements, which represented less than five percent of the Company's consolidated revenues in 1993, accounted for approximately 44% of its consolidated revenues in 1998. The Company believes that the range of services and solutions that it offers, combined with its worldwide network of 55 offices and subsidiary organizations, provides it with significant competitive advantages in the information technology marketplace. The Company's clients primarily are Fortune 500 companies with significant information technology budgets and recurring staffing or software development needs. In 1998, the Company provided information technology services to 768 clients. During 1998, the Company's largest client, AT&T, accounted for 8.8% of the Company's consolidated revenues. The Company's next largest client, Prudential, accounted for 8.3% of the Company's consolidated revenues with no other client accounting for more than 5% of such revenues. With the trend in the commercial market moving towards fully integrated information systems solutions, the Company offers its clients a broad range of business and technical services as a service outsourcer and systems integrator capable of providing complex total solutions. This total solutions approach comprises proprietary software and tools, proven processes and methodologies, tested project management practices and resource management and procurement programs. The Company offers a range of information technology services and solutions, which include (1) professional services staffing, (2) the solution for the millennium change, (3) e-business development services, (4) enterprise network management, (5) outsourcing, and (6) knowledge transfer. (1) Professional Services Staffing: Providing highly skilled software professionals to augment the internal information management staffs of major corporations remains the Company's primary business. The Company offers its clients centralized vendor management, supplying their staffing needs from among the Company's over 4,000 software professionals. The Company is committed to expanding its professional services staffing operations in conjunction with its solutions business. (2) Solution for the Millennium Change: CHC's Signature 2000(TM) offering combines an internally developed proprietary software toolkit, skilled resources, proven methodologies, experienced project management, as well as significant millennium project experience. It analyzes, locates, reports on, and then restructures all programs and database definitions affected by the absence of a century date field to permit processing of dates after December 31, 1999. The solution is customized for each particular enterprise and deals with all collateral issues. In effect, CHC's Signature 2000(TM) provides the Company with an opportunity to facilitate field expansion, and century date windowing, while simultaneously performing other systems upgrades such as language conversions and platform migrations. In addition, CHC's Signature 2000(TM) provides the Company a fully integrated testing solution across all phases of the testing life cycle, including Testing Processes, Software Products and experienced management and technical resources. The Company also provides a workstation solution for the Year 2000, including Asset Management, assessment and correction of spreadsheets and databases, correction to the workstation clocks, and third-party vendor compliancy assessment. To manage an organization's Year 2000 program, the Company provides a fully integrated "Program Management Office" (PMO) approach. The PMO provides a complete set of processes, templates and recommended software products to support the reporting, risk management, contingency planning and program management across the enterprise. (3) E-business Development Services: The Company has the capability to develop and implement open computer e-business strategy, architecture, and engineering, design, implementation and operational services. Such services include project management, selection of viable systems platforms, creation of migration plans, development of customized software applications, and systems and database integration. (4) Enterprise Network Management: As application development migrates to distributed systems platforms, so too must the disciplines of systems management. The Company's enterprise network management offering is comprised of experienced technical professionals whose only business focus is the development and integration of centralized management platforms for mission-critical distributed systems environments. The Company's staff handles large-scale integration projects, including those requiring vendor product integration and custom software development associated with LAN/WAN monitoring and control, network asset management, software distribution and help desk support. (5) Outsourcing: Spurred by global competition and rapid technological change, large companies, in particular, are downsizing and outsourcing for reasons ranging from cost reduction to capital asset improvement and from improved technology introduction to better strategic focus. In response to this trend, the Company has created a group of regional outsourcing centers with 24 hour/7 day a week support, which are fully equipped with the latest technology and communications, as well as a complete staff that includes experienced project managers, technicians and operators. These professionals facilitate essential data functions including: applications development, systems maintenance, data network management, voice network administration and help desk operations. (6) Knowledge Transfer: The Company's Education Division offers custom-designed and/or existing courseware to enhance the competencies of client staff in specific technologies, languages, methodologies and applications. The prevailing focus of the Company is to assist clients through instructor-led, on-site training and consulting and multimedia curricula in the transitioning IT organization of Fortune 1000 corporations. To support these changing technologies, the Company has developed extensive curriculum offerings in Operating Systems, Mainframe Technology, Client/Server and Open Systems, Object Orientation, Application Development, Information Engineering, Internet/Intranet, and ERP packages. Personnel As of December 3l, 1998, the Company had a staff of 4,834, of whom more than 4,000 were computer professionals. The Company devotes significant resources to recruitment of qualified professionals and provides continuing in-house training and education, and a career path management development program within the Company. Competition The Company competes in the commercial information technology services market which is highly competitive and served by numerous firms, many of which serve only their respective local markets. The market includes participants in a variety of market segments, including systems consulting and integration firms, professional services companies, application software firms, temporary employment agencies, the professional service groups of computer equipment companies such as Hewlett-Packard Company, Unisys Corporation and Digital Equipment Corporation, facilities management and management information systems ("MIS") outsourcing companies, certain "Big Five" accounting firms, and general management consulting firms. The Company's competitors also include companies such as Andersen Consulting, Technology Solutions Corporation, Cambridge Technology Partners, Inc., Cap Gemini America, Business System Group, the consulting division of Computer Sciences Corporation, Analysts International Corp., CIBER, Inc., Computer Task Group Inc., and Keane Inc. Many participants in the information technology consulting and software solutions market have significantly greater financial, technical and marketing resources and generate greater revenues than the Company. The Company believes that the principal competitive factors in the commercial information technology services industry include responsiveness to client needs, speed of application software development, quality of service, price, project management capability and technical expertise. Pricing has its greatest importance as a competitive factor in the area of professional service staffing. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate skilled technical and management personnel, the ownership by competitors of software used by potential clients, the price at which others offer comparable services and the extent of its competitors' responsiveness to customer needs. Item 2. Properties The Company's Corporate and Financial Headquarters, its IT Services Division, its Education Division, as well as its Eastern Regional Office, comprising approximately 63,000 square feet, are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey. The Mountain Lakes leases are for terms expiring December 31, 1999, at a current annual rental of approximately $1,101,000. As of December 3l, l998, the Company also maintained facilities in Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Washington, Washington D.C. and Wisconsin, as well as international operations located in London and Toronto, with an aggregate of approximately 211,600 square feet. The leases for these facilities are at a current annual aggregate rental of approximately $4,035,000. These leases expire at various times with no lease commitment longer than September 30, 2006. Item 3. Legal Proceedings There are no material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Company The following table sets forth certain information with respect to the executive officers of the Company, who are elected to serve until the next annual meeting of the Board of Directors and until their successors are elected and qualify. All the positions listed are or were held by such officers with the Company.
NAME AGE TITLE POSITION HELD - - ---- --- ----- ------------- John J. Cassese 54 Chairman of the Board 1982 - Present and President Director 1969 - Present William J. Murphy 54 Executive Vice President 1997 - Present and CFO Michael J. Shea 38 Controller 1995-Present Vice President 1996-Present
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is contained under the caption "Market and Dividend Information" in the Company's Annual Report to Shareholders for the year ended December 3l, 1998, which material is incorporated by reference in this Form 10-K Annual Report. Item 6. Selected Financial Data The information required by this item is contained under the caption "Selected Financial Data" in the Company's Annual Report to Shareholders for the year ended December 3l, 1998, which material is incorporated by reference in this Form 10-K Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation The information required by this item is contained under the caption "Management's Discussion and Analysis" in the Company's Annual Report to Shareholders for the year ended December 3l, 1998, which material is incorporated by reference in this Form 10-K Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by this item is contained under the caption "Management's Discussion and Analysis" in the Company's Annual Report to Shareholders for the year ended December 3l, 1998, which material is incorporated by reference in this Form 10-K Annual Report. Item 8. Financial Statements and Supplementary Data The financial statements together with the report thereon by Grant Thornton LLP, Independent Certified Public Accountants, appearing in the Company's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. Such information is listed in Item 14(a)1 of this Form 10-K Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with the Company's independent accountants involving accounting and financial disclosure matters. PART III Item 10. Directors and Executive Officers of the Registrant (a) The information called for by Item 10 with respect to identification of directors of the Company is incorporated herein by reference to the material under the caption "Election of Directors" in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders which is expected to be filed with the Securities and Exchange Commission on or before April 12, 1999 (the "1999 Proxy Statement"). (b) The information called for by Item 10 with respect to executive officers of the Company is included in Part I herein under the caption "Executive Officers of the Company". Item 11. Executive Compensation The information called for by Item 11 with respect to management remuneration and transactions is incorporated herein by reference to the material under the caption "Executive Compensation" in the 1999 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information called for by Item 12 with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the material under the caption "Certain Holders of Voting Securities" in the 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions None PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. The following consolidated financial statements, appearing in the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. - - - Consolidated balance sheets as of December 3l, 1998 and 1997 - - - Consolidated statements of income for each of the three years in the period ended December 31, 1998 - - - Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1998 - - - Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998 - - - Notes to consolidated financial statements - - - Report of independent certified public accountants on the consolidated financial statements 2. Schedule II - Valuation and qualifying accounts for the years ended December 31, 1998, 1997 and 1996. - - - Report of independent certified public accountants on the financial statements schedule. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. The exhibit index 4. Consent of Grant Thornton LLP (b) No reports on Form 8K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER HORIZONS CORP. Date: March 31, 1999 By: /s/John J. Cassese -------------- ------------------ John J. Cassese, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. COMPUTER HORIZONS CORP. Date: March 31, 1999 By: /s/ John J. Cassese ------------------- John J. Cassese, Chairman of the Board and President (Principal Executive Officer) and Director Date: March 31, 1999 By: /s/ William J. Murphy ---------------------- William J. Murphy, Executive Vice President and CFO (Principal Financial Officer) Date: March 31, 1999 By: /s/ Michael J. Shea ---------------------- Michael J. Shea Vice President and Controller (Principal Accounting Officer) Date: March 31, 1999 By: /s/ Thomas J. Berry -------------------- Thomas J. Berry, Director Date: March 31, 1999 By: /s/ William M. Duncan -------------------- William M. Duncan, Director Date: March 31, 1999 By: /s/ Rocco J. Marano ------------------- Rocco J. Marano, Director EXHIBIT INDEX
Exhibit Description Incorporated by Reference to - - ------- ----------- ---------------------------- 3(a-1) Certificate of Incorporation as Exhibit 3(a) to Registration amended through 1971. Statement on Form S-1 (File No. 2--42259). 3(a-2) Certificate of Amendment dated Exhibit 3(a-2) to Form 10K May 16, 1983 to Certificate of for the fiscal year ended Incorporation. February 28, 1983. 3(a-3) Certificate of Amendment dated Exhibit 3(a-3) to Form 10K June 15, 1988 to Certificate of for the fiscal year ended Incorporation. December 31, 1988. 3(a-4) Certificate of Amendment dated Exhibit 3(a-4) to Form 10K July 6, 1989 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-5) Certificate of Amendment dated Exhibit 3(a-5) to Form 10K February 14, 1990 to Certificate of for the fiscal year ended Incorporation. December 31, 1989. 3(a-6) Certificate of Amendment dated Exhibit 3(a-6) to Form 10K May 1, 1991 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-7) Certificate of Amendment dated Exhibit 3(a-7) to Form 10K July 12, 1994 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(b) Bylaws, as amended and Exhibit 3(b) to Form 10K for presently in effect. the year ended December 31, 1988. 4(a) Rights Agreement dated as of Exhibit 1 to Registration July 6, 1989 between the Statement on Form 8-A dated Company and Chemical Bank, as July 7, 1989. Rights Agent ("Rights Agreement") which includes the form of Rights Certificate as Exhibit B. 4(b) Amendment No. 1 dated as of Exhibit 1 to Amendment No. February 13, 1990 to Rights 1 on Form 8 dated February Agreement. 13, 1990 to Registration Statement on Form 8-A. Exhibit Description Incorporated by Reference to - - ------- ----------- ---------------------------- 4(c) Amendment No. 2 dated as of Exhibit 4(c) to Form 10K August 10, 1994 to Rights for the fiscal year ended Agreement. December 31, 1994. 4(d) Employee's Savings Plan and Exhibit 4.4 to Registration Amendment Number One. Statement on Form S-8 dated December 5, 1995. 4(e) Employee's Savings Plan Trust Exhibit 4.5 to Registration Agreement as Amended and Statement on Form S-3 dated Restated Effective January 1, December 5, 1995. 1996. 10(a) Employment Agreement dated as Exhibit 10(a) to Form 10K for of February 16, 1990 between the the year ended December 31, Company and John J. Cassese. 1989. 10(b) Employment Agreement dated as Exhibit 10(g) to Form S-3 dated of January 1, 1997 between the August 14, 1997. Company and William J. Murphy. 10(c) Employment Agreement dated as Exhibit 10(c) to Form 10K for of March 6, 1997 between the the year ended December 31, Company and Michael J. Shea. 1996. 10(d) 1991 Directors' Stock Option Plan, as amended. 10(e) 1994 Incentive Stock Option and Exhibit 10(h) to Form 10K Appreciation Plan. for the fiscal year ended December 31, 1994. 10(f) $15,000,000 Discretionary Line of Credit payable to Chase Manhattan Bank dated as of June 30, 1998. 10(g) $10,000,000 Discretionary Line of Credit from PNC Bank dated as of June 5, 1998 13 Annual Report to Security Holders, parts thereof 21 List of Subsidiaries.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders Computer Horizons Corporation In connection with our audit of the consolidated financial statements of Computer Horizons Corp. and Subsidiaries referred to in our report dated February 15, 1999, which is inlcuded in the 1998 Annual Report to Shareholders and incorporated by reference in this Form 10-K, we have also audited Schedule II for each of the years ended December 31, 1998, 1997 and 1996. In our opinion, this schedule presents fairly in all material respects, the information required to be set forth herein. GRANT THORNTON LLP Parsippany, New Jersey February 15, 1999 Computer Horizons Corp. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1998, 1997 and 1996
Column A Column B Column C Column D Column E -------- ----------- ------------ ----------- ----------- Balance at Charged to Balance at beginning costs and Deductions - end of Description of period expenses describe (1) period ----------- ---------------- ----------------- -------------- ---------- Year ended December 31, 1998 Allowance for doubtful accounts $1,742,000 $ $ $ ========== ======== ======== ========== Year ended December 31, 1997 Allowance for doubtful accounts $1,203,000 $575,000 $ 36,000 $1,742,000 ========== ======== ======== ========== Year ended December 31, 1996 Allowance for doubtful accounts $ 840,000 $487,000 $124,000 $1,203,000 ========== ======== ======== ==========
Notes - - ----- (1) Uncollectible accounts written off, net of recoveries. Computer Horizons Corp. and Subsidiaries SELECTED FINANCIAL DATA Year ended December 31,
1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (dollar amounts in thousands, except per share data) Revenues ........................................... $ 514,921 $ 350,310 $ 261,411 $ 224,809 $ 173,204 Costs and expenses: Direct costs ................................... 326,795 233,574 180,410 156,125 121,402 Selling, general and administrative ............ 113,035 74,165 59,677 48,837 38,534 Merger-related expenses......................... 4,272 976 ------------ ------------ ------------ ------------ ------------ Income from operations ............................. 70,819 41,595 21,324 19,847 13,268 Other income (expense): Interest income ................................ 5,334 1,700 404 346 83 Interest expense ............................... (750) (276) (507) (667) (725) Equity in net earnings of joint venture .............................. (90) 13 885 361 Gain on sale of joint vewnture................... 4,180 ------------ ------------ ------------ ------------ ------------ Income before income taxes .......................................... 79,493 43,032 22,106 19,887 12,626 Income taxes ....................................... 35,906 18,498 9,031 8,572 5,495 ------------ ------------ ------------ ------------ ------------ Net income ......................................... $ 43,587 $ 24,534 $ 13,075 $ 11,315 $ 7,131 ============ ============ ============ ============ ============ Earnings per share: Basic ........................................ $ 1.41 $ .89 $ .50 $ .47 $ .32 ------------ ============ ============ ============ ============ Diluted ...................................... $ 1.35 $ .85 $ .47 $ .44 $ .30 ------------ ============ ============ ============ ============ Weighted average number of shares outstanding: Basic ...................................... 30,925,000 27,567,000 26,380,000 24,312,000 22,446,000 ============ ============ ============ ============ ============ Diluted .................................... 32,230,000 28,999,000 27,932,000 25,823,000 23,952,000 ============ ============ ============ ============ ============
Computer Horizons Corp. and Subsidiaries SELECTED FINANCIAL DATA (continued) Year ended December 31,
1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (dollar amounts in thousands, except per share data) Analysis (%) Revenues ................................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin ........................... 36.6 33.3 31.0 30.5 29.9 Selling, general and administrative ...................... 22.0 21.1 22.8 21.7 22.2 Merger-related expenses..................... .8 .3 Income from operations ..................... 13.8 11.9 8.2 8.8 7.7 Interest income/(expense) - net ........ .9 .4 (.1) (.4) Equity in net earnings of joint venture ............................. .3 .1 Capital Gains .......................... .8 Income before income taxes ............. 15.5 12.3 8.5 8.8 7.3 Income taxes ............................... 7.0 5.3 3.5 3.8 3.2 Net income ..................................... 8.5 7.0 5.0 5.0 4.1 Revenue growth YOY ......................... 47.0 34.0 16.3 29.8 31.3 Net income growth YOY ...................... 77.7 87.6 15.6 58.7 90.2 Return on equity, average .................. 20.2 18.9 19.9 25.0 24.5 Effective tax rate ......................... 45.2 43.0 40.9 43.1 43.5 At year-end Total assets ............................... $ 296,052 $ 217,625 $ 96,610 $ 63,096 $ 54,521 Working capital ............................ 158,759 160,370 55,052 42,553 22,968 Long-term debt ............................. 0 0 1,442 3,324 4,346 Shareholders' equity ....................... 246,534 185,974 73,747 57,931 32,679 Stock price ................................ $ 26.63 $ 45.50 $ 25.67 $ 16.89 $ 4.00 P/E multiple ............................... 19 51 51 36 13 Employees ...................................... 4,834 3,794 3,228 2,830 2,419 Clients (during year) .......................... 768 549 556 538 545 Offices (worldwide) ............................ 55 49 49 45 39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders Computer Horizons Corp. In connection with our audit of the consolidated financial statements of Computer Horizons Corp. and Subidiaries referred to in our report dated February 15, 1999, which is included in the 1998 Annual Report to Shareholders and incorporated by reference in this Form 10-K. We have also audited Schedule II for each of the years ended December 31, 1998, 1997 and 1996. In our opinion, this schedule presents fairly in all material respects, the information required to be set forth therin. /s/GRANT THORNTON LLP - - --------------------- GRANT THORNTON LLP Parsippany, New Jersey February 15, 1999 EX-13 2 Management's Discussion and Analysis Results of Operations The following table sets forth certain operating data as a percentage of consolidated revenues for the periods indicated. All percentages include the operations of Spargo Consulting PLC combined with the Company on June 24, 1998. This combination has been accounted for as pooling-of-interests. Comparisons with prior years are based on restated combined results:
Year Ended December 31, 1997 1998 1997 1996 ---- ---- ---- 100.0% 100.0% 100.0% Revenues Costs and Expenses: Direct costs ................................ 63.4 66.7 69.0 Selling, general and administrative ......... 22.0 21.1 22.8 Merger-related expenses ..................... 0.8 0.3 Income from operations ........................... 13.8 11.9 8.2 Other income (expense): Interest income/(expense),net ............... 0.9 0.4 -- Equity in net earnings of joint venture ..... -- -- 0.3 Gain on sale of joint venture ............... 0.8 -- -- Income before income tax ......................... 15.5 12.3 8.5 Income taxes: Current ..................................... 7.7 5.6 3.6 Deferred .................................... (0.7) (0.3) (0.1) Net income ....................................... 8.5 7.0 5.0
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues Revenues increased to $514.9 million in the year ended December 31, 1998 from $350.3 million in the year ended December 31, 1997, an increase of $164.6 million, or 47%. This increase was comprised of 34% internal growth, primarily from increased headcount, and 13% resulting from 1998 acquisitions. Staffing revenues increased to $266.6 million in the year ended December 31, 1998 from $224.5 million in the year ended December 31, 1997, an increase of $42.1 million or 19%. Solutions revenues, including Year 2000 services, increased to $225.5 million in the year ended December 31, 1998, from $125.9 million in the year ended December 31, 1997, an increase of $99.6 million or 79%. Year 2000 Service revenues increased to $136.0 million in the year ended December 31, 1998, from $72.1 million in the year ended December 31, 1997, an increase of $63.9 million or 89%. The Company's Year 2000 business accounted for approximately 26% of total revenues in the year ended December 31, 1998 from $53.8 million for the year ended December 31, 1997, an increase of $35.7 million or 66%. Product revenues were $22.8 million in the year ended December 31, 1998, an increase from nil in the year ended December 31, 1997. Direct Costs Direct costs increased to $326.8 million in the year ended December 31, 1998 from $233.6 million in the year ended December 31, 1997. Gross margin increased to 36.6% in the year ended December 31, 1998 from 33.3% in the year ended December 31, 1997. The increase in gross margin was primarily due to stable margins in the Company's staffing business and an increase in the Company's higher margin Year 2000 business. The Company's margins are subject to fluctuation due to a number of factors, including the level of salary and other compensation-related expenses necessary to attract and retain qualified technical personnel and the mix of staffing versus solutions business during the year. Selling, General and Administrative Selling, general and administrative expenses (excluding merger-related expenses) increased to $113.0 million in the year ended December 31, 1998 from $74.2 million in the year ended December 31, 1997, an increase of $38.8 million or 52.3%. The increase in selling, general and administrative expenses was primarily a result of salaries and commissions for additional sales and recruiting personnel and, to a lesser extent, growth in the Company's administrative infrastructure. During 1998, the Company incurred merger-related expenses of approximately $4.3 million or 0.8% of revenues, an increase from $1.0 million, or 0.3% of revenues in 1997. Income from Operations Operating margins increased to 13.8% in the year ended December 31, 1998 from 11.9% in the year ended December 31, 1997. This increase was primarily due to an increase in the Company's higher margin Year 2000 business and the acquisition of a high margin products company. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. Other Income Other income increased to $8.7 million in the year ended December 31, 1998 from $1.4 million in the year ended December 31, 1997, an increase of $7.3 million. This increase was primarily the result of the sale of the Company's Birla Horizons Joint Venture, as well as increased interest income resulting from the follow-on offering of approximately $84 million completed in the third quarter of 1997. Provision for Income Taxes The effective tax rate for Federal, state and local income taxes was 45.2% and 43.0% in the years ended December 31, 1998 and 1997, respectively. The increase in the 1998 effective tax rate was primarily due to an increase in non-deductible merger-related expenses incurred in 1998. Net Income Net income increased to $43.6 million in the year ended December 31, 1998 from $24.5 million in the year ended December 31, 1997, an increase of $19.1 million, or 78%. Net income per share (diluted) increased to $1.35 in the year ended December 31, 1998, from $0.85 in the year ended December 31, 1997. The effect of merger-related expenses amounted to $.11 per share in 1998, compared to $.03 per share in 1997. All net income per share and share amounts have been adjusted to reflect a three-for-two common stock split, effected as a 50% stock distribution, distributed on June 9, 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues Revenues increased to $350.3 million in the year ended December 31, 1997 from $261.4 million in the year ended December 31, 1996, an increase of $88.9 million or 34%. Staffing revenues increased to $224.5 million in the year ended December 31, 1997 from $186.0 million in the year ended December 31, 1996, an increase of $38.5 million or 21%. Solutions revenues, including Year 2000 services, increased to $125.9 million in the year ended December 31, 1997 from $74.4 million in the year ended December 31, 1996, an increase of $51.5 million or 69%. Year 2000 revenues increased to $72.1 million in the year ended December 31, 1997 from $10.4 million in the year ended December 31, 1996. Solutions revenues, excluding Year 2000 services, decreased to $53.8 million in the year ended December 31, 1997 from $64.0 million in the year ended December 31, 1996, a decrease of $10.2 million or 16%. The decrease in Solutions revenues, excluding Year 2000 services, was primarily caused by a shift in client demand. Direct Costs Direct costs increased to $233.6 million in the year ended December 31, 1997 from $180.4 million in the year ended December 31, 1996. Gross margin increased to 33.3% in the year ended December 31, 1997 from 31.0% in the year ended December 31, 1996. The increase in gross margin was primarily due to stable margins in the Company's staffing business and an increase in Computer Horizons' higher margin Year 2000 business. The Company's margins are subject to fluctuation due to a number of factors, including the level of salary and other compensation-related expenses necessary to attract and retain qualified technical personnel and the mix of staffing versus solutions business during the year. Selling, General and Administrative Selling, general and administrative expenses (excluding merger-related expenses) increased to $74.2 million in the year ended December 31, 1997 from $59.7 million in the year ended December 31, 1996, an increase of $14.5 million or 24.3%. As a percentage of revenue, selling, general and administrative expenses decreased to 21.2% in the year ended December 31, 1997, from 22.8% in the year ended December 31, 1996. The increase in selling, general and administrative expenses in 1997 was primarily a result of salaries and commissions for additional personnel, infrastructure necessary to pursue large, high-profile opportunities, and marketing expenses incurred to raise the Company's visibility through public relations, trade shows and conferences. Income from Operations Income from operations increased to $41.6 million in the year ended December 31, 1997 from $21.3 million in the year ended December 31, 1995, an increase of $20.3 million or 95%. Operating margins increased to 11.9% in the year ended December 31, 1997 from 8.2% in the year ended December 31, 1996. The increase was attributable to increased revenues and improved gross margins, as well as the percentage decrease in selling, general and administrative expenses in 1997. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. Other Income Other income increased to $1.4 million in the year ended December 31, 1997 from $0.8 million in the year ended December 31, 1996. This increase was primarily a result of increased interest income resulting from the follow-on offering of approximately $84 million completed in the third quarter of 1997. Provisions for Income Taxes The effective tax rate for Federal, state and local income taxes was 43.0% and 40.95 in the years ended December 31, 1997 and 1996, respectively. The 1997 rate reflects a decrease in undistributed earnings of the Joint Venture for which taxes have not been provided. Net Income Net income increased to $24.5 million in the year ended December 31, 1997 from $13.1 million in the year ended December 31, 1996, an increase of $11.4 million or 87.6%. Net income increased to $0.85 per share (diluted) in the year ended December 31, 1997 from $0.47 per share (diluted) in the year ended December 31, 1996. All net income per share and share amounts have been adjusted to reflect a three-for-two common stock split, effected as a 50% stock distribution, distributed on June 9, 1997. Liquidity and Capital Resources Since 1995, Computer Horizons has financed its operations primarily through cash generated from operations and the public sale of its common stock. At December 31, 1998, the Company had $158.8 million in working capital, of which $63.1 million were cash, cash equivalents and short-term investments. At December 31, 1998, $140,000 Canadian (approximately $91,000 U.S.) was outstanding on a line of credit. Net cash provided by operating activities was $12.7 million, $17.0 million and $7.0 million, for the years ended December 31, 1998, 1997 and 1996, respectively, consisting primarily of net income, offset in part by an increase in accounts receivable. Net cash used in investing activities was $54.6 million, $22.1 million and $2.7 million in the years ended December 31, 1998, 1997 and 996, respectively. Net cash used in investing activities in 1998 consisted primarily of $49.4 million used for the acquisition of the assets of Enterprise Solutions Group, RPM Consulting and Informatics Search Group in the third quarter. In addition, the Company used approximately $6.0 million relating to the Company's new accounting/information system. Net cash used in investing activities in 1997 consisted primarily of the purchase of short-term investments, as well as the Company's acquisition of the assets of Millenium Computer Technology for approximately $5 million on December 31, 1997. Net cash used in investing activities in the year ended December 31, 1996 consisted primarily of purchases of furniture and equipment. For the Years ended December 31, 1998 and 1997, net cash provided by financing activities was $2.4 million and $83.4 million, respectively. Net provided in 1998 resulted primarily form cash received from the exercise of stock options, offset by repayments of notes to banks. Net cash provided in the year ended December 31, 1997 was $83.4 million, consisting primarily of $83.7 million in net proceeds form the Company's public offering of common stock Net cash used in 1996 was $1.5 million resulting primarily from the scheduled repayment of long-term debt. At December 31, 1998, the Company had a current ratio position of 4.4 to 1, no long-term debt and no outstanding borrowings under its two unsecured discretionary lines of credit of $15.0 million and $10.0 million. The Company believes that its cash and cash equivalents and short-term investments, lines of credit and internally generated funds will be sufficient to meet its working capital needs through 1999. The Company's billed accounts receivable were $83.4 million and $60.3 million at December 31, 1998 and December 31, 1997, respectively. Billed days sales outstanding were 53 days at December 31, 1998 and 55 days at December 31, 1997 based on fourth quarter sales. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing and implementation. The assessment phase included an examination of all systems that could be significantly affected by the Year 2000. With the completion of this phase, it was concluded that many of the Company's significant information technology systems could be affected, particularly in the time capture and billing areas. Concurrently, a review was being conducted to select a new accounting/information system to support the future growth of the Company. As a result, as part of the remediation phase, the Company chose a new system that addressed, among other areas, Year 2000 compliance. Following extensive testing procedures, including Year 2000 compliance, the new system was implemented in late 1998. Subsidiaries operating with independent accounting/information systems are already compliant or will transfer financial operations to the Company's core business system by the Year 2000. The Company has utilized both internal and external resources to implement the new accounting/information system. The total cost of the project is estimated at $6.8 million, of which approximately $6.0 million will be capitalizaed. The project is being funded through operating cash flows. As of December 31, 1998, the Company has incurred approximately $6.0 million relating to the project. The Company has queried and continues to monitor Year 2000 compliance of all significant outside vendors and service providers. To date, the Company is not aware of any outside vendor with a Year 2000 issue that would materially impact the Company's results of operations. However, the Company has no means of ensuring that external vendors will be Year 2000 ready. The inability of external vendors to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. As described above, the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, there is no guarantee that possible "worst case" Year 2000 issues of outside vendors, suppliers and customers would not impact the Company. In addition, disruptions in the economy generally resulting from Year 2000 issues could adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and adjusting staffing strategies. Market Risk Exposure The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling short-term investments. Based on the current holdings of short-term investments, the exposure to interest rate risk is not material. Foreign Currency Exposure The Company's international operations expose it to translation risk when the local currency financial statements are translated to U.S. dollars. As currency exchange rates fluctuate, translation of the statements of income of international businesses into U.S. dollars will affect the comparability of revenues and expenses between years. None of the components of the Company's consolidated statements of income was materially affected by exchange rate fluctuations in 1998, 1997 or 1996. FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS COMPUTER HORIZONS CORP. December 31, 1998 and 1997 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Computer Horizons Corp. We have audited the accompanying consolidated balance sheets of Computer Horizons Corp. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 Horizons Corp. and Subsidiaries as of December 31, 1998 and 1997 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Parsippany, New Jersey February 15, 1999
Computer Horizons Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, ------------------- 1998 1997 -------- -------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 51,796 $ 92,086 Short-term investments (Note 1) 11,259 13,165 Accounts receivable (Note 3) 135,447 81,547 Deferred income tax benefit (Note 7) 4,987 1,854 Other 2,049 1,087 -------- -------- Total current assets 205,538 189,739 -------- -------- Property and equipment: Furniture, equipment and other 26,469 13,202 Less accumulated depreciation 11,141 7,502 -------- -------- 15,328 5,700 -------- -------- Other assets - net: Goodwill (Note 1) 66,315 17,090 Deferred income tax benefit (Note 7) 1,348 816 Other (Note 4) 7,523 4,280 -------- -------- 75,186 22,186 -------- -------- Total Assets $296,052 $217,625 ======== ========
The accompanying notes are an integral part of these statements
December 31, ---------------------- 1998 1997 --------- --------- (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 5) $ $ 1,473 Accrued payroll, payroll taxes and benefits 24,262 18,231 Accounts payable 5,258 2,211 Income taxes payable 6,437 4,309 Other accrued expenses 10,821 3,145 --------- --------- Total current liabilities 46,778 29,369 --------- --------- Other liabilities (Note 10) 2,740 2,282 --------- --------- Commitments (Note 11) Shareholders' equity: Preferred stock, $.10 par; authorized and unissued, 200,000 shares, including 50,000 Series A Common stock, $.10 par; authorized, 100,000,000 shares; issued 32,351,580 shares and 31,247,069 shares at December 31, 1998 and 1997, respectively 3,235 3,125 Additional paid-in capital 128,821 117,718 Accumulated comprehensive income (762) 84 Retained earnings 123,943 78,919 255,237 199,846 --------- --------- Less shares held in treasury, at cost; 1,061,662 and 1,692,253 shares at December 31, 1998 and 1997, respectively (8,703) (13,872) --------- --------- Total shareholders' equity 246,534 185,974 --------- --------- Total Liabilities and Shareholders' Equity $ 296,052 $ 217,625 ========= =========
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ ----(in thousands, except per share data)--- Revenues $ 514,921 $ 350,310 $ 261,411 ------------ ------------ ------------ Costs and expenses: Direct costs 326,795 233,574 180,410 Selling, general and administrative 113,035 74,165 59,677 Merger-related expenses 4,272 976 ------------ ------------ ------------ 444,102 308,715 240,087 ------------ ------------ ------------ Income from operations 70,819 41,595 21,324 ------------ ------------ ------------ Other income (expense): Interest income 5,334 1,700 404 Interest expense (750) (276) (507) Equity in net earnings of joint venture (Note 4) (90) 13 885 Gain on sale of joint venture 4,180 ------------ ------------ ------------ 8,674 1,437 782 ------------ ------------ ------------ Income before income taxes 79,493 43,032 22,106 ------------ ------------ ------------ Income taxes (Notes 1 and 7): Current 39,645 19,448 9,413 Deferred (3,739) (950) (382) ------------ ------------ ------------ 35,906 18,498 9,031 ------------ ------------ ------------ Net Income $ 43,587 $ 24,534 $ 13,075 ============ ============ ============ Earnings per share (Notes 1 and 8): Basic $ 1.41 $ .89 $ .50 ============ ============ ============ Diluted $ 1.35 $ .85 $ .47 ============ ============ ============ Weighted average number of shares outstanding: Basic 30,925,000 27,567,000 26,380,000 ============ ============ ============ Diluted 32,230,000 28,999,000 27,932,000 ============ ============ ============
The accompanying notes are an integral part of these statements.
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1998, 1997 and 1996 Addi- Accumulat- tional ed other Common stock paid-in comprehen- Retained Shares Amount capital sive income earnings ------ ------ ------- ----------- -------- (dollars in thousands) Balance, December 31 1995, as restated 19,043,292 $1,904 $27,505 $37 $ 43,133 Net income for the year 13,075 Other comprehensive income: Foreign currency translation adjustments 253 Total comprehensive income Stock options exercised 467,022 47 1,679 Tax benefits related to stock option plans 1,589 Dividends paid (Spargo) (827) ---------- ----- ------ --- ------ Balance, December 31, 1996 19,510,314 1,951 30,773 290 55,381 Net income for the year 24,534 Other comprehensive income: Foreign currency translation (206) adjustments Total comprehensive income Three-for-two stock split declared May 1997 8,861,715 886 (886) Stock options exercised 375,040 38 1,759 Tax benefits related to stock option plans 2,610 Sale of common stock, net of expenses 2,500,000 250 83,462 Dividends paid (Spargo) (996) ---------- ----- ------ -- ------ Balance, December 31, 1997 31,247,069 3,125 117,718 84 78,919 Net income for the year 43,587 Other comprehensive income: Foreign currency translation adjustments (846) Total comprehensive income Increase resulting from immaterial pooling 954,213 95 170 2,607 Stock options exercised 2,265 (250) (399) Tax benefits related to stock option plans 2,998 Stock issuance costs (20) Issuance of common stock for purchase of assets 148,033 15 8,205 Dividends paid (Spargo) (771) ---------- ----- ------ ----- -------- Balance, December 31, 1998 32,351,580 $3,235 $128,821 $(762) $123,943 ========== ====== ======== ===== ======== Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1998, 1997 and 1996 Treasury stock Shares Amount Total ------ ------ ----- (dollars in thousands) Balance, December 31 1995, as restated 1,786,883 $14,648 $57,931 Net income for the year 13,075 Other comprehensive income: Foreign currency translation adjustments 253 ------- Total comprehensive income 13,328 Stock options exercised 1,726 Tax benefits related to stock option plans 1,589 Dividends paid (Spargo) (827) --------- ------ ------- Balance, December 31, 1996 1,786,883 14,648 73,747 Net income for the year 24,534 Other comprehensive income: Foreign currency translation adjustments (206) Total comprehensive income 24,328 Three-for-two stock split declared May 1997 Stock options exercised (94,630) (776) 2,573 Tax benefits related to stock option plans 2,610 Sale of common stock, net of expenses 83,712 Dividends paid (Spargo) (996) --------- ------ ------- Balance, December 31, 1997 1,692,253 13,872 185,974 Net income for the year 43,587 Other comprehensive income: Foreign currency translation adjustments (846) ------ Total comprehensive income 42,741 Increase resulting from immaterial pooling 2,872 Stock options exercised (510,209) (4,182) 3,533 Tax benefits related to stock option plans 2,998 Stock issuance costs (20) Issuance of common stock for purchase of assets (120,382) (987) 9,207 Dividends paid (Spargo) (771) --------- ------ ------- Balance, December 31, 1998 1,061,662 $8,703 $246,534 ========= ====== ========
The accompanying notes are an integral part of this statement.
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ------------------------------------ 1998 1997 1996 --------- -------- -------- (in thousands) Cash flows from operating activities Net income ................................................................. $ 43,587 $ 24,534 $ 13,075 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes ...................................................... (3,665) (950) (382) Depreciation ........................................................ 3,218 1,857 1,367 Loss on disposal of fixed assets .................................... (26) (25) Gain on sale of joint venture ....................................... (3,125) Amortization of intangibles ......................................... 4,145 602 587 Provision for bad debts ............................................. 1,676 575 54 Changes in assets and liabilities, net of acquisitions: Accounts receivable ............................................. (43,085) (22,850) (9,323) Other current assets ............................................ (572) (108) (6) Other assets .................................................... (1,462) (64) (12) Accrued payroll, payroll taxes and benefits ..................... 5,784 4,887 1,535 Accounts payable ................................................ 415 328 (776) Income taxes payable ............................................ 4,544 5,187 1,023 Other accrued expenses .......................................... (1,529) 2,370 (571) Other liabilities ............................................... 5,866 626 465 -------- -------- -------- Net cash provided by operating activities ....................... 15,797 16,968 7,011 -------- -------- -------- Cash flows from investing activities Purchases of furniture and equipment ....................................... (11,122) (2,480) (1,543) Acquisitions, net of cash .................................................. (51,948) (5,467) (363) Changes in goodwill ........................................................ 262 Changes in other assets .................................................... (968) (761) Proceeds from sale of joint venture ........................................ 4,695 Purchases of short-term investments ........................................ 2,556 (13,165) -------- -------- -------- Net cash used in investing activities ........................... (55,557) (22,080) (2,667) -------- -------- -------- Cash flows from financing activities Notes payable - banks, net ................................................. (2,313) Long-term debt ............................................................. (1,000) (1,903) (2,420) Dividends paid (Spargo) .................................................... (771) (996) (827) Stock issuance cost ........................................................ (20) Stock options exercised .................................................... 3,533 2,573 1,727 Proceeds from issuance of stock ............................................ 83,712 -------- -------- Net cash (used in)/provided by financing activities ............. (571) 83,386 (1,520) -------- -------- -------- Foreign currency gains/(losses) .................................. (41) (315) 160 Net (decrease)/increase in cash and cash equivalents ............ (40,290) 77,959 2,984 Cash and cash equivalents at beginning of year ................................. 92,086 14,127 11,143 -------- -------- -------- Cash and cash equivalents at end of year ....................................... $ 51,796 $ 92,086 $ 14,127 ======== ======== ========
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ------------------------------------ 1998 1997 1996 --------- -------- -------- (in thousands) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ............................................................... $ 132 $ 249 $ 470 Income taxes ........................................................... 35,111 13,694 8,219 Details of acquisition: Fair value of assets ....................................................... $ 70,590 $ 5,590 Liabilities ................................................................ 20,177 242 -------- -------- Cash paid for acquisition .................................................. $ 50,413 $ 5,348 ======== ========
The accompanying notes are an integral part of these statements. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Computer Horizons Corp. is a diversified information technology services company that provides clients with resource augmentation and advanced technology solutions to business problems through applications development, applications outsourcing client/server migration, network design and management, legacy systems maintenance, its solutions to the millennium date-change problem, and emerging technologies, including e-business and internet development. Principles of Consolidation The consolidated financial statements include the accounts of Computer Horizons Corp. and its wholly-owned subsidiaries (the "Company"). The Company's investment in a joint venture (Note 4) was accounted for under the equity method of accounting. All material intercompany accounts and transactions have been eliminated. Revenue Recognition The Company recognizes revenues as professional services are performed. On fixed fee engagements, revenue and gross profit adjustments are made to reflect revisions in estimated total costs and contract values. Estimated losses are recorded when identified. Recruitment Costs Recruitment costs are charged to operations as incurred. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 1 (continued) Cash and Cash Equivalents Cash and cash equivalents include all highly liquid instruments with a maturity of three months or less at the time of purchase and consist of the following at December 31:
1998 1997 ------- ------- -----(in thousands)------ Cash $ 7,170 $ 6,901 Money market funds 24,689 45,460 Demand obligations 17,962 21,924 Commercial paper 1,975 17,801 ------- ------- $51,796 $92,086 ======= =======
Short-term Investments The Company classifies investments with an original maturity of more than three months at the time of purchase as short-term investments. Short-term investments are classified as held to maturity, which approximates fair value. At December 31, 1998, short-term investments maturing within one year consist of commercial paper valued at cost. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 1 (continued) Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, regardless of the degree of such risk, consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. The Company invests the majority of its excess cash in money market funds, commercial paper and demand obligations of high-credit, high-quality financial institutions or companies, with certain limitations as to the amount that can be invested in any one entity. The Company maintains its cash balances principally in five financial institutions located in the United States, Canada and the United Kingdom. The balances in U.S. banks are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity at each institution. The balance in the Canadian bank is insured by the Canadian Deposit Insurance Corporation up to $60,000 Canadian (approximately $39,000 US). There is no depository insurance in the United Kingdom. At December 31, 1998, uninsured amounts held at these financial institutions total approximately $11,459,000. The Company's customers are generally very large, Fortune 500 companies in many industries and with wide geographic dispersion. The Company's largest customer accounts for approximately 7.5% of billed accounts receivable at December 31, 1998. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company's largest client accounted for 8.8%, 11.2% and 8.8%, respectively, of the Company's consolidated revenues in 1998, 1997 and 1996. No other client accounted for more than 8.5% in those years. Fair Value of Financial Instruments The carrying value of financial instruments (principally consisting of cash and cash equivalents, short-term investments, accounts receivable and payable and long-term debt) approximates fair value because of the short maturities or, as to long-term debt, the rates currently offered to the Company. Property and Equipment and Depreciation Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 1 (continued) Goodwill Goodwill, the cost in excess of the fair value of net assets acquired, is being amortized by the straight-line method, for periods ranging from twenty to thirty years. Accumulated amortization is $6,301,000 and $4,523,000 at December 31, 1998 and 1997, respectively. On an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of income generated, to determine that no impairment has occurred. Income Taxes The Company and its domestic subsidiaries file a consolidated Federal income tax return. The foreign subsidiaries file in each of their local jurisdictions. Deferred income taxes result from temporary differences between income reported for financial and income tax purposes. These temporary differences result primarily from the allowance for doubtful accounts provision and certain accrued expenses which are deductible, for tax purposes, only when paid. Tax benefits from early disposition of the stock by optionees under incentive stock options and from exercise of non-qualified options are credited to additional paid-in capital. The Company provides United States income taxes on the earnings of foreign subsidiaries, unless they are considered permanently invested outiside the United States. As of December 31, 1998, there is no cummulative amount of earnings on which Unoited States income taxes have not been provided. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 1 (continued) Earnings Per Share Basic Earning Per Share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. Use of Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation For operations outside the United States that prepare financial statements in currencies other than the United States dollar, results of operations and cash flows are translated at the average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Translation adjustments are included as a separate component of shareholders' equity. New Accounting Pronouncements In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 1999. The impact of adopting SFAS 133 is not expected to be material to the consolidated financial statements or notes to consolidated financial statements. Computer Horizons Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 2 - ACQUISITIONS On September 25, 1998, the Company acquired the assets of Enterprise Solutions Group, LLC ("ESG"), a Cincinnati, Ohio-based technology organization that provides training and educational services as well as consulting services for Fortune 500 companies. The acquisition was accounted for as a purchase. The total purchase price was approximately $7,333,000 in cash and common stock. The purchase price may be adjusted based on the actual earnings of the company for the twelve months ended December 31, 1998, up to a maximum purchase price of $11,000,000. The remaining purchase price is to be paid out in three payments starting December 1998 and ending December 2000. Had the acquisition of ESG occurred on January 1, 1998, the effect on revenues and net income would have been immaterial. On August 4, 1998, the Company acquired the assets of RPM Consulting ("RPM"), a leading provider of network consulting services, specializing in architecting, designing and upgrading large enterprise networks, based in Maryland, for a combination of cash and common stock totaling approximately $27,700,000, and two earnout payments (not to exceed $2.0 million in total) based on pretax profit margins. The acquisition was accounted for as a purchase. Had the acquisition of RPM occurred on January 1, 1998, the effect on revenues and net income would have been immaterial. On July 2, 1998, the Company acquired the net assets of Infomatics Search Group ("ISG), a Toronto, Canada based information technology service firm, offering both professional staffing and career placement services. The acquisition was accounted for as a purchase. The total purchase price was approximately $21,600,000 in cash. The purchase agreement includes an earnout clause equal to two times increases in prior period adjusted earnings (as defined in the purchase agreement) to be earned in 1998, 1999, and 2000. Had the acquisition of ISG occurred on January 1, 1998, the effect on revenues and net income would have been immaterial. On June 24, 1998, the Company acquired all of the common stock of Spargo Consulting PLC ("Spargo"), an information technology consultancy service provider, organized under the laws of the United Kingdom for 1,887,000 shares of Computer Horizon stock. This transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of Spargo. The combination with Spargo was treated as a Qualified Stock Purchase for U.S. Federal Income Tax purposes. The reconciliation below details the effect of the pooling noted above on the previously reported revenues, net income and earnings per share of the separate companies for the periods preceding the acquisition:
Three Months Ended Year Ended Year Ended Year Ended March 31, 1998 1997 1996 1995 --------------------------------------------------------------------------------- Revenues Computer Horizons Corp. $107,101 $334,729 $249,152 $213,165 Spargo 4,410 15,581 12,259 11,644 --------------------------------------------------------------------------------- Combined $111,511 $350,310 $261,411 $224,809 ================================================================================= Net Income Computer Horizons Corp. $8,174 $22,644 $11,864 $10,425 Spargo 530 1,890 1,211 890 --------------------------------------------------------------------------------- Combined $8,704 $24,534 $13,075 $11,315 ================================================================================= Earnings Per Share Basic Computer Horizons Corp. $0.28 $0.88 $0.48 $0.46 Spargo 0.00 0.01 0.02 0.01 --------------------------------------------------------------------------------- Combined $0.28 $0.89 $0.50 $0.47 ================================================================================= Diluted Computer Horizons Corp. $0.27 $0.84 $0.46 $0.44 Spargo 0.00 0.01 0.01 0.00 --------------------------------------------------------------------------------- Combined $0.27 $0.85 $0.47 $0.44 ================================================================================= Shares Outstanding Basic 30,714,000 27,567,000 26,380,000 24,312,000 Diluted 32,270,000 28,999,000 27,932,000 25,823,000
On February 27, 1998, the Company acquired all of the common stock of Princeton Softech, Inc. ("Princeton") in exchange for 954,213 shares of Computer Horizons stock. Princeton specializes in relational databases, data synchronization, intelligent data migration and data management tools, and is based in Princeton, New Jersey. This transaction was accounted for as an immaterial pooling of interests and the results of Princeton have been included since January 1, 1998. On December 31, 1997, the Company acquired, for approximately $5 million cash, certain assets from Millennium Computer Technology, Inc. ("Millennium"), a Chattanooga-based IT services provider. The acquisition was recorded under the purchase method of accounting. Had the acquisition of Millennium occurred on January 1, 1997, the effect on revenues and net income would have been immaterial. On December 19, 1997, the Company acquired all the common stock of CG Computer Services ("CG") in exchange for 566,666 shares of Computer Horizons stock. CG provides IT provisioning and staffing solutions with offices in San Francisco, Los Angeles, Chicago, and Parsippany, New Jersey. This transaction was accounted for as a pooling of interests. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 2 (continued) In June 1994, the Company acquired the net assets of Strategic Outsourcing Services, Inc. ("SOS"), a New Jersey-based provider of data processing services, for approximately $250,000. The acquisition agreement also provides for contingent consideration based on the future performance of SOS, through 1998. The acquisition was accounted for as a purchase. There was no contingent consideration recorded in 1998. In 1997 and 1996, the Company recorded contingent consideration, totaling approximately $119,000 and $137,000, respectively, as additional goodwill, with certain additional amounts payable subject to future performance. These contingent consideration payments were not dependent upon the continued employment of the former shareholder. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following at December 31:
1998 1997 -------- -------- ---(in thousands)--- Billed $ 83,394 $ 60,274 Unbilled 55,262 23,015 -------- -------- 138,656 83,289 Less allowance for doubtful accounts 3,209 1,742 -------- -------- $135,447 $ 81,547 ======== ========
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 4 - GAIN ON SALE OF JOINT VENTURE In 1995, the Company entered into a software development and services joint venture with the Birla Group, a large multinational conglomerate located in India. The foreign joint venture, known as Birla Horizons International ("BHI"), was headquartered in New Delhi, India and had operations in India, the United States, the United Kingdom and Canada. The Company and the Birla Group each made cash contributions of $500,000 and each received a 50% interest in the joint venture. The Birla Group had also contributed the net assets of its then existing information technology company to the joint venture and the Company provided technological and management support. The Company's total investment in BHI was $1,672,000 at December 31, 1997, representing the initial cost plus equity in the undistributed net earnings since formation, and was included in other noncurrent assets. BHI provided consultants to the Company at a total cost of $ 3,437,000, $5,017,000 and $4,216,000 in 1998, 1997 and 1996, respectively. Approximately $992,000 was included in accounts payable at December 31, 1998. During the fourth quarter of 1998, the Company sold its 50% interest to the Birla Group for a cash payment of $5,750,000. Accordingly, a gain of $4,180,000 was recognized. The impact on net income was $1,975,000 or $.06 per share. NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT The Company has no long term debt as of December 31, 1998. As of December 31, 1997, long-term debt consisted of the following: 9.55% senior notes $1,432 Notes payable at prime 41 ------ 1,473 Less current maturities 1,473 ------ $ -- ====== Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 5 (continued) In 1988, the Company issued two senior notes aggregating $10,000,000, bearing interest at 9.55%, payable semiannually. The notes were payable in annual installments of $1,428,000 from April 15, 1992 through 1997 with a final payment of $1,432,000 made in March, 1998. At December 31, 1998, the Company has two unused bank lines of credit in the amounts of $15,000,000 and $10,000,000 expiring June 30, 1999 and May 31, 1999, respectively. Under the first line of credit, the Company has two irrevocable standby letters of credit in the amounts of $666,000 and $190,000 expiring December 31, 1999 and September 25, 1999 respectively. At December 31, 1998, there were no outstanding balances on these lines of credit. In addition to the above lines of credit, the Company also has two ancillary lines of credit totaling $204,000 used for various day to day purchases. During 1998, the Company had no borrowings against either line. The Company also has a $1,000,000 Canadian (approximately $650,000 US) overdraft line of credit at its Canadian bank. At December 31, 1998, $140,000 Canadian (approximately $91,000 US) was outstanding on this line of credit. NOTE 6 - SHAREHOLDERS' EQUITY Authorized Shares On May 6, 1998, the Company approved an amendment to the Company's Certificate of Incorporation increasing the authorized number of shares of the Company's common stock from 60,000,000 to 100,000,000. Stock Splits The Board of Directors of the Company declared a three-for-two common stock split in the form of a 50% stock distribution on May 7, 1997, for shareholders of record as of May 22, 1997. The distribution was paid on June 9, 1997. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 6 (continued) An amount equal to the $.10 par value of the common shares distributed has been retroactively transferred from additional paid-in capital to common stock. All references in the financial statements with regard to number of shares of common stock, common stock prices and per share amounts have been restated to reflect the above-mentioned stock split. Stock Options and SFAS No. 123 Pro Forma Disclosure In 1994, the Company adopted a stock option plan which provides for the granting, to officers and key employees, of options for the purchase of a maximum of 7,594,000 shares of common stock and stock appreciation rights (SARs). Options and SARs generally expire five years from the date of grant and become exercisable in specified amounts during the life of the respective options. No SARs have been granted as of December 31, 1998. This plan, which replaces the Company's 1985 Plan, will terminate on June 15, 2004. There were 4,789,000 shares available for option at December 31, 1998. In 1998, the Company amended the non-qualified Directors' Stock Option Plan, providing that each new director of the Company who is not an employee of the Company (i) shall immediately receive options to purchase 10,000 shares of its common stock and (ii) shall receive annual grants to purchase 10,000 shares of its common stock. The plan expires on March 4, 2001. There were 484,000 shares available for option at December 31, 1998. The exercise price per share on all options and/or SARs granted may not be less than the fair value at the date of the option grant. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 6 (continued)
1998 1997 1996 ----------------- ------------- ------------- Net income As reported $43,587,000 $24,534,000 $13,075,000 Pro forma 39,516,000 21,623,000 10,746,000 Earnings per share Basic As reported $1.41 $.89 $.50 Pro forma $1.28 .78 .41 Diluted As reported $1.35 $.85 $.47 Pro forma $1.23 .75 .38
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: expected volatility of 127%, 61% and 97%; risk-free interest rates of 5.27%, 5.47%, and 6.28%; and expected lives of 4.5, 5.0 and 4.9 years. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates is presented below:
1998 1997 ------------------------------------- ------------------------------------- Weighted Weighted average average exercise exercise Shares price Shares price ------ ----- ------ ----- (000) (000) Outstanding - January 1 2,035 $9.97 2,200 $ 7.03 Granted 1,634 26.39 333 23.39 Exercised (512) 6.88 (462) 5.37 Canceled/forfeited (747) 35.09 (36) 13.36 --------- -------- Outstanding - December 31 2,410 13.94 2,035 9.97 ====== ===== Options exercisable - December 31 1,003 10.84 833 7.10 ====== ====== Weighted average fair value of options granted during the year 13.03 23.30 1996 ----------------------------------- Weighted average exercise Shares price ------ ----- (000) Outstanding - January 1 2,260 $ 3.80 Granted 885 14.65 Exercised (678) 2.50 Canceled/forfeited (267) 17.47 ------ Outstanding - December 31 2,200 7.03 ===== Options exercisable - December 31 764 4.94 ====== Weighted average fair value of options granted during the year 11.65
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 6 (continued) The following information applies to options outstanding at December 31, 1998:
Options outstanding Options exercisable ------------------------------------------------------------ ---------------------------------- Weighted Outstanding average Weighted Exercisable Weighted as of remaining average as of average December 31, contractual exercise December 31, exercise Range of exercise prices 1998 life price 1998 price - - ------------------------ ------------------ ------------------ ------------------ ------------------ ------------ (000's) (000's) $ 0.00 - $ 9.99 853 4.2 $ 4.48 529 $3.98 10.00 - 19.99 491 4.9 13.79 190 13.69 20.00 and over 1,066 5.2 21.42 284 21.68 ------- ---------- ---------- ---- ------ 2,410 4.7 $ 13.94 1,003 $ 10.84 ======= ======= ========== ====== =======
Certain officers have the right to borrow from the Company against the exercise price of options exercised. The Company has issued warrants to purchase shares of its common stock to two outside business/ legal consulting firms. There were no warrants issued in 1998. Warrants for 8,625 and 30,000 shares were granted, respectively, in 1997 and 1996. The exercise price is the fair value at the date of grant. Shareholder Rights Plan In July 1989, the Board of Directors declared a dividend distribution of .131 preferred stock purchase right on each outstanding share of common stock of the Company. The rights were amended on February 13, 1990. Each right will, under certain circumstances, entitle the holder to buy one one-hundredth (1/100) of a share of Series A preferred stock at an exercise price of $30.00 per one one-hundredth (1/100) share, subject to adjustment. Each one one-hundredth (1/100) of a share of Series A preferred stock has voting, dividend and liquidation rights and preferences substantively equivalent to one share of common stock. The rights will be exercisable and transferable separately from the common stock only if a person or group acquires 20% or more, subject to certain exceptions, of the Company's outstanding common stock or announces a tender offer that would result in the ownership of 20% or more of the common Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 6 (continued) stock. If a person becomes the owner of at least 20% of the Company's common shares (an "Acquiring Person"), each holder of a right other than the Acquiring Person is entitled, upon payment of the then current exercise price per right (the "Exercise Price"), to receive shares of common stock (or common stock equivalents) having a market value equal to twice the Exercise Price. Additionally, if the Company subsequently engages in a merger or other business combination with the Acquiring Person in which the Company is not the surviving corporation, or in which the outstanding shares of the Company's common stock are changed or exchanged, or if more than 50% of the Company's assets or earning power is sold or transferred, a right would entitle a Computer Horizon Corp. shareholder, other than the Acquiring Person and its affiliates, to purchase upon payment of the Exercise Price, shares of the Acquiring Person having a market value of twice the Exercise Price. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. No shareholder rights have become exercisable. The rights will expire on July 16, 1999. Repricing of Stock Options On October 16, 1998, the Company's Board of Directors approved the repricing of approximately 732,000 stock options that had been granted to employees earlier in the year. This decision was made in response to competitive pressures and as a means to retain key employees. No compensation expense was recorded as a result of the repricing. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 7 - INCOME TAXES The following is a geographical breakdown of the Company's income before taxes:
Year Ended December 31, 1998 1997 1996 ------- ------- ------- --------------- (in thousands)---------------- Domestic $72,714 $40,169 $19,342 Foreign 6,779 2,863 2,764 ------- ------- ------- Total $79,493 $43,032 $22,106 ======= ======= =======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 The provision for income taxes consists of the following for the years ended December 31:
1998 1997 1996 -------- -------- -------- -----------(in thousands)------------ Current Federal $ 28,539 $ 13,927 $ 6,629 State 8,334 4,558 2,108 Foreign 2,772 963 676 -------- -------- -------- Total current 39,645 19,448 9,413 Deferred Federal (2,926) (703) (341) State (794) (244) (33) Foreign (19) (3) (8) -------- -------- -------- Total deferred (3,739) (950) (382) Total $ 35,906 $ 18,498 $ 9,031 ======== ======== ========
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 7 (continued) Deferred tax assets and liabilities consist of the following at December 31:
1998 1997 ------- ------- (in thousands) Deferred tax liabilities Depreciation and amortization -- (123) Capitalized software development costs (290) -- Other (466) -- ------- ------- Total deferred tax liabilities (756) (123) Deferred tax assets Accrued insurance $ 293 $ 588 Accrued payroll and benefits 1,982 1,413 Deferred revenue 2,346 -- Allowance for doubtful accounts 1,059 469 Depreciation and amortization 715 -- Other 696 323 ------- ------- Deferred tax assets $ 7,091 $ 2,670 ======= =======
A reconciliation of income taxes, as reflected in the accompanying statements, with the statutory Federal income tax rate of 35% for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 -------- -------- -------- ---------(in thousands)-------- Statutory Federal income taxes $ 27,822 $ 15,061 $ 7,737 State and local income taxes, net of Federal tax benefit 4,901 2,804 1,349 Foreign taxes provided at rates other than the U.S. statutory rate 122 (37) 10 Amortization of goodwill 203 203 201 Equity in net earnings of joint venture 343 (310) Merger-related expenses 1,673 Other, net 842 467 44 -------- -------- -------- $ 35,906 $ 18,498 $ 9,031 ======== ======== ========
Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31,1998, totaling approximately $850,000, 264,000 expires in 2005 and the remainder has no expiration. During 1998, the Company completed a business combination which, for financial statement purposes, has been accounted for as a pooling-of-interests. For income tax purposes the Company believes the transaction qualifies as a taxable purchase that gives rise to future tax deductions. Since the tax structure of the transaction is subject to determination by the tax authorities, the Company has not recorded any potential tax impact in its financial statements. When resolved, the Company will record a deferred tax asset net of an appropriate valuation allowance. The net benefit will be reflected as an increase in additional paid-in-capital. Any adjustments to the valuation allowance will be charged or credited to income. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 8 - EARNINGS PER SHARE DISCLOSURES
For the year ended --------------------------------- Per Income Shares share (numerator) (denominator) amount ----------- ------------ ------ (in 000's, except per share data) December 31, 1998 Net income $ 43,587 ========== Basic earnings per share Income available to common stockholders $ 43,587 30,925,000 $ 1.41 ======== Effect of diluted securities Options 1,305,000 --------- Diluted earnings per share Income available to common stock- holders plus assumed conversions $ 43,587 32,230,000 $ 1.35 ========== ========== ======== December 31, 1997 Net income $ 24,534 ========== Basic earnings per share Income available to common stockholders $ 24,534 27,567,000 $ 0.89 ======== Effect of diluted securities Options 1,432,000 --------- Diluted earnings per share Income available to common stock- holders plus assumed conversions $ 24,534 28,999,000 $ 0.85 ========== ========== ======== December 31, 1996 Net income $ 13,075 ========== Basic earnings per share Income available to common stockholders $ 13,075 26,380,000 $ 0.50 ======== Effect of diluted securities Options 1,552,000 --------- Diluted earnings per share Income available to common stock- holders plus assumed conversions $ 13,075 27,932,000 $ 0.47 ========== ========== ========
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 8 (continued) Options to purchase 8,713 shares of common stock, ranging from $25.67 to $35.58, per share were outstanding during 1998 and 1997, but were not included in the computation of diluted earnings per share because the option's exercise price was greater than the average market price of common shares. The options which expire between December 31, 2001 and January 1, 2007 were still outstanding at December 31, 1998. All options to purchase shares of common stock were included in the computation of diluted earnings per share in 1996. NOTE 9 - SEGMENT INFORMATION In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 was effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for all prior periods have been restated. The Company has identified three segments: Staffing, Solutions and Products. There are no intersegment sales. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources based on operating income. Operating income consists of income before income taxes, excluding net interest income and amortization of intangibles, amounting to 439,000, 822,000 and (690,000) in 1998, 1997 and 1996, respectively. Long-term assets is made up of goodwill and property, plant and equipment. Corporate services, consisting of general and administrative services are provided to the segments from a centralized location. Such costs are allocated to the segments based on either revenue or headcount. In addition, substantially all of the sales and recruiting workforce is contained in the staffing segment. These costs are allocated to the solutions segment based generally on forecasted revenues.
(In Thousands) BY LINE OF BUSINESS 1998 1997 1996 ------- ------- ------- REVENUE Staffing .................................... 266,637 224,451 185,575 Solutions ................................... 225,528 125,859 75,836 Products .................................... 22,756 Corporate and other ------- ------- ------- Total Revenue .......................... 514,921 350,310 261,411 ======= ======= ======= OPERATING INCOME Staffing .................................... 36,065 24,069 20,229 Solutions ................................... 32,445 18,128 1,709 Products .................................... 6,454 Corporate and other ......................... 4,090 13 885 ------- ------- ------- Total Operating Income ................. 79,054 42,210 22,823 ======= ======= ======= ASSETS Staffing .................................... 114,523 68,373 53,577 Solutions ................................... 78,936 30,264 18,207 Products .................................... 15,454 Corporate and other ......................... 87,139 118,988 24,826 ------- ------- ------- Total Assets ........................... 296,052 217,625 96,610 ======= ======= ======= DEPRECIATION EXPENSE Staffing .................................... 651 668 495 Solutions ................................... 561 417 276 Products .................................... 279 Corporate and other ......................... 1,727 772 596 ------- ------- ------- Total Depreciation ..................... 3,218 1,857 1,367 ======= ======= ======= (In Thousands) BY LINE OF BUSINESS 1998 1997 1996 ------- ------- ------- BY GEOGRAPHIC AREA REVENUE United States ............................... 476,252 334,334 249,152 United Kingdom .............................. 23,651 15,581 12,259 Canada ...................................... 15,018 395 ------- ------- ------- Total Revenue .......................... 514,921 350,310 261,411 ======= ======= ======= LONG-TERM ASSETS United States ............................... 61,815 22,395 17,618 United Kingdom .............................. 334 323 339 Canada ...................................... 19,494 72 ------- ------- ------- Total Long-Term Assets ................. 81,643 22,790 17,957 ======= ======= =======
NOTE 10 - SAVINGS PLAN AND OTHER RETIREMENT PLANS The Company maintains a defined contribution savings plan covering eligible employees. The Company makes contributions up to a specific percentage of participants' contributions. The Company contributed approximately $704,000, $469,000 and $345,000 in 1998, 1997 and 1996, respectively. In 1995, the Company instituted a Supplemental Executive Retirement Plan whereby key executives are entitled to receive lump-sum payments (or, if they elect, a ten-year payout) upon reaching the age of 65 and being in the employ of the Company. The maximum commitment if all plan members remain in the employ of the Company until age 65 is approximately $11.0 million. Benefits accrue and vest based on a formula which includes total years with the Company and total years possible until age 65. The plan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist in funding the cost. The deferred compensation expense is charged to operations during the remaining service lives of the members and amounted to approximately $285,000, $183,000 and $97,000 in 1998, 1997 and 1996, respectively. In addition, the Company adopted a Deferred Compensation Plan for Key Executives that permits the individuals to defer a portion of their annual salary or bonus for a period of at least five years. There is no effect on the Company's operating results since any amounts deferred would have previously been expensed. Amounts deferred as of December 31, 1998 have been included in other noncurrent liabilities. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 11 - COMMITMENTS Leases The Company leases office space under long-term operating leases expiring through 2006. As of December 31, 1998, approximate minimum rental commitments were as follows: Year ending (in thousands) 1999 $ 5,526 2000 3,287 2001 2,656 2002 2,249 2003 1,453 Thereafter 1,255 --------- $ 16,426 ======== Office rentals are subject to escalations based on increases in real estate taxes and operating expenses. Aggregate rent expense for operating leases approximated $5,136,000, $3,721,000 and $2,899,000, in the years ended December 31, 1998, 1997 and 1996, respectively. Other In 1994, the Vice Chairman and Executive Vice President of the Company announced his resignation effective February 15, 1995. The Company recorded approximately $400,000 of deferred compensation in 1994 which is being paid beginning February 1998 through 2005. The Company also agreed to retain this former officer as a consultant for a three-year period for approximately $75,000 each year and entered into a noncompetition agreement for that period. NOTE 12 - SUBSEQUENT EVENTS On February 11, 1999, the Company's Board of Directors adopted a resolution allowing for the repurchase of up to 10 percent of the Company's outstanding common shares. The Company may, from time to time, purchase shares through periodic open market transactions or through privately negotiated transactions. Also on February 11, 1999, the Board of Directors approved the creation of an employee stock purchase plan. The plan, which qualifies under section 423 of the Internal Revenue Service code, allows employees to purchase shares of the Company's common stock through periodic payroll deductions. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, 1997 and 1996 NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited) For the years ended December 31, 1998 and 1997, selected quarterly financial data is as follows:
Quarters --------------------------------------------------------------- First Second Third Fourth (in thousands, except per share data) 1998 Revenues $111,512 $123,735 $ 136,633 $ 143,041 Direct costs 70,748 79,619 86,587 89,841 Selling, general and administrative 24,439 26,244 29,127 33,225 Merger-related expenses 1,328 2,209 735 Income from operations 14,997 15,663 20,184 19,975 Interest income - net 1,333 1,526 951 774 Equity in net earnings of joint venture (90) Gain on sale of joint venture 4,180 Income before income taxes 16,240 17,189 21,135 24,929 Income taxes 7,603 7,653 9,316 11,334 Net income 8,637 9,536 11,819 13,595 Earnings per share: Basic $0.28 $0.31 $0.38 $0.44 Diluted $0.27 $0.30 $0.37 $0.42 1997 Revenues $77,205 $83,645 $89,861 $99,599 Direct costs 52,485 56,102 59,698 65,289 Selling, general and administrative 17,106 18,320 18,687 20,052 Merger-related costs 976 Income from operations 7,614 9,223 11,476 13,282 Interest income - net 57 31 114 1,222 Equity in net earnings of joint venture 150 63 (75) (125) Income before income taxes 7,821 9,317 11,515 14,379 Income taxes 3,371 3,927 4,898 6,303 Net income 4,450 5,390 6,617 8,076 Earnings per share: Basic $0.17 $0.20 $0.25 $0.27 Diluted 0.16 0.19 0.23 0.26
Computer Horizons Corp. and Subsidiaries MARKET AND DIVIDEND INFORMATION Years ended December 31, 1998 and 1997 The Company's common stock is quoted on the Nasdaq National Market, under the symbol CHRZ. The range of high and low closing stock prices, as reported by the Nasdaq National Market, for each of the quarters for the years ended December 31, 1998 and 1997, retroactively adjusted to reflect the three-for-two common stock split declared by the Board of Directors in May 1997, is as follows:
1998 1997 ------------------------------- ------------------------------- High Low High Low ---- --- ---- --- Quarter First $ 52.19 $ 39.50 $25.42 $16.83 Second 51.75 30.38 38.88 19.67 Third 43.75 23.38 44.13 32.13 Fourth 28.63 18.13 45.50 27.00
The Company plans to reinvest its earnings in future growth opportunities and, therefore, does not anticipate paying cash dividends in the near future and has not paid any to date except for payments made to Spargo shareholders prior to the combination with Computer Horizons. As of December 31, 1998, there were approximately 1,250 holders of record of common stock. EX-23.1 3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 15, 1999 accompanying the consolidated financial statements incorporated by reference in the Annual Report of Computer Horizons Corp. on Form 10-K for the year ended December 31, 1998 and our report dated February 15, 1999 accompanying the financial statement schedule included in that Form 10-K. We hereby consent to the incorporation by reference of said report in the Registration Statements of Computer Horizons Corp. on Forms S-3 (File No. 333-33665, effective September 24, 1997, File No. 333-44417, effective February 27, 1998, and File No. 333-48877, effective March 30, 1998) and on Forms S-8 (File No. 033-41726, effective January 16, 1991, File No. 033-59437, effective May 18, 1995, File No. 033-64763, effective December 5, 1995, and File No. 333-60751, effective August 5, 1998, and File No. 333-74579, effective March 16, 1999). /s/GRANT THORNTON LLP - - --------------------- GRANT THORNTON LLP Parsippany, New Jersey March 31, 1999 EX-27 4
5 YEAR DEC-31-1998 DEC-31-1998 51,796 11,259 135,447 3,209 0 205,538 26,469 11,141 296,052 46,778 0 0 0 3,235 243,299 296,052 0 514,921 0 326,795 117,307 0 4,584 79,493 35,906 43,587 0 0 0 43,587 1.41 1.35
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