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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, 1999
[ ] 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 28, 2000, was approximately
$575,620,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 28, 2000: 33,152,206 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, l999, in Part II
of this Report and (ii) Proxy Statement for the 2000 Annual Meeting of
Shareholders, expected to be filed with the Securities and Exchange Commission
on or before April 7, 2000, 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
service, e-business solutions, human resource e-procurement solutions,
enterprise network management, software products, outsourcing, customer
relationship management and knowledge transfer. 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. The Company believes that the range of services and solutions that it
offers, combined with its worldwide network of 50 offices and subsidiary
organizations, provides it with significant competitive advantages in the
information technology marketplace.
The Company's clients primarily are Global 1000 companies with
significant information technology budgets and recurring staffing or software
development needs. In 1999, the Company provided information technology services
to 785 clients. During 1999, the Company's largest client, AT&T, accounted for
7.4% of the Company's consolidated revenues. The Company's next largest client,
Prudential, accounted for 7.0% of the Company's consolidated revenues with no
other client accounting for more than 4.1% 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
3
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) e-Business Solutions, (2) Consolidated Hiring
Internet Management Efficiency System ("CHIMES"), (3) enterprise network
management, (4) software products, (5) outsourcing, (6) professional services
staffing, (7) knowledge transfer and (8) the solution for the millenium change.
(1) e-Business Solutions: 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 customer
relationship management (CRM), project management, selection of viable systems
platforms, creation of migration plans, development of customized software
applications, and systems and database integrations. G. Triad Development Corp.
("G. Triad"), a wholly-owned subsidiary of the Company, provides comprehensive
web application development and Internet- working solutions, as well as network
engineering and server management. G. Triad's development practice specializes
in information design. Windows NT systems administration, data driven web site
development, systems integration project management and knowledge in ColdFusion.
(2) CHIMES: As an electronic market-maker, CHIMES, Inc. ("CHIMES"), a
wholly owned subsidiary of the Company, is a leading provider of e-Procurement
Solutions for Human Resource Acquisition and Management. CHIMES' Centralized
Vendor Management ("CVM") offering procures the top professionals on demand by
utilizing proven supply chain management techniques. CVM manages the entire
process, simplifying billing and timesheet administration, and coordinating the
activities of all the customer's vendors. CHIMES uses scalable ISO 9002
compliant procedures and browser based software.
(3) Enterprise Network Management: eB Networks, Inc., a wholly-owned
subsidiary of the Company, specializes in building and implementing strategic
network infrastructure to assist companies in achieving e Business objectives.
EB Networks' service offerings include infrastructure architecture, enterprise
management, security, operating systems integration and high availability
internet.
(4) Software Products: Princeton Softech, Inc. ("Princeton"), a
wholly-owned subsidiary of the Company, is a software products and services
company that delivers leveraging technologies for enterprise-scale e-Business
solutions. Princeton's component-based development tools enable customers to
synchronize IT and business objectives while moving at eSpeed through the
application lifecycle. Princeton's eData distribution and management and
intelligent archiving technologies allow organizations to optimize data
availability and deploy application data to the point of best business leverage.
Over 2,000 of the world's largest companies in more than 30 countries use
Princeton's products and services.
(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/7day 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) 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 2,600 software professionals.
5
The Company is committed to expanding its professional services staffing
operations in conjunction with its solutions business.
(7) Knowledge Transfer: The Company's Education Division offers
custom-designed and/or existing training programs 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 in the transition IT
organization of Global 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.
(8) Solution for the Millennium Change: The Company's Signature 2000
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, Signature 2000 provides the Company with an
opportunity to facilitate field expansion, and century data windowing, while
simultaneously performing other systems upgrades such as language conversions
and platform migrations. In addition, Signature 2000 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 workstations solution of the
Year 2000, including Asset Management, assessment and correction of spreadsheets
and databases, correction to the workstations clocks, and third-party vendor
compliancy assessment.
Personnel
As of December 3l, 1999, the Company had a staff of 4,149, of whom more
than 2,600 were IT 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, 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.
6
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, 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, 2002, at a current annual
rental of approximately $1,500,000. As of December 3l, l999, the Company also
maintained facilities
7
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 and Washington D.C., as well as international operations
located in Europe and Canada, with an aggregate of approximately 382,000 square
feet. The leases for these facilities are at a current annual aggregate rental
of approximately $6,000,000. These leases expire at various times with no lease
commitment longer than December 31, 2009.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
8
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.
PERIOD
NAME AGE TITLE POSITION HELD
- ---- --- ----- -------------
John J. Cassese 55 Chairman of the Board 1982 - Present
and President
Director 1969 - Present
William J. Murphy 55 Executive Vice President 1997 - Present
and CFO
Director 1999 - Present
Michael J. Shea 39 Controller 1995 - Present
Vice President 1996 - Present
9
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, 1999, 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, 1999, 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, 1999, 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, 1999, which material is
incorporated by reference in this Form 10-K Annual Report.
10
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, 1999,
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.
11
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 2000 Annual Meeting of Shareholders which is expected to be
filed with the Securities and Exchange Commission on or before April 7, 2000
(the "2000 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 2000 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 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
None
12
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 1999 Annual Report to Shareholders, are incorporated
herein by reference.
- Consolidated balance sheets as of December 3l, 1999 and 1998
- Consolidated statements of income for each of the three years in
the period ended December 31, 1999
- Consolidated statement of shareholders' equity for each of the
three years in the period ended December 31, 1999
- Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1999
- 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, 1999, 1998 and 1997.
- 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.
13
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 30, 2000 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 30, 2000 By:/s/John J. Cassese
------------------
John J. Cassese, Chairman
of the Board and President
(Principal Executive Officer) and Director
Date: March 30, 2000 By: /s/ William J. Murphy,
----------------------
William J. Murphy,
Executive Vice President and CFO
(Principal Financial Officer) and Director
Date: March 30, 2000 By: /s/ Michael J. Shea
-------------------
Michael J. Shea
Vice President and Controller
(Principal Accounting Officer)
Date: March 30, 2000 By:/s/Thomas J. Berry
------------------
Thomas J. Berry, Director
Date: March 30, 2000 By:/s/William M. Duncan
-------------------
William M. Duncan, Director
Date: March 30, 2000 By:/s/Rocco J. Marano
------------------
Rocco J. Marano, Director
Date: March 30, 2000 By:/s/Earl Mason
-------------
Earl Mason, Director
14
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 for the fiscal year ended
of 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.
15
16
17
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.
4(f) Amendment No. 3 Exhibit 4.1 to Form 8-K dated
dated as fo July 13, 1999 July 13, 1999
to Rights Agreement
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
of January 1, 1997 between the dated 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 Exhibit 10(g) to Form 10-K
Plan, as amended. for the year ended December,
31, 1994
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 Exhibit 10(h) to Form S-3
Credit payable to Chase Manhattan dated August 14, 1997
Bank dated as of June 30, 1998.
10(g) $10,000,000 Discretionary Line Exhibit 10(h) to Form 10K
of Credit from PNC Bank dated for the fiscal year ended
as of June 5, 1998 December 31, 1996
10(h) 1999 Employee Stock Purchase Plan Exhibit 99.1 to Form S-8
dated March 17, 1999
10(i) Amendment to the employment
agreement dated as of March 24,
2000 between the Company and
William J. Murphy
10(j) $15,000,000 Discretionary Line of
Credit payable to Chase Manhattan
Bank dated as of June 30, 1998, as
amended on March 15, 2000
(increased to $30,000,000).
13 Annual Report to Security Holders.
21 List of Subsidiaries.
16
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTS 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 Subsidiaries referred to in our report dated
February 21, 2000 (except for Note 5, as to which the date is March 15, 2000),
which is included in the 1999 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, 1999, 1998 and 1997. 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
Edison, New Jersey
February 21, 2000 (except for Note 5, as to
which the date is March 15, 2000)
Computer Horizons Corp. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at beginning Charged to cost Deductions - Balance at end
Description of period and expenses describe (1) of period
----------- --------- ------------ ------------ ---------
Year ended December 31, 1999
Allowance for doubtful accounts $ 3,209,000 $ 3,367,000 $ 757,000 $ 5,819,000
=========== =========== =========== ===========
Year ended December 31, 1998
Allowance for doubtful accounts $ 1,742,000 $ 1,676,000 $ 209,000 $ 3,209,000
=========== =========== =========== ===========
Year ended December 31, 1997
Allowance for doubtful accounts $ 1,203,000 $ 575,000 $ 36,000 $1,742,000
=========== =========== =========== ===========
Notes
(1) Uncollectible accounts written off, net of recoveries.
17
Computer Horizons Corp. and Subsidiaries
SELECTED FINANCIAL DATA
Year ended December 31,
1999 1998 1997 1996 1995
--------- --------- ----------- --------- ------
----------------(dollar amounts in thousands, except per share data)-------------
Revenues $ 534,594 $ 514,921 $ 350,310 $ 261,411 $ 224,809
Costs and expenses:
Direct costs 365,310 326,795 233,574 180,410 156,125
Selling, general and administrative 131,087 109,505 73,563 59,000 48,234
Amortization of intangibles 6,202 3,530 602 677 603
Restructuring charges 6,355 -- -- -- --
Merger-related expenses -- 4,272 976 -- --
Income from operations 25,640 70,819 41,595 21,324 19,847
Other income (expense):
Interest income 1,353 5,334 1,700 404 346
Interest expense (1,355) (750) (276) (507) (667)
Equity in net earnings of
joint venture -- (90) 13 885 361
Gain on sale of joint venture -- 4,180 -- -- --
Income before income
taxes 25,638 79,493 43,032 22,106 19,887
Income taxes 11,013 35,906 18,498 9,031 8,572
------------ ------------ ------------ ------------ ------------
Net income $ 14,625 $ 43,587 $ 24,534 $ 13,075 $ 11,315
============ ============ ============ ============ ============
Earnings per share:
Basic $ 0.47 $ 1.41 $ 0.89 $ 0.50 $ 0.47
============ ============ ============ ============ ============
Diluted $ 0.46 $ 1.35 $ 0.85 $ 0.47 $ 0.44
============ ============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 30,940,000 30,925,000 27,567,000 26,380,000 24,312,000
============ ============ ============ ============ ============
Diluted 31,647,000 32,230,000 28,999,000 27,932,000 25,823,000
============ ============ ============ ============ ============
Computer Horizons Corp. and Subsidiaries
SELECTED FINANCIAL DATA (continued)
Year ended December 31,
1999 1998 1997 1996 1995
--------- --------- ----------- --------- ------
---------------------(in thousands, except per share data)------------------
Analysis (%)
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 31.7 36.6 33.3 31.0 30.5
Selling, general and
administrative 24.5 21.3 21.0 22.5 21.4
Amortization of intangibles 1.2 0.7 0.1 0.3 0.3
Restructuring charges 1.2 -- -- -- --
Merger-related expenses -- 0.8 0.3 -- --
Income from operations 4.8 13.8 11.9 8.2 8.8
Interest income/(expense) - net -- 0.9 0.4 -- (0.1)
Equity in net earnings of joint
venture -- -- -- 0.3 0.1
Gain on sale of joint venture -- 0.8 -- -- --
Income before income taxes 4.8 15.5 12.3 8.5 8.8
Income taxes 2.1 7.0 5.3 3.5 3.8
Net income 2.7 8.5 7.0 5.0 5.0
Revenue growth YOY 3.8 47.0 34.0 16.3 29.8
Net income growth (decline) YOY (66.4) 77.7 87.6 15.6 58.7
Return on equity, average 5.7 20.2 18.9 19.9 25.0
Effective tax rate 43.0 45.2 43.0 40.9 43.1
At year-end
Total assets $ 347,994 $ 296,052 $ 217,625 $ 96,610 $ 63,096
Working capital 129,857 158,760 160,370 55,052 42,553
Long-term debt 4,100 -- -- 1,442 3,324
Shareholders' equity 262,652 246,534 185,974 73,747 57,931
Stock price $ 16.19 $ 26.63 $ 45.50 $ 25.67 $ 16.89
P/E multiple 34 19 51 51 36
Employees 4,149 4,834 3,794 3,228 2,830
Clients (during year) 785 768 549 556 538
Offices (worldwide) 50 55 49 49 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The following table sets forth certain operating data as a percentage of
consolidated revenues for the period indicated:
Year Ended December 31,
1999 1998 1997
Revenues 100.0% 100.0% 100.0%
Cost and expenses:
Direct costs 68.3 63.4 66.7
Selling, general, and administrative 24.5 21.3 21.0
Amortization of intangibles 1.2 0.7 0.1
Restructuring charges 1.2 -- --
Merger-related expenses -- 0.8 0.3
Income from operations 4.8 13.8 11.9
Other income (expense):
Interest income/(expense), net -- 0.9 0.4
Gain on sale of joint venture -- 0.8 --
Income before income taxes 4.8 15.5 12.3
Income taxes:
Current 3.0 7.7 5.6
Deferred (0.9) (0.7) (0.3)
Net income 2.7 8.5 7.0
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Revenues increased to $534.6 million in the year ended December 31, 1999 from
$514.9 million in the year ended December 31, 1998, an increase of $19.7
million, or 3.8%. E-Solutions Group revenues increased to $101.6 million in the
year ended December 31, 1999 from $55.2 million in the year ended December
31,1998, an increase of $46.4 million or 84.1%. IT Services revenues, including
Year 2000 revenues, decreased to $433.0 million in the year ended December 31,
1999 from $459.7 million in the year ended December 31, 1998, a decrease of
$26.7 million or 5.8%. Year 2000 services revenues decreased to $44.5 million in
the year ended December 31, 1999, from $136.0 million in the year ended December
31, 1998, a decrease of $91.5 million or 67.3%. The Company's Year 2000 business
accounted for approximately 8% of total revenues in the year ended December 31,
1999 versus approximately 26% of total revenues in 1998. As anticipated, the
decline in Year 2000 business is reflective of the completion of code
remediation assignments for major customers. IT Services revenues, excluding
Year 2000 services, increased to $388.5 million in the year ended December 31,
1999, from $323.7 million in the year ended December 31, 1998, an increase of
$64.8 million.
Direct Costs
Direct costs increased to $365.3 million in the year ended December 31, 1999
from $326.8 million in the year ended December 31, 1998. Gross margin decreased
to 31.7% in the year ended December 31, 1999 from 36.6% in the year ended
December 31, 1998. This decrease in gross margin was primarily due to a decrease
in the Company's higher margin Year 2000 business and significant investments in
the E-Solutions business during 1999. 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 IT Services versus E-solutions business
during the year.
Selling, General, and Administrative
Selling, general and administrative expenses (excluding amortization expense,
restructuring charges and merger-related expenses) increased to $131.1 million
in the year ended December 31, 1999 from $109.5 million in the year ended
December 31, 1998, an increase of $21.6 million or 19.7%. 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 administrative infrastructure of certain subsidiaries.
During 1998, the Company incurred merger-related expenses of approximately $4.3
million or 0.8% of revenues.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Amortization of Intangibles
Amortization of intangibles increased to $6.2 million in the year ended December
31, 1999 from $3.5 million in the year ended December 31, 1998, an increase of
$2.7 million or 77.1%. This increase in amortization of intangibles was
primarily due to the additional acquisitions of G. Triad Enterprises, Inc.,
Integrated Computer Management and Select Software Tools plc.
Restructuring Charges
During the third quarter of 1999, the Company recorded a restructuring charge of
approximately $6.4 million primarily related to the consolidating and closing of
certain facilities, generally used for Year 2000 and other legacy related
services, as well as attendant reduction of related staff levels. This provision
includes an accrued payment of approximately $4.0 million as of December 31,
1999 relating to future costs associated with continuing rent and severance
commitments.
Income from Operations
Income from operations, excluding restructuring charges in 1999 and
merger-related expenses in 1998, decreased to $32.0 million in the year ended
December 31, 1999 from $75.1 million in the year ended December 31, 1998, a
decrease of $43.1 million or 57.4%. Operating margins, excluding restructuring
charges in 1999 and merger- related expenses in 1998, decreased to 6.0% in the
year ended December 31, 1999 from 14.6% in the year ended December 31, 1998. The
decrease was primarily due to decreases in the Company's higher margin Year 2000
business and personnel investments in the E-Solutions business in 1999. 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/Expense
For the year ended December 31, 1999, other income decreased $8.7 million. This
reduction in other income was due to a decrease in the Company's cash position
during 1999, primarily as a result of several acquisitions and the stock
repurchase program. In addition, other income in 1998 included a gain on the
sale of the Company's Birla Horizons Joint Venture ($4.2 million or $0.06 per
share).
Provision for Income Taxes
The effective tax rate for Federal, state, and local income taxes was 43.0% and
45.2% in the years ended December 31,1999 and 1998, respectively. The decrease
in the 1999 effective tax rate was primarily due to less non-deductible
acquisition costs than in 1998.
Net Income
Net income decreased to $14.6 million in the year ended December 31, 1999 from
$43.6 million in the year ended December 31, 1998, a decrease of $29.0 million
or 66.5%. Net income per share (diluted) decreased to $0.46 in the year ended
December 31, 1999 from $1.35 in the year ended December 31, 1998. The effect of
restructuring charges amounted to $0.11 per share in 1999, with no effect in
1998.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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%. IT Services' revenues increased to $459.7 million in the year
ended December 31, 1998 from $334.7 million in the year ended December 31, 1997,
an increase of $125.0 million, or 37.3%. Year 2000 services, included in IT
Services revenues, totaled $136.0 million in the year ended December 31, 1998
and $72.1 million in the year ended December 31, 1997. The Company's Year 2000
business accounted for approximately 26.4% of total revenues in the year ended
December 31, 1998 versus approximately 21% of total revenues in 1997.
E-Solutions Group revenue increased to $55.2 million in the year ended December
31, 1998 from $15.6 million in the year ended December 31, 1997, an increase of
$39.6 million, or 253.8%.
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 IT Services versus E-Solutions business
during the year.
Selling, General, and Administrative
Selling, general and administrative expenses (excluding amortization of
intangibles and merger-related expenses) increased to $109.5 million in the year
ended December 31, 1998 from $73.6 million in the year ended December 31, 1997,
an increase of $35.9 million or 48.8%. 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 and amortization expense
of approximately $3.5 million or 0.7% of revenues, an increase from $0.6 million
or 0.2% of revenues in 1997.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Amortization of Intangibles
Amortization of intangibles increased to $3.5 million in the year ended December
31, 1998 from $0.6 million in the year ended December 31, 1997, an increase of
$2.9 million. This increase is primarily attributable to the acquisitions of
Enterprise Solutions Group, RPM Consulting and Infomatics Search Group.
Income from Operations
Income from operations, excluding merger-related expenses, increased to $75.1
million in the year ended December 31, 1998 from $42.6 million in the year ended
December 31, 1997, an increase of $32.5 million or 76.3%. Operating margins
increased to 14.6% in the year ended December 31, 1998 from 12.2% 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 ($0.06 per share), 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 78.0%. 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 $0.11 per share in 1998, compared to $0.03
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.
Liquidity and Capital Resources
Computer Horizons finances its operations primarily through cash generated from
operations, borrowings against bank lines of credit and the public sale of its
common stock. At December 31, 1999, the Company had $129.9 million in working
capital, of which $17.1 million was cash and cash equivalents. There was $15.0
million in borrowings outstanding against one of the Company's bank lines of
credit.
Net cash used in operating activities for the year ended December 31, 1999
totaled $19.5 million, primarily attributable to an increase in accounts
receivable. The significant increase in accounts receivable during 1999 was
primarily attributable to delays in billing to customers resulting from the
implementation of an enterprise-wide information system. Net cash provided by
operating activities was $15.8 million and $17.0 million, for the years ended
December 31, 1998 and 1997, respectively, consisting primarily of net income,
offset in part by an increase in accounts receivable.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net cash used in investing activities was $14.3 million, $55.6 million and $22.1
million in the years ended December 31, 1999, 1998, and 1997, respectively. Net
cash used in investing activities in 1999 consisted primarily of $14.0 million
used for the acquisitions of the assets of SELECT Software Tools plc, Integrated
Computer Management, G. Triad Enterprises, Inc., SPP and Unibase. Net cash used
in investing activities in 1998 consisted primarily of $50.4 million used for
the acquisitions of the assets of Enterprise Solutions Group, RPM Consulting,
and Infomatics Search Group. 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 acquisitions of the assets of
Millennium Computer Technology for approximately $5 million on December 31,
1997.
For the year ended December 31, 1999 net cash used in financing activites was
$2.1 million, primarily resulting from $15.0 million in borrowings against the
Company's bank lines of credit, partially offset by $12.8 million used to
repurchase the Company's stock. Net cash used in 1998 totaled $0.6 million and
resulted primarily from repayments of notes to banks, offset by cash received
from the exercise of stock options. Net cash provided by financing activities in
the year ended December 31, 1997, was $83.4 million, consisting of $83.7 million
in net proceeds from the Company's public offering of common stock.
At December 31, 1999, the Company had a current ratio position of 2.6 to 1,
long-term debt of $4.1 million and $15.0 million of outstanding borrowing under
its two unsecured discretionary lines of credit of $30.0 million and $10.0
million. The Company believes that its cash and cash equivalents, lines of
credit and internally generated funds will be sufficient to meet its working
capital needs through 2001.
The Company's billed accounts receivable were $128.2 million and $83.4 million
at December 31, 1999 and December 31, 1998, respectively. Billed days sales
outstanding were 84 days at December 31, 1999 and 57 days at December 31, 1998,
based on annual sales.
Year 2000
The Company utilizes a wide variety of complex information technologies to
conduct daily business operations. The Company examined all systems that could
be significantly affected by the Year 2000. Concurrently, a review was being
conducted to select a new accounting/information system to support the future
growth of the Company. As a result, the Company chose a new system that
addressed, among other areas, Year 2000 compliance. The new system was
implemented in late 1998. The total cost of the Year 2000 project was
approximately $10 million, of which approximately $9 million was capitalized.
The project was funded through operating cash flows. As of the date of this
filing, the Company has not experienced any material year 2000 problems or
disruptions from any internal systems or outside vendors.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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. Additionally, the Company
had $15 million in outstanding borrowings against a bank line of credit at
December 31, 1999, which has a floating LIBOR interest rate.
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 business 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 1999, 1998 or 1997.
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COMPUTER HORIZONS CORP.
December 31, 1999 and 1998
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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/GRANT THORNTON LLP
- ---------------------
GRANT THORNTON LLP
Edison, New Jersey
February 21, 2000 (except for Note 5, as to which the date is March 15, 2000)
Computer Horizons Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
---- ----
---------(in thousands)---------
Current assets:
Cash and cash equivalents (Note 1) $17,072 $ 51,796
Short-term investments (Note 1) -- 11,259
Accounts receivable (Note 3) 172,806 135,447
Deferred income tax benefit (Note 7) 8,945 4,987
Refundable income taxes 5,499 --
Other 4,459 2,049
-------- --------
Total current assets 208,781 205,538
-------- --------
Property and equipment:
Furniture, equipment and other 38,365 26,469
Less accumulated depreciation 18,144 11,141
------ --------
20,221 15,328
------ --------
Other assets - net:
Goodwill (Note 1) 94,349 66,315
Deferred income tax benefit (Note 7) 2,458 1,348
Purchased software (Note 1) 9,306 1,663
Other 12,879 5,860
------ ---------
118,992 75,186
------- --------
Total Assets $347,994 $296,052
======== =======
The accompanying notes are an integral part of these statements.
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
---- ----
---------(in thousands)---------
Current liabilities:
Current portion of long-term debt (Note 5) $19,502 --
Accrued payroll, payroll taxes and benefits 17,764 $ 24,262
Accounts payable 17,741 5,258
Income taxes payable -- 6,437
Restructuring reserve 4,003 --
Deferred revenue 9,576 6,719
Other accrued expenses 10,338 4,102
------ ----------
Total current liabilities 78,924 46,778
------ --------
Long-term debt 4,100 --
Other liabilities 2,318 2,740
----- ---------
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 33,149,595 shares and 32,351,580
shares at December 31, 1999 and 1998, respectively 3,315 3,235
Additional paid-in capital 138,821 128,821
Accumulated comprehensive income 385 (762)
Retained earnings 138,568 123,943
281,089 255,237
------- -------
Less shares held in treasury, at cost; 1,780,721 and 1,061,662
shares at December 31, 1999 and 1998, respectively (18,437) (8,703)
-------- ---------
Total shareholders' equity 262,652 246,534
------- -------
Total Liabilities and Shareholders' Equity $347,994 $296,052
======= =======
Computer Horizons Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------------------
1999 1998 1997
------(in thousands, except per share data)------
Revenues $ 534,594 $ 514,921 $ 350,310
------------ ------------ ------------
Costs and expenses:
Direct costs 365,310 326,795 233,574
Selling, general and administrative 131,087 109,505 73,563
Amortization of intangibles 6,202 3,530 602
Restructuring charges 6,355 -- --
Merger-related expenses -- 4,272 976
------------ ------------ ------------
508,954 444,102 308,715
------------ ------------ ------------
Income from operations 25,640 70,819 41,595
------------ ------------ ------------
Other income (expense):
Interest income 1,353 5,334 1,700
Interest expense (1,355) (750) (276)
Equity in net earnings/(loss) of
joint venture (Note 4) -- (90) 13
Gain on sale of joint venture (Note 4) -- 4,180 --
------------ ------------ ------------
(2) 8,674 1,437
------------ ------------ ------------
Income before income taxes 25,638 79,493 43,032
------------ ------------ ------------
Income taxes (Notes 1 and 7):
Current 16,081 39,645 19,448
Deferred (5,068) (3,739) (950)
------------ ------------ ------------
11,013 35,906 18,498
------------ ------------ ------------
Net Income $ 14,625 $ 43,587 $ 24,534
============ ============ ============
Earnings per share (Notes 1 and 8):
Basic $ 0.47 $ 1.41 $ 0.89
============ ============ ============
Diluted $ 0.46 $ 1.35 $ 0.85
============ ============ ============
Weighted average number of shares outstanding:
Basic 30,940,000 30,925,000 27,567,000
============ ============ ============
Diluted 31,647,000 32,230,000 28,999,000
============ ============ ============
The accompanying notes are an integral part of these statements.
Computer Horizons Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS'
EQUITY
Years ended December 31, 1999, 1998 and 1997
Addi- Accumulat-
Common stock tional ed other Treasury stock
-------------------- paid-in comprehen- Retained
Shares Amount capital sive income earnings Shares Amount Total
------ ------ ------- ----------- -------- ------ ------ -----
---------------------------------------(dollars in thousands)----------------------------------------
Balance, December 31 1996 19,510,314 1,951 30,773 290 55,381 1,786,883 14,648 $73,747
Net income for the year 24,534 24,534
Other comprehensive income
Foreign currency translation
adjustments (206) (206)
-------
Total comprehensive income 24,328
Three-for-two stock split
declared May 1997 8,861,715 886 (886)
Stock options exercised 375,040 38 1,759 (94,630) (776) 2,573
Tax benefits related to
stock option plans 2,610 2,610
Sale of common stock, net of
expenses 2,500,000 250 83,462 83,712
Dividends paid (Spargo) (996) (996)
---------- ----- ------- ---- ------- --------- ------- -------
Balance, December 31, 1997 31,247,069 $3,125 $117,718 $ 84 $ 78,919 1,692,253 $13,872 $185,974
---------- ----- ------- ---- ------- --------- ------- -------
Net income for the year 43,587 43,587
Other comprehensive income:
Foreign currency
translation
adjustments (846) (846)
-----
Total comprehensive income 42,741
Increase resulting from
immaterial pooling 954,213 95 170 2,607 2,872
Stock options exercised 2,265 (250) (399) (510,209) (4,182) 3,533
Tax benefits related to
stock option plans 2,998 2,998
Stock issuance costs (20) (20)
Issuance of common stock
for purchase of assets 148,033 15 8,205 (120,382) (987) 9,207
Dividends paid (Spargo) (771) (771)
---------- ----- ------- ---- ------- --------- ------- -------
Balance, December 31, 1998 32,351,580 $3,235 $128,821 $(762) $123,943 1,061,662 $8,703 $246,534
---------- ----- ------- ---- ------- --------- ------- -------
Net income for the year 14,625 14,625
Other comprehensive income:
Foreign currency
translation
adjustments 1,147 1,147
-----
Total comprehensive income 15,772
Stock options exercised (14) (230,684) (1,890) 1,876
Other issuance of common stock 32,816 3 3
Tax benefits related to
stock option plans 99 99
Stock warrants exercised (76) (9,250) (76) --
Issuance of common stock
for purchase of assets 765,199 77 9,840 (5,575) (48) 9,965
Employee Stock Purchase
Program 151 (122,432) (1,004) 1,155
Purchase of Treasury Shares 1,087,000 12,752 (12,752)
---------- ----- ------- ---- ------- --------- ------- -------
Balance, December 31, 1999 33,149,595 $3,315 $138,821 $385 $138,568 1,780,721 $18,437 $262,652
========== ===== ======= ==== ======= ========= ====== =======
The accompanying notes are an integral part of this statement.
Computer Horizons Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
-------------------(in thousands)-------------------
Cash flows from operating activities
Net income $ 14,625 $ 43,587 $ 24,534
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes (5,068) (3,665) (950)
Depreciation 5,463 3,218 1,857
Loss on disposal of fixed assets -- -- (26)
Gain on sale of joint venture -- (3,125)
Amortization of intangibles 6,202 4,145 602
Provision for bad debts 3,367 1,676 575
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (36,009) (43,085) (22,850)
Other current assets (2,036) (572) (108)
Other assets (5,898) (1,462) (64)
Refundable income taxes (5,499) -- --
Accrued payroll, payroll taxes and benefits (6,498) 5,784 4,887
Accounts payable 10,750 415 328
Income taxes payable (6,547) 4,544 5,187
Other accrued expenses 8,650 (1,529) 2,370
Other liabilities (1,030) 5,866 626
-------- -------- --------
Net cash (used in) provided by operating activities (19,528) 15,797 16,968
-------- -------- --------
Cash flows from investing activities
Purchases of furniture and equipment (7,924) (11,122) (2,480)
Acquisitions, net of cash (13,955) (51,948) (5,467)
Changes in goodwill (3,670) 262 --
Changes in other assets -- -- (968)
Proceeds from sale of joint venture -- 4,695 --
Purchases of short-term investments 11,259 2,556 (13,165)
-------- -------- --------
Net cash used in investing activities (14,290) (55,557) (22,080)
-------- -------- --------
Cash flows from financing activities
Notes payable - banks, net 7,502 (2,313) --
Long-term debt 100 (1,000) (1,903)
Dividends paid (Spargo) -- (771) (996)
Stock issuance cost -- (20) --
Stock options exercised 1,989 3,533 2,573
Purchase of treasury shares (12,752) -- --
Other stock issuances (11) -- --
Stock issued on employee stock option plan 1,155 -- --
Issuance of common stock for purchase of assets (36) -- --
Proceeds from issuance of stock -- -- 83,712
-------- -------- --------
Net cash (used in)/provided by financing activities (2,053) (571) 83,386
-------- -------- --------
Foreign currency gains/(losses) 1,147 41 (315)
Net (decrease)/increase in cash and cash equivalents (34,724) (40,290) 77,959
Cash and cash equivalents at beginning of year 51,796 92,086 14,127
-------- -------- --------
Cash and cash equivalents at end of year $ 17,072 $ 51,796 $ 92,086
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 811 $ 132 $ 249
Income taxes 28,025 35,111 13,694
Details of acquisition:
Fair value of assets $ 46,853 $ 70,590 $ 5,590
Liabilities 32,898 20,177 242
-------- -------- --------
Cash paid for acquisition $ 13,955 $ 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, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Computer Horizons Corp. is a strategic e-Business solutions and
professional services company. The Company enables its Global 1000 customer
base to realize competitive advantages through two major divisions, CHC
eB-Solutions and IT Services. Combined, Computer Horizons provides
enterprise application services, e-business solutions, customized Web
development and Web enablement of strategic applications, Customer
Relationship Management (CRM), network services, e-procurement solutions
for Human Resource acquisition and management (CHIMES), strategic
outsourcing and managed resourcing, as well as software and relational
database products.
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, 1999, 1998 and 1997
NOTE 1 (continued)
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid instruments with a maturity
of three months or less at the time of purchase and consist of the
following at December 31:
1999 1998
---- ----
-------(in thousands)-------
Cash $10,762 $ 7,170
Money market funds 4,830 24,689
Demand obligations 1,480 17,962
Commercial paper -- 1,975
-------- -------
$17,072 $51,796
====== ======
Short-term Investments
The Company considers investments with an original maturity of more than
three months, at the time of purchase, as short-term investments and
classifies them as held to maturity. At December 31, 1999, short-term
investments maturing within one year consist of commercial paper valued at
cost which approximates fair value.
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. In addition, as of December 31, 1999, the
Company had $15 million of debt outstanding with a floating Libor interest
rate. 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.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 1 (continued)
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 $42,000 US). There is no
depository insurance in the United Kingdom. At December 31, 1999, uninsured
amounts held by the Company at these financial institutions total
approximately $16,312,000.
The Company's customers are generally very large, Global 1000 companies in
many industries and with wide geographic dispersion. The Company's largest
customer accounts for approximately 7.9% of billed accounts receivable at
December 31, 1999. 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 7.4%, 8.8% and 11.2%,
respectively, of the Company's consolidated revenues in 1999, 1998 and
1997.
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
which range from three to seven years.
Goodwill and Purchased Software
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 $10,303,000 and
$6,301,000 at December 31, 1999 and 1998, respectively. Purchased software
is being amortized by the straight-line method, for a period of five years.
Accumulated amortization is $3,742,000 at December 31, 1999. On an ongoing
basis, management reviews the valuation and amortization of goodwill and
purchased software. As part of this review, the Company estimates the value
of future cash flows to determine that no impairment has occurred.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 1 (continued)
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 outside the
United States. As of December 31, 1999, there is no cumulative amount of
earnings on which United States income taxes have not been provided.
Earnings Per Share
Basic earnings 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.
Computer Horizons Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 1 (continued)
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.
NOTE 2 - ACQUISITIONS
1999
On October 18, 1999, the Company acquired G. Triad Enterprises,
Inc.("G.Triad"), a New Jersey based Internet / Intranet development firm,
for approximately $14.5 million in cash and stock. The acquisition was
accounted for as a purchase. The resulting goodwill of approximately $14
million is being amortized to operations over a 20-year period. Had the
acquisition of G. Triad occured on January 1, 1999, the effect on revenues
and net income would have been immaterial.
On May 6, 1999, the Company acquired all the common stock of Integrated
Computer Management ("ICM"), a New Jersey-based solutions company that
provides technology consulting, packaged software integration, customer
software development, systems integration and advanced learning solutions,
for stock, cash and promissory notes totaling approximately $17 million.
The acquisition was accounted for as a purchase. The resulting goodwill of
approximately $15 million is being amortized to operations over a 20-year
period. Had the acquisition of ICM occurred on January 1, 1999, the effect
on revenues and net income would have been immaterial.
Princeton
On June 1, 1999, Princeton Softech Inc. ("Princeton"), a wholly-owned
subsidiary of the Company, acquired the software products, intellectual
property rights and certain other assets of SELECT Software Tools plc
("Select"), a London-based software firm, for approximately $8 million cash
plus the assumption of certain liabilities such as severance, certain
payments due to a vendor under a contract that the Company expected to
derive no future benefit, and certain other assumed liabilities in
connection with its acquisition. These liabilities had the effect of
increasing the value of the intangible assets (purchased software) that
were acquired. The amount of such liabilities aggregated $3,100,000 of
which approximately $1,800,000 had been paid prior to December 31, 1999.
Substantially all of the accrued severance (which was for employees that
had been made redundant upon acquisition in the United Kingdom) had been
paid prior to December 31, 1999. The remaining accrued liabilities of
approximately $1,300,000 consist primarily of payments due pursuant to the
contract discussed above. The acquisition was accounted for as a purchase.
The cost of the purchased software and other intangibles approximates $12
million, and is being amortized to operations over a five-year period. Had
the acquisition of Select occurred on January 1, 1999, the effect on
revenues and net income would have been immaterial.
Computer Horizons Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 2 (continued)
On May 7, 1999, Princeton purchased the distribution rights in Australia
held by its former distributor, SPP. No tangible assets of SPP were
acquired. The aggregate cash purchase price was approximately $740,000 of
which approximately $672,000 was paid prior to year-end. The transaction
was accounted for using purchase accounting, and the aggregate cash
purchase price of $740,000 was allocated to distribution rights which is
being amortized to operations over a 48 month period. Had the acquisition
occurred on January 1, 1999, the effect on revenues and net income would
have been immaterial.
On April 14, 1999, Princeton purchased all of the capital stock of Unibase,
its French distributor. The aggregate cash purchase price was approximately
$1,424,000 including approximately $92,000 of fees and expenses relating to
such transaction. The transaction was accounted for using purchase
accounting. The excess of purchase price over tangible assets acquired of
approximately $1,090,000 was allocated to distribution rights which are
being amortized to operations over a 48 month period. Had the acquisition
of Unibase occurred on January 1, 1999, the effect on revenues and net
income would have been immaterial.
1998
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 Global 1000 companies. The acquisition was
accounted for as a purchase. The total adjusted purchase price was
approximately $8,883,000 in cash and common stock. Approximately $1,550,000
is to be paid out in two payments, approximately $1 million was paid in
January of 2000 and the remaining $550,000 owed in January of 2001 has been
accrued. 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 Maryland based provider of network consulting services,
specializing in architecting, designing and upgrading large enterprise
networks. The purchase agreement was for a combination of cash and common
stock totaling approximately $27,700,000, and two earnout payments
(totaling $2.2 million) based on pretax profit margins which were paid
during 1999. The acquisition was accounted for as a purchase. Had the
acquisition of which were paid off during 1999 RPM occurred on January 1,
1998, the effect on revenues and net income would have been immaterial.
On July 2, 1998, the Company's Canadian subsidiary 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 1999 and 2000. There was no earnout adjustment for 1998. Had the
acquisition of ISG occurred on January 1, 1998, the effect on revenues and
net income would have been immaterial.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 2 (continued)
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.
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.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
1999 1998
---- ----
--------(in thousands)-------
Billed $128,197 $ 83,394
Unbilled 50,428 55,262
------ --------
178,625 138,656
Less allowance for doubtful accounts 5,819 3,209
----- ---------
$172,806 $135,447
======= =======
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 Company's total investment in Birla Horizons International
("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 and $5,017,000 in 1998 and 1997,
respectively. Approximately $992,000 was included in accounts payable as of
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 $0.06
per share.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT
As of December 31, 1999, debt consisted of the following (in thousands):
1999
Line of Credit $15,000
Debt pertaining to acquisitions 8,000
Other 602
------
23,602
------
Less current maturities 19,502
------
Long-term debt due in 2001 $4,100
======
At December 31, 1999, the Company has two bank lines of credit in the
amounts of $30 million and $10 million expiring March 31, 2000 and May 31,
2000, respectively, of which $15 million was outstanding at December 31,
1999. On March 15, 2000 the $30 million bank line of credit was extended to
April 28, 2000. Under the first line of credit, the Company has a standby
letter of credit in the amount of $903,000. At December 31, 1999, the
unused lines of credit amounted to $24 million.
In addition to the above, the Company's subsidiary G. Triad also has a line
of credit in the amount of $50,000. This line is backed by G. Triad's
business assets approximating $1.7 million. As of December 31, 1999 there
was no outstanding balance due on the line of credit. ICM, another
subsidiary, has two letters of credit in the amounts of $149,609 and
$76,800. These letters expire on March 31, 2000 and September 30, 2000,
respectively. The $149,609 letter of credit was renewed for $101,414 and
will expire on March 31, 2001. There were no outstanding balances at
December 31, 1999.
The Company financed part of the acquisition of ICM by issuing ten
promissory notes totaling $8 million, bearing interest at 7%. Four million
of the notes come due on May 6, 2000 and the remainder are payable on May
6, 2001.
The Company also has a $320,000 Canadian (approximately $222,000 US) demand
loan outstanding with a Canadian bank as of December 31, 1999.
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.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 6 (continued)
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.
An amount equal to the $0.10 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, 1999. This
plan, which replaces the Company's 1985 Plan, will terminate on June 15,
2004. There were 3,400,000 and 4,789,000 shares available for option at
December 31, 1999 and 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 454,000 shares available for option at December 31, 1999.
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 and been 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, 1999, 1998 and 1997
NOTE 6 (continued)
1999 1998 1997
---- ---- ----
Net income As reported $ 14,625,000 $43,587,000 $24,534,000
Pro forma $ 12,721,000 $39,516,000 $21,623,000
Earnings per share
Basic As reported $0.47 $1.41 $0.89
Pro forma $0.41 $1.28 $0.78
Diluted As reported $0.46 $1.35 $0.85
Pro forma $0.40 $1.23 $0.75
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 1999, 1998 and 1997, respectively: expected
volatility of 77%, 127% and 61%; risk-free interest rates of 6.52%, 6.00%
and 5.47%; and expected lives of 5.0, 4.5 and 5.0 years.
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997, and changes during the years ending on those dates
is presented below:
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares price Shares price
---------------------- ------- -------- ----------------------
(000) (000) (000)
Outstanding - January 1 2,410 $13.94 2,035 $9.97 2,200 $ 7.03
Granted 1,571 11.75 1,634 26.39 333 23.39
Exercised (230) 5.97 (512) 6.88 (462) 5.37
Canceled/forfeited (151) 14.67 (747) 35.09 (36) 13.36
----- ----- ----- ----- ----- -------
Outstanding - December 31 3,600 13.46 2,410 13.94 2,035 9.97
===== ===== ====== ===== ===== =======
Options exercisable - December 31 1,547 13.61 1,003 10.84 833 7.10
===== ===== ===== ===== ===== =======
Weighted average fair value of
options granted during the $7.78 $ 13.03 $ 23.30
year
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 6 (continued)
The following information applies to options outstanding at December 31,
1999:
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 1999 life price 1999 price
------------------------ ----------- ----------- ----------- ----------- ---------
(000's) (000's)
$ 0.00 - $ 9.99 627 3.3 $ 4.45 562 $ 4.36
10.00 - 14.99 1,651 3.8 11.21 199 12.77
15.00 - 19.99 303 6.0 16.79 207 16.68
20.00 and over 1,019 3.8 21.49 579 21.75
----- ----- ------- ----- -----
3,600 3.9 13.46 1,547 13.61
===== ===== ======= ===== =====
Certain officers have the right to borrow from the Company against the
exercise price of options exercised. As of December 31, 1999, total
borrowings pertaining to one officer, amounted to $100,000.
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 either 1999 or 1998. Warrants for 8,625 shares were granted in 1997 .
The exercise price is the fair value at the date of grant. As of December
31, 1999, 9,250 warrants were exercised and 29,375 warrants were
outstanding.
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, 1999, 1998 and 1997
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 originally would
have expired on July 16, 1999, however, the Board of Directors approved the
adoption of a new Shareholder Rights Plan to replace the existing plan. The
terms of the new Rights Plan are substantially the same as the original
plan. The new rights will expire on July 15, 2009.
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 above referenced
repricing.
NOTE 7 - INCOME TAXES
The following is a geographical breakdown of the Company's income before
taxes:
Year ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
-------------------(in thousands)-------------------
Domestic $ 31,650 $ 72,714 $ 40,169
Foreign (6,012) 6,779 2,863
-------- -------- --------
$ 25,638 $ 79,493 $ 43,032
======== ======== ========
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 7 (continued)
The provision for income taxes consists of the following for the years
ended December 31:
1999 1998 1997
---- ---- ----
-------------(in thousands)-----------
Current
Federal $ 12,348 $ 28,539 $ 13,927
State 2,865 8,334 4,558
Foreign 868 2,772 963
-------- -------- --------
Total current 16,081 39,645 19,448
Deferred
Federal (2,403) (2,926) (703)
State (330) (794) (244)
Foreign (2,335) (19) (3)
-------- -------- --------
Total deferred (5,068) (3,739) (950)
-------- -------- --------
$ 11,013 $ 35,906 $ 18,498
======== ======== ========
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 7 (continued)
Deferred tax assets and liabilities consist of the following at December 31:
1999 1998
---- ----
-------(in thousands)----
Deferred tax liabilities
Depreciation and amortization $ (1,044) --
Capitalized Software development costs (241) $ (290)
Other -- (466)
-------- --------
Total deferred tax liabilities (1,285) (756)
-------- --------
Deferred tax assets
Accrued insurance 123 293
Foreign net operating losses 2,336 --
Accrued payroll and benefits 2,593 1,982
Deferred revenue 2,712 2,346
Allowance for doubtful accounts 1,968 1,059
Depreciation and amortization -- 715
Accrued severance and lease costs 2,052 --
Other 904 696
-------- --------
Total deferred tax assets 12,688 7,091
======== ========
Net deferred tax assets $ 11,403 $ 6,335
======== ========
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 7 (continued)
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, 1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
-----------(in thousands)--------
Statutory Federal income taxes $ 8,973 $ 27,822 $ 15,061
State and local income taxes, net of
Federal tax benefit 1,648 4,901 2,804
Foreign taxes provided at rates other than
the U.S. statutory rate 98 122 (37)
Amortization of goodwill 282 203 203
Equity in net earnings of joint venture -- 343
Merger-related expenses -- 1,673
Other, net 12 842 467
-------- -------- --------
$ 11,013 $ 35,906 $ 18,498
======== ======== ========
Certain foreign subsidiaries of the Company have net operating loss
carryforwards at December 31, 1999, totaling approximately $7,200,000,
$264,000 expires in 2005, $1,136,000 expires in 2006 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, 1999, 1998 and 1997
NOTE 8 - EARNINGS PER SHARE DISCLOSURES
For the year ended
-------------------------------------
Per
Income Shares share
(numerator) (denominator) amount
------------- --------------- ---------
--------(in 000's, except share and per share data)----
December 31, 1999
Net income $14,625
=======
Basic earnings per share
Income available to common stockholders $14,625 30,940,000 $0.47
====
Effect of diluted securities
Options 707,000
-------
Diluted earnings per share
Income available to common stock-
holders plus assumed conversions $14,625 31,647,000 $0.46
====== ========== ====
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
====== ========== ====
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 8 (continued)
The computation of diluted earnings per share excludes options with
exercise prices greater than the average market price. During 1999, there
were 1,322,000 excluded options outstanding at December 31, 1999 with
exercise prices of $15.53 to $28.13 per share. All options to purchase
shares of common stock were included in the computation of diluted earnings
per share in 1998. During 1997 options to purchase 8,713 shares of common
stock, ranging from $25.67 to $35.58, per share were outstanding 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.
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 changed its segment breakout and has identified two
segments: IT Services and the E-Solutions Group. The IT Services segment
consists largely of the professional services traditionally rendered by the
Company and primarily related to legacy and client server environments. IT
Services is primarily Staffing, Outsourcing and Y2K. The E-Solutions Group
consists of e-products, e-services and e-commerce components. Broadly
defined, revenue is derived from product sales and services that enable
customers to conduct business electronically. Operating income consists of
income before income taxes, excluding interest income, interest expense,
amortization of intangibles, restructuring charges, merger related
expenses, equity in earnings of joint venture and gain on sale of joint
venture , amounting to $12.6 million, $(1.0) million and $0.1 million in
1999, 1998 and 1997, respectively. Long-term assets includes goodwill,
property, plant and equipment and purchased software. 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.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 9 (continued)
BY LINE OF BUSINESS 1999 1998 1997
---- ---- ----
------------(in thousands)--------------
REVENUE
IT Services $ 433,044 $ 459,740 $ 334,729
E-Solutions Group 101,550 55,181 15,581
Corporate and other -- -- --
--------- --------- ---------
Total Revenue $ 534,594 $ 514,921 $ 350,310
========= ========= =========
OPERATING INCOME
IT Services 46,549 69,918 40,454
E-Solutions Group (8,352) 8,793 2,706
Corporate and other -- (90) 13
--------- --------- ---------
Total Operating Income $ 38,197 $ 78,621 $ 43,173
========= ========= =========
ASSETS
IT Services 183,694 151,111 92,528
E-Solutions Group 111,417 57,802 6,109
Corporate and other 52,883 87,139 118,988
--------- --------- ---------
Total Assets $ 347,994 $ 296,052 $ 217,625
========= ========= =========
DEPRECIATION EXPENSE
IT Services 1,094 810 935
E-Solutions Group 1,851 681 150
Corporate and other 2,518 1,727 772
--------- --------- ---------
Total Depreciation $ 5,463 $ 3,218 $ 1,857
========= ========= =========
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 9 (continued)
BY GEOGRAPHIC AREA 1999 1998 1997
---- ---- ----
--------------------(in thousands)--------------------
REVENUE
United States $480,131 $ 476,252 $ 334,334
Europe 26,134 23,651 15,581
Australia 757 -- --
Canada 27,572 15,018 395
------ ------------ -----------
Total Revenue $534,594 $ 514,921 $ 350,310
======= =========== =========
LONG-TERM ASSETS
United States 102,562 63,478 22,395
Europe 1,623 334 323
Australia 55 -- --
Canada 19,636 19,494 72
------ ------------ ------------
Total Long-Term Assets $123,876 $ 83,306 $ 22,790
======= ============ ==========
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
$1,440,000, $704,000 and $469,000 in 1999, 1998 and 1997, 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 $13.1 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 nil, $285,000 and $183,000 in 1999,
1998 and 1997, respectively.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 10 (continued)
During 1999 the Company adopted an Employee Stock Purchse Plan to provide
substantially all employees who have completed one year of service an
opportunity to purchase shares of its common stock through payroll
deductions, up to 10 percent of eligible compensation. Quarterly,
participant account balances are used to purchase shares of stock at 85
percent of its fair market value on either the first or the last trading
day of each calendar quarter. A total of 250,000 shares are available for
purchase under the plan. There were 122,432 shares purchased under the plan
in 1999.
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 have been included in accrued
payroll and amounted to $4.0 million and $2.8 million as of December 31,
1999, and 1998 respectively.
NOTE 11 - COMMITMENTS
Leases
The Company leases office space under long-term operating leases expiring
through 2006. As of December 31, 1999, approximate minimum rental
commitments were as follows:
Year ending (in thousands)
2000 $ 13,382
2001 12,848
2002 11,972
2003 10,394
2004 9,349
Thereafter 3,251
--------
$ 61,196
========
Office rentals are subject to escalations based on increases in real estate
taxes and operating expenses. Aggregate rent expense for operating leases
approximated $7,500,000, $5,136,000 and $3,721,000, in the years ended
December 31, 1999, 1998 and 1997, respectively.
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
For the years ended December 31, 1999 and 1998, selected quarterly
financial data is as follows:
Quarters
--------------------------------------------------------------------
First Second Third Fourth
------------- ------------- ------------- -----------
--------------(in thousands, except per share data)-----------------
1999
Revenues $ 138,141 $ 142,874 $ 135,061 $ 118,518
Direct costs 90,720 95,830 95,017 83,743
Selling, general and administrative 29,941 33,164 33,833 34,148
Amortization of intangibles 1,192 1,520 1,629 1,861
Restructuring charges -- -- 6,355 --
Income/(loss) from operations 16,288 12,360 (1,773) (1,234)
Interest income/(exp.) - net 266 124 (232) (161)
Income/(loss) before income taxes 16,554 12,484 (2,005) (1,395)
Income taxes (benefit) 7,035 5,243 (842) (423)
Net income/(loss) 9,519 7,241 (1,163) (972)
Earnings/(loss) per share:
Basic 0.30 0.24 (0.04) (0.03)
Diluted 0.30 0.23 (0.04) (0.03)
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 13 (continued)
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 24,199 25,751 28,075 31,480
Amortization of intangibles 240 493 1,052 1,745
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 loss 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
Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
NOTE 14 - Restructuring Charges
During the third quarter of 1999, the Company recorded a restructuring charge of
approximately $6.4 million primarily related to the consolidating and closing of
certain facilities, generally used for Year 2000 and other legacy related
services, as well as attendant reduction of related staff levels. This provision
includes an accrued payment of approximately $4.0 million relating to future
costs associated with continuing rent and severance commitments.
Remaining
Recorded Paid at Dec. 31, 1999
-------- ------- ----------------
SEVERANCE
US $ 1,172 ($1,021) $ 151
Europe 1,127 (775) 352
Canada 122 (89) 33
------- ------- -------
Total Severance $ 2,421 ($1,885) $ 536
======= ======= =======
LEASE OBLIGATIONS
US 3,564 (254) 3,310
Canada 101 (25) 76
------- ------- -------
Total Lease Obligations $ 3,665 ($ 279) $ 3,386
======= ======= =======
GENERAL OFFICE CLOSURE
Canada $ 269 $ (188) $ 81
------- ------- -------
TOTAL $ 6,355 ($2,352) $ 4,003
======= ======= =======
Computer Horizons Corp. and Subsidiaries
MARKET AND DIVIDEND INFORMATION
Years ended December 31, 1999 and 1998
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, 1999 and 1998 is as follows:
1999 1998
---------------------- ---------------------
High Low High Low
----- ----- ---- ----
Quarter
First $28.63 $10.63 $ 52.19 $ 39.50
Second 19.25 9.50 51.75 30.38
Third 14.25 10.88 43.75 23.38
Fourth 18.56 11.06 28.63 18.13
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. As of December 31, 1999, there were approximately 1,207
holders of record of common stock.