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