-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TqkCXsDdxpfEXuJZHVBhkGPM3btqzbVZAWlEO7EQZ2kgfbAHRzttZwO2TnUSAsQL uLW386f9Tn+XA12/0SypiQ== 0000912057-02-012617.txt : 20020415 0000912057-02-012617.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-012617 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER HORIZONS CORP CENTRAL INDEX KEY: 0000023019 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 132638902 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07282 FILM NUMBER: 02594126 BUSINESS ADDRESS: STREET 1: 49 OLD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 BUSINESS PHONE: 9732994000 MAIL ADDRESS: STREET 1: 49 0LD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 10-K 1 a2074673z10-k.txt FORM 10-K 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, 2001 / / 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 (Zip Code) executive offices) Registrant's telephone number, including area code: (973) 299-4000 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Par Value $.10 Per Share) -------------------------------------- (Title of class) Series A Preferred Stock Purchase Rights ---------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. { } The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 27, 2002, was approximately $125,795,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 27, 2002: 31,395,441 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, 2001, in Part II of this Report and (ii) Proxy Statement for the 2002 Annual Meeting of Shareholders, expected to be filed with the Securities and Exchange Commission on or before April 10, 2002, in Part III hereof. PART I Item 1. BUSINESS GENERAL The Company provides a wide range of information technology services and solutions to major corporations. Historically a professional services staffing firm, the Company has, over the past six years, developed the technological and managerial infrastructure to offer its clients value added services, e-business solutions, human resource e-procurement solutions, enterprise network management, software products, outsourcing, customer relationship management and knowledge transfer. The Company markets solutions to both existing and potential clients with the objective of becoming a preferred provider of comprehensive information technology services and solutions for such clients. The Company believes that the range of services and solutions that it offers, combined with its worldwide network of 52 offices and subsidiary organizations, provides it with significant competitive advantages in the information technology marketplace. The Company's clients primarily are Global 1000 companies with significant information technology budgets and recurring staffing or software development needs. In 2001, the Company provided information technology services to 879 clients. During 2001, the Company's largest client accounted for 5.0% of the Company's consolidated 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 -1- include (1) professional services staffing, (2) e-Business Solutions, including (2a) CHIMES, (2b) outsourcing, (2c) knowledge transfer, (2d) software products and (2e) enterprise network management. (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 a just-in-time solution to supply their staffing needs from among the Company's over 2,000 software professionals. Customers are serviced through the Company's branch network of offices in the United States and Canada. (2) e-BUSINESS SOLUTIONS: CHC Solutions Group is a leader in a new breed of end-to-end eSolutions providers, enabling legacy corporations and others to build business-critical and highly scalable solutions. The Company offers a comprehensive list of integrated solutions. CHC Solutions' offerings include: e-Business Strategy and Assessment, Web Architecture Design and Integration, Application Development, Customer Relationship Management (CRM), Project Management, Outsourcing and Networking Services. The Solutions Group provides comprehensive web application development and Internet-working solutions, as well as network engineering and server management. The Solutions Group development practice specializes in information design, data driven web site development, systems integration, project management and web hosting services. (2a) CHIMES: Chimes, Inc. ("Chimes"), a wholly owned subsidiary of the Company, is a leading provider of e-Procurement Solutions for Human Capital Acquisition and Management. Chimes' Centralized Vendor Management (CVM) offering procures the top professionals on demand by utilizing proven supply chain management techniques. CVM manages the entire process, simplifying billing and timesheet administration and coordinating the activities of all the customer's vendors. Chimes uses scalable procedures -2- and browser based software to provide customers access to the best workers, in a shorter period of time. This is accomplished while cost is controlled through competitive "e-market effect pricing." (2b) 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. (2c) KNOWLEDGE TRANSFER: The Company's Education Division offers custom-designed and/or existing training programs to enhance the competencies of client staff in specific technologies, languages, methodologies and applications. The prevailing focus of the Company is to assist clients through instructor-led, on-site training and consulting in the transitioning IT organization of Fortune 1000 corporations nationwide. To support these changing technologies, the Company has developed extensive curriculum offerings in Web technologies, Relational Databases, Programming Languages, Reporting Tools, Process Improvement, UNIX, Client/Server and Mainframe technologies. (2d) SOFTWARE PRODUCTS: Princeton Softech, Inc. ("Princeton"), a wholly-owned subsidiary of the Company, is a software products company that delivers leveraging technologies for enterprise-scale solutions. Princeton's patented Relationship Engine technology enables companies with large databases and large amounts of data to manage their mission critical applications through database's relational integrity in its business context. As of December 31, -3- 2001, this subsidiary is an asset held for sale. On March 25, 2002, the net assets of Princeton Softech, Inc. were sold for a cash payment of approximately $16 million. (2e) ENTERPRISE NETWORK MANAGEMENT: eB Networks, Inc., a formally wholly-owned subsidiary of the Company, specializes in building and implementing strategic network infrastructure to assist companies in achieving e Business objectives. eB Networks' service offerings include infrastructure architecture, enterprise management, security, operating systems integration and high availability internet. On September 10, 2001, the Company sold the assets of eB Networks, with the exception of its HIPAA practice which was retained by the Company. PERSONNEL As of December 3l, 2001, the Company had a staff of 3,313, of whom more than 2,500 were IT professionals. The Company devotes significant resources to recruitment of qualified professionals and provides continuing in-house training and education, and a career path management development program within the Company. COMPETITION The Company competes in the commercial information technology services market which is highly competitive and served by numerous firms, many of which serve only their respective local markets. The market includes participants in a variety of market segments, including systems consulting and integration firms, professional services companies, application software firms, temporary employment agencies, the professional service groups of computer equipment companies, facilities management and management information systems ("MIS") outsourcing companies, certain "Big Five" accounting firms, and general management consulting firms. The Company's competitors also include companies such as Accenture (formerly Andersen Consulting), Technology Solutions Corporation, Cap Gemini America, Business System Group, the consulting division of Computer Sciences -4- Corporation, Analysts International Corp., CIBER, Inc., Computer Task Group Inc., Keane Inc., i GATE CORP and Covansys Corp. 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. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, the Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document filed by the Company at the SEC's public reference room in Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C. 20549, or in the public reference rooms located in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The Company's SEC filings are also available to the public from the SEC's website at http://www.sec.gov. -5- Item 2. PROPERTIES The Company's Corporate and Financial Headquarters, as well as its Eastern Regional Office, comprising approximately 63,000 square feet, are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey. The Mountain Lakes lease is for a term expiring December 31, 2002, at a current annual rental of approximately $1,400,000. As of December 3l, 2001, the Company also maintained facilities in Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Washington and Washington D.C. as well as international operations located in Europe and Canada, with an aggregate of approximately 341,000 square feet. The leases for these facilities are at a current annual aggregate rental of approximately $6,597,000. These leases expire at various times with no lease commitment longer than December 31, 2007. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -6- EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the executive officers of the Company, who are elected to serve until the next annual meeting of the Board of Directors and until their successors are elected and qualify. All the positions listed are or were held by such officers with the Company.
PERIOD NAME AGE TITLE POSITION HELD - ---- --- ----- ------------- John J. Cassese 57 Chairman of the Board 1982 - Present and President Director 1969 - Present William J. Murphy 57 Executive Vice President 1997 - Present and CFO Director 1999 - Present Michael J. Shea 41 Controller 1995-Present Vice President 1996-Present
-7- 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, 2001, 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, 2001, 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, 2001, 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, 2001, which material is incorporated by reference in this Form 10-K Annual Report. -8- 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, 2001, 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. -9- 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 2002 Annual Meeting of Shareholders which is expected to be filed with the Securities and Exchange Commission on or before April 10, 2002 (the "2002 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 2002 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 2002 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None -10- 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 2001 Annual Report to Shareholders, are incorporated herein by reference. -Report of independent certified public accountants on the consolidated financial statements -Consolidated balance sheets as of December 3l, 2001 and 2000 -Consolidated statements of operations for each of the three years in the period ended December 31, 2001 -Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 2001 -Consolidated statements of cash flows for each of the three years in the period ended December 31, 2001 -Notes to consolidated financial statements 2. Schedule II - Valuation and qualifying accounts for the years ended December 31, 2001, 2000 and 1999. 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. -11- 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 29, 2002 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 29, 2002 By: /s/ John J. Cassese ------------------- John J. Cassese, Chairman of the Board and President (Principal Executive Officer) and Director Date: March 29, 2002 By: /s/ William J. Murphy --------------------- William J. Murphy, Executive Vice President and CFO (Principal Financial Officer) and Director Date: March 29, 2002 By: /s/ Michael J. Shea ------------------- Michael J. Shea Vice President and Controller (Principal Accounting Officer) Date: March 29, 2002 By: /s/ Thomas J. Berry -------------------- Thomas J. Berry, Director Date: March 29, 2002 By: /s/ William M. Duncan --------------------- William M. Duncan, Director Date: March 29, 2002 By: /s/ Rocco J. Marano ------------------- Rocco J. Marano, Director Date: March 29, 2002 By: /s/ William J. Marino --------------------- William J. Marino, Director Date: March 29, 2002 By: /s/ Earl Mason -------------- Earl Mason, Director -12- EXHIBIT INDEX
Exhibit Description Incorporated by Reference to 3(a-1) Certificate of Incorporation as Exhibit 3(a) to Registration amended through 1971. Statement on Form S-1 (File No. 2-42259). 3(a-2) Certificate of Amendment dated Exhibit 3(a-2) to Form 10K May 16, 1983 to Certificate of for the fiscal year ended Incorporation. February 28, 1983. 3(a-3) Certificate of Amendment dated Exhibit 3(a-3) to Form 10K June 15, 1988 to Certificate of for the fiscal year ended Incorporation. December 31, 1988. 3(a-4) Certificate of Amendment dated Exhibit 3(a-4) to Form 10K July 6, 1989 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-5) Certificate of Amendment dated Exhibit 3(a-5) to Form 10K February 14, 1990 to Certificate of for the fiscal year ended Incorporation. December 31, 1989. 3(a-6) Certificate of Amendment dated Exhibit 3(a-6) to Form 10K May 1, 1991 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-7) Certificate of Amendment dated Exhibit 3(a-7) to Form 10K July 12, 1994 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(b) Bylaws, as amended and Exhibit 3(b) to Form 10K for presently in effect. the year ended December 31, 1988. 4(a) Rights Agreement dated as of Exhibit 1 to Registration July 6, 1989 between the Statement on Form 8-A dated Company and Chemical Bank, as July 7, 1989. Rights Agent ("Rights Agreement") which includes the form of Rights Certificate as Exhibit B. 4(b) Amendment No. 1 dated as of Exhibit 1 to Amendment No. February 13, 1990 to Rights 1 on Form 8 dated February Agreement. 13, 1990 to Registration Statement on Form 8-A.
-13- 4(c) Amendment No. 2 dated as of Exhibit 4(c) to Form 10K August 10, 1994 to Rights for the fiscal year ended Agreement. December 31, 1994. 4(d) Employee's Savings Plan and Exhibit 4.4 to Registration Amendment Number One. Statement on Form S-8 dated December 5, 1995. 4(e) Employee's Savings Plan Trust Exhibit 4.5 to Registration Agreement as Amended and Statement on Form S-3 dated Restated Effective January 1, December 5, 1995. 1996. 4(f) Amendment No. 3 dated as of Exhibit 4.1 to Form 8-K July 13, 1999 to Rights dated July 13, 1999. Agreement. 10(a) Employment Agreement dated as Exhibit 10(a) to Form 10K for of February 16, 1990 between the the year ended December 31, Company and John J. Cassese. 1989. 10(b) Employment Agreement dated as Exhibit 10(g) to Form S-3 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 Exhibit 10(g) to Form 10-K Plan, as amended. for the year ended December 31, 1994. 10(e) 1994 Incentive Stock Option and Exhibit 10(h) to Form 10K Appreciation Plan. for the fiscal year ended December 31, 1994. 10(f) $15,000,000 Discretionary Line of Exhibit 10(h) to Form S-3 Credit payable to Chase Manhattan dated August 14, 1997. Bank dated as of June 30, 1998. 10(g) $10,000,000 Discretionary Line Exhibit 10(h) to Form 10K of Credit from PNC Bank dated for the fiscal year ended as of June 5, 1998. December 31, 1996. 10(h) 1999 Employee Stock Purchase Plan. Exhibit 99.1 to Form S8 dated March 17, 1999.
-14- 10(i) Amendment to the employment agreement Exhibit 10(i) to Form 10K dated as of March 24, 2000 between the for the fiscal year ended Company and William J. Murphy. December 31, 1999. 10(j) $15,000,000 Discretionary Line of Exhibit 10(j) to Form 10K Credit payable to Chase Manhattan for the fiscal year ended Bank dated as of June 30, 1998, as December 31, 1999. amended on March 15, 2000 (increased to $30,000,000). 10(k) $20,000,000 Discretionary Line of Credit Exhibit 10(k) to Form 10K payable to Chase Manhattan Bank for the fiscal year ended dated as of March 20, 2001. December 31, 2000. 10 (l) $40,000,000 Asset-Based Lending Agreement payable to CIT dated as of July 31, 2001. 13 Annual Report to Security Holders. 21 List of Subsidiaries. 23 Consent of Grant Thornton LLP, Independent Public Accountants.
-15- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS ON SCHEDULE II Board of Directors and Shareholders Computer Horizons Corp. In connection with our audit of the consolidated financial statements of Computer Horizons Corp. and Subsidiaries referred to in our report dated February 26, 2002, which is included in the 2001 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, 2001, 2000 and 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP - ---------------------- Grant Thornton LLP Edison, New Jersey February 26, 2002 -16- Computer Horizons Corp. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 2001, 2000 and 1999
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at beginning Charged to cost Deductions - Balance at end Description of period and expenses describe of period ----------- -------------------- ----------------- ----------------- ----------------- Year ended December 31, 2001 Allowance for doubtful accounts $ 2,702,000 $ 3,397,000 $ (1,443,000) (1) $ 7,542,000 -------------------- ----------------- ----------------- ----------------- Deferred tax asset valuation $ 2,727,000 $ 613,000 $ - $ 3,340,000 -------------------- ----------------- ----------------- ----------------- 2000 Restructure Reserve $ 2,620,000 $ 5,883,000 $ 7,039,000 (2) $ 1,464,000 -------------------- ----------------- ----------------- ----------------- 1999 Restructure Reserve $ 385,000 $ 638,000 $ 397,000 $ 626,000 -------------------- ----------------- ----------------- ----------------- Year ended December 31, 2000 Allowance for doubtful accounts $ 5,819,000 $ 26,452,000 $ 29,569,000 (1) $ 2,702,000 -------------------- ----------------- ----------------- ----------------- Deferred tax asset valuation $ - $ 2,727,000 $ - $ 2,727,000 -------------------- ----------------- ----------------- ----------------- 2000 Restructure Reserve $ - $ 43,904,000 $ 41,284,000 $ 2,620,000 -------------------- ----------------- ----------------- ----------------- 1999 Restructure Reserve $ 4,003,000 $ 1,242,000 $ (2,376,000) (3) $ 385,000 -------------------- ----------------- ----------------- ----------------- Year ended December 31, 1999 Allowance for doubtful accounts $ 3,209,000 $ 3,367,000 $ 757,000 (1) $ 5,819,000 -------------------- ----------------- ----------------- ----------------- 1999 Restructure Reserve $ - $ 6,355,000 $ 2,352,000 $ 4,003,000 -------------------- ----------------- ----------------- -----------------
Notes (1) Uncollectible accounts written off, net of recoveries. (2) Includes write-down of assets held for sale and write-off of ceased operations. (3) Credit recorded resulting from earlier than expected subleasing of properties. Computer Horizons Corp. and Subsidiaries SELECTED FINANCIAL DATA Year ended December 31,
2001 2000 1999 1998 1997 ----------- ------------ ------------ ------------ ------------ -------------(dollar amounts in thousands, except per share data)----------- Revenues $ 400,784 $ 445,479 $ 534,594 $ 514,921 $ 350,310 Costs and expenses: Direct costs 281,576 312,815 365,310 326,795 233,574 Selling, general and administrative 125,435 143,691 127,720 107,829 72,988 Bad debt expense 3,397 26,452 3,367 1,676 575 Amortization of intangibles 2,695 7,434 6,202 3,530 602 Restructuring charges 6,521 41,528 6,355 -- -- Merger-related expenses -- -- -- 4,272 976 Income/(loss) from operations (18,840) (86,441) 25,640 70,819 41,595 Other income / (expense): Loss on sale of assets (3,197) -- -- -- -- Net gain on investments 90 -- -- -- -- Interest income 2,293 620 1,353 5,334 1,700 Interest expense (1,944) (1,825) (1,355) (750) (276) Equity in net earnings of joint venture -- -- -- (90) 13 Gain on sale of joint venture -- -- -- 4,180 -- Income / (loss) before income taxes (21,598) (87,646) 25,638 79,493 43,032 Income taxes / (benefit) (7,148) (29,819) 11,013 35,906 18,498 ----------- ------------ ------------ ------------ ------------ Net income / (loss) $ (14,450) $ (57,827) $ 14,625 $ 43,587 $ 24,534 ============ ============ ============ ============ ============ Earnings / (loss) per share: Basic $ (0.45) $ (1.83) $ 0.47 $ 1.41 $ 0.89 ============ ============ ============ ============ ============ Diluted $ (0.45) $ (1.83) $ 0.46 $ 1.35 $ 0.85 ============ ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 31,911,000 31,656,000 30,940,000 30,925,000 27,567,000 ============ ============ ============ ============ ============ Diluted 31,911,000 31,656,000 31,647,000 32,230,000 28,999,000 ============ ============ ============ ============ ============
1 Computer Horizons Corp. and Subsidiaries SELECTED FINANCIAL DATA (CONTINUED) Year ended December 31,
2001 2000 1999 1998 1997 ---------- ----------- ---------- ---------- ---------- --------------(in thousands, except per share data)------------ Analysis (%) Revenues 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin 29.7 29.8 31.7 36.6 33.3 Selling, general and administrative 31.3 32.3 23.9 20.9 20.8 Bad debt expense 0.8 5.9 0.6 0.3 0.2 Amortization of intangibles 0.7 1.7 1.2 0.7 0.1 Restructuring charges 1.6 9.3 1.2 -- -- Merger-related expenses -- -- -- 0.8 0.3 Income / (loss) from operations (4.7) (19.4) 4.8 13.8 11.9 Loss on sale of assets (0.8) -- -- -- -- Interest income / (expense) - net 0.1 (0.3) -- 0.9 0.4 Gain on sale of joint venture -- -- -- 0.8 -- Income / (loss) before income taxes (5.4) (19.7) 4.8 15.5 12.3 Income taxes / (benefit) (1.8) (6.7) 2.1 7.0 5.3 Net income / (loss) (3.6) (13.0) 2.7 8.5 7.0 Revenue growth / (decline) YOY (10.0) (16.7) 3.8 47.0 34.0 Net income growth / (decline)YOY 75.0 (495.4) (66.4) 77.7 87.6 Return on equity, average (7.3) (24.6) 5.7 20.2 18.9 Effective tax rate 33.1 34.0 43.0 45.2 43.0 At year-end Total assets $ 237,721 $ 269,396 $ 347,994 $ 296,052 $ 217,625 Working capital 115,747 134,472 129,857 158,760 160,370 Long-term debt -- -- 4,100 -- -- Shareholders' equity 189,855 207,924 262,652 246,534 185,974 Stock price $ 3.21 $ 2.44 $ 16.19 $ 26.63 $ 45.50 P/E multiple N/A N/A 34 19 51 Employees 3,313 4,186 4,149 4,834 3,794 Clients (during year) 879 800 785 768 549 Offices (worldwide) 52 43 50 55 49
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of consolidated revenues for the period indicated:
Year Ended December 31, 2001 2000 1999 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost and expenses: Direct costs 70.3 70.2 68.3 Selling, general, and administrative 31.3 32.3 23.9 Bad debt expense 0.8 5.9 0.6 Amortization of intangibles 0.7 1.7 1.2 Restructuring charges 1.6 9.3 1.2 Income / (loss) from operations (4.7) (19.4) 4.8 Other income / (expense): Loss on sale of assets (0.8) -- -- Interest income / (expense), net 0.1 (0.3) -- Income / (loss) before income taxes (5.4) (19.7) 4.8 Income taxes / (benefit): Current (2.6) (4.3) 3.0 Deferred 0.8 (2.4) (0.9) Net income/(loss) (3.6) (13.0) 2.7
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUE GENERATING ACTIVITIES AND CRITICAL ACCOUNTING POLICIES REVENUE GENERATING ACTIVITIES The majority of the Company's revenues are derived from professional services rendered in the information technology sector. The Company also owns a stand-alone software products company, Princeton Softech Inc. ("Princeton"), which accounted for less than 10% of consolidated revenues in 2001 and as of December 31, 2001 is the only remaining asset held for sale from the restructuring plan announced at the end of 2000. On March 25, 2002, the net assets of Princeton Softech, Inc. were sold for a cash payment of approximately $16 million. The Company operates its business in two basic segments, IT Services and the Solutions Group. The distinctions between the two segments primarily relate to the management and supervision of services performed and related gross margins. The IT Services business consists of providing technology consultants to large organizations on a temporary hire basis. The consultant work is supervised and managed by the customer. For the most recent year 2001, this segment represented approximately 68.5% of total revenues. The IT Services business tends to be a lower risk, lower gross margin business with very competitive pricing. The Solutions Group tends to be a higher margin, higher risk business, due to the fact that the Company is responsible for project deliverables and other conditions contained in statements of work and/or contracts with customers. Virtually all projects performed by the Solutions Group are IT related and consist of practices such as application development, outsourcing arrangements, government services, Health Insurance Portability and Accountability Act, ("HIPAA") services, technology training and managed services. Our Chimes subsidiary is currently part of the Solutions Group. Chimes is a human capital management solution that, through the use of proprietary software and processes, manages the temporary workforce of large organizations. During 2001, Chimes accounted for less than 3% of total revenues. It is the Company's expectation that Chimes will continue to grow and become a separate business segment for financial reporting purposes. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION The most critical accounting policies used in the preparation of the Company's financial statements are related to revenue recognition and the evaluation of long-lived assets for impairment. The revenue for the IT Services Group is recognized as services are rendered. Hourly or daily rates are determined in advance and agreed to with the customer. Time worked is documented in various forms using the applicable timekeeping process (i.e. the client's or the Company's timekeeping systems). Revenues in the Solutions Group are also recognized as services are performed, however, adjustments are sometimes needed to reflect progress against milestones or deliverables. On fixed fee engagements, revenue and gross profit adjustments are made to reflect revisions in estimated costs and contract values. It is estimated that approximately 5% of total revenue is generated under fixed fee contracts. The Company's Chimes subsidiary recognizes revenue on a net transaction fee basis. Chimes recognizes only their fee for the service, not the aggregate billing to the customer. The Chimes solution aggregates the temporary workforce supply chain to the customer and renders one invoice to the customer. Chimes is paid for this service by the supply chain in the form of a fee. The gross amount of the customer invoicing is not considered revenue to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the supply chain until paid by the customer. Princeton recognizes revenue in accordance with AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," and AICPA Statement of Position 98-9 ("SOP 98-9"). Under SOP 97-2, the Company recognizes software license revenue when a noncancelable license agreement has been executed, fees are fixed and determinable, the software has been delivered, and collection is considered probable. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Up to and including the year ended December 31, 2001, the Company evaluated its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such an asset was considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the asset exceeded the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During 2001, all assets declared for sale were disposed of except for Princeton, which was sold on March 25, 2002. At the end of 2000, the Company made certain strategic decisions to realign businesses and declared certain assets for sale or disposition. These decisions resulted in the application of the above mentioned policy and the recording of $40.3 million of non-cash charges in 2000 for related write-offs. New accounting rules relating to goodwill and other intangibles are to take effect in 2002 together with new procedures to evaluate the carrying value of these assets. It is possible that the adoption of these new rules in 2002 could result in a transitional charge relating to the write-down of goodwill. If this were to occur, the charge would be reported as a change in accounting principle in the Company's income statement when adopted. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUES Revenues decreased to $400.8 million in the year ended December 31, 2001 from $445.5 million in the year ended December 31, 2000, a decrease of $44.7 million, or 10.0%. Solutions Group revenues, including business units held for sale decreased to $126.4 million in the year ended December 31, 2001 from $141.8 million in the year ended December 31, 2000, a decrease of $15.4 million or 10.9%. The decrease in Solutions Group revenue is primarily attributable to the decline experienced by the business units held for sale. Solutions Group revenue, excluding the operations of units held for sale increased to $85.9 million in the year ended December 31, 2001 from $60.0 million in the year ended December 31, 2000, an increase of $25.9 million or 43.2%. IT Services revenues decreased to $274.4 million in the year ended December 31, 2001 from $303.7 million in the year ended December 31, 2000, a decrease of $29.3 million or 9.6%. The decrease in IT Services revenue of $29.3 million is the result of continued decreases in the demand for temporary technology workers, the impact of pricing decreases by customers and the lagging economy. The Company does not anticipate any growth during 2002 in IT Services from the year-end 2001 headcount levels unless the economy recovers and IT spending increases. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DIRECT COSTS Direct costs decreased to $281.6 million in the year ended December 31, 2001 from $312.8 million in the year ended December 31, 2000. Gross margin remained essentially flat at 29.7% in the year ended December 31, 2001 from 29.8% in the year ended December 31, 2000. The Company's margins are subject to fluctuation due to a number of factors, including the level of salary and other compensation necessary to attract and retain qualified technical personnel. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general and administrative expenses (excluding bad debt expense, amortization expense and restructuring charges) decreased to $125.4 million in the year ended December 31, 2001 from $143.7 million in the year ended December 31, 2000, a decrease of $18.3 million or 12.7%. The decrease in selling, general and administrative expenses was primarily attributable to cost reductions in the IT Services group and Corporate, offset by increases in the Solutions group as the Company continues to invest in its Chimes subsidiary. BAD DEBT EXPENSE Bad debt expense decreased to $3.4 million in the year ended December 31, 2001 from $26.5 million in the year ended December 31, 2000, a decrease of $23.1 million. The 2000 bad debt expense includes a charge of $21.6 million in the fourth quarter of 2000 as a direct result of problems created in late 1998 and early 1999 relating to the flawed implementation of an enterprise-wide information system. The system was stabilized in the latter part of 1999 and much of 2000 was spent attempting to reconcile and settle outstanding balances with customers. However, it was deemed necessary in the fourth quarter of 2000 to make major concessions with customers for old balances in order to avoid potentially damaging conflicts. AMORTIZATION OF INTANGIBLES Amortization of intangibles decreased to $2.7 million in the year ended December 31, 2001 from $7.4 million in the year ended December 31, 2000, a decrease of $4.7 million or 63.5%. This decrease in amortization expense was due to the reduction of intangibles related to the assets held for sale. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTRUCTURING CHARGES / (CREDITS) During the fourth quarter of 2001, the Company recorded a restructuring charge adjustment of $1.0 million primarily due to the termination, by the sublessee, of the sublease contracts for closed offices included in the 1999 restructure charge. Since the sublessee defaulted on the rent payments, it was necessary to restore the Company's liability for the remaining lease obligations. In the second quarter of 2001, the Company recorded $5.5 million in restructuring expense to reduce the carrying amount of eB Networks to the estimated net realizable value. During the fourth quarter of 2000, the Company recorded a restructuring charge of $43.9 million related to the closing of seven offices, the size reduction of other IT Services offices, a non-cash write down of assets held for sale of $26.2 million for eB Networks and $6.9 million for Select Software, along with $7.2 million for ceased operations. During the second quarter of 2000, the Company recorded a restructuring credit of $2.4 million. This credit resulted primarily from the earlier than expected subleasing of discontinued properties that were part of the third quarter 1999 restructuring charge. INCOME / (LOSS) FROM OPERATIONS Income / (loss) from operations, excluding restructuring charges and bad debt expense, improved to a loss of $8.9 million in the year ended December 31, 2001 from a loss of $18.5 million in the year ended December 31, 2000, an improvement of $9.6 million or 51.9%. Operating margins, excluding restructuring charges and bad debt expense, improved to a loss of 2.2% in the year ended December 31, 2001 from a loss of 4.1% in the year ended December 31, 2000. The improvement was primarily due to decreased SG&A expenses. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. OTHER INCOME / EXPENSE For the year ended December 31, 2001, other expense increased to $2.8 million. This increase in other expenses was primarily due to the loss on sale of assets, partially offset by higher interest income on investments and a stock distribution received on the demutualization of the Company's previous group health insurance provider of $1.5 million. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROVISION FOR INCOME TAXES The effective tax rate for Federal, state, and local income taxes was 33.1% and 34.0% in the years ended December 31, 2001 and 2000, respectively. NET INCOME / (LOSS) Net income / (loss) improved to a loss of $14.5 million in the year ended December 31, 2001 from net loss of $57.8 million in the year ended December 31, 2000, an improvement of $43.3 million or 74.9%. Net loss per share (diluted) improved to $0.45 in the year ended December 31, 2001 from net loss per share (diluted) of $1.83 in the year ended December 31, 2000. The effect of restructuring charges and the operations of the assets held for sale amounted to $0.34 loss per share, net of taxes, in 2001. The effect of the bad debt special charge, restructuring charges and operations of assets held for sale amounted to $1.62 loss per share, net of taxes, in 2000. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 REVENUES Revenues decreased to $445.5 million in the year ended December 31, 2000 from $534.6 million in the year ended December 31, 1999, a decrease of $89.1 million, or 16.7%. Solutions Group revenues increased to $141.8 million in the year ended December 31, 2000 from $104.8 million in the year ended December 31,1999, an increase of $37.0 million or 35.3%. IT Services revenues, including Year 2000 revenues, decreased to $303.7 million in the year ended December 31, 2000 from $429.8 million in the year ended December 31, 1999, a decrease of $126.1 million or 29.3%. Year 2000 services revenues accounted for $44.3 million of the decline. As anticipated, the decline in Year 2000 business was reflective of the completion of code remediation assignments for major customers. The remaining decrease in IT Services revenue of $81.8 million was primarily attributed to softness in the IT Staffing business. This softness is the result of spending shifts of customers from legacy environments to e-business initiatives. DIRECT COSTS Direct costs decreased to $312.8 million in the year ended December 31, 2000 from $365.3 million in the year ended December 31, 1999. Gross margin decreased to 29.8% in the year ended December 31, 2000 from 31.7% in the year ended December 31, 1999. This decrease in gross margin was primarily due to a decrease in the Company's higher margin Year 2000 business. The Company's margins are subject to fluctuation due to a number of factors, including the level of salary and other compensation-related expenses necessary to attract and retain qualified technical personnel and the mix of IT Services versus Solutions business during the year. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general and administrative expenses (excluding bad debt expense, amortization expense, restructuring charges and merger-related expenses) increased to $143.7 million in the year ended December 31, 2000 from $127.7 million in the year ended December 31, 1999, an increase of $16.0 million or 12.5%. The increase in selling, general and administrative expenses was primarily attributable to an increase in the Solutions Group, as the Company continues to invest in its business development organization, Chimes and the development and sales staff of its software products company. This increase was partially offset by cost reductions in the IT Services Group during 2000. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BAD DEBT EXPENSE Bad debt expense increased to $26.5 million in the year ended December 31, 2000 from $3.4 million in the year ended December 31, 1999, an increase of $23.1 million. This increase includes a charge of $21.6 million in the fourth quarter of 2000 as a direct result of problems created in late 1998 and early 1999 relating to the flawed implementation of an enterprise-wide information system. The system was stabilized in the latter part of 1999 and much of 2000 was spent attempting to reconcile and settle outstanding balances with customers. However, it was deemed necessary in the fourth quarter of 2000 to make major concessions with customers for old balances in order to avoid potentially damaging conflicts. AMORTIZATION OF INTANGIBLES Amortization of intangibles increased to $7.4 million in the year ended December 31, 2000 from $6.2 million in the year ended December 31, 1999, an increase of $1.2 million or 19.4%. This increase in amortization of intangibles was primarily due to additional goodwill resulting from acquisition earnouts. RESTRUCTURING CHARGES / (CREDITS) During the fourth quarter of 2000, the Company recorded a restructuring charge of $43.9 million related to the closing of seven offices, the size reduction of other IT Services offices, a non-cash write down of assets held for sale of $26.2 million for eB Networks and $6.9 million for Select Software, along with $7.2 million for ceased operations. During the second quarter of 2000, the Company recorded a restructuring credit of $2.4 million. This credit resulted primarily from the earlier than expected subleasing of discontinued properties that were part of the third quarter 1999 restructuring charge. During the third quarter of 1999, the Company recorded a restructuring charge of $6.4 million primarily related to the consolidating and closing of certain facilities, generally used for Year 2000 and other legacy related services, as well as reduction of related staff levels. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME / (LOSS) FROM OPERATIONS Income / (loss) from operations, excluding bad debt expense and restructuring charges, decreased to a loss of $18.5 million in the year ended December 31, 2000 from income of $35.4 million in the year ended December 31, 1999, a decrease of $53.9 million or 152.3%. Operating margins, excluding bad debt expense and restructuring charges, decreased to a loss of 4.1% in the year ended December 31, 2000 from income of 6.6% in the year ended December 31,1999. The decrease was primarily due to decreases in the Company's higher margin Year 2000 business, a softness in the IT Staffing business and investments in the Solutions business, including Chimes in 2000. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. OTHER INCOME / EXPENSE For the year ended December 31, 2000, other expense increased to $1.2 million. This increase in other expenses was primarily due to interest expense on higher borrowings and a decrease of interest income. PROVISION FOR INCOME TAXES The effective tax rate for Federal, state, and local income taxes was 34.0% and 43.0% in the years ended December 31, 2000 and 1999, respectively. The decrease in the 2000 effective tax rate was primarily due to losses incurred in 2000. NET INCOME / (LOSS) Net income / (loss) decreased to a loss of $57.8 million in the year ended December 31, 2000 from net income of $14.6 million in the year ended December 31, 1999, a decrease of $72.4 million or 495.9%. Net loss per share (diluted) decreased to $1.83 in the year ended December 31, 2000 from net income per share (diluted) of $0.46 in the year ended December 31, 1999. The effect of bad debt expense and restructuring charges amounted to $1.42 loss per share, net of taxes, in 2000. The effect of bad debt expense and restructuring charges totaled $0.18 per diluted share in 1999, net of taxes. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Computer Horizons has historically financed its operations primarily through cash generated from operations, borrowings against bank lines of credit and the public sale of its common stock. A major component of the restructuring plan undertaken at the end of 2000 had, as an objective, the monetizing of certain non-strategic assets, the reducing of debt and the return of positive cash flow from operations. As a result of these actions, the Company has significantly improved its liquidity and capital resources. At December 31, 2001, the Company had $115.7 million in working capital, of which $41.0 million was cash and cash equivalents. The Company's working capital ratio at December 31, 2001 was 3.5 to 1. During 2001, short-term bank debt of approximately $21 million was reduced and converted to a long-term debt arrangement with a balance outstanding of $10 million at year-end. Due to management's intent to pay back this debt in 2002, the outstanding balance of $10 million has been classified as short-term debt. The Company also expects that its liquidity will significantly increase in 2002 with the consummation of the sale of Princeton Softech and the receipt of a 2001 tax refund (see Note 16 regarding subsequent events). The Company may use these additional resources to further reduce debt, continue to buy back its stock and potentially make acquisitions. Net cash provided by operating activities for the year ended December 31, 2001 and December 31, 2000 totaled $31.9 million and $9.9 million, respectively. In 2001, this was primarily attributable to income tax refunds, other non-cash charges and a reduction in accounts receivable. In 2000, it was primarily attributable to a non-cash charge relating to an increase in the provision for bad debts, the amortization and write-off of intangibles and the write-down of assets held for sale, offset in part by the operating loss. Net cash used in operating activities was $19.5 million in 1999, consisting primarily of net income, offset by an increase in accounts receivable. The significant increase in accounts receivable during 1999 was primarily attributable to delays in billing to customers resulting from the implementation of an enterprise-wide information system. Net cash provided by investing activities was $6.1 million for the year ended December 31, 2001, primarily attributable to cash received from the sale of assets. Net cash used in investing activities was $9.1 million and $14.3 million in the years ended December 31, 2000 and 1999, respectively. Net cash used in investing activities in 2000 primarily was attributable to acquisition related earnouts. Net cash used in investing activities in 1999 consisted primarily of $14.0 million used for the acquisitions of the assets of SELECT Software Tools plc, Integrated Computer Management, G. Triad Enterprises, Inc., SPP, and Unibase. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 2001, net cash used in financing activities was $12.6 million, resulting from $10.7 million reduction of debt and $3.4 million used in the repurchase of the Company's common stock. For the year ended December 31, 2000, net cash provided by financing activities was $1.1 million, resulting from $1.2 million in borrowings against the Company's bank lines of credit, $2.2 million of stock issued as a result of the Company's employee stock purchase program and stock option exercises partially offset by a reduction of $4.1 million of the Company's long-term debt. Net cash used in financing activities in 1999 was $2.1 million, primarily resulting from $15.0 million in borrowings against the Company's bank lines of credit, partially offset by $12.8 million used to repurchase the Company's stock. The Company believes that its cash and cash equivalents, lines of credit, internally generated funds and tax refunds will be sufficient to meet its working capital needs through 2002. The Company's billed accounts receivable were $53.7 million and $65.4 million at December 31, 2001 and December 31, 2000, respectively. Billed days sales outstanding were 47 days at December 31, 2001 and 61 days at December 31, 2000, based on annual sales. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The Company does not utilize off balance sheet financing other than operating lease arrangements for office premises and related equipment. Leases are short term in nature and non-capital. The following table summarizes all commitments under contractual obligations as of December 31, 2001:
-------------------------------Obligation due----------------------------- Total Amount 1 Year 2-3 Years 4-5 Years Over 5 Years -------------------------------------------------------------------------- ---------------------------------(in 000's)------------------------------- Short-term debt $ 10,000 $ 10,000 $ -- $ -- $ -- Operating leases 22,939 8,392 10,426 3,982 139 Other long-term 2,375 2,375 -- -- -- ------------ ------------- ------------ ------------ ------------ Total Cash Obligations $ 35,314 $ 20,767 $ 10,426 $ 3,982 $ 139 ============ ============= =========== ============ ============
14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARKET RISK EXPOSURE The Company has financial instruments that are subject to interest rate risk. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the current holdings, the exposure to interest rate risk is not material. Additionally, the Company had $10.0 million in outstanding borrowings against a long-term asset-based lending arrangement with CIT Business Credit, which has a LIBOR plus 2.75% interest rate. FOREIGN CURRENCY EXPOSURE The Company's international operations expose it to translation risk when the local currency financial statements are translated to U.S. dollars. As currency exchange rates fluctuate, translation of the financial statements 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 2001, 2000 or 1999. At December 31, 2001 the Company had $6.4 million in cash maintained in overseas financial institutions. 15 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS COMPUTER HORIZONS CORP. December 31, 2001 and 2000 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, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP - ---------------------- GRANT THORNTON LLP Edison, New Jersey February 26, 2002 Computer Horizons Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, ----------------------- ASSETS 2001 2000 ------- ------- (in thousands, except per share data) CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 41,033 $ 17,559 Accounts receivable (Note 4) 83,564 98,021 Net assets held for sale (Note 2) 10,381 35,274 Deferred income taxes (Note 8) 13,030 19,207 Refundable income taxes 7,992 21,325 Other 5,238 2,998 -------- -------- Total current assets 161,238 194,384 -------- -------- PROPERTY AND EQUIPMENT: Furniture, equipment and other 34,354 31,962 Less accumulated depreciation 21,881 17,920 -------- -------- 12,473 14,042 -------- -------- OTHER ASSETS - NET: Goodwill (Note 1) 48,725 51,264 Deferred income taxes (Note 8) 5,708 603 Other 9,577 9,103 -------- -------- 64,010 60,970 -------- -------- TOTAL ASSETS $237,721 $269,396 -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
December 31, ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 --------- ---------- (in thousands, except per share data) CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 10,000 $ 20,704 Accrued payroll, payroll taxes and benefits 12,782 14,194 Accounts payable 15,196 17,945 Restructuring reserve 2,090 2,887 Other accrued expenses 5,423 4,182 --------- --------- Total current liabilities 45,491 59,912 --------- --------- Other liabilities 2,375 1,560 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, $.10 par; authorized and unissued, 200,000 shares, including 50,000 Series A Common stock, $.10 par; authorized, 100,000,000 shares; issued 33,153,107 shares and 33,152,206 shares at December 31, 2001 and 2000, respectively 3,315 3,315 Additional paid-in capital 135,230 139,418 Accumulated comprehensive loss (2,932) (980) Retained earnings 66,291 80,741 --------- --------- 201,904 222,494 Less shares held in treasury, at cost; 1,720,191 shares and 1,344,615 shares at December 31, 2001 and 2000, respectively (12,049) (14,570) --------- --------- Total shareholders' equity 189,855 207,924 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 237,721 $ 269,396 ========= =========
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ ----(in thousands, except per share data)--- Revenues $ 400,784 $ 445,479 $ 534,594 ------------ ------------ ------------ COSTS AND EXPENSES: Direct costs 281,576 312,815 365,310 Selling, general and administrative 125,435 143,691 127,720 Bad debt expense (Note 4) 3,397 26,452 3,367 Amortization of intangibles 2,695 7,434 6,202 Restructuring charges (Note 14) 6,521 41,528 6,355 ------------ ------------ ------------ 419,624 531,920 508,954 ------------ ------------ ------------ Income / (loss) from operations (18,840) (86,441) 25,640 ------------ ------------ ------------ OTHER INCOME /(EXPENSE): Loss on sale of assets (3,197) -- -- Net gain on investments 90 -- -- Interest income 2,293 620 1,353 Interest expense (1,944) (1,825) (1,355) ------------ ------------ ------------ (2,758) (1,205) (2) ------------ ------------ ------------ Income / (loss) before income taxes (21,598) (87,646) 25,638 ------------ ------------ ------------ INCOME TAXES / (BENEFIT) (NOTES 1 AND 8): Current (10,292) (19,339) 16,081 Deferred 3,144 (10,480) (5,068) ------------ ------------ ------------ (7,148) (29,819) 11,013 ------------ ------------ ------------ NET INCOME / (LOSS) $ (14,450) $ (57,827) $ 14,625 ============ ============ ============ Earnings / (loss) per share (Notes 1 and 9): Basic $ (0.45) $ (1.83) $ 0.47 ============ ============ ============ Diluted $ (0.45) $ (1.83) $ 0.46 ============ ============ ============ Weighted average number of shares outstanding: Basic 31,911,000 31,656,000 30,940,000 ============ ============ ============ Diluted 31,911,000 31,656,000 31,647,000 ============ ============ ============ =============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999
Accumulat- Addi- ed other Common Stock tional comprehen- -------------------- paid-in sive Retained Treasury stock Shares Amount capital income/(loss) earnings Shares Amount Total ---------- ------ -------- ------------- -------- ------ ------ ----- --------------------------------------(dollars in thousands)------------------------------------ BALANCE, DECEMBER 31, 1998 32,351,580 $3,235 $128,821 $ (762) $123,943 1,061,662 $ 8,703 $246,534 ---------- ----- ------- ------- ------- --------- ----- ------- Net income for the year 14,625 14,625 Other comprehensive income: Foreign currency translation adjustments 1,147 1,147 ------- Total comprehensive income 15,772 Stock options exercised (14) (230,684) (1,890) 1,876 Other issuances of common stock 32,816 3 3 Tax benefits related to stock option plans 99 99 Stock warrants exercised (76) (9,250) (76) -- Issuance of common stock for purchase of assets 765,199 77 9,840 (5,575) (48) 9,965 Employee Stock Purchase program 151 (122,432) (1,004) 1,155 Purchase of Treasury Shares 1,087,000 12,752 (12,752) ------------ --------- ------------ ----------- ----------- --------- ------ ------- BALANCE, DECEMBER 31, 1999 33,149,595 3,315 138,821 385 138,568 1,780,721 18,437 262,652 ---------- ----- ------- ------- ------- --------- ------ ------- Net loss for the year (57,827) (57,827) Other comprehensive loss: Foreign currency translation adjustments (1,365) (1,365) ------- Total comprehensive loss (59,192) Stock options exercised (171,311) (1,695) 1,695 Other issuances of common stock 2,611 Tax benefits related to stock option plans 64 64 Issuance of common stock for purchase of assets 237 (32,470) (266) 503 Employee Stock Purchase program 296 (232,325) (1,906) 2,202 ------------ ----- ------- ------- --------- --------- ------ ------- BALANCE, DECEMBER 31, 2000 33,152,206 3,315 139,418 (980) 80,741 1,344,615 14,570 207,924 Net loss for the year (14,450) (14,450) Other comprehensive loss: Foreign currency translation adjustments (1,952) (1,952) -------- Total comprehensive loss (16,402) Stock options exercised (15,000) (30) 30 Other issuances of common stock 901 Issuance of common stock for purchase of assets (360) (77,144) (633) 273 Employee Stock Purchase program (3,828) (643,280) (5,273) 1,445 Purchase of Treasury Shares 1,111,000 3,415 (3,415) ---------- ------ -------- ------- ------- --------- -------- ------- BALANCE, DECEMBER 31, 2001 33,153,107 $3,315 $135,230 $(2,932) $66,291 1,720,191 $12,049 $189,855 ---------- ------ -------- ------- ------- --------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 -------- --------- -------- -----------------(in thousands)------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $(14,450) $(57,827) $14,625 --------- --------- ------ Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Deferred taxes 3,144 (10,480) (5,068) Depreciation 5,301 7,655 5,463 Amortization of intangibles 2,695 7,434 6,202 Provision for bad debts 3,397 26,452 3,367 Write-down of assets held for sale 5,473 33,114 -- Loss on sale of assets 3,197 -- -- Write off of goodwill -- 7,248 -- Changes in assets and liabilities, net of acquisitions: Accounts receivable 11,060 18,278 (36,009) Other current assets (2,240) (2,873) (2,036) Assets held for sale 5,401 (6,428) -- Other assets (474) 3,778 (5,898) Refundable income taxes 13,333 (12,862) (5,499) Accrued payroll, payroll taxes and benefits (1,412) (3,261) (6,498) Accounts payable (2,749) 1,475 10,750 Income taxes payable -- -- (6,547) Other accrued expenses (560) (1,267) 8,650 Other liabilities 815 (544) (1,030) -------- -------- ------- Net cash provided by/(used in) operating activities 31,931 9,892 (19,528) -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of furniture and equipment (3,732) (5,607) (7,924) Acquisitions, net of cash -- -- (13,955) Proceeds received from the sale of assets 10,027 -- -- Changes in goodwill (156) (3,496) (3,670) Purchases of short-term investments -- -- 11,259 -------- -------- ------- Net cash provided by/(used in) investing activities 6,139 (9,103) (14,290) -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Notes payable - banks, net (10,704) 1,202 7,502 Long-term debt -- (4,100) 100 Stock options exercised 30 1,759 1,989 Purchase of treasury shares (3,415) -- (12,752) Other stock issuances -- -- (11) Stock issued on employee stock purchase plan 1,445 2,202 1,155 Issuance of common stock for purchase of assets -- -- (36) -------- -------- -------- Net cash (used in)/provided by financing activities (12,644) 1,063 (2,053) -------- -------- -------- Foreign currency (losses)/gains (1,952) (1,365) 1,147 Net increase/(decrease) in cash and cash equivalents 23,474 487 (34,724) Cash and cash equivalents at beginning of year 17,559 17,072 51,796 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,033 $ 17,559 $ 17,072 -------- -------- --------
Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31, 2001 2000 1999 -------- ------- -------- ---------(in thousands)--------- Supplemental disclosures of cash flow information: Cash paid/(received) during the year for: Interest $ (106) $ 1,538 $ 811 Income taxes (24,097) (2,890) 28,025 Details of acquisition: Fair value of assets $ -- $ -- $ 46,853 Liabilities -- -- 32,898 -------- -------- -------- Cash paid for acquisition $ -- $ -- $ 13,955 -------- -------- -------- Book value of assets held for sale, net of cash $ 22,116 $ 80,035 $ -- Liabilities 11,735 18,075 -- -------- -------- -------- Net assets held for sale before write-down, net of cash 10,381 61,960 -- Write-down of assets held for sale -- 33,114 -- -------- -------- -------- Net assets held for sale, net of cash $ 10,381 $ 28,846 $ -- ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Computer Horizons Corp. is a strategic e-Business solutions and professional services company. The Company enables its Global 1000 customer base to realize competitive advantages through two major divisions, Solutions and IT Services. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, e-procurement solutions for Human Resource acquisition and management (CHIMES), strategic outsourcing and managed resourcing as well as software and relational database products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Computer Horizons Corp. and its wholly-owned subsidiaries (the "Company"). All subsidiaries of the Company have been consolidated into these financial statements. All material intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The revenue for the IT Services Group is recognized as services are rendered. Hourly or daily rates are determined in advance and agreed to with the customer. Time worked is documented in various forms using the applicable timekeeping process (i.e. the client's or the Company's timekeeping systems). Revenues in the Solutions Group are also recognized as services are performed, however, adjustments are sometimes needed to reflect progress against milestones or deliverables. On fixed fee engagements, revenue and gross profit adjustments are made to reflect revisions in estimated costs and contract values. It is estimated that approximately 5% of total revenue is generated under fixed fee contracts. The Company's Chimes subsidiary recognizes revenue on a net transaction fee basis. Chimes recognizes only their fee for the service, not the aggregate billing to the customer. The Chimes solution aggregates the temporary workforce supply chain to the customer and renders one invoice to the customer. Chimes is paid for this service by the supply chain in the form of a fee. The gross amount of the customer invoicing is not considered revenue to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the supply chain until paid by the customer. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company's Princeton subsidiary recognizes revenue in accordance with AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," and AICPA Statement of Position 98-9 ("SOP 98-9"). Under SOP 97-2, the Company recognizes software license revenue when a noncancelable license agreement has been executed, fees are fixed and determinable, the software has been delivered, and collection is considered probable. RECRUITMENT COSTS Recruitment costs are charged to operations as incurred. ADVERTISING COSTS The Company expenses all advertising costs as incurred and classifies these costs under selling, general and administrative expenses. Advertising costs for the years ended December 31, 2001, 2000 and 1999 were $0.6 million, $0.8 million and $0.9 million, respectively. RESEARCH AND DEVELOPMENT COSTS The Company charges all costs incurred to establish the technological feasibility of software products or product enhancements to research and development costs, which are included in selling, general and administrative expenses. Research and Development costs for the years ended December 31, 2001, 2000 and 1999 were $5.4 million, $6.9 million and $6.3 million, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid instruments with a maturity of three months or less at the time of purchase and consist of the following at December 31:
2001 2000 ------ ------ ----(in thousands)--- Cash $19,121 $11,126 Money market funds -- 83 Demand obligations -- 1 Commercial paper 21,912 6,349 ------ ----- $41,033 $17,559 ====== ======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 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 and trade accounts receivable. On July 31, 2001 the Company entered into an agreement with a secured asset-based lending facility which replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing is Prime plus 0.5%, thereafter the rate is LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $15 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of December 31, 2001, the Company had $10.0 million in borrowings outstanding against the facility. This balance has been classified as short-term debt on the consolidated financial statements due to management's intent to pay off the loan in full in 2002. The Company invests the majority of its excess cash in overnight commercial paper 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 nine 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 $38,000 U.S.). There is no depository insurance in the United Kingdom. At December 31, 2001, uninsured amounts held by the Company at these financial institutions total approximately $40,095,000. The Company's customers are generally very large, Global 1000 companies in many industries and with wide geographic dispersion. The Company's largest customer receivable accounts for approximately 21.1% and 8.8% of billed accounts receivable at December 31, 2001 and 2000, respectively. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments (principally consisting of cash and cash equivalents, accounts receivable and payable and the current portion of long-term debt) approximates fair value because of the short maturities or, as to the current portion of long-term debt, the rates currently offered to the Company. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 1 (CONTINUED) GOODWILL AND PURCHASED SOFTWARE Goodwill, the cost in excess of the fair value of net assets acquired, is being amortized by the straight-line method, for periods ranging from twenty to thirty years. Accumulated amortization is $18,567,000 and $15,872,000 at December 31, 2001 and 2000, respectively. Purchased software was being amortized by the straight-line method, for a period of five years and is now included in net assets held for sale (See Note 2). Accumulated amortization on the stand-alone financials of Princeton was $6,885,000 and $5,604,000 at December 31, 2001 and 2000, respectively. In 2001 the amortization was not expensed on the Company's consolidated financial statements as this entity is an asset held for sale. New accounting rules relating to goodwill and other intangibles are to take effect in 2002 together with new procedures to evaluate the carrying value of these assets. It is possible that the adoption of these new rules in 2002 could result in a transitional charge relating to the write-down of goodwill. If this were to occur, the charge would be reported as a change in accounting principle in the Company's income statement when adopted. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Up to and including the year ended December 31, 2001, the Company evaluated its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such an asset was considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the asset exceeded the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 1 (CONTINUED) INCOME TAXES The Company and its domestic subsidiaries file a consolidated Federal income tax return. The foreign subsidiaries file in each of their local jurisdictions. Deferred income taxes result from temporary differences between income reported for financial and income tax purposes. These temporary differences result primarily from the allowance for doubtful accounts provision and certain accrued expenses which are deductible, for tax purposes, only when paid. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Tax benefits from early disposition of the stock by optionees under incentive stock options and from exercise of non-qualified options are credited to additional paid-in capital. The Company provides United States income taxes on the earnings of foreign subsidiaries, unless they are considered permanently invested outside the United States. As of December 31, 2001, there is no cumulative amount of earnings on which United States income taxes have not been provided. EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding, except when the effect is anti-dilutive. 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 accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 1 (CONTINUED) FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the United States dollar, results of operations and cash flows are translated at the average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Translation adjustments are included as a separate component of comprehensive income/(loss) within the statement of shareholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations," and SFAS 142, "Goodwill and Intangible Assets." SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: -All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. -Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. -Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. -Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. -All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company will continue to amortize goodwill recognized prior to July 1, 2001, under its current method until January 1, 2002, at which time annual goodwill amortization of $2,695,000 will no longer be recognized. By June 30, 2002 the Company will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ended March 31, 2002, as a cumulative effect of a change in accounting principle. The Company is currently evaluating the impact of this statement. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 1 (CONTINUED) In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement is effective for fiscal years beginning after December 15, 2001. This supercedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," while retaining many of the requirements of such statement. The Company is currently evaluating the impact of the statement. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 and 1999 comparative financial statements to conform to the 2001 presentation. Computer Horizons Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 2 - NET ASSETS HELD FOR SALE The Company decided in 2000 to offer three of its subsidiaries (Princeton Softech "Princeton", including the SELECT Software Tools division "Select", CHC International Limited "Spargo", and eB Networks) for sale or disposition and accordingly classified these entities as "assets held for sale." This decision resulted in the recording of a net loss of $33.1 million, in the fourth quarter of 2000, to reduce the carrying amount to estimated net realizable value. The fair value of the assets held for sale was based on estimates of selling value from independent third party appraisals. During the second quarter of 2001, one of the Company's subsidiaries, eB Networks, was revalued and an additional loss of $5.5 million was recorded to reduce the carrying amount to the current estimated net realizable value. During 2001, two of the subsidiaries and Select were sold (See Note 3). For financial reporting purposes, the assets and liabilities of the remaining subsidiary Princeton, have been classified in the consolidated balance sheet as net assets held for sale and are included in the Solutions segment (see Note 9). During the year ended December 31, 2001, 2000 and 1999, these respective entities generated net income/(loss) of $(4.4) million, $(9.3) million and $2.5 million, respectively including amortization expense of nil, $3.6 million and $3.4 million, respectively. Such net assets consist of the following:
December 31, 2001 (in thousands) -------------------December 31, 2000 (in thousands)------------- PRINCETON PRINCETON SELECT SPARGO EB NETWORKS TOTAL --------- --------- ------ ------ ----------- ----- Current assets $ 19,607 $ 24,519 $ 2,729 $ 4,169 $ 9,714 $ 41,131 Property and equipment 1,370 1,444 1,087 212 1,388 4,131 Other assets 1,139 1,394 6,526 -- 33,281 41,201 -------- -------- ------- ------- ------- -------- Total assets 22,116 27,357 10,342 4,381 44,383 86,463 Total liabilities (11,735) (10,443) (2,504) (1,916) (3,212) (18,075) Net assets 10,381 16,914 7,838 2,465 41,171 68,388 Estimated loss in sale -- -- (6,943) -- (26,171) (33,114) -------- -------- -------- ------- ------- -------- Total net assets held for sale $ 10,381 $ 16,914 $ 895 $ 2,465 $ 15,000 $ 35,274 ======== ======== ======= ======= ======== ========
For the year ended December 31, 2001 Princeton's revenue was $29 million and its operating loss was $5.7 million. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 3 - SALE OF SUBSIDIARIES On September 10, 2001, the Company sold the assets of eB Networks to Inrange Technologies, a storage networking company, for cash of $5.4 million, including amounts held in escrow of $540,000. The loss from the transaction was $3.2 million, which included the final write-down of related goodwill of $2.1 million. The results of operations are included in the consolidated financial statements through September 10, 2001 within the Solutions group. On August 30, 2001, the Company sold the ICM Education name to AlphaNet Solutions, Inc., an IT professional services firm, for $0.5 million. The gain from the transaction was $332,000. The results of operations are included in the consolidated financial statements through August 30, 2001 within the Solutions group. On April 17, 2001, the Company sold the SELECT Software Tools division "Select" of Princeton Softech to Aonix, a member of the Gores Technology Group, for approximately $895,000 including $545,000 of cash received and a note receivable of $350,000. This sale included all the software assets and intellectual property rights of Select and was sold at book value. The results of operations are included in the consolidated financial statements through April 17, 2001 within the Solutions group. On January 31, 2001, the Company sold the stock of CHC International Limited, ("Spargo"), to an information technology consultancy services provider for cash of $3.2 million. The gain from the transaction was $438,000. The results of operations for January 2001 were not material to the consolidated financial statements. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 4 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following at December 31:
2001 2000 -------- --------- -----(in thousands)-------- Billed $53,735 $ 65,391 Unbilled 37,371 35,332 ------- --------- 91,106 100,723 Less allowance for doubtful accounts 7,542 2,702 ------- --------- $83,564 $ 98,021 ======= =========
During 2000 the Company recorded a $21.6 million write-off of accounts receivable, primarily during the fourth quarter of 2000. The charge was the direct result of problems created in late 1998 and early 1999 relating to the flawed implementation of an enterprise-wide information system. The system was stabilized in the latter part of 1999 and much of 2000 was spent attempting to reconcile and settle outstanding balances with customers. However, it was deemed necessary in the fourth quarter of 2000 to make major concessions with customers for old balances in order to avoid potentially damaging conflicts. NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT Long-term debt and lines of credit consist of the following at December 31:
2001 2000 -------- ------- ------(in thousands)------- Lines of Credit $10,000 $16,500 Debt pertaining to acquisitions -- 4,000 Other -- 204 ------- ------- 10,000 20,704 Less current maturities 10,000 20,704 ------- ------- Long-term debt $ -- $ -- ======= =======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT (CONTINUED) LINES OF CREDIT On July 31, 2001 the Company entered into an agreement with a secured asset-based lending facility which replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing is Prime plus 0.5%, thereafter the rate is LIBOR plus 2.75% based on the unpaid principal, which approximated 4.63% at December 31, 2001. The borrowing base less outstanding loans must equal or exceed $15 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of December 31, 2001, the unused portion of the line was $30 million. The fee of the unused portion of the line was approximately $42,000 during 2001. The commitment fee on the unused portion is 0.375% per annum charged to the Company monthly. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on incurring obligations and spending limits on capital expenditures. At December 31, 2000, the Company had three unsecured bank lines of credit. The available borrowings under the first line of credit was $20 million at December 31, 2000. This line of credit, which originally expired on December 31, 2000 was extended until August 31, 2001 at which time the line expired and was paid in full. Interest rates were based on LIBOR plus 1.2% and ranged from 5.8% to 9.5% during 2000. There were no commitment fees incurred in either year. The available borrowings under the second line of credit was $10 million at December 31, 2000. This line of credit expired May 31, 2001, at which time it was paid in full. Interest for this loan ranged between 7.0% through 9.0% in 2001. The Company also has a line of credit in the amount of $50,000. As of December 31, 2001, there were no outstanding balances due on this line of credit. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT (CONTINUED) DEBT PERTAINING TO ACQUISITIONS The Company financed part of the acquisition of Integrated Computer Management ("ICM") by issuing ten promissory notes totaling $8 million, bearing interest at 7%. Four million of the notes came due and were paid on May 6, 2000 and the remainder came due and were paid on May 6, 2001. LETTERS OF CREDIT The Company, has two letters of credit in the amount of $101,414 and $76,800. These letters expire on June 30, 2005 and September 30, 2005, respectively. There were no outstanding balances at December 31, 2001. Princeton, a subsidiary of the Company, had a letter of credit outstanding at December 31, 2000 in the amount of $302,953, this line of credit was released as of December 31, 2001 and replaced with a cash deposit which is included in assets held for sale. OTHER The Company also had a $1,000,000 Canadian (approximately $636,000 US) demand loan with a Canadian bank, of which $360,000 Canadian (approximately $229,000 US) was outstanding as of December 31, 2000. The outstanding balance was paid in full in 2001. NOTE 6 - PURCHASE OF TREASURY STOCK In April of 2001, the Board of Directors approved the repurchase in the open market of up to 10% of its common shares outstanding, or approximately 3.2 million shares. As of December 31, 2001, the Company had repurchased, in the open market, 1,111,000 shares of its stock at an average price of $3.22 per share for an aggregate purchase amount of $3.6 million. As of December 31, 2001 the remaining authorization for repurchase is 2.1 million shares. NOTE 7 - SHAREHOLDERS' EQUITY 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, 2001. This plan, which replaces the Company's 1985 Plan, will terminate on June 15, 2004. There were 1,930,000, 2,655,000 and 3,400,000 shares available for option at December 31, 2001, 2000 and 1999. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) 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 expired on March 4, 2001 and was extended for three additional years by the Board of Directors and Shareholders. There were 384,000 and 424,000 shares available for grant at December 31, 2001 and 2000. The exercise price per share on all options granted may not be less than the fair value at the date of the option grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as modified by FIN 44, "Accounting for Certain Transactions Involving Stock Compensation," in accounting for stock-based employee compensation, whereby no compensation cost had been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates and been consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ------------ ------------ ----------- Net income / (loss) As reported $(14,450,000) $(57,827,000) $14,625,000 Pro forma (18,297,000) (61,895,000) 12,721,000 Earnings per share Basic As reported $ (0.45) $ (1.83) $ 0.47 Pro forma (0.57) (1.96) 0.41 Diluted As reported (0.45) (1.83) 0.46 Pro forma (0.57) (1.96) 0.40
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 2001, 2000 and 1999, respectively: expected volatility of 84%, 105% and 77%; risk-free interest rates of 5.14%, 4.71% and 6.52%; and expected lives of 8.1, 4.5 and 5.0 years. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) A summary of the status of the Company's stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years ending on those dates is presented below:
2001 2000 1999 ---------------------- ---------------------- ------------------------ WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------- ---------- ------- -------- ------- --------- (000) (000) (000) Outstanding - January 1 4,216 $ 13.05 3,600 $13.46 2,410 $13.94 Granted 1,535 2.17 1,500 11.98 1,571 11.75 Exercised (15) 2.02 (159) 9.90 (230) 5.97 Canceled/forfeited (895) 10.47 (725) 13.60 (151) 14.67 ----- ------ ----- ----- ----- ------ Outstanding - December 31 4,841 10.11 4,216 13.05 3,600 13.46 ===== ====== ===== ===== ===== ====== Options exercisable - December 31 2,749 12.97 2,125 13.81 1,547 13.61 ===== ====== ===== ===== ===== ====== Weighted average fair value of options granted during the year $ 1.85 $ 9.42 $ 7.78
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) The following information applies to options outstanding at December 31, 2001:
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 2001 life price 2001 price ------------------------ ----------- ----------- ---------- ----------- --------- (000's) (000's) $ 0.00 - $ 9.99 1,790 7.6 $ 2.56 603 $ 3.27 10.00 - 14.99 1,970 3.3 11.56 1,105 11.58 15.00 - 19.99 340 4.4 16.71 299 16.67 20.00 and over 741 3.4 21.42 742 21.42 ----- ----- 4,841 5.0 $10.11 2,749 $12.97 ===== === ====== ===== ======
Certain officers have the right to borrow from the Company against the exercise price of options exercised. As of December 31, 2001 and 2000, total outstanding borrowings, pertaining to one officer, amounted to $100,000 which was issued by the Company prior to the adoption of FIN 44. In 2001, the Company adopted a stock option plan for its Princeton subsidiary which provides for the granting, to Princeton key employees, of options for the purchase of a maximum of 3,000,000 shares of Princeton common stock. These options expire ten years from the date of grant and become exercisable in two years. Under SFAS 123 the pro forma compensation expense calculated is approximately $150,000 for 2001. As of the date of the sale of Princeton the stock option plan will be terminated. 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 2001, 2000 or 1999. The exercise price is the fair value at the date of grant. As of December 31, 2001, 29,375 warrants were outstanding. There were 9,250 warrants exercised in 1999. There were no warrants exercised in 2001 or 2000. 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-thousandth (1/1000) of a share of Series A preferred stock at an exercise price of $90.00 per one one-thousandth (1/1000) share, subject to adjustment. Each one one-thousandth (1/1000) of a share of Series A preferred stock has voting, dividend and liquidation rights and preferences substantively equivalent to one share of common stock. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) 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 stock. If a person becomes the owner of at least 20% of the Company's common shares (an "Acquiring Person"), each holder of a right other than the Acquiring Person is entitled, upon payment of the then current exercise price per right (the "Exercise Price"), to receive shares of common stock (or common stock equivalents) having a market value equal to twice the Exercise Price. Additionally, if the Company subsequently engages in a merger or other business combination with the Acquiring Person in which the Company is not the surviving corporation, or in which the outstanding shares of the Company's common stock are changed or exchanged, or if more than 50% of the Company's assets or earning power is sold or transferred, a right would entitle a Computer Horizon Corp. shareholder, other than the Acquiring Person and its affiliates, to purchase upon payment of the Exercise Price, shares of the Acquiring Person having a market value of twice the Exercise Price. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. No shareholder rights have become exercisable. The rights originally would have expired on July 16, 1999, however, the Board of Directors approved the adoption of a new Shareholder Rights Plan to replace the existing plan. The terms of the new Rights Plan are substantially the same as the original plan. The new rights will expire on July 15, 2009. NOTE 8 - INCOME TAXES The following is a geographical breakdown of the Company's income/(loss) before taxes:
YEAR ENDED DECEMBER 31, ---------------------------------------- 2001 2000 1999 -------- ------- ------- --------------(in thousands)------------ Domestic $(20,679) $(85,463) $31,650 Foreign (919) (2,183) (6,012) -------- -------- ------- $(21,598) $(87,646) $25,638 ======== ======= =======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 8 - INCOME TAXES (CONTINUED) The provision for income taxes/(benefit) consists of the following for the years ended December 31:
2001 2000 1999 -------- -------- ------- ----------------(in thousands)------------------ Current Federal $(10,032) $(18,775) $12,348 State (280) (662) 2,865 Foreign 20 98 868 -------- -------- -------- Total current (10,292) (19,339) 16,081 Deferred Federal 3,501 (7,736) (2,403) State (508) (5,079) (330) Foreign 151 2,335 (2,335) -------- -------- ------- Total deferred 3,144 (10,480) (5,068) -------- -------- ------- $ (7,148) $(29,819) $11,013 ======== ======== ======
Refundable income taxes result primarily from net operating loss carrybacks. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 8 - INCOME TAXES (CONTINUED) Deferred tax assets and liabilities consist of the following at December 31:
2001 2000 ------- ------- ------(in thousands)----- Deferred tax liabilities Depreciation and amortization $(3,211) $(2,487) Capitalized software development costs -- (102) -------- ------- Total deferred tax liabilities (3,211) (2,589) -------- ------- Deferred tax assets Accrued insurance 36 36 State net operating losses 6,413 1,681 Foreign net operating losses 3,202 2,727 Accrued payroll and benefits 2,228 2,199 Deferred revenue 2,462 2,498 Allowance for doubtful accounts 1,389 2,184 Restructuring charges 6,301 14,574 Accrued severance and lease costs 526 425 Other 2,732 875 ------- ------- Total deferred tax assets 25,289 27,199 ------- ------- Valuation allowance (3,340) (2,727) Net deferred tax assets $18,738 $21,883 ======= =======
At December 31, 2000, net deferred tax assets in the amount of $2,073 were included in net assets held for sale. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 8 - INCOME TAXES (CONTINUED) A reconciliation of income taxes/(benefit), as reflected in the accompanying statements, with the statutory Federal income tax rate of 35% for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ------- -------- -------- --------------(in thousands)-------------- Statutory Federal income taxes/(benefit) $(7,559) $(30,676) $ 8,973 State and local income taxes/(benefit), net of Federal tax benefit (757) (3,732) 1,648 Foreign taxes provided at rates other than the U.S. statutory rate -- -- 98 Amortization of goodwill 452 688 282 Change in valuation allowance 613 2,727 -- Other, net 103 1,174 12 ------- -------- ------- $(7,148) $(29,819) $11,013 ======= ======== =======
At December 31, 2001, the Company had a federal net operating loss carryforward of approximately $64,600,000, which expires in 2021. Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 2001, totaling approximately $9,700,000; $264,000 expires in 2005, $1,136,000 expires in 2006, $649,000 expires in 2007 and the remainder has no expiration. A full valuation allowance has been recorded on the foreign taxes due to the uncertainty of the recognition of certain of these net operating loss carryforwards. 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 upon the sale of the acquired business which was subsequently sold in 2001. Since the tax structure of the transaction is subject to determination by the tax authorities, the Company has not recorded any potential tax impact in its financial statements. When resolved, the Company will record a deferred tax asset net of an appropriate valuation allowance. The net benefit will be reflected as an increase in additional paid-in-capital. Any adjustments to the valuation allowance will be charged or credited to income. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 9 - EARNINGS / (LOSS) PER SHARE DISCLOSURES
FOR THE YEAR ENDED ------------------------------------- Per Income / (loss) Shares share (numerator) (denominator) amount --------------- ------------- ------ ------(in 000's, except share and per share data)---- December 31, 2001 Net loss $(14,450) ======== Basic loss per share Loss available to common stockholders $(14,450) 31,911,000 $ (0.45) Effect of diluted securities Options -- ---------- Diluted loss per share Income available to common stock- holders plus assumed conversions $(14,450) 31,911,000 $ (0.45) ======== ========== ======= December 31, 2000 Net loss $(57,827) ======== Basic loss per share Loss available to common stockholders $(57,827) 31,656,000 $ (1.83) ======= Effect of diluted securities Options -- ---------- Diluted loss per share Income available to common stock- holders plus assumed conversions $(57,827) 31,656,000 $ (1.83) ======== ========== ======= December 31, 1999 Net income $ 14,625 ======== Basic earnings per share Income available to common stockholders $ 14,625 30,940,000 $ 0.47 ======= Effect of diluted securities Options 707,000 ---------- Diluted earnings per share Income available to common stock- holders plus assumed conversions $ 14,625 31,647,000 $ 0.46 ======== ========== =======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 9 - EARNINGS / (LOSS) PER SHARE DISCLOSURES (CONTINUED) The computation of diluted earnings per share excludes options with exercise prices greater than the average market price. During 2001, there were 3,120,000 excluded options outstanding at December 31, 2001 with exercise prices of $7.38 to $26.63 per share. During 2000, there were 3,003,000 excluded options outstanding at December 31, 2000 with exercise prices of $11.13 to $26.63 per share. During 1999, there were 1,322,000 excluded options outstanding at December 31, 1999 with exercise prices of $15.53 to $28.13 per share. NOTE 10 - 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. The Company has identified two segments: IT Services and the Solutions Group. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. IT Services is primarily Staffing and Outsourcing. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, e-procurement solutions for Human Resource acquisition and management (CHIMES), strategic outsourcing and managed resourcing as well as software and relational database products. Operating income/(loss) consists of income/(loss) before income taxes, excluding interest income, interest expense, restructuring charge, loss on the sale of assets, net gain on investments and amortization of intangibles. These exclusions total $12.0 million, $50.2 million and $12.6 million in 2001, 2000 and 1999, respectively. Long-term assets include goodwill and property, plant and equipment for 2001 and 2000. In 1999 long-term assets also includes purchased software. Corporate services, consisting of general and administrative services are provided to the segments from a centralized location. Such costs are allocated to the segments based on either revenue or headcount. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 10 - SEGMENT INFORMATION (CONTINUED)
BY LINE OF BUSINESS 2001 2000 1999 -------- -------- -------- ----------------(in thousands)------------------ REVENUE IT Services $274,379 $303,713 $429,757 Solutions Group 126,405 141,766 104,837 -------- -------- ------- TOTAL REVENUE $400,784 $445,479 $534,594 ======== ======== ======= OPERATING INCOME / (LOSS) IT Services 7,735 (14,615) 47,252 Solutions Group (17,359) (22,864) (9,055) TOTAL OPERATING INCOME / (LOSS) $(9,624) $ (37,479) $ 38,197 ======== ========= ======== ASSETS IT Services 93,920 131,694 179,965 Solutions Group 71,480 63,947 113,151 Corporate and other 72,321 73,755 54,878 -------- --------- -------- TOTAL ASSETS $237,721 $ 269,396 $347,994 ======== ========= ======== DEPRECIATION EXPENSE IT Services 762 1,267 1,066 Solutions Group 2,288 3,930 1,879 Corporate and other 2,251 2,458 2,518 -------- --------- -------- TOTAL DEPRECIATION $ 5,301 $ 7,655 $ 5,463 ======== ========= ========
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 10 - SEGMENT INFORMATION (CONTINUED)
BY GEOGRAPHIC AREA 2001 2000 1999 -------- -------- -------- ----------------(in thousands)------------------ REVENUE United States $361,884 $ 393,060 $480,131 Europe 12,617 26,777 26,134 Australia 2,102 3,602 757 Canada 24,181 22,040 27,572 -------- --------- -------- TOTAL REVENUE $400,784 $ 445,479 $534,594 ======== ========= ======== LONG-TERM ASSETS United States $ 41,716 $ 43,433 $102,562 Europe 163 1,462 1,623 Australia -- -- 55 Canada 19,319 20,411 19,636 --------- ---------- --------- TOTAL LONG-TERM ASSETS $ 61,198 $ 65,306 $123,876 ========= ========== =========
NOTE 11 - SAVINGS PLAN AND OTHER RETIREMENT PLANS The Company maintains a defined contribution savings plan covering eligible employees. The Company makes contributions up to a specific percentage of participants' contributions. The Company contributed approximately $1,413,000, $1,563,000 and $1,440,000 in 2001, 2000 and 1999, 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 employment of the Company. The maximum commitment if all plan members remain in the employment of the Company until age 65 is approximately $11.1 million. Benefits accrue and vest based on a formula which includes total years with the Company and total years possible until age 65. The plan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist in funding the cost. The deferred compensation expense is charged to operations during the remaining service lives of the members and was $115,000 in 2001, $311,000 in 2000 and nil in 1999. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 11 - SAVINGS PLAN AND OTHER RETIREMENT PLANS (CONTINUED) During 1999 the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed one year of service an opportunity to purchase shares of its common stock through payroll deductions, up to 10 percent of eligible compensation. Quarterly, participant account balances are used to purchase shares of stock at 85 percent of its fair market value on either the first or last trading day of each calendar quarter. A total of 1,150,000 shares are available for purchase under the plan. There were 643,280 and 232,325 shares purchased under the plan in 2001 and 2000, 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 under the plan are expensed in the period incurred. Amounts deferred have been included in accrued payroll and amounted to $4.7 million and $4.1 million as of December 31, 2001 and 2000, respectively. NOTE 12 - COMMITMENTS LEASES The Company leases office space under long-term operating leases expiring through 2007. As of December 31, 2001, approximate minimum rental commitments were as follows:
Year ending (in thousands) 2002 $ 8,392 2003 5,844 2004 4,582 2005 3,186 2006 796 Thereafter 139 ------- $22,939 -------
Office rentals are subject to escalations based on increases in real estate taxes and operating expenses. Aggregate rent expense for operating leases approximated $7,997,000, $8,536,000 and $7,500,000 in the years ended December 31, 2001, 2000 and 1999, respectively. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) For the years ended December 31, 2001 and 2000, selected quarterly financial data is as follows:
Quarters ---------------------------------------------------------------- First Second Third Fourth ------------- ------------- ------------- ------------ ---------------(in thousands, except per share data)------------ 2001 REVENUES $106,481 $104,995 $94,212 $95,096 DIRECT COSTS 72,916 74,927 67,672 66,061 SELLING, GENERAL AND ADMINISTRATIVE 34,221 32,162 29,790 29,262 BAD DEBT EXPENSE 443 396 614 1,944 AMORTIZATION OF INTANGIBLES 707 723 650 615 RESTRUCTURING CHARGES/(CREDITS) -- 5,473 -- 1,048 INCOME/(LOSS) FROM OPERATIONS (1,806) (8,686) (4,514) (3,834) GAIN/(LOSS) ON SALE OF ASSETS 438 -- (2,833) (802) NET GAIN ON INVESTMENTS -- -- -- 90 INTEREST INCOME/(EXPENSE) - NET (175) 256 43 225 INCOME/(LOSS) BEFORE INCOME TAXES (1,543) (8,430) (7,304) (4,321) INCOME TAXES/(BENEFIT) (525) (2,866) (2,483) (1,274) NET INCOME/(LOSS) (1,018) (5,564) (4,821) (3,047) EARNINGS/(LOSS) PER SHARE: BASIC $ (0.03) $ (0.17) $ (0.15) $ (0.10) DILUTED $ (0.03) $ (0.17) $ (0.15) $ (0.10)
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Quarters ---------------------------------------------------------------- First Second Third Fourth ------------- ------------- ------------- ------------ --------------(in thousands, except per share data)------------- 2000 Revenues $114,282 $118,095 $104,505 $108,597 Direct costs 83,015 79,578 75,011 75,211 Selling, general and administrative 32,073 35,049 36,634 39,935 Bad debt expense 1,087 1,484 1,916 21,965 Amortization of intangibles 1,776 1,680 1,662 2,316 Restructuring charges/(credits) -- (2,376) -- 43,904 Income/(loss) from operations (3,669) 2,680 (10,718) (74,734) Interest income/(expense) - net (266) (301) (373) (265) Income/(loss) before income taxes (3,935) 2,379 (11,091) (74,999) Income taxes/(benefit) (1,692) 1,023 (4,325) (24,825) Net income/(loss) (2,243) 1,356 (6,766) (50,174) Earnings/(loss) per share: Basic $ (0.07) $ 0.04 $ (0.21) $ (1.58) Diluted $ (0.07) $ 0.04 $ (0.21) $ (1.58)
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 14 - RESTRUCTURING CHARGES During the fourth quarter of 2001, the Company recorded a restructuring charge of $410,000 pertaining to 2001 office closings. In addition, during the second quarter of 2001, the Company recorded an additional $5.5 million in restructuring expense to reduce the carrying amount of eB Networks to the estimated net realizable value. During the fourth quarter of 2000, the Company recorded restructuring charges of $43.9 million. The Company's restructuring plan included the offering for sale of four businesses acquired between 1998 and 1999, including Princeton Softech, Inc., SELECT Software Tools division ("Select"), eB Networks and CHC International, Ltd (formerly Spargo Consulting PLC). In addition, restructuring charges included the shutdown of Enterprise Solutions Group ("ESG") which was acquired in 1998, the closing of seven offices and the site reduction of two other IT Services offices. At December 31, 2000, the Company recorded a write-down of goodwill of $7.2 million for the shutdown of ESG. In addition, a non-cash charge writing down goodwill of $26 million and purchased software of $6.9 million was recorded, in the fourth quarter of 2000, in connection with the write down of assets held for sale to realizable value. The closing of IT Services' and Solutions' offices resulted in the termination of 90 employees with a severance charge of $1.3 million. As of December 31, 2001, $1,024,000 had been paid in severance to the terminated employees. The balance remaining at December 31, 2001 includes continuing rent on five properties terminating in 2003, 2004 and 2005 and severance for two individuals with payments through January of 2002 and 2003. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 14 - RESTRUCTURING CHARGES (CONTINUED)
Remaining at Remaining at Cash Non-Cash Dec. 31, Paid/ Non-Cash Dec. 31, Recorded Charges Charges 2000 Recorded Reversed Charges 2001 -------- ------- ------- ---- - -------- -------- -------- ----- (in thousands) Severance: United States $ 1,267 $ (247) $ -- $ 1,020 $ -- $ (777) $ -- $ 243 -------- -------- ---------- -------- -------- -------- --------- -------- Lease Obligations: United States $ 2,275 $ (675) $ -- $ 1,600 $ 410 $ (789) $ -- $ 1,221 -------- -------- ---------- -------- -------- -------- --------- -------- Write Down of Assets Held for Sale: eB Networks $ 26,171 $ -- $ (26,171) $ -- $ 5,473 $ -- $ (5,473) $ -- Select 6,943 -- (6,943) -- -- -- -- -- ----- -------- ---------- -------- -------- -------- --------- -------- Total write-down of assets held for sale $ 33,114 $ -- $ (33,114) $ -- $ 5,473 $ -- $ (5,473) $ -- -------- -------- ---------- -------- -------- -------- --------- -------- Write-off of ceased operations - ESG: Goodwill $ 7,248 $ -- $ (7,248) $ -- $ -- $ -- $ -- $ -- -------- -------- ---------- -------- -------- -------- --------- -------- Total $ 43,904 $ (922) $ (40,362) $ 2,620 $ 5,883 $ (1,566) $ (5,473) $ 1,464 ======== ======== ========== ======== ======== ======== ========= ========
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 14 - RESTRUCTURING CHARGES (CONTINUED) During the fourth quarter of 2001, the Company recorded a restructuring charge adjustment of $638,000 pertaining to the termination, by the subleasor, of the sublease contracts for closed offices included in the 1999 restructure charge. During the third quarter of 1999, the Company recorded a restructuring charge of $6.4 million primarily related to the consolidating and closing of certain facilities, generally used for Year 2000 and other legacy related services, as well as attendant reduction of related staff levels. The provision included an accrued payment of approximately $4.0 million relating to the future costs associated with continuing rent and severance commitments at December 31, 1999. During the second quarter of 2000, the Company recorded a restructuring credit of $2.4 million. This credit resulted primarily from the earlier than expected occupancy of two abandoned properties that were part of the 1999 restructuring reserve and the reversal of an over accrual of employee severance benefits due to terminated employees in the UK and Canada. The balance remaining at December 31, 2001 includes continuing rents on two properties with the leases terminating in 2004 and 2005.
Balance Balance Balance at at at Dec. 31, Dec. 31, Paid/ Dec. 31, Recorded Paid 1999 Paid Reversed 2000 Recorded Reversed 2001 -------- ---- ---- ---- -------- ---- -------- -------- ---- (in thousands) Severance: United States $1,172 $(1,021) $ 151 $ (33) $ -- $ 118 $ -- $ (118) $ -- Europe 1,127 (775) 352 -- (352) -- -- -- -- Canada 122 (89) 33 -- (33) -- -- -- -- ------ ------- ------- -------- ------- ----- ------- ------ Total Severance $2,421 $(1,885) $ 536 $ (33) $ (385) $ 118 $ -- $ (118) $ -- ------ -------- ------- -------- ------- ----- ------- ------ ------- Lease Obligations: United States $3,564 $ (254) $ 3,310 $ (1,203) $(1,840) $ 267 $ 638 $ (279) $ 626 Canada 101 (25) 76 -- (76) -- -- -- -- ------ ------- ------- -------- ------- ----- ------- ------ ------- Total Lease Obligations $3,665 $ (279) $3,386 $ (1,203) $(1,916) $ 267 $ 638 $ (279) $ 626 ------ -------- ------ -------- ------- ----- ------- ------ ------- General Office Closure: Canada $ 269 $ (188) $ 81 $ (6) $ (75) $ -- $ -- $ -- $ -- ------ -------- -------- -------- ------- ----- ------- ------ ------- Total $6,355 $(2,352) $ 4,003 $ (1,242) $(2,376) $ 385 $ 638 $ (397) $ 626 ====== ======== ======= ======== ======= ===== ======= ====== =======
Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 15 - ACQUISITIONS On October 18, 1999, the Company acquired G. Triad Enterprises, Inc. ("G. Triad"), a New Jersey- based Internet / Intranet development firm, for approximately $14.5 million in cash and stock. The acquisition was accounted for as a purchase. The resulting goodwill of approximately $14 million is being amortized to operations over a 20-year period. Subsequently in 2000, the Company recorded an additional earnout of $500,000 to goodwill based on G. Triad meeting a projected revenue target. On May 6, 1999, the Company acquired all the common stock of Integrated Computer Management ("ICM"), a New Jersey-based solutions company that provides technology consulting, packaged software integration, customer software development, systems integration and advanced learning solutions, for stock, cash and promissory notes totaling approximately $17 million. The acquisition was accounted for as a purchase. The resulting goodwill of approximately $15 million was being amortized to operations over a 20-year period. Effective April 1, 2000 the assets of ICM were divided between three divisions of the Company, G. Triad, eB Networks and IT Services. Approximately $10 million of its net goodwill was allocated to eB Networks in 2000 and has been subsequently written off with the sale of eB Networks on September 10, 2001. On June 1, 1999, Princeton Softech Inc. ("Princeton"), a wholly-owned subsidiary of the Company, acquired the software products, intellectual property rights and certain other assets of SELECT Software Tools plc ("Select"), a London-based software firm, for approximately $8 million cash plus the assumption of certain liabilities such as severance, certain payments due to a vendor under a contract that the Company expected to derive no future benefit, and certain other assumed liabilities in connection with its acquisition. These liabilities had the effect of increasing the value of the intangible assets (purchased software) that were acquired. The amount of such liabilities aggregated $3,100,000 of which approximately $1,800,000 had been paid prior to December 31, 1999. Substantially all of the accrued severance (which was for employees that had been made redundant upon acquisition in the United Kingdom) had been paid prior to December 31, 1999. The remaining accrued liabilities of approximately $1,300,000 consist primarily of payments due pursuant to the contract discussed above. The acquisition was accounted for as a purchase. The cost of the purchased software and other intangibles approximates $12 million, and was being amortized to operations over a five-year period. During the fourth quarter of 2000 the Company made the decision to sell Select. On April 17, 2001, the Company sold Select to Aonix (see Note 3). Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 15 - ACQUISITIONS (CONTINUED) On May 7, 1999, Princeton purchased the distribution rights in Australia held by its former distributor, SPP. No tangible assets of SPP were acquired. The aggregate cash purchase price was approximately $740,000 of which approximately $672,000 was paid prior to year-end. The transaction was accounted for using purchase accounting, and the aggregate cash purchase price of $740,000 was allocated to distribution rights which is being amortized to operations over a 48 month period. On April 14, 1999, Princeton purchased all of the capital stock of Unibase, its French distributor. The aggregate cash purchase price was approximately $1,424,000 including approximately $92,000 of fees and expenses relating to such transaction. The transaction was accounted for using purchase accounting. The excess of purchase price over tangible assets acquired of approximately $1,090,000 was allocated to distribution rights which are being amortized to operations over a 48 month period. On September 25, 1998, the Company acquired the assets of Enterprise Solutions Group, LLC ("ESG"), a Cincinnati, Ohio-based technology organization that provides training and educational services as well as consulting services for Global 1000 companies. The acquisition was accounted for as a purchase. The total adjusted purchase price was approximately $8,883,000 in cash and common stock which was being amortized to operations over a 20-year period. Approximately $1,550,000 was to be paid out in two payments, approximately $1 million was paid in January of 2000 and the remaining $550,000 was paid in January of 2001. The Company has shut down these operations and has written off the remaining net goodwill of $7.2 million, which is a component of the restructure charge. On August 4, 1998, the Company acquired the assets of RPM Consulting ("RPM"), a Maryland based provider of network consulting services, specializing in architecting, designing and upgrading large enterprise networks. The subsidiary subsequently changed its name in 2000 to eB Networks. The purchase agreement was for a combination of cash and common stock totaling approximately $27,700,000, and two earnout payments (totaling $2.2 million) based on pretax profit margins, which were paid during 1999. The acquisition was accounted for as a purchase and was being amortized to operations over a 20-year period. In the fourth quarter of 2000, the Company made the decision to sell eB Networks. On September 10, 2001, the Company sold the assets of eB Networks to Inrange Technologies (see Note 3). Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2001, 2000 and 1999 NOTE 15 - ACQUISITIONS (CONTINUED) On July 2, 1998, the Company's Canadian subsidiary acquired the net assets of Infomatics Search Group ("ISG"), a Toronto, Canada based information technology service firm, offering both professional staffing and career placement services. The acquisition was accounted for as a purchase and was being amortized to operations over a 20-year period. The total purchase price was approximately $21,600,000 in cash. The purchase agreement includes an earnout clause equal to two times increases in prior period adjusted earnings (as defined in the purchase agreement) to be earned in 1999 and 2000. During 2000, the Company recorded $2.9 million as an addition to goodwill based on meeting the earnout. There were no earnout adjustments for 2001 or 1999. On June 24, 1998, the Company acquired all of the common stock of Spargo Consulting PLC ("Spargo"), an information technology consultancy service provider, organized under the laws of the United Kingdom for 1,887,000 shares of Computer Horizon stock. This transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of Spargo. On January 31, 2001, the Company sold the stock of Spargo (see Note 3). 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. In the fourth quarter of 2000, the Company made the decision to sell Princeton. The net assets of Princeton have been included in the assets held for sale. Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2001, 2000 AND 1999 NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED) IMPACT OF ECONOMIC STIMULUS ACT ON INCOME TAX REFUND CLAIM On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 (the "Act") was enacted into law. This Act contains many economic and tax incentives, including the extension of the carryback period for losses arising in years ending during 2001 and 2002 to five years from the previous two year carryback rule. As a result, the Company's tax refund claim of approximately $10 million at December 31, 2001 will increase to approximately $30 million. The additional refund amount will be recorded during the first quarter of 2002. SALE OF PRINCETON SOFTECH, INC. On March 25, 2002, the Company completed the sale of the net assets of Princeton Softech, Inc. for cash of approximately $16 million. The gain on sale is estimated to be approximately $3.6 million and will be recorded during the first quarter of 2002. PURCHASE OF TREASURY STOCK Subsequent to December 31, 2001, the Company has purchased 161,000 shares of its common stock at an aggregate cost of approximately $582,000. Computer Horizons Corp. and Subsidiaries MARKET AND DIVIDEND INFORMATION Years ended December 31, 2001 and 2000 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, 2001 and 2000 is as follows:
2001 2000 ------------------------- ----------------------- HIGH LOW HIGH LOW ----- ----- ----- ----- Quarter First $ 5.19 $ 2.19 $25.00 $13.63 Second 4.08 2.00 16.25 11.00 Third 4.49 2.53 13.63 6.81 Fourth 3.32 2.50 6.80 2.38
The Company plans to reinvest its earnings in future growth opportunities and, therefore, does not anticipate paying cash dividends in the near future and has not paid any to date. As of December 31, 2001, there were approximately 1,087 holders of record of common stock. EX-10 3 a2074673zex-10.txt EXHIBIT 10 (L) EXHIBIT 10(L) FINANCING AGREEMENT THE CIT GROUP/BUSINESS CREDIT, INC. (AS AGENT AND LENDER) AND COMPUTER HORIZONS CORP. (AS BORROWER) DATED: JULY 31, 2001 TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS.....................................................3 SECTION 2. CONDITIONS PRECEDENT...........................................16 SECTION 3. REVOLVING LOANS................................................20 SECTION 4. INTENTIONALLY OMITTED SECTION 5. LETTERS OF CREDIT..............................................24 SECTION 6. COLLATERAL.....................................................27 SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS......................32 SECTION 8. INTEREST, FEES AND EXPENSES....................................38 SECTION 9. POWERS.........................................................45 SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................46 SECTION 11. TERMINATION....................................................49 SECTION 12. MISCELLANEOUS..................................................49 SECTION 13. AGREEMENT BETWEEN THE LENDERS..................................49 SECTION 14. AGENCY.........................................................49
EXHIBIT Exhibit A - Form of Revolving Loan Promissory Note Exhibit B - Form of Assignment and Transfer Agreement SCHEDULES Schedule 1 - Collateral Information 2 THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, with offices located at 1211 Avenue of the Americas, New York, New York 10036 (hereinafter "CIT"), and CIT as agent for the lenders (the "Agent"), and any other party which now or hereafter becomes a lender hereunder pursuant to Section 13 hereof (individually a "Lender" and collectively the "Lenders") are pleased to confirm the terms and conditions under which the Agent shall make revolving loans and other financial accommodations to COMPUTER HORIZONS CORP., a New York corporation with a principal place of business at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey, 07046 (herein the "Company"). SECTION 1. DEFINITIONS ACCOUNTS shall mean all of the Company's now existing and future: (a) accounts (as defined in the UCC), and any and all other receivables (whether or not specifically listed on schedules furnished to the Agent), including, without limitation, all accounts created by, or arising from, all of the Company's renditions of services or sales, leases, or rentals of goods to its customers, including but not limited to, those accounts arising under any of the Company's trade names or styles, or through any of the Company's divisions; (b) any and all instruments, documents, chattel paper (including electronic chattel paper) (all as defined in the UCC); (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods; (e) reserves and credit balances arising in connection with or pursuant hereto; (f) guarantees, supporting obligations, payment intangibles and letter of credit rights (all as defined in the UCC); (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any and all of the foregoing (including all rights to payment, including those arising in connection with bank and non-bank credit cards), and including books and records and any electronic media and software thereto; (i) notes, deposits or property of account debtors securing the obligations of any such account debtors to the Company; and (j) cash and non-cash proceeds (as defined in the UCC) of any and all of the foregoing. ADMINISTRATIVE MANAGEMENT FEE shall mean the sum of $30,000.00 which shall be paid to the Agent in accordance with Section 8, paragraph 8.11 hereof to offset the expenses and costs (excluding Out-of-Pocket Expenses and auditor fees) of the Agent in connection with administration, record keeping, analyzing and evaluating the Collateral. ANNIVERSARY DATE shall mean the date occurring three (3) years from the Closing Date and the same date in every year thereafter. ASSIGNMENT AND TRANSFER AGREEMENT shall mean the Assignment and Transfer Agreement in the form of Exhibit E hereto. 3 AVAILABILITY shall mean at any time the amount by which: (a) the Borrowing Base exceeds (b) the outstanding aggregate amount of all Obligations, including without limitation, all Obligations with respect to Revolving Loans, but excluding the Letters of Credit. AVAILABILITY RESERVE shall mean the sum of: (a) three (3) months rental payments or similar charges for any of the Company's leased premises or, if applicable, Collateral locations for which the Company has not delivered to the Agent a landlord's waiver in form and substance reasonably satisfactory to the Agent, provided that the foregoing amounts shall be adjusted from time to time hereafter upon (x) delivery to the Agent of any such acceptable waiver, (y) if applicable, the opening or closing of a Collateral location and/or (z) any change in the amount of rental, storage or similar payments or charges; (b) at Agents discretion, reserves for (i) wages and payroll in States having wage priority statutes or similar statutes which may have priority over Agent's liens (as determined by the Agent), (ii) payroll taxes, (iii) volume rebate reserves, (iv) customer deposits and (v) billing adjustments (based on the Company's historical rate and time discrepancies, as determined by the Agent); (c) any reserve which the Agent may reasonably require from time to time pursuant to this Financing Agreement, including without limitation, for Letters of Credit pursuant to Paragraph 5.1 of Section 5 hereof; and (d) such other reserves as the Agent deems necessary in its commercially reasonable judgment as a result of (x) negative forecasts and/or trends in the Company's business, industry, prospects, profits, operations or financial condition or (y) other issues, circumstances or facts that could otherwise negatively impact the Company, its business, prospects, profits, operations, industry, financial condition or assets. BORROWING BASE shall mean (a) eighty five percent (85 %) of the Company's aggregate outstanding Eligible Accounts Receivable, less (b) without duplication, the sum of (i) a dilution percentage, which as of the Closing Date is in an amount not to exceed 5%, plus (ii) any applicable Availability Reserves. BUSINESS DAY shall mean any day on which the Agent and The Chase Manhattan Bank are open for business. CAPITAL EXPENDITURES shall mean, for any period, the aggregate expenditures of the Company during such period on account of, property, plant, equipment or similar fixed assets that, in conformity with GAAP, are required to be reflected in the balance sheet of the Company. CAPITAL IMPROVEMENTS shall mean operating Equipment and facilities (other than land) acquired or installed for use in the Company's business operations. CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed) which, in conformity with GAAP, is accounted for as a capital lease or a Capital Expenditure in the balance sheet of the Company. CHASE BANK RATE shall mean the rate of interest per annum announced by The Chase Manhattan Bank from time to time as its prime rate in effect at its principal office in New York City. (The 4 prime rate is not intended to be the lowest rate of interest charged by The Chase Manhattan Bank to its borrowers). CHASE BANK RATE LOANS shall mean any loans or advances pursuant to this Financing Agreement made or maintained at a rate of interest based upon the Chase Bank Rate. CLOSING DATE shall mean the date that this Financing Agreement has been duly executed by the parties hereto and delivered to the Agent. COLLATERAL shall mean all present and future Accounts, Equipment, Inventory, Documents of Title, General Intangibles, Real Estate, pledged stock of the Company's subsidiaries (subject to Section 2(j) hereof, except for the stock of EB Networks and Princeton Softech, Inc.), and Other Collateral. COLLECTION DAYS shall mean one (1) Business Day to provide for the deposit, clearance and collection of checks or other instruments representing the proceeds of Collateral, the amount of which has been credited to the Company's Revolving Loan Account, and for which interest may be charged on the aggregate amount of such deposits, at the rate provided for in Paragraph 8.1 of Section 8 of this Financing Agreement. COMMITMENT shall mean each Lender's commitment in accordance with this Financing Agreement to make Revolving Loans (the "Revolving Credit Commitment"), in the amount of their respective pro rata share set forth in schedules prepared by the Agent or the Assignment and Transfer Agreement executed by each such Lender. COMMITMENT LETTER shall mean the Commitment Letter, dated June 7th, 2001, issued by the Agent to, and accepted by, the Company. CONSOLIDATED BALANCE SHEET shall mean a consolidated or compiled, as applicable, balance sheet for the Company and its consolidated subsidiaries, eliminating all inter-company transactions and prepared in accordance with GAAP. CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus individual balance sheets for the Company and its consolidated subsidiaries, showing all eliminations of inter-company transactions, including a balance sheet for the Company exclusively, all prepared in accordance with GAAP. COPYRIGHTS shall mean all present and hereafter acquired copyrights, copyright registrations, recordings, applications, designs, styles, licenses, marks, prints and labels bearing any of the foregoing, goodwill, any and all general intangibles, intellectual property and rights pertaining thereto, and all cash and non-cash proceeds thereof. CURRENT ASSETS shall mean those assets of the Company which, in accordance with GAAP, are classified as current. 5 CURRENT LIABILITIES shall mean those liabilities of the Company which, in accordance with GAAP, are classified as "current", provided however, that, notwithstanding GAAP, the Revolving Loans and the current portion of Permitted Indebtedness shall be considered "current liabilities". CURRENT RATIO shall mean the ratio determined by dividing Current Assets by Current Liabilities. DEFAULT shall mean any event specified in Section 10 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act, has been satisfied. DEFAULT RATE OF INTEREST shall mean a rate of interest per annum on any Obligations hereunder, equal to the sum of: (a) two percent (2%) and (b) the applicable increment over the Chase Bank Rate (as set forth in paragraph 8.1 hereof) plus the Chase Bank Rate, or the applicable increment over the LIBOR Rate (as set forth in paragraph 8.14 hereof) plus the LIBOR Rate, which the Agent shall be entitled to charge the Company on all Obligations due the Agent on behalf of the Lenders by the Company, as further set forth in Paragraph 10.2 of Section 10 of this Financing Agreement. DEPOSITORY ACCOUNTS shall mean the collection accounts, which are subject to the Agent's instructions, as specified in Paragraph 3.4 of Section 3 of this Financing Agreement. DOCUMENTATION FEE shall mean (a) the sum of $20,000.00 intended to compensate the Agent for the use of the Agent's in-house Legal Department and facilities in documenting, in whole or in part, the initial transaction solely on behalf of the Agent, exclusive of Out-of-Pocket Expenses, and (b) subsequent to the Closing Date, the Agent's standard fees relating to any and all modifications, waivers, releases, amendments or additional collateral with respect to this Financing Agreement, the Collateral and/or the Obligations. DOCUMENTS OF TITLE shall mean all present and future documents (as defined in the UCC), and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. EARLY TERMINATION DATE shall mean the date on which the Company terminates this Financing Agreement or the Revolving Line of Credit which date is prior to an Anniversary Date. EARLY TERMINATION FEE shall: (a) mean the fee the Agent on behalf of the Lenders is entitled to charge the Company in the event the Company terminates the Revolving Line of Credit or this Financing Agreement on a date prior to an Anniversary Date; and (b) be determined by multiplying the Revolving Line of Credit by (x) two percent (2%) if the Early Termination Date occurs on or before one (1) year from the Closing Date, (y) one percent (1%) if the Early Termination Date occurs after one (1) year from the Closing Date but on or before two (2) years from the Closing Date; and (z) one half of one percent (0.5%) if the Early Termination Date occurs after two (2) years from the Closing Date but prior to an Anniversary Date, provided that in the event The Chase Manhattan 6 Bank refinances the Obligations hereunder and this Agreement is terminated in accordance with its terms, the foregoing Early Termination Fee shall not be due hereunder. EBITDA shall mean, in any period, all earnings of the Company for said period before all interest, tax obligations, depreciation and amortization of the Company for said period, determined in accordance with GAAP on a consistent basis with the latest audited financial statements of the Company, but excluding the effect of extraordinary or non-reoccurring gains or losses for such period. ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of the Company's Trade Accounts Receivable that are subject to a valid, exclusive, first priority and fully perfected security interest in favor of the Agent, on behalf of the Lenders, which conform to the warranties contained herein and which, at all times, continue to be acceptable to the Agent in the exercise of its reasonable business judgment, LESS, without duplication and in the Agent's discretion, the sum of: (a) any returns, discounts, claims, credits and allowances of any nature (whether issued, owing, granted, claimed or outstanding), and (b) reserves for any such Trade Accounts Receivable that arise from or are subject to or include: (i) sales to the United States of America or to any State or other governmental entity or to any agency, department or division thereof, except for any such sales as to which the Company has complied with the Assignment of Claims Act of 1940 or any other applicable statute, rules or regulation, to the Agent's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales, other than sales which otherwise comply with all of the other criteria for eligibility hereunder and are secured by letters of credit (in form and substance satisfactory to the Agent) issued or confirmed by, and payable at, banks having a place of business in the United States of America; (iii) Accounts that remain unpaid more than ninety (90) days from invoice date; (iv) contra accounts; (v) sales to any subsidiary, or to any company affiliated with the Company in any way; (vi) bill and hold (deferred shipment) or consignment sales; (vii) sales to any customer which is: (A) insolvent, (B) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts, or (D) financially unacceptable to the Agent or has a credit rating unacceptable to the Agent; (viii) all sales to any customer if fifty percent (50%) or more of the aggregate dollar amount of all outstanding invoices to such customer are unpaid more than ninety (90) days from invoice date; (ix) pre-billed receivables, deposits and receivables arising from progress billing; (x) an amount representing, historically, returns, discounts, claims, credits, allowances and applicable terms; (xi) sales not payable in United States currency; and (xii) any other reasons deemed necessary by the Agent in its reasonable judgment, including without limitation those which are customary either in the commercial finance industry or in the lending practices of the Agent and/or the Lenders. EQUIPMENT shall mean all present and hereafter acquired equipment (as defined in the UCC) including, without limitation, all machinery, equipment, furnishings and fixtures, and all additions, substitutions and replacements thereof, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all proceeds thereof of whatever sort. 7 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and the rules and regulations promulgated thereunder from time to time. EUROCURRENCY RESERVE REQUIREMENTS for any day, as applied to a LIBOR Loan, shall mean the aggregate (without duplication) of the maximum rates of reserve requirements (expressed as a decimal fraction) in effect with respect to the Agent and/or any present or future Lender or participant on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under Regulation D or any other applicable regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect, dealing with reserve requirements prescribed for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by the Agent and/or any such Lenders or participants (such rate to be adjusted to the nearest one sixteenth of one percent (1/16 of 1%) or, if there is not a nearest one sixteenth of one percent (1/16 of 1%), to the next higher one sixteenth of one percent (1/16 of 1%)). EVENT(s) OF DEFAULT shall have the meaning provided for in Section 10 of this Financing Agreement. EXECUTIVE OFFICERS shall mean the Chairman, President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Executive Vice President, Treasurer, Controller and Secretary of the Company. FISCAL QUARTER shall mean, with respect to the Company, each three (3) month period ending on March 31st, June 30th, September 30th and December 31st of each Fiscal Year. FISCAL YEAR shall mean each twelve (12) month period commencing on January 1st of each year and ending on the following December 31st. FIXED CHARGE COVERAGE RATIO shall mean, for the relevant period, the ratio determined by dividing EBITDA by the sum of (a) all interest obligations paid or due, (b) the amount of principal repaid or scheduled to be repaid on any fixed debt or term loans, and all other Indebtedness of the Company and its subsidiaries other than (i) the Revolving Loans, and (ii) reimbursement Obligations in respect of Letters of Credit, (c) Capital Expenditures actually incurred which were not financed or refinanced hereunder, (d) all redemptions of stock, and any permitted dividends and other distributions of a similar nature made in cash, and (e) all federal, state provincial and local income tax expenses due and payable. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time and for the period as to which such accounting principles are to apply, provided that in the event the Company modifies its accounting principles and procedures as applied as of the Closing Date, the Company shall provide to the Agent and the Lenders such statements of reconciliation as shall be in form and substance acceptable to the Agent. 8 GENERAL INTANGIBLES shall mean all present and hereafter acquired general intangibles (as defined in the UCC), and shall include, without limitation, all present and future right, title and interest in and to: (a) all Trademarks, tradenames, corporate names, business names, logos and any other designs or sources of business identities, (b) Patents, together with any improvements on said Patents, utility models, industrial models, and designs, (c) Copyrights, (d) trade secrets, (e) licenses, permits and franchises, (f) all applications with respect to the foregoing, (g) all right, title and interest in and to any and all extensions and renewals, (h) goodwill with respect to any of the foregoing, (i) any other forms of similar intellectual property, (j) all customer lists, distribution agreements, supply agreements, blueprints, indemnification rights and tax refunds, together with all monies and claims for monies now or hereafter due and payable in connection with any of the foregoing or otherwise, and all cash and non-cash proceeds thereof, including, without limitation, the proceeds or royalties of any licensing agreements between the Company and any licensee of any of the Company's General Intangibles. GUARANTIES shall mean the guaranty documents executed and delivered by the Guarantors guaranteeing the Obligations. GUARANTORS shall mean each of the Company's subsidiaries, except as further set forth herein, EB Networks and Chimes UK. INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or otherwise, which are any of the following: (a) obligations in respect of borrowed money or for the deferred purchase price of property, services or assets, other than Inventory, or (b) lease obligations which, in accordance with GAAP, have been, or which should be capitalized. INSURANCE PROCEEDS shall mean proceeds or payments from an insurance carrier with respect to any loss, casualty or damage to Collateral. INTEREST PERIOD shall mean: (a) with respect to any initial request by the Company for a LIBOR Loan, a one month, two month or three month period commencing on the borrowing or conversion date with respect to a LIBOR Loan and ending one, two or three months thereafter, as applicable; and (b) thereafter with respect to any continuation of, or conversion to, a LIBOR Loan, at the option of the Company, any one month, two month or three month period commencing on the last day of the immediately preceding Interest Period applicable to such LIBOR Loan and ending one, two or three months thereafter, as applicable; PROVIDED THAT, the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Working Day, that Interest Period shall be extended to the next succeeding Working Day, unless the result of 9 such extension would extend such payment into another calendar month in which event such Interest Period shall end on the immediately preceding Working Day; (ii) any Interest Period that begins on the last Working Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month, at the end of such Interest Period) shall end on the last Working Day of a calendar month; and (iii) for purposes of determining the availability of Interest Periods, such Interest Periods shall be deemed available if (x) Chase Manhattan Bank quotes an applicable rate or the Agent determines LIBOR, as provided in the definition of LIBOR, (y) the LIBOR determined by Chase Manhattan Bank or the Agent will adequately and fairly reflect the cost of maintaining or funding its loans bearing interest at LIBOR, for such Interest Period, and (z) such Interest Period will end on or before the earlier of Anniversary Date or the last day of the then current term of this Financing Agreement. If a requested Interest Period shall be unavailable in accordance with the foregoing sentence, the Company shall continue to pay interest on the Obligations at the applicable per annum rate based upon the Chase Bank Rate. INVENTORY shall mean all of the Company's present and hereafter acquired inventory (as defined in the UCC) and including, without limitation, all merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods and materials used or usable in manufacturing, processing, packaging or shipping same in all stages of production from raw materials through work-in-process to finished goods, and all proceeds thereof of whatever sort. INVESTMENT PROPERTY shall mean all now owned and hereafter acquired investment property (as defined in the UCC) and all proceeds thereof. ISSUING BANK shall mean the bank issuing Letters of Credit for the Company. LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of the Agent on behalf of the Lenders in accordance with Section 5 hereof by the Issuing Bank for or on behalf of the Company. LETTER OF CREDIT GUARANTY shall mean the guaranty delivered by the Agent, on behalf of the Lenders, to the Issuing Bank of the Company's reimbursement obligations under the Issuing Bank's reimbursement agreement, application for Letter of Credit or other like document. LETTER OF CREDIT GUARANTY FEE shall mean the fee the Agent, on behalf of the Lenders, may charge the Company under Paragraph 8.3 of Section 8 of this Financing Agreement for: (a) issuing a Letter of Credit Guaranty, and/or (b) otherwise aiding the Company in obtaining Letters of Credit, all pursuant to Section 5 hereof. LETTER OF CREDIT SUB-LINE shall mean the commitment of the Lenders to assist the Company in obtaining Letters of Credit, pursuant to Section 5 hereof, in an aggregate amount of $2,500,000. 10 LIBOR shall mean, at any time of determination, and subject to availability, for each applicable Interest Period, a variable rate of interest equal to: (a) at the Agent's election (i) the applicable LIBOR quoted to the Agent by The Chase Manhattan Bank (or any successor thereof), or (ii) the rate of interest determined by the Agent at which deposits in U.S. dollars are offered for the relevant Interest Period based on information presented on Telerate Systems at Page 3750 as of 11:00 A.M. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period, PROVIDED THAT, if at least two such offered rates appear on the Telerate System at Page 3750 in respect of such Interest Period, the arithmetic mean of all such rates (as determined by the Agent) will be the rate used; divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of Eurocurrency Reserve Requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period. LIBOR LENDING OFFICE with respect to the Agent, shall mean the office of The Chase Manhattan Bank, or any successor thereof, maintained at 270 Park Avenue, New York, NY 10017. LIBOR LOAN shall mean any loans made pursuant to this Financing Agreement which are made or maintained at a rate of interest based upon LIBOR, provided that (i) no Default or Event of Default has occurred hereunder, which has not been waived in writing by the Required Lenders, and (ii) no LIBOR Loan shall be made with an Interest Period that ends subsequent to an Anniversary Date or any applicable Early Termination Date. LINE OF CREDIT shall mean the aggregate commitment of the Lenders to (a) make Revolving Loans pursuant to Section 3 of this Financing Agreement and (b) assist the Company in opening Letters of Credit pursuant to Section 5 of this Financing Agreement, in the aggregate amount equal to $40,000,000; provided that nothing herein shall be deemed to increase any Lender's commitment hereunder, and which commitment shall be set forth in the applicable schedules maintained by the Agent or the Assignment and Transfer Agreements executed by such Lender. LINE OF CREDIT FEE shall: (a) mean the fee due the Agent at the end of each month for the Line of Credit, and (b) be determined by multiplying the difference between (i) the Revolving Line of Credit, and (ii) the sum, for said month, of (x) the average daily balance of Revolving Loans plus (y) the average daily balance of Letters of Credit outstanding for said month, by 0.375% per annum for the number of days in said month. LOAN DOCUMENTS shall mean this Financing Agreement, the Promissory Notes, the other closing documents and any other ancillary loan and security agreements executed from time to time in connection with this Financing Agreement, all as may be renewed, amended, extended, increased or supplemented from time to time. LOAN FACILITY FEE shall mean the fee payable to the Agent and the Lenders (as applicable) in accordance with, and pursuant to, the provisions of Paragraph 8.7 of Section 8 of this Financing Agreement. 11 NET WORTH shall mean, at any date of determination, an amount equal to (a) Total Assets minus (b) Total Liabilities, and shall be determined in accordance with GAAP, on a consistent basis with the latest audited financial statements of the Company. OBLIGATIONS shall mean all loans, advances and extensions of credit made or to be made by the Agent and/or the Lenders to the Company or to others for the Company's account (including, without limitation, all Revolving Loans, Letter of Credit Guaranties); any and all indebtedness and obligations which may at any time be owing by the Company to the Agent and/or the Lenders howsoever arising, whether now in existence or incurred by the Company from time to time hereafter; whether principal, interest, fees, costs, expenses or otherwise; whether secured by pledge, lien upon or security interest in any of the Company's Collateral, assets or property or the assets or property of any other person, firm, entity or corporation; whether such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect and whether the Company is liable to the Agent and/or the Lenders for such indebtedness as principal, surety, endorser, guarantor or otherwise. Obligations shall also include indebtedness owing to the Agent and/or the Lenders by the Company under any Loan Document or under any other agreement or arrangement now or hereafter entered into between the Company and the Agent and/or Lenders; the Company's liability to the Agent and/or the Lenders as maker or endorser of any promissory note or other instrument for the payment of money; the Company's liability to the Agent and/or the Lenders under any instrument of guaranty or indemnity, or arising under any guaranty, endorsement or undertaking which the Agent and/or the Lenders may make or issue to others for the Company's account, including any Letter of Credit Guaranty or other accommodation extended by CIT with respect to applications for Letters of Credit, the Agent's and/or Lenders' acceptance of drafts or the Agent's and/or Lenders' endorsement of notes or other instruments for the Company's account and benefit. OPERATING CASH FLOW shall mean EBITDA less Capital Expenditures, determined in accordance with GAAP consistently applied. OPERATING LEASES shall mean all leases of property (whether real, personal or mixed) other than Capital Leases. OTHER COLLATERAL shall mean all now owned and hereafter acquired lockbox, blocked account and any other deposit accounts maintained with any bank or financial institutions into which the proceeds of Collateral are or may be deposited; all other deposit accounts (as defined in the UCC); Investment Property; all cash and other monies and property in the possession or control of the Agent and/or any of the Lenders; all books, records, ledger cards, disks and related data processing software at any time evidencing or containing information relating to any of the Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and all cash and non-cash proceeds of the foregoing. OUT-OF-POCKET EXPENSES shall mean all of the Agent's (and the Lenders upon the occurrence of an Event of Default which is not waived by the Required Lenders) present and future expenses incurred relative to this Financing Agreement or any other Loan Documents, whether incurred heretofore or 12 hereafter, which expenses shall include, without being limited to: the cost of record searches, all costs and expenses incurred by the Agent in opening bank accounts, depositing checks, receiving and transferring funds, and wire transfer charges, any charges imposed on the Agent due to returned items and "insufficient funds" of deposited checks and the Agent's standard fees relating thereto, any amounts paid by, incurred by or charged to, the Agent and/or the Lenders by the Issuing Bank under a Letter of Credit Guaranty or the Company's reimbursement agreement, application for Letters of Credit or other like document which pertain either directly or indirectly to such Letters of Credit, and the Agent's standard fees relating to the Letters of Credit and any drafts thereunder, travel, lodging and similar expenses of the Agent's personnel in connection with inspecting and monitoring the Collateral from time to time hereunder, any applicable counsel fees and disbursements, fees and taxes relative to the filing of financing statements, all expenses, costs and fees set forth in Paragraph 10.3 of Section 10 of this Financing Agreement. OVERADVANCE RATE shall mean a rate equal to one-half of one percent (1/2%) per annum in excess of the applicable contract rate of interest determined in accordance with Section 8, Paragraph 8.1(a) of this Financing Agreement. OVERADVANCES shall mean the amount by which (a) the sum of all outstanding Revolving Loans, Letters of Credit and advances made hereunder exceed (b) the Borrowing Base. PATENTS shall mean all of the Company's present and hereafter acquired patents, patent applications, registrations, any reissues or renewals thereof, licenses, any inventions and improvements claimed thereunder, and all general intangible, intellectual property and patent rights with respect thereto of the Company, and all income, royalties, cash and non-cash proceeds thereof. PERMITTED ENCUMBRANCES shall mean: (a) liens existing on the date hereof on specific items of Equipment and other liens expressly permitted, or consented to in writing by the Agent and/or the Required Lenders; (b) Purchase Money Liens; (c) liens of local or state authorities for franchise or other like Taxes, provided that the aggregate amounts of such liens shall not exceed $100,000.00 in the aggregate at any one time; (d) statutory liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like liens imposed by law, created in the ordinary course of business and for amounts not yet due (or which are being contested in good faith, by appropriate proceedings or other appropriate actions which are sufficient to prevent imminent foreclosure of such liens) and with respect to which adequate reserves or other appropriate provisions are being maintained by the Company in accordance with GAAP; (e) deposits made (and the liens thereon) in the ordinary course of business of the Company (including, without limitation, security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; (f) easements (including, without limitation, reciprocal easement agreements and utility agreements), encroachments, minor defects or irregularities in title, variation and other restrictions, charges or encumbrances (whether or not recorded) affecting the 13 Real Estate, if applicable, and which in the aggregate (A) do not materially interfere with the occupation, use or enjoyment by the Company of its business or property so encumbered and (B) in the reasonable business judgment of the Agent do not materially and adversely affect the value of such Real Estate; and (g) liens granted the Agent by the Company; (h) liens of judgment creditors provided such liens do not exceed, in the aggregate, at any time, $50,000.00 (other than liens bonded or insured to the reasonable satisfaction of the Agent); and (i) tax liens which are not yet due and payable or which are being diligently contested in good faith by the Company by appropriate proceedings, and which liens are not (x) filed on any public records, (y) other than with respect to Real Estate, senior to the liens of the Agent or (z) for Taxes due the United States of America or any state thereof having similar priority statutes, as further set forth in paragraph 7.6 hereof. PERMITTED INDEBTEDNESS shall mean: (a) current Indebtedness maturing in less than one year and incurred in the ordinary course of business for raw materials, supplies, equipment, services, Taxes or labor; (b) the Indebtedness secured by Purchase Money Liens; (c) Subordinated Debt; (d) Indebtedness arising under the Letters of Credit and this Financing Agreement; (e) deferred Taxes and other expenses incurred in the ordinary course of business; and (f) other Indebtedness existing on the date of execution of this Financing Agreement and listed in the most recent financial statement delivered to the Agent and the Lenders or otherwise disclosed to the Agent and the Lenders in writing prior to the Closing Date. PERMITTED INVESTMENTS shall mean any of the following investments: a. U.S. Treasuries/Agencies b. Repurchase agreements collateralized by "(a)" above c. Corporate Debt, eligible issuers must have, at time of purchase, ratings of at least A-1 by S & P or P-1 by Moody's for short terms securities, or at least A by S & P or A by Moody's for long term securities d. Certificates of Deposit/Banker's Acceptances issued by domestic/foreign financial institutions rate A-2/A by S & P and P-2/A by Moody's e. Municipals issued with rating at least MIG-1 or AA f. Money Market Mutual Funds including, but not limited to, those managed by JP Morgan Chase and its affiliates which invest in investments described in Items "(a)" through "(e)" above. No more than 10% of the Account's total assets may be invested, at time of purchase, in the securities of a single issuer, except for all U.S. Government securities and repurchase agreements backed by U.S. Governments securities as well as money market mutual funds, to which there are no limitations. The maximum maturity of any Permitted Investment or issue hereunder will not exceed 90 days at time of purchase. Average maturity of portfolio should be 45 days or less. 14 PROMISSORY NOTE shall mean the note, in the form of Exhibit A attached hereto, delivered by the Company to the Agent to evidence the Revolving Loans pursuant to, and repayable in accordance with, the provisions of Section 3 of this Financing Agreement. PURCHASE MONEY LIENS shall mean liens on any item of Equipment acquired after the date of this Financing Agreement provided that (a) each such lien shall attach only to the property to be acquired, (b) a description of the Equipment so acquired is furnished to the Agent, and (c) the debt incurred in connection with such acquisitions shall not exceed, in the aggregate, $50,000.00 in any Fiscal Year. REAL ESTATE shall mean the Company's fee and/or leasehold interests in the real property. REQUIRED LENDERS shall mean the Lenders holding aggregate commitments under this Financing Agreement in an amount of 51% or more. REVOLVING LINE OF CREDIT shall mean the aggregate commitment of the Lenders to make loans and advances pursuant to Section 3 of this Financing Agreement and issue Letters of Credit Guaranties pursuant to Section 5 hereof to the Company, in the aggregate amount of $40,000,000. REVOLVING LOAN ACCOUNT shall mean the account on the Agent's books, in the Company's name, in which the Company will be charged with all Obligations under this Financing Agreement. REVOLVING LOANS shall mean the loans and advances made, from time to time, to or for the account of the Company by the Agent, on behalf of the Lenders, pursuant to Section 3 of this Financing Agreement. SETTLEMENT DATE shall mean the date, weekly, and more frequently, at the discretion of the Agent, upon the occurrence of an Event of Default or a continuing decline or increase of the Revolving Loans that the Agent and the Lenders shall settle amongst themselves so that (a) the Agent shall not have, as the Agent, any money at risk and (b) on such Settlement Date the Lenders shall have a pro rata amount of all outstanding Revolving Loans and Letters of Credit, provided that each Settlement Date for a Lender shall be a Business Day on which such Lender and its bank are open for business. SUBORDINATED DEBT shall mean, if applicable, any debt due a Subordinating Creditor (and the note(s) evidencing such) which has been subordinated, by a Subordination Agreement, to the prior payment and satisfaction of the Obligations of the Company to the Agent and the Lenders (in form and substance satisfactory to the Agent and/or the Required Lenders). SUBORDINATING CREDITOR shall mean, if applicable, the Person due any Subordinated Debt and any other party hereafter executing a Subordination Agreement. SUBORDINATION AGREEMENT shall mean the agreement (in form and substance satisfactory to the Agent) among the Company, a Subordinating Creditor and the Agent, pursuant to which 15 Subordinated Debt is subordinated to the prior payment and satisfaction of the Company's Obligations to the Agent and the Lenders (in form and substance satisfactory to the Agent). TAXES shall mean all federal, state, municipal and other governmental taxes, levies, charges, claims and assessments which are or may be due by the Company with respect to its business, operations, Collateral or otherwise. TOTAL ASSETS shall mean total assets determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Company. TOTAL LIABILITIES shall mean total liabilities determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Company. TRADE ACCOUNTS RECEIVABLE shall mean that portion of the Company's Accounts which arises from the sale of Inventory or the rendition of services in the ordinary course of the Company's business. TRADEMARKS shall mean all present and hereafter acquired trademarks, trademark registrations, recordings, applications, tradenames, trade styles, service marks, prints and labels (on which any of the foregoing may appear), licenses, reissues, renewals, and any other intellectual property and trademark rights pertaining to any of the foregoing, together with the goodwill associated therewith, and all cash and non-cash proceeds thereof. UCC shall mean the Uniform Commercial Code as the same may be amended and in effect from time to time in the state of New York. U.S. TREASURIES shall mean marketable direct obligations issued by, or unconditionally guaranteed by, or insured by the United States of America or issued by any agency thereof and backed by the full faith and credit of the United States. WORKING CAPITAL shall mean Current Assets in excess of Current Liabilities. WORKING DAY shall mean any Business Day on which dealings in foreign currencies and exchanges between banks may be transacted. SECTION 2. CONDITIONS PRECEDENT The obligation of the Agent and the Lenders to make the initial loans hereunder is subject to the satisfaction of, extension of or waiver of in writing, on or prior to, the Closing Date, the following conditions precedent: (a) LIEN SEARCHES - The Agent shall have received tax, judgment and Uniform Commercial Code searches satisfactory to the Agent for all locations presently occupied or used by the Company. 16 (b) CASUALTY INSURANCE - The Company shall have delivered, within 30 days of the Closing Date, to the Agent evidence satisfactory to the Agent that casualty insurance policies listing the Agent as additional insured, loss payee or mortgagee, as the case may be, are in full force and effect, all as set forth in Paragraph 7.5 of Section 7 of this Financing Agreement. (c) UCC FILINGS - Any financing statements required to be filed in order to create, in favor of the Agent, on behalf of the Lenders, a first perfected security interest in the Collateral, subject only to the Permitted Encumbrances, shall have been properly filed in each office in each jurisdiction required in order to create in favor of the Agent for the benefit of the Lenders a perfected lien on the Collateral. The Agent shall have received acknowledgment copies of all such filings (or, in lieu thereof, the Agent shall have received other evidence satisfactory to the Agent that all such filings have been made) and the Agent shall have received evidence that all necessary filing fees and all taxes or other expenses related to such filings have been paid in full. (d) BOARD RESOLUTION - The Agent shall have received a copy of the resolutions of the Board of Directors of each of the Company and the Guarantors (as the case may be) authorizing the execution, delivery and performance of (i) this Financing Agreement, (ii) the Guaranties, and (iii) any related agreements, in each case certified by the Secretary or Assistant Secretary of the Company and the Guarantors (as the case may be) as of the date hereof, together with a certificate of the Secretary or Assistant Secretary of the Company and the Guarantors (as the case may be) as to the incumbency and signature of the officers of the Company and/or the Guarantors executing such Loan Documents and any certificate or other documents to be delivered by them pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary, provided that with respect to the Guarantors, such documents shall be provided within 30 days from the Closing Date. (e) CORPORATE ORGANIZATION - The Agent shall have received (i) a copy of the Certificate of Incorporation of the Company and the Guarantors certified by the Secretary of State of the state of its incorporation, and (ii) a copy of the By-Laws of the Company certified by the Secretary or Assistant Secretary thereof, all as amended through the date hereof, provided that with respect to the Guarantors, such documents shall be provided within 30 days from the Closing Date. (f) OFFICER'S CERTIFICATE - The Agent shall have received an executed Officer's Certificate of the Company, satisfactory in form and substance to the Agent, certifying that (i) the representations and warranties contained herein are true and correct in all material respects on and as of the Closing Date; (ii) the Company is in compliance with all of the terms and provisions set forth herein; and (iii) no Default or Event of Default has occurred (g) OPINIONS - Counsel for the Company and the Guarantors shall have delivered to the Agent on behalf of the Lenders opinions satisfactory to the Agent opining, inter alia, that, subject to the (i) filing, priority and remedies provisions of the Uniform Commercial Code, (ii) the provisions of the Bankruptcy Code, insolvency statutes or other like laws, (iii) the equity powers of a court of law and (iv) such other matters as may be agreed upon with the Agent: (x) this Financing Agreement, the Guaranty and all other Loan Documents of the Company and the Guarantors are (A) valid, binding and enforceable according to their terms, (B) are duly authorized, executed and delivered, and (C) do not violate any terms, provisions, representations or covenants in the charter or by-laws of the Company or the Guarantors or, to the best knowledge of such counsel, of any loan agreement, mortgage, deed of trust, note, security or pledge agreement, indenture or other contract to which the Company or the Guarantors are signatories or by which the Company or the Guarantors or their 17 assets are bound. In addition, counsel to the Subordinating Creditor(s) shall have delivered an opinion satisfactory to the Agent that the Subordination Agreement(s) have been duly authorized, executed and delivered and constitute valid and binding agreements enforceable against such Subordinating Creditor(s) in accordance with the terms thereof. (h) ABSENCE OF DEFAULT - No Default or Event of Default shall have occurred and no material adverse change shall have occurred in the financial condition, business, prospects, profits, operations or assets of the COMPANY, the Guarantors or the Company's subsidiaries. (i) LEGAL RESTRAINTS/LITIGATION - As of the Closing Date, there shall be no: (x) litigation, investigation or proceeding (judicial or administrative) pending or threatened against the Company or the Guarantors or their assets, by any agency, division or department of any county, city, state or federal government arising out of this Financing Agreement; (y) injunction, writ or restraining order restraining or prohibiting the financing arrangements contemplated under this Financing Agreement; or (z) suit, action, investigation or proceeding (judicial or administrative) pending against the Company or the Guarantors or their assets, which, in the opinion of the Agent, if adversely determined, could have a material adverse effect on the business, operation, assets, financial condition or Collateral of the Company and/or the Guarantors. (j) GUARANTIES AND SECURITY AGREEMENTS - The Guarantors shall have executed and delivered to the Agent guaranties and security agreements providing for a first priority lien on all of their personal assets (excluding real estate), including financing statement with respect there to, all in form and substance acceptable to the Agent, guaranteeing and securing all present and future Obligations of the Company, PROVIDED THAT, guaranties and security agreements shall not be required from the Company's subsidiary, EB Networks, provided further that, absent the sale of such subsidiary or substantially all of its assets on or before sixty days from the Closing Date, the Company shall cause such subsidiary to enter into guaranty and security agreements with the Agent, as may be required by the Agent in its sole discretion, and in form and substance satisfactory to the Agent. (k) RESERVE/INTERCREDITOR AGREEMENT - In addition to any other requirements hereunder, the Agent shall establish an Availability Reserve equal to the dollar for dollar the amount due from the Company's affiliate, Chimes, Inc. (and/or Chimes Servicing Corp.), to Volt Management unless within 45 days from the Closing Date, (i) the Agent receives an Intercreditor Agreement from Volt Management, in form and substance satisfactory to the Agent, or (ii) the Company and the Agent otherwise reach a mutually satisfactory agreement relating thereto. The foregoing is based on CIT's understanding, based on the Company's representations, that Volt Management has no security interest in any of the Company's Collateral or assets, and that its security interest is limited solely to the assets of Chimes, Inc. (l) CASH BUDGET PROJECTIONS - The Agent shall have received, reviewed and been satisfied with a twelve (12) month cash budget projection prepared by the Company on the form provided by the Agent. (m) PLEDGE AGREEMENT - The Company shall (i) execute and deliver to the Agent, on behalf of the Lenders, a pledge and security agreement pledging to the Agent, on behalf of the Lenders, as additional collateral for the Obligations of the Company not less than (x) 100% of the issued and outstanding stock of all domestic subsidiaries of the Company, and (y) 66 2/3% of the issued and outstanding stock of all foreign subsidiaries of the Company and, (ii) within 10 business 18 days of the Closing Date, deliver to the Agent, on behalf of the Lenders, the stock certificates evidencing such stock together with duly executed stock powers (undated and in-blank) with respect thereto, all in form and substance satisfactory to CIT, PROVIDED THAT, the Company shall not be required to pledge the stock of EB Networks and CHIMES UK, provided further that absent the sale of such EB Networks or substantially all of its assets within sixty days of the Closing Date, the Company shall pledge such subsidiary's stock to the Agent, as may be required by the Agent in its sole discretion, and in form and substance satisfactory to the Agent. (n) ADDITIONAL DOCUMENTS - The Company shall have executed and delivered to the Agent all Loan Documents necessary to consummate the lending arrangement contemplated between the Company, the Agent and the Lenders, provided that Landlord Waivers shall be provided within 30 days of the Closing Date. (o) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to the Agent all information necessary for the Agent and the Lenders to issue wire transfer instructions on behalf of the Company for the initial and subsequent loans and/or advances to be made under this Financing Agreement including, but not limited to, disbursement authorizations in form acceptable to the Agent. (p) EXAMINATION & VERIFICATION - The Agent and each of the Lenders shall have completed, to their respective satisfaction, an examination and verification of the Accounts, Inventory, financial statements, books and records of the Company which examination shall indicate that, after giving effect to all Revolving Loans, advances and extensions of credit to be made at closing, the Company shall have an opening additional Availability of at least $15,000,000, as evidenced by a Borrowing Base certificate delivered by the Company to the Agent as of the Closing Date, all as more fully required by the Agent Commitment Letter. It is understood that such requirement contemplates that all debts and obligations are current, and that all payables are being handled in the normal course of the Company's business and consistent with its past practice. (q) DEPOSITORY ACCOUNTS - Within 30 days of the Closing Date, the Company shall have established a system of lockbox and bank accounts with respect to the collection of Accounts and the deposit of proceeds of Collateral as shall be acceptable to the Agent in all respects. Such accounts shall be subject to three party agreements (between the Company, the Agent and the depository bank), which shall be in form and substance satisfactory to the Agent. (r) EXISTING REVOLVING CREDIT AGREEMENT - The Company's and its subsidiaries' existing credit agreement with The Chase Manhattan Bank and any other secured lenders (herein collectively the "Existing Lender") shall be: (i) terminated; (ii) all loans and obligations of the Company and/or the Guarantors thereunder shall be paid or satisfied in full, including through utilization of the proceeds of the initial Revolving Loans to be made under this Financing Agreement; and (iii) all liens or security interests in favor of the Existing Lender on the Collateral and otherwise in connection therewith shall be terminated and/or released upon such payment. (s) SCHEDULES The Company or its counsel shall provide the Agent with schedules of: (a) any of the Company's and its subsidiaries (i) Trademarks, (ii) Patents, and (iii) Copyrights, as applicable and all in such detail as to provide appropriate recording information with respect thereto, (b) any tradenames, (c) monthly rental payments for any leased premises or any other premises where any Collateral may be stored or processed, (d) Investment Property and the financial institutions 19 holding the same, and (e) Permitted Liens, all of the foregoing in form and substance satisfactory to the Agent. (t) THE AGENT COMMITMENT LETTER - The Company shall have fully complied, to the reasonable satisfaction of the Agent, with all of the terms and conditions of the Agent Commitment Letter. Upon the execution of this Financing Agreement and the initial disbursement of loans hereunder, all of the above Conditions Precedent shall have been deemed satisfied except as otherwise set forth hereinabove or as the Company and the Agent shall otherwise agree in writing. 2.2 CONDITIONS TO EACH EXTENSION OF CREDIT Subject to the terms of this Financing Agreement, including, without limitation, the Agent's rights pursuant to paragraph 10.2 of Section 10 hereof, the agreement of the Agent on behalf of the Lenders to make any extension of credit requested to be made by it to the Company on any date (including without limitation, the initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES - Each of the representations and warranties made by the Company in or pursuant to this Financing Agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) NO DEFAULT - No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extension of credit requested to be made on such date. (c) BORROWING BASE - Except as may be otherwise agreed to from time to time by the Agent and the Company in writing, after giving effect to the extension of credit requested to be made by the Company on such date, the aggregate outstanding balance of the Revolving Loans and outstanding Letters of Credit owing by the Company will not exceed the lesser of (i) the Revolving Line of Credit or (ii) the Borrowing Base. Each borrowing by the Company hereunder shall constitute a representation and warranty by the Company as of the date of such loan or advance that each of the representations, warranties and covenants contained in the Financing Agreement have been satisfied and are true and correct, except as the Company and the Agent and/or the Required Lenders shall otherwise agree herein or in a separate writing. SECTION 3. REVOLVING LOANS 3.1 (a) The Agent and the Lenders agree, subject to the terms and conditions of this Financing Agreement, from time to time (but subject to the Agent's and the Lenders' right to make "Overadvances"), to make loans and advances to the Company on a revolving basis (i.e. subject to the limitations set forth herein, the Company may borrow, repay and re-borrow Revolving Loans). Such requests for loans and advances shall be in amounts not to exceed the lesser of (a) the Availability or (b) the Revolving Line of Credit. All requests for loans and advances must be 20 received by an officer of the Agent no later than (i) 1:00 p.m., New York time, of the Business Day on which any such Chase Bank Rate Loans and advances are required or (ii) three Business Days prior to any requested LIBOR Loan. Should the Agent for any reason honor requests for Overadvances, any such Overadvances shall be made in the Agent's sole discretion and subject to any additional terms the Agent and/or the Required Lenders deem necessary. (b)(i) Whenever the Company requests the Agent, on behalf of the Lenders, to make a Revolving Loan pursuant to this Section 3, it shall give the Agent notice in writing or irrevocable telephonic notice confirmed promptly in writing, specifying (A) the amount to be borrowed, and (B) the requested borrowing date (which shall be a business day and shall be prior to: the Anniversary Date, and if applicable, any Early Termination Date, or prior to any effective termination date of this Financing Agreement, all as further set forth herein), and (C) specify whether the requested Revolving Loan shall bear interest at the Chase Bank Rate or at LIBOR, as further set forth herein. All requests for loans and advances must be received by an officer of the Agent no later than 1:00 P.M. eastern time on any borrowing date. The procedure for Revolving Loans to be made on a requested borrowing date may be such other procedure as is mutually satisfactory to the Company, the Agent and/or the Lenders. (ii) Subject to paragraph 14.10 hereof, should the Agent, on behalf of the Lenders, for any reason honor requests for Overadvances, such Overadvance shall be made in the Agent's sole discretion, subject to any additional terms the Agent and/or the Required Lenders deem necessary. Requests for loans and advances shall be made solely by the Company and shall be directed solely to the Agent. (c) The Agent shall on any Settlement Date, and upon notice given by the Agent no later than 2:00 P.M. New York time, request each Lender to make, and each Lender hereby agrees to make, a Revolving Loan in an amount equal to such Lender's Revolving Credit Commitment percentage (calculated with respect to the aggregate Revolving Credit Commitments then outstanding) of the aggregate amount of the Revolving Loans made by the Agent from the preceding Settlement Date to the date of such notice. Each Lender's obligation to make the Revolving Loans referred to in subsection (a) and to make the settlements pursuant to this subsection (c) shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation (i) any set-off, counterclaim, recoupment, defense or other right which any such Lender or the Company may have against the Agent, the Company, any other Lender or any other person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Company; (iv) any breach of this Financing Agreement or any other loan document by the Company or any other Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. Without limiting the liability and obligation of each Lender to make such advances, the Company authorizes the Agent to charge the Company's Revolving Loan Account with the Agent to the extent amounts received from the Lenders are not sufficient to repay in full the amount of any such deficiency. 21 (d) The Company's Revolving Loan Obligations hereunder shall be evidenced by the Promissory Note in the form of Exhibit A attached hereto. 3.2 In furtherance of the continuing assignment and security interest in the Company's Accounts and Inventory, the Company will, upon the creation of Accounts and purchase or acquisition of Inventory, execute and deliver to the Agent in such form and manner as the Agent may reasonably require, solely for the Agent's convenience in maintaining records of Collateral, such confirmatory schedules of Accounts and Inventory as the Agent may reasonably request, including, without limitation, weekly schedules of Accounts and monthly schedules of Inventory, all in form and substance satisfactory to the Agent, and such other appropriate reports designating, identifying and describing the Accounts and Inventory as the Agent may reasonably request, and provided further that the Agent may request any such information more frequently, from time to time, upon its reasonable prior request. In addition, upon the Agent's request, the Company shall provide the Agent with copies of agreements with, or purchase orders from, the Company's customers, and copies of invoices to customers, proof of performance of services, shipment or delivery, access to its computers, electronic media and software programs associated therewith (including any electronic records, contracts and signatures) and such other documentation and information relating to said Accounts and other Collateral as the Agent may reasonably require. Failure to provide the Agent with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. The Company hereby authorizes the Agent to regard the Company's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of the Company's authorized officers or agents. 3.3 The Company hereby represents and warrants that: each Trade Account Receivable is based on an actual and bona fide sale and delivery of Inventory or rendition of services to its customers, made by the Company in the ordinary course of its business; the Inventory being sold, and the Trade Accounts Receivable created, are the exclusive property of the Company and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, other than the Permitted Encumbrances; the invoices evidencing such Trade Accounts Receivable are in the name of the Company; and the customers of the Company have accepted the Inventory or services, owe and are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business with respect to which the Company has complied with the notification requirements of Paragraph 3.5 of this Section 3. The Company confirms to the Agent that any and all Taxes or fees relating to its business, its sales, the Accounts or Inventory relating thereto, are its sole responsibility and that same will be paid by the Company when due, subject to Paragraph 7.6 of Section 7 of this Financing Agreement, and that none of said Taxes or fees represent a lien on or claim against the Accounts. The Company hereby further represents and warrants that it shall not acquire any Inventory on a consignment basis, nor co-mingle its Inventory with any of its customers or any other person, including pursuant to any bill and hold sale or otherwise, and that its Inventory is marketable to its customers in the ordinary course of business of the Company, except as it may otherwise report in writing to the Agent 22 pursuant to Paragraph 3.5 hereof from time to time. The Company also warrants and represents that it is a duly and validly existing corporation and is qualified in all states where the failure to so qualify would have an adverse effect on the business of the Company or the ability of the Company to enforce collection of Accounts due from customers residing in that state. The Company agrees to maintain such books and records regarding Accounts and Inventory as the Agent may reasonably require and agrees that the books and records of the Company will reflect the Agent's interest in the Accounts and Inventory. All of the books and records of the Company will, in the ordinary course of business, be available to the Agent upon reasonable prior notice at normal business hours, including any records handled or maintained for the Company by any other company or entity, provided that, in the Agent's reasonable business judgment, such books and records shall be available absent notice and at such times as the Agent may request. 3.4 Until the Agent has advised the Company to the contrary after the occurrence of an Event of Default, the Company, at its expense, will enforce, collect and receive all amounts owing on the Accounts in the ordinary course of its business and any proceeds it so receives shall be subject to the terms hereof, and held on behalf of and in trust for the Agent on behalf of the Lenders. Such privilege shall terminate at the election of the Agent, upon the occurrence of an Event of Default, until such Event of Default is waived in writing by the Required Lenders or cured to the Agent's and/or the Required Lender's satisfaction. Any checks, cash, credit card sales and receipts, notes or other instruments or property received by the Company with respect to any Collateral, including Accounts, shall be held by the Company in trust for the Agent, on behalf of the Lenders, separate from the Company's own property and funds, and promptly turned over to the Agent with proper assignments or endorsements by deposit to the Depository Accounts. The Company shall: (i) indicate on all of its invoices that funds should be delivered to and deposited in a Depository Account; (ii) direct all of its account debtors to deposit any and all proceeds of Collateral into the Depository Accounts; (iii) irrevocably authorize and direct any banks which maintain the Company's initial receipt of cash, checks and other items to promptly wire transfer all available funds to a Depository Account; and (iv) advise all such banks of the Agent's security interest in such funds. The Company shall provide the Agent with prior written notice of any and all deposit accounts opened or to be opened subsequent to the Closing Date. Subject to Collection Days, all amounts received by the Agent in payment of Accounts will be credited to the Revolving Loan Account when the Agent is advised by its bank of its receipt of "collected funds" at the Agent's bank account in New York, New York on the Business Day of such advise if advised no later than 1:00 p.m. EST or on the next succeeding Business Day if so advised after 1:00 PM EST. No checks, drafts or other instrument received by the Agent shall constitute final payment to the Agent and/or the Lenders unless and until such instruments have actually been collected. 3.5 The Company agrees to notify the Agent: (a) of any matters affecting the value, enforceability or collectibility of any Account and of all customer disputes, offsets, defenses, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods, and of any adverse effect in the value of its Inventory, in its weekly and monthly collateral reports (as applicable) provided to the Agent hereunder, in such detail and format as the Agent may reasonably require from time to time and (b) promptly of any such matters which are material, as a whole, to the 23 Accounts and/or the Inventory. The Company shall deliver a report relating to its Accounts to the Agent no less frequently than bi-monthly. The Company agrees to issue credit memoranda promptly (with duplicates to the Agent upon request after the occurrence of an Event of Default) upon accepting returns or granting allowances. Upon the occurrence of an Event of Default (which is not waived in writing by the Required Lenders) and on notice from the Agent, the Company agrees that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Company, marked with the Agent's name (as secured party) and held by the Company for the Agent's account. 3.6 The Agent shall maintain a Revolving Loan Account on its books in which the Company will be charged with all loans and advances made by the Agent to it or for its account, and with any other Obligations, including any and all costs, expenses and reasonable attorney's fees which the Agent may incur in connection with the exercise by or for the Agent of any of the rights or powers herein conferred upon the Agent, or in the prosecution or defense of any action or proceeding to enforce or protect any rights of the Agent in connection with this Financing Agreement, the other Loan Documents or the Collateral assigned hereunder, or any Obligations owing by the Company. The Company will be credited with all amounts received by the Agent and/or the Lenders from the Company or from others for the Company's account, including, as above set forth, all amounts received by the Agent in payment of Accounts, and such amounts will be applied to payment of the Obligations as set forth herein. In no event shall prior recourse to any Accounts or other security granted to or by the Company be a prerequisite to the Agent's right to demand payment of any Obligation. Further, it is understood that the Agent and/or the Lenders shall have no obligation whatsoever to perform in any respect any of the Company's contracts or obligations relating to the Accounts. 3.7 After the end of each month, the Agent shall promptly send the Company a statement showing the accounting for the charges, loans, advances and other transactions occurring between the Agent and the Company during that month. The monthly statements shall be deemed correct and binding upon the Company and shall constitute an account stated between the Company and the Agent unless the Agent receives a written statement of the exceptions within thirty (30) days of the date of the monthly statement. 3.8 In the event that any requested advance exceeds Availability or that (a) the sum of (i) the outstanding balance of Revolving Loans and (ii) outstanding balance of Letters of Credit exceeds (b)(x) the Borrowing Base or (y) the Revolving Line of Credit, any such nonconsensual Overadvance shall be due and payable to the Agent on behalf of the Lenders immediately upon the Agent's demand therefor. SECTION 4. INTENTIONALLY OMMITTED 24 SECTION 5. LETTERS OF CREDIT In order to assist the Company in establishing or opening Letters of Credit with an Issuing Bank, the Company has requested the Agent, on behalf of the Lenders, to join in the applications for such Letters of Credit, and/or guarantee payment or performance of such Letters of Credit and any drafts or acceptances thereunder through the issuance of the Letters of Credit Guaranty, thereby lending the Agent's credit to the Company and the Agent has agreed to do so. These arrangements shall be handled by the Agent subject to the terms and conditions set forth below. 5.1 Within the Revolving Line of Credit and Availability, the Agent on behalf of the Lenders shall assist the Company in obtaining Letter(s) of Credit in an amount not to exceed the outstanding amount of the Letter of Credit Sub-Line. the Agent's assistance for amounts in excess of the limitation set forth herein shall at all times and in all respects be in the Agent's sole discretion. It is understood that the term, form and purpose of each Letter of Credit and all documentation in connection therewith, and any amendments, modifications or extensions thereof, must be mutually acceptable to the Agent, the Issuing Bank and the Company, provided that Letters of Credit shall not be used for the purchase of domestic Inventory or to secure present or future debt of domestic Inventory suppliers. Any and all outstanding Letters of Credit shall be reserved dollar for dollar from Availability as an Availability Reserve. 5.2 The Agent shall have the right, without notice to the Company, to charge the Company's Revolving Loan Account with the amount of any and all indebtedness, liability or obligation of any kind incurred by the Agent and/or the Lenders under the Letters of Credit Guaranty at the earlier of (a) payment by the Agent under the Letters of Credit Guaranty; or (b) the occurrence of an Event of Default which has not been waived in writing by the Required Lenders. Any amount charged to Company's Revolving Loan Account shall be deemed a Revolving Loan hereunder and shall incur interest at the rate provided in Paragraph 8.1 of Section 8 of this Financing Agreement. 5.3 The Company unconditionally indemnifies the Agent and the Lenders and holds the Agent and the Lenders harmless from any and all loss, claim or liability incurred by the Agent arising from any transactions or occurrences relating to Letters of Credit established or opened for the Company's account, the collateral relating thereto and any drafts or acceptances thereunder, and all Obligations thereunder, including any such loss or claim due to any errors, omissions, negligence, misconduct or action taken by any Issuing Bank, other than for any such loss, claim or liability arising out of the gross negligence or willful misconduct by the Agent and/or the Lenders under the Letters of Credit Guaranty, provided that the foregoing shall not be deemed to limit the Company's rights with respect to the Issuing Bank. This indemnity shall survive termination of this Financing Agreement. The Company agrees that any charges incurred by the Agent and/or the Lenders for the Company account by the Issuing Bank shall be conclusive on the Agent and may be charged to the Company's Revolving Loan Account. 5.4 The Agent shall not be responsible for: (a) the existence, character, quality, quantity, condition, packing, value or delivery of the goods purporting to be represented by any documents; (b) any difference or variation in the character, quality, quantity, condition, packing, value or delivery of the goods from that expressed in the documents; (c) the validity, sufficiency or genuineness of any 25 documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (d) the time, place, manner or order in which shipment is made; (e) partial or incomplete shipment, or failure or omission to ship any or all of the goods referred to in the Letters of Credit or documents; (f) any deviation from instructions; (g) delay, default, or fraud by the shipper and/or anyone else in connection with the goods or the shipping thereof; or (h) any breach of contract between the shipper or vendors and the Company. 5.5 The Company agrees that any action taken by the Agent and/or the Lenders, if taken in good faith, or any action taken by any Issuing Bank, under or in connection with the Letters of Credit, the Letter of Credit Guarantees, the drafts or acceptances, or the Collateral, shall be binding on the Company and shall not result in any liability whatsoever of the Agent to the Company. In furtherance thereof, the Agent shall have the full right and authority to: (a) clear and resolve any questions of non-compliance of documents; (b) give any instructions as to acceptance or rejection of any documents or goods; (c) execute any and all steamship or airways guaranties (and applications therefore), indemnities or delivery orders; (d) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents; and (e) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, drafts or acceptances; all in the Agent's sole name. The Issuing Bank shall be entitled to comply with and honor any and all such documents or instruments executed by or received solely from the Agent, all without any notice to or any consent from the Company. Notwithstanding any prior course of conduct or dealing with respect to the foregoing including amendments and non-compliance with documents and/or the Company's instructions with respect thereto, the Agent may exercise its rights hereunder in its sole and reasonable judgment. In addition, without the Agent's express consent and endorsement in writing, the Company agrees: (a) not to execute any and all applications for steamship or airway guaranties, indemnities or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances or documents; or to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, drafts or acceptances; and (b) after the occurrence of an Event of Default which is not cured within any applicable grace period, if any, or waived by the Agent, not to (i) clear and resolve any questions of non-compliance of documents, or (ii) give any instructions as to acceptances or rejection of any documents or goods. 5.6 The Company agrees that: (a) any necessary import, export or other licenses or certificates for the import or handling of the Collateral will have been promptly procured; (b) all foreign and domestic governmental laws and regulations in regard to the shipment and importation of the Collateral, or the financing thereof will have been promptly and fully complied with; and (c) any certificates in that regard that the Agent may at any time request will be promptly furnished. In connection herewith, the Company warrants and represents that all shipments made under any such Letters of Credit are in accordance with the laws and regulations of the countries in which the shipments originate and terminate, and are not prohibited by any such laws and regulations. The Company assumes all risk, liability and responsibility for, and agrees to pay and discharge, all present and future local, state, federal or foreign Taxes, duties, or levies. Any embargo, restriction, 26 laws, customs or regulations of any country, state, city, or other political subdivision, where the Collateral is or may be located, or wherein payments are to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall be solely the Company's risk, liability and responsibility. 5.7 Upon any payments made to the Issuing Bank under the Letter of Credit Guaranty, the Agent on behalf of the Lenders shall acquire by subrogation, any rights, remedies, duties or obligations granted or undertaken by the Company to the Issuing Bank in any application for Letters of Credit, any standing agreement relating to Letters of Credit or otherwise, all of which shall be deemed to have been granted to the Agent on behalf of the Lenders and apply in all respects to the Agent and shall be in addition to any rights, remedies, duties or obligations contained herein. SECTION 6. COLLATERAL 6.1 As security for the prompt payment in full of all Obligations, the Company hereby pledges and grants to the Agent, on behalf of the Lenders, a continuing general lien upon, and security interest in, all of its: (a) Accounts; (b) Inventory; (c) General Intangibles; (d) Documents of Title; (e) Other Collateral; (f) Equipment; and (g) Real Estate. 6.2 The security interests granted hereunder shall extend and attach to: (a) All Collateral which is owned by the Company or in which the Company has any interest, whether held by the Company or others for its account, and, if any Collateral is Equipment, whether the Company's interest in such Equipment is as owner, finance lessee or conditional vendee; (b) All Equipment, whether the same constitutes personal property or fixtures, including, but without limiting the generality of the foregoing, all dies, jigs, tools, benches, molds, tables, accretions, component parts thereof and additions thereto, as well as all accessories, motors, engines and auxiliary parts used in connection with, or attached to, the Equipment; and 27 (c) All Inventory and any portion thereof which may be returned, rejected, reclaimed or repossessed by either the Agent or the Company from the Company's customers, as well as to all supplies, goods, incidentals, packaging materials, labels and any other items which contribute to the finished goods or products manufactured or processed by the Company, or to the sale, promotion or shipment thereof. 6.3 The Company agrees to safeguard, protect and hold all Inventory for the Agent's account and make no disposition thereof except in the ordinary course of its business of the Company, as herein provided. The Company represents and warrants that Inventory will be sold and shipped by the Company to its customers only in the ordinary course of the Company's business, and then only on open account and on terms currently being extended by the Company to its customers, provided that, absent the prior written consent of the Agent, the Company shall not sell Inventory on a consignment basis nor retain any lien or security interest in any sold Inventory. Upon the sale, exchange, or other disposition of Inventory, as herein provided, the security interest in the Inventory provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, Trade Accounts Receivable, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sale, exchange or disposition. As to any such sale, exchange or other disposition, the Agent shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. The Company hereby agrees to immediately forward any and all proceeds of Collateral to the Depository Account, and to hold any such proceeds (including any notes and instruments), in trust for the Agent, on behalf of the Lenders, pending delivery to the Agent. Irrespective of the Agent's perfection status in any and all of the General Intangibles, including, without limitations, any Patents, Trademarks, Copyrights or licenses with respect thereto, the Company hereby irrevocably grants the Agent a royalty free license to sell, or otherwise dispose or transfer, in accordance with Paragraph 10.3 of Section 10 of this Financing Agreement, and the applicable terms hereof, of any of the Inventory upon the occurrence of an Event of Default which has not been waived in writing by the Agent. 6.4 The Company agrees at its own cost and expense to keep the Equipment in as good and substantial repair and condition as the same is now or at the time the lien and security interest granted herein shall attach thereto, reasonable wear and tear excepted, making any and all repairs and replacements when and where necessary. The Company also agrees to safeguard, protect and hold all Equipment in accordance with the terms hereof and subject to the Agent's security interest. Absent the Agent's prior written consent, any sale, exchange or other disposition of any Equipment shall be made by the Company in the ordinary course of business and as set forth herein. The Company may, in the ordinary course of its business, sell, exchange or otherwise dispose of obsolete or surplus Equipment provided, however, that: (a) the then value of the Equipment so disposed of in any Fiscal Year does not exceed $100,000 in the aggregate; and (b) the proceeds of any such sales or dispositions shall be held in trust by the Company for the Agent and shall be immediately delivered to the Agent by deposit to the Depository Account, except that the Company may retain and use such proceeds to purchase forthwith replacement Equipment which the Company determines in its reasonable judgment to have a collateral value at least equal to the Equipment so disposed of or sold; 28 provided, however, that the aforesaid right shall automatically cease upon the occurrence of a Default or an Event of Default which is not waived in writing by the Agent. Upon the sale, exchange, or other disposition of the Equipment, as herein provided, the security interest provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, Accounts, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sales, exchange or disposition. As to any such sale, exchange or other disposition, the Agent and the Lenders shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. 6.5 The rights and security interests granted to the Agent and the Lenders hereunder are to continue in full force and effect, notwithstanding the termination of this Financing Agreement or the fact that the Revolving Loan Account may from time to time be temporarily in a credit position, until the final payment in full to the Agent of all Obligations and the termination of this Financing Agreement. Any delay, or omission by the Agent to exercise any right hereunder shall not be deemed a waiver thereof, or be deemed a waiver of any other right, unless such waiver shall be in writing and signed by the Agent. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 6.6 Notwithstanding the Agent's security interest in the Collateral and to the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral or by the guarantee, endorsement, assets or property of any other person, the Agent shall have the right in its sole discretion to determine which rights, liens, security interests or remedies the Agent shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of them, or any of the Agent's and/or the Lenders' rights hereunder. 6.7 Any balances to the credit of the Company and any other property or assets of the Company in the possession or control of the Agent and/or the Lenders may be held by the Agent as security for any Obligations and applied in whole or partial satisfaction of such Obligations when due. The liens and security interests granted herein, and any other lien or security interest the Agent and/or the Lenders may have in any other assets of the Company, shall secure payment and performance of all now existing and future Obligations. The Agent may, in its discretion, charge any or all of the Obligations to the Revolving Loan Account when due. The agent may in its discretion request in writing that the Company to enter into applicable three party security agreements (in form and substance satisfactory to the Agent) granting the Agent a first priority security interest in the Company's Permitted Investments, and the Company shall comply therewith within a reasonable time therefrom. 6.8 The Company possesses all General Intangibles and rights thereto necessary to conduct its business as conducted as of the Closing Date and the Company shall maintain its rights in, and the value of, the foregoing in the ordinary course of its business, including, without limitation, by making timely payment with respect to any applicable licensed rights. The Company shall deliver to 29 the Agent, and/or shall cause the appropriate party to deliver to the Agent, from time to time such pledge or security agreements with respect to General Intangibles (now or hereafter acquired) of the Company and its subsidiaries as the Agent shall require to obtain valid first liens thereon. In furtherance of the foregoing, the Company shall provide timely notice to the Agent of any additional Patents, Trademarks, tradenames, service marks, Copyrights, brand names, trade names, logos and other trade designations acquired or applied for subsequent to the Closing Date and the Company shall execute such documentation as the Agent may reasonably require to obtain and perfect its lien thereon. The Company hereby confirms that it shall deliver, or cause to be delivered, any pledged stock issued subsequent to the Closing Date to the Agent in accordance with the applicable terms of the Pledge Agreement and prior to such delivery, shall hold any such stock in trust for the Agent. The Company hereby irrevocably grants to the Agent a royalty-free, non-exclusive license in the General Intangibles, including tradenames, Trademarks, Copyrights, Patents, licenses, and any other proprietary and intellectual property rights and any and all right, title and interest in any of the foregoing, for the sole purpose, upon the occurrence of an Event of Default, of the right to: (i) advertise for sale and sell or transfer any Inventory bearing any of the General Intangibles, and (ii) make, assemble, prepare for sale or complete, or cause others to do so, any applicable raw materials or Inventory bearing any of the General Intangibles, including use of the Equipment and Real Estate for the purpose of completing the manufacture of unfinished goods, raw materials or work-in-process comprising Inventory, and apply the proceeds thereof to the Obligations hereunder, all as further set forth in this Financing Agreement and irrespective of the Agent's lien and perfection in any General Intangibles. 6.9 The Company agrees that, if applicable, any chattel paper created by the Company will be marked: "This chattel paper has been assigned to The CIT Group/Business Credit, Inc. Further assignment of this chattel paper violates the rights of The CIT Group/Business Credit, Inc." SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 The Company hereby warrants, represents and covenants that: (a) the fair value of the Total Assets exceeds the book value of the Total Liabilities; (b) the Company is generally able to pay its debts as they become due and payable; and (c) the Company does not have unreasonably small capital to carry on its business as it is currently conducted absent extraordinary and unforeseen circumstances. The Company further warrants and represents that: (i) Schedule 1 hereto correctly and completely sets forth the Company's (A) chief executive office, (B) Collateral locations, (C) tradenames, and (D) all the other information listed on said Schedule; (ii) except for the Permitted Encumbrances, after filing of financing statements in the applicable filing clerks office at the locations set forth in Schedule 1, this Financing Agreement creates a valid, perfected and first priority security interest in the Collateral and the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral; (iii) except for the Permitted Encumbrances, the Company is, or will be, at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer and create a security interest therein, free and clear of any and all claims or liens in favor of others; (iv) the Company will, at its expense, forever warrant and, at the Agent's request, defend the same from any and all claims 30 and demands of any other person other than a holder of a Permitted Encumbrance; (v) the Company will not grant, create or permit to exist, any lien upon, or security interest in, the Collateral, or any proceeds thereof, in favor of any other person other than the holders of the Permitted Encumbrances; and that the Equipment does not comprise a part of the Inventory of the Company; and (vi) the Equipment is and will only be used by the Company in its business and will not be held for sale or lease, or removed from its premises, or otherwise disposed of by the Company except as otherwise permitted in this Financing Agreement. 7.2 The Company agrees to maintain books and records pertaining to the Collateral in accordance with GAAP and in such additional detail, form and scope as the Agent shall reasonably require. The Company agrees that the Agent or its agents, and any of the Lenders who may wish to accompany the Agent at their own cost expense, may enter upon the Company's premises at any time during normal business hours, and from time to time in its reasonable business judgment, for the purpose of inspecting the Collateral and any and all records pertaining thereto. The Company agrees to afford the Agent thirty (30) days prior written notice of any change in the location of any Collateral, other than to locations, that as of the Closing Date, are known to the Agent and at which the Agent has filed financing statements and otherwise fully perfected its liens thereon. The Company is also to advise the Agent promptly, in sufficient detail, of any material adverse change relating to the type, quantity or quality of the Collateral or on the security interests granted to the Agent therein. 7.3 The Company agrees to: (a) execute and deliver to the Agent, from time to time, solely for the Agent's convenience in maintaining a record of the Collateral, such written statements, and schedules as the Agent may reasonably require, designating, identifying or describing the Collateral; and (b) provide the Agent, on request, with an appraisal of the Inventory which appraisal shall be at the Company's expense and otherwise acceptable to the Agent. The Company's failure, however, to promptly give the Agent such statements, or schedules shall not affect, diminish, modify or otherwise limit the Agent's and/or the Lenders' security interests in the Collateral. 7.4 The Company agrees to comply with the requirements of all state and federal laws in order to grant to the Agent valid and perfected first security interests in the Collateral, subject only to the Permitted Encumbrances. The Agent is hereby authorized by the Company to file (including pursuant to the applicable terms of the UCC) from time to time any financing statements, continuations or amendments covering the Collateral. The Company hereby consents to and ratifies any and all execution and/or filing of financing statements on or prior to the Closing Date by the Agent. The Company agrees to do whatever the Agent may reasonably request, from time to time, by way of: (a) filing notices of liens, financing statements, amendments, renewals and continuations thereof; (b) cooperating with the Agent's agents and employees; (c) keeping Collateral records; (d) transferring proceeds of Collateral to the Agent's possession; and (e) performing such further acts as the Agent and/or the Lenders may reasonably require in order to effect the purposes of this Financing Agreement, including but not limited to obtaining control agreements with respect to deposit accounts and/or Investment Property. 31 7.5(a) The Company agrees to maintain insurance on its Real Estate, Equipment and Inventory under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to the Agent. All policies covering the Real Estate, Equipment and Inventory are, subject to the rights of any holders of Permitted Encumbrances holding claims senior to the Agent, to be made payable to the Agent, on behalf of the Lenders, in case of loss, under a standard non-contributory "mortgagee", "lender" or "secured party" clause and are to contain such other provisions as the Agent may require to fully protect the Agent's interest in the Real Estate, Inventory and Equipment and to any payments to be made under such policies. All original policies or true copies thereof are to be delivered to the Agent, premium prepaid, with the loss payable endorsement in the Agent's favor, and shall provide for not less than thirty (30) days prior written notice to the Agent of the exercise of any right of cancellation. At the Company's request, or if the Company fails to maintain such insurance, the Agent may arrange for such insurance, but at the Company's expense and without any responsibility on the Agent's part for: (i) obtaining the insurance; (ii) the solvency of the insurance companies; (iii) the adequacy of the coverage; or (iv) the collection of claims. Upon the occurrence of an Event of Default which is not waived in writing by the Required Lenders, the Agent shall, subject to the rights of any holders of Permitted Encumbrances holding claims senior to the Agent, have the sole right and at its option, in the name of the Agent or the Company, to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. (b)(i) In the event of any loss or damage by fire or other casualty, insurance proceeds relating to Inventory shall first reduce the Company's Revolving Loans, and then to any other Obligations. Upon the occurrence of a Default or Event of Default, such Insurance Proceeds may be applied to the Obligations in such order as the Agent may elect; (ii) In the event any part of any of the Company's Real Estate or Equipment is damaged by fire or other casualty and the Insurance Proceeds for such damage or other casualty is less than or equal to $100,000.00, the Agent shall promptly apply such Proceeds to reduce the Company's outstanding balance in the Revolving Loan Account. Upon the occurrence of a Default or Event of Default, such Insurance Proceeds may be applied to the Obligations in such order as the Agent may elect. Absent the occurrence of an Event of Default, and provided that (x) such Company has sufficient business interruption insurance to replace the lost profits of such Company's facilities, and (y) the Insurance Proceeds are in excess of $100,000.00, such Company may elect (by delivering written notice to the Agent) to replace, repair or restore such Real Estate or Equipment to substantially the equivalent condition prior to such fire or other casualty as set forth herein. If the Company does not, or cannot, elect to use the Insurance Proceeds as set forth above, the Agent may, subject to the rights of any holders of Permitted Encumbrances holding claims senior to the Agent, apply the Insurance Proceeds to the payment of the Obligations in such manner and in such order as the Agent may reasonably elect. 32 (c) In the event the Company fails to provide the Agent with timely evidence, acceptable to the Agent, of its maintenance of insurance coverage required pursuant to paragraph 7.5(a) above, the Agent may purchase, at the Company's expense, insurance to protect the Agent's interests in the Collateral. The insurance acquired by the Agent may, but need not, protect the Company's interest in the Collateral, and therefore such insurance may not pay claims which the Company may have with respect to the Collateral or pay any claim which may be made against the Company in connection with the Collateral. In the event the Agent purchases, obtains or acquires insurance covering all or any portion of the Collateral, the Company shall be responsible for all of the applicable costs of such insurance, including premiums, interest (at the applicable Chase Bank Rate for Revolving Loans set forth in paragraph 8.1 of Section 8 hereof), fees and any other charges with respect thereto, until the effective date of the cancellation or the expiration of such insurance. The Agent may charge all of such premiums, fees, costs, interest and other charges to the Company's Revolving Loan Account. The Company hereby acknowledges that the costs of the premiums of any insurance acquired by the Agent may exceed the costs of insurance which the Company may be able to purchase on its own. In the event that the Agent purchases such insurance, the Agent will notify the Company of said purchase within thirty (30) days of the date of such purchase. If, within thirty (30) days after the date of such notice, the Company provides the Agent with proof that the Company had the insurance coverage required pursuant to 7.5(a) above (in form and substance satisfactory to the Agent) as of the date on which the Agent purchased insurance and the Company continued at all times to have such insurance, then the Agent agrees to cancel the insurance purchased by the Agent and credit the Company's Revolving Loan Account with the amount of all costs, interest and other charges associated with any insurance purchased by the Agent, including with any amounts previously charged to the Revolving Loan Account. 7.6 The Company agrees to pay, when due, all Taxes, including sales taxes, assessments, claims and other charges lawfully levied or assessed upon the Company or the Collateral unless such Taxes are being diligently contested in good faith by the Company by appropriate proceedings and adequate reserves are established in accordance with GAAP. Notwithstanding the foregoing, if any lien shall be filed or claimed thereunder (a) for Taxes due the United States of America, or (b) which in the Agent's opinion might create a valid obligation having priority over the rights granted to the Agent herein (exclusive of Real Estate), such lien shall not be deemed to be a Permitted Encumbrance hereunder and the Company shall immediately pay such tax and remove the lien of record. If the Company fails to do so promptly, then at the Agent's election, the Agent may (i) create an Availability Reserve in such amount as it may deem appropriate in its business judgment, or (ii) upon the occurrence of a Default or Event of Default, imminent risk of seizure, filing of any priority lien, forfeiture, or sale of the Collateral, pay Taxes on the Company's behalf, and the amount thereof shall be an Obligation secured hereby and due on demand. 7.7 The Company: (a) agrees to comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the business or operations of the Company, provided that the Company may contest any acts, rules, regulations, orders and directions of such bodies or officials in any reasonable manner which will not, in the 33 Agent's reasonable opinion, materially and adversely effect the Agent's and/or the Lenders' rights or priority in the Collateral; (b) agrees to comply with all environmental statutes, acts, rules, regulations or orders as presently existing or as adopted or amended in the future, applicable to the Collateral, the ownership and/or use of its real property and operation of its business, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the operation of the business of the Company; and (c) shall not be deemed to have breached any provision of this Paragraph 7.7 if (i) the failure to comply with the requirements of this Paragraph 7.7 resulted from good faith error or innocent omission, (ii) the Company promptly commences and diligently pursues a cure of such breach, and (iii) such failure is cured within (30) days following the Company's receipt of notice of such failure, or if such cannot in good faith be cured within thirty (30) days, then such breach is cured within a reasonable time frame based upon the extent and nature of the breach and the necessary remediation, and in conformity with any applicable consent order, consensual agreement and applicable law. 7.8 Until termination of this Financing Agreement and payment and satisfaction of all Obligations due hereunder, the Company agrees that, unless the Agent shall have otherwise consented in writing, the Company will furnish to the Agent and each Lender: (a) within (i) ninety (90) days after the end of each Fiscal Year of the Company, an audited Consolidated Balance Sheet, with a Consolidating Balance Sheet attached thereto, as at the close of such year, and statements of profit and loss, cash flow and reconciliation of surplus of the Company and its consolidated subsidiaries for such year, audited by independent public accountants selected by the Company and satisfactory to the Agent, and (ii) ten (10) days of the issuance thereof, the Company's filings with the SEC, including its 10K's and 10Q's; (b) within sixty (60) days after the end of each Fiscal Quarter a Consolidated Balance Sheet and Consolidating Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Company and its consolidated subsidiaries, certified by an authorized financial or accounting officer of the Company; (c) within thirty (30) days after the end of each month an internally prepared Consolidated Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Company and all subsidiaries for such period, certified by an authorized financial or accounting officer of the Company; (d) yearly cash flow projections (including a break-down for each month of such period) provided by the Company within thirty (30) days of its fiscal year end, including profit and loss, cash flow and surplus, in form satisfactory to the Agent; and (e) from time to time and without duplication of the foregoing, such further information regarding the business affairs and financial condition of the Company and its consolidated subsidiaries as the Agent may reasonably request, including, without limitation (i) the accountant's management practice letter and (ii) annual cash flow projections in form satisfactory to the Agent and (iii) any audits conducted by the Company's auditors of its Accounts or systems relating thereto. Each financial statement which the Company is required to submit hereunder must be accompanied by an officer's certificate, signed by the President, Vice President, Controller, or Treasurer, pursuant to which any one such officer must certify that: (x) the financial statement(s) fairly and accurately represent(s) the Company's financial condition at the end of the particular accounting period, as well as the Company's operating results during such accounting period, subject to year-end audit adjustments; and (y) during the particular accounting period: (A) there has been no Default or Event of Default under this Financing 34 Agreement, PROVIDED, HOWEVER, that if any such officer has knowledge that any such Default or Event of Default, has occurred during such period, the existence of and a detailed description of same shall be set forth in such officer's certificate; (B) the Company has not received any notice of cancellation with respect to its property insurance policies; (C) the Company has not received any notice that could result in a material adverse effect on the value of the Collateral taken as a whole; and (D) the exhibits attached to such financial statement(s) constitute detailed calculations showing compliance with all financial covenants contained in this Financing Agreement. 7.9 Until termination of the Financing Agreement and payment and satisfaction of all Obligations hereunder, the Company agrees that, without the prior written consent of the Agent, except as otherwise herein provided, the Company will not: (a) Mortgage, assign, pledge, transfer or otherwise permit any lien, charge, security interest, encumbrance or judgment, (whether as a result of a purchase money or title retention transaction, or other security interest, or otherwise) to exist on any of the Company's Collateral or any other assets, whether now owned or hereafter acquired, except for the Permitted Encumbrances; (b) Incur or create any Indebtedness other than the Permitted Indebtedness; (c) Sell, lease, assign, transfer or otherwise dispose of (i) Collateral, except as otherwise specifically permitted by this Financing Agreement, or (ii) either all or substantially all of the Company's assets, which do not constitute Collateral, provided that the Company may sell all or substantially all of the assets or stock of EB Networks and Princeton Softech, Inc., provided further that any such sale shall occur on or before six months from the Closing Date; (d) Merge, consolidate or otherwise alter or modify its corporate name, principal place of business, structure, or existence, re-incorporate or re-organize, or enter into or engage in any operation or activity materially different from that presently being conducted by the Company, except that the Company may change its corporate name or address; provided that: (i) the Company shall give the Agent thirty (30) days prior written notice thereof and (ii) the Company shall execute and deliver, prior to or simultaneously with any such action, any and all documents and agreements requested by the Agent to confirm the continuation and preservation of all security interests and liens granted to the Agent hereunder; (e) Assume, guarantee, endorse, or otherwise become liable upon the obligations of any person, firm, entity or corporation, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (f) Declare or pay any dividend or distributions of any kind on, or purchase, acquire, redeem or retire, any of the capital stock or equity interest, of any class whatsoever, whether now or hereafter outstanding of the Company or any of its subsidiaries, PROVIDED HOWEVER THAT, the Company may redeem its publicly traded stock in an aggregate amount not to exceed $3,000,000 in any fiscal quarter, provided further 35 that, prior to and after giving affect to any such redemption, the Company's Availability is in an amount of $15,000,000 or more; or (g) Make any advance or loan to, or any investment in, any firm, entity, person or corporation, or purchase or acquire all or substantially all of the stock or assets of any entity, person or corporation, or pay any management, consulting or other similar fees to any person, corporation or other entity affiliated with the Company, in excess of $100,000 in the aggregate in any fiscal year, excepted for Permitted Investments. 7.10 Until termination of the Financing Agreement and payment and satisfaction in full of all Obligations hereunder, the Company shall: (a) The Company shall maintain Availability, as required under (a)(i) below, from the Closing Date through the date when, pursuant to written mutual agreement of the Company and the Agent, the Company maintains a Fixed Charge Coverage Ratio of 1.0 to 1.0. Absent such mutual agreement, the Availability covenant shall continue uninterrupted and in full force and effect. Upon such written mutual agreement and attaining the Required Fixed Charge Coverage Ratio set forth herein above, the Availability provision in (a)(i) shall be deemed terminated (absent the occurrence of and for so long as no Default or Event of Default has occurred hereunder, provided that for purposes hereof, upon any Default or Event of Default such covenant shall be deemed reinstated), and the Fixed Charge Coverage Ratio covenant will thereafter remain in full force and effect. (i) The Company shall maintain $15,000,000 in Availability at all times, as evidenced by a Borrowing Base certificate delivered by the Company to the Agent from time to time hereunder, but in no event less frequently than weekly. It is understood that such requirement contemplates that all debts and obligations of the Company are current, and that all payables are being handled in the normal course of the Company's business and consistent with its past practice, provided that for purposes of calculation of this provision, Availability shall include any deposits in the Company's "invest-a-cash" account (#1770) with The Chase Manhattan Bank. (ii) The Company shall maintain, on a consolidated basis, a Fixed Charge Coverage Ratio of not less than an amount to be mutually agreed upon in writing by the parties hereto. It is contemplated as of the Closing Date that such amount shall be approximately 85% of the amount set forth in the Company's projections for the period beginning with the Fiscal Quarter ending March 31, 2002, all to be in form and substance satisfactory to the Agent. The Fixed Charge Coverage Ratio shall be determined on a cumulating basis for the period of four consecutive Fiscal Quarters. (b) without the prior written consent of the Agent, the Company will not: 36 (i) enter into or have outstanding any Operating Lease if after giving effect thereto the Company's aggregate obligations with respect to Operating Leases during any Fiscal Year would exceed $9,000,000.00; (ii) contract for, purchase, make expenditures for, lease pursuant to a Capital Lease or otherwise incur obligations with respect to Capital Expenditures (whether subject to a security interest or otherwise) during any period below in the aggregate amount in excess of the amount set forth for such period: (A) $8,000,000.00 for the Fiscal Year ending December 31, 2001; (B) $8,000,000.00 for the Fiscal Year ending December 31, 2002; (C) $8,000,000.00 for the Fiscal Year ending December 31, 2003; (D) $8,000,000.00 for the Fiscal Year ending December 31, 2004; and (E) $8,000,000.00 for the Fiscal Year ending December 31, 2005, and for each Fiscal Year ending thereafter. (c) obtain minimum monthly collections of $20,000,000. For purposes of calculation hereof, "collections" shall refer solely to the Company's Accounts, and exclude any amounts due or received from any of the Company's affiliates. 7.11 The Company agrees to advise the Agent and the Lenders in writing of: (a) all expenditures (actual or anticipated) in excess of $150,000.00 from the budgeted amount therefor in any Fiscal Year for (i) environmental clean-up, (ii) environmental compliance or (iii) environmental testing and the impact of said expenses on the Company's Working Capital; and (b) any notices the Company receives from any local, state or federal authority advising the Company of any environmental liability (real or potential) stemming from the Company's operations, its premises, its waste disposal practices, or waste disposal sites used by the Company and to provide the Agent with copies of all such notices if so required; and (c) any accrued and unpaid Taxes (including payroll taxes) in an amount of $100,000 or more. 7.12 The Company hereby agrees to indemnify and hold harmless the Agent, the Lenders and their respective officers, directors, employees, attorneys and agents (each an "Indemnified Party") from, and holds each of them harmless against, any and all losses, liabilities, obligations, claims, actions, damages, costs and expenses (including attorney's fees) arising in connection with this Financing Agreement or the Loan Documents, including without limitation for any payments made by the Agent pursuant to any indemnity provided by the Agent with respect to or subject to the Loan Documents, including without limitation those which may arise from or relate to: (a) the Depository Account, the Blocked Accounts, the lockbox and/or any other depository account and/or the agreements executed in connection therewith; and (b) any and all claims or expenses asserted against the Agent as a result of any environmental pollution, hazardous material or environmental clean-up relating to the Real Estate; or any claim or expense which results from the Company's operations (including, but not limited to, the Company's off-site disposal practices) and use of the Real Estate, which the Agent may sustain or incur (other than solely as a result of the physical actions of the 37 Agent on the Company's premises which are determined to constitute gross negligence or willful misconduct by a court of competent jurisdiction), all whether through the alleged or actual negligence of such person or otherwise, except and to the extent that the same results solely and directly from the gross negligence or willful misconduct of such Indemnified Party as finally determined by a court of competent jurisdiction. The Company hereby agrees that this indemnity shall survive termination of this Financing Agreement, as well as payments of Obligations which may be due hereunder. The Agent may, in its sole business judgment, establish such Availability Reserves with respect thereto as it may deem advisable under the circumstances and, upon any termination hereof, hold such reserves as cash reserves for any such contingent liabilities. 7.13 Without the prior written consent of the Agent, the Company agrees that it will not enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property with any subsidiary or affiliate of the Company, provided that, except as otherwise set forth in this Financing Agreement, the Company may enter into sale and service transactions in the ordinary course of its business and pursuant to the reasonable requirements of the Company, and upon standard terms and conditions and fair and reasonable terms, no less favorable to the Company than the Company could obtain in a comparable arms length transaction with an unrelated third party, provided further that no Default or Event of Default exists or will occur hereunder prior to and after giving effect to any such transaction.. SECTION 8. INTEREST, FEES AND EXPENSES 8.1 (a) Interest on the Revolving Loans shall be payable monthly as of the end of each month. Chase Bank Rate Loans shall be at a rate equal to the Chase Bank Rate (listed as "Prime" in the table below) plus any applicable margin (as set forth in the table below), per annum on the average of the net balances owing by the Company to the Agent in the Revolving Loan Account at the close of each day during such month. In the event of any change in said Chase Bank Rate, the rate hereunder for Chase Bank Rate Loans shall change as of the date of such change. The rate hereunder for Chase Bank Rate Loans shall be calculated based on a 360-day year. The Agent shall be entitled to charge the Company's Revolving Loan Account at the rate provided for herein when due until all Obligations have been paid in full. Notwithstanding anything to the contrary herein, for purposes of calculation hereof, during the first ninety (90) days from the Closing Date all Revolving Loans shall bear interest at the Chase Bank Rate plus 0.50%.
- ---------------------------------------------------------------------------------- AVAILABILITY PRIME RATE LIBOR RATE - ---------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $30,000,000 Prime LIBOR + 2.25% - ---------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $20,000,000 Prime + 0.25% LIBOR + 2.50% - ---------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $10,000,000 Prime + 0.50% LIBOR + 2.75% - ---------------------------------------------------------------------------------- LESS THAN OR EQUAL TO $10,000,000 Prime + 1.0% LIBOR + 3.25% - ----------------------------------------------------------------------------------
38 (b) Notwithstanding any provision to the contrary contained in this section 8, in the event that the sum of (i) the outstanding Revolving Loans and (ii) the outstanding Letters of Credit exceed the lesser of either (x) the maximum aggregate amount available under Sections 3 and 5 of this Financing Agreement or (y) the Revolving Line of Credit: (A) as a result of Revolving Loans advanced by the Agent at the request of the Company (herein "Requested Overadvances"), for any one (1) or more days in any month, or (B) for any other reason whatsoever (herein "Other Overadvances") and such Other Overadvances continue for five (5) or more days in any month, the average net balance of all Revolving Loans for such month shall bear interest at the Overadvance Rate. (c) Upon and after the occurrence of an Event of Default and the giving of any required notice by the Agent in accordance with the provisions of Section 10, Paragraph 10.2 hereof, all Obligations shall bear interest at the Default Rate of Interest. 8.2 Intentionally Omitted. 8.3 In consideration of the Letter of Credit Guaranty of the Agent, the Company shall pay the Agent the Letter of Credit Guaranty Fee which shall be an amount equal to (a) one and one half percent (1.5%) on the face amount of each documentary Letter of Credit payable upon issuance thereof and (b) one and one half percent (1.5%) per annum, payable monthly, on the face amount of each standby Letter of Credit less the amount of any and all amounts previously drawn under such standby Letter of Credit. 8.4 Any and all charges, fees, commissions, costs and expenses charged to the Agent for the Company's account by any Issuing Bank in connection with, or arising out of, Letters of Credit or out of transactions relating thereto will be charged to the Revolving Loan Account in full when charged to, or paid by the Agent, or as may be due upon any termination of this Financing Agreement hereof, and when made by any such Issuing Bank shall be conclusive on the Agent. 8.5 The Company shall reimburse or pay the Agent, as the case may be, for: (a) all Out-of-Pocket Expenses and (b) any applicable Documentation Fee. 8.6 Upon the last Business Day of each month, commencing on July 31, 2001, the Company shall pay to the Agent (i) the Line of Credit Fee, and (ii) solely for the account of the Agent, interest on the Collection Days. Interest will be computed at the rate, and in the manner, set forth in Paragraph 8.1 of this Financing Agreement. 8.7 To induce the Agent to enter into this Financing Agreement and to extend to the Company the Revolving Loan and Letters of Credit Guaranties, the Company shall pay to the Agent, solely for its account, a Loan Facility Fee in the amount of $400,000.00 payable upon execution of this Financing Agreement. The Commitment Fee (of $150,000 paid by the Company to the Agent upon execution of the Commitment Letter) shall be credited toward the Loan Facility Fee upon consummation of this financing transaction on the Closing Date. 39 8.8 On the Closing Date and each anniversary of the Closing Date thereafter, the Company shall pay to the Agent the Administrative Management Fee, which shall be deemed fully earned when paid. 8.9 The Company shall pay the Agent's standard charges and fees for the Agent's personnel used by the Agent for reviewing the books and records of the Company and for verifying, testing, protecting, safeguarding, preserving or disposing of all or any part of the Collateral (which fees shall be in addition to the Administrative Management Fee and any Out-of-Pocket Expenses). 8.10 The Company hereby authorizes the Agent to charge the Revolving Loan Account with the amount of all payments due hereunder as such payments become due. The Company confirms that any charges which the Agent may so make to the Revolving Loan Account as herein provided will be made as an accommodation to the Company and solely at the Agent's discretion. 8.11 In the event that the Agent or any participant hereunder (or any financial institution which may from time to time become a participant or lender hereunder) shall have determined in the exercise of its reasonable business judgment that, subsequent to the Closing Date, any change in applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof, or compliance by the Agent or such participant with any new request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Agent's or such participant's capital as a consequence of its obligations hereunder to a level below that which the Agent or such participant could have achieved but for such adoption, change or compliance (taking into consideration the Agent or such participant's policies with respect to capital adequacy) by an amount reasonably deemed by the Agent or such participant to be material, then, from time to time, the Company shall pay no later than five (5) days following demand to the Agent or such participant such additional amount or amounts as will compensate the Agent's or such participant's for such reduction. In determining such amount or amounts, the Agent or such participant may use any reasonable averaging or attribution methods. The protection of this Paragraph 8.11 shall be available to the Agent or such participant regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. A certificate of the Agent or such participant setting forth such amount or amounts as shall be necessary to compensate the Agent or such participant with respect to this Section 8 and the calculation thereof when delivered to the Company shall be conclusive on the Company absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event the Agent or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determines that the additional amounts paid by the Company in whole or in part exceed the amount which the Agent or such participant actually required to be made whole, the excess, if any, shall be returned to the Company by the Agent or such participant. 8.12. In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by the Agent or such participant 40 with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (a) subject the Agent or such participant to any tax of any kind whatsoever with respect to this Financing Agreement or change the basis of taxation of payments to the Agent or such participant of principal, fees, interest or any other amount payable hereunder or under any other documents (except for changes in the rate of tax on the overall net income of the Agent or such participant by the federal government or the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by the Agent or such participant by reason of or in respect to this Financing Agreement and the Loan Documents, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (c) impose on the Agent or such participant any other condition with respect to this Financing Agreement or any other document, and the result of any of the foregoing is to increase the cost to the Agent or such participant of making, renewing or maintaining its loans hereunder by an amount that the Agent or such participant deems to be material in the exercise of its reasonable business judgment or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the loans by an amount that the Agent or such participant deems to be material in the exercise of its reasonable business judgment, then, in any case the Company shall pay the Agent or such participant, within five (5) days following its demand, such additional cost or such reduction, as the case may be. The Agent or such participant shall certify the amount of such additional cost or reduced amount to the Company and the calculation thereof and such certification shall be conclusive upon the Company absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event the Agent or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determine that the additional amounts paid by the Company in whole or in part exceed the amount which the Agent or such participant actually required pursuant hereto, the excess, if any, shall be returned to the Company by the Agent or such participant. 8.13 The Company may request LIBOR Loans on the following terms and conditions: (a) The Company may elect, subsequent to 90 days from the Closing Date and from time to time thereafter (i) to request any loan made hereunder to be a LIBOR Loan as of the date of such loan or (ii) to convert Chase Bank Rate Loans to LIBOR Loans, and may elect from time to time to convert LIBOR Loans to Chase Bank Rate Loans by giving the Agent at least three (3) Business Days' prior irrevocable notice of such election, PROVIDED that any such conversion of LIBOR Loans to Chase Bank Rate Loans shall only be made, subject to the second following sentence, on the last day of an Interest Period with respect thereto. Should the Company elect to convert Chase Bank Rate Loans to LIBOR Loans, it shall give the Agent at least four Business Days' prior irrevocable notice of such election. If the last day of an Interest Period with respect to a loan that is to be converted is not a Business Day or Working Day, then such conversion shall be made on 41 the next succeeding Business Day or Working Day, as the case may be, and during the period from such last day of an Interest Period to such succeeding Business Day, as the case may be, such loan shall bear interest as if it were a Chase Bank Rate Loan. All or any part of outstanding Chase Bank Rate Loans then outstanding with respect to Revolving Loans may be converted to LIBOR Loans as provided herein, PROVIDED that partial conversions shall be in multiples in an aggregate principal amount of $1,000,000 or more. The Agent shall be entitled to charge the Company a $500 fee upon the first effective day of any such election for a LIBOR Loan. (b) Any LIBOR Loans may be continued as such upon the expiration of an Interest Period, PROVIDED the Company so notifies the Agent, at least three (3) Business Days' prior to the expiration of said Interest Period, and PROVIDED FURTHER that no LIBOR Loan may be continued as such upon the occurrence of any Default or Event of Default under this Financing Agreement, but shall be automatically converted to a Chase Bank Rate Loan on the last day of the Interest Period during which occurred such Default or Event of Default. Absent such notification, LIBOR Rate Loans shall convert to Chase Bank Rate Loans on the last day of the applicable Interest Period. Each notice of election, conversion or continuation furnished by the Company pursuant hereto shall specify whether such election, conversion or continuation is for a one, two, or three month period. Notwithstanding anything to the contrary contained herein, the Agent (or any participant, if applicable) shall not be required to purchase United States Dollar deposits in the London interbank market or from any other applicable LIBOR Rate market or source or otherwise "match fund" to fund LIBOR Rate Loans, but any and all provisions hereof relating to LIBOR Rate Loans shall be deemed to apply as if the Agent (and any participant, if applicable) had purchased such deposits to fund any LIBOR Rate Loans. (c) The Company may request a LIBOR Loan, convert any Chase Bank Rate Loan or continue any LIBOR Loan provided there is then no Default or Event of Default in effect. 8.14 (a) The LIBOR Loans shall bear interest for each Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the LIBOR determined for each Interest Period in accordance with the terms hereof plus the following applicable margin (calculated on the Company's Availability on the lesser of the date of any such request or the date of funding):
- ----------------------------------------------------------------------------------------- AVAILABILITY PRIME RATE LIBOR RATE - ----------------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $30,000,000 Prime LIBOR + 2.25% - ----------------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $20,000,000 Prime + 0.25% LIBOR + 2.50% - ----------------------------------------------------------------------------------------- GREATER THAN OR EQUAL TO $10,000,000 Prime + 0.50% LIBOR + 2.75% - ----------------------------------------------------------------------------------------- LESS THAN OR EQUAL TO $10,000,000 Prime + 1.0% LIBOR + 3.25% - -----------------------------------------------------------------------------------------
(b) If all or a portion of the outstanding principal amount of the Obligations shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such outstanding 42 amount, to the extent it is a LIBOR Loan, shall be converted to a Chase Bank Rate Loan at the end of the last Interest Period therefor. (c) The Company may not have more than three (3) LIBOR Loans outstanding at any given time. 8.15 (a) Interest in respect of the LIBOR Loans shall be calculated on the basis of a 360 day year and shall be payable as of the end of each month. (b) The Agent shall, at the request of the Company, deliver to the Company a statement showing the quotations given by The Chase Manhattan Bank and the computations used in determining any interest rate pursuant to Paragraph 8.14 of Section 8 hereof. 8.16 As further set forth in paragraph 8.12 above, in the event that the Agent (or any financial institution which may become a participant hereunder) shall have determined in the exercise of its reasonable business judgment (which determination shall be conclusive and binding upon the Company) that by reason of circumstances affecting the interbank LIBOR market, adequate and reasonable means do not exist for ascertaining LIBOR applicable for any Interest Period with respect to: (a) a proposed loan that the Company has requested be made as a LIBOR Loan; (b) a LIBOR Loan that will result from the requested conversion of a Chase Bank Rate Loan into a LIBOR Loan; or (c) the continuation of LIBOR Loans beyond the expiration of the then current Interest Period with respect thereto, the Agent shall forthwith give written notice of such determination to the Company at least one day prior to, as the case may be, the requested borrowing date for such LIBOR Loan, the conversion date of such Chase Bank Rate Loan or the last day of such Interest Period. If such notice is given (i) any requested LIBOR Loan shall be made as a Chase Bank Rate Loan, (ii) any Chase Bank Rate Loan that was to have been converted to a LIBOR Loan shall be continued as a Chase Bank Rate Loan, and (iii) any outstanding LIBOR Loan shall be converted, on the last day of then current Interest Period with respect thereto, to a Chase Bank Rate Loan. Until such notice has been withdrawn by the Agent, no further LIBOR Loan shall be made nor shall the Company have the right to convert a Chase Bank Rate Loan to a LIBOR Loan. 8.17 If any payment on a LIBOR Loan becomes due and payable on a day other than a Business Day or Working Day, the maturity thereof shall be extended to the next succeeding Business Day or Working Day unless the result of such extension would be to extend such payment into another calendar month in which event such payment shall be made on the immediately preceding Business Day or Working Day. 8.18 Notwithstanding any other provisions herein, if any law, regulation, treaty or directive or any change therein or in the interpretation or application thereof, shall make it unlawful for the Agent to make or maintain LIBOR Loans as contemplated herein, the then outstanding LIBOR Loans, if any, shall be converted automatically to Chase Bank Rate Loans as of the end of such month, or within such earlier period as required by law. The Company hereby agrees promptly to pay the Agent, upon demand, any additional amounts necessary to compensate the Agent for any 43 costs incurred by the Agent in making any conversion in accordance with this Section 8 including, but not limited to, any interest or fees payable by the Agent to lenders of funds obtained by the Agent in order to make or maintain LIBOR Loans hereunder. 8.19 The Company agrees to indemnify and to hold the Agent (including any participant) harmless from any loss or expense which the Agent or such participant may sustain or incur as a consequence of: (a) Default by the Company in payment of the principal amount of or interest on any LIBOR Loans, as and when the same shall be due and payable in accordance with the terms of this Financing Agreement, including, but not limited to, any such loss or expense arising from interest or fees payable by the Agent or such participant to lenders of funds obtained by either of them in order to maintain the LIBOR Loans hereunder; (b) default by the Company in making a borrowing or conversion after the Company has given a notice in accordance with Paragraph 8.13 of Section 8 hereof; (c) any prepayment of LIBOR Loans on a day which is not the last day of the Interest Period applicable thereto, including, without limitation, prepayments arising as a result of the application of the proceeds of Collateral to the Revolving Loans; and (d) default by the Company in making any prepayment after the Company had given notice to the Agent thereof. The determination by the Agent of the amount of any such loss or expense, when set forth in a written notice to the Company, containing the Agent's calculations thereof in reasonable detail, shall be conclusive on the Company in the absence of manifest error. Calculation of all amounts payable under this paragraph with regard to LIBOR Loans shall be made as though the Agent had actually funded the LIBOR Loans through the purchase of deposits in the relevant market and currency, as the case may be, bearing interest at the rate applicable to such LIBOR Loans in an amount equal to the amount of the LIBOR Loans and having a maturity comparable to the relevant interest period; PROVIDED, HOWEVER, that the Agent may fund each of the LIBOR Loans in any manner the Agent sees fit and the foregoing assumption shall be used only for calculation of amounts payable under this paragraph. In addition, notwithstanding anything to the contrary contained herein, the Agent shall apply all proceeds of Collateral and all other amounts received by it from or on behalf of the Company (i) initially to the Chase Bank Rate Loans and (ii) subsequently to LIBOR Loans; PROVIDED, HOWEVER, (x) upon the occurrence of an Event of Default or (y) in the event the aggregate amount of outstanding LIBOR Rate Loans exceeds Availability or the applicable maximum levels set forth therefor, the Agent may apply all such amounts received by it to the payment of Obligations in such manner and in such order as the Agent may elect in its reasonable business judgment. In the event that any such amounts are applied to Revolving Loans which are LIBOR Loans, such application shall be treated as a prepayment of such loans and the Agent shall be entitled to indemnification hereunder. This covenant shall survive termination of this Financing Agreement and payment of the outstanding Obligations. 8.20 Notwithstanding anything to the contrary in this Agreement, in the event that, by reason of any Regulatory Change (for purposes hereof "Regulatory Change" shall mean, with respect to the Agent, any change after the date of this Financing Agreement in United States federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including the Agent of or under any United States federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), the 44 Agent either (a) incurs any material additional costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such bank which includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Financing Agreement or a category of extensions of credit or other assets of the Agent which includes LIBOR Loans, or (b) becomes subject to any material restrictions on the amount of such a category of liabilities or assets which it may hold, then, if the Agent so elects by notice to the Company, the obligation of the Agent to make or continue, or to convert Chase Bank Rate Loans into LIBOR Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect. 8.21 For purposes of this Financing Agreement and Section 8 thereof, any reference to the Agent shall include any financial institution which may become a participant or co-lender subsequent to the Closing Date. SECTION 9. POWERS The Company hereby constitutes the Agent, or any person or agent the Agent may designate, as its attorney-in-fact, at the Company's cost and expense, to exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all Obligations to the Agent have been paid in full: (a) To receive, take, endorse, sign, assign and deliver, all in the name of the Agent or the Company, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; (b) To receive, open and dispose of all mail addressed to the Company and to notify postal authorities to change the address for delivery thereof to such address as the Agent may designate; (c) To request from customers indebted on Accounts at any time, in the name of the Agent information concerning the amounts owing on the Accounts; (d) To request from customers indebted on Accounts at any time, in the name of the Company, in the name of certified public accountant designated by the Agent or in the name of the Agent's designee, information concerning the amounts owing on the Accounts; (e) To transmit to customers indebted on Accounts notice of the Agent's interest therein and to notify customers indebted on Accounts to make payment directly to the Agent for the Company's account; and (f) To take or bring, in the name of the Agent or the Company, all steps, actions, suits or proceedings deemed by the Agent necessary or desirable to enforce or effect collection of the Accounts. 45 Notwithstanding anything hereinabove contained to the contrary, the powers set forth in (b), (c), (e) and (f) above may only be exercised after the occurrence of an Event of Default and until such time as such Event of Default is waived in writing by the Agent. SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Notwithstanding anything hereinabove to the contrary, the Agent may terminate this Financing Agreement immediately upon the occurrence of any of the following Events of Default: (a) cessation of the business of the Company or the calling of a meeting of the creditors of the Company for purposes of compromising the debts and obligations of the Company; (b) the failure of the Company to generally meet its debts as they mature; (c) (i) the commencement by The Company of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law; (ii) the commencement against the Company, of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any federal or state law by creditors of the Company, provided that such Default shall not be deemed an Event of Default if such proceeding is controverted within ten (10) days and dismissed and vacated within forty-five (45) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or the Company shall take action to authorize or effect any of the actions in any such proceeding; or (iii) the commencement (x) by the Company's subsidiaries, or any one of them, of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any applicable state law, or (y) against the Company's subsidiaries, or any one of them, of any involuntary bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under applicable law, provided that such Default shall not be deemed an Event of Default if such proceeding is controverted within ten (10) days and dismissed or vacated within forty-five (45) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or the Company's subsidiaries, or any one of them, shall take action to authorize or effect any of the actions in any such proceeding; (d) breach by the Company of any warranty, representation or covenant contained herein (other than those referred to in sub-paragraph (e) below) or in any other written agreement between the Company or the Agent, provided that such Default by the Company of any of the warranties, representations or covenants referred in this clause (d) shall not be deemed to be an Event of Default unless and until such Default shall remain unremedied to the Agent's satisfaction for a period of thirty (30) days from the date of such breach; (e) breach by the Company of any warranty, representation or covenant of Paragraphs 3.3 (other than the fourth sentence of Paragraph 3.3) and 3.4 of Section 3 hereof; 46 Paragraphs 6.3 and 6.4 (other than the first sentence of Paragraph 6.4) of Section 6 hereof; Paragraphs 7.1, 7.5, 7.6, and 7.8 through 7.14 hereof; (f) failure of the Company to pay any of the Obligations within five (5) Business Days of the due date thereof, provided that nothing contained herein shall prohibit the Agent from charging such amounts to the Revolving Loan Account on the due date thereof; (g) the Company shall be found by a competent tribunal to have(i) engage in any "prohibited transaction" as defined in ERISA, (ii) have any "accumulated funding deficiency" as defined in ERISA, (iii) have any "reportable event" as defined in ERISA, (iv) terminate any "plan", as defined in ERISA or (v) be engaged in any proceeding in which the Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as trustee or administrator of any "plan", as defined in ERISA, and with respect to this sub-paragraph (g) such event or condition (x) remains uncured for a period of thirty (30) days from date of receipt by the Company of written notice or the occurrence thereof and (y) could, in the reasonable opinion of the Agent, subject the Company to any tax, penalty or other liability material to the business, operations or financial condition of the Company; (h) without the prior written consent of the Agent and, except as permitted in the Subordination Agreement, the Company shall (x) amend or modify the Subordinated Debt, or (y) make any payment on account of the Subordinated Debt; or (i) the occurrence of any default or event of default (after giving effect to any applicable grace or cure periods) under any instrument or agreement evidencing (x) Subordinated Debt or (y) any other Indebtedness of the Company having a principal amount in excess of $250,000. 10.2 Upon the occurrence of a Default and/or an Event of Default, the Agent in its sole discretion may, or upon the written direction of the Required Lenders the Agent shall, declare that, all loans, advances and extensions of credit provided for in Sections 3 and 5 of this Financing Agreement shall be thereafter in the Agent's or the Required Lenders' sole discretion, and the obligation of the Agent and/or the Lenders to make Revolving Loans, open Letters of Credit and provide Letters of Credit Guaranties shall cease unless such Default or Event of Default is waived in writing by the Required Lenders or cured to the Agent's or the Required Lenders' satisfaction in the exercise of the Agent's and the Lenders' reasonable judgment. Upon the occurrence of an Event of Default, the Agent in its sole discretion may, or upon the written direction of the Required Lenders the Agent shall, declare that: (a) all Obligations shall become immediately due and payable; (b) the Agent may charge the Company the Default Rate of Interest on all then outstanding or thereafter incurred Obligations in lieu of the interest provided for in Section 8 of this Financing Agreement, provided that, with respect to this clause "(b)" the Agent has given the Company written notice of the Event of Default, provided further however, that no notice is required if the Event of Default is the Event listed in Paragraph 10.1(c) of this Section 10; and (c) the Agent may immediately terminate this Financing Agreement upon notice to the Company; provided, however, that upon the occurrence 47 of an Event of Default listed in Paragraph 10.1(c) of this Section 10, this Financing Agreement shall automatically terminate and all Obligations shall become due and payable, without any action, declaration, notice or demand by the Agent. The exercise of any option is not exclusive of any other option, which may be exercised at any time by the Agent. 10.3 Immediately upon the occurrence of any Event of Default, the Agent may, to the extent permitted by law: (a) remove from any premises where same may be located any and all books and records, computers, electronic media and software programs associated with any Collateral (including any electronic records, contracts and signatures pertaining thereto), documents, instruments, files and records, and any receptacles or cabinets containing same, relating to the Accounts, or the Agent may use, at the Company's expense, such of the Company's personnel, supplies or space at the Company's places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) bring suit, in the name of the Company or the Agent, and generally shall have all other rights respecting said Accounts, including without limitation the right to: accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of the Company or the Agent; (c) sell, assign and deliver the Collateral and any returned, reclaimed or repossessed Inventory, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at the Agent's sole option and discretion, and the Agent may bid or become a purchaser at any such sale, free from any right of redemption, which right is hereby expressly waived by the Company; (d) foreclose the security interests in the Collateral created herein or by the Loan Documents by any available judicial procedure, or to take possession of any or all of the Collateral, including any Inventory, Equipment and/or Other Collateral without judicial process, and to enter any premises where any Inventory and Equipment and/or Other Collateral may be located for the purpose of taking possession of or removing the same; and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. The Agent shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, in the name of the Company or the Agent, or in the name of such other party as the Agent may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations (including but not limited to warranties of title, possession, quiet enjoyment and the like), and upon such other terms and conditions as the Agent in its sole discretion may deem advisable, and the Agent shall have the right to purchase at any such sale. If any Inventory and Equipment shall require rebuilding, repairing, maintenance or preparation, the Agent shall have the right, at its option, to do such of the aforesaid as is necessary, for the purpose of putting the Inventory and Equipment in such saleable form as the Agent shall deem appropriate and any such costs shall be deemed an Obligation hereunder. Any action taken by CIT pursuant to this paragraph shall not effect commercial reasonableness of the sale. The Company agrees, at the request of the Agent, to assemble the Inventory and Equipment and to make it available to the Agent at premises of the Company or elsewhere and to make available to the Agent the premises and facilities of the Company for the purpose of the Agent's taking possession of, removing or putting the Inventory and Equipment in saleable form. If notice of intended disposition of any Collateral is required by law, it is agreed that ten (10) days notice shall constitute reasonable notification and full compliance with 48 the law. The net cash proceeds resulting from the Agent's exercise of any of the foregoing rights, (after deducting all charges, costs and expenses, including reasonable attorneys' fees) shall be applied by the Agent to the payment of the Obligations, whether due or to become due, in such order as the Agent may elect, and the Company shall remain liable to the Agent for any deficiencies, and the Agent in turn agrees to remit to the Company or its successors or assigns, any surplus resulting therefrom. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. The Company hereby indemnifies the Agent and holds the Agent harmless from any and all costs, expenses, claims, liabilities, Out-of-Pocket Expenses or otherwise, incurred or imposed on the Agent by reason of the exercise of any of its rights, remedies and interests hereunder, including, without limitation, from any sale or transfer of Collateral, preserving, maintaining or securing the Collateral, defending its interests in Collateral (including pursuant to any claims brought by the Company, the Company as debtor-in-possession, any secured or unsecured creditors of the Company, any trustee or receiver in bankruptcy, or otherwise), and the Company hereby agrees to so indemnify and hold the Agent harmless, absent the Agent's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The foregoing indemnification shall survive termination of this Financing Agreement until such time as all Obligations (including the foregoing) have been finally and indefeasibly paid in full. In furtherance thereof the Agent, may establish such reserves for Obligations hereunder (including any contingent Obligations) as it may deem advisable in its reasonable business judgment. Any applicable mortgage(s), deed(s) of trust or assignment(s) issued to the Agent on the Real Estate shall govern the rights and remedies of the Agent thereto. SECTION 11. TERMINATION Except as otherwise permitted herein, the Agent may terminate this Financing Agreement only as of the initial or any subsequent Anniversary Date and then only by giving the Company at least sixty (60) days prior written notice of termination. Notwithstanding the foregoing the Agent may terminate the Financing Agreement immediately upon the occurrence of an Event of Default, provided, however, that if the Event of Default is an event listed in Paragraph 10.1(c) of Section 10 of this Financing Agreement, this Financing Agreement shall terminate in accordance with paragraph 10.2 of Section 10. This Financing Agreement, unless terminated as herein provided, shall automatically continue from Anniversary Date to Anniversary Date. The Company may terminate this Financing Agreement at any time upon sixty (60) days' prior written notice to the Agent, provided that the Company pays to the Agent immediately on demand an Early Termination Fee and/or the Prepayment Premium, if applicable. All Obligations shall become due and payable as of any termination hereunder or under Section 10 hereof and, pending a final accounting, the Agent may withhold any balances in the Company's account (unless supplied with an indemnity satisfactory to the Agent) to cover all of the Obligations, whether absolute or contingent, including, but not limited to, cash reserves for any contingent Obligations, including an amount of 110% of the face amount of any outstanding Letters of Credit with an expiry date on, or within thirty (30) days of the effective date of termination of this Financing Agreement. All of the Agent's rights, liens and security interests shall continue after any termination until all Obligations have been paid and satisfied in full. 49 SECTION 12. MISCELLANEOUS 12.1 Except as otherwise set forth herein, the Company hereby waives diligence, notice of intent to accelerate, notice of acceleration, demand, presentment and protest and any notices thereof as well as notice of nonpayment. No delay or omission of the Agent or the Company to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Agent of any right or remedy precludes any other or further exercise thereof, or precludes any other right or remedy. 12.2 This Financing Agreement and the Loan Documents executed and delivered in connection therewith constitute the entire agreement between the Company and the Agent; supersede any prior agreements; can be changed only by a writing signed by both the Company and the Agent; and shall bind and benefit the Company and the Agent and their respective successors and assigns. 12.3 In no event shall the Company, upon demand by the Agent for payment of any Indebtedness relating hereto, by acceleration of the maturity thereof, or otherwise, be obligated to pay interest and fees in excess of the amount permitted by law. Regardless of any provision herein or in any agreement made in connection herewith, the Agent shall never be entitled to receive, charge or apply, as interest on any indebtedness relating hereto, any amount in excess of the maximum amount of interest permissible under applicable law. If the Agent ever receives, collects or applies any such excess, it shall be deemed a partial repayment of principal and treated as such; and if principal is paid in full, any remaining excess shall be refunded to the Company. This paragraph shall control every other provision hereof, the Loan Documents and of any other agreement made in connection herewith. 12.4 If any provision hereof or of any other agreement made in connection herewith is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. Furthermore, in lieu of any such provision, there shall be added automatically as a part of the applicable agreement a legal and enforceable provision as similar in terms to the severed provision as may be possible. 12.5 THE COMPANY, THE LENDERS AND THE AGENT EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREUNDER. THE COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED. IN NO EVENT WILL THE AGENT BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 12.6 Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing (provided that, any electronic communications from the Company with 50 respect to any request, transmission, document, electronic signature, electronic mail or facsimile transmission shall be deemed binding on the Company for purposes of this Financing Agreement, provided further that any such transmission shall not relieve the Company from any other obligation hereunder to communicate further in writing), and shall be deemed to have been validly served, given or delivered when hand delivered or sent by facsimile, or three days after deposit in the United States mail, with proper first class postage prepaid and addressed to the party to be notified or to such other address as any party hereto may designate for itself by like notice, as follows: (A)if to CIT, at: THE CIT GROUP/BUSINESS CREDIT, INC., AS AGENT 1211 Avenue of the Americas, New York, New York 10036 Attn: Regional Credit Manager Fax No.: (212) 536-1295 (B)if to the Company at: COMPUTER HORIZONS CORP. 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey, 07046 Attn: William J. Murphy Fax No.: (973) 402-7988 With a courtesy copy of any material notice to the Company's counsel at: COMPUTER HORIZONS CORP. 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey, 07046 Attn: Michael C. Caulfield, Esq. Fax No.: (973) 402-7988 provided, however, that the failure of the Agent to provide the Company's counsel with a copy of such notice shall not invalidate any notice given to the Company and shall not give the Company any rights, claims or defenses due to the failure of the Agent to provide such additional notice. 12.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT ANY OTHER LOAN DOCUMENT INCLUDES AN EXPRESS ELECTION TO BE GOVERNED BY THE LAWS OF ANOTHER JURISDICTION. 51 SECTION 13. AGREEMENT BETWEEN THE LENDERS 13.1 (a) The Agent, for the account of the Lenders, shall disburse all loans and advances to the Company and shall handle all collections of Collateral and repayment of Obligations. It is understood that for purposes of advances to the Company and for purposes of this Section 13 the Agent is using the funds of the Agent. (b) Unless the Agent shall have been notified in writing by any Lender prior to any advance to the Company that such Lender will not make the amount which would constitute its share of the borrowing on such date available to the Agent, the Agent may assume that such Lender shall make such amount available to the Agent on a Settlement Date, and the Agent may, in reliance upon such assumption, make available to the Company a corresponding amount. A certificate of the Agent submitted to any Lender with respect to any amount owing under this subsection shall be conclusive, absent manifest error. If such Lender's share of such borrowing is not in fact made available to the Agent by such Lender on the Settlement Date, the Agent shall be entitled to recover such amount with interest thereon at the rate per annum applicable to Revolving Loans hereunder, on demand, from the Company without prejudice to any rights which the Agent may have against such Lender hereunder. Nothing contained in this subsection shall relieve any Lender which has failed to make available its ratable portion of any borrowing hereunder from its obligation to do so in accordance with the terms hereof. Nothing contained herein shall be deemed to obligate the Agent to make available to the Company the full amount of a requested advance when the Agent has any notice (written or otherwise) that any of the Lenders will not advance its ratable portion thereof. 13.2 On the Settlement Date, the Agent and the Lenders shall each remit to the other, in immediately available funds, all amounts necessary so as to ensure that, as of the Settlement Date, the Lenders shall have their proportionate share of all outstanding Obligations. 13.3 The Agent shall forward to each Lender, at the end of each month, a copy of the account statement rendered by the Agent to the Company. 13.4 The Agent shall, after receipt of any interest and fees earned under this Financing Agreement, promptly remit to the Lenders: (a) their pro rata portion of all fees, provided, however, that the Lenders (other than CIT in its role as the Agent) shall (i) not share in the Collateral Management Fee or Documentation Fees or the fees provided for in Section 8, Paragraph 8.12; and (ii) receive their share of the Loan Facility Fee in accordance with their respective agreements with the Agent; (b) interest computed at the rate and as provided for in Section 8 of this Financing Agreement on all outstanding amounts advanced by the Lenders on each Settlement Date, prior to adjustment, that are subsequent to the last remittance by the Agent to the Lenders of the Company's interest computed at the rate and as provided for in Section 8 of this Financing Agreement. 13.5 (a) The Company acknowledges that the Lenders with the prior written consent of the Agent may sell participation in the loans and extensions of credit made and to be made to the Company hereunder. The Company further acknowledges that in doing so, the Lenders may grant to such participants certain rights which would require the participant's consent to certain waivers, amendments and other actions with respect to the provisions of this Financing Agreement, provided 52 that the consent of any such participant shall not be required except for matters requiring the consent of all Lenders hereunder as set forth in Section 14, Paragraph 14.10 hereof. (b) The Company authorizes each Lender to disclose to any participant or purchasing lender (each, a "TRANSFEREE") and any prospective Transferee any and all financial information in such Lender's possession concerning the Company and their affiliates which has been delivered to such Lender by or on behalf of the Company pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Company in connection with such Lender's credit evaluation of the Company and their affiliates prior to entering into this Agreement, provided that such Transferee agrees to hold such information in confidence in the ordinary course of its business. 13.6 The Company hereby agrees that each Lender is solely responsible for its portion of the Line of Credit and that neither the Agent nor any Lender shall be responsible for, nor assume any obligations for the failure of any Lender to make available its portion of the Line of Credit. Further, should any Lender refuse to make available its portion of the Line of Credit, then the other Lender may, but without obligation to do so, increase, unilaterally, its portion of the Line of Credit in which event the Company are so obligated to that other Lender. 13.7 In the event that the Agent, the Lenders or any one of them is sued or threatened with suit by the Company or any one of them, or by any receiver, trustee, creditor or any committee of creditors on account of any preference, voidable transfer or lender liability issue, alleged to have occurred or been received as a result of, or during the transactions contemplated under this Financing Agreement, then in such event any money paid in satisfaction or compromise of such suit, action, claim or demand and any expenses, costs and attorneys' fees paid or incurred in connection therewith, whether by the Agent, the Lenders or any one of them, shall be shared proportionately by the Lenders. In addition, any costs, expenses, fees or disbursements incurred by outside agencies or attorneys retained by the Agent to effect collection or enforcement of any rights in the Collateral, including enforcing, preserving or maintaining rights under this Financing Agreement shall be shared proportionately between and among the Lenders to the extent not reimbursed by the Company or from the proceeds of Collateral. The provisions of this paragraph shall not apply to any suits, actions, proceedings or claims that (x) predate the date of this Financing Agreement or (y) are based on transactions, actions or omissions that predate the date of this Financing Agreement. 13.8 Each of the Lenders agrees with each other Lender that any money or assets of the Company held or received by such Lender, no matter how or when received, shall be applied to the reduction of the Obligations (to the extent permitted hereunder) after (x) the occurrence of an Event of Default and (y) the election by the Required Lenders to accelerate the Obligations. In addition, the Company authorize, and the Lenders shall have the right, without notice, upon any amount becoming due and payable hereunder, to set-off and apply against any and all property held by, or in the possession of such Lender the Obligations due such Lenders. 13.9 The Agent shall have the right at any time to assign to one or more commercial banks, commercial finance lenders or other financial institutions all or a portion of its rights and obligations 53 under this Financing Agreement (including, without limitation, its obligations under the Line of Credit, the Revolving Loans and its rights and obligations with respect to Letters of Credit). Upon execution of an Assignment and Transfer Agreement, (a) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment, have the rights and obligations of the Agent as the case may be hereunder and (b) the Agent shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such assignment, relinquish its rights and be released from its obligations under this Financing Agreement. The Company shall, if necessary, execute any documents reasonably required to effectuate the assignments. No other Lender may assign its interest in the loans and advances and extensions of credit hereunder without the prior written consent of the Agent. In the event that the Agent consents to any such assignment by any other Lenders (i) the amount being assigned shall in no event be less than the lesser of (x) $5,000,000 or (y) the entire interest of such Lender hereunder, (ii) such assignment shall be of a pro-rata portion of all of such assigning Lender's loans and commitments hereunder and (iii) the parties to such assignment shall execute and deliver to the Agent an Assignment and Transfer Agreement, and, at the Agent's election, a processing and recording fee of $3,000 payable by the Company to the Agent for its own account. SECTION 14. AGENCY 14.1 Each Lender hereby irrevocably designates and appoints CIT as the Agent for the Lenders under this Financing Agreement and any ancillary loan documents and irrevocably authorizes CIT as the Agent for such Lender, to take such action on its behalf under the provisions of this Financing Agreement and all ancillary documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Financing Agreement and all ancillary documents together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Financing Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Financing Agreement and the ancillary documents or otherwise exist against the Agent. 14.2 The Agent may execute any of its duties under this Financing Agreement and all ancillary documents by or through agents or attorneys-in-fact and shall be entitled to the advice of counsel concerning all matters pertaining to such duties. 14.3 Neither the Agent nor any of its officers, directors, employees, agents, or attorneys-in-fact shall be (i) liable to any Lender for any action lawfully taken or omitted to be taken by it or such person under or in connection with this Financing Agreement and all ancillary documents (except for its or such person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in this Financing Agreement and all ancillary documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Financing Agreement and all ancillary documents or for the 54 value, validity, effectiveness, genuineness, enforceability or sufficiency of this Financing Agreement and all ancillary documents or for any failure of the Company to perform their obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Financing Agreement and all ancillary documents or to inspect the properties, books or records of the Company. 14.4 The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Financing Agreement and all ancillary documents unless it shall first receive such advice or concurrence of the Lenders, or the Required Lenders, as the case may be, as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Financing Agreement and all ancillary documents in accordance with a request of the Lenders, or the Required Lenders, as the case may be, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 14.5 The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received written notice from a Lender or the Company describing such Default or Event of Default. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Lenders, or Required Lenders, as the case may be; PROVIDED that unless and until the Agent shall have received such direction, the Agent may in the interim (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Lenders. In the event the Agent in its sole discretion, or at the request of the Required Lenders, continues to make Revolving Loans and advances under this Financing Agreement upon the occurrence of a Default or Event of Default, any such Revolving Loans and advances may be in such amounts (subject to Paragraph 14.10 hereof) and on such additional terms and conditions as the Agent or the Required Lenders may deem appropriate. 14.6 Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents or attorneys-in-fact has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Company shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition 55 and creditworthiness of the Company and made its own decision to enter into this Financing Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the Financing Agreement and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition or creditworthiness of the Company. The Agent, however, shall provide the Lenders with copies of all financial statements, projections and business plans which come into the possession of the Agent or any of its officers, employees, agents or attorneys-in-fact. 14.7 (a) The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (including, without limitation, all Out-of-Pocket Expenses) of any kind whatsoever (including negligence on the part of the Agent) which may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Financing Agreement or any ancillary documents or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct. The agreements in this paragraph shall survive the payment of the Obligations. (b) The Agent will use its reasonable business judgment in handling the collection of the Accounts, enforcement of its rights hereunder and realization upon the Collateral but shall not be liable to the Lenders for any action taken or omitted to be taken in good faith or on the written advice of counsel. The Lenders expressly release the Agent from any and all liability and responsibility (express or implied), for any loss, depreciation of or delay in collecting or failing to realize on any Collateral, the Obligations or any guaranties therefor and for any mistake, omission or error in judgment in passing upon or accepting any Collateral or in making (or in failing to make) examinations or audits or for granting indulgences or extensions to the Company, any account debtor or any guarantor, other than resulting from the Agent's gross negligence or willful misconduct. 14.8 The Agent may make loans to, and generally engage in any kind of business with the Company as though the Agent were not the Agent hereunder. With respect to its loans made or renewed by it or loan obligations hereunder as Lender, the Agent shall have the same rights and powers, duties and liabilities under this Financing Agreement as any Lender and may exercise the same as though it was not the Agent and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 14.9 The Agent may resign as the Agent upon 30 days' notice to the Lenders and such resignation shall be effective upon the appointment of a successor Agent. If the Agent shall resign as Agent, then the Lenders shall appoint a successor Agent for the Lenders whereupon such successor 56 Agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Financing Agreement. After any retiring Agent's resignation hereunder as the Agent the provisions of this Section 14 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent. 14.10 Notwithstanding anything contained in this Financing Agreement to the contrary, the Agent will not, without the prior written consent of all Lenders: (a) amend the Financing Agreement to (i) increase the Line of Credit; (ii) reduce the interest rates; (iii) reduce or waive (x) any fees in which the Lenders share hereunder, or (y) the repayment of any Obligations due the Lenders; (iv) extend the maturity of the Obligations; or (v) alter or amend (x) this Paragraph 14.10 or (y) the definitions of Eligible Accounts Receivable, Eligible Inventory, Inventory Loan Cap, Collateral or Required Lenders, or (vi) increase the advance percentages against Eligible Accounts Receivable or Eligible Inventory or alter or amend the Agent's criteria for determining compliance with such definitions of Eligible Accounts Receivable and/or Eligible Inventory if the effect thereof is to increase Availability; (b) except as otherwise required in this Financing Agreement, release any guaranty or Collateral in excess of $500,000 during any year, or (c) knowingly make any Revolving Loan or assist in opening any Letter of Credit hereunder if after giving effect thereto the total of Revolving Loans and Letters of Credit hereunder for the Company would exceed one hundred and ten percent (110%) of the maximum amount available under this Financing Agreement (the portion in excess of 100% of such maximum available amount shall be referred to herein as the "Agent Permitted Overadvances"), provided that the Agent shall not be entitled to continue to knowingly make such Agent Permitted Overadvances for a period in excess of ninety (90) days without the Lenders' consent, and provided further that the foregoing limitations shall not prohibit or restrict advances by the Agent to preserve and protect Collateral. Subject to the provisions of Section 12, Paragraph 12.2 and the provisions of this Paragraph 14.10 of Section 14 of this Financing Agreement, in all other respects the Agent is authorized by each of the Lenders to take such actions or fail to take such actions under this Financing Agreement if the Agent, in its reasonable discretion, deems such to be advisable and in the best interest of the Lenders. Notwithstanding any provision to the contrary contained in this Financing Agreement (including the provisions of Section 12, Paragraph 12.2 and Section 14, Paragraph 14.10 hereof) the Agent is authorized to take such actions or fail to take such actions in connection with (a) the exercise of (i) any and all rights and remedies under this Financing Agreement (including but not limited to the exercise of rights and remedies under Section 10, Paragraph 10.2 of this Financing Agreement) and (ii) its discretion in (x) determining compliance with the eligibility requirements of Eligible Accounts Receivable and/or Eligible Inventory and establishing reserves against Availability in connection therewith and/or (y) the making of Agent Permitted Overadvances, and/or (b) the release of Collateral not to exceed $250,000 in the aggregate during any Fiscal Year, and/or (c) curing any ambiguity, defect or inconsistency in the terms of this Financing Agreement; provided that the Agent, in its reasonable discretion, deems such to be advisable and in the best interests of the Lenders. In the event the Agent terminates this Financing Agreement pursuant to the terms hereof, the Agent will cease making any loans or advances upon the effective date of termination except for any loans or advances which the 57 Agent may deem, in its sole discretion, are reasonably required to maintain, protect or realize upon the Collateral. 14.11 In the event any Lender's consent is required pursuant to the provisions of this Financing Agreement and such Lender does not respond to any request by the Agent for such consent within 10 days after such request is made to such Lender, such failure to respond shall be deemed a consent. In addition, in the event that any Lender declines to give its consent to any such request, it is hereby mutually agreed that the Agent and/or any other Lender shall have the right (but not the obligation) to purchase such Lender's share of the Loans for the full amount thereof together with accrued interest thereon to the date of such purchase. 14.12 Each Lender agrees that notwithstanding the provisions of Section 11 of this Financing Agreement any Lender may terminate this Financing Agreement and the Line of Credit only as of the initial or any subsequent Anniversary Date and then only by giving the Agent 90 days prior written notice thereof. Within 30 days after receipt of any such termination notice, the Agent shall, at its option, either (i) give notice of termination to the Company hereunder or (ii) purchase, or arrange for the purchase of, the Lender's share of the Obligations hereunder for the full amount thereof plus accrued interest thereon. Unless so terminated this Financing Agreement and the Line of Credit shall be automatically extended from Anniversary Date to Anniversary Date. Termination of this Financing Agreement by any of the Lenders as herein provided shall not affect the Lenders' respective rights and obligations under this Financing Agreement incurred prior to the effective date of termination as set forth in the preceding sentence. 14.13 If the Agent is required at any time to return to the Company or to a trustee, receiver, liquidator, custodian or other similar official any portion of the payments made by the Company to the Agent as result of a bankruptcy or similar proceeding with respect to the Company, any guarantor or any other person or entity or otherwise, then each Lender shall, on demand of the Agent, forthwith return to the Agent its ratable share of any such payments made to such Lender by the Agent, together with its ratable share of interest and/or penalties, if any, payable by the Lenders; this provision shall survive the termination of this Financing Agreement. 14.14 The Lenders agree to maintain the confidentiality of any non-public information provided by the Company to them, in the ordinary course of their business, provided that the foregoing confidentiality provision shall terminate one (1) year after the termination date of this Financing Agreement, and provided further that any such Lenders may disclose such information (i) to any applicable bank regulatory and auditor personnel and (ii) upon the advise of their counsel. 58 IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to be effective, executed, accepted and delivered at New York, New York, by their proper and duly authorized officers as of the date set forth above. THE CIT GROUP/BUSINESS CREDIT, INC. (AS AGENT AND LENDER) By: -------------------- Title: COMPUTER HORIZONS CORP. By: -------------------- Title: 59 EXHIBIT A REVOLVING CREDIT NOTE Dated as of July ___, 2001 $40,000,000 FOR VALUE RECEIVED, the undersigned, COMPUTER HORIZONS CORP. (herein the "Company"), a New York corporation with a principal place of business at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey, 07046, hereby, absolutely and unconditionally promises to pay to the order of THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, (hereinafter "CIT") with offices located at 1211 Avenue of the Americas, New York, New York 10036, and CIT as agent for the Lenders (the "Agent"), and any other party which now or hereafter becomes a lender hereunder pursuant to Section 13 hereof (individually a "Lender" and collectively the "Lenders"), in lawful money of the United States of America and in immediately available funds, the principal amount of Forty Million Dollars ($40,000,000), or such other principal amount advanced pursuant to Section 3 and Section 5 of the Financing Agreement (as herein defined), such Revolving Loan advances shall be repaid on a daily basis as a result of the application of the proceeds of collections of the Accounts and the making of additional Revolving Loans as described in Section 3. Subject to the terms of the Financing Agreement, the Revolving Loans may be borrowed, repaid and reborrowed by the Company. A final balloon payment in an amount equal to the outstanding aggregate balance of principal and interest remaining unpaid, if any, under this Note as shown on the books and records of the Agent shall be due and payable on the termination of the Financing Agreement, as set forth in Section 11 thereof. The Company further absolutely and unconditionally promises to pay to the order of the Agent at said office, interest, in like money, on the unpaid principal amount owing hereunder from time to time from the date hereof on the dates and at the rates specified in Section 8, of the Financing Agreement. If any payment on this Note becomes due and payable on a day other than a business day, the maturity thereof shall be extended to the next succeeding business day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. This Note is one of the Promissory Notes referred to in the Financing Agreement, dated as of the date hereof, as the same may be amended and restated and in effect from time to time, among the Company, the Agent, and the Lenders thereto from time to time (the "Financing Agreement"), and is subject to, and entitled to, all of the terms, provisions and benefits thereof and is subject to optional and mandatory prepayment, in whole or in part, as provided therein. All capitalized terms used 60 herein shall have the meaning provided therefor in the Financing Agreement, unless otherwise defined herein. The date and amount of the advance(s) made hereunder may be recorded on the grid page or pages which are attached hereto and hereby made part of this Note or the separate ledgers maintained by the Agent. The aggregate unpaid principal amount of all advances made pursuant hereto may be set forth in the balance column on said grid page or such ledgers maintained by the Agent. All such advances, whether or not so recorded, shall be due as part of this Note. The Company confirms that any amount received by or paid to the Agent in connection with the Financing Agreement and/or any balances standing to its credit on any of its or their accounts on the Agent's books under the Financing Agreement may in accordance with the terms of the Financing Agreement be applied in reduction of this Note, but no balance or amounts shall be deemed to effect payment in whole or in part of this Note unless the Agent shall have actually charged such account or accounts for the purposes of such reduction or payment of this Note. Upon the occurrence of any one or more of the Events of Default specified in the Financing Agreement or upon termination of the Financing Agreement, all amounts then remaining unpaid on this Note may become, or be declared to be, immediately due and payable as provided in the Financing Agreement. Attest: COMPUTER HORIZONS CORP. By: - ------------------------- -------------------- Secretary Title: 61 SCHEDULE TO GRID
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62 SCHEDULE 1 - COLLATERAL INFORMATION [TO BE PROVIDED BY COMPUTER HORIZONS CORP. AND COMPANY'S COUNSEL] EXACT COMPANY NAME IN STATE OF ORGANIZATION: STATE OF INCORPORATION OR FORMATION: FEDERAL TAX I.D. NO. CHIEF EXECUTIVE OFFICE: COLLATERAL LOCATIONS: 63 EX-21 4 a2074673zex-21.txt EXHIBIT 21 EXHIBIT 21 The Company's only active subsidiaries are each wholly owned and are included in the consolidated financial statements of the Company, and their jurisdictions of incorporation are as follows: Name of Subsidiary Jurisdiction of Incorporation CHC Consulting Services Limited England and Wales CHC International England and Wales Computer Horizons (Canada) Corp. Toronto, Canada Horizons Technologies, Inc. Delaware Strategic Outsourcing Systems, Inc. Delaware Princeton Softech, Inc. New Jersey G. Triad Development Corp. New Jersey Integrated Computer Management New Jersey CHIMES, Inc. Delaware eB Networks, Inc. Delaware CG Computer Services Corp. California Horizon Enterprises, Inc. Delaware Spargo Holdings, Inc. Delaware Spargo Holdings II, Inc. Delaware EX-23 5 a2074673zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 26, 2002, 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, 2001 and our report dated February 26, 2002 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 July 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 17, 1999). /s/ Grant Thornton - ------------------ Grant Thornton Edison, New Jersey March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----