-----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, Vst1z2LoJATwvYoyYsls6ZQp24ey0TJ0POgu+YEWU6qPcLEZNLa9PTmwtQYvMQ3V 0oTDPB5Zml535qQlEFn3zw== 0000914317-98-000185.txt : 19980330 0000914317-98-000185.hdr.sgml : 19980330 ACCESSION NUMBER: 0000914317-98-000185 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD 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: SEC FILE NUMBER: 000-07282 FILM NUMBER: 98576915 BUSINESS ADDRESS: STREET 1: 49 OLD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 BUSINESS PHONE: 2014027400 MAIL ADDRESS: STREET 1: 49 0LD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-7282 COMPUTER HORIZONS CORP. (Exact name of registrant as specified in its charter) New York 13-2638902 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 49 Old Bloomfield Avenue Mountain Lakes, New Jersey 07046-1495 (Address of principal executive offices) (Zip Code) - -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (973) 299-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Par value $.10 per share) (Title of class) Series A Preferred Stock Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of March 23, l998, was approximately $1,344,848,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 23, l998: 28,886,106 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, l997, in Part II of this Report and (ii) Proxy Statement for the 1998 Annual Meeting of Shareholders, expected to be filed with the Securities and Exchange Commission on or before April 6, 1998, in Part III hereof. PART I Item 1. Business General The Company provides a wide range of information technology services and solutions to major corporations. Historically a professional services staffing firm, the Company has, over the past six years, developed the technological and managerial infrastructure to offer its clients value added services including CHC's Signature 2000(TM) solution for the millennium change, client/server systems development and migration, enterprise network management, document imaging practices, outsourcing and offshore software development and maintenance ("solutions"). The Company markets solutions to both existing and potential clients with the objective of becoming a preferred provider of comprehensive information technology services and solutions for such clients. Solutions engagements, which represented less than five percent of the Company's consolidated revenues in 1992, accounted for approximately 33% of its consolidated revenues in 1997. The Company believes that the range of services and solutions that it offers, combined with its worldwide network of 47 offices and subsidiary organizations, provides it with significant competitive advantages in the information technology marketplace. In 1997, the Company expanded recently opened offices in Toronto, Canada and London, England. Together with the offices operated by the Company's joint venture, Birla Horizons International, the Company has established itself as an international enterprise, with global capabilities. The Company's clients primarily are Fortune 500 companies with significant information technology budgets and recurring staffing or software development needs. In 1997, the Company provided information technology services to 499 clients. During 1997, the Company's largest client, AT&T, accounted for 11.7% of the Company's consolidated revenues, with no other client accounting for more than 8% of such revenues. With the trend in the commercial market moving towards fully integrated information systems solutions, the Company offers its clients a broad range of business and technical services as a service outsourcer and systems integrator capable of providing complex total solutions. This total solutions approach comprises proprietary software and tools, proven processes and methodologies, tested project management practices and resource management and procurement programs. The Company offers a range of information technology services and solutions, which include (1) professional services staffing, (2) the solution for the millennium change, (3) client/ server systems development and migration, (4) enterprise network management, (5) document imaging practices, (6) outsourcing, (7) offshore software development and maintenance, and (8) knowledge transfer. (1) Professional Services Staffing: Providing highly skilled software professionals to augment the internal information management staffs of major corporations remains the Company's primary business. The Company offers its clients centralized vendor management, supplying their staffing needs from among the Company's over 3,100 software professionals. The Company is committed to expanding its professional services staffing operations in conjunction with its solutions business. (2) Solution for the Millennium Change: CHC's Signature 2000(TM) offering combines an internally developed proprietary software toolkit, skilled resources, proven methodologies, experienced project management, as well as significant millennium project experience. It analyzes, locates, reports on, and then restructures all programs and database definitions affected by the absence of a century date field to permit processing of dates after December 31, 1999. The solution is customized for each particular enterprise and deals with all collateral issues. In effect, CHC's Signature 2000(TM) provides the Company with an opportunity to facilitate field expansion, and century date windowing, while simultaneously performing other systems upgrades such as language conversions and platform migrations. In addition, CHC's Signature 2000(TM) provides the Company a fully integrated testing solution across all phases of the testing life cycle, including Testing Processes, Software Products and experienced management and technical resources. CHC also provides a workstation solution for the Year 2000, including Asset Management, assessment and correction of spreadsheets and databases, correction to the workstation clocks, and third-party vendor compliancy assessment. (3) Client/Server Systems Development and Migration: The Company has the capability to develop and implement open computer systems using client/server architecture and integrating servers, mini and mainframe systems, workstations, terminals and communication gateways into complete, flexible networks. Such services include project management, selection of viable systems platforms, creation of migration plans, development of customized software applications, and systems and database integration. The Company specializes in integrating local area network ("LAN") environments into single heterogeneous networks and unifying enterprise networks into wide area network ("WAN") environments. (4) Enterprise Network Management: As application development migrates to distributed systems platforms, so too must the disciplines of systems management. The Company's enterprise network management offering is comprised of experienced technical professionals whose only business focus is the development and integration of centralized management platforms for mission-critical distributed systems environments. The Company's staff handles large-scale integration projects, including those requiring vendor product integration and custom software development associated with LAN/WAN monitoring and control, network asset management, software distribution and help desk support. (5) Document Imaging Practices: The Company offers an open-architectured document management solution that enables its clients to seamlessly image-enable existing applications that can reside on mainframes, mid-range or PC environments. The client is able to obtain a total solution that utilizes the Company's proprietary toolset, UNIDOC(TM), to provide customized design, development and deployment for their document management needs. (6) 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. (7) Offshore Software Development and Maintenance: For major U.S. corporations under the constraints of downsizing and cost-cutting, offshore software development and maintenance provides a high quality, low-cost alternative to having these services performed domestically. Through Birla Horizons International, a joint venture established in India, the Company is able to provide offshore development, legacy systems maintenance and conversion services, which can be ported to client computers at satellite speed. Quality control and project management remains localized through one of the Company's domestic offices. (8) Knowledge Transfer: The Company's Education Division offers custom-designed and/or existing courseware to enhance the competencies of client staff in specific technologies, languages, methodologies and applications. The prevailing focus of the Company is to assist clients, through instructor-led offerings, on-site counseling and various self-paced courses geared toward IT departments of Fortune 500 companies. The Company's offerings include mainframe, client/server and open systems, relational databases, object orientation, application downsizing, information engineering, SAP, Internet/Intranet as well as training college graduates or "second career" candidates to become proficient in technologies necessary to perform within IT departments. Personnel As of December 3l, 1997, the Company had a staff of 3,630, of whom more than 3,100 were computer professionals. The Company devotes significant resources to recruitment of qualified professionals and provides continuing in-house training and education, and a career path management development program within the Company. Competition The Company competes in the commercial information technology services market which is highly competitive and served by numerous firms, many of which serve only their respective local markets. The market includes participants in a variety of market segments, including systems consulting and integration firms, professional services companies, application software firms, temporary employment agencies, the professional service groups of computer equipment companies such as Hewlett-Packard Company, Unisys Corporation and Digital Equipment Corporation, facilities management and management information systems ("MIS") outsourcing companies, certain "Big Six" accounting firms, and general management consulting firms. The Company's competitors also include companies such as Andersen Consulting, Technology Solutions Corporation, Cambridge Technology Partners, Inc., Cap Gemini America, Business System Group, the consulting division of Computer Sciences Corporation, Analysts International Corp., CIBER, Inc., Computer Task Group Inc., and Keane Inc. Many participants in the information technology consulting and software solutions market have significantly greater financial, technical and marketing resources and generate greater revenues than the Company. The Company believes that the principal competitive factors in the commercial information technology services industry include responsiveness to client needs, speed of application software development, quality of service, price, project management capability and technical expertise. Pricing has its greatest importance as a competitive factor in the area of professional service staffing. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate skilled technical and management personnel, the ownership by competitors of software used by potential clients, the price at which others offer comparable services and the extent of its competitors' responsiveness to customer needs. Item 2. Properties The Company's Corporate and Financial Headquarters, its Solutions Division, its Enterprise Management Division, its Document Management Division, its Education Division, as well as its Eastern Regional Office, comprising approximately 63,000 square feet, are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey. The Mountain Lakes leases are for terms expiring December 31, 1999, at a current annual rental of approximately $1,028,000. As of December 3l, l997, the Company also maintained facilities in Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Washington D.C. and Wisconsin, as well as international operations located in London and Toronto, with an aggregate of approximately 138,300 square feet. The leases for these facilities are at a current annual aggregate rental of approximately $2,805,000. These leases expire at various times with no lease commitment longer than September 30, 2006. In addition, through Birla Horizons International, the Company has offices in New Delhi, India; London, England; Toronto, Canada; California; and New Jersey. Item 3. Legal Proceedings There are no material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Company The following table sets forth certain information with respect to the executive officers of the Company, who are elected to serve until the next annual meeting of the Board of Directors and until their successors are elected and qualify. All the positions listed are or were held by such officers with the Company.
PERIOD NAME AGE TITLE POSITION HELD - ---- --- ----- ------------- John J. Cassese 53 Chairman of the Board 1982-Present and President Director 1969-Present William J. Murphy 53 Executive Vice President 1997 - Present and CFO Michael J. Shea 37 Controller 1995-Present Vice President 1996-Present
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is contained under the caption "Market and Dividend Information" in the Company's Annual Report to Shareholders for the year ended December 3l, 1997, 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, 1997, 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, 1997, which material is incorporated by reference in this Form 10-K Annual Report. Item 8. Financial Statements and Supplementary Data The financial statements together with the report thereon by Grant Thornton LLP, Independent Certified Public Accountants, appearing in the Company's Annual Report to Shareholders for the year ended December 31, 1997, are incorporated herein by reference. Such information is listed in Item 14(a)1 of this Form 10-K Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with the Company's independent accountants involving accounting and financial disclosure matters. PART III Item 10. Directors and Executive Officers of the Registrant (a) The information called for by Item 10 with respect to identification of directors of the Company is incorporated herein by reference to the material under the caption "Election of Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders which is expected to be filed with the Securities and Exchange Commission on or before April 6, 1998 (the "1998 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 1998 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 1998 Proxy Statement. Item 13. Certain Relationships and Related Transactions None PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. The following consolidated financial statements, appearing in the Company's 1997 Annual Report to Shareholders, are incorporated herein by reference. - Consolidated balance sheets as of December 3l, 1997 and 1996 - Consolidated statements of income for each of the three years in the period ended December 31, 1997 - Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1997 - Consolidated statements of cash flows for each of the three years in the period ended December 31, 1997 - Notes to consolidated financial statements - Report of independent certified public accountants on the consolidated financial statements 2. Schedule II - Valuation and qualifying accounts for the years ended December 31, 1997, 1996 and 1995. 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) One report on Form 8K was filed during the quarter ended December 31, 1997, to report the Company's acquisition of CG Computer Services Corporation on December 19, 1997. 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 26, 1998 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 26, 1998 By: /s/ John J. Cassese ------------------- John J. Cassese, Chairman of the Board and President (Principal Executive Officer) and Director Date: March 26, 1998 By: /s/ William J. Murphy ---------------------- William J. Murphy, Executive Vice President and CFO (Principal Financial Officer) Date: March 26, 1998 By: /s/ Michael J. Shea ---------------------- Michael J. Shea Vice President and Controller (Principal Accounting Officer) Date: March 26, 1998 By: /s/ Thomas J. Berry -------------------- Thomas J. Berry, Director Date: March 26, 1998 By: /s/ Rocco J. Marano ------------------- Rocco J. Marano, Director
EXHIBIT INDEX Exhibit Description Incorporated by Reference to - ------- ----------- ---------------------------- 3(a-1) Certificate of Incorporation as Exhibit 3(a) to Registration amended through 1971. Statement on Form S-1 (File No. 2--42259). 3(a-2) Certificate of Amendment dated Exhibit 3(a-2) to Form 10K May 16, 1983 to Certificate of for the fiscal year ended Incorporation. February 28, 1983. 3(a-3) Certificate of Amendment dated Exhibit 3(a-3) to Form 10K June 15, 1988 to Certificate of for the fiscal year ended Incorporation. December 31, 1988. 3(a-4) Certificate of Amendment dated Exhibit 3(a-4) to Form 10K July 6, 1989 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-5) Certificate of Amendment dated Exhibit 3(a-5) to Form 10K February 14, 1990 to Certificate of for the fiscal year ended Incorporation. December 31, 1989. 3(a-6) Certificate of Amendment dated Exhibit 3(a-6) to Form 10K May 1, 1991 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(a-7) Certificate of Amendment dated Exhibit 3(a-7) to Form 10K July 12, 1994 to Certificate of for the fiscal year ended Incorporation. December 31, 1994. 3(b) Bylaws, as amended and Exhibit 3(b) to Form 10K for presently in effect. the year ended December 31, 1988. 4(a) Rights Agreement dated as of Exhibit 1 to Registration July 6, 1989 between the Statement on Form 8-A dated Company and Chemical Bank, as July 7, 1989. Rights Agent ("Rights Agreement") which includes the form of Rights Certificate as Exhibit B. 4(b) Amendment No. 1 dated as of Exhibit 1 to Amendment No. February 13, 1990 to Rights 1 on Form 8 dated February Agreement. 13, 1990 to Registration Statement on Form 8-A. 4(c) Amendment No. 2 dated as of Exhibit 4(c) to Form 10K August 10, 1994 to Rights for the fiscal year ended Agreement. December 31, 1994. 4(d) Employee's Savings Plan and Exhibit 4.4 to Registration Amendment Number One. Statement on Form S-8 dated December 5, 1995. 4(e) Employee's Savings Plan Trust Exhibit 4.5 to Registration Agreement as Amended and Statement on Form S-3 dated Restated Effective January 1, December 5, 1995. 1996. 10(a) Employment Agreement dated as Exhibit 10(a) to Form 10K for of February 16, 1990 between the the year ended December 31, Company and John J. Cassese. 1989. 10(b) Employment Agreement dated as Exhibit 10(g) to Form S-3 dated of January 1, 1997 between the August 14, 1997. Company and William J. Murphy. 10(c) Employment Agreement dated as Exhibit 10(c) to Form 10K for of March 6, 1997 between the the year ended December 31, Company and Michael J. Shea. 1996. 10(d) Note Agreement dated as of Exhibit 10(i) to Form 10K for March 15, 1988 between the the year ended December 31, Company and Massachusetts 1988. Mutual Life Insurance Company. 10(e) 1990 Directors' Stock Option Exhibit 10(g) to Form 10K Plan, as amended. for the fiscal year ended December 31, 1994. 10(f) 1994 Incentive Stock Option and Exhibit 10(h) to Form 10K Appreciation Plan. for the fiscal year ended December 31, 1994. 10(g) $15,000,000 Discretionary Line of Exhibit 10(h) to Form S-3a Credit payable to Chase Manhattan dated September 23, 1997. Bank dated as of June 30, 1997. 10(h) $10,000,000 Discretionary Line Exhibit 10(h) to Form 10K of Credit from PNC Bank. for the fiscal year ended December 31, 1996. 13 Annual Report to Security Holders. 21 List of Subsidiaries. 23.1 Consent of Independent Certified Public Accountants
Computer Horizons Corp. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1997, 1996 and 1995 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Charged to Balance at beginning costs and Deductions - end of Description of period expenses describe(l) period ----------- --------- -------- ----------- ------ Year ended December 31, 1997 Allowance for doubtful accounts $1,203,000 $575,000 $ 36,000 $1,742,000 ---------- -------- -------- ---------- Year ended December 31, 1996 Allowance for doubtful accounts $ 840,000 $487,000 $124,000 $1,203,000 ---------- -------- -------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts $ 566,000 $465,000 $191,000 $ 840,000 ---------- -------- -------- ----------
Notes (1) Uncollectible accounts written off, net of recoveries. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors and Shareholders Computer Horizons Corp. In connection with our audit of the consolidated financial statements of Computer Horizons Corp. and Subsidiaries referred to in our report dated January 29, 1998 (except for Note 2, as to which the date is February 27, 1998), which is included in the 1997 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, 1997, 1996 and ]995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Parsippany, New Jersey January 29, 1998 (except for Note 2, as to which the date is February 27, 1998) EX-13 2 Investment Highlights Superior Core Competency in IT Staffing Market Leader in Year 2000 Solution World-Class Outsourcing and Solutions Capabilities Best-of-Breed Software Products Long-Term Client Relationships--Repeat Business Growing International Presence An Impressive Record of Growth, Profitability, and Market Development Experienced and Stable Management Team Background Founded in 1969 26th Year as a Public Company 1997 Revenues--$335 million 3,600 Employees--3,100 Billable Consultants Over 450 Consulting Service Clients 47 Offices Worldwide International and Offshore Capabilities Provider of Enterprise-Wide Software Products 1 SHAREHOLDERS' SUMMARY INFORMATION Market Capitalization: The market capitalization of our Company exceeded $1 billion at the end of 1997 for the first time in our history. The individual value of a share of CHC stock at December 31, 1997 was almost 80% higher than the value at the end of 1996. This increase in value to our shareholders was more than three times that experienced by the Dow Jones index. The chart below depicts the growth in our market capitalization over the past five years. [GRAPHIC-PIE CHART OF INDUSTRY PROFILE OF CLIENTS] Industry Profile of Clients: The above chart shows the diversity of our revenue across broad industry lines, with the Telecommunications industry providing the largest percentage of our revenue, followed by the Insurance, Manufacturing and Banking and Finance groups. These industry segments tend to have very large needs for IT professionals, services and products because of their high volume of transactions, complicated business systems and regulatory environments. CHC has served these industries and their respective leaders for more than 25 years. [GRAPHIC-CHART OF MARKET CAPITALIZATION] Revenues: Revenues during the past five years have grown at a compounded annual rate of 26%. More importantly, the percentage of our revenue derived from our Solutions services has expanded. In 1993, Solutions revenue was $15 million or 11% of total revenue, whereas in 1997 our Solutions revenue was $110 million, accounting for 33% of our total business. [GRAPHIC-GRAPH OF EARNINGS PER SHARE] [GRAPHIC-GRAPH OF REVENUES] [GRAPHIC-GRAPH OF OPERATING INCOME (MARGINS)] Operating Income (Margins): The growth in our operating income (margins) during the past five years has been at a compounded annual rate of 51%, nearly twice the compounded rate of our revenue growth. In 1997, our operating income doubled and our margins expanded to 11.9%, excluding merger-related expenses. EPS: Earnings per share-diluted has increased at a compounded annual rate of 50% during the past five years; more than 80% in 1997. Our number of weighted average shares increased in 1997 as a result of the additional 2.5 million shares sold at the end of our third quarter. [GRAPHIC- PHOTO OF JOHN J. CASESE CHAIRMLAN OF THE BOARD AND PRESIDENT] To Our Shareholders, Employees and Clients: 1997 was truly a landmark year for Computer Horizons. Financially, we had our best year ever with revenues increasing 34% to $335 million, while net earnings increased 91% to $22.6 million. For the first time, our market capitalization exceeded $1 billion at year-end, primarily resulting from a nearly 80% increase in stock price. At the close of 1997, we had approximately 3,600 employees, of which 3,100 were billable consultants. Even more important than our financial success is our position with the investment community and IT industry, where Computer Horizons is now a leading provider of services and products. The New Jersey Technology Council formally recognized us in 1997 as "Large Company of the Year." Additionally, our Midwest Regional headquarters was awarded ISO 9002 certification and we became ITAA Year 2000 certified. These accomplishments would not have been possible without the hard work and dedication of our employees. Clearly, our strong growth and expanding operating margins are being enhanced by our Year 2000 practice. We are a major force in assisting large organizations in their challenge to become Year 2000 compliant. The experience of our people in managing and fixing this problem, together with our proprietary tools, puts us in a category that is second to none. In our Millennium Refurbishment Centers, we continue to process massive amounts of code efficiently and accurately. We look at 1997 not as the peak, but as the foundation from which we can move this company to new heights. In September, we completed the sale of an additional 2.5 million shares of stock, raising $84 million of new capital and doubling the equity of our company. This was done to financially position our company to achieve our goal of becoming a billion-dollar enterprise. As we move into 1998, our financial condition is looking more like a billion-dollar service company than would be expected of a $500 million entity. We are well positioned to take advantage of investment opportunities. 2 In 1992, senior management set certain long-range goals, one of which was to become more of a solutions company. As we close 1997, it is satisfying to realize that we have in essence achieved this target. More than one-third of our business is derived from solutions services. Our challenge today is to embrace the strategic initiatives we have established for the next three to five years. The management team in place today is eagerly pursuing this challenge. Computer Horizons was founded on one premise: to provide value-added services and products to all our customers in all of our service and product offerings. Twenty-eight years later, this is still our credo. Our great clients are our franchise to our future success and prosperity. The high percentage of repeat business with our clients is a statistic of which we are particularly proud. [GRAPHIC-PHOTO OF WILLIAM J. MURPHY EXECUTIVE VICE PRESIDENT AND CEO] As we look to 1998 and beyond, we are confident that our strategic initiatives will be achieved. We continually meet with our clients to discuss the challenges they face and earnestly work to provide the necessary solution, whether it be staff augmentation of technical professionals, project management, Year 2000 services and products, training, application development, client server, or network management. No professional services company prospers without a dedicated and talented workforce. We are proud of our people and their accomplishments. We welcome the more than 350 employees who joined Computer Horizons as a result of the recent acquisitions of CG Computer Services, Millennium Computer Technology and Princeton Softech. We thank our employees and clients for a terrific year and look forward to 1998. Sincerely, /s/John J. Cassese - ------------------ John J. Cassese Chairman of the Board and President /s/William J. Murphy - -------------------- William J. Murphy Executive Vice President and CFO 3 [GRAPHIC-FOUR PHOTOS OF INDIVIDUALS] During 1997, Computer Horizons continued to advance its status as a world-class Information Technology (IT) solutions and services firm. To carry Computer Horizons well into the next millennium, our service offerings were expanded; our marketplace was enlarged; our infrastructure was fortified; praise and awards for performance were bestowed; quality in everything we do was instilled; and strategic growth plans were put in place. The IT marketplace continued to expand in 1997, driven largely by the need for corporate America and the world to deal with the costly problems associated with maintaining accurate computing during and after the century change. The Year 2000 problem, now commonly known as the "millennium bug," continues to plague our customers and virtually all computer users. New estimates of the price tag could well exceed the previous plateau of $600 billion worldwide. But with huge problems come great opportunities, and Computer Horizons' Signature 2000(TM) continues to be the solution chosen by many of the most significant companies around the world. This Year 2000-related expansion of opportunity is also furthering a shortage of experienced data processing professionals, as greater numbers of staff are needed to participate in the millennium solution. Computer Horizons' highly experienced staffing services are now being sought after by a growing list of Fortune 500 companies that must fill the resource gap. Further, the Giga Information Group estimates that as many as 40% of Fortune 500 companies have not yet even begun to address the problem. As a client-driven firm, we continue to seek advice from our customers as we ready new services and products to meet emerging needs. As has been our practice, each client is viewed as a franchise. Therefore, as clients select a CHC offering, we strive to introduce each client to all our services, expanding our partnership and our value. We invite you, our shareholders, to survey our vision for progress using the accomplishments of 1997 as the starting point. Financially, 1997 was an historic, record-breaking year for our company. Shareholders for the full year saw the value of their holdings increase by nearly 80%. Our stock outperformed the Dow Jones and the Nasdaq by a factor of three. The confidence shown 4 International Expansion Partnerships for Growth by our investors was rewarded with record revenues, record earnings and record returns. By the end of 1997, our market capitalization broke through the billion dollar level, where it has remained. [GRAPHIC-FOUR PHOTOS OF INDIVIDUALS] The investment community is taking increasing interest in our company. The number of firms whose analysts are covering Computer Horizons has risen to nine. Our company was included in reports appearing in most major investment magazines, cable outlets and on-line services. As a result of our strong performance, high investor recognition and confidence, our follow-on common stock offering was a success. An investment banking group led by BT Alex Brown raised $84,000,000 in our September 26th offering. Late in 1997, we completed our first two acquisitions as part of a strategic expansion plan. On December 19, 1997, Computer Horizons acquired CG Computer Services, a Los Angeles-headquartered IT provisioning and staffing solutions company, in a transaction accounted for as a pooling of interests. Although primarily serving West Coast-based Fortune 500 customers, CG had expanded in recent years by adding offices and clients in Chicago, IL and Parsippany, NJ. On December 31st, we completed our second acquisition, Millennium Computer Technology, a Chattanooga, TN-based IT staffing and solutions company. In the fourth quarter of 1997, our Solutions Division received ITAA*2000 Certification from the Information Technology Association of America. Certification is the IT industry's evaluation program which examines the process and methods used by member companies to perform Year 2000 software conversions. This stamp of approval from a neutral and objective third party is a significant indicator of the quality incorporated into the services we proudly perform. In 1995, we reported to you that quality was a primary objective in everything your company does. To further that goal, we created a Quality Management initiative to develop a Total Quality program. In 1996, we received the highly coveted "Q1" Quality Award from the Ford Motor Company after exceeding their rigorous quality standard. In 1997, we once again advanced in our quest for excellence when our Midwest Regional headquarters was awarded the important ISO 9002 status, passing the quality examination on the first try. These initial rewards are reflective of our company's ongoing commitment to the highest quality standards. We will now go 7 [GRAPHIC-PHOTOS OF FOUR INDIVIDUALS] forward with a program to have other areas of our company certified as well. During the past few years, Computer Horizons has taken its first steps toward international expansion. This year we truly became an international IT company. In North America, we established a Canadian subsidiary, Computer Horizons (Canada) Corp., based in Toronto. By the end of 1997 we added a Millennium Refurbishment Center (MRC) in Toronto to facilitate Year 2000 outsourcing. Although this full-service facility will handle Canadian and Year 2000 computing demands, it is part of the broader international expansion plan to position Computer Horizons to win outsourcing contracts worldwide. In Europe, CHC International Limited was created and based in London. During the year, CHC staff were working on several projects in European countries. The expansion into Europe was rewarded quickly when our company received a Year 2000 solutions contract from Norwich Union, Ireland, one of the United Kingdom's largest insurance and financial services companies. Internationally, we are today providing a growing clientele with a myriad of solutions that include full lifecycle Year 2000 services and various other IT solutions and staffing services. These strong initial steps in expanding outside the United States place Computer Horizons firmly on the path to the globalization of our company. This past year also brought strategic changes and additions to the company's infrastructure, organization and management team, as well as enhancements to several of our service offerings. We added strategically to our off-site outsourcing capabilities by building two new facilities in Toronto and in New Jersey. Our network of 47 offices worldwide enables us to offer our products and services in new and broader geographies. In our continuing effort to enable clients to avail themselves of all we offer, two of our solutions business units, Enterprise Management and Document Imaging groups, were consolidated into the existing Solutions Division as separate practices or "Centers of Excellence." This unified image in the marketplace enables us to leverage all our contacts and expand each other's existing client base. It will also enable new clients to better understand the breadth of our offerings as we move beyond the century change. 8 Solutions Capabilities Market Leadership [GRAPHIC-PHOTOS OF FIVE INDIVIDUALS] During 1997, we introduced several new or enhanced solution and staffing products and services to fill out our offerings. In the Year 2000 area, two new components were successfully introduced into our industry leading solution, Signature 2000. Computer Horizons was the first major solutions provider to introduce a comprehensive service to bring Distributed (or "Desktop") computing environments into Year 2000 compliance. With an estimated 100 million PCs in existence and the proliferation of open systems, companies must bring hardware, software, operating systems, communications software, spreadsheets and databases into compliance, representing a significant opportunity for Computer Horizons. At the core of every Year 2000 project which Computer Horizons manages is our internally developed proprietary Signature 2000 toolset. During the year, we announced that our toolset is available on a licensed basis, independent of our services. The toolset has clearly proven its functionality and robustness by the successful assessment of hundreds of millions of lines of code to date. A client purchasing this proven toolset is able to support a full lifecycle, end-to-end solution using almost any remediation strategy. As the time to repair "mission-critical" systems shortens, it becomes essential to test growing inventories of remediated code. Computer Horizons recently introduced a full testing solution that reduces the total work effort required to test the corrected applications. Our comprehensive, risk-driven testing process focuses on business and technical risks while reducing the total work effort required. These enhancements, coupled with the doubling of our off-site capacity, insure that the Computer Horizons' Signature 2000 solution will continue to be the choice of many of the largest companies on the Fortune 500 list. In the Enterprise Management area, our newly introduced Momentum series is allowing clients to quickly implement Help Desk, Network Management/ Monitoring and Systems Management solutions. The Momentum series combines best-in-class vendor products with Computer Horizons project management, methodologies and resources. CHC's Momentum series allows clients to rapidly improve control of their environment, while also setting the foundation for ongoing improvements. Most companies realize almost immediate savings and a positive return on their investments. 11 During 1997, Computer Horizons and its management received praise, media attention and awards for quality, financial performance, growth, offerings and its contribution to expanding opportunity and employment. We are proud to share this sampling with our shareholders. After several preliminary rounds and eliminations, John Cassese, CEO, received the coveted New Jersey "Entrepreneur of the Year" award, in the Masters category, from a prestigious group headed by Ernst and Young LLP. Computer Horizons' long commitment to New Jersey, where we now employ almost 1000 of our professionals, and to technical excellence by instilling quality in everything we do, was recognized by the New Jersey Technology Council as the "Large Company of the Year." Management of Computer Horizons has a strong vision for the future of your company that is being propelled by past accomplishments and lessons learned over our 28-year history. We will evolve Computer Horizons into becoming the leading provider of comprehensive IT solutions and staffing services to major corporations around the globe. To achieve this status, we will offer the matchless combination of methodology, leading-edge technology-based products, comprehensive and flexible solutions, and a world-class cadre of proven resources. The following are the key strategies we will employ to achieve our goals: o Leverage Customer Relationships and Expand the Client Base o Maintain Our Leadership Position in Staffing o Expand Year 2000 Offerings and Business o Grow and Enhance Our Solutions Business o Expand Our Geographic Presence o Enhance Our Product and Service Offerings - -------------------------------------------------------------------------------- At Computer Horizons, our most important asset continues to be our people. Page 4; Clockwise: Thomas Culmone, Lisa Matkowski, John Paul Cassese, Craig Barbret. Page 7; Clockwise: Arlene Brady, Thimmaiah Biddanda, Donna Smiley, Sean O'Donnell. Page 8; Clockwise: Mary Clementi, Brian Soderholm, Janet-Lee Hatt, William Barlow, Robert Farrell. Page 11; Clockwise: Robi Scheidt, Edward Stengel, Kim Heinz, Thomas Geist, Michael Gange. 12
SELECTED FINANCIAL DATA Year Ended December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) Revenues $334,729 $249,152 $213,165 $163,987 $131,936 Costs and expenses: Direct costs 224,123 172,734 148,530 115,835 94,719 Selling, general and administrative 70,741 56,903 46,156 36,724 29,635 Merger-related expenses 976 Income from operations 38,889 19,515 18,479 11,428 7,582 Other income (expense): Interest income 1,543 307 266 53 235 Interest expense (263) (480) (642) (710) (840) Equity in net earnings of joint venture 13 885 361 Income before income taxes 40,182 20,227 18,464 10,771 6,977 Income taxes 17,538 8,363 8,039 4,852 3,228 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 22,644 $ 11,864 $ 10,425 $ 5,919 $ 3,749 =========================================================================================================================== Earnings per share: Basic $.88 $.48 $.46 $.29 $.17 =========================================================================================================================== Diluted $.84 $.46 $.44 $.27 $.17 =========================================================================================================================== Weighted average number of shares outstanding: Basic 25,680,000 24,493,000 22,425,000 20,559,000 22,160,000 =========================================================================================================================== Diluted 27,102,000 26,028,000 23,931,000 21,962,000 23,074,000 ===========================================================================================================================
Analysis (%) Revenues 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin 33.0 30.7 30.3 29.4 28.2 Selling, general and administrative 21.1 22.9 21.6 22.4 22.4 Merger-related expenses .3 Income from operations 11.6 7.8 8.7 7.0 5.8 Interest income/(expense), net .4 (.1) (.2) (.4) (.5) Equity in net earnings of joint venture -- .4 .2 Income before income taxes 12.0 8.1 8.7 6.6 5.3 Income taxes 5.2 3.3 3.8 3.0 2.4 Net Income 6.8 4.8 4.9 3.6 2.9 Revenue growth YOY 34.3 16.9 30.0 24.3 18.1 Net income growth YOY 90.9 13.8 76.1 57.9 71.9 Return on equity, average 17.9 18.7 24.0 20.6 11.5 Effective tax rate 43.6 41.3 43.5 45.0 46.3 At year-end Total assets $211,601 $91,760 $78,794 $51,103 $42,347 Working capital 157,413 52,761 40,779 21,558 18,522 Long-term debt -- 1,432 3,299 4,288 6,093 Shareholders' equity 182,532 70,993 55,814 30,947 26,504 Stock price $45.50 $25.67 $16.89 $4.00 $2.32 P/E multiple 52 53 37 14 14 Employees* 3,630 3,102 2,668 2,289 1,749 Clients (during year)* 499 508 492 501 493 Offices (worldwide) 47 47 43 37 34 ===========================================================================================================================
*Does not include Birla Horizons International and Millennium Computer Technology, Inc. 13 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 periods indicated. All percentages include the operations of CG Computer Services Corp., acquired by Computer Horizons Corp. ("the Company") on December 19, 1997. This acquisition has been accounted for as a pooling of interests. Comparisons with prior years are based on restated combined results:
Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% Costs and expenses: Direct costs 67.0 69.3 69.7 Selling, general and administrative 21.1 22.9 21.6 Merger-related expenses 0.3 Income from operations 11.6 7.8 8.7 Other income (expense): Interest income/(expense), net 0.4 (0.1) (0.2) Equity in net earnings of joint venture -- 0.4 0.2 Income before income taxes 12.0 8.1 8.7 Income taxes: Current 5.5 3.5 4.0 Deferred (0.3) (0.2) (0.2) Net income 6.8 4.8 4.9 - ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues Revenues increased to $334.7 million in the year ended December 31, 1997 from $249.2 million in the year ended December 31, 1996, an increase of $85.5 million, or 34%. Staffing revenues increased to $224.5 million in the year ended December 31, 1997 from $186.0 million in the year ended December 31, 1996, an increase of $38.5 million or 21%. Revenues from the acquisition of CG Computer Services Corp. amounted to approximately $17.4 million in 1997 and $15.3 million in 1996. Solutions revenues, including Year 2000 services, increased to $110.3 million in the year ended December 31, 1997 from $63.2 million in the year ended December 31, 1996, an increase of $47.1 million or 75%. Year 2000 services revenues increased to $72.1 million in the year ended December 31, 1997, an increase of $61.7 million from $10.4 million in the year ended December 31, 1996. The Company's Year 2000 business accounted for approximately 22% of total revenues in the year ended December 31, 1997 versus approximately 4% of total revenues in 1996. Solutions revenues, excluding Year 2000 services, decreased to $38.1 million for the year ended December 31, 1997 from $52.7 million for the year ended December 31, 1996, a decrease of $14.6 million or 28%. The Company's solutions revenues were impacted by a shift in client demand, the Company's increased focus on its Year 2000 business, as well as the unexpected termination of a large contract in the second quarter of 1996. Direct Costs Direct costs increased to $224.1 million in the year ended December 31, 1997 from $172.7 million in the year ended December 31, 1996. Gross margin increased to 33.0% in the year ended December 31, 1997 from 30.7% in the year ended December 31, 1996. The increase in gross margin was primarily due to stable margins in the Company's staffing business and an increase in the Company's higher margin Year 2000 business. Selling, General and Administrative Selling, general and administrative expenses (excluding merger-related expenses) increased to $70.7 million in the year ended December 31, 1997 from $56.9 million in the year ended December 31, 1996, an increase of $13.8 million or 24.2%. As a percentage of revenues, selling, general and administrative expenses decreased to 21.1% of revenues in the year ended December 31, 1997 from 22.9% of revenues in the year ended December 31, 1996. The increase in selling, general and administrative expenses in absolute dollars was primarily a result of salaries and 14 commissions for additional sales and recruiting personnel and, to a lesser extent, growth in Computer Horizons' administrative infrastructure. In the fourth quarter of 1997, the Company incurred merger-related expenses of approximately $1.0 million or 0.3% of revenues. Income from Operations Operating margins increased to 11.6% in the year ended December 31, 1997 from 7.8% in the year ended December 31, 1996. This increase was primarily due to an increase in the Company's higher margin Year 2000 business and lower selling, general and administrative expenses as a percentage of revenue. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. Other Income Other income increased to $1.3 million in the year ended December 31, 1997 from $0.7 million in the year ended December 31, 1996, an increase of $0.6 million or 82%. This increase was primarily the result of increased interest income resulting from the follow-on offering of approximately $84 million completed in the third quarter of 1997. This increase was partially offset by a decrease in earnings from the Company's Birla Horizons Joint Venture. The Joint Venture's decreased earnings in the year ended December 31, 1997 were primarily due to costs associated with increased headcount, particularly in marketing and project management personnel as it expanded its solutions business. Provision for Income Taxes The effective tax rate for Federal, state and local income taxes was 43.6% and 41.3% in the years ended December 31, 1997 and 1996, respectively. The increase in the 1997 effective tax rate was partially due to certain non-deductible merger-related expenses incurred in the fourth quarter of 1997. The 1997 rate also reflects a decrease in undistributed earnings of the Joint Venture, for which taxes were not provided. Net Income Net income increased to $22.6 million in the year ended December 31, 1997 from $11.9 million in the year ended December 31, 1996, an increase of $10.7 million, or 90%. Net income per share (diluted) increased to $0.84 in the year ended December 31, 1997 from $0.46 in the year ended December 31, 1996 on higher weighted average shares outstanding (27.1 million in 1997 versus 26.0 million in 1996). The effect of merger-related expenses amounted to $.03 per share in 1997. All net income per share and share amounts have been adjusted to reflect a three-for-two common stock split, effected as a 50% stock distribution, distributed on June 9, 1997. - -------------------------------------------------------------------------------- Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues Revenues increased to $249.2 million in the year ended December 31, 1996 from $213.2 million in the year ended December 31, 1995, an increase of $36.0 million, or 17%. Staffing revenues increased to $186.0 million in the year ended December 31, 1996 from $154.0 million in the year ended December 31, 1995, an increase of $32.0 million or 21%. Revenues from the acquisition of CG Computer Services Corp. amounted to approximately $15.3 million in 1996 and $13.1 million in 1995. Solutions revenues, including Year 2000 services, increased to $63.2 million in the year ended December 31, 1996 from $59.1 million in the year ended December 31, 1995, an increase of $4.1 million or 7%. Year 2000 revenues increased to $10.4 million in the year ended December 31, 1996 from nil in the year ended December 31, 1995. Solutions revenues, excluding Year 2000 services, decreased to $52.7 million in the year ended December 31, 1996 from $59.1 million in the year ended December 31, 1995, a decrease of $6.4 million or 11%. The decrease in solutions revenues, excluding Year 2000 services, was primarily related to the unexpected termination of a large contract in the second quarter of 1996. 15 Direct Costs Direct costs increased to $172.7 million in the year ended December 31, 1996 from $148.5 million in the year ended December 31, 1995. Gross margin increased to 30.7% in the year ended December 31, 1996 from 30.3% in the year ended December 31, 1995. The increase in gross margin was primarily due to stable margins in the Company's staffing business and an increase in Computer Horizons' higher margin Year 2000 business. The Company's margins are subject to fluctuation due to a number of factors, including the level of salary and other compensation-related expenses necessary to attract and retain qualified technical personnel and the mix of staffing versus solutions business during the year. Selling, General and Administrative Selling, general and administrative expenses increased to $56.9 million in the year ended December 31, 1996 from $46.2 million in the year ended December 31, 1995, an increase of $10.7 million or 23.2%. As a percentage of revenues, selling, general and administrative expenses increased to 22.9% in the year ended December 31, 1996, from 21.6% in the year ended December 31, 1995. The increase in selling, general and administrative expenses in 1996 was primarily a result of salaries and commissions for additional personnel, infrastructure necessary to pursue large, high-profile opportunities, and marketing expenses incurred to raise the Company's visibility through public relations, trade shows and conferences. Income from Operations Income from operations increased to $19.5 million in the year ended December 31, 1996 from $18.5 million in the year ended December 31, 1995, an increase of $1.0 million or 5.4%. Operating margins decreased to 7.8% in the year ended December 31, 1996 from 8.7% in the year ended December 31, 1995. The increase in absolute dollars was attributable to increased revenues and improved gross margins, offset by the impact of the unexpected termination of a large contract in the second quarter of 1996 and the increase in selling, general and administrative expenses in 1996. The Company's business is labor-intensive and, as such, is sensitive to inflationary trends. This sensitivity applies to client billing rates, as well as to payroll costs. Other Income Other income increased to $0.7 million in the year ended December 31, 1996 from nil in the year ended December 31, 1995. This increase was primarily a result of reduced interest expense as Computer Horizons reduced its outstanding debt with a portion of the net proceeds from its June 1995 follow-on offering and by the increased earnings of the Joint Venture. Provision for Income Taxes The effective tax rate for Federal, state and local income taxes was 41.3% and 43.5% in the years ended December 31, 1996 and 1995, respectively. The 1996 rate reflects an increase in undistributed earnings of the Joint Venture for which taxes have not been provided. Net Income Net income increased to $11.9 million in the year ended December 31, 1996 from $10.4 million in the year ended December 31, 1995, an increase of $1.5 million or 14.4%. Net income increased to $0.46 per share (diluted) in the year ended December 31, 1996 from $0.44 per share (diluted) in the year ended December 31, 1995. All net income per share and share amounts have been adjusted to reflect a three-for-two common stock split, effected as a 50% stock distribution, distributed on June 9, 1997. - -------------------------------------------------------------------------------- Liquidity and Capital Resources Since 1995, Computer Horizons has financed its operations primarily through cash generated from operations and the public sale of its common stock. At December 31, 1997, the Company had $157.4 million in working capital, of which $101.8 million was cash, cash equivalents and short-term investments (including $83.7 million of net proceeds of its public offering of common stock completed on September 23, 1997). There were no borrowings under its bank lines of credit. 16 Net cash provided by operating activities was $14.2 million, $5.3 million and $2.2 million, for the years ended December 31, 1997, 1996 and 1995, respectively, consisting primarily of net income, offset in part by an increase in accounts receivable. Net cash used in investing activities was $22.0 million, $2.5 million and $6.2 million in the years ended December 31, 1997, 1996 and 1995, respectively. Net cash used in investing activities in 1997 consisted primarily of the purchase of short-term investments. In addition, on December 31, 1997, the Company acquired the assets of Millennium Computer Technology ("Millennium"), a Chattanooga-based IT services provider, for approximately $5 million. Net cash used in investing activities in the year ended December 31, 1996 consisted primarily of purchases of furniture and equipment. Net cash used in investing activities in 1995 consisted primarily of approximately $3.0 million of additional goodwill resulting from earn-out provisions in connection with Computer Horizons' acquisition of Unified Systems Solutions, Inc. and Strategic Outsourcing Services, Inc., the purchase of furniture and equipment and the establishment of client-specific outsourcing centers. Net cash provided by financing activities was $84.4 million and $11.1 million in the years ended December 31, 1997 and December 31, 1995, respectively, consisting primarily of $83.7 million and $13.3 million in net proceeds from the Company's public offerings of common stock, offset in part by the repayment following the offering of outstanding bank debt of $6.0 million in 1995. For the year ended December 31, 1996, net cash used in financing activities was $0.7 million, resulting primarily from the scheduled repayment of long-term debt. At December 31, 1997, the Company had a current ratio position of 6.9 to 1, no long-term debt and no outstanding borrowings under its two unsecured discretionary lines of credit of $15.0 million and $10.0 million. Computer Horizons also has outstanding two notes, each bearing interest at a rate of 9.55%. As of December 31, 1997, approximately $1.4 million remained outstanding under the notes and will become due on April 15, 1998. The Company's accounts receivable were $79.5 million and $56.4 million at December 31, 1997 and December 31, 1996, respectively. Days sales outstanding were 75 days at December 31, 1997 and 77 days at December 31, 1996, based on fourth quarter sales. The Company is currently implementing a new firmwide accounting/information system. In addition to being Year 2000 compliant, the system will support the Company's future growth. The implementation is expected to be completed in late 1998, and the related cost is not expected to have a material impact on the Company's financial condition or results of operations. The Company believes that its cash and cash equivalents and short-term investments, lines of credit and internally generated funds will be sufficient to meet its working capital needs through 1998. 17 AUDITORS' REPORT Report of Independent [Grant Thornton - logo] 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Computer Horizons Corp. and Subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/GRANT THORNTON LLP - --------------------- GRANT THORNTON LLP Parsippany, New Jersey January 29, 1998 (except for Note 2, as to which the date is February 27, 1998) 18
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) Revenues $334,729 $249,152 $213,165 - --------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Direct costs 224,123 172,734 148,530 Selling, general and administrative 70,741 56,903 46,156 Merger-related expenses 976 - --------------------------------------------------------------------------------------------------------------------------- 295,840 229,637 194,686 - --------------------------------------------------------------------------------------------------------------------------- Income from operations 38,889 19,515 18,479 - --------------------------------------------------------------------------------------------------------------------------- Other income (expense): Interest income 1,543 307 266 Interest expense (263) (480) (642) Equity in net earnings of joint venture (Note 4) 13 885 361 - --------------------------------------------------------------------------------------------------------------------------- 1,293 712 (15) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 40,182 20,227 18,464 - --------------------------------------------------------------------------------------------------------------------------- Income taxes (Notes 1 and 7): Current 18,485 8,737 8,533 Deferred (947) (374) (494) - --------------------------------------------------------------------------------------------------------------------------- 17,538 8,363 8,039 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 22,644 $ 11,864 $ 10,425 =========================================================================================================================== Earnings per share (Notes 1 and 8): Basic $.88 $.48 $.46 =========================================================================================================================== Diluted $.84 $.46 $.44 =========================================================================================================================== Weighted average number of shares outstanding: Basic 25,680,000 24,493,000 22,425,000 =========================================================================================================================== Diluted 27,102,000 26,028,000 23,931,000 ===========================================================================================================================
The accompanying notes are an integral part of these statements. 19
CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Assets Current assets: Cash and cash equivalents $ 88,633 $11,993 Short-term investments (Note 1) 13,165 -- Accounts receivable (Note 3) 79,526 56,378 Deferred income tax benefit (Note 7) 1,818 1,119 Other 1,087 979 - ------------------------------------------------------------------------------------------------------------------------------- Total current assets 184,229 70,469 - ------------------------------------------------------------------------------------------------------------------------------- Property and equipment: Furniture, equipment and other 12,479 9,685 Less accumulated depreciation 7,101 5,389 - ------------------------------------------------------------------------------------------------------------------------------- 5,378 4,296 - ------------------------------------------------------------------------------------------------------------------------------- Other assets - net: Goodwill (Note 1) 17,090 13,322 Deferred income tax benefit (Note 7) 816 568 Other (Note 4) 4,088 3,105 - ------------------------------------------------------------------------------------------------------------------------------ 21,994 16,995 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $211,601 $91,760 ==============================================================================================================================
The accompanying notes are an integral part of these statements. 20
December 31, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Liabilities and Current liabilities: Shareholders' Current portion of long-term debt (Note 5) $ 1,432 $ 1,867 Equity Accrued payroll, payroll taxes and benefits 17,526 12,775 Accounts payable 1,830 1,217 Income taxes payable 3,394 1,100 Other accrued expenses 2,634 749 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 26,816 17,708 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt (Note 5) -- 1,432 - ----------------------------------------------------------------------------------------------------------------------------- Other liabilities (Note 9) 2,253 1,627 - ----------------------------------------------------------------------------------------------------------------------------- Commitments (Note 10) - ----------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock, $.10 par; authorized and unissued, 200,000 shares, including 50,000 Series A Common stock, $.10 par; authorized, 60,000,000 shares; issued 29,360,069 shares and 26,485,029 shares at December 31, 1997 and 1996, respectively 2,936 2,648 Additional paid-in capital 117,718 29,887 Retained earnings 75,750 53,106 - ----------------------------------------------------------------------------------------------------------------------------- 196,404 85,641 Less shares held in treasury, at cost; 1,692,253 shares and 1,786,883 shares at December 31, 1997 and 1996, respectively (13,872) (14,648) - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 182,532 70,993 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $211,601 $ 91,760 =============================================================================================================================
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Common stock Additional Treasury stock ------------------- paid-in Retained ------------------ Shares Amount capital earnings Shares Amount - ----------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997, 1996 and 1995 (dollars in thousands) Balance, December 31, 1994, as previously reported 7,739,576 $ 774 $ 13,940 $29,851 1,786,883 $14,648 Pooling of interests with CG Computer Services Corporation 167,901 17 46 966 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994, as restated 7,907,477 791 13,986 30,817 1,786,883 14,648 Three-for-two stock split declared: April 1995 3,086,949 309 (309) December 1995 5,332,803 533 (533) Stock options exercised 318,063 32 1,138 Sale of common stock, net of expenses 1,140,000 114 13,159 Net income for the year 10,425 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 17,785,292 1,779 27,441 41,242 1,786,883 14,648 Stock options exercised 467,022 46 1,680 Tax benefits related to stock option plans 1,589 Net income for the year 11,864 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 18,252,314 1,825 30,710 53,106 1,786,883 14,648 Three-for-two stock split declared May 1997 8,232,715 823 (823) Stock options exercised 375,040 38 1,759 (94,630) (776) Tax benefits related to stock option plans 2,610 Sale of common stock, net of expenses 2,500,000 250 83,462 Net income for the year 22,644 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 29,360,069 $2,936 $117,718 $75,750 1,692,253 $13,872 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 22
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities Net income $ 22,644 $11,864 $10,425 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes (947) (374) (494) Depreciation 1,711 1,216 704 Amortization of intangibles 602 587 505 Provision for bad debts 575 54 170 Changes in assets and liabilities, net of acquisitions: Accounts receivable (22,829) (9,869) (14,768) Other current assets (108) 13 (519) Accrued payroll, payroll taxes and benefits 4,751 1,555 3,266 Accounts payable 371 (582) 1,198 Income taxes payable 4,904 959 725 Other accrued expenses 1,885 (637) 578 Other liabilities 626 465 424 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 14,185 5,251 2,214 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Purchases of furniture and equipment (2,363) (1,373) (1,521) Acquisitions, net of cash (5,467) (363) (2,966) Change in other assets (968) (761) (1,673) Purchases of short-term investments (13,165) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (21,963) (2,497) (6,160) - --------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Notes payable--banks, net (3,200) Long-term debt (1,867) (2,385) (168) Stock options exercised 2,573 1,727 1,170 Proceeds from issuance of stock 83,712 13,273 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 84,418 (658) 11,075 - --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 76,640 2,096 7,129 Cash and cash equivalents at beginning of year 11,993 9,897 2,768 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 88,633 $11,993 $ 9,897 ===========================================================================================================================
Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 236 $ 443 $ 608 Income taxes 12,950 7,592 6,840 =========================================================================================================================== Details of Acquisition: Fair value of assets $ 5,590 Liabilities 242 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for acquisition $ 5,348 ===========================================================================================================================
The accompanying notes are an integral part of these statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies December 31, 1997, 1996 and 1995 Description of Business Computer Horizons Corp. is a diversified information technology services company that provides clients with resource augmentation and advanced technology solutions to business problems through applications development, client/server migration, network management, emerging technologies, and legacy systems maintenance, including its solution to the millennium date-change problem, Computer Horizons' Signature 2000(TM). Principles of Consolidation The consolidated financial statements include the accounts of Computer Horizons Corp. and its wholly-owned subsidiaries (the "Company"). The Company's investment in a joint venture (Note 4) is accounted for under the equity method of accounting. All material intercompany accounts and transactions have been eliminated. Revenue Recognition The Company recognizes revenues as professional services are performed. On fixed fee engagements, revenue and gross profit adjustments are made to reflect revisions in estimated total costs and contract values. Estimated losses are recorded when identified. Recruitment Costs Recruitment costs are charged to operations as incurred. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid instruments with a maturity of three months or less at the time of purchase and consist of the following at December 31:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Cash $ 3,448 $ 2,053 Money market funds 45,460 5,926 Commercial paper 21,924 1,247 Demand obligations 17,801 2,767 - ------------------------------------------------------------------------------------------------------------------------------ $88,633 $11,993 ==============================================================================================================================
Short-term Investments The Company classifies investments with an original maturity of more than three months at the time of purchase as short-term investments. Short-term investments are classified as held-for-sale and carried at cost, which approximates fair value. At December 31, 1997, short-term investments maturing within one year consist of:
Fair Cost value - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Commercial paper $ 8,711 $ 8,711 Corporate bonds 2,452 2,450 Government bonds 2,002 2,000 - ------------------------------------------------------------------------------------------------------------------------------ $13,165 $13,161 ==============================================================================================================================
24 Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, regardless of the degree of such risk, consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. The Company invests the majority of its excess cash in money market funds, commercial paper and demand obligations of high-credit, high-quality financial institutions or companies, with certain limitations as to the amount that can be invested in any one entity. The Company maintains its cash balances principally in three financial institutions located in New York, New Jersey and California. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity at each institution. At December 31, 1997, uninsured amounts held at these financial institutions total approximately $7,312,000. The Company's customers are generally very large, Fortune 500 companies in many industries and with wide geographic dispersion. The Company's largest customer accounts for approximately 4% of billed accounts receivable at December 31, 1997. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. The Company's largest client accounted for 11.7%, 9.2% and 7.3%, respectively, of the Company's consolidated revenues in 1997, 1996 and 1995. No other client accounted for more than 8% in those years. Fair Value of Financial Instruments The carrying value of financial instruments (principally consisting of cash and cash equivalents, short-term investments, accounts receivable and payable and long-term debt) approximates fair value because of the short maturities or, as to long-term debt, the rates currently offered to the Company. Property and Equipment and Depreciation Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Goodwill Goodwill, the cost in excess of the net assets of acquired businesses, is being amortized by the straight-line method, primarily over thirty years. Accumulated amortization is $4,523,000 and $3,921,000 at December 31, 1997 and 1996, respectively. On an ongoing basis, management reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the value and future benefits of income generated, to determine that no impairment has occurred. Income Taxes The Company and its domestic subsidiaries file a consolidated Federal income tax return. The foreign subsidiaries file in each of their local jurisdictions. Deferred income taxes result from temporary differences between income reported for financial and income tax purposes. These temporary differences result primarily from the allowance for doubtful accounts provision and certain accrued expenses which are deductible, for tax purposes, only when paid. Tax benefits from early disposition of the stock by optionees under incentive stock options and from exercise of non-qualified options are credited to additional paid-in capital. The Company intends to permanently reinvest the unremitted earnings at December 31, 1997 from its foreign corporate joint venture and, accordingly, has not provided deferred taxes on these amounts. The Company's Canadian and United Kingdom subsidiaries have no unremitted earnings at December 31, 1997. 25 Earnings Per Share In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share. In accordance with SFAS No. 128, all comparative periods have been restated as of December 31, 1997. Basic EPS is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. Use of Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," governing the reporting and display of comprehensive income and its components, and Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information," requiring that all public businesses report financial and descriptive information about their reportable operating segments. Both statements are applicable to fiscal years beginning after December 15, 1997. The impact of adopting SFAS No. 130 is not expected to be material to the consolidated financial statements or notes to consolidated financial statements. Management is currently evaluating the effect of SFAS No. 131 on consolidated financial statement disclosures. - -------------------------------------------------------------------------------- Note 2 Acquisitions On December 31, 1997, the Company acquired, for approximately $5 million cash, certain assets from Millennium Computer Technology, Inc. ("Millennium"), a Chattanooga-based IT services provider. The acquisition was recorded under the purchase method of accounting. Had the acquisition of Millennium occurred on January 1, 1997, the effect on revenues and net income would have been immaterial. On December 19, 1997, the Company acquired all the common stock of CG Computer Services Corporation ("CG") in exchange for 566,666 shares of Computer Horizons common stock. CG provides IT provisioning and staffing solutions with offices in San Francisco, Los Angeles, Chicago, and Parsippany, New Jersey. This transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of CG. 26 The reconciliation below details the effects of the pooling noted above on the previously reported revenues, net income and earnings per share of the separate companies for the periods preceding the acquisition:
Nine months ended September 27, Year ended Year ended 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) Revenues Computer Horizons Corp. $226,846 $233,858 $200,050 CG 12,820 15,294 13,115 - ------------------------------------------------------------------------------------------------------------------------------- Combined $239,666 $249,152 $213,165 =============================================================================================================================== Net income Computer Horizons Corp. $ 14,903 $ 11,232 $ 9,907 CG 468 632 518 - ------------------------------------------------------------------------------------------------------------------------------ Combined $ 15,371 $ 11,864 $ 10,425 ============================================================================================================================== Earnings per share Basic Computer Horizons Corp. $.61 $.47 $.45 CG .00 .01 .01 - ------------------------------------------------------------------------------------------------------------------------------ Combined $.61 $.48 $.46 ============================================================================================================================== Diluted Computer Horizons Corp. $.58 $.44 $.42 CG .00 .02 .02 - ------------------------------------------------------------------------------------------------------------------------------ Combined $.58 $.46 $.44 ==============================================================================================================================
In June 1994, the Company acquired the net assets of Strategic Outsourcing Services, Inc. ("SOS"), a New Jersey-based provider of data processing services, for approximately $250,000. The acquisition agreement also provides for contingent consideration based on the future performance of SOS, through 1998. The acquisition was accounted for as a purchase. In 1997, 1996 and 1995, the Company recorded contingent consideration, totalling approximately $119,000, $137,000 and $202,000, respectively, as additional goodwill. In January 1993, the Company acquired Unified Systems Solutions, Inc. ("USS"), a New Jersey-based provider of systems and network integration services, for approximately $750,000. The acquisition agreement also provided for contingent consideration based on the future performance of USS through 1996. The acquisition was accounted for as a purchase. The excess of cash over the fair value of assets acquired, totalling approximately $509,000, was recorded as goodwill in 1994. In 1995 and 1994, the Company recorded contingent consideration, totalling approximately $390,000 and $245,000, as additional goodwill. These contingent consideration payments are not dependent upon the continued employment of the former shareholders. Also in 1995, the Company entered into an agreement with the former shareholders of USS to pay approximately $2,396,000, plus interest, in lieu of any amounts that may have been due for the remaining contingent period ending March 31, 1996. The $2,396,000 was also recorded as goodwill in 1995. Subsequent Event 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 common stock. Princeton specializes in relational databases, data synchronization, intelligent data migration and data management tools, and is based in Princeton, New Jersey. This transaction will be accounted for as a pooling of interests. 27 Note 3 Accounts Receivable Accounts receivable consist of the following at December 31:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Billed $58,253 $39,096 Unbilled 23,015 18,485 - ------------------------------------------------------------------------------------------------------------------------------ 81,268 57,581 Less allowance for doubtful accounts 1,742 1,203 - ------------------------------------------------------------------------------------------------------------------------------ $79,526 $56,378 ==============================================================================================================================
Note 4 Investment in Joint Venture In 1995, the Company entered into a software development and services joint venture with the Birla Group, a large multinational conglomerate located in India. The foreign joint venture, known Joint Venture as Birla Horizons International ("BHI"), is headquartered in New Delhi, India and currently has operations in India, the United States, the United Kingdom and Canada. The Company and the Birla Group each made cash contributions of $500,000 and each received a 50% interest in the joint venture. The Birla Group has also contributed the net assets of its then existing information technology company to the joint venture and the Company is providing technological and management support. The Company's total investment in BHI is $1,672,000 and $1,746,000 at December 31, 1997 and 1996, respectively, representing the initial cost plus equity in the undistributed net earnings since formation, and is included in other noncurrent assets. BHI provided consultants to the Company at a total cost of $5,017,000, $4,216,000 and $2,686,000 in 1997, 1996 and 1995, respectively. Approximately $374,000 was included in accounts payable at December 31, 1997. Note 5 Long-Term Debt and Lines of Credit Long-term debt consists of the following at December 31:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 9.55% senior notes $1,432 $2,860 Notes payable at prime 439 - ------------------------------------------------------------------------------------------------------------------------------ 1,432 3,299 Less current maturities 1,432 1,867 - ------------------------------------------------------------------------------------------------------------------------------ $ -- $1,432 ==============================================================================================================================
In 1988, the Company issued two senior notes aggregating $10,000,000 bearing interest at 9.55%, payable semiannually. The notes are payable in annual installments of $1,428,000 from April 15, 1992 through 1997 with a final payment of $1,432,000 due April 15, 1998, and are subject to the provisions of the loan agreement, including, among other things, restrictions on additional borrowings, prepayments, dividends and stock purchases (which were waived in connection with certain purchases of treasury stock), and maintenance of a minimum net worth of $13,500,000. The notes payable consist of notes to the four former shareholders of USS. In 1995, an agreement was signed (Note 2) resulting in $957,000 being due in April 1996 and $439,000 in April 1997, with 8.75% imputed interest. At December 31, 1997, the Company has two unused bank lines of credit totalling $25,000,000 at rates below the banks' prime lending rates. During 1997, the Company had no borrowings against either line. 28 Note 6 Shareholders' Equity Authorized Shares On May 7, 1997, the Company approved an amendment to the Company's Certificate of Incorporation increasing the authorized number of shares of the Company's common stock from 30,000,000 to 60,000,000. Stock Splits The Board of Directors of the Company has declared three-for-two common stock splits in the form of 50% stock distributions as follows:
Shareholder of Date declared record date Date payable - --------------------------------------------------------------------------------------------------------------------------- May 7, 1997 May 22, 1997 June 9, 1997 December 12, 1995 December 22, 1995 January 9, 1996 April 24, 1995 May 9, 1995 May 30, 1995
Amounts equal to the $.10 par value of the common shares distributed have been retroactively transferred from additional paid-in capital to common stock. All references in the financial statements with regard to number of shares of common stock, common stock prices and per share amounts have been restated to reflect the above-mentioned stock splits. 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, 1997. This plan, which replaces the Company's 1985 Plan, will terminate on June 15, 2004. There were 5,555,000 shares available for option at December 31, 1997. In 1994, the Company amended the non-qualified Directors' Stock Option Plan increasing the maximum number of shares of common stock that may be acquired pursuant to the exercise of options granted under the plan from 379,000 to 844,000, and providing that each new director of the Company who is not an employee of the Company (i) shall immediately receive options to purchase 75,938 shares of its common stock and (ii) shall receive up to five annual grants to purchase 10,125 shares of its common stock. The plan expires on March 4, 2001. There were 504,000 shares available for option at December 31, 1997. The exercise price per share on all options and/or SARs granted may not be less than the fair value at the date of the option grant. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Net income As reported $22,644,000 $11,864,000 $10,425,000 Pro forma 19,749,000 9,533,000 9,619,000 Earnings per share: Basic As reported $.88 $.48 $.46 Pro forma .77 .39 .43 Diluted As reported $.84 $.46 $.44 Pro forma .73 .37 .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 1997, 1996 and 1995, respectively: expected volatility of 61%, 97% and 70%; risk-free interest rates of 5.47%, 6.28% and 6.27%; and expected lives of 5.0, 4.9 and 4.5 years. 29 A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price - ------------------------------------------------------------------------------------------------------------------------------ (000) (000) (000) Outstanding--January 1 2,169 $ 6.87 2,214 $ 3.69 2,182 $2.03 Granted 328 23.55 885 14.65 783 6.01 Exercised (462) 5.37 (678) 2.50 (749) 1.29 Canceled/forfeited (36) 13.36 (252) 17.95 (2) 6.78 - ------------------------------------------------------------------------------------------------------------------------------ Outstanding--December 31 1,999 $ 9.84 2,169 $ 6.87 2,214 $3.69 ============================================================================================================================== Options exercisable--December 31 833 $ 7.10 764 $ 4.94 999 $2.42 ============================================================================================================================== Weighted average fair value of options granted during the year $23.54 $11.65 $3.64
The following information applies to options outstanding at December 31, 1997:
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 1997 life (years) price 1997 price - ------------------------------------------------------------------------------------------------------------------------------ (000) (000) $ 0.00-$14.99 1,518 5.0 $ 6.13 708 $ 4.55 15.00- 29.99 480 6.3 21.53 125 21.47 30.00 and over 1 4.7 35.38 -- -- - ----------------------------------------------------------------------------------------------------------------------------- 1,999 5.3 $ 9.84 833 $ 7.10 =============================================================================================================================
Certain officers have the right to borrow from the Company against the exercise price of options exercised. The Company has issued warrants to purchase shares of its common stock to two outside business/ legal consulting firms. Warrants for 8,625, 30,000 and 10,125 shares were granted, respectively, in 1997, 1996 and 1995. The exercise price is the fair value at the date of grant. Shareholder Rights Plan In July 1989, the Board of Directors declared a dividend distribution of .131 preferred stock purchase right on each outstanding share of common stock of the Company. The rights were amended on February 13, 1990. Each right will, under certain circumstances, entitle the holder to buy one one-hundredth (1/100) of a share of Series A preferred stock at an exercise price of $30.00 per one one-hundredth (1/100) share, subject to adjustment. Each one one-hundredth (1/100) of a share of Series A preferred stock has voting, dividend and liquidation rights and preferences substantively equivalent to one share of common stock. The rights will be exercisable and transferable separately from the common stock only if a person or group acquires 20% or more, subject to certain exceptions, of the Company's outstanding common stock or announces a tender offer that would result in the ownership of 20% or more of the common 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 30 than 50% of the Company's assets or earning power is sold or transferred, a right would entitle a Computer Horizons Corp. shareholder, other than the Acquiring Person and its affiliates, to purchase upon payment of the Exercise Price, shares of the Acquiring Person having a market value of twice the Exercise Price. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. No shareholder rights have become exercisable. The rights will expire on July 16, 1999. Note 7 Income Taxes The provision for income taxes consists of the following for the years ended December 31:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Current: Federal $13,927 $6,629 $6,180 State 4,558 2,108 2,353 Deferred: Federal (703) (341) (358) State (244) (33) (136) - ------------------------------------------------------------------------------------------------------------------------------ $17,538 $8,363 $8,039 ==============================================================================================================================
Deferred tax assets and liabilities consist of the following at December 31:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Deferred tax assets: Accrued insurance $ 588 $ 291 Accrued payroll and benefits 1,413 1,011 Deferred lease obligations 48 72 Allowance for doubtful accounts 469 249 Other 239 95 - ------------------------------------------------------------------------------------------------------------------------------ 2,757 1,718 Deferred tax liabilities: Depreciation 123 31 - ------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets, net $2,634 $1,687 ==============================================================================================================================
A reconciliation of income taxes, as reflected in the accompanying statements, with the statutory Federal income tax rate of 35% for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Statutory Federal income taxes $14,064 $7,079 $6,462 State and local income taxes, net of Federal tax benefit 2,804 1,349 1,441 Amortization of goodwill 203 201 180 Equity in net earnings of joint venture (310) (126) Other, net 467 44 82 - ------------------------------------------------------------------------------------------------------------------------------ $17,538 $8,363 $8,039 ==============================================================================================================================
Deferred income taxes of approximately $413,000 have not been provided on undistributed earnings of a foreign joint venture in the amount of $1,181,000, as the earnings at December 31, 1997 are considered to be permanently reinvested. 31 Note 8 Earnings per Share Disclosures
Per Income Shares share For the year ended (numerator) (denominator) amount - ------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share data) December 31, 1997 Net income $22,644 ============================================================================================================================== Basic earnings per share Income available to common shareholders $22,644 25,680,000 $.88 Effect of diluted securities Options 1,422,000 - ------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share Income available to common shareholders plus assumed conversions $22,644 27,102,000 $.84 ============================================================================================================================= December 31, 1996 Net income $11,864 ============================================================================================================================= Basic earnings per share Income available to common shareholders $11,864 24,493,000 $.48 Effect of diluted securities Options 1,535,000 - ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share Income available to common shareholders plus assumed conversions $11,864 26,028,000 $.46 ============================================================================================================================= December 31, 1995 Net income $10,425 ============================================================================================================================= Basic earnings per share Income available to common shareholders $10,425 22,425,000 $.46 Effect of diluted securities Options 1,506,000 - ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share Income available to common shareholders plus assumed conversions $10,425 23,931,000 $.44 =============================================================================================================================
Options to purchase 8,713 and 27,375 shares of common stock in 1997 and 1996, respectively, ranging from $25.67 to $35.58, and $18.00 to $33.33 per share were outstanding during 1997 and 1996, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of common shares. The options which expire between December 31, 2001 and January 1, 2007 were still outstanding at December 31, 1997. All options to purchase shares of common stock were included in the computation of diluted earnings per share in 1995. 32 Note 9 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 $469,000, $345,000, and $246,000 in 1997, 1996 and 1995, respectively. In 1995, the Company instituted a Supplemental Executive Retirement Plan whereby key executives are entitled to receive lump-sum payments (or, if they elect, a ten-year payout) upon reaching the age of 65 and being in the employ of the Company. The maximum commitment if all plan members remain in the employ of the Company until age 65 is approximately $9.7 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 non-qualified and not formally funded. Life insurance policies on the members are purchased to assist in funding the cost. The deferred compensation expense is charged to operations during the remaining service lives of the members and amounted to approximately $183,000, $97,000 and $82,000 in 1997, 1996 and 1995, respectively. In addition, the Company adopted a Deferred Compensation Plan for Key Executives that permits the individuals to defer a portion of their annual salary or bonus for a period of at least five years. There is no effect on the Company's operating results since any amounts deferred would have previously been expensed. Amounts deferred as of December 31, 1997 have been included in other non-current liabilities. - -------------------------------------------------------------------------------- Note 10 Commitments Leases The Company leases office space under long-term operating leases expiring through 2006. As of December 31, 1997, approximate minimum rental commitments were as follows:
Year ending (in thousands) - --------------------------------------------------------------------------------------------------------------------------- 1998 $ 3,833 1999 3,141 2000 1,286 2001 976 2002 700 Thereafter 729 - --------------------------------------------------------------------------------------------------------------------------- $10,665 ===========================================================================================================================
Office rentals are subject to escalations based on increases in real estate taxes and operating expenses. Aggregate rent expense for operating leases approximated $3,610,000, $2,799,000, and $2,176,000 in the years ended December 31, 1997, 1996 and 1995, respectively. Other In 1994, the Vice Chairman and Executive Vice President of the Company announced his resignation effective February 15, 1995. The Company recorded approximately $400,000 of deferred compensation in 1994 which is to be paid beginning March 1998 through 2005. The Company also agreed to retain this former officer as a consultant for a three-year period for approximately $75,000 each year and entered into a noncompetition agreement for that period. 33 Note 11 Selected Quarterly Financial Data (Unaudited) For the years ended December 31, 1997 and 1996, selected quarterly financial data is as follows:
Quarters - ------------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1997 Revenues $73,940 $79,934 $85,792 $95,063 Direct costs 50,418 53,850 57,190 62,665 Selling, general and administrative 16,291 17,449 17,847 19,154 Merger-related costs 976 Income from operations 7,231 8,635 10,755 12,268 Interest income/(expense), net 32 (2) 74 1,176 Equity in net earnings of joint venture 150 63 (75) (125) Income before income taxes 7,413 8,696 10,754 13,319 Income taxes 3,148 3,715 4,630 6,045 Net income $ 4,265 $ 4,981 $ 6,124 $ 7,274 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $0.17 $0.20 $0.24 $0.26 Diluted 0.16 0.19 0.23 0.25 ============================================================================================================================= 1996 Revenues $60,648 $59,910 $61,092 $67,502 Direct costs 41,654 42,341 42,147 46,592 Selling, general and administrative 13,314 13,802 14,289 15,498 Income from operations 5,680 3,767 4,656 5,412 Interest income/(expense), net (44) (85) (18) (26) Equity in net earnings of joint venture 213 230 200 242 Income before income taxes 5,849 3,912 4,838 5,628 Income taxes 2,473 1,666 2,032 2,192 Net income $ 3,376 $ 2,246 $ 2,806 $ 3,436 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $0.14 $0.09 $0.11 $0.14 Diluted 0.13 0.09 0.11 0.13 =============================================================================================================================
MARKET AND DIVIDEND INFORMATION 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, 1997 and 1996, retroactively adjusted to reflect the three-for-two common stock split declared by the Board of Directors in May 1997, is as follows:
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Quarter High Low High Low - ------------------------------------------------------------------------------------------------------------------------------ First $25.42 $16.83 $25.67 $12.67 Second 38.88 19.67 36.00 22.00 Third 44.13 32.13 28.17 10.00 Fourth 45.50 27.00 25.83 16.17 - ------------------------------------------------------------------------------------------------------------------------------
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, 1997, there were approximately 1,100 holders of record of common stock. 34 CORPORATE INFORMATION Board of Directors John J. Cassese Chairman and President Thomas J. Berry Retired--AT&T Rocco J. Marano Retired--Bellcore Corporate John J. Cassese Chairman and President William J. Murphy Executive Vice President & CFO David M. Reingold Senior Vice President Joseph DaLuz Vice President--CIO Michael J. Shea Vice President & Controller Mark W. Walztoni Vice President--Human Resources Field Organization Charles J. McCourt Senior Vice President Barry D. Olson Senior Vice President Robert J. Palmieri Senior Vice President Terry C. Quinn Senior Vice President Solutions Divisions Pamela A. Fredette President--Solutions Division Robert J. Farrell Executive V.P.--Solutions Division William D. Gargano Executive V.P.--Solutions Division Arthur V. Quinlan Executive V.P.--Solutions Division Steven J. Morgenthal President--Enterprise Management Division Barry D. Olson President--Education Division Wholly Owned Subsidiary Princeton Softech, Inc. Princeton, NJ Joseph Allegra--President Joint Venture Birla Horizons International New Delhi, India London, England Sunnyvale, CA Iselin, NJ Corporate and Financial Headquarters 49 Old Bloomfield Avenue Mountain Lakes, NJ 07046-1495 973-299-4000 International Headquarters Computer Horizons (Canada) Corp. Toronto, Canada CHC International Limited London, England Millennium Refurbishment Factories/Outsourcing Centers Parsippany, NJ Jersey City, NJ Toronto, Canada Corporate Counsel Dennis M. DiVenuta, Esq. General Counsel Proskauer Rose LLP Auditors Grant Thornton LLP Transfer Agent Registrar & Transfer Company Cranford, NJ Shares Traded Nasdaq National Market Symbol--CHRZ Options Traded Chicago Board Options Exchange Symbol--ZQH Availability of Form 10-K A copy of the Company's Annual Report to the SEC on Form 10-K may be obtained without charge by writing to: Shareholder Relations Computer Horizons Corp. 49 Old Bloomfield Avenue Mountain Lakes, NJ 07046-1495 Annual Meeting The Annual Meeting of Shareholders will be held at The Hamilton Park Conference Center Florham Park, NJ May 6, 1998 at 10:00 A.M. Website http://www.computerhorizons.com E-mail for Investor & General Information: information@chc.fabrik.com Statement Regarding Forward-Looking Information: This Annual Report includes certain forward-looking statements for purposes of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made by, and information currently available to management, including management's own knowledge and assessment of the Company's industry and competition. EX-23.1 3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 29, 1998 (except for Note 2, as to which the date is February 27, 1998), 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, 1997. 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 and File No. 333-44417) and on Forms S-8 (File No. 033-64763, File No. 033-59439 and File No. 033-41726). /s/Grant Thornton LLP GRANT THORNTON LLP Parsippany, New Jersey March 26, 1998 EX-27.1 4
5 1,000 YEAR DEC-31-1997 DEC-31-1997 88,633 13,165 81,268 1,742 0 184,229 12,479 7,101 211,601 26,816 0 0 0 2,936 179,596 211,601 0 334,729 0 224,123 71,704 0 1,280 40,182 17,538 22,644 0 0 0 22,644 0.88 0.84
EX-27.2 5
5 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 11,993 9,897 0 0 57,581 46,563 1,203 840 0 0 70,469 59,298 9,685 7,681 5,389 4,168 91,760 78,794 17,708 18,519 1,432 3,299 0 0 0 0 2,648 2,578 68,345 53,236 91,760 78,794 0 0 249,152 213,165 0 0 172,734 148,530 56,018 45,795 0 0 173 376 20,227 18,464 8,363 8,039 11,864 10,425 0 0 0 0 0 0 11,864 10,425 48 46 46 43
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