-----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, UrRnwZXBv9sJETRxBkab+DF9tZcujJKDKC0lLycMjTKOSdSkn1eci1ocegOqTj6o U7kOEpCLXMa7o5/JTsUXKg== 0001047469-03-042208.txt : 20031230 0001047469-03-042208.hdr.sgml : 20031230 20031230152344 ACCESSION NUMBER: 0001047469-03-042208 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20031230 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-07282 FILM NUMBER: 031077666 BUSINESS ADDRESS: STREET 1: 49 OLD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 BUSINESS PHONE: 9732994000 MAIL ADDRESS: STREET 1: 49 0LD BLOOMFIELD AVE CITY: MOUNTAIN LAKES STATE: NJ ZIP: 07046-1495 10-K/A 1 a2123732z10-ka.txt 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 (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, 2002 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________to___________ Commission file number 0-7282 COMPUTER HORIZONS CORP. ------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-2638902 - ------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 49 Old Bloomfield Avenue Mountain Lakes, New Jersey 07046-1495 - --------------------------- -------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (973) 299-4000 ---------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Par Value $.10 Per Share) --------------------------------------- (Title of class) Series A Preferred Stock Purchase Rights ---------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part HI of this Form 10-K or any amendment to this Form. 1O-K. / / Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was approximately $158,700,000. The number of shares outstanding of each of the registrant's classes of common stock as of March 26, 2003 were 30,286,125 shares. DOCUMENTS INCORPORATED BY REFERENCE There is incorporated herein by reference the registrant's (i) portions of the Annual Report to Shareholders for the year ended December 3l, 2002, in Part II of this Report and (ii) portions of the Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on April 10, 2003, in Part III hereof. EXPLANATORY NOTE This Amendment No. 2 on Form 10-K/A to our annual report on Form 10-K for the year ended December 31, 2002 is being filed solely for the purposes of responding to comments received by us from the Staff of the Securities and Exchange Commission. This Amendment speaks as of the original filing date of our annual report on Form 10-K and has not been updated to reflect events occurring subsequent to the original filing date. For the convenience of the reader, we have refiled our annual report on Form 1O-K in its entirety with the applicable changes. 2 PART I Item 1. BUSINESS GENERAL Computer Horizons Corp., or CHC, is a strategic human capital management and professional services company with more than thirty-six years of experience, specifically in information technology. As a systems integration and managed services company, CHC enables companies to maximize technology investments. By leveraging its IT services' business and proprietary technology through Chimes, CHC is enabling its Global 2000 customer base, which according to Forbes magazine, represents the biggest and most important companies, as measured by sales, profits, assets and market value, to align and integrate business planning with human resource management across an enterprise's business functions. The Company markets solutions to existing and potential clients with the objective of becoming a preferred provider of comprehensive information technology services and solutions for such clients. The Company believes that the range of services and solutions that it offers, combined with its proprietary Chimes technology, provides it with competitive advantages in the information technology marketplace. The Company's clients primarily are Global 2000 companies with significant information technology budgets and recurring staffing needs. In 2002, the Company provided information technology services to 905 clients. During 2002, the Company's largest client accounted for 6% of the Company's consolidated revenues. The Company offers its clients a broad range of business and technical services as an 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 global technology services and solutions, which are divided into three divisions; (1) IT Services, (2) Solutions and (3) Chimes. (1) IT Services: CHC's IT Services Group provides highly skilled software professionals to augment the internal information management staffs of major corporations. The Company offers its clients a just-in-time solution to supply their staffing needs from among the Company's over 1,500 IT professionals. Customers are serviced through the Company's branch network of offices in the United States and Canada, and virtually through Chimes. The customer is responsible for managing and supervising our software professionals. In addition, gross margins in this business area are significantly less than Solutions services. Revenue for the IT Services Group is recognized as services are rendered on a time and material basis. Hourly or daily rates are determined in advance and agreed to with the customer. Time worked is documented in various forms using the applicable timekeeping process (i.e. the client's or the Company's timekeeping systems). (2) Solutions: CHC Solutions Group (including CHC Healthcare Solutions and CHC's training/education practice) is an e-Business Solutions provider, enabling enterprises to build business-critical and highly scalable solutions. The Company offers a comprehensive list of integrated solutions including e-business strategy and assessment; HIPAA compliance; on shore, near-shore and offshore outsourcing; e-procurement solutions for human capital; enterprise network management; web architecture design; hosting and integration; application development; customer relationship management (CRM); project management; systems integration; networking services and education/training. CHC is responsible for the project management and supervision. Generally, the gross margins in this business division are higher than that of the IT Services division. Revenues in the Solutions Group are also recognized as services are performed under either time and material or a fixed fee basis. However, adjustments are made if necessary to reflect progress against milestones or deliverables. (2a) 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 outsourcing centers onshore, near-shore in Montreal and offshore in Chennai, India 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. 3 (2b) CHC Healthcare Solutions, LLC: CHC Healthcare Solutions was formed, in 2002, as a consortium of Computer Horizons Corp. and a healthcare consulting firm, ZA Consulting, LLC. CHC Healthcare Solutions, reported under CHC Solutions, offers services and solutions to the healthcare vertical from an operational, compliance, and technology viewpoint. (2c) Education/Training: The Company's education division offers custom-designed and/or existing training programs to enhance the competencies of client staff in specific technologies, languages, methodologies and applications. The prevailing focus of the Company is to assist clients through instructor-led, on-site training and consulting in the transitioning IT organization of Global 2000 corporations nationwide. To support these changing technologies, the Company has developed extensive curriculum offerings in Web technologies, Relational Databases, Programming Languages, Reporting Tools, Process Improvement, UNIX, Client/Server and Mainframe technologies. (2d) Software Products: Princeton Softech, Inc. a wholly-owned subsidiary of the Company which was sold March 25, 2002, was a software products company that delivered leveraging technologies for enterprise-scale solutions. (2e) Enterprise Network Management: eB Networks, Inc., a wholly-owned subsidiary of the Company which was sold September 10, 2001, was a company specializing in building and implementing strategic network infrastructure to assist companies in achieving e-Business objectives. (3) Chimes: Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies. Through scalable, web-based software, Chimes administers the hiring cycle to identify, leverage and manage the enterprise-wide spend on human capital. Chimes' portfolio of services addresses contingent hiring (CVM), full-time hiring (CAM), program management (RPM) and consolidated time sheet and expense processing (CTE). PERSONNEL As of December 3l, 2002, the Company had a staff of 2,800, including approximately 2,100 IT professionals and 200 Chimes payrolled consultants. The Company devotes significant resources to recruitment of qualified professionals and provides continuing in-house training and education, and a career path management development program within the Company. COMPETITION The Company competes in the commercial information technology services market which is highly competitive and served by numerous firms, many of which serve only their respective local markets. The market includes participants in a variety of market segments, including systems consulting and integration firms, professional services companies, application software firms, temporary employment agencies, the professional service groups of computer equipment companies, facilities management and management information systems or MIS outsourcing companies, certain accounting firms, and general management consulting firms. The Company's competitors also include companies such as Analysts International Corp., CIBER, Inc., Computer Task Group Inc., iGATE Corp. and Covansys Corp. Many participants in the information technology consulting and software solutions market have significantly greater financial, technical and marketing resources and generate greater revenues than the Company. The Company believes that the principal competitive factors in the commercial information technology services industry include responsiveness to client needs, speed of application software development, quality of service, price, project management capability and technical expertise. Pricing has its greatest importance as a competitive factor in the area of professional service staffing. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate skilled technical and management personnel, the 4 ownership by competitors of software used by potential clients, the price at which others offer comparable services and the extent of its competitors' responsiveness to customer needs. AVAILABLE INFORMATION The Company's internet website address is www.computerhorizons.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Item 2. PROPERTIES The Company's Corporate and Financial Headquarters, as well as its Eastern Regional Office, comprising approximately 63,000 square feet of general office space, are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey. The Mountain Lakes lease is for a term expiring December 31, 2003, at a current annual rental of approximately $1,400,000. As of December 3l, 2002, the Company also maintained other office facilities, which are shared between the IT Services and Solutions business segments, in California, Connecticut, Florida, Georgia, Illinois, Indiana, Michigan, Minnesota, New Jersey, New York, Ohio, Tennessee, Texas, and Washington as well as international operations located in Europe and Canada, with an aggregate of approximately 262,000 square feet. Chimes maintains office facilities in California, Illinois, Michigan, Minnesota and New Jersey. The leases for all of these office facilities are at a current annual aggregate rental of approximately $4,400,000. These leases expire at various times with no lease commitment longer than March 15, 2008. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 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 as of the filing date of the document.
PERIOD NAME AGE TITLE POSITION HELD - ---- --- ----- ------------- William J. Murphy 58 President and CEO 2003 - Present Director 1999 - Present Executive Vice President and Chief Financial Officer 1997 - 2003 Michael J. Shea 42 Chief Financial Officer 2003 - Present Vice President 1996 - Present Controller 1995 - 2003 Kristin Evins 35 Controller 2003 - Present Assistant Controller 2001 - 2003 Manager of Financial Reporting 2000 - 2001
6 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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, 2002 and 2001 is as follows:
2002 2001 High Low High Low ------ ------ ------ ------ Quarter First $ 4.19 $ 3.11 $ 5.19 $ 2.19 Second 4.87 3.65 4.08 2.00 Third 4.65 3.40 4.49 2.53 Fourth 4.00 2.95 3.32 2.50
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 March 26, 2003, there were approximately 1,051 registered holders of common stock, per the Company's transfer agent. Information concerning the Company's equity compensation plans is shown under Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 7 Item 6. SELECTED FINANCIAL DATA Consolidated Statement of Operations Data:
2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ --------(dollar amounts in thousands, except per share data)-------- Revenues $ 297,115 $ 400,784 $ 445,479 $ 534,594 $ 514,921 Costs and expenses: Direct costs 216,181 281,576 312,815 365,310 326,795 Selling, general and administrative 86,347 125,435 143,691 127,720 107,829 Bad debt expense 4,996 3,397 26,452 3,367 1,676 Amortization of intangibles -- 2,695 7,434 6,202 3,530 Restructuring charges 2,515 1,048 1,166 6,355 -- Write-down of assets held for sale -- 5,473 40,362 -- -- Merger-related expenses -- -- -- -- 4,272 ------------ ------------ ------------ ------------ ------------ Income / (loss) from operations (12,924) (18,840) (86,441) 25,640 70,819 ------------ ------------ ------------ ------------ ------------ Other income / (expense): Gain/(loss) on sale of assets 5,890 (3,197) -- -- -- Net (loss) / gain on investments (61) 90 -- -- -- Interest income 928 2,293 620 1,353 5,334 Interest expense (174) (1,944) (1,825) (1,355) (750) Equity in net earnings of joint venture -- -- -- -- (90) Gain on sale of joint venture -- -- -- -- 4,180 ------------ ------------ ------------ ------------ ------------ Income / (loss) before income taxes (6,341) (21,598) (87,646) 25,638 79,493 Income taxes / (benefit) 1,869 (7,148) (29,819) 11,013 35,906 ------------ ------------ ------------ ------------ ------------ Income / (loss) before cumulative effect of change in accounting principle (8,210) (14,450) (57,827) 14,625 43,587 Minority interest 35 -- -- -- -- Cumulative effect of change in accounting principle (29,861) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income / (loss) $ (38,036) $ (14,450) $ (57,827) $ 14,625 $ 43,587 ============ ============ ============ ============ ============ Earnings / (loss) per share: Basic $ (1.22) $ (0.45) $ (1.83) $ 0.47 $ 1.41 ============ ============ ============ ============ ============ Diluted $ (1.22) $ (0.45) $ (1.83) $ 0.46 $ 1.35 ============ ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 31,243,000 31,911,000 31,656,000 30,940,000 30,925,000 ============ ============ ============ ============ ============ Diluted 31,243,000 31,911,000 31,656,000 31,647,000 32,230,000 ============ ============ ============ ============ ============
8 Item 6. SELECTED FINANCIAL DATA (CONTINUED)
December 31, 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ --------(dollar amounts in thousands, except per share data)-------- Analysis (%) Revenues 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin 27.2 29.7 29.8 31.7 36.6 Selling, general and administrative 29.1 31.3 32.3 23.9 20.9 Bad debt expense 1.7 0.8 5.9 0.6 0.3 Amortization of intangibles -- 0.7 1.7 1.2 0.7 Restructuring charges 0.8 0.2 0.3 1.2 -- Write-down of assets held for sale -- 1.4 9.0 -- -- Merger-related expenses -- -- -- -- 0.8 ------------ ------------ ------------ ------------ ------------ Income / (loss) from operations (4.4) (4.7) (19.4) 4.8 13.8 Gain / (loss) on sale of assets 2.0 (0.8) -- -- -- Interest income / (expense) - net 0.3 0.1 (0.3) -- 0.9 Gain on sale of joint venture -- -- -- -- 0.8 ------------ ------------ ------------ ------------ ------------ Income / (loss) before income taxes (2.1) (5.4) (19.7) 4.8 15.5 Income taxes / (benefit) 0.6 (1.8) (6.7) 2.1 7.0 Income / (loss) before cumulative effect of change in accounting principle (2.7) (3.6) (13.0) 2.7 8.5 Cumulative effect of change in accounting principle (10.1) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income / (loss) (12.8) (3.6) (13.0) 2.7 8.5 ============ ============ ============ ============ ============ Revenue growth / (decline) YOY (25.9) (10.0) (16.7) 3.8 47.0 Net income growth / (decline)YOY (163.2) 75.0 (495.4) (66.4) 77.7 Return on equity, average (22.7) (7.3) (24.6) 5.7 20.2 Effective tax rate 29.5 33.1 34.0 43.0 45.2 Consolidated Balance Sheet Data: At year-end Total assets $ 193,731 $ 237,721 $ 269,396 $ 347,994 $ 296,052 Working capital 100,656 115,747 134,472 129,857 158,760 Long-term debt -- -- -- 4,100 -- Shareholders' equity 145,855 189,855 207,924 262,652 246,534 Other Data: Stock price $ 3.27 $ 3.21 $ 2.44 $ 16.19 $ 26.63 P/E multiple N/A N/A N/A 34 19 Employees 2,800 3,313 4,186 4,149 4,834 Clients (during year) 905 879 800 785 768 Offices (worldwide) 36 52 43 50 55
9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD-LOOKING STATEMENTS Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission (SEC). Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology industry, the continued need of current and prospective customers for the Company's services, the availability of qualified professional staff, and price and wage inflation. REVENUE GENERATING ACTIVITIES AND CRITICAL ACCOUNTING POLICIES REVENUE GENERATING ACTIVITIES The majority of the Company's revenues are derived from professional services rendered in the information technology sector. The Company also owned a stand-alone software products company, Princeton Softech Inc., or Princeton, which accounted for less than 1% of consolidated revenues in 2002 and less than 10% of consolidated revenues in 2001. On March 25, 2002, the net assets of Princeton were sold for a cash payment of approximately $16 million. The Company operates its business in three basic segments, IT Services, the Solutions Group and Chimes, Inc. The distinctions between the IT Services and Solutions Group segments primarily relate to the management and supervision of services performed and related gross margins. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies. The IT Services business consists of providing technology consultants to large organizations on a temporary hire basis. The consultant work is supervised and managed by the customer. For the most recent year 2002, this segment represented approximately 68% of total revenues. The IT Services business tends to be a lower risk, lower gross margin business with very competitive pricing. The Solutions Group, tends to be a higher margin, higher risk business, due to the fact that the Company is responsible for project deliverables and other conditions contained in statements of work and/or contracts with customers. Virtually all projects performed by the Solutions Group are IT related and consist of practices such as application development, outsourcing arrangements, governments services, Health Insurance Portability and Accountability Act, or 10 HIPAA, services, technology training and managed services. For the year 2002, the Solutions Group accounted for 26% of consolidated revenue. All of the Company's customer relationships are memorialized in a master agreement, which address the terms and conditions which define the client engagement. Depending on the service to be performed for the client, either a task order (in the case of a staffing engagement) or a Statement of Work ("SOW") (in the case of a Solutions engagement) is generated. The SOW is signed by both the Company and the customer. In general, no Solutions work is done unless there is a SOW because the SOW provides the technical details of the work to be done. The SOW, although falling under the corresponding master agreement, is a stand-alone binding contractual document, typically outlining the project objectives, describing the personnel who will work on the project, describing phases of the project, the timeframes for work performance, and the rate of compensation, on a time and materials basis. In the event that the parameters of the project expand or otherwise change, a Project Change Request is implemented, to memorialize whatever change has occurred to the deliverables, personnel and or time/materials. The master agreements, in conjunction with the SOWs, are written to define, with as much detail as possible, the client relationship and all aspects of the work to be performed for the client. With regard to revenues expected in future periods, each SOW has a defined term or sets forth the anticipated length of a project. Where a client engagement is on-going, like certain "Help Desk" type services, the master agreements would still have a term length, but would recite that the agreement was renewable. Generally Solutions engagements are for a year or less. Staffing engagements can and do last for more than a year, with variations in the number of consultants being provided at any given time. Staffing engagements are generally cancelable by clients with a two to four week notice period. Chimes, Inc. is a human capital management solution that, through the use of proprietary software and processes, manages the temporary workforce of large organizations. During 2002, Chimes accounted for approximately 6% of total revenues. CRITICAL ACCOUNTING POLICIES The most critical accounting policies used in the preparation of the Company's financial statements are related to revenue recognition, the evaluation of long-lived assets for impairment and the evaluation of goodwill and other intangible assets. REVENUE RECOGNITION For the IT Services division revenues are recognized as services are performed under time-and-material contracts. Under a typical time and materials billing arrangement, our customers are billed on a regularly scheduled basis, such as biweekly or monthly. At the end of each accounting period, revenue is estimated and accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month. The Solutions Group recognizes revenue either on a time and material basis or on a fixed fee basis, however, principally on a time and material basis. For fixed-fee contracts, revenue is recognized on the basis of the estimated percentage of completion based on costs incurred relative to total estimated costs. Each fixed fee contract has different terms, milestones and deliverables. The milestones and deliverables primarily relate to the work to be performed and the timing of billing. If it becomes apparent that estimated cost will be exceeded, an adjustment will be made. The cumulative effect of revisions in estimated revenues and costs are recognized in the period in which the facts that give rise to the impact of any revisions become known. Approximately 93% and 97% of consolidated revenue in 2002 and 2001, respectively, was derived from time-and-material contracts. Unbilled accounts receivable, in the IT Services and Solutions Group, represent amounts recognized as revenue based on services performed in advance of customer billings principally on a time and material basis. At the end of each accounting period, revenue is accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month. Costs and estimated earnings in excess of billings on fixed fee contracts arise when percentage of completion accounting is used. Such amounts are billed at specific dates or at contract completion. The Company's Chimes subsidiary recognizes revenue on a transaction fee basis. The Chimes service offering aggregates the suppliers of temporary workers to the customer and renders one invoice to the customer. Upon payment from the customer, Chimes deducts a transaction fee and remits the balance of the client payment to the applicable vendor. Chimes recognizes only their fee for the service, not the aggregate billing to the customer. The gross amount of the customer invoicing is not considered revenue or receivable to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the vendor until paid by the customer. Princeton recognized revenue in accordance with AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," and AICPA Statement of Position 98-9 ("SOP 98-9"). Under SOP 97-2, the Company recognized software license revenue when a noncancelable license agreement had been executed, fees were fixed and determinable, the software had been delivered, and collection was considered probable. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Up to and including the year ended December 31, 2001, the Company evaluated its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such an asset was considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the asset exceeded the fair value of the assets. Assets to be disposed of were reported at the lower of the carrying amount or fair value, less costs to sell. 11 At the end of 2000, the Company made certain strategic decisions to realign businesses and declared certain assets for sale or disposition. These decisions resulted in the application of the above mentioned policy and the recording of $40.3 million of non-cash charges in 2000 for related write-offs. As of December 31, 2002, all assets previously declared for sale were disposed of. Effective on January 1, 2002, the Company adopted Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS 144"). This supercedes SFAS 121, while retaining many of the requirements of such statement. The effect of this statement is immaterial to the Company. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" and in July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets." The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new regulation has discontinued the amortization of goodwill. During the quarter ended June 30, 2002, the Company completed the initial valuation of the carrying value of goodwill existing at January 1, 2002. As a result, a non-cash charge of $29.9 million, or $(0.96) per share was retroactively recorded as the cumulative effect of an accounting change in the six months ended June 30, 2002 statement of operations. For the year ended December 31, 2002 the Company completed a second valuation of the carrying value of the remaining goodwill and it was determined that no further impairment had occurred. The changes in the carrying amount of goodwill for the year ended December 31, 2002, are as follows (in 000's):
Reporting Units Solutions It Services Education Chimes Consolidated ------------- ------------- ------------- ------------- ------------- Balance as of December 31, 2001 $ 18,864 $ 29,422 $ 439 $ -- $ 48,725 Addition to goodwill 339 -- -- -- 339 Impairment Losses -- (29,422) (439) -- (29,861) ------------- ------------- ------------- ------------- ------------- Balance as of December 31, 2002 $ 19,203 $ -- $ -- $ -- $ 19,203 ============= ============= ============= ============= =============
The reporting units are equal to, or one level below, reportable segments. The Company engaged independent valuation consultants to assist with the transitional goodwill impairment tests. The fair value of each of the reporting units was calculated using the following approaches: (i) market approach and (ii) income approach. Under the market approach, value is estimated by comparing the performance fundamentals relating to similar public companies' stock prices. 12 Multiples are then developed of the value of the publicly traded stock to various measures and are then applied to each reporting unit to estimate the value of its equity. Under the income approach, value was determined using the present value of the projected future cash flows to be generated by the reporting unit. The fair value conclusion of the reporting units reflects an appropriately weighted value of the market multiple approach and the income approach discussed above. An asset approach was not used because the asset approach is most relevant for liquidation approaches, investment company valuations and asset rich company valuations (i.e. real estate entities) and was not deemed relevant for manufacturing and service company going-concern valuations. When either the income approach or the market approach was used, each indicated value of the Solutions entity's equity exceeds the carrying value of the Solutions entity by at least $15 million. Since each of the two approaches yielded values far in excess of carrying value, any weighting of the two approaches or either approach used alone results in the same conclusion, that the goodwill was not impaired. When the other entities were tested, both approaches yielded an indicated value which was far below the carrying value of those entity's equity, therefore the entire amount of goodwill was written off. As a result, a loss of $29.9 million was recognized and recorded as a cumulative effect of change in accounting principle in the accompanying Consolidated Statements of Operations. There was no income tax effect on the impairment charge as approximately $19 million of the charge related to goodwill in foreign tax jurisdictions where the Company believes it is more likely than not that future taxable income in these jurisdictions will not be sufficient to realize the related income tax benefits associated with the charge. The remaining $11 million of the charge was related primarily to goodwill that was acquired prior to the ability to deduct goodwill for tax purposes. The following pro forma table shows the effect of amortization expense and the cumulative effect of change in accounting principle on the Company's net loss as follows:
Twelve Months Ended DECEMBER 31, December 31, 2002 2001 -------------------------------------- Reported Net Loss $ (38,036) $ (14,450) Cumulative Effect of Change in Accounting Principle 29,861 -- Amortization of Intangibles -- 2,695 --------- --------- Adjusted Net Loss $ (8,175) $ (11,755) ========= ========= Reported Loss per Share: Basic & Diluted $ (1.22) $ (0.45) Adjustments for Cumulative Effect of Change in Accounting Principle Basic & Diluted 0.96 -- Adjustment for Amortization of Intangibles: Basic & Diluted -- 0.08 --------- --------- Adjusted Loss per Share: Basic & Diluted $ (0.26) $ (0.37) ========= =========
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after 13 June 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The Company is currently evaluating the impact of adopting this guidance. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUES Consolidated revenue decreased to $297.1 million in the year ended December 31, 2002 from $400.8 million in the year ended December 31, 2001, a decrease of $103.7 million, or 25.9%. Solutions Group revenues, which included revenue from assets held for sale of $2.9 million for Princeton in 2002, and $29.0 million for Princeton and $11.5 million for Eb Networks in 2001, decreased to $79.3 million in the year ended December 31, 2002 from $116.9 million in the year ended December 31, 2001, a decrease of $37.6 million or 32.2%. The Solutions Group revenue, excluding the revenue of Princeton in 2002 and Princeton and EBN in 2001 remained flat at $76.4 million in the year ended December 31, 2002 and December 31, 2001, respectively. IT Services revenues decreased to $201.3 million in the year ended December 31, 2002 from $274.4 million in the year ended December 31, 2001, a decrease of $73.1 million or 26.6%. The decrease in IT Services revenue of $73.1 million is the result of continued decreases in the demand for temporary technology workers, the trend of companies to outsource technology jobs offshore, the impact of pricing decreases by customers and the lagging economy. For the year ended December 31, 2002, IT Services consultant average headcount decreased by 24%, accounting for approximately $66 million of the revenue decrease. The balance of the decrease in revenue (approximately $7 million) is attributable to a reduction in average bill rates. The Company does not anticipate any growth during 2003 in IT Services from the year-end 2002 headcount levels unless the economy recovers and IT spending increases. Chimes revenue increased to $16.5 million in the year ended December 31, 2002, from $9.5 million in the year ended December 31, 2001, an increase of $7 million, or 73.7%. This increase was primarily due to an increase in revenue from existing customers of approximately $2.2 million and an increase of approximately $4.8 million in revenue from new customers in this segment. DIRECT COSTS Direct costs decreased to $216.2 million in the year ended December 31, 2002 from $281.6 million in the year ended December 31, 2001. Gross margin decreased to 27.2% in the year ended December 31, 2002 from 29.7% in the year ended December 31, 2001. Direct costs, excluding $494,000 of direct expense from Princeton in 2002 and $6.3 million of direct expense from Princeton and $7.3 million from EBN in 2001, decreased to $215.7 million in the year ended December 31, 2002 from $268.0 million in the year ended December 31, 2001. Gross margins excluding these expenses in both years increased to 26.7% in the year ended December 31, 2002 from 25.6% in the year ended December 31, 2001. This increase in gross margins was primarily attributable to the increase in higher margin business, primarily in Chimes. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general and administrative expenses (excluding amortization expense, restructuring charges and the write-down of assets held for sale) decreased to $91.3 million, or 30.7% of revenue, in the year ended December 31, 2002 from $128.8 million, or 32.1% of revenue, in the year ended December 31, 2001, a decrease of $37.5 million or 29.1%. Selling, general and administrative expenses (excluding assets held for sale of $4.3 million expense for Princeton in 2002 and $28.4 million for Princeton and $5.3 million for EBN in 2001, amortization expense, restructuring charges and the write-down of assets held for sale) decreased to $87.0 million, or 29.3% of revenue, in the year ended December 31, 2002 from $95.1 million or 23.7% of revenue in the year ended December 31, 2001, a decrease of $8.1 million or 8.5%. 14 The decrease in selling, general and administrative expenses was primarily attributable to cost reductions in all segments, with approximately $1.3 million from rent savings and the balance primarily related to staff reduction and personnel costs. The decreases were offset by a $3.5 million increase in Chimes as the Company continues to invest in this subsidiary. Chimes average headcount increased 21% from approximately 168 at December 31, 2001 to 204 at December 31, 2002 primarily from the hiring of additional program office personnel used in the implementation and delivery of Chimes services. RESTRUCTURING CHARGES / (CREDITS) During the fourth quarter of 2002, the Company recorded a restructuring charge of $2.8 million pertaining to 2002 office closings, along with a reversal of $192,000 of the previously recorded restructure reserves pertaining to lease buyouts and $140,000 pertaining to severance adjustments. These office closings were made to eliminate the infrastructure costs related to having offices in certain areas. The Company did not eliminate marketing efforts or business in these areas, but rather turned these areas into virtual marketplaces whereby sales personnel work from their homes. As a result of these office closings, in both IT Services and the Solutions business areas, rent expense and the related reduction of SG&A headcount (salary and fringe benefits) were eliminated from the current SG&A cost structure. During the fourth quarter of 2001, the Company recorded a restructuring charge adjustment of $1.0 million primarily due to the termination, by the sublessee, of the sublease contracts for closed offices included in the 1999 restructure charge. Since the sublessee defaulted on the rent payments, it was necessary to restore the Company's liability for the remaining lease obligations. WRITE-DOWN OF ASSETS HELD FOR SALE In the second quarter of 2001, the Company recorded $5.5 million expense for the write-down of assets held for sale to further reduce the carrying amount of eB Networks to the estimated net realizable value. INCOME / (LOSS) FROM OPERATIONS The Company's loss from operations, excluding restructuring charges, write-down of assets held for sale and amortization expense in 2001, totaled $10.4 million in the year ended December 31, 2002, a decline of $0.8 million or 8.3%, from a loss of $9.6 million in the year ended December 31, 2001. The composition of the operating loss of $10.4 million included a loss of $2.2 million in IT Services, profit of $748,000 in the Solutions Group and a loss of $8.9 million in Chimes. This compares to the operating loss of $9.6 million in the year ended December 31, 2001, consisting of profit of $7.7 million in IT Services, loss of $7.2 million in the Solutions Group and loss of $10.1 million in Chimes. Operating margins, excluding restructuring charges, write-down of assets held for sale and amortization expense in 2001, were a loss of 3.5% in the year ended December 31, 2002 as compared to a loss of 2.4% in the year ended December 31, 2001. The Company's loss from operations, excluding the losses from the assets held for sale of $1.9 million loss in Princeton in 2002 and $5.7 million loss for Princeton and $1.1 million loss for EBN in 2001, restructuring charges, amortization expense and the write-down of assets held for sale, totaled $8.5 million in the year ended December 31, 2002, a decline of $5.6 million or 193.1%, from a loss of $2.9 million in the year ended December 31, 2001. The composition of the operating loss of $8.5 million included a loss of $2.4 million in IT Services, profit of $2.8 million in the Solutions Group and a loss of $8.9 million in Chimes. This compares to the operating loss of $2.9 million in the year ended December 31, 2001, consisting of profit of $5.7 million in IT Services, profit of $1.5 million in the Solutions Group and loss of $10.1 million in Chimes. Operating margins, excluding restructuring charges, write-down of assets held for sale and amortization expense in 2001, were a loss of 2.9% in the year ended December 31, 2002 as compared to a loss of 0.8% in the year ended December 31, 2001. OTHER INCOME / EXPENSE For the year ended December 31, 2002, other income increased to $6.6 million from other expense of $2.8 million in the year ended December 31, 2001. This increase in other income 15 was primarily attributable to a $3.2 million gain on the sale of Princeton and a $2.7 million gain on the sale of Spargo which resulted from a favorable purchase price adjustment after the final resolution of outstanding accounts receivables and the termination of leases. In 2001, a $4.0 million loss was recorded on the sale of Eb Networks offset in part by a $332,000 gain on the sale of ICM Education and the original $438,000 gain recorded for the sale of Spargo in 2001. PROVISION FOR INCOME TAXES The effective tax rate for Federal, state, and local income taxes was 29.5% for the year ended December 31, 2002, and a tax benefit rate of 33.1% in the year ended December 31, 2001. The primary reason for the change in the effective tax rate in 2002 was the establishment of a valuation allowance of state deferred tax assets. A review of all available positive and negative evidence was conducted by the Company, including the Company's current and past performance, the market environment in which the company operates, and the length of carryback and carryforward periods. In January 2003, the Company received a federal income tax refund of $20 million, resulting from the Economic Stimulus Act of 2002 (see Note 8). NET INCOME / (LOSS) The Company recorded a net loss of $38.0 million in the year ended December 31, 2002, a decline of $23.5 million or 162.1% from net loss of $14.5 million in the year ended December 31, 2001. Net loss per share (diluted) totaled $1.22 in the year ended December 31, 2002 from net loss per share (diluted) of $0.45 in the year ended December 31, 2001. The net loss in 2002 includes the cumulative effect of change in accounting principle of $29.9 million, or $0.96 per share and differences in the effective tax rate primarily relating to the recording of a valuation allowance in the Company's state deferred tax assets of approximately $4.0 million, or $0.13 per share. The effect of restructuring charges, operations of assets held for sale, gain on sale of assets, cumulative effect of change in accounting principle and the valuation allowance on deferred tax assets amounted to $1.06 loss per share, net of taxes, in 2002. The effect of restructuring charges, loss on sale of assets, amortization expense and the operations of the assets held for sale amounted to $0.40 loss per share, net of taxes, in 2001. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUES Consolidated revenues decreased to $400.8 million in the year ended December 31, 2001 from $445.5 million in the year ended December 31, 2000, a decrease of $44.7 million, or 10.0%. Solutions Group revenues, including business units held for sale; $29.0 million for Princeton and $11.5 million for EBN in 2001, along with $39.8 million for Princeton, $30.7 million for EBN and $11.3 million for Spargo in 2000, decreased to $126.4 million in the year ended December 31, 2001 from $141.8 million in the year ended December 31, 2000, a decrease of $15.4 million or 10.9%. Chimes was not a separate line of business in 2000 because the stand alone operations were not identifiable and are included in the Solutions Group in 2000. The decrease in Solutions Group revenue is primarily attributable to the decline experienced by the business units held for sale. Solutions Group revenue, excluding the operations of units held for sale increased to $85.9 million in the year ended December 31, 2001 from $60.0 million in the year ended December 31, 2000, an increase of $25.9 million or 43.2%. This increase was due to an increase in average billable headcount of 6% in the Solutions division from 353 in the year ended December 31, 2000 to 373 in the year ended December 31, 2001. IT Services revenues decreased to $274.4 million in the year ended December 31, 2001 from $303.7 million in the year ended December 31, 2000, a decrease of $29.3 million or 9.6%. The decrease in IT Services revenue of $29.3 million is the result of continued decreases in the demand for temporary technology workers, the impact of pricing decreases by customers and the lagging economy. In addition, for the year 2001, IT Services consultant average headcount decreased by 11% from 2,532 during 2000 to 2,263 during 2001. This accounted for the entire $29.3 million decline in revenue. 16 DIRECT COSTS Direct costs decreased to $281.6 million in the year ended December 31, 2001 from $312.8 million in the year ended December 31, 2000. Gross margin remained essentially flat at 29.7% in the year ended December 31, 2001 from 29.8% in the year ended December 31, 2000. Direct costs, excluding $6.3 million expense from Princeton and $7.3 million from EBN in 2001 and $7.5 million expense from Princeton, $20.8 million from EBN and $8.9 million from Spargo in 2000, decreased to $268.0 million in the year ended December 31, 2001 from $275.6 million in the year ended December 31, 2000. Gross margins, excluding these expenses in both years, increased to 25.6% in the year ended December 31, 2001 from 24.2% in the year ended December 31, 2000. Gross margins increased due to the change in the revenue mix increasing the higher margin Solutions business which includes the increase in Chimes business. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general and administrative expenses (excluding bad debt expense, amortization expense and restructuring charges) decreased to $125.4 million, or 31.3% of revenue, in the year ended December 31, 2001 from $143.7 million, or 32.3% of revenue, in the year ended December 31, 2000, a decrease of $18.3 million or 12.7%. Selling, general and administrative expenses (excluding business units held for sale: $28.4 million expenses for Princeton and $5.3 million expenses for EBN in 2001 and $31.5 million for Princeton, $15.6 million for EBN and $3.3 million for Spargo in 2000, bad debt expense, amortization expense, restructuring charges and the write-down of assets held for sale) decreased to $91.7 million, or 22.9% of revenue, in the year ended December 31, 2001 from $93.3 million, or 20.9% of revenue, in the year ended December 31, 2000, a decrease of $1.6 million or 1.7%. The decrease in selling, general and administrative expenses was primarily attributable to cost reductions in all segments, with approximately $1.1 million from rent savings and the balance primarily related to staff reduction and personnel costs. These expenses were offset by a $9.7 million increase in Chimes as the Company continues to invest in this subsidiary. Chimes average headcount increased 147% from approximately 68 at December 31, 2000 to approximately 168 at December 31, 2001. BAD DEBT EXPENSE Bad debt expense decreased to $3.4 million in the year ended December 31, 2001 from $26.5 million in the year ended December 31, 2000, a decrease of $23.1 million. The 2000 bad debt expense includes a charge of $21.6 million in the fourth quarter of 2000 as a direct result of problems created in late 1998 and early 1999 relating to the flawed implementation of an enterprise-wide information system. The system implementation in late 1998 and early 1999 caused billing delays which resulted in a significant increase in receivables and created numerous billing and reconciliation issues with the Company's clients. The system was stabilized in the latter part of 1999 and much of 2000 was spent reconciling outstanding balances with customers. Although sales were recorded in 1998 and 1999 based on services performed pursuant to signed contracts, bad debt expense was recorded in the fourth quarter of 2000 when it became evident that major concessions with our customers for the old balances would have to be made in order to retain customers and avoid long protracted and possibly damaging conflicts. Collection efforts were ceased in the fourth quarter of 2000. AMORTIZATION OF INTANGIBLES Amortization of intangibles decreased to $2.7 million in the year ended December 31, 2001 from $7.4 million in the year ended December 31, 2000, a decrease of $4.7 million or 63.5%. This decrease in amortization expense was due to the reduction of intangibles related to the assets held for sale. RESTRUCTURING CHARGES / (CREDITS) During the fourth quarter of 2001, the Company recorded a restructuring charge adjustment of $1.0 million primarily due to the termination, by the sublessee, of the sublease contracts for closed offices included in the 1999 restructure charge. Since the sublessee defaulted on the rent 17 payments, it was necessary to restore the Company's liability for the remaining lease obligations. During the fourth quarter of 2000, the Company recorded a restructuring charge of $1.2 million related to the closing of seven offices and the size reduction of other IT Services offices. During the second quarter of 2000, the Company recorded a restructuring credit of $2.4 million. This credit resulted primarily from the earlier than expected subleasing of discontinued properties that were part of the third quarter 1999 restructuring charge. WRITE-DOWN OF ASSETS HELD FOR SALE In the second quarter of 2001, the Company recorded a non-cash $5.5 million expense for the write-down of assets held for sale to further reduce the carrying amount of eB Networks to its estimated net realizable value. During the fourth quarter of 2000, the Company evaluated its strategic direction and determined that it needed to refocus its efforts and resources in three primary areas. These areas were IT Services (Staff Augmentation), a Solutions Practice focused primarily on application development and maintenance services, and Chimes. As a result, the Company placed four businesses for sale, Princeton Softech, Inc., including its Select division, Eb Networks, Spargo and the ICM Microsoft training business. In addition, the Company decided to exit the ESG certified SAP training business. In connection with this plan a non-cash write-down of approximately $40 million was recorded to reduce the assets to estimated net realizable value. This $40 million write-down is comprised of $6.9 million of Select software, $26.2 million of Eb Networks and $7.2 million related to the exit of the ESG SAP training business. As a result of these strategic decisions the SG&A expense structure of the Company was significantly reduced and the Company no longer offered for sale software tools and products surrounding the movement and storage of data, network architectural and design services and certified SAP Microsoft training. INCOME / (LOSS) FROM OPERATIONS Income / (loss) from operations, excluding restructuring charges, write-down of assets held for sale and bad debt expense, improved to a loss of $8.9 million in the year ended December 31, 2001 from a loss of $18.5 million in the year ended December 31, 2000, an improvement of $9.6 million or 51.9%. Operating margins, excluding restructuring charges, write-down of assets held for sale and bad debt expense, improved to a loss of 2.2% in the year ended December 31, 2001 from a loss of 4.1% in the year ended December 31, 2000. Income / (loss) from operations, excluding results of assets held for sale ($5.7 million loss for Princeton and $1.1 million loss for EBN in 2001 and $1.5 million loss for Princeton, $7.4 million loss for EBN and $945,000 loss for Spargo in 2000) restructuring charges, the write-down of assets held for sale and bad debt expense, improved to income of $417,000 in the year ended December 31, 2001 from a loss of $5.3 million in the year ended December 31, 2000, an improvement of $5.7 million or 107.9%. Operating margins, excluding the expenses listed above, improved to income of 0.1% in the year ended December 31, 2001 from a loss of 1.4% in the year ended December 31, 2000. OTHER INCOME / EXPENSE For the year ended December 31, 2001, other expense increased to $2.8 million. This increase in other expenses was primarily due to the loss on sale of assets, partially offset by higher interest income on investments and a stock distribution received on the demutualization of the Company's previous group health provider of $1.5 million. PROVISION FOR INCOME TAXES The effective tax rate for Federal, state, and local income taxes was 33.1% and 34.0% in the years ended December 31, 2001 and 2000, respectively. NET INCOME / (LOSS) Net income / (loss) improved to a loss of $14.5 million in the year ended December 31, 2001 from net loss of $57.8 million in the year ended December 31, 2000, an improvement of $43.3 million or 74.9%. Net loss per share (diluted) improved to $0.45 in the year ended December 31, 2001 from net loss per share (diluted) of $1.83 in the year ended December 31, 2000. The effect of restructuring charges and the operations of the assets held for sale amounted to $0.34 loss per share, net of taxes, in 2001. The effect of the bad debt special charge, restructuring charges and operations of assets held for sale amounted to $1.62 loss per share, net of taxes, in 2000. 18 LIQUIDITY AND CAPITAL RESOURCES Computer Horizons has historically financed its operations primarily through cash generated from operations, borrowings against bank lines of credit and the public sale of its common stock. At December 31, 2002, the Company had $100.7 million in working capital, of which $59.8 million was cash and cash equivalents. The Company's working capital ratio at December 31, 2002 was 3.2 to 1. During the first quarter of 2002, $10 million of short-term debt was repaid and the Company has remained debt free throughout the remainder of 2002. In January 2003, the Company received a federal income tax refund of $20 million, resulting from the Economic Stimulus Act of 2002. The Company may use these additional resources to continue to buy back its stock and potentially make acquisitions. Net cash provided by operating activities for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 totaled $20.7 million, $31.9 million and $9.9 million, respectively. In 2002, this was primarily attributable to a reduction in accounts receivable. In 2001, this was primarily attributable to income tax refunds, other non-cash charges and a reduction in accounts receivable. In 2000, it was primarily attributable to a non-cash charge relating to an increase in the provision for bad debts, the amortization and write-off of intangibles and the write-down of assets held for sale, offset in part by the operating loss. Net cash provided by investing activities was $13.0 million and $6.1 million for the years ended December 31, 2002 and 2001, respectively. In both years this was primarily attributable to cash received from the sale of assets. Net cash used in investing activities was $9.1 million in the year ended December 31, 2000, primarily attributable to acquisition related earnouts and the purchase of furniture and fixtures. For the years ended December 31, 2002 and 2001, respectively, net cash used in financing activities was $14.6 million and $12.6 million, resulting from $10.0 million reduction of debt and $6.1 million used in the repurchase of the Company's common stock in 2002 and from $10.7 million reduction of debt and $3.4 million used in the repurchase of the Company's common stock in 2001. For the year ended December 31, 2000, net cash provided by financing activities was $1.1 million, resulting from $1.2 million in borrowings against the Company's bank lines of credit, $2.2 million of stock issued as a result of the Company's employee stock purchase program and stock option exercises partially offset by a reduction of $4.1 million of the Company's long-term debt. On July 31, 2001, the Company entered into a secured asset-based lending facility which replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing was Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $17.5 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of December 31, 2002, the Company had no outstanding loan balance against this facility. Based on the Company's eligible customer receivables and cash balances, $20.5 million and $24.7 million was available for borrowing as of February 28, 2003 and December 31, 2002, respectively. The Company believes that its cash and cash equivalents, asset-based lending facility, internally generated funds and tax refunds (received in 2003) will be sufficient to meet its working capital needs through 2003. 19 The Company's billed accounts receivable were $49.4 million and $76.1 million at December 31, 2002 and December 31, 2001, respectively. Including both billed and unbilled receivables, days sales outstanding were 76 days at December 31, 2002 and 88 days at December 31, 2001, based on quarterly sales. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The Company does not utilize off balance sheet financing other than operating lease arrangements for office premises and related equipment. Leases are short term in nature and non-capital. The following table summarizes all commitments under contractual obligations as of December 31, 2002:
Total Over 5 Amount 1 year 2-3 years 4-5 years years -------------------------------------------------------------- ------------in thousands------------ Operating Leases $ 10,606 $ 4,192 $ 5,088 $ 1,314 $ 12 Other long term 1,320 1,320 -- -- -- ---------- ---------- ---------- ---------- ---------- Total Cash Obligations $ 11,926 $ 5,512 $ 5,088 $ 1,314 $ 12 ========== ========== ========== ========== ==========
FOREIGN CURRENCY EXPOSURE The Company's international operations expose it to translation risk when the local currency financial statements are translated to U.S. dollars. As currency exchange rates fluctuate, translation of the financial statements of international businesses into U.S. dollars will affect the comparability of revenues and expenses between years. None of the components of the Company's consolidated statements of income was materially affected by exchange rate fluctuations in 2002, 2001 or 2000. At December 31, 2002 the Company had $379,000 in cash maintained in overseas financial institutions. RECENT DEVELOPMENTS Impact of Economic Stimulus Act on Income Tax Refund Claim On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 (the "Act") was enacted into law. This Act contains many economic and tax incentives, including the extension of the carryback period for losses arising in years ending during 2001 and 2002 to five years from the previous two year carryback rule. As a result, the Company's tax refund claim of approximately $10 million at December 31, 2001 was increased to approximately $30 million. The additional refund amount of $20 million was received in January 2003. 20 Sale of Solutions UK On February 14, 2003, the Company sold the business and net assets of Computer Horizons e-Solutions (Europe) Limited, ("Solutions UK") to Systems Associates Limited for 92,822 British Sterling Pounds (approximately US$ 145,500). Purchase of Westfield - India On January 31, 2003, the Company acquired the IT Solutions operations of Global Business Technology Solutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group of companies and Westfield Services, Inc., a subsidiary of Westfield Financial Corporation. The outsourcing facility and its IT professionals are located in Chennai (Madras), India. This transaction was completed for $400,000. Stock Option Exchange Program On January 8, 2003, the Company commenced a tender offer to its employees to exchange stock options granted under the Company's 1994 Incentive Stock Option and Appreciation Plan with an exercise price of $10.01 or greater for new stock options with a new exercise price. The tender offer expired on February 10, 2003, and 1,635,526 options were accepted for exchange. Please see Item 12 on Form 10-K - Security Ownership of Certain Beneficial Owners and Management. Purchase of Treasury Stock Subsequent to December 31, 2002, the Company has purchased 211,800 shares of its common stock at an aggregate cost of approximately $694,000. Management Changes On March 13, 2003, John J. Cassese, the Company's CEO, President and Chairman, informed the Board that he has taken a leave of absence as CEO and President and resigned his position as Director and Chairman of the Board as a result of being informed that the Justice Department obtained an indictment relating to Mr. Cassese's June 1999 purchase and sale of an unrelated company's shares. The Board has named William J. Murphy to the position of Acting President and CEO, appointed Thomas J. Berry Chairman of the Board and named Michael J. Shea to the position of acting Chief Financial Officer. 21 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK EXPOSURE The Company has financial instruments that are subject to interest rate risk. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the current holdings, the exposure to interest rate risk is not material. Additionally, at December 31, 2002 the Company was debt free. 22 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Computer Horizons Corp. We have audited the accompanying consolidated balance sheets of Computer Horizons Corp. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Computer Horizons Corp. and Subsidiaries as of December 31, 2002 and 2001 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. /s/ Grant Thornton LLP - ---------------------- GRANT THORNTON LLP Edison, New Jersey February 25, 2003 23 Computer Horizons Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 2002 2001 ------------ ------------ (in thousands, except per share data) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 59,769 $ 41,033 Accounts receivable (Note 4) 56,616 83,564 Net assets held for sale (Note 2) -- 10,381 Deferred income taxes (Note 8) 4,557 13,030 Refundable income taxes 19,051 7,992 Other 7,219 5,238 ------------ ------------ Total current assets 147,212 161,238 ------------ ------------ PROPERTY AND EQUIPMENT: Furniture, equipment and other 37,643 34,354 Less accumulated depreciation 26,626 21,881 ------------ ------------ 11,017 12,473 ------------ ------------ OTHER ASSETS - NET: Goodwill (Note 1) 19,203 48,725 Deferred income taxes (Note 8) 8,020 5,708 Other 8,279 9,577 ------------ ------------ 35,502 64,010 ------------ ------------ Total Assets $ 193,731 $ 237,721 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 24 Computer Horizons Corp. and Subsidiaries CONSOLIDATED BALANCE SHEETS (continued)
December 31, ---------------------------- 2002 2001 ------------ ------------ (in thousands, except per share data) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ -- $ 10,000 Accrued payroll, payroll taxes and benefits 9,452 12,782 Accounts payable 10,830 15,196 Restructuring reserve (Note 14) 3,266 2,090 Tax benefit reserve (Note 8) 19,600 -- Other accrued expenses 3,408 5,423 ------------ ------------ Total current liabilities 46,556 45,491 ------------ ------------ Other liabilities 1,320 2,375 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred stock, $.10 par; authorized and unissued, 200,000 shares, including 50,000 Series A Common stock, $.10 par; authorized, 100,000,000 shares; issued 33,153,107 shares at December 31, 2002 and 2001, respectively 3,315 3,315 Additional paid-in capital 133,518 135,230 Accumulated comprehensive loss (4,306) (2,932) Retained earnings 28,255 66,291 ------------ ------------ 160,782 201,904 Less shares held in treasury, at cost; 2,660,667 shares and 1,720,191 shares at December 31, 2002 and 2001, respectively (14,927) (12,049) ------------ ------------ Total shareholders' equity 145,855 189,855 ------------ ------------ Total Liabilities and Shareholders' Equity $ 193,731 $ 237,721 ============ ============
25 Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ (in thousands, except per share data) Revenues $ 297,115 $ 400,784 $ 445,479 ------------ ------------ ------------ COSTS AND EXPENSES: Direct costs 216,181 281,576 312,815 Selling, general and administrative 86,347 125,435 143,691 Bad debt expense 4,996 3,397 26,452 Amortization of intangibles -- 2,695 7,434 Restructuring charges (Note 14) 2,515 1,048 1,166 Write-down of assets held for sale (Note 14) -- 5,473 40,362 ------------ ------------ ------------ 310,039 419,624 531,920 ------------ ------------ ------------ Loss from operations (12,924) (18,840) (86,441) ------------ ------------ ------------ OTHER INCOME /(EXPENSE): Gain / (loss) on sale of assets (Note 3) 5,890 (3,197) -- Net gain /(loss) on investments (61) 90 -- Interest income 928 2,293 620 Interest expense (174) (1,944) (1,825) ------------ ------------ ------------ 6,583 (2,758) (1,205) ------------ ------------ ------------ Loss before income taxes (6,341) (21,598) (87,646) ------------ ------------ ------------ INCOME TAXES / (BENEFIT) (NOTES 1 AND 8): Current (4,292) (10,292) (19,339) Deferred 6,161 3,144 (10,480) ------------ ------------ ------------ 1,869 (7,148) (29,819) ------------ ------------ ------------ Loss before cumulative effect of change in accounting principle (8,210) (14,450) (57,827) Cumulative effect of change in accounting principle (Note 1) (29,861) -- -- Minority Interest 35 -- -- ------------ ------------ ------------ Net Loss $ (38,036) $ (14,450) $ (57,827) ============ ============ ============ Loss per share - Basic and Diluted (Notes 1 and 9): Before cumulative effect of change in accounting principle $ (0.26) $ (0.45) $ (1.83) ============ ============ ============ Cumulative effect of change in accounting principle $ (0.96) $ -- $ -- ============ ============ ============ Net Loss $ (1.22) $ (0.45) $ (1.83) ============ ============ ============ Weighted average number of shares outstanding: Basic and Diluted 31,243,000 31,911,000 31,656,000 ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 26 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 2002, 2001 and 2000
Common Stock ------------ Accumulated Other Additional Comprehensive Shares Amount Paid-in Capital Income/(Loss) ---------- ------- --------------- -------------- ---------------(dollars in thousands)--------------- BALANCE, DECEMBER 31, 1999 33,149,595 $ 3,315 $ 138,821 $ 385 ---------- ------- ---------- -------- Net loss for the year Other comprehensive loss: Foreign currency translation adjustments (1,365) Total comprehensive loss Stock options exercised Other issuances of common stock 2,611 Tax benefits related to stock option plans 64 Issuance of common stock for purchase of assets 237 Employee stock purchase program 296 ---------- ------- --------- -------- BALANCE, DECEMBER 31, 2000 33,152,206 3,315 139,418 (980) ---------- ------- --------- -------- Net loss for the year Other comprehensive loss: Foreign currency translation adjustments (1,952) Total comprehensive loss Stock options exercised Other issuances of common stock 901 Issuance of common stock for purchase of assets (360) Employee stock purchase program (3,828) Purchase of treasury shares ---------- ------- --------- -------- BALANCE, DECEMBER 31, 2001 33,153,107 3,315 135,230 (2,932) ---------- ------- --------- -------- Net loss for the year Other comprehensive loss: Current year unrealized loss on serp investments (1,100) Foreign currency Translation adjustments (274) Total Comprehensive loss Stock options exercised Employee stock purchase program (1,712) Purchase of treasury shares ---------- ------ -------- ------- BALANCE, DECEMBER 31, 2002 33,153,107 $3,315 $133,518 $(4,306) ========== ====== ======== ======= Treasury Stock -------------- Retained Earnings Shares Amount Total ---------- --------- --------- --------- BALANCE, DECEMBER 31, 1999 $ 138,568 1,780,721 $ 18,437 $ 262,652 ---------- --------- --------- --------- Net loss for the year (57,827) (57,827) Other comprehensive loss: Foreign currency translation adjustments (1,365) ---------- Total comprehensive loss (59,192) Stock options exercised (171,311) (1,695) 1,695 Other issuances of common stock Tax benefits related to stock option plans 64 Issuance of common stock for purchase of assets (32,470) (266) 503 Employee stock purchase program (232,325) (1,906) 2,202 -------- --------- -------- -------- BALANCE, DECEMBER 31, 2000 80,741 1,344,615 14,570 207,924 -------- --------- -------- -------- Net loss for the year (14,450) (14,450) Other comprehensive loss: Foreign currency translation adjustments (1,952) ---------- Total comprehensive loss (16,402) Stock options exercised (15,000) (30) 30 Other issuances of common stock Issuance of common stock for purchase of assets (77,144) (633) 273 Employee stock purchase program (643,280) (5,273) 1,445 Purchase of treasury shares 1,111,000 3,415 (3,415) -------- --------- -------- ---------- BALANCE, DECEMBER 31, 2001 66,291 1,720,191 12,049 189,855 -------- --------- -------- ---------- Net loss for the year (38,036) (38,036) Other comprehensive loss: Current year unrealized loss on serp investments (1,100) Foreign currency Translation adjustments (274) ---------- Total comprehensive loss (39,410) ---------- Stock Options Exercised (265,858) (449) 449 Employee Stock Purchase Program (405,366) (2,814) 1,102 Purchase Of Treasury Shares 1,611,700 6,141 (6,141) -------- --------- -------- ---------- BALANCE, DECEMBER 31, 2002 $ 28,255 2,660,667 $ 14,927 $ 145,855 ======== ========= ======== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. 27 Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ ---------------(in thousands)--------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (38,036) $ (14,450) $ (57,827) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Deferred taxes 6,161 3,144 (10,480) Depreciation 4,634 5,301 7,655 Amortization of intangibles -- 2,695 7,434 Provision for bad debts 4,996 3,397 26,452 Write-down of assets held for sale -- 5,473 33,114 Loss / (gain) on sale of assets (5,890) 3,197 -- Write off of goodwill 29,861 -- 7,248 Changes in assets and liabilities, net of acquisitions: Accounts receivable 21,952 11,060 18,278 Other current assets (1,981) (2,240) (2,873) Assets held for sale 397 5,401 (6,428) Other assets 1,298 (474) 3,778 Refundable income taxes/benefit reserve 8,541 13,333 (12,862) Accrued payroll, payroll taxes and benefits (4,430) (1,412) (3,261) Accounts payable (4,366) (2,749) 1,475 Other accrued expenses (1,432) (560) (1,267) Other liabilities (1,055) 815 (544) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 20,650 31,931 9,892 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of furniture and equipment (3,178) (3,732) (5,607) Proceeds received from the sale of assets 16,467 10,027 -- Changes in goodwill (339) (156) (3,496) ------------ ------------ ------------ NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,950 6,139 (9,103) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Notes payable - banks, net (10,000) (10,704) 1,202 Long-term debt -- -- (4,100) Stock options exercised 449 30 1,759 Purchase of treasury shares (6,141) (3,415) -- Stock issued on employee stock purchase plan 1,102 1,445 2,202 ------------ ------------ ------------ NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (14,590) (12,644) 1,063 ------------ ------------ ------------ Foreign currency losses (274) (1,952) (1,365) NET INCREASE IN CASH AND CASH EQUIVALENTS 18,736 23,474 487 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 41,033 17,559 17,072 ============ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 59,769 $ 41,033 $ 17,559 ============ ============ ============
28 Computer Horizons Corp. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ -------------(in thousands)------------- Supplemental disclosures of cash flow information: Cash paid/(received) during the year for: Interest $ (461) $ (106) $ 1,538 Income taxes (10,967) (24,097) (2,890) Book value of assets held for sale, net of cash $ -- $ 22,116 $ 80,035 Liabilities -- 11,735 18,075 ------------ ------------ ------------ Net assets held for sale before write-down, net of cash -- 10,381 61,960 Write-down of assets held for sale -- -- 33,114 ------------ ------------ ------------ Net assets held for sale, net of cash $ -- $ 10,381 $ 28,846 ============ ============ ============
NON CASH ACTIVITIES: During 2002, the Company recorded a refundable income tax and tax benefit reserve of $19.6 million. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 29 Computer Horizons Corp. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Computer Horizons Corp. is a strategic e-Business solutions and professional services company. The Company enables its Global 2000 customer base to realize competitive advantages through three major divisions, IT Services, Solutions and Chimes, Inc. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, strategic outsourcing and managed resourcing as well as software and relational database products. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Computer Horizons Corp. and its wholly-owned and majority-owned subsidiaries (the "Company"). All subsidiaries of the Company have been consolidated into these financial statements. All material intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION For the IT Services division revenues are recognized as services are performed under time-and-material contracts. Under a typical time and materials billing arrangement, our customers are billed on a regularly scheduled basis, such as biweekly or monthly. At the end of each accounting period, revenue is estimated and accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month. The Solutions Group recognizes revenue either on a time and material basis or on a fixed fee basis, however, principally with time and material contracts. For fixed-fee contracts, revenue is recognized on the basis of the estimated percentage of completion based on costs incurred relative to total estimated costs. Each fixed fee contract has different terms, milestones and deliverables. The milestones and deliverables primarily relate to the work to be performed and the timing of billing. If it becomes apparent that estimated cost will be exceeded an adjustment will be made. The cumulative effect of revisions in estimated revenues and costs are recognized in the period in which the facts that give rise to the impact of any revisions become known. Approximately 93% and 97% of consolidated revenue in 2002 and 2001, respectively, was derived from time-and-material contracts. Unbilled accounts receivable represent amounts recognized as revenue based on services performed in advance of customer billings principally on a time and material basis. At the end of each accounting period, revenue is accrued for services performed since the last billing cycle. These unbilled amounts are billed the following month. Costs and estimated earnings in excess of billings on fixed fee contracts arise when percentage of completion accounting is used. Such amounts are billed at specific dates or at contract completion. The Company's Chimes subsidiary recognizes revenue on a transaction fee basis. The Chimes service offering aggregates the suppliers of temporary workers to the customer and renders one invoice to the customer. Upon payment from the customer, Chimes deducts a transaction fee and remits the balance of the client payment to the applicable vendor. Chimes recognizes only their fee for the service, not the aggregate billing to the customer. The gross amount of the customer invoicing is not considered revenue or receivable to Chimes because there is no earnings process for the gross amount and by contract terms. Chimes is not obligated to pay the vendor until paid by the customer. 30 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company's Princeton subsidiary recognized revenue in accordance with AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," and AICPA Statement of Position 98-9 ("SOP 98-9"). Under SOP 97-2, the Company recognized software license revenue when a noncancelable license agreement had been executed, fees were fixed and determinable, the software had been delivered, and collection was considered probable. Princeton Softech was sold on March 25, 2002, (see Note 3). RECRUITMENT COSTS Recruitment costs are charged to operations as incurred. ADVERTISING COSTS The Company expenses all advertising costs as incurred and classifies these costs under selling, general and administrative expenses. Advertising costs for the years ended December 31, 2002, 2001 and 2000 were $0.3 million, $0.6 million and $0.8 million, respectively. RESEARCH AND DEVELOPMENT COSTS The Company charges all costs incurred to establish the technological feasibility of software products or product enhancements to research and development costs, which are included in selling, general and administrative expenses. Research and Development costs for the years ended December 31, 2002, 2001 and 2000 were $0.9 million, $5.4 million and $6.9 million, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid instruments with an original maturity of three months or less at the time of purchase and consist of the following at December 31:
2002 2001 ------------ ------------ ------(in thousands)------- Cash $ 22,806 $ 19,121 Commercial paper 36,963 21,912 ------------ ------------ $ 59,769 $ 41,033 ============ ============
31 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, regardless of the degree of such risk, consist principally of cash and cash equivalents and trade accounts receivable. On July 31, 2001, amended February 14, 2003, the Company entered into a secured asset-based lending facility which replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing is Prime plus 0.5%, thereafter the rate is LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $17.5 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of December 31, 2002, the Company had no borrowings outstanding against the facility. The Company invests the majority of its excess cash in overnight commercial paper of high-credit, high-quality financial institutions or companies, with certain limitations as to the amount that can be invested in any one entity. The Company maintains its cash balances principally in seven financial institutions located in the United States, Canada and the United Kingdom. The balances in U.S. banks are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity at each institution. The balance in the Canadian bank is insured by the Canadian Deposit Insurance Corporation up to $60,000 Canadian (approximately $38,000 U.S.). There is no depository insurance in the United Kingdom. At December 31, 2002, uninsured amounts held by the Company at these financial institutions total approximately $59,031,000. The Company's customers are generally very large, Global 2000 companies in many industries and with wide geographic dispersion. The Company's largest customer, the City of New York, accounts for approximately 19.2% and 21.0% of billed accounts receivable at December 31, 2002 and 2001, respectively. Revenues from this customer totaled approximately $11.9 million, or 4% of total consolidated revenues, for the year ended December 31, 2002 and $9.1 million, or 2% of total consolidated revenues, for the year ended December 31, 2001. Historically, there have been no collection issues with this customer; however, the payment cycle is significantly slower than the Company's commercial customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments (principally consisting of cash and cash equivalents, accounts receivable and payable) approximates fair value because of the short maturities currently offered to the Company. 32 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Up to and including the year ended December 31, 2001, the Company evaluated its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such an asset was considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the asset exceeded the fair value of the assets. Assets to be disposed of were reported at the lower of the carrying amount or fair value less costs to sell. Effective on January 1, 2002, the Company adopted Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets," ("SFAS 144"). This supercedes SFAS 121, while retaining many of the requirements of such statement. The effect of this statement is immaterial to the Company. 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 net operating loss carryovers, amortization of goodwill, the allowance for doubtful accounts provision and certain accrued expenses which are deductible, for tax purposes, only when paid. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Tax benefits from early disposition of the stock by optionees under incentive stock options and from exercise of non-qualified options are credited to additional paid-in capital. The Company provides United States income taxes on the earnings of foreign subsidiaries, unless they are considered permanently invested outside the United States. As of December 31, 2002, there is no cumulative amount of earnings on which United States income taxes have not been provided. EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding, except when the effect is anti-dilutive. The calculation takes into account the shares that may be issued upon 33 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the United States dollar (Canadian dollar and British pound), results of operations and cash flows are translated at the average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates. Translation adjustments are included as a separate component of comprehensive income/(loss) within the statement of shareholders' equity. ACCOUNTS RECEIVABLE Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, "Business Combinations" and in July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets." The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new regulation has discontinued the amortization of goodwill. 34 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During the quarter ended June 30, 2002, the Company completed the initial valuation of the carrying value of goodwill existing at January 1, 2002. As a result, a non-cash charge of $29.9 million, or $(0.96) per share was retroactively recorded as the cumulative effect of an accounting change in the six months ended June 30, 2002 statement of operations. For the year ended December 31, 2002 the Company completed a second valuation of the carrying value of the remaining goodwill and it was determined that no further impairment had occurred. The changes in the carrying amount of goodwill for the year ended December 31, 2002, are as follows:
Reporting Units Solutions It Services Education Chimes Consolidated --------------- --------------- --------------- --------------- --------------- ---------------------------------------in thousands-------------------------------------- Balance as of December 31, 2001 $ 18,864 $ 29,422 $ 439 $ -- $ 48,725 Additions to goodwill 339 -- -- -- 339 Impairment losses -- (29,422) (439) -- (29,861) --------------- --------------- --------------- --------------- --------------- Balance as of December 31, 2002 $ 19,203 $ -- $ -- $ -- $ 19,203 =============== =============== =============== =============== ===============
35 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The reporting units are equal to, or one level below, reportable segments. The Company engaged independent valuation consultants to assist with the transitional goodwill impairment tests. The fair value of each of the reporting units was calculated using the following approaches: (i) market approach and (ii) income approach. Under the market approach, value is estimated by comparing the performance fundamentals relating to similar public companies' stock prices. Multiples are then developed of the value of the publicly traded stock to various measures and are then applied to each reporting unit to estimate the value of its equity. Under the income approach, value was determined using the present value of the projected future cash flows to be generated by the reporting unit. The fair value conclusion of the reporting units reflects an appropriately weighted value of the market multiple approach and the income approach discussed above. As a result of performing steps one and two of the goodwill impairment test, a loss of $29.9 million was recognized and recorded as a cumulative effect of change in accounting principle in the accompanying Consolidated Statements of Operations. There was no income tax effect on the impairment charge as approximately $19 million of the charge related to goodwill in foreign tax jurisdictions where the Company believes it is more likely than not that future taxable income in these jurisdictions will not be sufficient to realize the related income tax benefits associated with the charge. The remaining $11 million of the charge was related primarily to goodwill that was acquired prior to the ability to deduct goodwill for tax purposes. 36 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following pro forma table shows the effect of amortization expense and the cumulative effect of change in accounting principle on the Company's net loss as follows:
Twelve Months Ended DECEMBER 31, December 31, 2002 2001 --------------------------------- Reported Net Loss $ (38,036) $ (14,450) Cumulative Effect of Change in Accounting Principle 29,861 -- Amortization of Intangibles -- 2,695 --------- --------- Adjusted Net Loss $ (8,175) $ (11,755) ========= ========= Reported Loss per Share: Basic & Diluted $ (1.22) $ (0.45) Adjustment for Cumulative Effect of Change in Accounting Principle: Basic & Diluted 0.96 -- Adjustment for Amortization of Intangibles: Basic & Diluted -- 0.08 --------- --------- Adjusted Loss per Share: Basic & Diluted $ (0.26) $ (0.37) ========= =========
RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 146, "Accounting for Exit or Disposal Activities," ("SFAS 146"), which supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The new standards require that a liability for a cost associated with an exit or disposal activity, including costs related to terminating a contract that is not a capital lease and the termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not ongoing or an individual deferred-compensation contract, be recognized when the liability is incurred. Previously, under Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan, which may not necessarily meet the definition of a liability. SFAS 146 is effective for exit or 37 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) disposal activities of the Company that are initiated after December 31, 2002. The Company is currently evaluating the impact of this statement to the Company. In December 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 148, "Accounting for Stock-Based Compensation - Translation and Disclosure." This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The exercise price per share on all options granted may not be less than the fair value at the date of the option grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as modified by FIN 44, "Accounting for Certain Transactions Involving Stock Compensation," in accounting for stock-based employee compensation, whereby no compensation cost had been recognized for the plans. The Company expects to continue following the guidance under APB 25 for stock based compensation to employees. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates and been consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2002 2001 2000 -------------- -------------- -------------- Net loss As reported $ (38,036,000) $ (14,450,000) $ (57,827,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (3,334,000) (3,847,000) (4,068,000) -------------- -------------- -------------- Pro forma $ (41,370,000) $ (18,297,000) $ (61,895,000) ============== ============== ============== Earnings per share Basic As reported $ (1.22) $ (0.45) $ (1.83) Pro forma (1.32) (0.57) (1.96) Diluted As reported $ (1.22) (0.45) (1.83) Pro forma (1.32) (0.57) (1.96)
38 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 2002, 2001 and 2000, respectively: expected volatility of 64%, 84% and 105%; risk-free interest rates of 3.62%, 5.14% and 4.71%; and expected lives of 4.4, 8.1 and 4.5 years. In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The Company is currently evaluating the impact of adopting this guidance. RECLASSIFICATIONS Certain reclassifications have been made to the 2001 and 2000 comparative financial statements to conform to the 2002 presentation. 39 NOTE 2 - NET ASSETS HELD FOR SALE The Company decided in 2000 to offer three of its subsidiaries (Princeton Softech "Princeton", including the SELECT Software Tools division "Select", CHC International Limited "Spargo", and eB Networks) for sale or disposition and accordingly classified these entities as "assets held for sale." During 2001, two of the subsidiaries and Select were sold (See Note 3). During 2002, the last remaining asset held for sale, Princeton, was sold (See Note 3). During the years ended December 31, 2002, 2001 and 2000, these respective entities generated net losses of $1.3 million, $4.4 million and $9.3 million, respectively including amortization expense of $3.6 million in 2000. At December 31, 2001, the assets and liabilities of the remaining subsidiary Princeton, were classified in the consolidated balance sheet as net assets held for sale and were included in the Solutions segment (see Note 10). Such net assets consisted of the following:
December 31, 2001 (in thousands) Princeton -------------- Current assets $ 19,607 Property and equipment 1,370 Other assets 1,139 -------------- Total assets 22,116 Total liabilities (11,735) -------------- Total net assets held for sale $ 10,381 ==============
For the year ended December 31, 2002, Princeton's revenue was $2.9 million and its loss, net of taxes, was $1.3 million. 40 NOTE 3 - SALE OF SUBSIDIARIES On March 25, 2002, the Company sold the net assets of Princeton Softech to Apax Partners, Inc. and LLR Partners, for cash of $16 million, including amounts held in escrow of $1.5 million. The gain from the transaction was initially estimated as $3.6 million and was adjusted in the fourth quarter of 2002 to $3.2 million due to a purchase price adjustment. The results of operations are included in the consolidated financial statements through February 28, 2002 within the Solutions group. On September 10, 2001, the Company sold the assets of eB Networks to Inrange Technologies, a storage networking company, for cash of $5.4 million, including amounts held in escrow of $540,000. The loss from the transaction was initially estimated as $3.2 million, which included the final write-down of related goodwill of $2.1 million. A purchase price adjustment was recorded in the fourth quarter of 2002 resulting in an increase to the loss of $144,000. The results of operations are included in the consolidated financial statements through September 10, 2001 within the Solutions group. On August 30, 2001, the Company sold the ICM Education name to AlphaNet Solutions, Inc., an IT professional services firm, for $0.5 million. The gain from the transaction was $332,000. The results of operations are included in the consolidated financial statements through August 30, 2001 within the Solutions group. In November 2002, the Company received an additional $100,253 from AlphaNet Solutions, Inc. relating to an earnout. On April 17, 2001, the Company sold the SELECT Software Tools division "Select" of Princeton Softech to Aonix, a member of the Gores Technology Group, for approximately $895,000 including $545,000 of cash received and a note receivable of $350,000, subsequently written off with the sale of Princeton Softech on March 25, 2002. This sale included all the software assets and intellectual property rights of Select and was sold at book value. The results of operations are included in the consolidated financial statements through April 17, 2001 within the Solutions group. On January 31, 2001, the Company sold the stock of CHC International Limited, ("Spargo"), to an information technology consultancy services provider for cash of $3.2 million. The gain from the transaction was initially estimated as $438,000. A purchase price adjustment of $2.7 million was recorded, in the fourth quarter of 2002, to increase the gain after the final resolution of outstanding accounts receivables and the termination of leases. The results of operations for January 2001 were not material to the consolidated financial statements. 41 NOTE 4 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following at December 31:
2002 2001 ------------ ------------ -------(in thousands)------ Billed $ 49,453 $ 76,127 Unbilled 14,859 14,979 ------------ ------------ 64,312 91,106 Less allowance for doubtful accounts 7,696 7,542 ------------ ------------ $ 56,616 $ 83,564 ============ ============
NOTE 5 - LONG-TERM DEBT AND LINES OF CREDIT Long-term debt and lines of credit consisted of $10 million at December 31, 2001. LINES OF CREDIT On July 31, 2001, amended February 14, 2003, the Company entered into a secured asset-based lending facility that replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing was Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $17.5 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of December 31, 2002, the Company had no outstanding loan balance against the facility. Based on the Company's eligible customer receivables and cash balances, $24.7 million was available for borrowing as of December 31, 2002. The fee for the unused portion of the line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $144,000 and $42,000 for the years ended December 31, 2002 and 2001, respectively. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on incurring obligations and spending limits on capital expenditures. NOTE 6 - PURCHASE OF TREASURY STOCK In April of 2001, the Board of Directors approved the repurchase in the open market of up to 10% of its common shares outstanding, or approximately 3.2 million shares. For the year ended December 31, 2002, the Company had repurchased, in the open market, 1,611,700 shares of its stock at an average price of $3.81 per share for an aggregate purchase amount of $6.1 million. For the year ended December 31, 2001, the Company had repurchased, in the open market, 1,111,000 shares of its stock at an average price of $3.22 per share for an aggregate purchase amount of $3.6 million. As of December 31, 2002 the remaining authorization for repurchase is approximately 485,000 shares. 42 NOTE 7 - SHAREHOLDERS' EQUITY STOCK OPTIONS In 1994, the Company adopted a stock option plan which provides for the granting of options, to officers and key employees, for the purchase of a maximum of 7,594,000 shares of common stock and stock appreciation rights (SARs). Options and SARs generally expire ten 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, 2002. This plan, which replaces the Company's 1985 Plan, will terminate on June 15, 2004. There were 2,036,000, 1,930,000 and 2,655,000 shares available for option at December 31, 2002, 2001 and 2000. In 1998, the Company amended the non-qualified Directors' Stock Option Plan, providing that each new director of the Company who is not an employee of the Company (i) shall immediately receive options to purchase 10,000 shares of its common stock and (ii) shall receive annual grants to purchase 10,000 shares of its common stock. The plan expired on March 4, 2001 and was extended for three additional years by the Board of Directors and Shareholders. There were 334,000, 384,000 and 424,000 shares available for grant at December 31, 2002, 2001 and 2000. A summary of the status of the Company's stock option plans as of December 31, 2002, 2001 and 2000, and changes during the years ending on those dates is presented below:
2002 2001 2000 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise (000'S) Price (000's) price (000's) price Outstanding - January 1 4,841 $ 10.11 4,216 $ 13.05 3,600 $ 13.46 Granted 1,340 3.68 1,535 2.17 1,500 11.98 Exercised (266) 1.47 (15) 2.02 (159) 9.90 Canceled/forfeited/expired (1,388) 12.45 (895) 10.47 (725) 13.60 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding - December 31 4,527 7.93 4,841 10.11 4,216 13.05 ========== ========== ========== ========== ========== ========== Options exercisable - December 31 2,573 10.89 2,749 12.97 2,125 13.81 ========== ========== ========== ========== ========== ========== Weighted average fair value of options granted during the year $ 2.72 $ 1.85 $ 9.42
43 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) The following information applies to options outstanding at December 31, 2002:
Weighted Outstanding as average Exercisable as Weighted of December 31, remaining Weighted of December 31, average 2002 contractual average 2002 (000's) exercise Range of exercise prices (000's) life exercise price price $ 0.00 - $ 9.99 2,653 8.2 $ 3.14 911 $ 3.17 10.00 - 14.99 1,135 2.7 11.58 935 11.55 15.00 - 19.99 242 4.8 16.57 230 16.53 20.00 and over 497 3.4 21.21 497 21.21 --------------- --------------- 4,527 6.1 $ 7.93 2,573 $ 10.89 =============== ============= =============== =============== ===============
Prior to 2002, certain officers had the right to borrow from the Company against the exercise price of options exercised. As of December 31, 2002 and 2001, total outstanding borrowings, pertaining to one officer, amounted to $100,000 which was issued by the Company in 1999, prior to the adoption of FIN 44 and the Sarbanes-Oxley Act of 2002. In 2001, the Company adopted a stock option plan for its Princeton subsidiary which provided for the granting, to Princeton key employees, of options for the purchase of a maximum of 3,000,000 shares of Princeton common stock. These options expire ten years from the date of grant and become exercisable in two years. As of the date of the sale of Princeton, the stock option plan was terminated. The Company has issued warrants to purchase shares of its common stock to two outside business/ legal consulting firms. There were no warrants issued in 2002, 2001 or 2000. The exercise price is the fair value at the date of grant. As of December 31, 2002, 29,375 warrants were outstanding. There were no warrants exercised in 2002, 2001 or 2000. SHAREHOLDER RIGHTS PLAN In July 1989, the Board of Directors declared a dividend distribution of .131 preferred stock purchase right on each outstanding share of common stock of the Company. The rights were amended on February 13, 1990. Each right will, under certain circumstances, entitle the holder to buy one one-thousandth (1/1000) of a share of Series A preferred stock at an exercise price of $90.00 per one one-thousandth (1/1000) share, subject to adjustment. Each one one-thousandth (1/1000) of a share of Series A preferred stock has voting, dividend and liquidation rights and preferences substantively equivalent to one share of common stock. 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. 44 NOTE 7 - SHAREHOLDERS' EQUITY (CONTINUED) Additionally, if the Company subsequently engages in a merger or other business combination with the Acquiring Person in which the Company is not the surviving corporation, or in which the outstanding shares of the Company's common stock are changed or exchanged, or if more than 50% of the Company's assets or earning power is sold or transferred, a right would entitle a Computer Horizon Corp. shareholder, other than the Acquiring Person and its affiliates, to purchase upon payment of the Exercise Price, shares of the Acquiring Person having a market value of twice the Exercise Price. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. No shareholder rights have become exercisable. The rights originally would have expired on July 16, 1999, however, the Board of Directors approved the adoption of a new Shareholder Rights Plan to replace the existing plan. The terms of the new Rights Plan are substantially the same as the original plan. The new rights will expire on July 15, 2009. NOTE 8 - INCOME TAXES The following is a geographical breakdown of the Company's loss before taxes:
Year Ended December 31, 2002 2001 2000 --------- ----------- ----------- -----------------(in thousands)-------------------- Domestic $ (6,005) $ (20,679) $ (85,463) Foreign (336) (919) (2,183) --------- ----------- ----------- $ (6,341) $ (21,598) $ (87,646) ========= =========== ===========
45 NOTE 8 - INCOME TAXES (CONTINUED) The provision for income taxes/(benefit) consists of the following for the years ended December 31:
2002 2001 2000 --------- ---------- ---------- -----------------(in thousands)------------------ Current Federal $ (4,993) $ (10,032) $ (18,775) State 701 (280) (662) Foreign -- 20 98 --------- ---------- ---------- Total current (4,292) (10,292) (19,339) Deferred Federal 819 3,501 (7,736) State 5,342 (508) (5,079) Foreign -- 151 2,335 --------- ---------- ---------- Total deferred 6,161 3,144 (10,480) --------- ---------- ---------- $ 1,869 $ (7,148) $ (29,819) ========= ========== ==========
Refundable income taxes result primarily from net operating loss carrybacks. 46 NOTE 8 - INCOME TAXES (Continued) Deferred tax assets and liabilities consist of the following at December 31:
2002 2001 ---------- ---------- ---------(in thousands)--------- Deferred tax liabilities Depreciation $ (1,086) $ (1,223) Amortization of intangibles -- (1,988) ---------- ---------- Total deferred tax liabilities (1,086) (3,211) ---------- ---------- Deferred tax assets Accrued insurance -- 36 Federal and state net operating losses 9,764 6,413 Foreign net operating losses 3,767 3,202 Amortization of intangibles 3,985 -- Accrued payroll and benefits 2,007 2,228 Deferred revenue -- 2,462 Allowance for doubtful accounts 1,150 1,389 Restructuring charges 1,593 6,301 Accrued severance and lease costs -- 526 Other 1,686 2,732 ---------- ---------- Total deferred tax assets 23,952 25,289 ---------- ---------- Valuation allowance (10,289) (3,340) Net deferred tax assets $ 12,577 $ 18,738 ========== ==========
47 NOTE 8 - INCOME TAXES (Continued) A reconciliation of income taxes/(benefit), as reflected in the accompanying statements, with the statutory Federal income tax rate of 35% for the years ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000 ---------------(in thousands)-------------- Statutory Federal income taxes $ (2,219) $ (7,559) $ (30,676) State and local income taxes/(benefit), net of Federal tax benefit 91 (757) (3,732) Amortization of goodwill -- 452 688 Change in valuation allowance, sale of assets (1,855) -- -- Change in valuation allowance, other 5,095 613 2,727 Other, net 757 103 1,174 --------- --------- ---------- $ 1,869 $ (7,148) $ (29,819) ========= ========= ==========
At December 31, 2002 the Company has a federal net operating loss carryforward of approximately $21 million; $9.8 million expires in 2021 and $11.2 million expires in 2022. At December 31, 2002 the Company has state deferred tax assets, net of federal tax effect, of approximately $6.5 million relating primarily to state net operating loss carryforwards. These state net operating loss carryforwards are subject to limitations which differ from federal law. Many states do not allow the carryback of net operating losses, have shorter carryforward periods, and do not allow the filing of consolidated returns. Additionally, New Jersey and California have temporarily suspended the deduction for net operating loss carryforwards. These state limitations create uncertainties with respect to the realization of these state deferred tax assets. Accordingly, the Company has recorded a valuation allowance of approximately $5.2 million with respect to these assets. 48 NOTE 8 - INCOME TAXES (Continued) Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 2002, totaling approximately $11.8 million (including $4.5 million in Canada and $7.3 million in the United Kingdom); $507,000 expires in 2005, $1.7 million expires in 2006, $833,000 expires in 2007, $1.4 million expires in 2008, and the remainder has no expiration. A full valuation allowance has been recorded on the foreign taxes due to the uncertainty of the recognition of certain of these net operating loss carryforwards. During 1998, the Company completed a business combination which, for financial statement purposes, has been accounted for as a pooling-of-interests. For income tax purposes the Company believes the transaction qualifies as a taxable purchase that gives rise to future tax deductions. Upon the sale of the acquired business in 2001, these deductions were recognized for tax purposes. The tax benefit of $19.6 million relating to the part of these deductions that was carried back to prior years was included in refundable income taxes in 2002. Since the tax structure of the transaction is subject to determination by the tax authorities, the Company has recorded a reserve for the tax benefits resulting from the carryback and has not recorded deferred tax assets for the tax benefits being carried forward. When resolved, the Company will record a deferred tax asset for the part of the tax benefits being carried forward and a tax benefit for the portion that was carried back, net of an appropriate valuation allowance. The tax benefit will be reflected as an increase in additional paid-in capital. Any adjustments to the valuation allowance will be charged or credited to income. 49 NOTE 9 - EARNINGS/(LOSS) PER SHARE DISCLOSURES The computation of diluted earnings per share excludes options with exercise prices greater than the average market price. During 2002, there were 2,072,000 excluded options outstanding at December 31, 2002 with exercise prices of $4.00 to $26.63 per share. During 2001, there were 3,120,000 excluded options outstanding at December 31, 2001 with exercise prices of $7.38 to $26.63 per share. During 2000, there were 3,003,000 excluded options outstanding at December 31, 2000 with exercise prices of $11.13 to $26.63 per share. NOTE 10 - SEGMENT INFORMATION The Company has identified three business segments: IT Services, the Solutions Group and Chimes, Inc. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. IT Services is primarily staffing augmentation. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, strategic outsourcing and managed resourcing as well as software and relational database products, up to the time of sale, March 25, 2002, of Princeton Softech Inc. During 2002, Princeton made up the following within the Solutions Group; $2.9 million of revenue, $2.4 million of gross margin, $1.9 million operating loss and depreciation expense of $84,000. During 2001, Princeton made up the following within the Solutions Group; $29.0 million of revenue, $22.7 million of gross margin, $5.7 million of operating loss and depreciation expense of $582,000. During 2000, Princeton made up the following within the Solutions Group; $39.8 million of revenue, $32.3 million of gross margin, $1.5 million of operating loss and depreciation expense of $2.2 million. During these years Princeton was classified as an asset held for sale. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies, which according to Forbes Magazine, represent the biggest and most important companies, as measured by sales, profits, assets and market value. Operating income/(loss) consists of income/(loss) before income taxes, excluding interest income, interest expense, gain/(loss) on the sale of assets, restructuring charge, net gain/(loss) on investments and amortization of intangibles. These exclusions total income of $4.1 million and expense of $12.0 million and $50.2 million at December 31, 2002, 2001 and 2000, respectively. Long-term assets include goodwill and property, plant and equipment for 2002, 2001 and 2000. Corporate services, consisting of general and administrative services are provided to the segments from a centralized location. Such costs are allocated to the segments based on either revenue or headcount. 50 NOTE 10 - SEGMENT INFORMATION (Continued)
BY LINE OF BUSINESS 2002 2001 2000 ---------------(in thousands)--------------- REVENUE IT Services $ 201,295 $ 274,379 $ 303,713 Solutions Group 79,283 116,873 141,766 Chimes(1) 16,537 9,532 -- ------------ ------------ ------------ Total Revenue $ 297,115 $ 400,784 $ 445,479 ------------ ------------ ------------ GROSS MARGIN IT Services $ 40,626 $ 58,752 $ 64,557 Solutions Group 25,712 51,419 68,107 Chimes(1) 14,596 9,037 -- ------------ ------------ ------------ Total Gross Margin $ 80,934 $ 119,208 $ 132,664 ------------ ------------ ------------ OPERATING INCOME / (LOSS) IT Services $ (2,243) $ 7,735 $ (14,615) Solutions Group 748 (7,204) (22,864) Chimes(1) (8,914) (10,155) -- ------------ ------------ ------------ Total Operating Loss $ (10,409) $ (9,624) $ (37,479) ------------ ------------ ------------ ASSETS IT Services $ 47,876 $ 93,920 $ 131,694 Solutions Group 29,640 63,126 63,947 Chimes(1) 26,762 8,354 -- Corporate and other 89,453 72,321 73,755 ------------ ------------ ------------ Total Assets $ 193,731 $ 237,721 $ 269,396 ------------ ------------ ------------ DEPRECIATION EXPENSE IT Services $ 482 $ 762 $ 1,267 Solutions Group 1,133 1,764 3,930 Chimes(1) 1,044 524 -- Corporate and other 1,975 2,251 2,458 ------------ ------------ ------------ Total Depreciation $ 4,634 $ 5,301 $ 7,655 ------------ ------------ ------------
(1) Chimes was not a separate line of business in 2000 because stand alone operations were not identifiable. Chimes is included in the Solutions Group during this year. 51 NOTE 10 - SEGMENT INFORMATION (CONTINUED)
BY GEOGRAPHIC AREA 2002 2001 2000 ---------------(in thousands)------------- REVENUE United States $ 270,890 $ 361,884 $ 393,060 Europe 2,775 12,617 26,777 Australia 60 2,102 3,602 Canada 23,390 24,181 22,040 ------------ ------------ ------------ Total Revenue $ 297,115 $ 400,784 $ 445,479 ============ ============ ============ LONG-TERM ASSETS United States $ 29,486 $ 41,716 $ 43,433 Europe 106 163 1,462 Canada 628 19,319 20,411 ------------ ------------ ------------ Total Long-Term Assets $ 30,220 $ 61,198 $ 65,306 ============ ============ ============
RECONCILIATION OF SEGMENTS OPERATING LOSS TO CONSOLIDATED LOSS BEFORE INCOME TAXES
2002 2001 2000 ---------------(in thousands)------------- Total Segments Operating Loss $ (10,409) $ (9,624) $ (37,479) ------------ ------------ ------------ Adjustments: Interest income 928 2,293 620 Interest expense (174) (1,944) (1,825) Net gain/(loss) on investments (61) 90 -- Gain/(loss) on sale of assets 5,890 (3,197) -- Write-down of assets held for sale -- (5,473) (40,362) Restructuring charges (2,515) (1,048) (1,166) Amortization of intangibles -- (2,695) (7,434) ------------ ------------ ------------ Total Adjustments 4,068 (11,974) (50,167) ------------ ------------ ------------ Consolidated Loss Before Income Taxes $ (6,341) $ (21,598) $ (87,646) ============ ============ ============
NOTE 11 - SAVINGS PLAN AND OTHER RETIREMENT PLANS The Company maintains a defined contribution savings plan covering eligible employees. The Company makes contributions up to a specific percentage of participants' contributions. The Company contributed approximately $1,089,000, $1,413,000 and $1,563,000 in 2002, 2001 and 2000, respectively. In 1995, the Company instituted a Supplemental Executive Retirement Plan, or SERP, whereby key executives are entitled to receive lump-sum payments (or, if they elect, a ten-year payout) upon reaching the age of 65 and being in the employment of the Company. The maximum commitment if all plan members remain in the employment of the Company until age 65 is approximately $13.8 million. Benefits accrue and vest based on a formula which includes total years with the Company and total years possible until age 65. The plan is nonqualified and not formally funded. Life insurance policies on the members are purchased to assist in funding the cost. The SERP expense is charged to operations during the remaining service lives of the members and was $407,000 in 2002, $115,000 in 2001 and $311,000 in 2000. 52 NOTE 11 - SAVINGS PLAN AND OTHER RETIREMENT PLANS (CONTINUED) During 1999 the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed one year of service an opportunity to purchase shares of its common stock through payroll deductions, up to 10 percent of eligible compensation. Quarterly, participant account balances are used to purchase shares of stock at 85 percent of its fair market value on either the first or last trading day of each calendar quarter. There were 405,366, 643,280 and 232,325 shares purchased under the plan in 2002, 2001 and 2000, respectively. In addition, the Company adopted a Deferred Compensation Plan for Key Executives that permits the individuals to defer a portion of their annual salary or bonus for a period of at least five years. There is no effect on the Company's operating results since any amounts deferred under the plan are expensed in the period incurred. Amounts deferred have been included in accrued payroll and amounted to $4.9 million, $4.7 million and $4.1 million as of December 31, 2002, 2001 and 2000, respectively. NOTE 12 - COMMITMENTS Leases The Company leases office space under long-term operating leases expiring through 2008. As of December 31, 2002, approximate minimum rental commitments were as follows:
Year ending (in thousands) 2003 $ 4,192 2004 3,120 2005 1,968 2006 859 2007 455 Thereafter 12 --------- $ 10,606 =========
Office rentals are subject to escalations based on increases in real estate taxes and operating expenses. Rent expense, net of sublease income of approximately $480,000, $208,000 and $167,000 for December 31, 2002, 2001, and 2000, respectively, for operating leases approximated $5,320,000, $7,789,000 and $8,369,000 in the years ended December 31, 2002, 2001 and 2000, respectively. 53 NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) For the years ended December 31, 2002 and 2001, selected quarterly financial data is as follows:
QUARTERS FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- --------(IN THOUSANDS, EXCEPT PER SHARE DATA)------- 2002 Revenues $ 79,219 $ 77,318 $ 73,574 $ 67,004 Direct costs 58,192 56,570 52,865 48,554 Selling, general and administrative 26,459 22,452 22,347 20,085 Restructuring charges -- -- -- 2,515 Loss from operations (5,432) (1,704) (1,638) (4,150) Gain on sale of assets 3,570 -- -- 2,320 Net loss on investments (61) -- -- -- Interest income/(expense) - net 55 255 247 197 Loss before income taxes (1,868) (1,449) (1,391) (1,633) Income taxes/(benefit) (635) (493) (473) 3,470 Loss before cumulative effect of change in accounting principle (1,233) (956) (918) (5,103) Cumulative effect of change in accounting principle (29,861) -- -- -- Minority interest -- -- -- 35 Net loss $ (31,094) $ (956) $ (918) $ (5,068) Loss per share (basic and diluted): Before cumulative effect of change in accounting principle $ (0.04) $ (0.03) $ (0.03) $ (0.16) Cumulative effect of change in accounting principle $ (0.95) $ -- $ -- $ -- Net loss $ (0.99) $ (0.03) $ (0.03) $ (0.16)
54 NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
QUARTERS FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- --------(IN THOUSANDS, EXCEPT PER SHARE DATA)------- 2001 Revenues $ 106,481 $ 104,995 $ 94,212 $ 95,096 Direct costs 72,916 74,927 67,672 66,061 Selling, general and administrative 34,664 32,558 30,404 31,206 Amortization of intangibles 707 723 650 615 Restructuring charges -- -- -- 1,048 Write-down of assets held for sale -- 5,473 -- -- Loss from operations (1,806) (8,686) (4,514) (3,834) Gain/(loss) on sale of assets 438 -- (2,833) (802) Net gain on investments -- -- -- 90 Interest income/(expense) - net (175) 256 43 225 Loss before income taxes (1,543) (8,430) (7,304) (4,321) Income taxes benefit (525) (2,866) (2,483) (1,274) Net loss (1,018) (5,564) (4,821) (3,047) Loss per share: Basic $ (0.03) $ (0.17) $ (0.15) $ (0.10) Diluted $ (0.03) $ (0.17) $ (0.15) $ (0.10)
55 NOTE 14 - RESTRUCTURING CHARGES AND THE WRITE-DOWN OF ASSETS HELD FOR SALE During the fourth quarter of 2002, the Company recorded a restructuring charge of $2.8 million pertaining to 2002 office closings.
Remaining at December 31 Recorded Paid 2002 ---------- ---------- ---------- ------------(in thousands)----------- Severance: United States $ 133 $ (133) $ -- ---------- ---------- ---------- Lease Obligations: United States $ 2,714 $ (231) $ 2,483 ---------- ---------- ---------- Total $ 2,847 $ (364) $ 2,483 ========== ========== ==========
During the fourth quarter of 2001, the Company recorded a restructuring charge of $410,000 pertaining to 2001 office closings. In addition, during the second quarter of 2001, the Company recorded an additional $5.5 million in the write-down of assets held for sale to reduce the carrying amount of eB Networks to its estimated net realizable value. During the fourth quarter of 2000, the Company recorded restructuring charges of $3.5 million and a write-down of assets held for sale of $40.4 million. The Company's restructuring plan included the offering for sale of four businesses acquired between 1998 and 1999, including Princeton Softech, Inc., SELECT Software Tools division ("Select"), eB Networks and CHC International, Ltd (formerly Spargo Consulting PLC). In addition, the restructuring plan included the shutdown of Enterprise Solutions Group ("ESG") which was acquired in 1998, the closing of seven offices and the site reduction of two other IT Services offices. 56 NOTE 14 - RESTRUCTURING CHARGES AND THE WRITE-DOWN OF ASSETS HELD FOR SALE (CONTINUED) At December 31, 2000, the Company recorded a write-down of goodwill of $7.2 million for the shutdown of ESG. In addition, a non-cash charge writing down goodwill of $26 million and purchased software of $6.9 million was recorded, in the fourth quarter of 2000, in connection with the write down of assets held for sale to realizable value. The closing of IT Services' and Solutions' offices resulted in the termination of 90 employees with a severance charge of $1.3 million. As of December 31, 2002, $1,126,000 had been paid in severance to the terminated employees. The balance remaining at December 31, 2002 includes continuing rent on six properties terminating in 2003, 2004 and 2005 and severance for one individual with payments through January of 2003.
Remaining at Non-cash December Recorded Cash Charges Charges 31, 2000 Recorded -------- -------- ---------- -------- -------- RESTRUCTURING CHARGES: Severance: United States $ 1,267 $ (247) $ -- $ 1,020 $ -- -------- -------- ---------- -------- -------- Lease Obligations: United States $ 2,275 $ (675) $ -- $ 1,600 $ 410 -------- -------- ---------- -------- -------- Total Restructuring Charges $ 3,542 $ (922) $ -- $ 2,620 $ 410 ======== ======== ========== ======== ======== Remaining Non- Remaining at at Paid/ cash December Paid/ December Reversed Charges 31, 2001 Reversed 31, 2002 -------- -------- -------- -------- -------- RESTRUCTURING CHARGES: Severance: United States $ (777) $ -- $ 243 $ (242) $ 1 -------- -------- -------- -------- -------- Lease Obligations: United States $ (789) $ -- $ 1,221 $ (927) $ 294 -------- -------- -------- -------- -------- Total Restructuring Charges $ (1,566) $ -- $ 1,464 $ (1,169) $ 295 ======== ======== ======== ======== ======== Remaining at Non-cash December Recorded Cash Charges Charges 31, 2000 Recorded -------- -------- ---------- -------- -------- WRITE DOWN OF ASSETS HELD FOR SALE: eB Networks $ 26,171 $ -- $ (26,171) $ -- $ 5,473 Select 6,943 -- (6,943) -- -- -------- -------- ---------- -------- -------- Write-off of ceased operations - ESG Goodwill $ 7,248 $ -- $ (7,248) $ -- $ -- -------- -------- ---------- -------- -------- Total Write Down of Assets Held for Sale: $ 40,362 $ -- $ (40,362) $ -- $ 5,473 ======== ======== ========== ======== ======== Remaining Non- Remaining at at Paid/ cash December Paid/ December Reversed Charges 31, 2001 Reversed 31, 2002 -------- -------- -------- -------- -------- WRITE DOWN OF ASSETS HELD FOR SALE: eB Networks $ -- $ (5,473) $ -- $ -- $ -- Select -- -- -- -- -- -------- -------- -------- -------- -------- Write-off of ceased operations - ESG Goodwill $ -- $ -- $ -- $ -- $ -- -------- -------- -------- -------- -------- Total Write Down of Assets Held for Sale: $ -- $ (5,473) $ -- $ -- $ -- ======== ======== ======== ======== ========
57 NOTE 14 - RESTRUCTURING CHARGES (CONTINUED) During the third quarter of 1999, the Company recorded a restructuring charge of $6.4 million primarily related to the consolidating and closing of certain facilities, generally used for Year 2000 and other legacy related services, as well as attendant reduction of related staff levels. The provision included an accrued payment of approximately $4.0 million relating to the future costs associated with continuing rent and severance commitments at December 31, 1999. During the second quarter of 2000, the Company recorded a restructuring credit of $2.4 million. This credit resulted primarily from the earlier than expected occupancy of two abandoned properties that were part of the 1999 restructuring reserve and the reversal of an over accrual of employee severance benefits due to terminated employees in the UK and Canada. During the fourth quarter of 2001, the Company recorded a restructuring charge adjustment of $638,000 pertaining to the termination, by the sublessee, of the sublease contracts for closed offices included in the 1999 restructure charge. The balance remaining at December 31, 2002 includes continuing rents on one property with the lease terminating in 2005.
Balance Balance Balance Balance at at at at Dec. 31, Paid/ Dec. 31, Recorded Paid/ Dec. 31, Paid/ Dec. 31, 1999 Reversed 2000 Reversed 2001 Reversed 2002 ------- ------- ------- ------- ------- ------- ------- ------- Severance: United States $ 151 $ (33) $ 118 $ -- $ (118) $ -- $ -- $ -- Europe 352 (352) -- -- -- -- -- -- Canada 33 (33) -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total Severance $ 536 $ (418) $ 118 $ -- $ (118) $ -- $ -- $ -- ------- ------- ------- ------- ------- ------- ------- ------- Lease Obligations: United States $ 3,310 $(3,043) $ 267 $ 638 $ (279) $ 626 $ (138) $ 488 Canada 76 (76) -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total Lease Obligations $ 3,386 $(3,119) $ 267 $ 638 $ (279) $ 626 $ (138) $ 488 ------- ------- ------- ------- ------- ------- ------- ------- General Office Closure: Canada $ 81 $ (81) $ -- $ -- $ -- $ -- $ -- $ -- ------- ------- ------- ------- ------- ------- ------- ------- Total $ 4,003 $(3,618) $ 385 $ 638 $ (397) $ 626 $ (138) $ 488 ======= ======= ======= ======= ======= ======= ======= =======
58 NOTE 15 - MAJORITY-OWNED SUBSIDIARY On September 30, 2002, the Company announced that it had joined its existing HIPAA compliance, healthcare information technology and other compliance business practices with ZA Consulting LLC (ZAC) to form CHC Healthcare Solutions, LLC. Under the terms of the agreement, CHC has an 80% interest in the newly formed company. NOTE 16 - ACQUISITIONS On October 18, 1999, the Company acquired G. Triad Enterprises, Inc. ("G. Triad"), a New Jersey- based Internet / Intranet development firm, for approximately $14.5 million in cash and stock. The acquisition was accounted for as a purchase. The resulting goodwill of approximately $14 million was being amortized to operations over a 20-year period. Subsequently in 2000, the Company recorded an additional earnout of $500,000 to goodwill based on G. Triad meeting a projected revenue target. On May 6, 1999, the Company acquired all the common stock of Integrated Computer Management ("ICM"), a New Jersey-based solutions company that provides technology consulting, packaged software integration, customer software development, systems integration and advanced learning solutions, for stock, cash and promissory notes totaling approximately $17 million. The acquisition was accounted for as a purchase. The resulting goodwill of approximately $15 million was being amortized to operations over a 20-year period. Effective April 1, 2000 the assets of ICM were divided between three divisions of the Company, G. Triad, eB Networks and IT Services. Approximately $10 million of its net goodwill was allocated to eB Networks in 2000 and has been subsequently written off with the sale of eB Networks on September 10, 2001. 59 NOTE 16 - ACQUISITIONS (CONTINUED) On June 1, 1999, Princeton Softech Inc. ("Princeton"), a wholly-owned subsidiary of the Company, acquired the software products, intellectual property rights and certain other assets of SELECT Software Tools plc ("Select"), a London-based software firm, for approximately $8 million cash plus the assumption of certain liabilities such as severance, certain payments due to a vendor under a contract that the Company expected to derive no future benefit, and certain other assumed liabilities in connection with its acquisition. These liabilities had the effect of increasing the value of the intangible assets (purchased software) that were acquired. The amount of such liabilities aggregated $3,100,000 of which approximately $1,800,000 had been paid prior to December 31, 1999. Substantially all of the accrued severance (which was for employees that had been made redundant upon acquisition in the United Kingdom) had been paid prior to December 31, 1999. The remaining accrued liabilities of approximately $1,300,000 consist primarily of payments due pursuant to the contract discussed above. The acquisition was accounted for as a purchase. The cost of the purchased software and other intangibles approximates $12 million, and was being amortized to operations over a five-year period. During the fourth quarter of 2000 the Company made the decision to sell Select. On April 17, 2001, the Company sold Select to Aonix (see Note 3). On September 25, 1998, the Company acquired the assets of Enterprise Solutions Group, LLC ("ESG"), a Cincinnati, Ohio-based technology organization that provides training and educational services as well as consulting services for Global 1000 companies. The acquisition was accounted for as a purchase. The total adjusted purchase price was approximately $8,883,000 in cash and common stock which was being amortized to operations over a 20-year period. Approximately $1,550,000 was to be paid out in two payments, approximately $1 million was paid in January of 2000 and the remaining $550,000 was paid in January of 2001. The Company has shut down these operations and has written off the remaining net goodwill of $7.2 million, which is a component of the restructure charge. On August 4, 1998, the Company acquired the assets of RPM Consulting ("RPM"), a Maryland based provider of network consulting services, specializing in architecting, designing and upgrading large enterprise networks. The subsidiary subsequently changed its name in 2000 to eB Networks. The purchase agreement was for a combination of cash and common stock totaling approximately $27,700,000, and two earnout payments (totaling $2.2 million) based on pretax profit margins, which were paid during 1999. The acquisition was accounted for as a purchase and was being amortized to operations over a 20-year period. In the fourth quarter of 2000, the Company made the decision to sell eB Networks. On September 10, 2001, the Company sold the assets of eB Networks to Inrange Technologies (see Note 3). On July 2, 1998, the Company's Canadian subsidiary acquired the net assets of Infomatics Search Group ("ISG"), a Toronto, Canada-based information technology service firm, offering both professional staffing and career placement services. The acquisition was accounted for as a purchase and was being amortized to operations over a 20-year period. The total purchase price was approximately $21,600,000 in cash. The purchase agreement includes an earnout clause equal to two times increases in prior period adjusted earnings (as defined in the purchase agreement) to be earned in 1999 and 2000. During 2000, the Company recorded $2.9 million as an addition to goodwill based on meeting the earnout. There were no earnout adjustments for 1999. 60 NOTE 16 - ACQUISITIONS (CONTINUED) On June 24, 1998, the Company acquired all of the common stock of Spargo Consulting PLC ("Spargo"), an information technology consultancy service provider, organized under the laws of the United Kingdom for 1,887,000 shares of Computer Horizons stock. This transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for the periods presented have been restated to include the accounts of Spargo. On January 31, 2001, the Company sold the stock of Spargo (see Note 3). On February 27, 1998, the Company acquired all of the common stock of Princeton Softech, Inc. ("Princeton") in exchange for 954,213 shares of Computer Horizons stock. Princeton specializes in relational databases, data synchronization, intelligent data migration and data management tools, and is based in Princeton, New Jersey. This transaction was accounted for as an immaterial pooling of interests and the results of Princeton have been included since January 1, 1998. On March 25, 2002 the Company sold Princeton to Apax Partners, Inc. and LLR Partners (see Note 3). NOTE 17 - SUBSEQUENT EVENTS (UNAUDITED) Impact of Economic Stimulus Act on Income Tax Refund Claim On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 (the "Act") was enacted into law. This Act contains many economic and tax incentives, including the extension of the carryback period for losses arising in years ending during 2001 and 2002 to five years from the previous two year carryback rule. As a result, the Company's tax refund claim of approximately $10 million at December 31, 2001 was increased to approximately $30 million. The additional refund amount of $20 million was received in January 2003. Sale of Solutions UK On February 14, 2003, the Company sold the business and net assets of Computer Horizons e-Solutions (Europe) Limited, ("Solutions UK") to Systems Associates Limited for 92,822 British Sterling Pounds (approximately US$ 145,500). Purchase of Westfield - India On January 31, 2003, the Company acquired the IT Solutions operations of Global Business Technology Solutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group of companies and Westfield Services, Inc., a subsidiary of Westfield Financial Corporation. The outsourcing facility and its IT professionals are located in Chennai (Madras), India. This transaction was completed for $400,000. Stock Option Exchange Program On January 8, 2003, the Company commenced a tender offer to its employees to exchange stock options granted under the Company's 1994 Incentive Stock Option and Appreciation Plan with an exercise price of $10.01 or greater for new stock options with a new exercise price. The tender offer expired on February 10, 2003, and 1,635,526 options were accepted for exchange. Please see Item 12 on Form 10-K - Security Ownership of Certain Beneficial Owners and Management. 61 NOTE 17 - SUBSEQUENT EVENTS (UNAUDITED) Purchase of Treasury Stock Subsequent to December 31, 2002, the Company has purchased 211,800 shares of its common stock at an aggregate cost of approximately $694,000. Management Changes On March 13, 2003, John J. Cassese, the Company's CEO, President and Chairman, informed the Board that he has taken a leave of absence as CEO and President and resigned his position as Director and Chairman of the Board as a result of being informed that the Justice Department obtained an indictment relating to Mr. Cassese's June 1999 purchase and sale of an unrelated company's shares. The Board has named William J. Murphy to the position of Acting President and CEO, appointed Thomas J. Berry Chairman of the Board and named Michael J. Shea to the position of acting Chief Financial Officer. NOTE 18 - RESCISSION OFFER From April 2001 through January 2003, the sale of shares of the Company's common stock pursuant to the Employee Stock Purchase Plan were not exempt from registration or qualification under federal securities laws. As a result, the Company may have failed to comply with the registration or qualification requirements of federal and applicable state securities laws because the Company did not register or qualify these stock issuances under either federal or applicable state securities laws. As a result the Company intends to make a rescission offer to all those persons who purchased shares of common stock pursuant to the Employee Stock Purchase Plan during the affected periods. The rescission offer will be made pursuant to a registration statement filed under the Securities Act and pursuant to applicable state securities laws. In this rescission offer, the Company is offering to repurchase the shares subject to our rescission offer for the price paid per share plus interest from the date of purchase until the rescission offer expires, at the current statutory rate per year mandated by the state in which the shares were purchased. The rescission offer will expire approximately 30 days after the effective date of the registration statement. Assuming all of the shares subject to the rescission offer (approximately 659,000) are tendered in the rescission offer, the aggregate purchase price, excluding interest is estimated to be approximately $1.8 million. This contingency payment is considered remote by the Company as the current price of the stock is above the price at which the shares would be repurchased. 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. 62 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 2003 Annual Meeting of Shareholders which is expected to be filed with the Securities and Exchange Commission on or before April 10, 2003 (the "2003 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." (c) The Company's Board of Directors has designated Mr. Earl Mason as the Audit Committee Financial Expert. Mr. Mason is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934. 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 2003 Proxy Statement. The following table sets forth the compensation paid by the Company for the fiscal years indicated, to the Chief Executive Officer and to each of the Company's other executive officers (together, the "named executive officers"), as of December 31, 2002. On March 13, 2003, the Company issued a press release reporting that John J. Cassese, its CEO, President and Chairman, has taken a leave of absence as CEO and President and resigned his position as Director and Chairman of the Board as a result of being informed that the Justice Department obtained an indictment relating to the June 1999 purchase and sale of an unrelated company's shares. The Board has name William J. Murphy to the position of President and CEO, appointed Thomas J. Berry Chairman of the Board and named Michael J. Shea to the position of Chief Finanical Officer. SUMMARY COMPENSATION TABLE as of December 31,
Long-Term Compensation ------------------------- Annual Compensation Awards Payouts ---------------------------------- --------- --------- Other Securities All Annual Restricted Underlying Other Compen- Stock Options/ LTIP Compen- Year Salary Bonus sation Awards SARs Payments sation(1) ---- -------- ------- ------- ---------- ---------- -------- ---------- John J. Cassese 2002 $475,000 $ -- -- -- 100,000 -- $ 237,334 Chairman of the Board, 2001 475,000 -- -- -- 75,000 -- 256,644 President and Chief Executive Officer 2000 475,000 55,000 -- -- 75,000 -- 256,269 William J. Murphy 2002 $290,000 $ -- -- -- 75,000 -- $ 4,580 Executive Vice President 2001 290,000 -- -- -- 50,000 -- 2,580 Chief Financial Officer and Secretary 2000 290,000 25,000 -- -- 50,000 -- 2,880 Michael J. Shea 2002 $150,000 $ -- -- -- 30,000 -- $ 3,180 Vice President and Controller 2001 150,000 25,000 -- -- 30,000 -- 3,180 2000 150,000 17,500 -- -- 20,000 -- 3,065 Kristin Evins 2002 $ 77,600 $ -- -- -- 5,000 -- $ 1,467 Assistant Controller 2001 77,600 8,000 -- -- 5,000 -- 1,460 2000 72,600 6,000 -- -- 2,000 -- 679
- -------------------- (1) In 2001, the Company paid the premiums on a whole life insurance policy of $80,000, a universal life insurance policy of $800,000 and a term life insurance policy of $150,000 for Mr. Cassese. The Company also paid the premium on a $3,000,000 split-dollar life insurance policy on the joint lives of Mr. Cassese and his spouse and a split-dollar survivorship policy. In connection with the enactment of the Sarbanes-Oxley Act, Company payments were discontinued. In addition, the Company paid the premiums on a $150,000 term life insurance policy for both Mr. Murphy and Mr. Shea. Under each such insurance policy, the insured has the right to designate the beneficiaries. The Company maintains a defined contribution (401K) savings plan and contributes $.50 for every dollar contributed by all participating employees up to 4% of each employee's salary deferral. The amounts for all other compensation in the year 2002 were as follows: Mr. Cassese Flex premium joint insurance, $179,500; car allowance, $25,440; tax preparation fees, $15,000; Universal Life Insurance, $10,000; 401K match, $5,500; Whole life insurance, $1,714 and term-life insurance, $180. Mr. Murphy 401K match, $4,400 and term-life insurance, $180. Mr. Shea 401K match, $3,000 and term-life insurance, $180. Ms. Evins 401K match, $1,467. The Company entered into an executive compensation exchange program with Mr. Cassese. Under the program, Mr. Cassese waived payments of $2,000,000 due to be made to him under the non-qualified supplemental retirement agreement, except for a $2,000,000 payment to be made in the event that a change of control occurs. In conjunction with this waiver, the Company entered into an arrangement to purchase a life insurance policy for the benefit of a trust established by Mr. Cassese. The cost of the life insurance policies to the Company has been actuarially determined and will not exceed the after-tax cost the Company expected to incur in connection with the payments under the non-qualified supplemental retirement agreement. In addition, the Company has non-qualified supplemental retirement benefit agreements with Messrs. Murphy and Shea. Under their agreements Messrs, Murphy and Shea will be entitled to receive $1,000,000 each, upon retirement from the Company at age 65. If Mr. Murphy or Mr. Shea retires from continuous employment with the Company prior to age 65 as a result of total and permanent disability, he will be deemed to have continuously employed by the Company until age 65 for purposes of his agreement. If Mr. Murphy or Mr. Shea terminates his employment with the Company prior to reaching age 65, other than as a result of death or total and permanent disability, he will be entitled to receive, upon reaching age 65, a retirement benefit based on accrual and vesting formulas set forth in his respective agreement. Had either Mr. Murphy or Mr. Shea terminated his employment as of the date of this Proxy Statement or during the year of 2002, Mr. Murphy's accrued and vested benfit would be $250,000 and Mr. Shea's accrued and vested benefit would be $34,500. If Mr. Murphy or Mr. Shea were to die prior to age 65, while still in the employ of the Company, his beneficiaries would be entitled to receive a lump sum benefit equal to the greater of his accrued and vested benefit or $500,000. Benefits payable upon retirement may be paid in a lump sum or in annual installments at the discretion of the beneficiary. In the event that a Change of Control occurs, Mr. Murphy's and Mr. Shea's entitlements will immediately vest and become payable. 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 2003 Proxy Statement. 63 The following table summarizes information about the Company's equity compensation plans as of December 31, 2002. Equity Compensation Plan Information
Number of securities remaining available for Number of securities to be future issuance under equity issued upon exercise of Weighted-average exercise compensation plans outstanding options, price of outstanding (excluding securities Plan Category warrants and rights options warrants and rights reflected in Column (a) - ----------------------------------------------------------------------------------------------------------------------- (a) (b) (c) Equity compensation plans approved by security holders 4,527,000 7.93 2,370,000 (1) (2) (3) Equity compensation plans not approved by security holders -0- -0- -0- TOTAL 4,527,000 7.93 2,370,000
(1) Consists of 2,036,000 shares of the Company's common stock reserved under the Company's 1994 Incentive Stock Option and Appreciation Plan, 334,000 shares of the Company's common stock reserved under the Company's 1991 Directors' Stock Option Plan. (2) On March 28, 2003, the Company's Board of Directors reserved an additional 3,500,000 shares of the Company's common stock under the Employee Stock Purchase Plan, subject to stockholder approval. (3) On January 8, 2003, the Company commenced a tender offer to its employees to exchange all options granted under the Company's 1994 Incentive Stock Option and Appreciation Plan with an exercise price of $10.01 or greater for new stock options with a new exercise price. For options priced between $10.01 and $14.99 per share, for every two options surrendered, one new option will be granted. The tender offer expired on February 10, 2003 and on February 11, 2003, the Company accepted for exchange and cancelled options to purchase 1,635,526 shares of the Company's common stock. A total of 612,850 options with an exercise price greater than or equal to $15.00 per share were accepted for exchange, representing approximately 37% of the options that were tendered. Of these options 63% were tendered by officers of the Company. A total of 1,022,676 options with an exercise price of between $10.01 and $14.99 were accepted for exchange, representing approximately 63% of the options that were tendered of these options 24% were tendered by officers of the Company. The Company anticipates that it will grant 715,621 new options with new exercise prices on or about August 12, 2003, which is six months and one day after the cancellation of the original options. 64 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None Item 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Within 90 days prior to the filing of this yearly report on Form 10-K, the Company's President and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures and concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its officers, as appropriate to allow timely decisions regarding required disclosure, and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Changes in Internal Controls The Company's President and Chief Financial Officer have also concluded there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 65 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules 1. Consolidated financial statements - Report of independent certified public accountants on the consolidated financial statements - Consolidated balance sheets as of December 3l, 2002 and 2001 - Consolidated statements of operations for each of the three years in the period ended December 31, 2002 - Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 2002 - Consolidated statements of cash flows for each of the three years in the period ended December 31, 2002 - Notes to consolidated financial statements 2. Schedule II - Valuation and qualifying accounts for the years ended December 31, 2002, 2001 and 2000. 66 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) 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. List of Exhibits
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.
67 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. 4(f) Amendment No. 3 dated as of Exhibit 4.1 to Form 8-K July 13, 1999 to Rights dated July 13, 1999. Agreement. 10(a) Employment Agreement dated as Exhibit 10(a) to Form 10K for of February 16, 1990 between the the year ended December 31, Company and John J. Cassese. 1989. 10(b) Employment Agreement dated as Exhibit 10(g) to Form S-3 dated of January 1, 1997 between the August 14, 1997. Company and William J. Murphy. 10(c) Employment Agreement dated as Exhibit 10(c) to Form 10K for of March 6, 1997 between the the year ended December 31, Company and Michael J. Shea. 1996. 10(d) 1991 Directors' Stock Option Exhibit 10(g) to Form 10-K Plan, as amended. for the year ended December 31, 1994. 10(e) 1994 Incentive Stock Option and Exhibit 10(h) to Form 10K Appreciation Plan. for the fiscal year ended December 31, 1994. 10(f) $15,000,000 Discretionary Line of Exhibit 10(h) to Form S-3 Credit payable to Chase Manhattan dated August 14, 1997. Bank dated as of June 30, 1998. 10(g) $10,000,000 Discretionary Line Exhibit 10(h) to Form 10K of Credit from PNC Bank dated for the fiscal year ended as of June 5, 1998. December 31, 1996.
68 10(h) 1999 Employee Stock Purchase Exhibit 99.1 to Form S8 dated Plan. March 17, 1999. 10 (i) Amendment to the employment Exhibit 10(i) to Form 10K agreement dated as of March 24, for the fiscal year ended 2000 between the Company and December 31, 1999. William J. Murphy. 10 (j) $15,000,000 Discretionary Line of Exhibit 10(j) to Form 10K Credit payable to Chase Manhattan for the fiscal year ended Bank dated as of June 30, 1998, as December 31, 1999. amended on March 15, 2000 (increased to 30,000,000). 10 (k) $20,000,000 Discretionary Line of Exhibit 10(k) to Form 10K Credit payable to Chase Manhattan for the fiscal year ended Bank dated as of March 20, 2001. December 31, 2000. 10 (l) $40,000,000 Asset-Based Lending Exhibit 10(l) to Form 10K Agreement payable to CIT dated as of for the fiscal year ended July 31, 2001. December 31, 2001 10(m) Offer to Exchange Outstanding Exhibit (a)(1) to Schedule Options, dated as of January 8, 2003 TO, dated January 8, 2003, as amended on February 14, 2003. 10(n) Amendment to the $40,000,000 Exhibit 10(n) to Form 10K for the Asset-Based Lending Agreement fiscal year ended December 31, 2002 Payable to CIT dated as of February 14, 2003 10(o) Non-qualified supplemental retirement Exhibit 10(o) to Form benefit agreement for William J. Murphy 10-K for the fiscal year ended December 31, 2003. 10(p) Non-qualified supplemental retirement Exhibit 10(p) to Form benefit agreement for Michael J. Shea 10-K for the fiscal year ended December 31, 2003. 10(q) First Amendment to the non-qualified Exhibit 10(q) to Form supplemental retirement benefit agreement 10-K for the fiscal year for William J. Murphy ended December 31, 2003. 10(r) First Amendment to the non-qualified Exhibit 10(r) to Form supplement retirement benefit agreement 10-K for the fiscal year for Michael J. Shea ended December 31, 2003. 10(s) Summary of Executive Compensation Filed Herewith Exchange Program with John J. Cassese 21 List of Subsidiaries. Exhibit 21 to Form 10K for the fiscal year ended December 31, 2002. 23 Consent of Grant Thornton LLP, Filed Herewith Independent Public Accountants. 31.1 CEO Certification required by Rule 13a- Filed Herewith 14(a)/15d-14(a) under the Securities Exchange Act of 1934. 31.2 CFO Certification required by Rule 13a- Filed Herewith 14(a)/15d-14(a) under the Securities Exchange Act of 1934. 32.1 CEO Certification pursuant to 18 U.S.C. Filed Herewith Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 CFO Certification pursuant to 18 U.S.C. Filed Herewith Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
4. Reports on form 8-K during the fourth quarter of fiscal 2002. No reports on Form 8-K were filed during the fourth quarter of fiscal 2002. 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER HORIZONS CORP. Date: December 30, 2003 By: /s/ William J. Murphy ------------------------- William J. Murphy, President, CEO (Principal Executive Officer) and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment 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: December 30, 2003 By: /s/ William J. Murphy ------------------------- William J. Murphy, President, CEO (Principal Executive Officer) and Director Date: December 30, 2003 By: /s/ Michael J. Shea ----------------------- Michael J. Shea, Vice President and CFO (Principal Financial Officer) Date: December 30, 2003 By: /s/ Kristin Evins --------------------- Kristin Evins Controller (Principal Accounting Officer) Date: December 30, 2003 By: /s/ Earl Mason ----------------------- Earl Mason, Chairman of the Board and Director Date: December 30, 2003 By: /s/ William M. Duncan ------------------------- William M. Duncan, Director Date: December 30, 2003 ------------------------- Eric P. Edelstein, Director Date: December 30, 2003 By: /s/ William J. Marino ------------------------- William J. Marino, Director Date: December 30, 2003 --------------------- Karl L. Meyer, Director Date: December 30, 2003 ----------------------------- Robert A. Trevisani, Director 70 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 2002, 2001 and 2000
Column A Column B Column C Column D Column E Balance at beginning Charged to cost Deductions - Balance at end Description of period and expenses describe of period Year ended December 31, 2002 Allowance for doubtful accounts $ 7,542,000 4,996,000 4,842,000 (1) $ 7,696,000 Deferred tax asset valuation $ 3,340,000 6,949,000 -- $ 10,289,000 2002 Restructure Reserve $ - 2,847,000 364,000 (3) $ 2,483,000 2000 Restructure Reserve $ 1,464,000 -- 1,169,000 $ 295,000 1999 Restructure Reserve $ 626,000 -- 138,000 $ 488,000 Year ended December 31, 2001 Allowance for doubtful accounts $ 2,702,000 3,397,000 (1,443,000) (1) $ 7,542,000 Deferred tax asset valuation $ 2,727,000 613,000 -- $ 3,340,000 2000 Restructure Reserve $ 2,620,000 410,000 (1,566,000) $ 1,464,000 1999 Restructure Reserve $ 385,000 638,000 397,000 $ 626,000 Year ended December 31, 2000 Allowance for doubtful accounts $ 5,819,000 26,452,000 29,569,000 (1) $ 2,702,000 Deferred tax asset valuation $ - 2,727,000 -- $ 2,727,000 2000 Restructure Reserve $ - 3,542,000 (922,000) $ 2,620,000 1999 Restructure Reserve $ 4,003,000 1,242,000 (2,376,000) (2) $ 385,000
Notes (1) Uncollectible accounts written off, net of recoveries. (2) Credit recorded resulting from earlier than expected subleasing of properties. (3) Includes charge for office closings 71 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS ON SCHEDULE II Board of Directors and Shareholders Computer Horizons Corp. In connection with our audit of the consolidated financial statements of Computer Horizons Corp. and Subsidiaries referred to in our report dated February 25, 2003, which is included in the 2002 Annual Report to Shareholders on Form 10-K, we have also audited Schedule II for each of the years ended December 31, 2002, 2001 and 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP - ---------------------- Grant Thornton LLP Edison, New Jersey February 25, 2003 72 EX-10.(S) 3 a2123732zex-10_s.txt EXHIBIT 10(S) Exhibit 10(S) Summary of Executive Compensation Exchange Program Between Computer Horizons Corp. And John J. Cassese Dated: March 1999 Computer Horizons Corp. (the "Company") maintains a non-qualified supplemental executive retirement plan ("SERP") in which certain highly compensated employees are eligible to participate. In March 1999, the Company entered into an arrangement with its then Chief Executive Officer, John J. Cassese whereby Mr. Cassese agreed to forfeit his SERP benefits in the amount of $2,000,000 which would have been payable at age 65 in exchange for the Company entering into a split dollar life insurance arrangement with Mr. Cassese's life insurance trust. The split dollar life insurance program was designed as survivorship variable universal life and had a face amount of $6,700,000. The Company would have paid 7 annual premiums of $179,500. Upon the death of the second of Mr. Cassese or Mr. Cassese's spouse, the Company would have the cost of the premiums paid by the Company repaid from the proceeds of the life insurance. During 2002, the Company discontinued making premium payments under the split dollar life insurance policy. 2 EX-23 4 a2123732zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated February 25, 2003, accompanying the consolidated financial statements and schedule included in the Annual Report of Computer Horizons Corp. on Form 10-K/A for the year ended December 31, 2002. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Computer Horizons Corp. on Forms S-3 (File No. 333-33665, effective September 24, 1997, File No. 333-44417, effective February 27, 1998, and File No. 333-48877, effective March 30, 1998) and on Forms S-8 (File No. 033-41726, effective July 16, 1991, File No. 033-59437, effective May 18, 1995, File No. 033-64763, effective December 5, 1995, File No. 333-60751, effective August 5, 1998, File No. 333-74579, effective March 17, 1999 and File No. 333-104126 effective March 28, 2003). /s/ GRANT THORNTON LLP ------------------------------ GRANT THORNTON LLP EDISON, NEW JERSEY DECEMBER 23, 2003 EX-31.1 5 a2123732zex-31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, WILLIAM J. MURPHY, certify that: 1. I have reviewed this annual report on Form 10-K of COMPUTER HORIZONS; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 30, 2003 /s/ William J. Murphy - --------------------- WILLIAM J. MURPHY Chief Executive Officer 73 EX-31.2 6 a2123732zex-31_2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATIONS I, MICHAEL J. SHEA, certify that: 1. I have reviewed this annual report on Form 10-K of COMPUTER HORIZONS; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 30, 2003 /s/ Michael J. Shea - ------------------- MICHAEL J. SHEA Chief Financial Officer 74 EX-32.1 7 a2123732zex-32_1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Computer Horizons Corp. (the "Company") for the year ended December 31, 2002 (the "Annual Report"), I, William J. Murphy, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 30, 2003 /s/ William J. Murphy ---------------------- WILLIAM J. MURPHY Chief Executive Officer EX-32.2 8 a2123732zex-32_2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Annual Report on Form 10-K of Computer Horizons Corp. (the "Company") for the year ended December 31, 2002 (the "Annual Report"), I, Michael J. Shea, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 30, 2003 /s/ Michael J. Shea --------------------- MICHAEL J. SHEA Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----