<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
[ ] 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: 0-28166
-------
WHITTMAN-HART, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3797833
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
311 South Wacker Drive, Suite 3500, Chicago, Illinois 60606-6618
----------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(312) 922-9200
-------------
(Registrant's telephone number, including area code)
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 [ ]
As of May 1, 1999, there were 53,150,203 shares of common stock of the
registrant outstanding.
<PAGE>
WHITTMAN-HART, INC.
FORM 10-Q
For the quarterly period ended March 31, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 3
and December 31, 1998 (unaudited)
Consolidated Statements of Earnings and Comprehensive Income
for the three months ended March 31, 1999
and March 31, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure 13
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
INDEX TO EXHIBITS 14
SIGNATURES 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITTMAN-HART, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,745,531 $ 49,656,020
Short-term investments 78,715,973 70,478,919
Trade accounts receivable, net of allowance for
doubtful accounts of $1,769,473 and $1,797,631 in 1999
and 1998, respectively 64,346,227 56,321,881
Prepaid expenses and other current assets 5,629,192 3,858,396
Notes and interest receivable 225,307 168,847
Deferred income taxes 1,165,241 988,457
------------- -------------
Total current assets 189,827,471 181,472,520
------------- -------------
Property and equipment, net 43,375,205 34,862,122
Long-term investments 34,459,968 30,195,927
Deferred income taxes - 79,500
Other assets 1,269,809 1,256,106
------------- -------------
Total assets $ 268,932,453 $ 247,866,175
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,250,924 $ 1,988,652
Accrued compensation and related costs 24,932,284 21,610,028
Income taxes payable - 2,724,015
Accrued expenses and other liabilities 9,208,297 8,820,311
Current maturities of long-term debt - 447,502
------------- -------------
Total current liabilities 37,391,505 35,590,508
------------- -------------
Deferred income taxes 150,841 879,226
Deferred rent 1,902,929 1,671,978
Deferred revenue 64,956 37,720
Other liabilities 15,678 -
Long-term debt, less current maturities - 229,478
------------- -------------
Total liabilities 39,525,909 38,408,910
------------- -------------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares
authorized, none issued and outstanding
Common stock, $.001 par value; 75,000,000 authorized - -
52,850,000 and shares issued and 52,082,439
outstanding in 1999 and 1998, respectively 52,850 52,082
Additional paid-in capital 187,998,961 173,694,055
Retained earnings 42,024,665 36,476,778
Deferred compensation (769,554) (848,628)
Accumulated other comprehensive income 99,622 82,978
------------- -------------
Total stockholders' equity 229,406,544 209,457,265
------------- -------------
Total liabilities and stockholders' equity $ 268,932,453 $ 247,866,175
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WHITTMAN-HART, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
MARCH 31, MARCH 31,
1999 1998
------------- -------------
<S> <C> <C>
Revenues $ 104,092,168 $ 64,420,137
Cost of services 59,076,922 37,987,448
------------- -------------
Gross profit 45,015,246 26,432,689
Costs and expenses:
Selling 4,243,387 2,312,554
Recruiting 2,548,440 2,182,302
General and administrative 26,959,063 16,784,773
Business combination costs 2,652,034 383,044
------------- -------------
Total costs and expenses 36,402,924 21,662,673
------------- -------------
Operating income 8,612,322 4,770,016
Other income (expense):
Interest expense (13,465) (42,253)
Interest income 1,736,629 920,955
Other, net - 8,249
------------- -------------
Total other income 1,723,164 886,951
------------- -------------
Income before income taxes 10,335,486 5,656,967
Income taxes:
Income tax 4,775,960 2,398,581
Initial deferred income tax - 296,048
------------- -------------
Total income taxes 4,775,960 2,694,629
------------- -------------
Net income $ 5,559,526 $ 2,962,338
Other comprehensive income-
Foreign currency translation
adjustments 46,490 789
Unrealized appreciation of
available-for-sale securities (29,846) -
------------- -------------
Comprehensive income $ 5,576,170 $ 2,963,127
------------- -------------
------------- -------------
Basic earnings per share $ 0.11 $ 0.06
------------- -------------
------------- -------------
Diluted earnings per share $ 0.09 $ 0.06
------------- -------------
------------- -------------
Weighted average number of
common shares outstanding 52,345,712 47,109,030
------------- -------------
------------- -------------
Weighted average number of
common and common equivalent
shares outstanding 60,042,228 51,295,050
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WHITTMAN-HART, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,559,526 $ 2,962,338
Adjustments to reconcile income to net income to cash provided by (used in)
operating activities:
Depreciation and amortization 1,309,326 807,430
Deferred income taxes (819,642) (599,107)
Gain (loss) on sales of investments 2,677 (9,011)
Stock-based non-cash compensation expense 1,089,835 -
Unrealized holding loss on investments 29,846 -
Changes in assets and liabilities:
Trade accounts receivable, net (8,024,346) (7,239,107)
Prepaid expenses and other current assets (757,907) (242,135)
Other assets (13,703) (131,305)
Accounts payable 1,262,272 779,790
Accrued compensation and related costs 3,322,256 (143,524)
Income taxes 3,144,955 1,267,635
Accrued expenses and other liabilities 387,986 (270,969)
Other, net 213,921 (108,248)
------------ ------------
Net cash provided by (used in) operating activities 6,707,002 (2,926,213)
------------ ------------
Cash flows from investing activities:
Purchases of investments (32,425,964) (41,002,427)
Sales and maturities of investments 19,843,929 46,010,122
Purchases of property and equipment (9,708,134) (4,330,155)
------------ ------------
Net cash (used in) provided by investing activities (22,290,169) 677,540
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt - 105,633
Proceeds from exercise of stock options 6,333,981 4,801,914
Payment of long-term debt (661,303) (227,697)
S corporation distributions - QCC - (674,670)
------------ ------------
Net cash provided by financing activities 5,672,678 4,005,180
------------ ------------
Net increase (decrease) in cash and cash equivalents (9,910,489) 1,756,507
Cash and cash equivalents at beginning of period 49,656,020 10,221,887
------------ ------------
Cash and cash equivalents at end of period $ 39,745,531 $ 11,978,394
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Interest paid $ 13,465 $ 44,924
Income taxes paid 2,528,570 1,210,150
Supplemental disclosure of noncash financing activities
Tax benefit related to stock plans 6,881,859 3,419,978
Issuance of common stock for business combinations (shares) - 300,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Whittman-Hart, Inc. (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles. The
information furnished herein includes all adjustments which are, in the
opinion of management, necessary for a fair presentation of results for these
interim periods, and all such adjustments are of a normal recurring nature.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999.
As described in Note 3, the Company acquired The Waterfield Technology
Group ("Waterfield") in March 1999. The merger was accounted for under the
pooling-of-interests method of accounting and, accordingly, the historical
financial statements of the Company have been restated to include the
financial position and results of operations of Waterfield for all periods
presented.
These financial statements should be read in conjunction with the
Company's historical audited consolidated financial statements and notes
thereto for the year ended December 31, 1998, included in the Annual Report
on Form 10-K filed by the Company with the Securities and Exchange Commission.
2. COMPUTATION OF EARNINGS PER SHARE
Net income and earnings per share are computed in accordance with
Financial Accounting Standards No. 128, "Earnings per share" ("Statement 128").
3. BUSINESS COMBINATIONS
During March 1998, the Company issued 600,000 shares of its common
stock in exchange for all of the outstanding capital stock of QCC, Inc.
("QCC"). Headquartered in the Boston metropolitan area, QCC's approximately
75 professionals provide the following services: package software evaluation;
business process reengineering; data warehousing; implementation of software
packages developed by SSA-Registered Trademark-, Oracle-Registered
Trademark-, and JDEdwards-Registered Trademark-; application development for
AS/400 and client server applications; and Year 2000 compliance services.
This business combination has been accounted for as a pooling-of-interests
combination. The stockholders' equity and operations of QCC were not material
in relation to those of the Company. As such, the Company has recorded the
combination without restating prior periods' consolidated financial
statements to reflect the pooling-of-interests combination. In connection
with the acquisition of QCC, the Company recorded deferred income tax expense
related to the establishment of deferred income tax assets and liabilities
which arose due to the change in tax status from an S corporation to a
C corporation.
6
<PAGE>
During July 1998, the Company issued 638,508 shares of its common stock
in exchange for all the outstanding capital stock of North Central Consulting
(" NCC"), a Minneapolis-based IT services firm. The transaction was accounted
for as a pooling-of-interests combination and, accordingly, the Company's
historical consolidated financial statements have been restated to include
the accounts and results of operations of NCC for all periods presented.
Headquartered in Minnetonka, Minnesota, with a satellite office in Milwaukee,
NCC's approximately 120 professionals specialize in providing ERP software
implementations, custom application development and internet-enabled
solutions to middle-market manufacturing, distribution and financial services
companies, as well as some divisions and departments of Fortune 500
companies. The combination of Whittman-Hart's opened Minneapolis branch with
approximately 40 employees and NCC's four-year-old office accelerates
Whittman-Hart's ability to provide a full-suite of IT services to its target
customer base
On March 9, 1999, the Company acquired all of the outstanding stock of
the Waterfield Technology Group ("Waterfield") a Boston-based IT services
firm and strategic business partner of Kurt Salmon and Associates, a global
consulting firm, in exchange for 576,074 shares of the Company's common stock
for all of the outstanding stock of the Waterfield. Headquarted in Lexington,
Massachusetts, with a branch office in Parsippany, New Jersey, Waterfield's
approximately 90 employees specialize in client server and internet-enabled
application development. They have extensive experience with Java and
Java-based tools, Powerbuilder and the Microsoft suite of products. This
business combination was accounted for as a pooling-of-interests combination
and, accordingly, the Company's historical consolidated financial statements
have been restated to include the accounts and results of operations of
Waterfield for all periods presented.
4. STOCKHOLDERS' EQUITY
On May 8, 1998, the Company completed an offering of its common
stock in which an additional 3,400,000 shares were sold by the Company,
resulting in net proceeds to the Company of $69.6 million.
In July 1998, the Board of Directors approved a 2-for-1 split of the
Company's common shares. Shareholders received one additional common share
for every share held on the record date of July 12, 1998. All of the per
share data, as appropriate, reflect this split.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Whittman-Hart's revenues are generated primarily from professional
fees, which are generally billed at a contracted hourly rate and are
recognized as services are provided. Over the last three fiscal years, at
least 90% of the Company's revenues have been generated on a time and
materials basis. The Company's services may also be provided on a fixed-bid
or fee-capped basis, in which case revenues are recognized by the percentage
of completion method. These arrangements subject the Company to the risk of
cost overruns; however, historically, such overruns have not been
significant. The Company typically bills on a weekly basis to monitor client
satisfaction and manage its outstanding accounts receivable balances. The
Company's most significant cost is project personnel cost, which consists of
consultant salaries and benefits. Thus, the Company's financial performance
is primarily based upon billing margin (billable hourly rate less the
consultant's hourly cost) and personnel utilization rates (billable hours
divided by paid hours).
To date, the Company has been able to maintain its billing margins by
offsetting increases in consultant salaries with increases in its hourly
rates. Because most of the Company's engagements are on a time and materials
basis, increases in its cost of services are generally passed along to the
Company's clients and, accordingly, do not have a significant impact on the
Company's financial results. In addition, the Company attempts to control
expenses that are not passed through to its clients. Furthermore,
profitability is improved by tying significant incentive compensation to
achieving performance goals.
The Company establishes standard billing guidelines based on the type
of service offered. Actual billing rates are established on a
project-by-project basis and may vary from the standard guidelines. Over the
last three years, the Company's average revenue per assignment hour has
steadily increased. The growth in average revenue per assignment hour
reflects a higher percentage of value-added services, such as package
software implementations and solutions-oriented, strategic consulting
projects.
Whittman-Hart manages its personnel utilization rates by monitoring
project requirements and timetables. The number of consultants assigned to a
project will vary according to the size, complexity, duration and demands of
the project. Project terminations, completions and scheduling delays may
result in periods when consultants are not fully utilized. An unanticipated
termination of a project could result in a higher than expected number of
unassigned consultants or, if the Company were to terminate such consultants,
increased severance expenses. Although the number of the Company's
consultants can be adjusted to correspond to the number of active projects,
Whittman-Hart must maintain a sufficient number of senior consultants to
oversee existing client projects and assist the Company's sales force in
securing new client assignments. Whittman-Hart consultants are subject to
employment-at-will contracts, which may be terminated upon two weeks' notice
without substantial penalty or further expense to the Company.
Historically, the Company's revenue growth has been attributable to the
addition of new clients and the growth of current client relationships at
existing and new branch locations. During 1997 and 1998, the Company
supplemented its internal revenue growth with acquisitions. During 1999, the
Company intends to grow its existing branch locations and expand its network
through the traditional greenfield approach supplemented by acquisitions.
Each of the branches, originally developed by the Company, has generated
annual revenue and gross profit growth since inception.
8
<PAGE>
RESULTS OF OPERATIONS
--------------------------------------
The following table sets forth, for the periods
indicated, selected consolidated statements of
earnings and comprehensive income data as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME DATA:
Revenues 100% 100%
Cost of services 57 59
--- ---
Gross profit: 43 41
Costs and expenses:
Selling 4 4
Recruiting 2 3
General and administrative 26 26
Business combination costs 3 *
--- ---
Total costs and expenses 35 33
--- ---
Operating income 8 8
Other income 2 1
--- ---
Income before income taxes: 10 9
Income taxes 5 4
Initial deferred income taxes - *
--- ---
Total income taxes 5 4
--- ---
Net income 5% 5%
--- ---
--- ---
</TABLE>
*- Less than 1% of total revenues.
REVENUES. Revenues increased 62% to $104.1 million for the three months
ended March 31, 1999 from $ 64.4 million for the three months ended March 31,
1998. The increase was attributable to the addition of new clients and the
growth of current client relationships at existing and new branch locations.
Revenues from the Company's ten most significant clients grew by 55%, but as
a percentage of total revenues remained at 13% both in the first quarters of
1999 and 1998.
GROSS PROFIT. Gross profit consists of revenues less cost of services,
which includes consultant salaries and benefits. Gross profit for the three
months ended March 31,1999 grew 70% to $45.0 million from $26.4 million for
the three months ended March 31,1998. Gross profit as a percentage of
revenues was 43% in the first three months of 1999 as compared to 41% in
1998. These increases were attributable to a change in the sales mix toward
higher-end service offerings and the Company's established branches reaching
critical mass, partially offset by lower margins in recently opened branches.
SELLING EXPENSES. Selling expenses include the salaries, benefits,
commissions, travel, entertainment and all other direct costs associated with
the Company's direct sales force.
9
<PAGE>
Selling expenses for the three months ended March 31, 1999 increased
approximately 83% to $4.2 million from $2.3 million for the three months
ended March 31, 1998. These increases were attributable to higher
commissions, an increased fixed cost structure related to newly acquired
offices and business development initiatives, and other costs associated with
the increase in revenues. As a percentage of revenues, however, selling
expenses in the first quarter of 1999 were 4%, consistent with the same
period in the prior year.
RECRUITING EXPENSES. Recruiting expenses consist of costs related to
hiring new personnel. These costs include the salaries, benefits, bonuses and
other direct costs of in-house recruiters, outside recruiting agency fees,
sign-on bonuses, relocation fees and advertising costs. Recruiting expenses
for the three months ended March 31, 1999 increased 17% to $2.5 million from
$2.2 million for the three months ended March 31, 1998. The number of
employees increased 40% to approximately 3,150 at March 31, 1999, from 2,245
at March 31, 1998. Total recruiting costs per hire were in line with the
historical average of $5,000 to $7,000 for the three months ended March 31,
1999 and March 31, 1998. As a percentage of revenues, recruiting expenses
fell to 2% for the three months ended March 31,1999 as compared to 3% for the
three months March 31, 1998 due to the leveraging of fixed recruiting
overhead on a higher revenue base. As of March 31, 1999, approximately 78% of
the Company's total employees were consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include salaries and benefits of management and support personnel,
facilities costs, training, travel, outside professional fees and all other
branch and corporate costs. General and administrative expenses for the three
months ended March 31, 1999 increased 61% to $ 27.0 million from $16.8
million for the three months ended March 31, 1998. As a percentage of
revenues, general and administrative expenses remained constant at 26% for
the three month periods ended March 31, 1999 and 1998.
BUSINESS COMBINATION COSTS. Business combination costs were $2.7
million for the three months ended March 31, 1999 and $0.4 million for the
three months ended March 31, 1998. As a percentage of revenue, business
combination costs accounted for 3% of revenues for the three months ended
March 31, 1999, and less than 1% for the three months ended March 31, 1998.
The business combination costs included legal, accounting, other
transaction-related fees and expenses, and severance payments and expenses
resulting from non-cash compensation related to stock options. During the
first three months of 1999, these costs related to the Company's acquisition
of Waterfield in March 1999. In the first quarter of 1998, the Company
incurred similar costs in connection with the acquisition of QCC Incorporated
("QCC").
OPERATING INCOME. Operating income increased 81% to $8.6 million for
the three months ended March 31, 1999 from $4.8 million in the three months
ended March 31, 1998. As a percentage of revenues, operating income improved
to 11% before business combination costs for the three months ended March 31,
1999, due to increased gross profit and lower recruiting costs. After
business combination costs operating income remained constant at 8% for the
three months ended March 31, 1999 and March 31, 1998.
OTHER INCOME (EXPENSE). Other income (expense) increased 94% to $1.7
million for the three months ended March 31,1999 from $0.9 million for the
three months ended March 31, 1998. The first quarter of 1999 included
increased interest income on investments related to the net proceeds of
$69.6 million from the Company's public offering in May 1998.
10
<PAGE>
INCOME TAXES. The Company's effective tax rate before non-deductible
business combination costs for the three months ended March 31, 1999 and
March 31, 1998 was 42% and 40%, respectively. The increase in the effective
tax rate relates primarily to higher state tax rates of newly opened branch
offices. The Company's effective tax rate was 46% for the three
months ended March 31, 1999 as compared to 48% for the three months ended
March 31, 1998. The effective tax rate for the three months ended March 31,
1999 including non-deductible business combination costs related to the
acquisition of Waterfield. The effective tax rate for the three months ended
March 31, 1998 includes non-deductible business combination costs and the
recording of initial deferred income tax expense related to the acquisition
of QCC.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had approximately $152.9 million of
cash, cash equivalents, and short-term and long-term investments compared to
$150.3 million at December 31, 1998. The Company's primary source of
liquidity has been cash provided through equity offerings and cash from
operations. The Company renewed its loan agreement permitting borrowing up to
$10.0 million of unsecured credit with interest, at the Company's option, at
LIBOR plus 1.5% or the lender's prime rate. There were no borrowings under
this loan agreement as of May 1, 1999. The Company's loan agreement expires
on April 30, 2000.
On May 8, 1996, the Company completed an initial public offering of its
common stock, which resulted in net proceeds to the Company of $37.8 million.
A portion of the proceeds from the offering were used to retire the Company's
term loan facilities. On August 27, 1996, the Company completed a public
offering of its common stock, resulting in net proceeds to the Company of
$27.8 million. On May 8, 1998, the Company completed another public offering
of its common stock, resulting in net proceeds to the Company of $69.6
million.
Operating activities provided net cash flows of $6.7 million for the
three months ended March 31, 1999 primarily as a result of increases in net
income, accrued compensation and income taxes payable which was partially
offset by an increase in accounts receivable. During the three months ended
March 31, 1998, the operating activities used net cash flows of $2.9 million
due primarily to increases in accounts receivable.
Capital expenditures of $9.7 million for the three month periods ended
March 31, 1999, which included approximately $4.1 million of purchases
relating to facilities to house the Company's education center, Chicago
branch office, and to provide space for its corporate headquarters. In
addition, $2.6 million of expenditures related to the implementation of the
Company's new information system, and the remainder for computer equipment
and software, and office furniture and equipment to support the growth and
expansion of the Company. Capital expenditures for the three months ended
March 31, 1998 were $4.3 million relating primarily to purchase of real
estate and other expenditures to support the Company's growth and expansion.
During the first quarter of 1999 and 1998, cash provided by financing
activities from the exercise of stock options aggregated $6.3 million and
$4.8 million, respectively.
The Company anticipates the net proceeds of its three public offerings,
together with existing sources of liquidity and funds generated from
operations, will provide adequate cash to fund its anticipated cash needs at
least through the next 12 months.
11
<PAGE>
ACQUISITIONS
On March 9, 1999, the Company acquired the Waterfield Technology Group
("Waterfield") a Boston-based IT services firm and strategic business partner
of Kurt Salmon and Associates, a global consulting firm, for 576,074 shares
of its common stock for all of the outstanding stock of the Waterfield.
Headquarted in Lexington, Massachusetts, with a branch office in Parsippany,
New Jersey, Waterfield's approximately 90 employees specialize in client
server and internet -enabled application development. They have extensive
experience with Java and Java-based tools, Powerbuilder and the Microsoft
suite of products. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts
and results of operations of Waterfield for all periods presented.
YEAR 2000
The Company has identified three issues related to Year 2000 compliance;
first is the effect on internal information systems, second are issues
related to vendors performing services for the Company, and finally are the
issues related to consulting activities performed by the Company.
The Company is in the process of replacing its existing internal information
systems. The system replacement was part of a strategic initiative and was
not accelerated to address Year 2000 issues. This initiative is expected to
be completed in the third quarter of 1999. A contingency plan exists to make
existing systems Year 2000 compliant by the end of the third quarter 1999 in
the unlikely event the new systems' implementation cannot be completed. The
cost of this implementation is not expected to have a material adverse impact
on the Company's results of operations or financial condition.
The Company has relationships with several vendors who provide administration
of compensation and related employee benefits and other vendors who perform
banking and treasury services. The Company has completed an evaluation of the
state of readiness of these vendors and it believes that the vendors are
currently Year 2000 compliant or will become compliant during 1999.
Contingency plans are in place to administer employee compensation and
benefits in the event of non-compliance by any of these vendors. The cost to
the Company in the event of non-compliance with Year 2000 issues by any of
these third parties is not expected to have material impact on the Company's
result of operations or its financial condition.
The Company believes that many of middle-market companies have yet to achieve
Year 2000 compliance. To resolve the Year 2000 issue, many companies are
electing to install new package software applications, rather than modify
existing systems, thus creating significant demand for package
software-related services such as those provided by the Company.
Consequently, the Company believes that companies' need to address their Year
2000 compliance is creating significant demand for IT products and services
such as those provided by the Company. There can be no assurance that the
passage of the Year 2000 will not have a material adverse effect on the
demand for the Company's services The Company provides solutions for the IT
systems that are critical to companies'operations. Business interruptions,
loss or corruption of data or other major problems resulting form the failure
of a client's IT system to process year 2000 data correctly could have a
significant adverse consequences to that client. The Company cannot currently
predict whether or to what extent there will be any legal claims brought
against the Company or whether there will be any other material adverse
effect on the Company's business, financial condition or the results of
operations, as a result of any such adverse consequences to its clients.
12
<PAGE>
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS" No. 133),
"Accounting for Derivative Instruments and Hedging Activities," is effective
for financial statements for fiscal years beginning after June 15,1999, but
may be adopted in earlier periods. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not believe that SFAS No. 133 will have a significant impact on
its financial statements.
SAFE HARBOR PROVISION
This Form 10-Q contains certain forward-looking statements (as
defined in Section 21E of the Securities Exchange Act of 1934, as amended)
that involve substantial risks and uncertainties. When used in this Form
10-Q, the words "plans", "intends", "anticipates", and "expects" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results,
performance or achievements expressed in, or implied by, these
forward-looking statements. Risks and uncertainties and other factors that
could cause or contribute to such differences include, but are not limited
to, difficulties in attracting and retaining highly skilled employees, the
Company's ability to manage rapid growth and expansion into new geographic
areas and service lines, the Company's ability to manage the risks associated
with client projects, risks related to recently completed and potential
future acquisitions; the Company's ability to develop IT solutions that keep
pace with continuing changes in technology, evolving industry standards and
changing client preferences; and risks related to Year 2000 failures in
client's information systems. These and other risks are more fully described
in the "Risk Factors" section of the Company's registration statement (No.
333-50029) on Form S-3 filed by the Company with the Securities and Exchange
Commission on April 14, 1998, as amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company maintains investments in marketable securities. The
securities are classified as available for sale on the consolidated balance
sheet at fair value, with unrealized gains and losses reported as a separate
component stockholders' equity, net of applicable deferred income taxes. As
of March 31,1999, the fair value of the Company's marketable securities
portfolio was $113.2 million, all of which was invested in debt securities.
The Company operates its only non-U.S. office in London, England which
exposes it to market risk associated with foreign currency exchange rate
fluctuations; however, such risk is immaterial at this time to the Company's
consolidated financial statements.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 9, 1999, the Company acquired all of the outstanding capital stock
of Waterfield from the shareholders of Waterfiled , in exchange for 576,074
shares of the Company's Common Stock. The shares of Common Stock were issued
in reliance upon the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. There were no underwriters or other distributors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Whittman-Hart, Inc.
Date: May 17, 1998 By: /s/ Robert F. Bernard
---------------------- ---------------------------------
Robert F. Bernard
Chairman of the Board and
Chief Executive Officer
Date: May 17, 1998 By: /s/ Kevin M. Gaskey
---------------------- ---------------------------------
Kevin M. Gaskey
Chief Financial Officer and Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,746
<SECURITIES> 78,716
<RECEIVABLES> 66,116
<ALLOWANCES> 1,769
<INVENTORY> 0
<CURRENT-ASSETS> 189,827
<PP&E> 54,539
<DEPRECIATION> 11,164
<TOTAL-ASSETS> 268,932
<CURRENT-LIABILITIES> 37,392
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 229,354
<TOTAL-LIABILITY-AND-EQUITY> 229,407
<SALES> 0
<TOTAL-REVENUES> 104,092
<CGS> 0
<TOTAL-COSTS> 59,077
<OTHER-EXPENSES> 36,403
<LOSS-PROVISION> 996
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,335
<INCOME-TAX> 4,776
<INCOME-CONTINUING> 5,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,560
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS RESTATED TO REFLECT THE ACQUISITIONS OF
NCC AND WATERFIELD AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,978
<SECURITIES> 53,703
<RECEIVABLES> 46,479
<ALLOWANCES> 748
<INVENTORY> 0
<CURRENT-ASSETS> 116,150
<PP&E> 27,190
<DEPRECIATION> 6,948
<TOTAL-ASSETS> 137,712
<CURRENT-LIABILITIES> 24,188
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 111,247
<TOTAL-LIABILITY-AND-EQUITY> 111,295
<SALES> 0
<TOTAL-REVENUES> 64,420
<CGS> 0
<TOTAL-COSTS> 37,987
<OTHER-EXPENSES> 21,663
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,657
<INCOME-TAX> 2,695
<INCOME-CONTINUING> 2,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,962
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
