SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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F O R M 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For Quarter Ended March 31, 1999 Commission File Number 0-7282
COMPUTER HORIZONS CORP.
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(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 Number)
49 Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (973) 299-4000
--------------
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report)
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 twelve 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 12, 1999, the issuer had 30,470,022 shares of common stock
outstanding.
<PAGE>
COMPUTER HORIZONS CORP.
Index
Part I Financial Information
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
Consolidated Statements of Income
Three Months Ended
March 31, 1999 and 1998
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Part II Other Information
Signatures
<PAGE>
<TABLE>
<CAPTION>
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 22,673 $ 51,796
Short term investments .................................. 2,450 11,259
Accounts receivable, net of allowance for doubtful
accounts of $4,223,000 and $3,209,000 at March 31, 1999
and December 31, 1998, respectively ................... 172,523 135,447
Deferred income tax benefit ............................. 5,582 4,987
Other ................................................... 1,910 2,049
-------- --------
TOTAL CURRENT ASSETS ............................ 205,138 205,538
PROPERTY AND EQUIPMENT .................................... 32,157 26,469
Less accumulated depreciation ........................... 15,059 11,141
-------- --------
17,098 15,328
OTHER ASSETS - NET:
Goodwill ................................................ 65,123 66,315
Deferred income tax benefit ............................. 1,650 1348
Other ................................................... 8,939 7,523
-------- --------
TOTAL OTHER ASSETS .............................. 75,712 75,186
TOTAL ASSETS .............................................. $297,948 $296,052
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued payroll, payroll taxes and benefits ............. 23,433 24,262
Accounts payable ........................................ 4,365 5,258
Income taxes payable .................................... 11,218 6,437
Other accrued expenses .................................. 3,945 10,821
-------- --------
TOTAL CURRENT LIABILITIES ....................... 42,961 46,778
LONG-TERM DEBT ............................................ -- --
OTHER LIABILITIES ......................................... 4,282 2,740
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31,
1999 1998
-------- --------
(dollars in thousands)
<S> <C> <C>
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par; authorized and unissued
200,000 shares, including 50,000 Series A
Common stock, $.10 par, authorized 100,000,000 shares;
issued 32,351,580 shares at March 31, 1999 and
December 31, 1998 ..................................... 3,235 3,235
Additional paid-in capital .............................. 128,821 128,821
Accumulated comprehensive income ........................ -725 -762
Retained earnings ....................................... 132,925 123,943
264,256 255,237
Less shares held in treasury, at cost; 1,381,558
shares and 1,061,662 shares at March 31, 1999 and
December 31, 1998, respectively ....................... 13,551 8,703
-------- --------
TOTAL SHAREHOLDERS' EQUITY ...................... 250,705 246,534
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $297,948 $296,052
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
IT Services ................................ $ 132,066 95.6% $ 107,974 96.8%
Products ................................... 6,075 4.4% 3,538 3.2%
------------ ----- ------------ -----
138,141 100.0% 111,512 100.0%
COSTS AND EXPENSES:
Direct costs - Services ................... 89,680 64.9% 70,155 62.9%
Direct costs - Products ................... 1,040 0.8% 593 0.5%
Selling, general and
administrative ......................... 31,133 22.5% 24,439 21.9%
Merger-related expenses .................... 0 0.0% 1,328 1.2%
------------ ----- ------------ -----
121,853 88.2% 96,515 86.6%
INCOME FROM OPERATIONS ......................... 16,288 11.8% 14,997 13.4%
OTHER INCOME (expense):
Interest income ........................... 438 0.3% 1,374 1.2%
Interest expense .......................... (172) (0.1%) (41) 0.0%
Equity in Joint Venture net earnings (loss) 0 0.0% (9) (0.1%)
------------ ----- ------------ -----
266 0.2% 1,243 1.1%
INCOME BEFORE INCOME TAXES ..................... 16,554 12.0% 16,240 14.5%
INCOME TAXES:
Current ................................... 7,928 5.7% 7,927 7.1%
Deferred .................................. (893) (0.6%) (324) (0.3%)
------------ ----- ------------ -----
7,035 5.1% 7,603 6.8%
NET INCOME ..................................... $ 9,519 6.9% $ 8,637 7.7%
EARNINGS PER SHARE:
Basic ...................................... $ 0.30 $ 0.28
Diluted .................................... $ 0.30 $ 0.27
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic ...................................... 31,221,000 30,714,000
Diluted .................................... 31,833,000 32,278,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31, March 31,
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES ............... (28,397) 2,062
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales/(Purchases) of short-term investments ..... 8,809 (8,437)
Purchases of property and equipment ............. (2,771) (2,875)
(Increase) decrease in other assets ............. (1,416) (465)
Repurchase of common stock ...................... (6,578) --
------- -------
(1,956) (11,777)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in long-term debt ........... -- (1,402)
Stock options exercised ......................... 1,193 1,632
------- -------
1,193 230
------- -------
Foreign currency gain ........................... 37 74
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......... (29,123) (9,411)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..... 51,796 92,086
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... 22,673 82,675
</TABLE>
<PAGE>
COMPUTER HORIZONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters Ended March 31, 1999 and 1998
The information furnished reflects all adjustments which, in the
opinion of the Company, are necessary to present fairly its consolidated
financial position and the results of its operations and changes in financial
position for the periods indicated.
Reference is made to the Company's annual financial statements for the
year ended December 31, 1998, for a description of the accounting policies,
which have been continued without change. Also refer to the footnotes with those
annual statements for additional details of the Company's financial condition,
results of operations and changes in cash flows. The details in those notes have
not changed except as a result of normal transactions in the interim.
The results of operations for 1998 have been retroactively adjusted to
reflect the acquisition of Spargo Consulting PLC, which has been accounted for
as a pooling of interests.
Earnings per Share: Basic Earnings Per Share ("EPS") is based on the
weighted average number of common shares outstanding without consideration of
common stock equivalents. Diluted earnings per share is based on the weighted
average number of common and common equivalent shares outstanding. The
calculation takes into account the shares that may be issued upon exercise of
stock options, reduced by the shares that may be repurchased with the funds
received from the exercised, based on the average price during the year.
The computation of diluted earnings per share excludes options with
exercise prices greater than the average market price. During 1999, there were
approximately 1,136,000 excluded options outstanding at March 31, 1999, with an
average exercise price of approximately $21.37 per share. All options to
purchase shares of common stock were included in the computation of diluted
earnings per share in 1998.
In accordance with SFAS No.128, the table below presents both basic and
diluted earnings per share:
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net income ............................... $ 9,519 $ 8,637
Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding ... 31,221,000 30,714,000
Effect of stock options ........................... 612,000 1,564,000
Dilutive potential earnings per share:
Denominator for diluted earnings per share
Adjusted weighted average shares
outstanding and assumed conversions ... 31,833,000 32,278,000
Basic earnings per share .......................... $ 0.30 $ 0.28
Diluted earnings per share ........................ $ 0.30 $ 0.27
</TABLE>
Segment Information
- -------------------
The Company has identified two segements: IT Services and Products. Segment
information for revenues and operating income (which consists of income before
income taxes, excluding net interest income and amortization of intangibles)
consisted of the following:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 1998
<S> <C> <C>
Revenue
IT Services ...................... 132,066 107,974
Products ......................... 6,075 3,538
Corporate and other .............. -- --
TOTAL ..................................... 138,141 111,512
Operating Income
IT Services ...................... 15,979 15,371
Products
(excluding one time merger related
expenses in 1998)............... 1,501 688
Corporate and other .............. -- (90)
TOTAL ..................................... 17,480 15,969
</TABLE>
<PAGE>
Subsequent Events
- -----------------
At the Company's annual meeting of shareholders on May 5, 1999, the
shareholders approved the creation of an employee stock purchase plan. The plan,
which qualifies under section 423 of the Internal Revenue Service Code, allows
employees to purchase shares of the Company's common stock through periodic
payroll deductions.
On May 10, 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. The
acquisition will be accounted for as a purchase.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarters Ended March 31, 1999 and 1998
Revenues. Revenues increased to $138.1 million in the first quarter of 1999
from $111.5 million in the first quarter of 1998, an increase of $26.6 million
or 23.9%. Total IT Services revenues, including Year 2000 revenues, increased to
$132.0 million in the first quarter of 1999 from $108.0 million in the first
quarter of 1999, an increase of $24.0 million or 22.2%. IT Services revenues,
excluding Year 2000 services, increased to $114.0 million in the first quarter
of 1999 from $74.8 million in the first quarter of 1998, an increase of $39.2
million or 52.4%. Year 2000 services revenues decreased to $18.0 million in the
first quarter of 1999 from $33.2 million in the first quarter of 1998, a
decrease of $15.2 million or 45.8%. The Company's Year 2000 business accounted
for 13% of total revenues in the first quarter of 1999 versus 30% of total
revenues in the first quarter of 1998. The Company's product revenues increased
to $6.1 million for the first quarter of 1999 from $3.5 million in the first
quarter of 1998, an increase of $2.6 million or 74.3%.
Direct Costs. Direct costs increased to $90.7 million in the first quarter
of 1999 from $70.7 million in the first quarter of 1998. Gross margin decreased
to 34.3% in the first quarter of 1999 from 36.6% in the first quarter of 1998.
The decrease in gross margin was primarily due to stable margins in the
Company's staffing business and a decrease in the Company's higher margin Year
2000 business. The Company's margins are subject to fluctuations due to a number
of factors, including the level of salary and other compensation necessary to
attract and retain qualified technical personnel, and the mix of staffing versus
solutions business during a particular quarter.
Selling, General and Administrative. Selling, general and administrative
expenses (excluding merger-related expenses) increased to $31.1 million in the
first quarter of 1999 from $24.4 million in the first quarter of 1998, an
increase of $6.7 million or 27.5%. As a percentage of revenues, selling, general
and administrative expenses increased slightly to 22.5% of revenues in the first
quarter of 1999 from 22.0% of revenues in the first quarter of 1998. The
increase in dollars in selling, general and administrative expenses was
primarily a result of salaries and commissions for additional sales and
recruiting personnel and, to a lesser extent, growth in the Company's general
and administrative infrastructure. In the first quarter of 1998, the Company
incurred merger-related expenses of approximately $1.3 million, or 1.2% of
revenues.
Income from Operations. Operating margins decreased to 11.8% in the first
quarter of 1999 from 13.4% in the first quarter of 1998. These decreases were
primarily due to decreases in the Company's higher margin Year 2000 business.
The Company's business is labor-intensive and, as such, is sensitive to
inflationary trends. This sensitivity applies to client billing rates, as well
as to payroll costs.
Other Income. Other income decreased to $0.3 in the first quarter of 1999
from $1.2 million in the first quarter of 1998, a decrease of $0.9 million. This
decrease was primarily the result of decreased interest income, due to the
Company spending approximately $50.4 million to complete three acquisitions
during the third quarter of 1998.
<PAGE>
Provision for Income Taxes. The effective tax rate for Federal, state
and local income taxes was 42.5% and 46.8% for the first quarter of 1999 and
1998, respectively. The higher 1998 rate was primarily due to certain
non-deductible merger-related expenses incurred during the quarter.
Net Income. Net income increased to $9.5 million for the first quarter
of 1999 from $8.6 million for the first quarter of 1998, an increase of $0.9
million or 10.5%. Net income per share (diluted) was $0.30 versus $0.27 for the
first quarter of 1999 and 1998, respectively.
Liquidity and Capital Resources. At March 31, 1999, the Company had
$162.2 million in working capital, of which $25.1 million was cash, cash
equivalents and short-term investments. There were no borrowings under its bank
lines of credit.
Net cash used by operating activities in the first three months of 1999
was $28.4 million, consisting primarily of an increase in accounts receivable,
offset in part by net income. The increase in accounts receivable is due
primarily to invoicing delays caused by a recent implementation of an internal
ERP system. During the first three months of 1998, net cash provided by
operating activities was $2.1 million, consisting primarily of net income,
offset in part by an increase in accounts receivable, largely due to growth in
the Company's solutions business.
Net cash used in investing activities in the first three months of 1999
was $2.0 million, consisting primarily of the repurchase of 510,000 shares of
the Company's common stock, as well as purchases of equipment, offset in part by
sales of short-term investments. During the first three months of 1998, net cash
used in investing activities was $11.8 million, consisting of purchases of
short-term investments and equipment purchases.
Net cash provided by financing activities in the first three months of
1999 was $1.2 million consisting primarily of cash received from the exercise of
stock options. Net cash provided by financing activities was $0.2 million for
the first three months of 1998, as proceeds received from stock option exercises
exceeded the amount of repayment of long-term debt.
At March 31, 1999, the Company had a current ratio position of 4.8 to
1, no long-term debt and no outstanding borrowings under its two unsecured lines
of credit. The Company believes that its cash and cash equivalents and
short-term investments, lines of credit and internally generated funds will be
sufficient to meet its working capital needs through 1999.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failure or miscalculations causing disruptions
of operations including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing and implementation.
The assessment phase included an examination of all systems that could
be significantly affected by the Year 2000. With the completion of this phase,
it was concluded that many of the Company's significant information technology
systems could be affected, particularly in the time capture and billing areas.
<PAGE>
Concurrently, a review was being conducted to select a new
accounting/information system to support the future growth of the Company. As a
result, as part of the remediation phase, the Company chose a new system that
addressed, among other areas, Year 2000 compliance. Following extensive testing
procedures, including Year 2000 compliance, the new system was implemented in
late 1998. Subsidiaries operating with independent accounting/information
systems are already compliant or will transfer financial operations to the
Company's core business system by the Year 2000.
The Company has utilized both internal and external resources to
implement the new accounting/information system. The total cost of the project
is estimated at $6.8 million, of which approximately $6.0 million will be
capitalized. The project is being funded through operating cash flows.
The Company has queried and continues to monitor Year 2000 compliance
of all significant outside vendors and service providers. To date, the Company
is not aware of any outside vendor with a Year 2000 issue that would materially
impact the Company's results of operations. However, the Company has no means of
ensuring that external vendors will be Year 2000 ready. The inability of
external vendors to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company.
As described above, the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. However, there is no
guarantee that possible "worst case" Year 2000 issues of outside vendors,
suppliers and customers would not impact the Company. In addition, disruptions
in the economy generally resulting from Year 2000 issues could adversely affect
the Company. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
The Company has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and adjusting staffing strategies.
Certain Disclosures. This report contains certain forward-looking
statements for purposes of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties
that could cause actual results to differ materially. Such statements are based
upon, among other things, assumptions made by, and information currently
available to management, including management's own knowledge and assesment of
the Company's industry and competition.
<PAGE>
PART II Other Information
Item 6.
b) One report on Form 8-K has been filed during the quarter for which
this report is filed. This form was filed on March 17, 1999 to restate certain
financial schedules of the Company's 1997 Form 10-K filing, pursuant to the
Company's acquisition of Spargo Consulting, PLC in June, 1998.
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER HORIZONS CORP.
(Registrant)
DATE: May 14, 1999 /s/John J. Cassese
------------ ------------------
John J. Cassese, Chairman of the Board
and President
DATE: May 14, 1999 /s/William J. Murphy
------------ ---------------------
William J. Murphy, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
DATE: May 14, 1999 /s/Michael J. Shea
------------ -------------------
Michael J. Shea
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 22,673
<SECURITIES> 2,450
<RECEIVABLES> 172,523
<ALLOWANCES> 4,223
<INVENTORY> 0
<CURRENT-ASSETS> 205,138
<PP&E> 32,157
<DEPRECIATION> 15,059
<TOTAL-ASSETS> 297,948
<CURRENT-LIABILITIES> 42,961
<BONDS> 0
0
0
<COMMON> 3,235
<OTHER-SE> 247,470
<TOTAL-LIABILITY-AND-EQUITY> 297,948
<SALES> 0
<TOTAL-REVENUES> 138,141
<CGS> 0
<TOTAL-COSTS> 90,720
<OTHER-EXPENSES> 31,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266
<INCOME-PRETAX> 16,554
<INCOME-TAX> 7,035
<INCOME-CONTINUING> 9,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,519
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
