<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
--------------------------------------------
For Quarter Ended June 30, 1999 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 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
--------------
(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.
X
-
Yes No
As of August 10, 1999 the issuer had 30,695,172 shares of common stock
outstanding.
1
<PAGE> 2
COMPUTER HORIZONS CORP.
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I Financial Information
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1999 and June 29, 1998 4
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1999 and June 29, 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II Other Information 13
Signatures 13
</TABLE>
2
<PAGE> 3
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $19,755 $51,796
Short term investments 2,450 11,259
Accounts receivable, net of allowance for doubtful
accounts of $5,284,000 and $3,209,000 at June 30, 1999
and December 31, 1998, respectively 175,793 135,447
Deferred income tax benefit 6,254 4,987
Other 3,584 2,049
----- -----
TOTAL CURRENT ASSETS 207,836 205,538
PROPERTY AND EQUIPMENT 32,157 26,469
Less accumulated depreciation 10,922 11,141
------ ------
21,235 15,328
OTHER ASSETS - NET:
Goodwill 89,694 66,315
Deferred income tax benefit 1,639 1,348
Other 8,061 7,523
----- -----
TOTAL OTHER ASSETS 99,394 75,186
TOTAL ASSETS $328,465 $296,052
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, current $ 20,014 -
Accrued payroll, payroll taxes and benefits 25,342 $ 24,262
Accounts payable 3,585 5,258
Income taxes payable 2,207 6,437
Other accrued expenses 8,165 10,821
----- ------
TOTAL CURRENT LIABILITIES 59,313 46,778
LONG-TERM DEBT 4,348 -
OTHER LIABILITIES 7,696 2,740
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 June 30, 1999 and
December 31, 1998 3,235 3,235
Additional paid-in capital 128,818 128,821
Accumulated comprehensive income -593 -762
Retained earnings 141,675 123,943
------- -------
273,135 255,237
Less shares held in treasury, at cost; 1,656,408 shares and
1,061,662 shares at June 30, 1999 and
December 31, 1998, respectively 16,027 8,703
------ -----
TOTAL SHAREHOLDERS' EQUITY 257,108 246,534
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $328,465 $296,052
============== ================
</TABLE>
3
<PAGE> 4
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1999 JUNE 29, 1998
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
IT Services $133,716 93.6% $118,144 95.5%
Products 9,158 6.4% 5,592 4.5%
----- ---- ----- ----
142,874 100.0% 123,736 100.0%
COSTS AND EXPENSES:
Direct costs - Services 93,810 65.7% 78,702 63.6%
Direct costs - Products 2,020 1.4% 918 0.7%
Selling, general and
administrative 34,684 24.3% 26,244 21.2%
Merger-related expenses 0 0.0% 2,209 1.8%
- ---- ----- ----
130,514 91.3% 108,073 87.3%
INCOME FROM OPERATIONS 12,360 8.7% 15,663 12.7%
OTHER INCOME (expense):
Interest income 363 0.3% 1,542 1.2%
Interest expense -239 -0.2% -16 0.0%
Equity in Joint Venture net earnings (loss) 0 0.0% 0 0.0%
- ---- - ----
124 0.1% 1,526 1.2%
INCOME BEFORE INCOME TAXES 12,484 8.7% 17,189 13.9%
INCOME TAXES:
Current 5,909 4.1% 8,346 6.7%
Deferred -666 -0.5% -693 -0.6%
---- ----- ---- -----
5,243 3.7% 7,653 6.2%
NET INCOME $7,241 5.1% $9,536 7.7%
EARNINGS PER SHARE:
Basic $0.24 $0.31
Diluted $0.23 $0.30
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 30,515,000 30,827,000
Diluted 31,323,000 32,214,000
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 29, 1998
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
IT Services $265,782 94.6% $226,117 96.1%
Products 15,233 5.4% 9,130 3.9%
------ ---- ----- ----
281,015 100.0% 235,247 100.0%
COSTS AND EXPENSES:
Direct costs - Services 183,490 65.3% 148,854 63.3%
Direct costs - Products 3,060 1.1% 1,511 0.6%
Selling, general and
administrative 65,817 23.4% 50,683 21.5%
Merger-related expenses 0 0.0% 3,537 1.5%
- ---- ----- ----
252,367 89.8% 204,585 87.0%
INCOME FROM OPERATIONS 28,648 10.2% 30,662 13.0%
OTHER INCOME (expense):
Interest income 801 0.3% 2,875 1.2%
Interest expense -411 -0.1% -16 0.0%
Equity in Joint Venture net earnings (loss) 0 0.0% -90 0.0%
- ---- --- ----
390 0.1% 2,769 1.2%
INCOME BEFORE INCOME TAXES 29,038 10.3% 33,431 14.5%
INCOME TAXES:
Current 13,837 4.9% 16,276 6.9%
Deferred -1,559 -0.6% -1,017 -0.4%
------ ----- ----- -----
12,278 4.4% 15,259 6.5%
NET INCOME $16,760 6.0% $18,172 7.7%
EARNINGS PER SHARE:
Basic $0.54 $0.59
Diluted $0.53 $0.56
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 30,868,000 30,771,500
Diluted 31,578,000 32,246,000
</TABLE>
4
<PAGE> 5
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30 June 29
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $(24,305) $ 4,082
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales/(Purchases) of short-term investments 8,809 (17,636)
Purchases of property and equipment (8,095) (4,940)
Acquisitions, net of cash (14,100)
(Increase) decrease in other assets (538) (586)
Repurchase of common stock (11,604) -
---------- ----------
(25,528) (23,162)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in borrowings 16,362 (1,432)
Dividends paid - (773)
Stock options exercised 1,261 2,865
---------- ----------
17,623 660
---------- ----------
Foreign currency gain 169 -
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,041) (18,420)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51,796 92,087
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,755 $73,667
=========== ===========
DETAILS OF ACQUISITIONS:
Fair value of assets 18,548
Liabilities (4,991)
----------
Cash paid for acquisitions 13,557
</TABLE>
5
<PAGE> 6
COMPUTER HORIZONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters Ended June 30, 1999 and June 29, 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.
On June 1, 1999, 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. The acquisition was accounted for as
a purchase. The cost of the purchased software and other intangibles
approximates $12 million, and is being amortized to operations over a five year
period.
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, for stock,
cash and promissory notes totaling approximately $16 million. The acquisition
was accounted for as a purchase. The resulting goodwill of approximately $14
million is being amortized to operations over a 20 year period.
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.
In accordance with SFAS No.128, the table below presents both basic and
diluted earnings per share:
6
<PAGE> 7
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 29,
1999 1998
<S> <C> <C>
Numerator:
Net income (in thousands) $16,760 $18,172
Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding 30,868,000 30,770,500
Effect of stock options 710,000 1,475,500
Dilutive potential earnings per share:
Denominator for diluted earnings per share
Adjusted weighted average shares
outstanding and assumed conversions 31,578,000 32,246,000
Basic earnings per share $0.54 $0.59
Diluted earnings per share $0.53 $0.56
</TABLE>
Segment Information: The Company has identified two segments: 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>
Six Months Ended
June 30, June 29,
1999 1998
---- ----
<S> <C> <C>
Revenue
IT Services $265,782 $226,117
Products 15,233 9,130
Corporate and other -- --
TOTAL 281,015 235,247
Operating Income
IT Services 27,862 29,085
Products (excluding one time merger
related expenses in 1998) 3,498 2,398
Corporate and other -- (90)
TOTAL $ 31,360 $ 31,393
</TABLE>
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarters Ended June 30, 1999 and June 29, 1998
Revenues. Revenues increased to $142.9 million in the second quarter of
1999 from $123.7 million in the second quarter of 1998, an increase of $19.2
million or 15.5%. Staffing revenues increased to $77.2 million in the second
quarter of 1999 from $62.6 million in the second quarter of 1998, an increase of
$14.6 million or 23.3%. Total solutions revenues, including Year 2000 revenues,
increased to $56.0 million in the second quarter of 1999 from $55.6 million in
the second quarter of 1998, an increase of $0.4 million or 0.7%. Year 2000
services revenues decreased to $14.8 million in the second quarter of 1999 from
$36.6 million in the second quarter of 1998, a decrease of $21.8 million. The
Company's Year 2000 business accounted for 10.4% of total revenues in the second
quarter of 1999 versus 29.5% of total revenues in the second quarter of 1998. As
anticipated, the sharp decline in Year 2000 business is reflective of the
completion of code remediation assignments for major customers. This trend is
expected to continue for the remainder of 1999. Solutions revenues, excluding
Year 2000 services, increased to $41.2 million in the second quarter of 1999
from $19.0 million in the second quarter of 1998, an increase of $22.2 million.
Product revenues increased to $9.2 million for the second quarter of 1999 from
$5.6 million in the second quarter of 1998, an increase of $3.6 million or 64.3%
Revenues increased to $281.0 million in the first six months of 1999 from $235.2
million in the first six months of 1998, an increase of $45.8 million or 19.5%.
Staffing revenues increased to $154.4 million in the first six months of 1999
from $121.1 million in the first six months of 1998, an increase of $33.3
million or 27.5%. Total solutions revenues, including Year 2000 revenues,
increased to $109.4 million in the first six months of 1999 from $105.0 million
in the first six months of 1998, an increase of $4.4 million or 4.2%. Year 2000
services revenues decreased to $32.8 million in the first six months of 1999
from $69.8 million in the first six months of 1998, a decrease of $37.0 million
or 53.0%. The Company's Year 2000 business accounted for 11.7% of total revenues
in the first six months of 1999 versus 29.7% of total revenues in the first six
months of 1998. Solutions revenues, excluding Year 2000 services, increased to
$76.6 million in the first six months of 1999 from $35.2 million in the first
six months of 1998, an increase of $41.4 million. Product revenues increased to
$15.2 million in the first six months of 1999 from $9.1 million in the first six
months of 1998, an increase of $6.1 million or 67.0%.
Direct Costs. Direct costs increased to $95.8 million and $186.6 million in
the second quarter and first six months of 1999, respectively, from $79.6
million and $150.4 million in the comparable 1998 periods. Gross margin
decreased to 32.9% and 33.6% in the second quarter and first six months of 1999,
respectively, from 35.7% and 36.1% in the second quarter and first six months of
1998, respectively. 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.
8
<PAGE> 9
Selling, General and Administrative. Selling, general and administrative
expenses (excluding merger-related expenses) increased to $34.7 million and
$65.8 million in the second quarter and first six months of 1999, respectively,
from $26.2 million and $50.7 million in the comparable 1998 periods. As a
percentage of revenues, selling, general and administrative expenses increased
to 24.3% of revenues and 23.4% of revenues in the second quarter and first six
months of 1999, respectively, from 21.2% of revenues and 21.5% of revenues in
the comparable 1998 periods. The increase 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. The Company incurred merger-related
expenses of approximately $2.2 million and $3.5 million in the second quarter
and first six months of 1998, respectively.
Income from Operations. Operating margins decreased to 8.7% and 10.2% in
the second quarter and first six months of 1999, respectively, from 12.7% and
13.0% in the comparable 1998 periods. These decreases were primarily due to
decreases in the Company's higher margin Year 2000 business, partially offset by
merger-related expenses in 1998. 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 $0.1 million and $0.4 million in
the second quarter and first six months of 1999, respectively, from $1.5 million
and $2.8 million in the comparable 1998 periods. This decrease was primarily the
result of decreased interest income. The Company completed several acquisitions
during the second half of 1998 and first half of 1999 which decreased cash
available for investment.
Provision for Income Taxes. The effective tax rates for Federal, state and
local income taxes were 42.0% and 42.3% for the second quarter and first six
months of 1999, respectively. For the comparable 1998 periods, the rates were
44.5% and 45.6%, respectively. The decrease in the 1999 rates was primarily due
to the inclusion of certain non-deductible merger-related expenses in 1998
operating results.
Net Income. Net income decreased to $7.2 million, or $0.23 per share
(diluted) for the second quarter of 1999, from $9.5 million, or $0.30 per share
(diluted) for the second quarter of 1998, a decrease of $2.3 million or 24.2%.
For the first six months of 1999, net income decreased to $16.8 million, or
$0.53 per share (diluted), from $18.2 million, or $0.57 per share (diluted) for
the first six months of 1998.
Liquidity and Capital Resources. At June 30, 1999, the Company had $148.5
million in working capital, of which $22.2 million was cash, cash equivalents
and short-term investments. There was a $15 million borrowing outstanding
against one of the Company's bank lines of credit.
Net cash used by operating activities in the first six months of 1999 was
$24.3 million, consisting primarily of an increase in accounts receivable,
partially offset by net income. During the first six months of 1998, net cash
provided by operating activities was $4.1 million, consisting primarily of net
income, offset in part by an increase in accounts receivable. The significant
increase in accounts receivable during the first six months of 1999 was a
temporary condition caused by delays in billing to customers, resulting from the
implementation of an enterprise-wide information system. The Company expects its
investment in receivables to be normalized in the second half of 1999.
9
<PAGE> 10
Net cash used in investing activities in the first six months of 1999 was $25.5
million, consisting primarily of the funds used to complete the acquisitions of
Select products and ICM, as well as the Company's repurchase of approximately
1,015,000 shares of common stock. During the first six months of 1998, cash used
in investing activities was $23.2 million, primarily as a result of the
purchases of short-term investments, as well as equipment purchases.
Net cash provided by financing activities was $17.6 million for the first
six months of 1999, primarily consisting of borrowings against the Company's
line of credit. For the first six months of 1998, net cash provided by financing
activities was $0.7 million, consisting of cash received from stock option
exercises, reduced by a scheduled repayment of long term debt and the payment by
Spargo of dividends to its shareholders.
At June 30, 1999, the Company had a current ratio position of 3.5 to 1.
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.
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 during the fourth quarter of 1999.
The Company has utilized both internal and external resources to
implement the new accounting/information system. The total cost of the project
was approximately $9 million, of which approximately $8 million was
capitalized. The project was 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.
10
<PAGE> 11
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.
11
<PAGE> 12
PART II Other Information
Item 6.
b) One report on Form 8-K was filed during the quarter for which this
report is filed. This form was filed on July 15, 1999, in connection with the
Company's declaration of a stock purchase right dividend distribution.
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: August 11, 1999 /s/ John J. Cassese
--------------- ----------------------
John J. Cassese
Chairman of the Board and
President
DATE: August 11, 1999 /s/ William J. Murphy
--------------- ------------------------
William J. Murphy
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: August 11, 1999 /s/ Michael J. Shea
--------------- ----------------------
Michael J. Shea
Vice President and Controller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,755
<SECURITIES> 2,450
<RECEIVABLES> 175,793
<ALLOWANCES> 5,284
<INVENTORY> 0
<CURRENT-ASSETS> 207,836
<PP&E> 32,157
<DEPRECIATION> 10,922
<TOTAL-ASSETS> 328,465
<CURRENT-LIABILITIES> 59,313
<BONDS> 0
0
0
<COMMON> 3,235
<OTHER-SE> 253,873
<TOTAL-LIABILITY-AND-EQUITY> 328,465
<SALES> 0
<TOTAL-REVENUES> 281,015
<CGS> 0
<TOTAL-COSTS> 186,550
<OTHER-EXPENSES> 65,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390
<INCOME-PRETAX> 29,038
<INCOME-TAX> 12,278
<INCOME-CONTINUING> 16,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,760
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
</TABLE>
