UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2001
Commission file number 1-9410
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COMPUTER TASK GROUP, INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0912632
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(State of incorporation) (IRS Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 882-8000
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
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Number of shares of common stock outstanding:
Shares outstanding
Title of each class at September 28, 2001
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Common stock, par value
$.01 per share 20,870,014
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter Ended For the Three Quarters Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2001 2000 2001 2000
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(amounts in thousands, except per share data)
Revenue $ 75,065 $ 79,842 $ 241,589 $ 262,305
Direct costs 52,723 55,190 171,003 186,207
Selling, general and administrative expenses 21,275 23,630 71,302 78,676
Restructuring charge (credit) - (1,538) - 4,157
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Operating income (loss) 1,067 2,560 (716) (6,735)
Interest and other income 150 131 555 260
Interest and other expense (958) (897) (3,496) (2,482)
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Income (loss) before income taxes 259 1,794 (3,657) (8,957)
Provision (benefit) for income taxes 77 2,003 (1,102) (3,125)
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Net income (loss) $ 182 $ (209) $ (2,555) $ (5,832)
=========== =========== ============ ===========
Net income (loss) per share:
Basic and diluted $ 0.01 $ (0.01) $ (0.16) $ (0.36)
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Weighted average shares outstanding:
Basic and diluted 16,443 16,207 16,415 16,140
The accompanying notes are an integral part of these consolidated financial
statements.
2
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPT. 28, DECEMBER 31,
2001 2000
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(amounts in thousands)
ASSETS
Current Assets:
Cash and temporary cash investments $ 6,586 $ 2,562
Accounts receivable, net of allowances and reserves 60,562 57,968
Prepaids and other 2,047 2,736
Deferred income taxes 1,572 2,799
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Total current assets 70,767 66,065
Property and equipment, net of
accumulated depreciation and amortization 13,415 13,784
Acquired intangibles, net of accumulated
amortization of $17,045,000 and $14,130,000, respectively 75,758 78,771
Deferred income taxes 2,776 3,095
Other assets 710 652
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Total assets $ 163,426 $ 162,367
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,059 $ 12,563
Accrued compensation 23,134 26,121
Income taxes payable 3,133 3,806
Advance billings on contracts 444 642
Other current liabilities 7,429 10,389
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Total current liabilities 43,199 53,521
Long-term debt 23,508 9,700
Deferred compensation benefits 9,691 9,642
Other long-term liabilities 537 711
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Total liabilities 76,935 73,574
Shareholders' Equity:
Common stock, par value $.01 per share, 150,000,000
shares authorized; 27,017,824 shares issued 270 270
Capital in excess of par value 111,569 111,564
Retained earnings 73,020 75,575
Less: Treasury stock of 6,147,810 and 6,146,759 shares, at cost (31,410) (31,404)
Stock Trusts of 4,377,350 and 4,507,903 shares, at cost (59,407) (59,964)
Accumulated other comprehensive income:
Foreign currency adjustment (6,709) (6,406)
Minimum pension liability adjustment (842) (842)
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Accumulated other comprehensive income (7,551) (7,248)
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Total shareholders' equity 86,491 88,793
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Total liabilities and shareholders' equity $ 163,426 $ 162,367
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The accompanying notes are an integral part of these consolidated financial
statements.
3
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE QUARTERS ENDED
SEPT. 28, SEPT. 29,
2001 2000
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(amounts in thousands)
Cash flows from operating activities:
Net loss $ (2,555) $ (5,832)
Adjustments:
Depreciation expense 3,546 3,493
Amortization expense 2,981 3,827
Deferred income taxes 1,546 314
Tax benefit from stock option exercises 27 68
Loss on sales or disposals of fixed assets 71 33
Deferred compensation expense (forfeitures) 49 (267)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,982) 18,798
Decrease in prepaids and other 698 422
Increase in other assets (58) (222)
Increase (decrease) in accounts payable (3,410) 1,379
Decrease in accrued compensation (2,947) (6,954)
Decrease in income taxes payable (625) (6,310)
Decrease in advance billings on contracts (198) (151)
Decrease in other current liabilities (2,952) (334)
Decrease in other long-term liabilities (174) (62)
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Net cash provided by (used in) operating activities (6,983) 8,202
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Cash flows from investing activities:
Additions to property and equipment (3,324) (4,229)
Proceeds from sales of fixed assets 56 20
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Net cash used in investing activities (3,268) (4,209)
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Cash flows from financing activities:
Proceeds from (payments on) long-term revolving debt, net 13,808 (7,830)
Proceeds from Employee Stock Purchase Plan 411 578
Purchase of stock for treasury (6) (125)
Proceeds from other stock plans 124 1,205
Dividends paid - (810)
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Net cash provided by (used in) financing activities 14,337 (6,982)
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Effect of exchange rate changes on cash and temporary cash investments (62) (1,024)
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Net increase (decrease) in cash and temporary cash investments 4,024 (4,013)
Cash and temporary cash investments at beginning of year 2,562 10,684
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Cash and temporary cash investments at end of quarter $ 6,586 $ 6,671
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The accompanying notes are an integral part of these consolidated financial
statements.
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COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
The condensed consolidated financial statements included herein
reflect, in the opinion of the management of Computer Task Group, Incorporated
("CTG" or "the Company"), all normal recurring adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
periods presented.
2. Basis of Presentation
The condensed consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. Management believes that the information and disclosures
provided herein are adequate to present fairly the financial position, results
of operations and cash flows of the Company. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest Annual Report on Form 10-K filed with the SEC.
3. Comprehensive Income
Accumulated other comprehensive income totaled $(7,551,000) and
$(7,248,000) at September 28, 2001 and September 29, 2000, respectively. These
balances included adjustments of $991,000 and $(1,165,000) related to foreign
currency translation made in the third quarter of 2001 and 2000, respectively,
and adjustments of $(303,000) and $(2,264,000) related to foreign currency
translation in made in the nine month periods ended September 28, 2001 and
September 29, 2000, respectively.
4. Debt
On May 11, 2001, the Company and its bank group entered into a new
credit agreement. The new agreement has interest rates similar to the previous
agreement, and provides certain of the Company's assets as security for
outstanding borrowings. At September 28, 2001, the borrowing limit under the
agreement was $64.9 million.
5. Accounting Standards Pronouncements
On January 1, 2001, the Company adopted the provisions of Financial
Accounting Standard (FAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and those of FAS No. 137 and No. 138, which deferred the
effective date and amended FAS No. 133, respectively. These standards provide
accounting and reporting guidelines for derivative instruments, including those
embedded in other contracts, and for hedging activities. The Company evaluated
each of these standards and compared the guidance provided to its current
accounting practices, and determined the adoption of the standards had no effect
on the consolidated financial condition and required minimal disclosure by the
Company.
5
In July 2001, the FASB issued FAS No. 141, "Business Combinations", and
FAS No. 142, "Goodwill and Other Intangible Assets". These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets. FAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations with limited exceptions for combinations
initiated prior to July 1, 2001. In addition, it clarifies the criteria for
recognition of intangible assets apart from goodwill. This statement is
effective for business combinations completed after June 30, 2001.
FAS No. 142 discontinues the practice of amortizing goodwill and
indefinite-lived intangible assets and initiates a review, at least annually,
for impairment. Intangible assets with a determinable useful life will continue
to be amortized over their useful lives. FAS No. 142 applies to goodwill and
intangible assets acquired after June 30, 2001. Goodwill and intangible assets
existing prior to July 1, 2001 will be affected when the Company adopts the
statement. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. The Company is currently evaluating the impact of the adoption of
these standards and has not yet determined the effect of adoption on its
financial position and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER AND THREE QUARTERS ENDED SEPTEMBER 28, 2001
Forward-Looking Statements
Statements included in this Management's Discussion and Analysis of
Results of Operations and Financial Condition 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. 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.
Results of Operations
To better understand the financial trends of the Company, the following
tables set forth data as contained on the consolidated statements of operations,
with the percentage information calculated as a percentage of consolidated
revenues.
September 28, September 29,
For the quarter ended: 2001 2000
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Revenue 100.0% $75,065 100.0% $79,842
Direct costs 70.2% 52,723 69.1% 55,190
Selling, general, and administrative expenses 28.4% 21,275 29.6% 23,630
Restructuring charge (credit) 0.0% - (1.9)% (1,538)
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Operating income 1.4% 1,067 3.2% 2,560
Interest and other expense, net 1.1% (808) 1.0% (766)
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Income before income taxes 0.3% 259 2.2% 1,794
Provision for income taxes 0.1% 77 2.5% 2,003
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Net income (loss) 0.2% $ 182 (0.3)% $ (209)
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September 28, September 29,
For the three quarter's ended: 2001 2000
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Revenue 100.0% $241,589 100.0% $262,305
Direct costs 70.8% 171,003 71.0% 186,207
Selling, general, and administrative expenses 29.5% 71,302 30.0% 78,676
Restructuring charge 0.0% - 1.6% 4,157
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Operating loss (0.3)% (716) (2.6)% (6,735)
Interest and other expense, net (1.2)% (2,941) (0.8)% (2,222)
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Loss before income taxes (1.5)% (3,657) (3.4)% (8,957)
Benefit for income taxes (0.4)% (1,102) (1.2)% (3,125)
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Net loss (1.1)% $ (2,555) (2.2)% $ (5,832)
========= =========== ========= ==========
CTG's third quarter 2001 revenue was $75.1 million, a decrease of 5.9
percent when compared to third quarter 2000 revenue of $79.8 million, while
year-to-date 2001 revenues were $241.6 million, a decrease of 7.9 percent when
compared to year-to-date 2000 revenues of $262.3 million. The year over year
revenue decrease in both the third quarter and the year-to-date period is a
result of the continued economic slowdown in the current year, which has
negatively affected the purchase of IT services by companies worldwide. The
Company anticipates the slowdown to continue through the 2001 fourth quarter,
and may also continue into 2002. North American revenue decreased by $9.0
million or 4.2 percent in the year-to-date 2001 period as compared to 2000,
while revenue from European operations decreased by $11.7 million, or 24.4
percent in the same time period. The European revenue decline is primarily due
to a helpdesk contract that ended in the second quarter of 2000, and the
economic slowdown noted above.
The 2000 to 2001 quarter-to-quarter and year-to-date revenue decline
was slightly impacted by the strengthening of the U.S. dollar as compared to the
currencies of the Netherlands, Belgium, the United Kingdom, and Luxembourg, the
countries in which the Company's European subsidiaries operate. If there had
been no change in these foreign currency exchanges rates from the third quarter
of 2000 to 2001, total consolidated revenues would have been $0.2 million
higher, resulting in a quarter-to-quarter consolidated revenue decline of 5.6
percent. If there had been no change in these foreign currency exchange rates
for the year-to-date 2001 period as compared to the 2000 year-to-date period,
total consolidated revenues would have been $2.1 million higher, resulting in a
year-to-date revenue decline of 7.1 percent. This additional $2.1 million
increase in revenue would have decreased the European revenue decline in 2001
from 2000 to 20.0 percent.
In November 2000, the Company signed a new contract with IBM for three
years as one of IBM's national technical service providers for the United
States. In the third quarter of 2001, IBM continued to be the Company's largest
customer, accounting for $17.1 million or 22.8 percent of total revenue as
compared to $22.2 million or 27.8 percent of third quarter 2000 revenue. For the
2001 year-to-date period, IBM revenues have totaled $62.8 million or 26.0
percent of revenue, as compared to $73.3 million or 27.9 percent of revenue in
the year-to-date 2000 period. Although revenues from IBM have been constrained
in 2001, CTG expects to continue to derive a significant portion of its revenue
from IBM throughout the fourth quarter of 2001 and in future years. While the
decline in revenue from IBM has had a negative effect on the Company's revenues
and profits, the Company believes a simultaneous loss of all IBM business is
unlikely to occur due to the existence of the national contract, the diversity
of the projects performed for IBM, and the number of locations and divisions
involved.
8
Direct costs, defined as costs for billable staff, were 70.2 percent of
revenue in the third quarter of 2001 as compared to 69.1 percent of third
quarter 2000 revenue, and 70.8 percent of the 2001 year-to-date revenue as
compared to 71.0 percent of the 2000 year-to-date revenue. For the year-to-date
2001 period as compared to the year-to-date 2000 period, the Company has been
able to maintain its direct costs to revenue percentage primarily due to an
increase in the utilization of its billable employees.
Selling, general and administrative expenses were 28.4 percent of
revenue in the third quarter of 2001 as compared to 29.6 percent of third
quarter 2000 revenue, and 29.5 percent of the 2001 year-to-date revenue as
compared to 30.0 percent of the 2000 year-to-date revenue. The percentage
decline in selling, general and administrative expense from the third quarter
of 2000 to the third quarter of 2001 is due to the Company implementing expense
reductions to better align CTG's cost structure with current revenue levels.
While year-to-date selling, general and administrative expenses decreased 9.4
percent year over year, there was only a slight decrease as a percentage of
revenue from 2000 to 2001 due to the revenue decline discussed above.
In the first quarter of 2000, the Company recorded a restructuring
charge of $5.7 million, which consisted primarily of severance and related costs
of $4.2 million for approximately 400 employees, costs associated with the
consolidation of facilities of $0.7 million, and $0.8 million for other exit
costs related to the restructuring plan. On an after-tax basis, the charge was
$3.8 million, or $0.23 per diluted share. At September 29, 2000, approximately
$0.7 million of the total charge of $5.7 million was included in other current
liabilities on the consolidated balance sheet. The Company completed its
restructuring plan as of March 30, 2001.
Operating income (loss) was 1.4 percent of revenue in the third quarter
of 2001 as compared to 3.2 percent of third quarter 2000 revenue, and (0.3)
percent of 2001 year-to-date revenue as compared to (2.6) percent of 2000
year-to-date revenue. Included in operating income in the third quarter of 2000
was a restructuring credit of $1.5 million. Without this credit, the 2000 third
quarter operating income would have been 1.3 percent. Without the restructuring
charge in the year-to-date 2000 period, the operating loss would have been (1.0)
percent. Operating income from North American operations was $1.8 million in the
2001 third quarter, and $1.1 million in the 2001 year-to-date period, while
European operations recorded operating losses of $(0.7) million in the 2001
third quarter, and $(1.8) million in the 2001 year-to-date period.
Interest and other expense, net was 1.2 percent of revenue in the
year-to-date 2001 period and 0.8 percent in the comparable 2000 period. The
increase as a percentage of revenue from 2000 to 2001 is primarily due to an
increase in interest expense related to outstanding long-term debt and the
revenue decline discussed above. The benefit rate for income taxes was 30.1
percent in 2001 and 34.9 percent in 2000. The benefit rate in each quarter is
calculated based upon the estimated tax (benefit) rate for the entire year, and
is adjusted each quarter as needed.
The net loss for the 2001 year-to-date period was (1.1) percent of
revenue or $(0.16) per diluted share, compared to a loss of (2.2) percent of
revenue or $(0.36) per diluted share in 2000. Without the restructuring charge,
the net loss in 2000 would have been $(0.18) per diluted share. Diluted earnings
per share were calculated using 16.4 million and 16.1 million equivalent shares
outstanding in 2001 and 2000, respectively.
9
Financial Condition
Cash used in operating activities was $7.0 million for the year-to-date
2001 period. The net loss totaled $2.6 million, and non-cash adjustments
consisting primarily of depreciation and amortization expense and deferred taxes
totaled $8.1 million. Accounts receivable increased by $3.0 million as compared
to December 31, 2000, as a result of slower accounts receivable turnover, offset
by a decrease in revenue, in the third quarter of 2001 as compared to the fourth
quarter of 2000. Accounts payable and other current liabilities decreased $3.4
and $3.0 million, respectively, primarily due to the timing of certain payments.
Accrued compensation decreased $2.9 million due to fewer total employees. Income
taxes payable decreased $0.6 million due to the taxable loss incurred in 2001.
Net property and equipment decreased $0.4 million. Additions to
property and equipment were $3.3 million, offset by depreciation expense of $3.5
million and $0.2 million of translation adjustments. The Company has no material
commitments for capital expenditures at September 28, 2001.
Financing activities provided $14.3 million of cash in 2001. Net
proceeds from long-term revolving debt totaled $13.8 million. The Company
received $0.4 million from employees for stock purchased under the Employee
Stock Purchase Plan, and $0.1 million from other stock plans.
The Company is authorized to repurchase a total of 3.4 million shares
of its common stock for treasury and the Company's stock trusts. As of September
28, 2001, approximately 3.2 million shares have been repurchased under the
authorizations, leaving 0.2 million shares authorized for future purchases. No
share purchases have been made in 2001.
The Company believes existing internally available funds, cash
generated by operations, and available borrowings will be sufficient to meet
foreseeable working capital, stock repurchase, and capital expenditure
requirements and to allow for future internal growth and expansion.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is nominally exposed to market risk in the normal course of
its business operations. The Company has $23.5 million of borrowings at
September 28, 2001, primarily under a revolving credit agreement, which exposes
the Company to risk of earnings or cash flow loss due to negative changes in
market interest rates. Additionally, as the Company sells its services in North
America and in Europe, financial results could be affected by weak economic
conditions in those markets.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description Page
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11. Statement re: computation of earnings per share 13
Reports on Form 8-K
Date Description
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July 12, 2001 Press release entitled "CTG Announces 2001 Second Quarter Conference Call Information and
Comments on Expected Results."
July 16, 2001 Press release entitled "CTG Reports 2001 Second Quarter Results," and second press release
entitled "CTG Appoints Randolph A. Marks Chairman and James R. Boldt Chief Executive Officer."
* * * * * * *
SIGNATURE
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.
COMPUTER TASK GROUP, INCORPORATED
By: /s/ Gregory M. Dearlove
------------------------------------
Gregory M. Dearlove
Principal Accounting and
Financial Officer
Title: Vice President and Chief
Financial Officer
Date: November 9, 2001
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