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 27, 2002
Commission file number 1-9410
COMPUTER TASK GROUP, INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0912632
- ----------------------------------- -------------------------------
(State of incorporation) (IRS Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
- -------------------------------------------- --------------------------------
(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
--- ---
Number of shares of common stock outstanding:
Shares outstanding
Title of Each Class At September 27, 2002
------------------- ----------------------
Common stock, par value
$.01 per share 20,868,834
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE THREE QUARTERS ENDED
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
(amounts in thousands, except per share data)
Revenue $ 62,149 $ 77,122 $ 199,710 $247,998
Direct costs 45,250 54,780 144,385 177,412
Selling, general and administrative expenses 16,399 21,275 51,716 71,302
--------- --------- --------- --------
Operating income (loss) 500 1,067 3,609 (716)
Interest and other income 38 150 206 555
Interest and other expense (305) (958) (1,731) (3,496)
---------- ---------- ---------- ---------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle 233 259 2,084 (3,657)
Provision (benefit) for income taxes 92 77 823 (1,102)
--------- --------- --------- ---------
Net income (loss) before cumulative
effect of change in accounting principle 141 182 1,261 (2,555)
Cumulative effect of change
in accounting principle - - (37,038) -
--------- --------- ---------- --------
Net income (loss) $ 141 $ 182 $ (35,777) $ (2,555)
========= ========= ========== =========
Basic net income (loss) per share:
Income (loss) before cumulative effect
of change in accounting principle $ 0.01 $ 0.01 $ 0.08 $ (0.16)
Cumulative effect of change in
accounting principle - - (2.24) -
-------- --------- --------- --------
Basic net income (loss) per share $ 0.01 $ 0.01 $ (2.16) $ (0.16)
======== ========= ========= ========
Diluted net income (loss) per share:
Income (loss) before cumulative effect
of change in accounting principle $ 0.01 $ 0.01 $ 0.08 $ (0.16)
Cumulative effect of change in
accounting principle - - (2.19) -
-------- --------- --------- --------
Diluted net income (loss) per share $ 0.01 $ 0.01 $ (2.11) $ (0.16)
======== ========= ========= ========
Weighted average shares outstanding:
Basic 16,575 16,443 16,555 16,415
Diluted 16,813 16,443 16,938 16,415
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- ------------
(amounts in thousands)
ASSETS
- ------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 866 $ 3,362
Accounts receivable, net of allowances and reserves of $1,800,000
and $2,900,000, respectively 46,427 51,230
Prepaids and other 2,990 2,958
Deferred income taxes 830 1,089
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 51,113 58,639
Property and equipment, net of
accumulated depreciation and amortization 9,570 13,082
Property held for sale 2,190 -
Goodwill, net of accumulated amortization 37,292 74,735
Deferred income taxes 2,163 2,660
Other assets 812 682
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TOTAL ASSETS $ 103,140 $ 149,798
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 5,920 $ 8,193
Accrued compensation 16,735 24,133
Income taxes payable 1,799 -
Advance billings on contracts 491 471
Other current liabilities 3,943 5,531
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 28,888 38,328
Long-term debt 13,197 15,512
Deferred compensation benefits 8,799 8,794
Other long-term liabilities 350 537
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 51,234 63,171
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 111,492 111,500
Retained earnings 37,595 73,373
Less: Treasury stock of 6,148,990 and 6,147,810 shares, at cost, respectively (31,416) (31,410)
Stock Trusts of 4,268,779 and 4,338,000 shares, at cost, respectively (58,944) (59,239)
Other comprehensive income:
Foreign currency adjustment (6,508) (7,284)
Minimum pension liability adjustment (583) (583)
- ------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (7,091) (7,867)
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 51,906 86,627
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 103,140 $ 149,798
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE QUARTERS ENDED
SEPT. 27, SEPT. 28,
2002 2001
------------ -----------
(amounts in thousands)
Cash flows from operating activities:
Net loss $ (35,777) $ (2,555)
Adjustments:
Depreciation expense 2,769 3,546
Amortization expense - 2,981
Change in accounting principle 37,038 -
Deferred income taxes 644 1,546
Tax benefit from stock option exercises - 27
Loss on sales, disposals or impairment of fixed assets 142 71
Deferred compensation expense 5 49
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 5,658 (2,982)
(Increase) decrease in prepaids and other (40) 698
Increase in other assets (130) (58)
Decrease in accounts payable (2,501) (3,410)
Decrease in accrued compensation (7,621) (2,947)
Increase (decrease) in income taxes payable 1,986 (625)
Increase (decrease) in advance billings on contracts 20 (198)
Decrease in other current liabilities (1,337) (2,952)
Decrease in other long-term liabilities (187) (174)
----------- ------------
Net cash provided by (used in) operating activities 669 (6,983)
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (1,624) (3,324)
Proceeds from sales of fixed assets 21 56
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Net cash used in investing activities (1,603) (3,268)
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Cash flows from financing activities:
Proceeds from (payments on) long-term revolving debt, net (2,315) 13,808
Proceeds from Employee Stock Purchase Plan 267 411
Purchase of stock for treasury (6) (6)
Proceeds from other stock plans 20 124
---------- -----------
Net cash provided by (used in) financing activities (2,034) 14,337
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments 472 (62)
---------- ------------
Net increase (decrease) in cash and temporary cash investments (2,496) 4,024
Cash and temporary cash investments at beginning of year 3,362 2,562
- ------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 866 $ 6,586
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
condensed consolidated 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 consolidated 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 $(7,091,000) and
$(7,867,000) at September 27, 2002 and December 31, 2001, respectively. Total
comprehensive (loss) for the three quarters ended September 27, 2002 and
September 28, 2001 totaled $(35,001,000) and $(2,858,000), respectively. Total
comprehensive income for the quarters ended September 27, 2002 and September 28,
2001 was $618,000 and $1,173,000, respectively.
4. Accounting Standards Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (FAS) No. 141, "Business Combinations," and FAS
No. 142, "Goodwill and Other Intangible Assets." These standards 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 existing
goodwill and intangible assets, and such assets acquired after June 30, 2001.
FAS No. 142 was effective for fiscal years beginning after December 15, 2001.
Accordingly, the Company adopted this standard as of January 1, 2002, and no
longer amortizes its existing goodwill after that date.
5
In conjunction with the adoption of FAS No. 142, the initial valuation of
the business unit for which the Company's goodwill relates was completed by an
independent appraisal company. Such valuation indicated that the carrying value
of the business unit was greater than the determined fair value. The goodwill on
the Company's balance sheet primarily relates to the acquisition in February
1999 of the healthcare information technology services provider Elumen
Solutions, Inc. Although the revenues and profits for this unit dipped in 2000
and 2001, in 2002 the revenues and profits for that unit are similar to when
the acquisition was completed in 1999. However, the valuation of technology
companies in 1999 was relatively high as compared to the valuations at the
beginning of 2002. Accordingly, as a result of the independent appraisal based
upon the fair market values of similar companies and the subsequent independent
valuation of the implied goodwill which was completed during the third quarter
of 2002, the Company recorded a $37.0 million non-cash charge for impairment of
goodwill in that business unit in the Company's year-to-date financial results.
There was no tax associated with this impairment as the amortization of this
goodwill was not deductible for tax purposes.
The effect of the amortization of the Company's existing goodwill on net
income (loss), and basic and diluted net income (loss) per share for the
quarters and three quarters ended September 27, 2002 and September 28, 2001,
respectively, is as follows:
For the quarter ended
Sept. 27, Sept. 28,
2002 2001
---------- --------
NET INCOME:
Reported net income $ 141 $ 182
Goodwill amortization - 993
--------- ---------
Adjusted net income $ 141 $ 1,175
========= =========
BASIC AND DILUTED NET INCOME PER SHARE:
Reported basic and diluted net income per share $ 0.01 $ 0.01
Goodwill amortization - 0.06
--------- ---------
Adjusted basic and diluted net income per share $ 0.01 $ 0.07
========= =========
For the three quarters ended
Sept. 27, Sept. 28,
2002 2001
--------- --------
NET INCOME (LOSS):
Reported net loss $ (35,777) $ (2,555)
Goodwill amortization - 2,981
--------- ---------
Adjusted net income (loss) $ (35,777) $ 426
========== =========
BASIC NET INCOME (LOSS) PER SHARE:
Reported basic net loss per share $ (2.16) $ (0.16)
Goodwill amortization - 0.19
--------- ---------
Adjusted basic net income (loss) per share $ (2.16) $ 0.03
========= =========
DILUTED NET INCOME (LOSS) PER SHARE:
Reported diluted net loss per share $ (2.11) $ (0.16)
Goodwill amortization - 0.19
--------- ---------
Adjusted diluted net income (loss) per share $ (2.11) $ 0.03
========= =========
Included in the net loss for the three quarters ended September 27, 2002 is
the charge for the cumulative effect of a change in accounting principle
related to the adoption of FAS No. 142 of $37.0 million, or $2.24 per basic
share and $2.19 per diluted share. Without this charge, reported net income
in 2002 was $1.3 million, or $0.08 per basic and diluted share.
6
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses the accounting and reporting
for the impairment or disposal of long-lived assets. The Company adopted this
standard effective January 1, 2002. During the first quarter of 2002, the
Company began to actively market one of its owned properties for sale, and has
classified this property as held for sale on its condensed consolidated balance
sheet as of September 27, 2002. During the 2002 third quarter, the Company made
an adjustment of approximately $0.1 million to the carrying value of this asset
in order to write-down the property's value to the anticipated net fair value.
During the 2002 first quarter, based upon new interpretive guidance issued
for the accounting for billable expenses under Emerging Issues Task Force issue
No. D-103, "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred," the Company began to record its billable
expenses on a gross basis as both revenue and direct costs, rather than on a net
basis. Such costs totaled $1.6 million and $2.0 million in the third quarter of
2002 and 2001, respectively, and $5.4 million and $6.4 million in the
year-to-date periods for 2002 and 2001, respectively. The 2001 revenue and
direct cost balances on the condensed consolidated statement of operations have
been restated by these amounts from that which was previously reported.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER AND THREE QUARTERS ENDED SEPTEMBER 27, 2002
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 (SEC). Such forward-looking
statements involve risks and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements.
Forward-looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. Among
the important factors on which such statements are based are assumptions
concerning the anticipated growth of the information technology industry, the
continued need of current and prospective customers for the Company's services,
the availability of qualified professional staff, and price and wage inflation.
RESULTS OF OPERATIONS
To better understand the financial trends of the Company, the following
tables set forth data as contained on the condensed consolidated statements of
operations, with the percentage information calculated as a percentage of
consolidated revenues.
FOR THE QUARTER ENDED: SEPT. 27, SEPT. 28,
2002 2001
------ ------
Revenue 100.0% $62,149 100.0% $77,122
Direct costs 72.8% 45,250 71.0% 54,780
Selling, general, and administrative expenses 26.4% 16,399 27.6% 21,275
- -----------------------------------------------------------------------------------------------------
Operating income 0.8% 500 1.4% 1,067
Interest and other expense, net (0.4)% (267) (1.1)% (808)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 0.4% 233 0.3% 259
Provision for income taxes 0.2% 92 0.1% 77
- -----------------------------------------------------------------------------------------------------
Net income 0.2% $ 141 0.2% $ 182
==== ======= ==== ======
8
FOR THE THREE QUARTERS ENDED: SEPT. 27, SEPT. 28,
2002 2001
------ ------
Revenue 100.0% $199,710 100.0% $247,998
Direct costs 72.3% 144,385 71.5% 177,412
Selling, general, and administrative expenses 25.9% 51,716 28.8% 71,302
- --------------------------------------------------------------------------------------------------------------
Operating income (loss) 1.8% 3,609 (0.3)% (716)
Interest and other expense, net (0.8)% (1,525) (1.2)% (2,941)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 1.0% 2,084 (1.5)% (3,657)
Provision (benefit) for income taxes 0.4% 823 (0.5)% (1,102)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of
change in accounting principle 0.6% 1,261 (1.0)% (2,555)
Cumulative effect of change in accounting principle (18.5)% (37,038) - -
------- -------- ------ ------
Net loss (17.9)% $(35,777) (1.0)% $(2,555)
======= ========= ====== ========
CTG's third quarter 2002 revenue was $62.1 million, a decrease of 19.5
percent when compared to third quarter 2001 revenue of $77.1 million, while 2002
year-to-date revenues were $199.7 million, a decrease of 19.5 percent from 2001
year-to-date revenues of $248.0 million. The year-over-year revenue decrease is
a result of the ongoing recession in the technology sector which has had a
significant negative effect on customer spending for information technology
services. North American revenue decreased by $39.2 million or 18.5 percent in
the year-to-date 2002 period as compared to 2001, while revenue from European
operations decreased by $9.1 million, or 25.0 percent. The European decrease is
also due to a general economic slowdown in the countries in which the Company
operates.
The 2001 to 2002 year-to-date revenue decline was slightly offset by the
weakening of the U.S. dollar as compared to the currencies of the Netherlands,
Belgium, the United Kingdom, and Luxembourg. If there had been no change in
these foreign currency exchange rates from 2001 to 2002, total consolidated
revenues would have been $1.2 million lower.
In November 2000, the Company signed a contract with IBM for three years as
one of IBM's national technical service providers for the United States. In the
third quarter of 2002, IBM continued to be the Company's largest customer,
accounting for $12.2 million or 19.6 percent of total revenue as compared to
$17.3 million or 22.4 percent of third quarter 2001 revenue. For the 2002
year-to-date period, revenues from IBM were $38.9 million or 19.5 percent of
consolidated revenue, as compared to $63.7 million or 25.7 percent of
consolidated 2001 revenues. Although revenues from IBM have been constrained in
2002, the Company expects to continue to derive a significant portion of its
revenue from IBM throughout the remainder of 2002 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 diversity of the projects performed for IBM and the
number of locations and divisions involved.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 72.8 percent of revenue in the third quarter of
2002 as compared to 71.0 percent of third quarter 2001 revenue, and 72.3 percent
of 2002 year-to-date revenue as compared to 71.5 percent of 2001 year-to-date
revenue. The increase in direct costs as a percentage of revenue in 2002 as
compared to 2001 is primarily due to the recession mentioned above which has
negatively affected the rates at which the Company bills customers for its
services.
9
Selling, general and administrative (SG&A) expenses were 26.4 percent of
revenue in the third quarter of 2002 as compared to 27.6 percent of revenue in
the third quarter of 2001, and 25.9 percent in the 2002 year-to-date period as
compared to 28.8 percent in the 2001 year-to-date period. During 2002, due to
the adoption of Financial Accounting Standard (FAS) No. 142, the Company
discontinued the amortization of its existing goodwill. In the 2001 third
quarter and year-to-date period, such amortization totaled approximately $1.0
million and $3.0 million, respectively. If such amortization expense was
excluded from the 2001 balances, SG&A expense as a percentage of revenue would
have been 26.3 percent in the 2001 third quarter, and 27.5 percent in the 2001
year-to-date period. The decline in SG&A expense year-over-year is due to the
Company continuing to align its cost structure to the current level of revenue.
Operating income was 0.8 percent of revenue in the 2002 third quarter as
compared to 1.4 percent of revenue in the 2001 third quarter, and 1.8 percent in
the 2002 year-to-date period as compared to an operating loss of (0.3) percent
in the 2001 year-to-date period. Without the amortization expense in 2001,
operating income would have been 2.7 percent in the third quarter, and 0.9
percent in the year-to-date period. Operating income from North American
operations was $1.8 million and $7.3 million in the 2002 third quarter and
year-to-date period, respectively, while European operations recorded an
operating loss of $1.3 million and $3.7 million, respectively, in such periods.
Interest and other expense, net was 0.8 percent of revenue in the 2002
year-to-date period and 1.2 percent in the corresponding 2001 period. The
decrease as a percentage of revenue from 2001 to 2002 is primarily due to lower
average outstanding indebtedness balances and lower interest rates. The
provision (benefit) for income taxes was 39.5 percent in the 2002 year-to-date
period and (30.1) percent in the corresponding 2001 period. The provision
(benefit) rate in each year is calculated based upon the estimated tax rate
(benefit) for the entire year.
Net income for the third quarter of 2002 was 0.2 percent of revenue or
$0.01 per diluted share, compared to 0.2 percent of revenue or $0.01 per diluted
share in 2001. Net income before the cumulative effect of change in accounting
principle for the 2002 year-to-date period was 0.6 percent of revenue or $0.08
per diluted share, compared to a loss of (1.0) percent of revenue or $(0.16) per
diluted share in 2001. Without the amortization expense, net income in the 2001
third quarter would have been 1.5 percent of revenue or $0.07 per diluted share
and in the 2001 year-to-date period would have been 0.2 percent of revenue or
$0.03 per diluted share. Diluted earnings per share were calculated using 16.9
million and 16.4 million equivalent shares outstanding in 2002 and 2001,
respectively. The increase in equivalent shares outstanding in 2002 is due to
additional weighted average shares outstanding in 2002.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (FAS) No. 141, "Business Combinations," and FAS
No. 142, "Goodwill and Other Intangible Assets." These standards 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 existing
goodwill and intangible assets, and such assets acquired after June 30, 2001.
FAS No. 142 was effective for fiscal years beginning after December 15, 2001.
Accordingly, the Company adopted this standard as of January 1, 2002, and no
longer amortizes its existing goodwill after that date.
10
In conjunction with the adoption of FAS No. 142, the initial valuation of
the business unit for which the Company's goodwill relates was completed by an
independent appraisal company. Such valuation indicated that the carrying
value of the business unit was greater than the determined fair value.
The goodwill on the Company's balance sheet primarily relates to the acquisition
in February 1999 of the healthcare information technology services provider
Elumen Solutions, Inc. Although the revenues and profits for this unit dipped in
2000 and 2001, in 2002 the revenues and profits for that unit are similar to
when the acquisition was completed in 1999. However, the valuation of technology
company's in 1999 was relatively high as compared to the valuations at the
beginning of 2002. Accordingly, as a result of the independent appraisal based
upon the fair market values of similar companies and the subsequent independent
valuation of the implied goodwill which was completed during the third quarter
of 2002, the Company recorded a $37.0 million non-cash charge for impairment of
goodwill in that business unit in the Company's year-to-date financial results.
There was no tax associated with this impairment as the amortization of this
goodwill was not deductible for tax purposes.
In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses the accounting and reporting
for the impairment or disposal of long-lived assets. The Company adopted this
standard effective January 1, 2002. During the first quarter of 2002, the
Company began to actively market one of its owned properties for sale, and has
classified this property as held for sale on its condensed consolidated balance
sheet as of September 27, 2002. During the 2002 third quarter, the Company made
an adjustment of approximately $0.1 million to the carrying value of this asset
in order to write-down the property's value to the anticipated net fair value.
During the first quarter of 2002, based upon new interpretive guidance
issued for the accounting for billable expenses under Emerging Issues Task Force
issue No. D-103, "Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred," the Company began to record its billable
expenses on a gross basis as both revenue and direct costs, rather than on a net
basis. Such costs totaled $1.6 million and $2.0 million in the third quarter of
2002 and 2001, respectively, and $5.4 million and $6.4 million in the
year-to-date periods for 2002 and 2001, respectively. The 2001 revenue and
direct cost balances on the condensed consolidated statement of operations have
been restated by these amounts from that which was previously reported.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure of Critical Accounting Policies" (FR No. 60) in December
2001 which requires companies to disclose those accounting policies that include
estimates which could be of a critical nature. In evaluating FR No. 60, CTG has
determined that its sole critical accounting estimates involve the valuation of
its existing goodwill balance. As previously discussed, FAS No. 142 discontinued
the practice of amortizing goodwill and indefinite-lived intangible assets and
initiated a review, at least annually, for impairment. With the adoption of FAS
No. 142 in 2002, CTG recorded a charge of $37.0 million representing the
cumulative effect of the change in accounting principle. Going forward, the
remaining goodwill balance will be evaluated annually or more frequently if
facts and circumstances indicate impairment may exist. These evaluations will be
based on estimates and assumptions which analyze the appraised value of similar
transactions from which the goodwill arose; the appraised value of similar
companies, and estimates of future discounted cash flows. The estimates and
assumptions on which the Company's evaluations are based necessarily involve
judgements and are based on currently available information, any of which could
prove wrong or inaccurate when made, or become wrong or inaccurate as a result
of subsequent events. Changes in future evaluations could lead to additional
impairment charges.
11
FINANCIAL CONDITION
Cash provided by operating activities was $0.7 million through the first
three quarters of 2002. Net loss totaled $(35.8) million, while the non-cash
adjustment for the change in accounting principle totaled $37.0 million, and
other non-cash adjustments primarily consisting of depreciation expense and
deferred income taxes totaled $3.6 million. Accounts receivable decreased by
$5.7 million as compared to December 31, 2001 due to the timing of the
collection of outstanding balances in the third quarter of 2002. Accounts
payable decreased $2.5 million and other current liabilities decreased $1.3
million primarily due to the timing of certain payments. Accrued compensation
decreased $7.6 million due to the timing of the US bi-weekly payroll, and fewer
total employees. Income taxes payable increased $2.0 million due to the Company
having taxable income in the 2002 year-to-date period as compared to a
significant loss in the corresponding 2001 period.
Net property and equipment and property held for sale decreased $1.3
million. Additions to property and equipment were $1.6 million, offset by
depreciation expense of $2.8 million, and foreign currency translation
adjustments of $0.1 million. The Company has no material commitments for capital
expenditures at September 27, 2002.
Financing activities used $2.0 million of cash through the first three
quarters of 2002. Net payments on long-term revolving debt totaled $2.3 million,
and the Company received $0.3 million from employees for stock purchased under
the Employee Stock Purchase Plan.
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. At September 27,
2002, 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 2002.
The Company believes existing internally available funds, cash potentially
generated by operations, and available borrowings under the Company's revolving
line of credit will be sufficient to meet foreseeable working capital, capital
expenditure, and possible stock repurchase requirements, and to allow for future
internal growth and expansion.
12
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 $13.0 million of borrowings at September
27, 2002 under a revolving credit agreement, which expose the Company to risk of
earnings or cash flow loss due to 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.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation completed within 90 days prior to the filing of
this report with the SEC, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective for gathering and disclosing information as required
for reports filed under the Securities and Exchange Act of 1934. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of this
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT DESCRIPTION PAGE
11. Statement re: computation of earnings per share 17
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the third quarter of 2002:
DATE DESCRIPTION
July 8, 2002 Press release entitled "CTG Announces 2002 Second Quarter
Conference Call Information"
July 15, 2002 Press release entitled "CTG Reports 2002 Second Quarter
Financial Results"
September 16, 2002 Press release entitled "CTG Announces Completion of Valuation
of Intangible Assets and Comments on Expected 2002 Third
Quarter Results"
* * * * * * *
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 11, 2002
14
CERTIFICATION
I, James R. Boldt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Computer Task
Group, Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which periodic
reports are being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this report (the "Evaluation Date"); and
c. presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditor and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. any significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ James R. Boldt
------------------
James R. Boldt
Chairman, President and CEO
15
CERTIFICATION
I, Gregory M. Dearlove, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Computer Task
Group, Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which periodic
reports are being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this report (the "Evaluation Date"); and
c. presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditor and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. any significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Gregory M. Dearlove
------------------------
Gregory M. Dearlove
Vice President and CFO
16