UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______ to _______
Commission File No. 1-9410
COMPUTER TASK GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
State of New York 16-0912632
(State of incorporation) (I.R.S. Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
(Address of principal executive offices) (Zip Code)
(716) 882-8000
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Rights to Purchase Series A
Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
YES NO X
----- -----
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act
YES NO X
----- -----
Note - Checking the box above will not relieve any Registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those sections.
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large Accelerated Filer Accelerated Filer X Non-Accelerated Filer
----- ----- -----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act) YES NO X
----- -----
The aggregate market value of the Registrant's voting and non-voting common
equity, computed by reference to the price at which the common equity was last
sold on the last business day of the Registrant's most recently completed second
quarter was $60.6 million. Solely for the purposes of this calculation, all
persons who are or may be executive officers or directors of the Registrant and
all persons who have filed a Schedule 13D or Schedule 13G with respect to the
Registrant's stock have been deemed to be affiliates.
The total number of shares of Common Stock of the Registrant outstanding at
March 7, 2006 was 20,491,934.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Company's definitive proxy statement to be filed under
the Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year ended December 31, 2005, are incorporated by reference into Part III
hereof. Except for those portions specifically incorporated by reference herein,
such document shall not be deemed to be filed with the Commission as part of
this Form 10-K.
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PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements by management and the Company
that are subject to a number of risks and uncertainties. The forward-looking
statements contained in the report are based on information as of the date of
this report. The Company assumes no obligation to update these statements based
on information from and after the date of this report. Generally,
forward-looking statements include words or phrases such as "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects," "could,"
"may," "might," "should," "will" and words and phrases of similar impact. The
forward-looking statements include, but are not limited to, statements regarding
future operations, industry trends or conditions and the business environment,
and statements regarding future levels of, or trends in, revenues, operating
expenses, capital expenditures, and financing. The forward-looking statements
are made pursuant to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Numerous factors could cause actual results to differ
materially from those in the forward-looking statements, including the
following: (i) industry conditions, including fluctuations in demand for IT
services, (ii) the availability to us of qualified professional staff, (iii)
industry competition, (iv) rate and wage inflation or deflation, (v) risks
associated with operating in foreign jurisdictions, (vi) the impact of current
and future laws and government regulation, as well as repeal or modification of
same, affecting the IT solutions and staffing industry, taxes and the Company's
operations in particular, (vii) renegotiations, nullification, or breaches of
contracts with customers, vendors, subcontractors or other parties, (viii)
consolidation among the Company's competitors or customers, and (ix) the risks
described in Item 1A of this annual report on Form 10-K and from time to time in
the Company's reports to the Securities and Exchange Commission.
ITEM 1. BUSINESS
OVERVIEW
Computer Task Group, Incorporated (the Company, CTG, or the Registrant) was
incorporated in Buffalo, New York on March 11, 1966, and its corporate
headquarters are located at 800 Delaware Avenue, Buffalo, New York 14209
(716-882-8000). CTG is an international information technology (IT) solutions
and staffing company. CTG employs approximately 3,600 people worldwide and
serves customers through an international network of offices in North America
and Europe. During 2005, the Company had six operating subsidiaries: CTG
HealthCare Solutions (Kansas), Inc., and Computer Task Group of Canada, Inc.,
primarily providing services in North America; and Computer Task Group Belgium
N.V., Computer Task Group Luxembourg S.A., Computer Task Group Luxembourg PSF,
and Computer Task Group (U.K.) Ltd. primarily providing services in Europe.
During 2005, the Company merged its subsidiary CTG Healthcare Solutions
(Kansas), Inc., and during 2004, the Company merged its subsidiary CTG Services,
Inc. into the parent entity Computer Task Group, Incorporated.
SERVICES
The Company operates in one industry segment, providing IT services to its
clients. These services include IT Staffing, IT Solutions, and Application
Management Outsourcing. CTG provides these three primary services to all of the
markets that it serves. The services provided typically encompass the IT
business solution life cycle, including phases for planning, developing,
implementing, managing, and ultimately maintaining the IT solution. A typical
customer is an organization with large, complex information and data processing
requirements. Approximately 83.6% of consolidated 2005 revenue of $294.5 million
was generated in North America and 16.4% in Europe. The Company promotes a
majority of its services through four vertical market focus areas: Technology
Service Providers, Financial Services, HealthCare, and Life Sciences. A brief
discussion of the Company's IT Staffing, Application Management Outsourcing, and
IT Solutions services is as follows:
- IT STAFFING: CTG recruits, retains, and manages IT talent for its
clients. The Company services both large organizations with multiple
locations and high-volume IT requirements, and companies that need to
augment their own staff on a flexible basis. Our recruiting
organization works with customers to define their staffing
requirements and develop the most competitive pricing to meet those
requirements.
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- IT SOLUTIONS: CTG's services in this area range from helping clients
assess their business needs and identifying the right IT solutions to
meet these needs, to the delivery of services that include the
selection and implementation of packaged software and the design,
construction, testing, and integration of new systems.
- APPLICATION MANAGEMENT OUTSOURCING (AMO): In an AMO project, a client
outsources the management of some or all of its applications so that
their internal management and staff can focus on projects that will
help them in creating and fostering initiatives that will aid in
delivering a competitive advantage to the company. CTG's services in
this area include support of single or multiple applications, help
desk, and facilities management through a full suite of cost-effective
maintenance, enhancement, and systems development and integrated
solutions.
International Business Machines Corporation (IBM) is CTG's largest customer. CTG
provides services to various IBM divisions in many locations. During 2005, the
Company signed an addendum to the Technical Services Agreement it has with IBM
making it a predominant supplier to IBM's Systems and Technology Group. This
addendum has an expiration date of December 31, 2007. The agreement and the
addendum accounted for approximately 95% of all of the services provided to IBM
by the Company in 2005. IBM accounted for $105.5 million or 35.8% of the
Company's 2005 consolidated revenue, $52.6 million or 22.2% of 2004 consolidated
revenue, and $51.9 million or 21.1% of 2003 consolidated revenue. The Company
expects to continue to derive a significant portion of its revenue from IBM in
2006 and in future years. However, a decline or the loss of the revenue from IBM
would have a significant negative effect on the Company's revenues and profits.
No other customer accounted for more than 10% of the Company's revenues in 2005,
2004 or 2003.
PRICING AND BACKLOG
The majority of CTG's services are performed on a time-and-materials basis.
Rates vary based on the type and level of skill required by the customer, as
well as geographic location. Agreements for work performed on a
time-and-materials basis generally do not specify any dollar amount as services
are rendered on an "as required" basis.
The Company performs a portion of its business on a monthly fee basis, as well
as a small portion of its project business on a fixed-price basis. These
contracts generally have different terms and conditions regarding cancellation
and warranties, and are usually negotiated based on the unique aspects of the
project. Contract value for fixed-price contracts is generally a function of the
type and level of skills required to complete the related project and the risk
associated with the project. Risk is a function of the project deliverable,
completion date and CTG's management and staff performance. Fixed-price
contracts accounted for under the percentage of completion method represented
approximately three percent of 2005, four percent of 2004, and three percent of
2003 consolidated revenue, respectively. Revenue from contracts accounted for
under the percentage of completion method and on a monthly fee basis represented
8%, 11%, and 13% of consolidated revenues in 2005, 2004, and 2003, respectively.
As of December 31, 2005 and 2004, the backlog for fixed-price and all
managed-support contracts was approximately $19.7 million and $20.2 million,
respectively. Approximately 100% of the December 31, 2005 backlog of $19.7
million is expected to be earned in 2006. Of the $20.2 million of backlog at
December 31, 2004, approximately 85%, or $17.2 million was earned in 2005.
Revenue is subject to seasonal variations, with a minor downturn in months of
high vacation and legal holidays (July, August, and December). Backlog does not
tend to be seasonal; however, it does fluctuate based upon the timing of
long-term contracts.
COMPETITION
The IT services market is highly competitive. The market is also highly
fragmented with many providers with no single competitor maintaining a clear
market leadership. The Company's competition varies by location, the type of
service provided, and the customer to whom services are provided. Competition
comes from four major channels: large national or international vendors,
including major accounting and consulting firms; hardware vendors and suppliers
of packaged software systems; small local firms or individuals specializing in
specific programming services or applications; and a customer's internal data
processing staff. CTG competes against all four of these channels for its share
of the market. The Company believes that to compete successfully it is necessary
to have a local geographic presence, offer appropriate IT solutions, provide
skilled professional resources, and price its services competitively.
CTG has implemented a Global Management System, with a goal to achieve
continuous, measured improvements in
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services and deliverables. As part of this program, CTG has developed specific
methodologies for providing high value services that result in unique solutions
and specified deliverables for its clients. The Company believes these
methodologies will enhance its ability to compete. CTG initially achieved
worldwide ISO 9001:1994 certification in June 2000. CTG received its worldwide
ISO 9001:2000 certification in January 2003. The Company believes it is the only
IT services company of its size to achieve worldwide certification.
INTELLECTUAL PROPERTY
The Company has registered its symbol and logo with the U.S. Patent and
Trademark Office. It has entered into agreements with various software and
hardware vendors from time to time in the normal course of business, none of
which are material to the business.
EMPLOYEES
Our business depends on our ability to attract and retain qualified professional
staff to provide services to our customers. We have approximately 3,600
employees worldwide, with 3,100 in the United States and Canada and 500 in
Europe. Of these, approximately 3,130 are IT professionals and 470 are
individuals who work in sales, recruiting, delivery, administrative and support
positions. We believe that our relationship with our employees is good. No
employees are covered by a collective bargaining agreement or are represented by
a labor union. CTG is an equal opportunity employer.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
All information below has been revised as applicable to reflect the results from
continuing operations only and therefore exclude the results of CTG Nederland,
B.V. which was sold effective January 1, 2004.
2005 2004 2003
-------- -------- --------
(amounts in thousands)
Revenue from External Customers:
United States $243,223 $191,648 $210,490
Belgium 32,940 28,694 22,967
Other European countries 15,384 14,724 10,472
Other countries 2,918 2,056 1,585
-------- -------- --------
Total revenue $294,465 $237,122 $245,514
======== ======== ========
Operating Income (Loss):
United States $ 16,627 $ 16,207 $ 18,672
Europe 1,884 849 33
Other countries (11) (87) (257)
Corporate and other (13,575) (13,871) (12,917)
-------- -------- --------
Total operating income $ 4,925 $ 3,098 $ 5,531
======== ======== ========
Identifiable Assets:
United States $100,620 $ 76,765 $ 73,964
Europe 13,817 13,202 10,190
Other countries 834 586 396
Corporate and other (1) 12,524 12,922 14,072
Discontinued operations -- -- 2,549
-------- -------- --------
Total identifiable assets $127,795 $103,475 $101,171
======== ======== ========
(1) Corporate and other identifiable assets consist principally of cash and
temporary cash investments, deferred taxes, and other assets
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DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch operating
subsidiary, CTG Nederland B.V., in a transaction in which the Company sold the
subsidiary's stock and transferred the unit's business, staff, and lease and
equipment obligations to the unit's management team. The effective date of the
disposition was January 1, 2004, and the transaction has been treated as
discontinued operations in the Company's consolidated financial statements
contained in this report. As part of the transaction, the Company retained the
assets and liabilities related to the defined-benefit plan for its previous
employees in The Netherlands (NDBP). At the time of the disposition, the net
asset of the plan totaled approximately $0.5 million. The activities of the NDBP
are discussed in note 8, "Deferred Compensation Benefits," included in the
Company's consolidated financial statements in this Form 10-K under Item 8,
"Financial Statements and Supplementary Data." This unit had previously been
included in the financial results of the Company's European operations.
The loss from discontinued operations resulting from this divestiture totaled
approximately $4.4 million in 2004, with approximately $4.3 million of that loss
incurred in the first quarter of 2004. The loss includes a cumulative loss on
disposal of approximately $3.9 million, and approximately $0.5 million from a
foreign currency adjustment which had previously been reported as a direct
charge to shareholders' equity. All activities related to this subsidiary have
been removed from the Company's individual accounts and subsequently combined
and included on the line entitled "Income (loss) from discontinued operations"
on the Company's Consolidated Statements of Operations.
Revenue, loss before income taxes, and income (loss) from discontinued
operations for 2004 and 2003 are as follows:
(amounts in thousands) 2004 2003
-------- -------
Revenue $ -- $ 6,827
Loss before income taxes $ -- $(1,762)
Income (loss) from discontinued operations $(4,411) $ 62
During 2003, the Company recorded a tax refund and interest thereon of
approximately $1.1 million and $0.6 million, respectively, resulting from the
resolution of a court case in The Netherlands which for tax purposes created a
net operating loss benefit for the Company's Dutch subsidiaries. This refund was
received in 2004 and included above as part of the income from discontinued
operations in 2003.
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EXECUTIVE OFFICERS OF THE COMPANY
As of December 31, 2005, the following individuals were executive officers of
the Company:
Period During Other Positions
Which Served as and Offices with
Name Age Office Executive Officer Registrant
- ---- --- ------ ----------------- ----------------
James R. Boldt 54 Chairman, President and June 21, 2001 for President, Director
Chief Executive Officer July 16, 2001 for Chief
Executive Officer,
May 2002 for Chairman,
all to date
Executive Vice President February 2001 to June 2001
Vice President, December 2000 to
Strategic Staffing September 2001
Acting Chief Executive Officer June 2000 to November 2000
Vice President and February 12, 1996 to
Chief Financial Officer October 1, 2001
Michael J. Colson 43 Senior Vice President January 3, 2005 to date None
Arthur W. Crumlish 51 Senior Vice President September 24, 2001 to date None
Gregory M. Dearlove 51 Senior Vice President, October 17, 2005 to date None
Administration
Senior Vice President, October 1, 2001 to None
Chief Financial Officer October 16, 2005
Paul F. Dimouro 63 Senior Vice President, May 5, 2004 to date None
Operations
Filip J.L. Gyde 45 Senior Vice President October 1, 2000 to date None
Brendan M. Harrington 39 Interim Chief Financial October 17, 2005 to date Treasurer
Officer
Michael J. McNees 53 Senior Vice President May 5, 2004 to date None
Thomas J. Niehaus 44 Senior Vice President July 22, 1999 to date None
Peter P. Radetich 52 Senior Vice President, April 28, 1999 to date Secretary
General Counsel
Mr. Boldt was appointed President and joined CTG's Board of Directors on June
21, 2001, and was appointed Chief Executive officer on July 16, 2001. Mr. Boldt
became the Company's Chairman in May 2002. Mr. Boldt joined the Company as a
Vice President and its Chief Financial Officer and Treasurer in February 1996.
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Mr. Colson joined the Company as Senior Vice President of Solutions Development
in January 2005. Prior to that, Mr. Colson was Chief Executive Officer of
Manning and Napier Information Services, a software and venture capital firm
from September 1998 until the time he joined CTG.
Mr. Crumlish was promoted to Senior Vice President in September 2001, and is
currently responsible for the Company's Strategic Staffing Services
organization. Prior to that, Mr. Crumlish was Controller of the Strategic
Staffing Services organization. Mr. Crumlish joined the Company in 1990.
Mr. Dearlove serves as the Company's Senior Vice President of Administration.
Mr. Dearlove joined the Company as a Senior Vice President and its Chief
Financial Officer in October 2001. Prior to that, Mr. Dearlove was the office
managing partner of Deloitte & Touche's (Deloitte) Upstate New York Offices from
June 1997 to September 2001. Mr. Dearlove had been a partner with Deloitte since
1986.
Mr. Dimouro serves as the Company's Senior Vice President of Operations,
responsible for the Company's logistics solutions practice and the commercial
accounts segment of the Company's Strategic Staffing Services organization. Mr.
Dimouro joined the Company in June 2001.
Mr. Gyde was promoted to Senior Vice President in October 2000, and is currently
responsible for all of the Company's European operations. Prior to that, Mr.
Gyde was Managing Director of the Company's Belgium operation. Mr. Gyde has been
with the Company since May 1987.
Mr. Harrington was promoted to Interim Chief Financial Officer and Treasurer on
October 17, 2005. Previously, he held the position of Corporate Controller for
the Company since May 2005. Mr. Harrington joined the Company in February 1994
and served in a number of managerial financial positions in the Company's
corporate and European operations before being appointed Corporate Controller.
Mr. McNees joined the Company in September 1992 as a sales manager. He was
promoted to Director, Business Development in October 1996 for the Company's
mid-Atlantic region, to Managing Director in July 1998, to Vice President of the
Company's Life Sciences unit in June 2003, and to Senior Vice President of the
Company's Life Sciences unit in May 2004.
Mr. Niehaus joined the Company in February 1999, and was promoted to Senior Vice
President of CTG HealthCare Solutions in July 1999. Previously, Mr. Niehaus was
Executive Vice President of Elumen Solutions, Inc. from September 1997 to
February 1999. Prior to that, Mr. Niehaus was Vice President of Exemplar
Systems.
Mr. Radetich joined the Company in June 1988 as Associate General Counsel, and
was promoted to General Counsel and Secretary in April 1999.
AVAILABLE COMPANY INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and reports pertaining to the Company filed under Section 16 of the
Exchange Act are available without charge on the Company's website at
www.ctg.com as soon as reasonably practicable after the Company electronically
files the information with, or furnishes it to, the Securities and Exchange
Commission. The Company's code of ethics, committee charters and governance
policies are also available without charge on the Company's website at
www.ctg.com/investors/corporategov.htm.
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ITEM 1A. RISK FACTORS
We operate in a dynamic and rapidly changing environment that involves numerous
risks and uncertainties. The following section describes some, but not all, of
the risks and uncertainties that could have a material adverse effect on our
business, financial condition, results of operations and the market price of our
common stock, and could cause our actual results to differ materially from those
expressed or implied in our forward-looking statements.
THE RECENT INCREASE IN DEMAND FOR INFORMATION TECHNOLOGY (IT) SERVICES AND
STAFFING MAY ONLY BE TEMPORARY AND ANOTHER DECLINE IN DEMAND SIMILAR TO THAT
EXPERIENCED FROM 1999 THROUGH 2003 WOULD CAUSE AN ADVERSE EFFECT ON OUR REVENUES
AND OPERATING RESULTS.
There was a steady decline in demand in the technology services sector from the
second half of 1999 through 2003 as a recession in the technology industry
negatively affected spending for information technology services. We believe
that staffing demand began to increase in 2004, and has returned to more
normalized levels in 2005 for the first time in five years. However, declines in
spending for IT services in 2006 or future years may again adversely affect our
operating results in the future as it has in the past.
OUR BUSINESS DEPENDS ON A LARGE NUMBER OF HIGHLY QUALIFIED PROFESSIONAL
EMPLOYEES AND, IF WE ARE NOT ABLE TO RECRUIT AND RETAIN A SUFFICIENT NUMBER OF
THESE EMPLOYEES, WE WOULD NOT BE ABLE TO PROVIDE HIGH QUALITY SERVICES TO OUR
CURRENT AND FUTURE CUSTOMERS, WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR REVENUES
AND OPERATING RESULTS.
We actively compete with other IT service providers for qualified professional
staff. The availability or lack thereof of qualified professional staff may
affect our ability to provide services and meet the needs of our customers in
the future. An inability to fulfill customer requirements due to a lack of
available qualified staff at agreed upon salary rates may adversely impact our
operating results in the future.
INCREASED COMPETITION AND THE BARGAINING POWER OF A SIGNIFICANT CUSTOMER MAY
CAUSE OUR BILLING RATES TO DECLINE, WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES AND, IF WE ARE UNABLE TO CONTROL OUR PERSONNEL COSTS ACCORDINGLY, OUR
OPERATING RESULTS.
While the rates at which we have billed our customers for services somewhat
stabilized in 2004 and 2005, there had been a general decline in these rates
over recent years as a result of the technology recession mentioned above. We
have experienced several significant reductions in the rates for which we bill
for services for our significant customer in the past several years.
Additionally, we actively compete against many other companies for business with
new and existing clients. Competitive pressures may lead to a further decline in
the rates that we bill our customers for services, which may adversely affect
our operating results in the future.
THE CURRENCY, LEGISLATIVE, TAX, REGULATORY AND ECONOMIC RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS
IF WE ARE UNABLE TO MITIGATE OR HEDGE THESE RISKS.
We have operations in the United States and Canada in North America, and in
Belgium, the United Kingdom and Luxembourg in Europe. Our foreign operations are
subject to currency fluctuations. Each of our operations is subject to
legislation and tax law changes, and economic climates. These factors related to
our foreign operations are different than those of the United States. Although
we actively manage these foreign operations with local management teams,
economic conditions or other changes beyond our control may negatively affect
our overall operating results.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A SINGLE CUSTOMER AND A
SIGNIFICANT REDUCTION IN THE AMOUNT OF IT SERVICES REQUESTED BY THIS CUSTOMER
WOULD HAVE AN ADVERSE EFFECT ON OUR REVENUES AND OPERATING RESULTS.
In 2005, International Business Machines (IBM) was our largest customer,
accounting for $105.5 million or 35.8% of consolidated revenue. The Company's
accounts receivable balance from IBM at December 31, 2005 totaled $33.9 million.
During 2005, we signed an addendum to the Technical Services Agreement we have
with IBM making us a predominant supplier to IBM's Systems and Technology Group.
This addendum has an expiration date of December 31, 2007. We expect to continue
to derive a significant portion of our revenue from IBM in 2006 and in future
years. However, a significant decline or the loss of the revenue from IBM would
have a significant negative effect on our operating
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results. No other customer accounted for more than 10% of our revenue in 2005,
2004 or 2003.
THE IT SERVICES INDUSTRY IS HIGHLY COMPETITIVE AND FRAGMENTED, WHICH MEANS THAT
OUR CUSTOMERS HAVE A NUMBER OF CHOICES FOR PROVIDERS OF IT SERVICES AND WE MAY
NOT BE ABLE TO COMPETE EFFECTIVELY.
The market for our services is highly competitive. The market is fragmented, and
no company holds a dominant position. Consequently, our competition for client
requirements and experienced personnel varies significantly by geographic area
and by the type of service provided. Some of our competitors are larger and have
greater technical, financial, and marketing resources and greater name
recognition than we have in the markets we collectively serve. In addition,
clients may elect to increase their internal IT systems resources to satisfy
their custom software development and integration needs.
CHANGES IN GOVERNMENT REGULATIONS AND LAWS AFFECTING THE IT SERVICES INDUSTRY,
INCLUDING ACCOUNTING PRINCIPLES AND INTERPRETATIONS AND THE TAXATION OF DOMESTIC
AND FOREIGN OPERATIONS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC
regulations and NYSE rules are creating uncertainty for companies such as ours.
These new or changed laws, regulations and standards are subject to varying
interpretations which, in many instances, is due to their lack of specificity.
As a result, the application of these new standards and regulations in practice
may evolve over time as new guidance is provided by regulatory and governing
bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance
practices. We are committed to maintaining high standards of corporate
governance and public disclosure. As a result, our efforts to comply with
evolving laws, regulations and standards have resulted in, and are likely to
continue to result in, increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to comply with Section 404 of
the Sarbanes-Oxley Act of 2002 and the related regulations regarding our
required assessment of our internal controls over financial reporting and our
independent auditors' audit of that assessment has required the commitment of
significant internal, financial and managerial resources.
The Financial Accounting Standards Board, SEC or other accounting rulemaking
authorities may issue new accounting rules or standards that are different than
those that we presently apply to our financial results. Such new accounting
rules or standards could require significant changes from the way we currently
report our financial condition, results of operations or cash flows.
U.S. generally accepted accounting principles have been the subject of frequent
interpretations. As a result of the enactment of the Sarbanes-Oxley Act and the
review of accounting policies by the SEC as well as by national and
international accounting standards bodies, the frequency of future accounting
policy changes may accelerate. Such future changes in financial accounting
standards may have a significant effect on our reported results of operations,
including results of transactions entered into before the effective date of the
changes. For instance, our reported results of operations will be negatively
impacted with the adoption of FAS 123R effective January 1, 2006 when we are
required to expense stock options or other compensatory equity-based
compensation to our employees where we had previously been allowed to report the
pro forma effect of such compensation in the footnotes to our financial
statements.
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Our provision for income taxes and our tax liability in the
future could be adversely affected by numerous factors including, but not
limited to, income before taxes being lower than anticipated in countries with
lower statutory tax rates and higher than anticipated in countries with higher
statutory tax rates, changes in the valuation of deferred tax assets and
liabilities, and changes in tax laws, regulations, accounting principles or
interpretations thereof, which could adversely impact our financial condition,
results of operations and cash flows in future periods.
OUR CUSTOMER CONTRACTS GENERALLY HAVE A SHORT TERM OR ARE TERMINABLE ON SHORT
NOTICE AND A SIGNIFICANT NUMBER OF FAILURES TO RENEW, EARLY TERMINATIONS OR
RENEGOTIATIONS OF OUR EXISTING CUSTOMER CONTRACTS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
Our clients typically retain us on a non-exclusive, engagement-by-engagement
basis, rather than under exclusive long-term contracts. We perform approximately
97 % of our services on a time and materials basis. As such, our customers
generally have the right to terminate a contract with us upon written notice
without the payment of any financial penalty. Client projects may involve
multiple engagements or stages, and there is a risk that a client may choose not
to retain us for
10
additional stages of a project or that a client will cancel or delay additional
planned engagements. These terminations, cancellations or delays could result
from factors that are beyond our control and are unrelated to our work product
or the progress of the project, but could be related to business or financial
conditions of the client, changes in client strategies or the economy in
general. When contracts are terminated, we lose the associated revenues and we
may not be able to eliminate the associated costs in a timely manner.
Consequently, our operating results in subsequent periods may be lower than
expected. Our clients can cancel or reduce the scope of their engagements with
us on short notice. If they do so, we may be unable to reassign our
professionals to new engagements without delay. The cancellation or reduction in
scope of an engagement could, therefore, reduce the utilization rate of our
professionals, which would have a negative impact on our business, financial
condition, and results of operations. As a result of these and other factors,
our past financial performance should not be relied on as a guarantee of similar
or better future performance. Due to these factors, we believe that our results
of operations may fluctuate from period-to-period in the future.
THE INTRODUCTION OF NEW IT PRODUCTS OR SERVICES MAY RENDER OUR EXISTING
STAFFING, IT SOLUTIONS, OR OUTSOURCING OFFERINGS TO BE OBSOLETE, WHICH, IF WE
ARE UNABLE TO KEEP PACE WITH THESE CORRESPONDING CHANGES, COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS.
Our success depends, in part, on our ability to implement and deliver strategic
staffing, IT solutions, and outsourcing services that anticipate and keep pace
with rapid and continuing changes in technology, industry standards and client
preferences. We may not be successful in anticipating or responding to these
developments on a timely basis, and our offerings may not be successful in the
marketplace. Also, services, solutions and technologies developed by our
competitors may make our staffing, solution or outsourcing offerings
uncompetitive or obsolete. Any one of these circumstances could have a material
adverse effect on our ability to obtain and successfully complete client
engagements.
EXISTING AND POTENTIAL CUSTOMERS ARE OUTSOURCING OR CONSIDERING OUTSOURCING
THEIR IT REQUIREMENTS TO FOREIGN COUNTRIES IN WHICH WE MAY NOT CURRENTLY HAVE
OPERATIONS, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR ABILITY TO OBTAIN NEW
CUSTOMERS OR RETAIN EXISTING CUSTOMERS.
In the past few years, more companies are using or are considering using
low cost offshore outsourcing centers to perform technology related work and
complete projects. Currently, we have partnered with clients to perform services
in Russia and India to mitigate and reduce this risk to our Company. However,
the risk of additional increases in the future in the outsourcing of IT
solutions overseas could have a material, negative impact on our future
operations.
A SIGNIFICANT PORTION OF OUR TOTAL ASSETS CONSISTS OF GOODWILL, WHICH IS SUBJECT
TO A PERIODIC IMPAIRMENT ANALYSIS AND A SIGNIFICANT IMPAIRMENT DETERMINATION IN
ANY FUTURE PERIOD COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS EVEN
WITHOUT A SIGNIFICANT LOSS OF REVENUE OR INCREASE IN CASH EXPENSES ATTRIBUTABLE
TO SUCH PERIOD.
We have goodwill totaling approximately $35.7 million at December 31, 2005
resulting from our acquisition of Elumen Solutions, Inc. in early 1999. At least
annually, we evaluate this goodwill for impairment based on the fair value of
the operating business unit to which this goodwill relates. This estimated fair
value could change if we are unable to achieve operating results at the levels
that have been forecasted, the market valuation of such companies decreases
based on transactions involving similar companies, or there is a permanent,
negative change in the market demand for the services offered by this business
unit. These changes could result in an impairment of the existing goodwill
balance that could require a material non-cash charge to our results of
operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
11
ITEM 2. PROPERTIES
The Company owns and occupies a headquarters building at 800 Delaware Avenue,
and an office building at 700 Delaware Avenue, both located in Buffalo, New York
and part of the Company's North American operations. The corporate headquarters
consists of approximately 40,000 square feet and is occupied by corporate
administrative operations. The office building consists of approximately 39,000
square feet and is also occupied by corporate administrative operations. At
December 31, 2005, these properties were not mortgaged or pledged as collateral
against the Company's existing revolving credit agreement.
Previously, the Company also owned a 37,000 square foot building in Melbourne,
Florida. The property was sold during the second quarter of 2003 for
approximately $2.2 million. The Company recorded a loss of approximately $0.2
million at the time of the sale.
The remainder of the Company's locations are leased facilities. Most of these
facilities serve as sales and support offices and their size varies, generally
in the range of approximately 250 to 10,000 square feet, with the number of
people employed at each office. The Company's lease terms generally vary from
periods of less than a year to five years and generally have flexible renewal
options. The Company believes that its present owned and leased facilities are
adequate to support its current and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved from time to time in various legal
proceedings arising in the ordinary course of business. Although the outcome of
lawsuits or other proceedings involving the Company and its subsidiaries cannot
be predicted with certainty and the amount of any liability that could arise
with respect to such lawsuits or other proceedings cannot be predicted
accurately, management does not expect these matters to have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 2005.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
STOCK MARKET INFORMATION
The Company's stock is traded on the New York Stock Exchange under the symbol
CTG, and is commonly abbreviated Cptr Task. The following table sets forth the
high and low sales prices for the Company's common stock on the New York Stock
Exchange for the previous two years.
STOCK PRICE HIGH LOW
- ----------- ----- -----
YEAR ENDED DECEMBER 31, 2005
Fourth Quarter $4.20 $3.40
Third Quarter $4.00 $3.50
Second Quarter $3.90 $2.83
First Quarter $5.71 $3.50
YEAR ENDED DECEMBER 31, 2004
Fourth Quarter $6.55 $2.65
Third Quarter $4.05 $2.75
Second Quarter $5.72 $3.85
First Quarter $5.66 $3.75
On March 7, 2006, there were 2,763 record holders of the Company's common
shares. The Company has not paid a dividend since 2000. The Company paid an
annual cash dividend of $.05 per share from 1993 to 2000 and, prior to that,
paid $.025 per share annually since 1976 plus a 10% share dividend in 1980. The
Company is required to meet certain financial covenants under its current
revolving credit agreement in order to pay dividends. The determination of the
timing, amount and payment of dividends on the Company's common stock in the
future is at the discretion of the Board of Directors and will depend upon,
among other things, the Company's profitability, liquidity, financial condition,
capital requirements and compliance with the aforementioned financial covenants.
For information concerning common stock issued in connection with the Company's
equity compensation plans, see "Part III, Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters."
On August 11, 2005, the Company received a notice from the New York Stock
Exchange, Inc. (NYSE) advising it that the NYSE considered it to be "below
criteria" with respect to a continued listing requirement. In accordance with
the policies and procedures of the NYSE, the Company responded within 45 days
after the NYSE's notice by providing a plan (the "Plan") advising the NYSE of
the definitive action that the Company would take that would bring it into
conformity with the continued listing standards within 18 months of the date of
receipt of the NYSE notice. On October 28, 2005 the NYSE notified the Company
that it had accepted the Plan thereby permitting the continued listing of the
Company's common stock. The NYSE will continue to perform quarterly reviews of
the Company's compliance with the goals and initiatives outlined in the Plan
over the 18 month period. Failure to achieve the Plan's financial and
operational goals could result in the Company being subject to NYSE trading
suspension at the point the initiative or goal is not met.
13
ISSUER PURCHASES OF EQUITY SECURITIES
The chart below reflects purchases by the Company of its Common Stock during the
fourth quarter ended December 31, 2005.
Total Number of Maximum
Shares Purchased Number of
Total Average as Part of Shares that may
Number of Price Publicly yet be Purchased
Shares Paid per Announced Plans Under the Plans
Period Purchased Share or Programs or Agreements
- ------ --------- -------- ---------------- ----------------
October 1 - October 31 1,800 $3.50 1,800 1,025,982
November 1 - November 30 113,000 $3.60 113,000 912,982
December 1 - December 31 80,000 $4.00 80,000 832,982
------- -------
Total 194,800 $3.76 194,800 832,982
======= =======
During May 2005, the Company announced a 1.0 million share repurchase
authorization. This share repurchase authorization added to an existing
approximately 0.2 million share repurchase authorization that remained from an
initial authorization of 1.4 million shares in 1995. Neither share repurchase
program has an expiration date, nor were there any share repurchase programs
terminated during the fourth quarter of 2005. However, during the fourth quarter
of 2005 the Company purchased the remaining shares from the 1995 authorization,
leaving only the remaining shares under the May 2005 authorization available for
repurchase at December 31, 2005.
14
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY - FIVE-YEAR SELECTED FINANCIAL INFORMATION
The selected operating data and financial position information set forth below
for each of the years in the five-year period ended December 31, 2005 has been
derived from the Company's audited consolidated financial statements. This
information should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Item 8. "Financial Statements
and Supplementary Data" included in this report. Information reported for the
years 2001 to 2003 has been revised, as applicable, to reflect the disposition
of CTG Nederland, B.V. effective January 1, 2004.
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(amounts in millions, except per-share data)
OPERATING DATA
Revenue $294.5 $237.1 $245.5 $256.1 $299.4
Operating income $ 4.9 $ 3.1 $ 5.5 $ 6.0 $ 1.4
Income (loss) from continuing operations
before cumulative effect of change
in accounting principle $ 2.4 $ 3.0 $ 2.7 $ 2.8 $ (1.3)
Net income (loss) $ 2.4 $ (1.4)* $ 2.7 $(35.7)** $ (2.2)
Basic net income (loss) per share from
continuing operations before cumulative
effect of change in accounting principle $ 0.14 $ 0.18 $ 0.16 $ 0.17 $(0.08)
Basic net income (loss) per share $ 0.14 $(0.09)* $ 0.16 $(2.15)** $(0.13)
Diluted net income (loss) per share from
continuing operations before cumulative
effect of change in accounting principle $ 0.14 $ 0.17 $ 0.16 $ 0.16 $(0.08)
Diluted net income (loss) per share $ 0.14 $(0.08)* $ 0.16 $(2.11)** $(0.13)
Cash dividend per share $ -- $ -- $ -- $ -- $ --
FINANCIAL POSITION
Working capital $ 40.7 $ 17.5 $ 16.1 $ 16.5 $ 20.5
Total assets $127.8 $103.5 $101.2 $105.0 $152.0
Long-term debt $ 23.2 $ -- $ -- $ 8.5 $ 15.5
Shareholders' equity $ 57.0 $ 56.7 $ 56.4 $ 52.6*** $ 86.6
* Includes a loss from discontinued operations of approximately $4.4 million,
or $0.27 per basic share and $0.25 per diluted share from the disposition
of CTG Nederland, B.V. effective January 1, 2004.
** Includes a charge for the cumulative effect of a change in accounting
principle related to the adoption of Financial Accounting Standard (FAS)
No. 142, "Goodwill and Other Intangible Assets," which reduced net income
by $37.0 million, basic net income per share by $2.23, and diluted net
income per share by $2.19.
*** During 2005, the Company identified certain errors in the application of
generally accepted accounting principles that affected the Company's
retained earnings balance as of December 31, 2002. This balance has been
revised to include the net impact of those adjustments which totaled an
increase of approximately $0.2 million to the Company's retained earnings
balance. See note 2, "Adjustment to Retained Earnings as of December 31,
2002" included in this Form 10-K under Item 8, "Financial Statements and
Supplementary Data."
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of financial condition and results of
operations contains forward-looking statements by management and the Company
that are subject to a number of risks and uncertainties. These forward-looking
statements are based on information as of the date of this report. The Company
assumes no obligation to update these statements based on information from and
after the date of this report. Generally, forward-looking statements include
words or phrases such as "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "projects," "could," "may," "might," "should," "will" and
words and phrases of similar impact. The forward-looking statements include, but
are not limited to, statements regarding future operations, industry trends or
conditions and the business environment, and statements regarding future levels
of, or trends in, revenues, operating expenses, capital expenditures, and
financing. The forward-looking statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Numerous
factors could cause actual results to differ materially from those in the
forward-looking statements, including the following: (i) industry conditions,
including fluctuations in demand for IT services, (ii) the availability to us of
qualified professional staff, (iii) industry competition, (iv) rate and wage
inflation or deflation, (v) risks associated with operating in foreign
jurisdictions, (vi) the impact of current and future laws and government
regulation, as well as repeal or modification of same, affecting the IT
solutions and staffing industry, taxes and the Company's operations in
particular, (vii) renegotiations, nullification, or breaches of contracts with
customers, vendors, subcontractors or other parties, (viii) consolidation among
the Company's competitors or customers, and (ix) the risks described in Item 1A
of this annual report on Form 10-K and from time to time in the Company's
reports to the Securities and Exchange Commission.
TRENDS
The market demand for the Company's services is heavily dependent on IT spending
by major corporations, organizations and government entities in the markets and
regions that we serve. The pace of technology change and changes in business
requirements and practices of our clients all have a significant impact on the
demand for the services that we provide. In addition, the recent economic
downturn has negatively affected the operations of many of our clients and
prospective clients and has negatively impacted their IT spending. As a result,
competition for new engagements and pricing pressure has been strong. We have
responded to these challenging business conditions by focusing on three main
services, which are providing strategic staffing, IT solutions, and application
outsourcing to our clients. We have in turn promoted a majority of our services
through four vertical market focus areas, which are technology service
providers, financial services, healthcare and life sciences. Finally, we have
closely monitored and managed the utilization of our billable personnel, and
managed our selling, general and administrative costs as a percentage of
revenue.
The IT services industry is extremely competitive and characterized by
continuous changes in customer requirements and improvements in technologies.
Our competition varies significantly by geographic region, as well as by the
type of service provided. Many of our competitors are larger than we are and
have greater financial, technical, sales and marketing resources than we have.
In addition, we frequently compete with a client's own internal IT staff. Our
industry is being impacted by the growing use of lower-cost offshore delivery
capabilities (primarily India). There can be no assurance that we will be able
to continue to compete successfully with existing or future competitors or that
future competition will not have a material adverse effect on our results of
operations and financial condition.
OPERATIONS
The Company operates in one industry segment, providing IT staffing solutions
services to its clients. These services include IT Staffing, Application
Outsourcing, and IT Solutions. CTG provides these three primary services to all
of the markets that it serves. The services provided typically encompass the IT
business solution life cycle, including phases for planning, developing,
implementing, managing, and ultimately maintaining the IT solution. A typical
customer is an organization with large, complex information and data processing
requirements. The Company promotes a portion of its services through four
vertical market focus areas: Technology Service Providers, Financial Services,
HealthCare, and Life Sciences.
16
DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch operating
subsidiary, CTG Nederland B.V., in a transaction in which the Company sold the
subsidiary's stock and transferred the unit's business, staff, and lease and
equipment obligations to the unit's management team. The effective date of the
disposition was January 1, 2004, and the transaction has been treated as
discontinued operations in the Company's consolidated financial statements
contained in this report. As part of the transaction, the Company retained the
assets and liabilities related to the defined-benefit plan for its previous
employees in The Netherlands (NDBP). At the time of the disposition, the net
assets of the plan totaled approximately $0.5 million. The activities of the
NDBP are discussed in note 8, "Deferred Compensation Benefits," included in the
Company's consolidated financial statements in this Form 10-K under Item 8,
"Financial Statements and Supplementary Data." This unit had previously been
included in the financial results of the Company's European operations.
The loss from discontinued operations resulting from this divestiture totaled
approximately $4.4 million in 2004, with approximately $4.3 million of that loss
incurred in the first quarter of 2004. The loss includes a cumulative loss on
disposal of approximately $3.9 million, and approximately $0.5 million from a
foreign currency adjustment which had previously been reported as a direct
charge to shareholders' equity. All activities related to this subsidiary have
been removed from the Company's individual accounts and subsequently combined
and included on the line entitled "Income (loss) from discontinued operations"
on the Company's Consolidated Statements of Operations.
Revenue, loss before income taxes, and income (loss) from discontinued
operations for 2004 and 2003 are as follows:
(amounts in thousands) 2004 2003
------- -------
Revenue $ -- $ 6,827
Loss before income taxes $ -- $(1,762)
Income (loss) from discontinued operations $(4,411) $ 62
During 2003, the Company recorded a tax refund and interest thereon of
approximately $1.1 million and $0.6 million, respectively, resulting from the
resolution of a court case in The Netherlands which for tax purposes created a
net operating loss benefit for the Company's Dutch subsidiaries. This refund was
received in 2004 and included above as part of the income from discontinued
operations in 2003.
RESULTS OF OPERATIONS
The table below sets forth data as contained on the consolidated statements of
operations, with the percentage information calculated as a percentage of
consolidated revenues as reported on the Company's Consolidated Statements of
Operations as included in this Form 10-K under Item 8, "Financial Statements and
Supplementary Data."
YEAR ENDED DECEMBER 31, 2005 2004 2003
- ----------------------- ------ ------ ------
(percentage of revenue)
Revenue 100.0% 100.0% 100.0%
Direct costs 77.0% 73.0% 72.7%
Selling, general, and administrative expenses 21.3% 25.7% 25.0%
------ ------ ------
Operating income 1.7% 1.3% 2.3%
Interest and other expense, net (0.5)% (0.3)% (0.4)%
------ ------ ------
Income from continuing operations before income taxes 1.2% 1.0% 1.9%
Provision (benefit) for income taxes 0.4% (0.3)% 0.8%
------ ------ ------
Income from continuing operations 0.8% 1.3% 1.1%
Income (loss) from discontinued operations 0.0% (1.9)% 0.0%
------ ------ ------
Net income (loss) 0.8% (0.6)% 1.1%
===== ===== =====
2005 AS COMPARED TO 2004
In 2005, the Company recorded revenue of $294.5 million, an increase of 24.2%
compared to revenue of $237.1 million recorded in 2004. Revenue from the
Company's North American operations totaled $246.2 million in 2005, an increase
17
of 27.1% when compared to 2004 revenue of $193.7 million. Revenue from the
Company's European operations totaled $48.3 million in 2005, an increase of
11.3% when compared to 2004 revenue of $43.4 million. The European revenue
represented 16.4% and 18.3% of 2005 and 2004 consolidated revenue, respectively.
The Company's revenue includes reimbursable expenses billed to customers. These
expenses totaled $9.2 million and $8.3 million in 2005 and 2004, respectively.
In North America, the revenue increase in 2005 over 2004 is primarily the result
of adding approximately 1,000 or 55% additional billable staff in 2005, which
was largely due to the expansion of the IBM staffing business. During 2005, the
Company signed an addendum to the Technical Services Agreement it has with IBM
making it a predominant supplier to IBM's Systems and Technology Group. This
addendum has an expiration date of December 31, 2007. Although the North
American billable staff increased by approximately 55%, North American revenues
only increased 27.1% as a large percentage of the increase was in the Company's
staffing business which generally yields lower bill rates than the remainder of
the Company's business, and the staff were added throughout the year rather than
being in place for the entire year.
In 2005, IBM was the Company's largest customer, accounting for $105.5 million
or 35.8% of consolidated revenue as compared to $52.6 million or 22.2% of 2004
revenue. No other customer accounted for more than 10% of the Company's revenue
in either 2005 or 2004.
The increase in revenue in the Company's European operation in 2005 as compared
to 2004 is primarily due to an increase in demand in 2005 for the testing
services offered by the Company. There was a nominal effect on revenue for
changes in year-over-year foreign currency exchange rates. In Belgium and
Luxembourg, the functional currency is the Euro, while in the United Kingdom the
functional currency is the British pound. Had there been no change in these
exchange rates from 2004 to 2005, total European revenue would have been
approximately $0.1 million higher, or $48.4 million in total in Europe as
compared to the $48.3 million reported in 2005.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 77.0% of revenue in 2005 as compared to 73.0% of
2004 revenue. The increase in direct costs as a percentage of revenue in 2005 as
compared to 2004 is primarily due to the significant increase in the headcount
for the Company's staffing business, which generally yields lower direct profit
margins than the remainder of the Company's business.
Selling, general and administrative (SG&A) expenses were 21.3% of revenue in
2005 as compared to 25.7% of revenue in 2004. The decrease in SG&A expense as a
percentage of revenue reflects a higher concentration of staffing business in
the Company's sales mix in 2005, which requires a lower level of support from
the Company's SG&A staff than the remainder of the Company's business. The
decrease in the year-over-year percentage of revenue was in contrast to an
increase in SG&A expense from 2004 to 2005 totaling approximately $1.9 million.
The increase in SG&A in 2005 as compared to 2004 was primarily due to additional
recruiting costs incurred of approximately $2.3 million to respond to the
increase in demand for the Company's staffing services, and approximately $0.5
million of additional audit fees offset by approximately $0.1 million for the
increase in cash surrender value for Company owned life insurance policies that
had previously not been recorded, and the Company's continued efforts to control
and reduce its SG&A costs in various areas as a percentage of revenue.
Operating income was 1.7% of revenue in 2005 as compared to 1.3% of revenue in
2004. The Company's operating income as a percentage of revenue generally
increased throughout 2005 primarily as certain transition costs associated with
the significant amount of staffing business added during the first quarter of
2005, which totaled approximately 700 of the total 1,000 billable staff added
during 2005 ended. Operating income from North American operations was $3.0
million in 2005 as compared to $2.3 million in 2004, while European operations
recorded operating income of $1.9 million in 2005 and $0.8 million in 2004.
Interest and other expense, net was 0.5% of revenue in 2005 and 0.3% in 2004.
The increase as a percentage of revenue from 2004 to 2005 is primarily due to an
increase in the average outstanding debt during 2005 as the Company utilized its
revolving line of credit to fund higher accounts receivable during 2005
resulting from the additional billable staff added during the year.
Additionally, there were higher interest rates in 2005 on the Company's
revolving debt, and the Company realized a loss of approximately $0.1 million
for the settlement of inter-company transactions with the Company's foreign
subsidiaries.
18
The estimated effective tax rate (ETR) used to calculate the provision for
income taxes from continuing operations was 31.8% in 2005. The ETR is calculated
quarterly based upon current assumptions relating to the full years estimated
operating results, and various tax related items. The ETR rate in 2005 was
reduced primarily due to several items that created net tax benefits totaling
approximately $0.3 million. The Company released a net amount of approximately
$0.1 million from its tax reserves primarily due to a change in judgment and
settlement of open items, and also reduced a valuation allowance for its net
operating loss for Canada by approximately $0.2 million. Without the aggregate
tax benefit for all of these items totaling approximately $0.3 million, the
Company's ETR in 2005 would be approximately 40.1%. In 2004, the ETR was a
benefit of (22.6)%. During 2004, the ETR was reduced by approximately $0.6
million for a release of reserve due to a change in judgment resulting from
legislation enacted in The Netherlands, the reversal of approximately $0.5
million of valuation allowances offsetting deferred tax assets related to the
Company's European and Canadian operations, $0.4 million for state tax net
operating loss tax benefits that had previously been offset by a valuation
allowance, and a net amount of approximately $0.2 million from the release of
other deferred tax items. Without these items, the ETR in 2004 would have been
approximately 48.0%.
During the second quarter ended July 1, 2005, the Company changed its method of
accounting for reporting changes in liabilities in interim periods resulting
from changes in judgments or settlements of tax exposure items. The Company had
previously accounted for such changes in judgments or settlements as adjustments
to the estimated annual ETR. However, the Company has now changed its method of
accounting for such changes in judgments or settlements, resulting in either
additional tax expense or tax benefits, so that they are recorded as discrete
items in the interim period in which the change occurs. This newly adopted
accounting method is preferable as it more appropriately reflects the impact of
the change on the Company's consolidated operations and financial position at
the time of the change.
Net income from continuing operations for 2005 was 0.8% of revenue or $0.14 per
diluted share, compared to net income from continuing operations of 1.3% of
revenue or $0.17 per diluted share in 2004. Diluted earnings per share were
calculated using 17.1 million weighted-average equivalent shares outstanding in
both 2005 and 2004.
STOCK OPTION VESTING ACCELERATION
On November 16, 2005, the Board of Directors of the Company approved the
acceleration of the vesting of all unvested out-of-the money stock options
previously awarded to its employees, including its executive officers and its
directors under the Company's equity compensation plans having an exercise price
greater than $3.48, which was the closing price of the Company's common stock on
that date. Options to purchase approximately 1.1 million shares of the Company's
common stock became exercisable immediately. The weighted-average exercise price
of the options subject to the acceleration was $4.69.
The purpose of the acceleration was to enable the Company to eliminate future
compensation expense the Company would otherwise recognize in its statement of
operations with respect to these accelerated options upon the adoption of FASB
Statement No. 123R, "Share-Based Payment" (FAS No. 123R). The Board of Directors
took the action in the belief that it is in the best interest of the
shareholders to minimize future compensation expense associated with stock
options upon adoption of FAS No. 123R. FAS No. 123R is effective for the Company
beginning in the first quarter of 2006 and will require that compensation
expense associated with stock options be recognized in the statement of
operations, rather than as a footnote disclosure in the Company's consolidated
financial statements. It is estimated that the maximum future compensation
expense that would have been recorded in the Company's statements of operations
had the vesting of these options not been accelerated is approximately $1.4
million. The impact of the acceleration of the vesting of the options on the
Company's 2005 financial statements is disclosed in the pro forma footnote
disclosures, as permitted under the transition guidance provided by the FASB, in
note 11 "Stock Option Plans," included in the Company's consolidated financial
statements in this Form 10-K under Item 8, "Financial Statements and
Supplementary Data."
2004 AS COMPARED TO 2003
In 2004, the Company recorded revenue of $237.1 million, a decrease of 3.4%
compared to revenue of $245.5 million recorded in 2003. Revenue from the
Company's North American operations totaled $193.7 million in 2004, a decrease
of 8.7% when compared to 2003 revenue of $212.1 million. Revenue from the
Company's European operations totaled
19
$43.4 million in 2004, an increase of 29.9% when compared to 2003 revenue of
$33.4 million. The European revenue represented 18.3% and 13.6% of 2004 and 2003
consolidated revenue, respectively. The Company's revenue includes reimbursable
expenses billed to customers. These expenses totaled $8.3 million and $6.7
million in 2004 and 2003, respectively.
In North America, the revenue decrease was primarily the result of a large
outsourcing engagement involving approximately 100 billable staff ending at the
end of July 2004 as the customer, who was in liquidation, decided to hire its
own staff for its IT department. Offsetting this engagement was stronger demand
for the staffing services the Company provides to its other clients. Although
demand for staffing services increased during 2004, the addition of billable
staff was gradual throughout the year as compared to the large engagement ending
at the end of July, and therefore only partially offset the decline in revenue.
The Company continued to see strong demand for its staffing services in 2005.
The significant increase in revenue in the Company's European operations in 2004
as compared to 2003 was in part due to the addition of a large healthcare
project in the United Kingdom. This project accounted for approximately
one-third of the year-over-year revenue increase. Additionally, the increase in
year-over-year revenue was partially due to the strength of the currencies of
Belgium, the United Kingdom, and Luxembourg, the countries in which the
Company's European subsidiaries operate. In Belgium and Luxembourg, the
functional currency is the Euro, while in the United Kingdom, the functional
currency is the British pound. If there had been no change in these foreign
currency exchange rates from 2003 to 2004, European and total consolidated
revenues in 2004 would have been $4.1 million lower, or $39.3 million in total
as compared to the $43.4 million reported in 2004.
In November 2003, the Company signed a contract with International Business
Machines (IBM) for one year as one of IBM's national technical service providers
for the United States. The Company and IBM completed the renewal of this
contract for one additional year near the end of 2004. This contract accounted
for approximately 93% of all of the services provided to IBM by the Company in
2004. In 2004, IBM was the Company's largest customer, accounting for $52.6
million or 22.2% of total revenue as compared to $51.9 million or 21.1% of 2003
revenue. The Company continued to derive a significant portion of its revenue
from IBM in 2005.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 73.0% of revenue in 2004 as compared to 72.7% of
2003 revenue. The increase in direct costs as a percentage of revenue in 2004 as
compared to 2003 was primarily due to higher medical benefit costs (0.4)%,
offset by a change in the mix of services provided to clients.
Selling, general and administrative (SG&A) expenses were 25.7% of revenue in
2004 as compared to 25.0% of revenue in 2003. Although the percentages have
increased in 2004, total SG&A expenses decreased from 2003 as the Company
continued to actively manage its cost structure in response to the revenue
pressures mentioned above, which caused overall Company revenue to decrease. In
2004, the Company did incur costs to continue to make investments in the Company
in the areas of recruiting and its service offerings in order to capitalize on
increases in market demand when they began to occur during 2004. Also, in
addition to the use of internal resources, the Company incurred in excess of
$0.5 million of costs to comply with the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002, which were not incurred in 2003.
Operating income was 1.3% of revenue in 2004 as compared to 2.3% of revenue in
2003. Operating income from North American operations was $2.3 million in 2004
as compared to $5.5 million in 2003, while European operations recorded
operating income of $0.8 million in 2004 and $0 in 2003. Operating income in
Europe was positively affected by approximately $0.1 million due to the strength
of the currencies in the countries in which the Company's European subsidiaries
operate.
Interest and other expense, net was 0.3% of revenue in 2004 and 0.4% in 2003.
The decrease as a percentage of revenue from 2003 to 2004 was primarily due to
lower average outstanding indebtedness balances in 2004.
The estimated effective tax rate (ETR) used to calculate the provision for
income taxes from continuing operations was a benefit of (22.6)% in 2004 and
42% in 2003. The ETR is recalculated quarterly based upon current assumptions
relating to the full years estimated operating results, and various tax related
items. The decrease in the rate in 2004 as compared to 2003 is primarily due to
the Company utilizing previously recorded net operating loss tax benefits of
20
approximately $0.5 million for its European and Canadian operations that had
been fully offset by a valuation allowance, a release of approximately $0.6
million of previously recorded tax liabilities resulting from the Company's
interpretation of recent tax legislation enacted in Europe, $0.4 million for
state tax net operating loss tax benefits that had previously been fully offset
by a valuation allowance, and a net amount of approximately $0.2 million from
the release of other deferred tax items. Without these adjustments to the ETR,
the rate would have been approximately 48% in 2004.
Net income from continuing operations for 2004 was 1.3% of revenue or $0.17 per
diluted share, compared to net income from continuing operations of 1.1% of
revenue or $0.16 per diluted share in 2003. Diluted earnings per share were
calculated using 17.1 million and 16.8 million equivalent shares outstanding in
2004 and 2003 periods, respectively. The increase in equivalent shares
outstanding in 2004 is due to an increase in the Company's stock price which
resulted in a greater dilutive effect of outstanding stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment." This FAS
establishes standards for the accounting for transactions in which the Company
exchanges its equity instruments for goods or services. The standard requires
the Company to measure the cost of employee services received in exchange for
awards of equity instruments based upon the grant date fair value of the award.
Currently, the Company only issues stock options in exchange for employee and
director services. Under the new standard, the calculated cost of the equity
awards will be recognized in the Company's results of operations over the period
in which an employee or director is required to provide the services for the
award. Compensation cost will not be recognized for employees or directors that
do not render the requisite services.
Currently, the Company accounts for its stock-based employee compensation plans
as allowed under current guidance and does not record compensation cost in its
statements of operations for stock-based compensation. This new standard is
effective for the Company as of January 1, 2006. The Company has evaluated the
effect of the adoption of this new standard on its financial condition and
results of operations and determined that the expense associated with issued and
outstanding options will total approximately $0.35 million and result in a
reduction of diluted earnings per share of approximately $0.02 in 2006.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Corrections of
Errors." This FAS replaces Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes," and FAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This new FAS changes the requirements for the accounting
for and reporting of a change in accounting principle, as well as carrying
forward some of the guidance in the previous statements. This new standard is
effective for the Company for accounting changes and corrections of errors made
in fiscal years beginning January 1, 2006. The Company is currently in the
process of evaluating the effect, if any, on its financial condition and results
of operations of the adoption of this new standard.
During 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations" (FIN 47). This Interpretation clarifies that the term
"conditional asset retirement obligation" refers to a legal obligation to
perform asset retirement activities in which the timing or method of settlement
are conditional on a future event that may or may not be within the control of
the Company, but that the obligation to perform the asset retirement activity is
not conditional. FIN 47 is applicable to the Company for the year ended December
31, 2005. The Company has reviewed its assets and business operations, including
its leasing activities, and determined that the issuance of this Interpretation
did not have an impact on the Company's financial condition or results of
operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with U.S. generally accepted accounting principles requires the Company's
management to make estimates, judgments and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The
Company's significant accounting policies are included in note 1 to the
consolidated financial statements contained in this Form 10-K under Item 8,
"Financial Statements and Supplementary Data." These policies, along with the
underlying assumptions and judgments made by the Company's management in their
application, have a significant impact on the Company's consolidated financial
statements. The Company identifies its most critical accounting policies as
those that are the most pervasive and important to the portrayal of the
Company's financial position and results of operations, and that require the
most
21
difficult, subjective and/or complex judgments by management regarding estimates
about matters that are inherently uncertain. The Company's most critical
accounting policies are those related to goodwill valuation, income taxes,
specifically relating to deferred taxes and valuation allowances, and the
discount rates and expected return on plan assets, as applicable, used to
calculate the Company's pension obligations.
GOODWILL VALUATION
The goodwill balance of $35.7 million relates to the Company's North
American operations and is evaluated annually or more frequently if facts
and circumstances indicate impairment may exist. This evaluation, as
applicable, is based on estimates and assumptions that may analyze the
appraised value of similar transactions from which the goodwill arose, the
appraised value of similar companies, or estimates of future discounted
cash flows. The estimates and assumptions on which the Company's
evaluations are based necessarily involve judgments 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.
As of January 1, 2006 and 2005, with the assistance of an outside third
party valuation expert, and as of January 1, 2004, the Company completed
its annual valuation of the business unit to which the Company's goodwill
relates. These valuations indicated that the estimated fair value of the
business unit exceeded the carrying value of this unit in each period.
Additionally, there are no facts or circumstances that arose during 2003,
2004 or 2005 that led management to believe the goodwill was impaired.
Accordingly, the Company believes no impairment was required to be recorded
in its consolidated financial results. Changes in business conditions which
could impact future valuations however, could lead to impairment charges.
INCOME TAXES - DEFERRED TAXES AND VALUATION ALLOWANCES
At December 31, 2005, the Company had a total of approximately $6.8 million
of current and non-current net deferred tax assets recorded on its balance
sheet. The changes in deferred tax assets and liabilities from period to
period are determined based upon the changes in differences between the
basis of assets and liabilities for financial reporting purposes and the
basis of assets and liabilities for tax purposes, as measured by the
enacted tax rates when these differences are estimated to reverse. The
Company has made certain assumptions regarding the timing of the reversal
of these assets and liabilities, and whether taxable operating income in
future periods will be sufficient to recognize all or a part of any gross
deferred tax asset of the Company.
At December 31, 2005, the Company has deferred tax assets recorded
resulting from net operating losses. This includes assets resulting from
net operating losses in various states totaling approximately $0.6 million,
in The Netherlands of approximately $2.3 million, and approximately $0.5
million in various other countries. Management of the Company has analyzed
each jurisdiction's tax position, including forecasting potential taxable
income in future periods, and the expiration of the net operating loss
carryforwards as applicable, and determined that it is unclear whether all
of these deferred tax assets will be realized at any point in the future.
Accordingly, at December 31, 2005, the Company has offset a portion of
these assets with a valuation allowance totaling $2.6 million, resulting in
a net deferred tax asset from net operating loss carryforwards of
approximately $0.8 million.
During 2005 the valuation allowance was reduced by approximately $1.3
million, net due to a variety of factors including the Company utilizing
recorded net operating loss benefits of approximately $0.1 million for its
Canadian operations and $0.2 million related to the reversal of the
remaining Canadian valuation allowance due to a change in estimate. In
2005, The Netherlands tax authorities settled an audit of the Company's
Netherlands foreign subsidiary's 2001 income tax return. A resulting
decrease in The Netherlands company's net operating loss carry forward of
$0.9 million, with a corresponding decrease in the valuation allowance for
this deferred tax asset, was primarily due to the disallowance of interest
expense on an intercompany loan with its U.S. parent under thin
capitalization rules recently affirmed by The Netherlands court system.
The Company's deferred tax assets and their potential relizability are
evaluated each quarter to determine if any changes should be made to the
valuation allowance. Any additional change in the valuation allowance in
the future could result in a change in the Company's ETR. The total
reduction in the valuation allowance of approximately $0.2 million for the
Company's Canadian operations reduced the ETR by approximately 5%. An
22
additional 1% decrease in the ETR would have equaled approximately $35,000
of additional net income in 2005.
DEFINED BENEFIT PENSION PLANS - DISCOUNT RATES AND EXPECTED RETURN ON PLAN
ASSETS
The Company maintains a non-qualified defined-benefit Executive
Supplemental Benefit Plan (ESBP) that provides a current and certain former
key executives with deferred compensation benefits, based on years of
service and base compensation, payable during retirement. The plan was
amended as of November 30, 1994, to freeze benefits for participants at
that time. The Company also retained a contributory defined-benefit plan
for its previous employees located in The Netherlands (NDBP) when the
Company disposed of its subsidiary, CTG Nederland, B.V., in the first
quarter of 2004. Benefits paid under the NDBP are a function of a
percentage of career average pay. The NDBP was curtailed for additional
contributions in January 2003.
For the ESBP, the discount rate used in 2005 to calculate the benefit
obligation was 5.6%, which is reflective of a series of bonds that are
included in the Moody's Aa long-term corporate bond yield. The Company
selected this rate as it anticipates making payments to participants under
the ESBP for 20-30 years in the future, and this rate is reflective of
specific bonds within the Moody's Aa index that cover that time period.
This rate was a decrease of 25 basis points from the rate used in the prior
year to calculate the benefit obligation. For 2005, the Company made
payments totaling approximately $0.7 million to participants. There is no
salary increase rate assumption for the plan as it is frozen for additional
benefits, and the plan is deemed to be unfunded as the Company has not
specifically set aside assets to be used to discharge the deferred
compensation benefit liability. Payments to participants under the ESBP are
funded by the Company as needed.
For the NDBP, the discount rate used in 2005 to calculate the benefit
obligation was 4.1%, which is reflective of the current return on long-term
corporate bonds that have a remaining life of greater than 10 years which
corresponds to the remaining average life of the plan. This rate was a
decrease of 90 basis points from the rate used in the prior year to
calculate the benefit obligation. There is no salary increase rate
assumption for the plan as it is frozen for additional benefits. The NDBP
is under funded by approximately $40,000 at December 31, 2005. The expected
return on plan assets for 2005 was approximately $0.3 million. The assets
in the NDBP are 20% invested in the Aegon World Equity Fund. This fund
invests in global equities, with a small portion of the fund in new or
emerging economies. The remaining 80% of the assets are invested as
determined by Aegon with no direction from the Company, with a guaranteed
minimum return to the Company of 4%. The Company's investments were
allocated as indicated above in 2003, 2004 and 2005, and the Company does
not anticipate changing these allocation percentages going forward. The
expected return on plan assets for 2005 was a function of the average
historical return of 4.5% on the 80% of the funds invested by Aegon, and an
estimated return of 9% on the 20% of the funds invested in the Aegon Equity
Fund. The three year return to the Company on the Aegon Equity Fund was
approximately 15%. In 2005, the actual return on plan assets exceeded the
expected return on plan assets by approximately $0.2 million.
The Company has also made a number of estimates and assumptions relating to
the reporting of other assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements pursuant to the rules and regulations of the Securities and
Exchange Commission. Such estimates primarily relate to allowances for
doubtful accounts receivable, investment valuation, legal matters, and
estimates of progress toward completion and direct profit or loss on
fixed-price contracts, as applicable. Actual results could differ from
these estimates.
23
FINANCIAL CONDITION AND LIQUIDITY
Cash used in operating activities was $16.2 million in 2005. Net income from
continuing operations was $2.4 million, while other non-cash adjustments,
primarily consisting of depreciation expense, deferred taxes, and deferred
compensation totaled $2.3 million. Accounts receivable increased $26.6 million
as compared to December 31, 2004 primarily due to the increase in revenue in
2005 as compared to 2004, and the timing of the services provided by the
additional staff added during 2005. The timing of the collection of these new
billings resulted in an increase in days sales outstanding to 85 days at
December 31, 2005 from 72 days at December 31, 2004. The Company anticipates
entering into an advance payment program in the first quarter of 2006 for
certain of its accounts receivable balances which should lower the consolidated
accounts receivable balance, reduce days sales outstanding, and improve
operating cash flows. Income taxes receivable, net decreased $0.4 million
primarily due to the timing and amount of payments in 2005 as compared to 2005
tax expense. Accounts payable decreased $0.8 million primarily due to the timing
of certain payments near year-end. Accrued compensation increased $5.9 million
in 2005 due to an increase of approximately 1,000 in the total headcount in
North America in 2005. Advance billings on contracts decreased $0.6 million due
to the timing of billings on customer accounts near the end of 2005.
Investing activities used $3.3 million in 2005, which primarily represented the
additions to property and equipment. The Company has no significant commitments
for the purchase of property or equipment at December 31, 2005.
Financing activities provided $18.1 million of cash in 2005. For 2005,
additional net borrowings under the Company's revolving credit lines totaled
$18.5 million. On April 20, 2005, the Company entered into a new revolving
credit agreement (Agreement) which allows the Company to borrow up to $35
million. Total debt issuance costs for this new agreement totaled approximately
$0.5 million, and are being amortized over the term of the Agreement. This new
Agreement has a term of three years and expires in April 2008. Accordingly, the
Company has recorded its outstanding indebtedness at December 31, 2005 of $23.2
million as long-term debt. The Agreement has interest rates ranging from 0 to 75
basis points over the prime rate and 150 to 225 basis points over Libor, and
provides certain of the Company's assets as security for outstanding borrowings.
The Company is required to meet certain financial covenants in order to maintain
borrowings under the Agreement, pay dividends, and make acquisitions. The
Company was in compliance with these covenants at December 31, 2005. The Company
borrows or repays its revolving debt as needed based upon its working capital
obligations, including the timing of the U.S. bi-weekly payroll. Daily average
borrowings for 2005 were $17.3 million. Payments for interest expense totaled
approximately $1.1 million during 2005.
During the second quarter of 2005, the Company authorized an additional buyback
of 1.0 million shares, bringing the total authorizations to repurchase shares of
its common stock for treasury and the Company's stock trusts to 2.4 million
shares. During 2005, the Company used $1.4 million to purchase approximately 0.4
million shares of its stock for treasury. At December 31, 2005, approximately
1.6 million shares have been repurchased in total under the authorizations,
leaving 0.8 million shares authorized for future purchases.
At December 31, 2005, consolidated shareholders' equity totaled $57.0 million,
an increase of $0.3 million from the December 31, 2004 total of $56.7 million.
Net income in 2005 totaled $2.4 million, but was primarily offset by a foreign
currency adjustment of $1.0 million, and the $1.4 million spent to purchase
approximately 0.4 million shares of the Company's stock for treasury.
During 2005, the Company identified certain errors in the application of
generally accepted accounting principles that affected the Company's retained
earnings balance as of December 31, 2002. One item related to a deferred tax
liability for property and equipment basis differences. The Company determined
that this liability was overstated by approximately $0.4 million, and that the
missstatement did not relate to 2003, 2004 or 2005. A second item related to the
accounting for rent escalation clauses in long-term operating leases for several
of the Company's leased offices. When recognizing operating lease expense for
historical periods, the Company determined that it had not applied the
requirement of SFAS No. 13, paragraph 15, Accounting for Leases, related to the
straight-line recognition of operating lease expense. The Company determined
that a liability of approximately $0.2 million ($0.1 million net of tax) was
necessary at December 31, 2002. The net impact of these adjustments, totaling
approximately $0.2 million, has been recorded as an adjustment to increase the
Company's retained earnings balance as of December 31, 2002. No adjustment was
made to the Company's consolidated statements of operations related to this
matter for 2003 or 2004 as such amounts were not deemed material. Adjustments
were made to the Company's 2005 statement of operations for certain of these
items, the impact of which was not deemed material.
24
At December 31, 2005, the Company has restricted use to approximately $0.3
million of its cash and temporary cash investments as the funds are held as a
guarantee by a financial institution for leased office space.
The Company believes existing internally available funds, cash potentially
generated from operations, and available borrowings under the Company's
revolving line of credit totaling approximately $11.5 million at December 31,
2005, will be sufficient to meet foreseeable working capital, capital
expenditure, and stock repurchase requirements, and to allow for future internal
growth and expansion.
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not have off-balance sheet arrangements or transactions in
either 2005 or 2004.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures consist of interest rate risk
associated with variable rate borrowings and foreign currency exchange risk
associated with the Company's European operations.
At December 31, 2005, there was a total of $23.2 million outstanding under the
Company's revolving credit agreement. As noted in "Financial Condition and
Liquidity," daily average borrowings for 2005 under the Company's revolving
credit agreement were $17.3 million. Accordingly, a 1% increase or decrease in
interest rates would have increased or decreased annual interest expense by
approximately $173,000.
There was a nominal affect on revenue for changes in year-over-year foreign
currency exchange rates. In Belgium and Luxembourg, the functional currency is
the Euro, while in the United Kingdom the functional currency is the British
pound. Had there been no change in these exchange rates from 2004 to 2005, total
European revenue would have been approximately $0.1 million higher, or $48.4
million in total in Europe as compared to the $48.3 million reported in 2005.
The Company has historically not used any market risk sensitive instruments to
hedge its foreign currency exchange risk.
CONTRACTUAL OBLIGATIONS
A summary of the Company's contractual obligations at December 31, 2005 is as
follows:
(in millions) Less than Years Years More than
Total 1 year 2-3 4-5 5 years
----- --------- ----- ----- ---------
Long-term debt A $23.2 $ -- $23.2 $ -- $ --
Capital lease obligations B 0.0 0.0 0.0 -- --
Operating lease obligations C 14.1 4.6 6.1 1.8 1.6
Purchase obligations D 1.4 1.0 0.4 -- --
Deferred compensation benefits
(United States) E 6.7 0.7 1.5 1.5 3.0
Deferred compensation benefits
(Europe) F -- -- -- -- --
Other long-term liabilities G 0.7 0.2 0.4 0.1 --
----- ---- ----- ---- ----
Total $46.1 $6.5 $31.6 $3.4 $4.6
===== ==== ===== ==== ====
A On April 20, 2005, the Company entered into a new revolving credit
agreement (Agreement) which allows the Company to borrow up to $35 million.
This Agreement has a term of three years and expires in April 2008. The
Company uses this facility to fund its working capital obligations as
needed, primarily including funding the U.S. bi-weekly payroll.
25
The Company currently has two outstanding letters of credit totaling
approximately $0.3 million that collateralize an office lease and an
employee benefit program.
B The Company has one capital lease totaling less than $50,000, and is not
committed to enter any other capital lease obligations at this time.
C Operating lease obligations relate to the rental of office space, office
equipment, and automobiles leased in the Company's European operations.
Total rental expense under operating leases in 2005, 2004, and 2003 was
approximately $6.3 million, $7.4 million, and $7.5 million, respectively.
D The Company is currently obligated for purchase obligations in 2006 to
spend approximately $1.0 million, including $0.6 million for software
maintenance and support fees, $0.2 million for computer-based training
courses, $0.1 million for recruiting services, and $0.1 million for a
telephone and voicemail upgrade. In 2007, the Company's total purchase
obligation for similar services totals $0.4 million.
E The Company is committed for deferred compensation benefits in the United
States under two plans. The Executive Supplemental Benefit Plan (ESBP)
provides a current and certain former key executives with deferred
compensation benefits. The ESBP was amended as of November 30, 1994 to
freeze benefits for participants at that time. Currently, 13 individuals
are receiving benefits under this plan. The ESBP is deemed to be unfunded
as the Company has not specifically identified Company assets to be used to
discharge the deferred compensation benefit liabilities.
The Company also has a non-qualified defined-contribution deferred
compensation plan for certain key executives. There were no contributions
to this plan in 2005, and only one executive currently has a vested balance
under the plan. The Company anticipates making contributions totaling
approximately $0.2 million in 2006 to this plan for amounts earned in 2005.
F The Company retained a contributory defined-benefit plan for its previous
employees located in The Netherlands when the Company disposed of its
subsidiary, CTG Nederland B.V., in the first quarter of 2004. This plan was
curtailed on January 1, 2003 for additional contributions. As this plan is
nearly fully funded at December 31, 2005, the Company does not anticipate
making significant additional payments to fund the Plan.
G The Company has other long-term liabilities including payments for a
postretirement benefit plan and payments for taxes.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposures consist of interest rate risk
associated with variable rate borrowings and foreign currency exchange risk
associated with the Company's European operations.
On April 20, 2005, the Company entered into a new revolving credit agreement
(Agreement) which allows the Company to borrow up to $35 million based upon
available collateral and which replaced a previous revolving credit agreement
which expired in May 2005. At December 31, 2005 and 2004, there were $23.2
million and $4.7 million outstanding, respectively, under these agreements.
Additionally, at December 31, 2005 and 2004, there were $0.3 million and $0.2
million, respectively, outstanding under letters of credit under these
agreements.
The maximum amounts outstanding under the revolving credit agreements during
2005, 2004, and 2003 were $29.4 million, $14.7 million, and $20.7 million,
respectively. Average bank borrowings outstanding for the years 2005, 2004, and
2003 were $17.3 million, $8.6 million, and $12.4 million, respectively, and
carried weighted-average interest rates of 6.0%, 3.5%, and 3.4%, respectively.
Accordingly, during 2005 a one percent increase in the weighted-average interest
rate would have cost the Company an additional $173,000. The Company incurred
commitment fees totaling approximately $0.1 million in each of 2005, 2004 and
2003 relative to the agreements.
During 2005, there was a nominal affect on revenue for year-over-year foreign
currency exchange rate changes of Belgium, the United Kingdom, and Luxembourg,
the countries in which the Company's European subsidiaries operate. In Belgium
and Luxembourg, the functional currency is the Euro, while in the United
Kingdom, the functional currency is the British pound. Had there been no change
in these exchange rates from 2004 to 2005, total European revenue would have
been approximately $0.1 million higher, or $48.4 million in total in Europe as
compared to the $48.3 million reported in 2005. Operating income in Europe was
not significantly affected by year-over-year exchange rate changes in these
countries. The Company has historically not used any market risk sensitive
instruments to hedge its foreign currency exchange risk.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Computer Task Group, Incorporated:
We have audited the accompanying consolidated balance sheets of Computer Task
Group, Incorporated and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computer Task Group,
Incorporated and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Computer Task
Group, Incorporated's internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 10, 2006 expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
Buffalo, New York
March 10, 2006
28
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 2004 2003
- ------------------------------------- -------- -------- --------
(amounts in thousands, except per-share data)
Revenue $294,465 $237,122 $245,514
Direct costs 226,663 173,025 178,530
Selling, general, and administrative expenses 62,877 60,999 61,453
-------- -------- --------
Operating income 4,925 3,098 5,531
Interest and other income 101 103 61
Interest and other expense (1,472) (780) (968)
-------- -------- --------
Income from continuing operations before income taxes 3,554 2,421 4,624
Provision (benefit) for income taxes 1,131 (546) 1,942
-------- -------- --------
Income from continuing operations 2,423 2,967 2,682
Income (loss) from discontinued operations (including loss
on disposal of $3.9 million in 2004) -- (4,411) 62
-------- -------- --------
Net income (loss) $ 2,423 $ (1,444) $ 2,744
======== ======== ========
Basic net income (loss) per share:
Continuing operations $ 0.14 $ 0.18 $ 0.16
Discontinued operations -- (0.27) --
-------- -------- --------
Basic net income (loss) per share $ 0.14 $ (0.09) $ 0.16
======== ======== ========
Diluted net income (loss) per share:
Continuing operations $ 0.14 $ 0.17 $ 0.16
Discontinued operations -- (0.25) --
-------- -------- --------
Diluted net income (loss) per share $ 0.14 $ (0.08) $ 0.16
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 2004
- ---------------------------------------- -------- ---------
(amounts in thousands, except share balances)
ASSETS
Current assets:
Cash and temporary cash investments $ 2,556 $ 4,488
Accounts receivable, net of allowances of $1,087
and $1,327 in 2005 and 2004, respectively 71,940 46,771
Prepaids and other 1,978 2,103
Income taxes receivable -- 225
Deferred income taxes 1,767 1,572
-------- --------
Total current assets 78,241 55,159
Property and equipment, net of accumulated depreciation
of $25,377 and $24,618 in 2005 and 2004, respectively 6,616 6,075
Goodwill 35,678 35,678
Deferred income taxes 4,987 4,717
Other assets 2,273 1,846
-------- --------
Total assets $127,795 $103,475
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,277 $ 9,263
Accrued compensation 22,153 16,831
Advance billings on contracts 1,312 1,922
Other current liabilities 4,773 5,030
Current portion of long-term debt -- 4,650
Income taxes payable 70 --
-------- --------
Total current liabilities 37,585 37,696
Long-term debt 23,150 --
Deferred compensation benefits 8,842 8,570
Other long-term liabilities 1,203 499
-------- --------
Total liabilities 70,780 46,765
-------- --------
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 111,172 111,272
Retained earnings 41,646 39,223
Less: Treasury stock of 6,525,890 and 6,148,990 shares
at cost, respectively (32,811) (31,416)
Stock Trusts of 3,939,664 and 4,057,857 shares
at cost, respectively (57,542) (58,045)
Accumulated other comprehensive loss:
Foreign currency adjustment (4,221) (3,205)
Minimum pension liability adjustment (1,499) (1,389)
-------- --------
Accumulated other comprehensive loss (5,720) (4,594)
-------- --------
Total shareholders' equity 57,015 56,710
-------- --------
Total liabilities and shareholders' equity $127,795 $103,475
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2005 2004 2003
- ------------------------------------- -------- ------- -------
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,423 $(1,444) $ 2,744
Income (loss) from discontinued operations -- (4,411) 62
-------- ------- -------
Income from continuing operations 2,423 2,967 2,682
Adjustments:
Depreciation expense 2,662 2,625 3,226
Deferred income taxes (567) (187) (86)
Tax benefit on stock option exercises 31 18 4
Loss on sales of property and equipment 23 31 220
Deferred compensation 162 1 76
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (26,555) (5,613) 4,722
(Increase) decrease in prepaids and other 48 361 (867)
(Increase) decrease in income taxes receivable, net 374 866 (1,219)
Increase in other assets (12) (75) (16)
Increase (decrease) in accounts payable (794) 675 428
Increase (decrease) in accrued compensation 5,917 (2,687) (275)
Increase (decrease) in advance billings on contracts (609) 628 (313)
Increase in other current liabilities 7 755 323
Increase (decrease) in other long-term liabilities 704 (70) (242)
-------- ------- -------
Net cash provided by (used in) operating activities (16,186) 295 8,663
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,422) (1,841) (1,492)
Proceeds from sales of property and equipment 92 15 2,283
-------- ------- -------
Net cash provided by (used in) investing activities (3,330) (1,826) 791
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) long-term revolving debt, net 18,500 4,650 (8,497)
Change in cash overdraft, net 1,165 (2,094) (557)
Debt issuance costs (507) -- --
Proceeds from Employee Stock Purchase Plan 144 162 215
Purchase of stock for treasury (1,395) -- --
Proceeds from other stock plans 228 160 51
-------- ------- -------
Net cash provided by (used in) financing activities 18,135 2,878 (8,788)
-------- ------- -------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
(revised - See note 1, "Statement of Cash Flows")
Cash provided by (used in) operating activities -- (2,308) 1,215
Cash used in investing activities -- -- (180)
Cash from financing activities -- -- --
-------- ------- -------
Net cash provided by (used in) discontinued operations -- (2,308) 1,035
-------- ------- -------
Effect of exchange rate changes on cash and temporary cash investments (551) 252 625
-------- ------- -------
Net increase (decrease) in cash and temporary
cash investments (1,932) (709) 2,326
-------- ------- -------
Cash and temporary cash investments at beginning of year 4,488 5,197 2,871
Cash and temporary cash investments at end of year $ 2,556 $ 4,488 $ 5,197
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK CAPITAL IN TREASURY STOCK
--------------- EXCESS OF RETAINED -----------------
SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT
------ ------ ---------- -------- ------ --------
(amounts in thousands) (see note 2)
BALANCE AS OF DECEMBER 31, 2002 27,018 $270 $111,465 $37,923 6,149 $(31,416)
Employee Stock Purchase Plan share issuance -- -- (99) -- -- --
Stock Option Plan share issuance -- -- (33) -- -- --
Comprehensive income (loss):
Net income -- -- -- 2,744 -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- -------- ------- ----- --------
Total comprehensive income (loss) -- -- -- 2,744 -- --
------ ---- -------- ------- ----- --------
BALANCE AS OF DECEMBER 31, 2003 27,018 270 111,333 40,667 6,149 (31,416)
Employee Stock Purchase Plan share issuance -- -- (14) -- -- --
Stock Option Plan share issuance -- -- (47) -- -- --
Comprehensive income (loss):
Net loss -- -- -- (1,444) -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- -------- ------- ----- --------
Total comprehensive income (loss) -- -- -- (1,444) -- --
------ ---- -------- ------- ----- --------
BALANCE AS OF DECEMBER 31, 2004 27,018 270 111,272 39,223 6,149 (31,416)
Employee Stock Purchase Plan share issuance -- -- (23) -- -- --
Stock Option Plan share issuance -- -- (77) -- -- --
Purchase of stock -- -- -- -- 377 (1,395)
Comprehensive income (loss):
Net income -- -- -- 2,423 -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- -------- ------- ----- --------
Total comprehensive income (loss) -- -- -- 2,423 -- --
------ ---- -------- ------- ----- --------
BALANCE AS OF DECEMBER 31, 2005 27,018 $270 $111,172 $41,646 6,526 $(32,811)
====== ==== ======== ======= ===== ========
MINIMUM
STOCK TRUSTS FOREIGN PENSION TOTAL
----------------- CURRENCY LIABILITY SHAREHOLDERS'
SHARES AMOUNT ADJUSTMENT ADJUSTMENT EQUITY
------ -------- ---------- ---------- -------------
(amounts in thousands)
BALANCE AS OF DECEMBER 31, 2002 4,246 $(58,848) $(6,116) $ (682) $52,596
Employee Stock Purchase Plan share issuance (73) 314 -- -- 215
Stock Option Plan share issuance (21) 88 -- -- 55
Comprehensive income (loss):
Net income -- -- -- -- 2,744
Foreign currency adjustment -- -- 1,276 -- 1,276
Minimum pension liability adjustment -- -- -- (529) (529)
----- -------- ------- ------- -------
Total comprehensive income (loss) -- -- 1,276 (529) 3,491
----- -------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2003 4,152 (58,446) (4,840) (1,211) 56,357
Employee Stock Purchase Plan share issuance (41) 176 -- -- 162
Stock Option Plan share issuance (53) 225 -- -- 178
Comprehensive income (loss):
Net loss -- -- -- -- (1,444)
Foreign currency adjustment -- -- 1,635 -- 1,635
Minimum pension liability adjustment -- -- -- (178) (178)
----- -------- ------- ------- -------
Total comprehensive income (loss) -- -- 1,635 (178) 13
----- -------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2004 4,058 (58,045) (3,205) (1,389) 56,710
Employee Stock Purchase Plan share issuance (39) 167 -- -- 144
Stock Option Plan share issuance (79) 336 -- -- 259
Purchase of stock -- -- -- -- (1,395)
Comprehensive income (loss):
Net income -- -- -- -- 2,423
Foreign currency adjustment -- -- (1,016) -- (1,016)
Minimum pension liability adjustment -- -- -- (110) (110)
----- -------- ------- ------- -------
Total comprehensive income (loss) -- -- (1,016) (110) 1,297
----- -------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2005 3,940 $(57,542) $(4,221) $(1,499) $57,015
===== ======== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Computer Task
Group, Incorporated, and its subsidiaries (the Company or CTG), located
primarily in North America and Europe. There are no unconsolidated entities, or
off balance sheet arrangements. All inter-company accounts and transactions have
been eliminated. Certain amounts in the prior years' consolidated financial
statements and notes have been reclassified to conform to the current year
presentation. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with U.S. generally accepted accounting
principles. Such estimates primarily relate to the valuation of goodwill,
allowances for doubtful accounts receivable and deferred tax assets, investment
valuation, legal matters, actuarial assumptions, estimates of progress toward
completion and direct profit or loss on fixed-price contracts, and discount
rates and expected rates of return, as applicable, for the Company's defined
benefit and postretirement benefit plans. Actual results could differ from those
estimates.
The Company operates in one industry segment, providing IT staffing solutions
services to its clients. These services include IT Staffing, Application
Outsourcing, and IT Solutions. CTG provides these three primary services to all
of the markets that it serves. The services provided typically encompass the IT
business solution life cycle, including phases for planning, developing,
implementing, managing, and ultimately maintaining the IT solution. A typical
customer is an organization with large, complex information and data processing
requirements. The Company promotes a portion of its services through four
vertical market focus areas: Technology Service Providers, Financial Services,
HealthCare, and Life Sciences.
REVENUE AND COST RECOGNITION
The Company primarily recognizes revenue on time-and-materials and monthly fee
contracts as hours are expended and costs are incurred. Fixed-price contracts
accounted for under the percentage-of-completion method represented
approximately three percent of 2005, four percent of 2004, and three percent of
2003 revenue, respectively. The amount of revenue recorded is a factor of the
percentage of labor and overhead costs incurred to date to total estimated labor
and overhead costs for each contract. Fixed-price contract costs include all
direct labor and material costs and those indirect costs related to contract
performance. Selling, general, and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. As required, the Company
includes billable expenses in its accounts as both revenue and direct costs.
These billable expenses totaled $9.2 million, $8.3 million, and $6.7 million in
2005, 2004 and 2003, respectively.
Bad debt expense (benefit) in 2005, 2004 and 2003 was $(0.1) million, $0.4
million, and $0.5 million, respectively.
RESTRICTED CASH
At December 31, 2005, the Company has restricted use to approximately $0.3
million of its cash and temporary cash investments as the funds are held as a
guarantee by a financial institution for leased office space.
33
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At December 31, 2005 and 2004, the carrying amounts of the Company's financial
instruments, which include cash and temporary cash investments ($2.6 million and
$4.5 million, respectively), accounts receivable, net ($71.9 million and $46.8
million, respectively), accounts payable ($9.3 million and $9.3 million,
respectively), and the current and non-current portions of long-term debt ($23.2
million and $4.7 million, respectively), approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are generally stated at historical cost less accumulated
depreciation (see "Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of"). Depreciation is computed using the straight-line method based on
estimated useful lives of one year to 30 years, and begins after an asset has
been put into service. The cost of property or equipment sold or otherwise
disposed of, along with related accumulated depreciation, is eliminated from the
accounts, and the resulting gain or loss is reflected in current earnings.
Maintenance and repairs are charged to expense when incurred, while significant
betterments to existing assets are capitalized.
LEASES
The Company is obligated under a number of long-term operating leases primarily
for the rental of office space, office equipment and automobiles based in
Europe. In instances where the Company has negotiated rent holidays, or leases
that contain rent escalation clauses, the expense for those leases is recognized
monthly on a straight line basis over the term of the lease.
GOODWILL
As of December 31, 2005 or 2004, the Company does not have any intangible assets
other than goodwill recorded on its consolidated balance sheet. As of January 1,
2006 and 2005 with the assistance of an independent appraisal company, and as of
January 1, 2004, the Company completed its annual valuation of the business unit
to which the Company's goodwill relates. These valuations, as applicable, are
based on estimates and assumptions that may analyze the appraised value of
similar transactions from which the goodwill arose, the appraised value of
similar companies, or estimates of future discounted cash flows. The valuations
indicated that the estimated fair value of the business unit exceeded the
carrying value of this unit in each period. Additionally, there are no facts or
circumstances that arose during 2005, 2004 or 2003 that led management to
believe the goodwill was impaired. Accordingly, the Company believes no
additional impairment is required to be recorded in its consolidated financial
results. The remaining goodwill balance at December 31, 2005 of $35.7 million is
included in the Company's North American operations.
34
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of by sale are reported at the lower of the carrying amount or fair value less
costs to sell.
During the second quarter of 2003, the Company sold a property it owned for
approximately $2.2 million. The Company recorded a loss of approximately $0.2
million at the time of the sale.
INCOME TAXES
The Company provides deferred income taxes for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. In assessing the realizability of deferred tax assets, management
considers within each tax jurisdiction, whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Tax credits, if any, are accounted for as a reduction of the income tax
provision in the year in which they are realized. For the years ended December
31, 2005, 2004, and 2003, the tax expense associated with the minimum pension
liability adjustment (recorded in shareholders' equity) was $0.1 million, $0.1
million, and $0.4 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans in
accordance with the provisions of FAS No. 123, "Accounting for Stock-Based
Compensation," and FAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which allows entities to continue to apply the
intrinsic value recognition and measurement provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, no stock-based employee compensation cost is
reflected in the net income (loss) of the Company for the periods presented in
these consolidated financial statements, as all options granted by the Company
had an exercise price that was equal to or greater than the underlying common
stock at the date of grant. See note 11, "Stock Option Plans."
On November 16, 2005, the Board of Directors of the Company approved the
acceleration of the vesting of all unvested out-of-the money stock options
previously awarded to its employees, including its executive officers and its
directors under the Company's equity compensation plans having an exercise price
greater than $3.48, which was the closing price of the Company's common stock on
that date. Options to purchase approximately 1.1 million shares of the Company's
common stock became exercisable immediately. The weighted-average exercise price
of the options subject to the acceleration was $4.69.
The purpose of the acceleration was to enable the Company to eliminate future
compensation expense the Company would otherwise recognize in its statements of
operations with respect to these accelerated options upon the adoption of FASB
Statement No. 123R, "Share-Based Payment" (FAS No. 123R). The Board of Directors
took the action in the belief that it is in the best interest of the
shareholders to minimize future compensation expense associated with stock
options upon adoption of FAS No. 123R. FAS No. 123R is effective for the Company
beginning in the first quarter of 2006 and will require that compensation
expense associated with stock options be recognized in the statement of
operations, rather than as a footnote disclosure in the Company's consolidated
financial statements. It is estimated that the maximum future compensation
expense that would have been recorded in the Company's statements of operations
had the vesting of these options not been accelerated is approximately $1.4
million. The impact of the acceleration of the vesting of the options on the
Company's 2005 financial statements is disclosed in the pro forma footnote
disclosures, as permitted under the transition guidance provided by the FASB, in
note 11 "Stock Option Plans."
35
The following table details the effect on net income (loss) and basic and
diluted net income (loss) per share as if the Company had adopted the fair value
recognition provisions of FAS No. 123 as they apply to stock-based employee
compensation:
2005 2004 2003
------- ------- -------
(amounts in thousands, except per-share data)
Net income (loss), as reported $ 2,423 $(1,444) $ 2,744
Stock-based employee compensation expense as
calculated under the fair value
method for all awards, net of tax (2,502) (1,082) (1,253)
------- ------- -------
Pro forma net income (loss) $ (79) $(2,526) $ 1,491
======= ======= =======
Basic net income (loss) per share:
As reported $ 0.14 $ (0.09) $ 0.16
======= ======= =======
Pro forma $ (0.00) $ (0.15) $ 0.09
======= ======= =======
Diluted net income (loss) per share:
As reported $ 0.14 $ (0.08) $ 0.16
======= ======= =======
Pro forma $ (0.00) $ (0.15) $ 0.09
======= ======= =======
Pro forma amounts for compensation cost may not be indicative of the effects on
earnings for future years. The Company's pro forma amounts of compensation
expense, net of tax, are calculated using the straight-line method of
calculating expense for the pro rata vesting that occurs for the Company's
outstanding stock options.
36
NET INCOME (LOSS) PER SHARE
Basic and diluted earnings (loss) per share (EPS) for the years ended December
31, 2005, 2004, and 2003 are as follows:
NET WEIGHTED- EARNINGS
INCOME AVERAGE (LOSS)
FOR THE YEAR ENDED (LOSS) SHARES PER SHARE
- ------------------ ------- --------- ---------
(amounts in thousands, except per-share data)
DECEMBER 31, 2005
Basic EPS
Income from continuing operations $ 2,423 16,735 $ 0.14
Loss from discontinued operations -- 16,735 --
------- -------
Net income $ 2,423 16,735 $ 0.14
======= =======
Diluted EPS
Income from continuing operations $ 2,423 17,066 $ 0.14
Loss from discontinued operations -- 17,066 --
------- -------
Net income $ 2,423 17,066 $ 0.14
======= =======
DECEMBER 31, 2004
Basic EPS
Income from continuing operations $ 2,967 16,761 $ 0.18
Loss from discontinued operations (4,411) 16,761 (0.27)
------- -------
Net loss $(1,444) 16,761 $ (0.09)
======= =======
Diluted EPS
Income from continuing operations $ 2,967 17,140 $ 0.17
Loss from discontinued operations (4,411) 17,140 (0.25)
------- -------
Net loss $(1,444) 17,140 $ (0.08)
======= =======
DECEMBER 31, 2003
Basic EPS
Income from continuing operations $ 2,682 16,663 $ 0.16
Income from discontinued operations 62 16,663 --
------- -------
Net income $ 2,744 16,663 $ 0.16
======= =======
Diluted EPS
Income from continuing operations $ 2,682 16,846 $ 0.16
Income from discontinued operations 62 16,846 --
------- -------
Net income $ 2,744 16,846 $ 0.16
======= =======
Weighted-average shares represent the average of issued shares less treasury
shares and less the shares held in the Stock Trusts. In 2005, 2004 and 2003, the
dilutive effect of outstanding stock options was 331,000, 379,000 and 183,000
weighted-average shares, respectively.
Options to purchase 2.3 million, 1.8 million, and 1.6 million shares of common
stock were outstanding at December 31, 2005, 2004, and 2003, respectively, but
were not included in the computation of diluted earnings per share, as the
options' exercise price was greater than the average market price of the
Company's common shares.
37
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. The translation of the applicable foreign currencies into U.S.
dollars is performed for assets and liabilities using current exchange rates in
effect at the balance sheet date, for equity accounts using historical exchange
rates, and for revenue and expense activity using the applicable month's average
exchange rates. During 2005, the Company recorded a loss totaling approximately
$0.1 million from a foreign currency transaction for the settlement of
intercompany balances, while during 2004 the Company recorded a gain of
approximately $30,000 from such transactions.
STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, cash and temporary cash investments
are defined as cash on hand; demand deposits; and short-term, highly liquid
investments with a maturity of three months or less. Additionally, as the
Company does not fund its bank accounts for the checks it has written until the
checks are presented to the bank for payment, the change in cash overdraft, net
represents the increase or decrease in outstanding checks.
In 2005, the Company has separately disclosed the operating, investing and
financing portions of the cash flows from discontinued operations in 2003 and
2004, where as in prior periods these amounts were presented on a combined basis
as a single amount in each year.
Interest paid during 2005, 2004, and 2003 amounted to $1.1 million, $0.4
million, and $0.5 million, respectively, while net income tax payments
(receipts) totaled $0.7 million, $(1.5) million, and $1.1 million for the
respective years.
RELATED PARTY TRANSACTIONS
The Company did not have any related party arrangements or transactions in 2005,
2004 or 2003.
ACCOUNTING STANDARDS PRONOUNCEMENTS
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment" (FAS
123R). FAS 123R establishes standards for the accounting for transactions in
which the Company exchanges its equity instruments for goods or services. The
standard requires the Company to measure the cost of services received in
exchange for awards of equity instruments based upon the grant date fair value
of the award. Currently, the Company only issues stock options in exchange for
employee and director services. Under the new standard, the calculated cost of
the equity awards will be recognized in the Company's results of operations over
the period in which an employee or director is required to provide the services
for the award. Compensation cost will not be recognized for employees or
directors that do not render the requisite services. This new standard is
effective for the Company as of January 1, 2006.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Corrections of
Errors" (FAS 154). FAS 154 replaces Accounting Principles Board (APB) Opinion
No. 20, "Accounting Changes," and FAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements." FAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle, as well as
carrying forward some of the guidance in the previous statements. This new
standard is effective for the Company for accounting changes and corrections of
errors made in fiscal years beginning January 1, 2006. The Company is currently
in the process of evaluating the affect of the adoption of this new standard, if
any, on its financial condition and results of operations.
During 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations" (FIN 47). This interpretation clarifies that the term
"conditional asset retirement obligation" refers to a legal obligation to
perform asset retirement activities in which the timing or method of settlement
are conditional on a future event that may or may not be within the control of
the Company, but that the obligation to perform the asset retirement activity is
not conditional. FIN 47 is applicable to the Company for the year ended December
31, 2005. The Company has reviewed its assets and business operations, including
its leasing activities, and determined that the issuance of this interpretation
did not have an impact on the Company's financial condition or results of
operations.
38
2. ADJUSTMENT TO RETAINED EARNINGS AS OF DECEMBER 31, 2002
During 2005, the Company identified certain errors in the application of
generally accepted accounting principles that affected the Company's retained
earnings balance as of December 31, 2002. One item related to a deferred tax
liability for property and equipment basis differences. The Company determined
that this liability was overstated by approximately $0.4 million, and that the
misstatement did not relate to 2003, 2004 or 2005. A second item related to the
accounting for rent escalation clauses in long-term operating leases for several
of the Company's leased offices. When recognizing operating lease expense for
historical periods, the Company determined that it had not applied the
requirement of SFAS No. 13, paragraph 15, Accounting for Leases, related to the
straight-line recognition of operating lease expense. The Company determined
that a liability of approximately $0.2 million ($0.1 million net of tax) was
necessary at December 31, 2002. The net impact of these adjustments, totaling
approximately $0.2 million, has been recorded as an adjustment to increase the
Company's retained earnings balance as of December 31, 2002. No adjustment was
made to the Company's consolidated statements of operations related to this
matter for 2003 or 2004 as such amounts were not deemed material. Adjustments
were made to the Company's 2005 statement of operations for certain of these
items, the impact of which was not deemed material.
3. DISCONTINUED OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch operating
subsidiary, CTG Nederland B.V., in a transaction in which the Company sold the
subsidiary's stock and transferred the unit's business, staff, and lease and
equipment obligations to the unit's management team. The effective date of the
disposition was January 1, 2004, and the transaction has been treated as
discontinued operations in these consolidated financial statements. As part of
the transaction, the Company retained the assets and liabilities related to the
defined-benefit plan for its previous employees in The Netherlands (NDBP). At
the time of the disposition, the net asset of the plan totaled approximately
$0.5 million. The activities of the NDBP are discussed in note 8, "Deferred
Compensation Benefits." This unit had previously been included in the financial
results of the Company's European operations.
The loss from discontinued operations resulting from this divestiture totaled
approximately $4.4 million in 2004, with approximately $4.3 million of that loss
incurred in the first quarter of 2004. The loss includes a cumulative loss on
disposal of approximately $3.9 million, and approximately $0.5 million from a
foreign currency adjustment which had previously been reported as a direct
charge to shareholders' equity. All activities related to this subsidiary have
been removed from the Company's individual accounts and subsequently combined
and included on the line entitled "Income (loss) from discontinued operations"
on the Company's Consolidated Statements of Operations.
Revenue, loss before income taxes, and income (loss) from discontinued
operations for 2004 and 2003 are as follows:
2004 2003
------- -------
(amounts in thousands)
Revenue $ -- $ 6,827
Loss before income taxes $ -- $(1,762)
Income (loss) from discontinued operations $(4,411) $ 62
During 2003, the Company recorded a tax refund and interest thereon of
approximately $1.1 million and $0.6 million, respectively, resulting from the
resolution of a court case in The Netherlands which for tax purposes created a
net operating loss benefit for the Company's Dutch subsidiaries. This refund was
received in 2004 and included above as part of the income from discontinued
operations in 2003.
39
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 are summarized as follows:
DECEMBER 31, USEFUL LIFE 2005 2004
- ------------ ----------- -------- --------
(years) (amounts in thousands)
Land -- $ 378 $ 378
Buildings 30 4,448 4,527
Equipment 2-5 10,894 10,633
Furniture 5-10 4,510 4,860
Software 1-5 8,901 7,494
Leasehold improvements 3-10 2,862 2,801
-------- --------
31,993 30,693
Less accumulated depreciation (25,377) (24,618)
-------- --------
$ 6,616 $ 6,075
======== ========
5. DEBT
On April 20, 2005, the Company entered into a new revolving credit agreement
(Agreement) which allows the Company to borrow up to $35 million. This new
Agreement has a term of three years and expires in April 2008. Accordingly, the
Company has recorded its outstanding indebtedness at December 31, 2005 of $23.2
million as long-term debt. The Agreement has interest rates ranging from 0 to 75
basis points over the prime rate and 150 to 225 basis points over Libor, and
provides certain of the Company's assets as security for outstanding borrowings.
The Company is required to meet certain financial covenants in order to maintain
borrowings under the Agreement, pay dividends, and make acquisitions. At
December 31, 2005, the Company was in compliance with these covenants. Prior to
signing this new Agreement, the Company had a previous revolving credit
agreement which expired in May 2005. At December 31, 2005 and 2004, there were
$23.2 million and $4.7 million outstanding, respectively, under these
agreements. Additionally, at December 31, 2005 and 2004, there were $0.3 million
and $0.2 million, respectively, outstanding under letters of credit under these
agreements.
The maximum amounts outstanding under the revolving credit agreements during
2005, 2004, and 2003 were $29.4 million, $14.7 million, and $20.7 million,
respectively. Average bank borrowings outstanding for the years 2005, 2004, and
2003 were $17.3 million, $8.6 million, and $12.4 million, respectively, and
carried weighted-average interest rates of 6.0%, 3.5%, and 3.4%, respectively.
The Company incurred commitment fees totaling approximately $0.1 million in each
of 2005, 2004 and 2003 relative to the agreements.
40
6. INCOME TAXES
The provision (benefit) for income taxes for 2005, 2004, and 2003 consists of
the following:
2005 2004 2003
------ ------ -------
(amounts in thousands)
DOMESTIC AND FOREIGN COMPONENTS OF INCOME
(LOSS) BEFORE INCOME TAXES ARE AS FOLLOWS:
Domestic $2,835 $2,552 $ 6,049
Foreign 719 (131) (1,425)
------ ------ -------
$3,554 $2,421 $ 4,624
====== ====== =======
THE PROVISION (BENEFIT) FOR INCOME TAXES
CONSISTS OF:
Current tax:
U.S. federal $ 557 $ 201 $ 1,648
Foreign 344 (683) --
U.S. state and local 108 188 545
------ ------ -------
1,009 (294) 2,193
Deferred tax:
U.S. federal (246) 12 (165)
Foreign 360 316 (133)
U.S. state and local 8 (580) 47
------ ------ -------
122 (252) (251)
------ ------ -------
$1,131 $ (546) $ 1,942
====== ====== =======
THE EFFECTIVE AND STATUTORY INCOME
TAX RATE CAN BE RECONCILED AS FOLLOWS:
Tax at statutory rate of 34% $1,208 $ 823 $ 1,572
State tax, net of federal benefits 99 102 360
Benefit of state net operating losses previously offset
by valuation allowances (29) (356) --
Non-taxable income (557) (455) (206)
Non-deductible expenses 712 600 227
Change in beginning of year temporary differences -- (151) --
Change in estimate primarily related to recent tax
legislation enacted in Europe -- (639) --
Change in estimate primarily related to foreign taxes (161) -- --
Change in estimate primarily related to state taxes (88) -- --
Benefit of foreign net operating losses previously offset
by valuation allowances (66) (524) --
Foreign tax rate change -- 47 --
Other, net 13 7 (11)
------ ------ -------
$1,131 $ (546) $ 1,942
====== ====== =======
Effective income tax rate 31.8% (22.6)% 42.0%
41
The estimated effective tax rate (ETR) used to calculate the provision for
income taxes from continuing operations was 31.8% in 2005 and a benefit of
(22.6)% in 2004. The ETR is recalculated quarterly based upon current
assumptions relating to the full years estimated operating results, and various
tax related items. In 2005, the ETR was reduced due to a change in estimate of
approximately $0.1 million for state taxes and a reduction in the valuation
allowance for net operating losses in Canada totaling approximately $0.2
million. The increase in the rate in 2005 as compared to 2004 is primarily due
to the Company utilizing in 2004 previously recorded net operating loss tax
benefits of approximately $0.5 million for its European and Canadian operations
that had been fully offset by a valuation allowance, a release of approximately
$0.6 million of previously recorded tax liabilities resulting from the Company's
interpretation of tax legislation enacted in Europe, $0.4 million for state tax
net operating loss tax benefits that had previously been fully offset by a
valuation allowance, and a net amount of approximately $0.2 million from the
release of other deferred tax items.
The Company's deferred tax assets and liabilities at December 31, 2005 and 2004
consist of the following:
DECEMBER 31, 2005 2004
- ------------ ------- -------
(amounts in thousands)
ASSETS
Deferred compensation $ 3,352 $ 3,251
Loss carryforwards 3,353 4,995
Accruals deductible for tax purposes when paid 747 189
Depreciation 30 --
Allowance for doubtful accounts 338 421
Amortization 798 918
State taxes 728 643
------- -------
Gross deferred tax assets 9,346 10,417
Deferred tax assets valuation allowance (2,559) (3,899)
LIABILITIES
Depreciation (33) (229)
------- -------
Net deferred tax assets $ 6,754 $ 6,289
======= =======
Net deferred assets and liabilities are
recorded at December 31, 2005
and 2004 as follows:
Net current assets $ 1,767 $ 1,572
Net non-current assets 4,987 4,717
------- -------
Net deferred tax assets $ 6,754 $ 6,289
======= =======
In assessing the realizability of deferred tax assets, management considers,
within each taxing jurisdiction, whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Factors
that may affect the Company's ability to achieve sufficient forecasted taxable
income in future periods may include, but are not limited to, the following:
increased competition, a decline in sales or margins, a loss of market share,
the availability of qualified professional staff, and a decrease in demand for
IT services. Based upon the levels of historical taxable income or loss and
projections for future taxable income or loss over the years in which the
deferred tax assets are deductible, at December 31, 2005 management believes
that it is more likely than not that the Company will realize the benefits, net
of the established valuation allowance, of these deferred tax assets in the
future.
For the loss carryforwards the Company has recorded as deferred tax assets, the
expiration of the various state net operating loss carryforwards totaling
approximately $13.2 million is 5 to 20 years and these losses began to expire in
2005. For Canada, the expiration of the net operating loss carryforward totaling
$0.4 million is 7 years and begins to expire in 2008, and for Europe, the net
operating loss carryforwards for The Netherlands and United Kingdom total
approximately $8.3 million, and have no expiration date.
42
At December 31, 2005, the Company has a deferred tax asset before the valuation
allowance resulting from net operating losses in various states of approximately
$0.6 million, in The Netherlands of approximately $2.3 million, and
approximately $0.5 million in various other countries where it does business.
Management of the Company has analyzed each jurisdiction's tax position,
including forecasting potential operating profits in future years, and the
expiration of the net operating loss carryforwards as applicable, and determined
that it is unclear whether all of the deferred tax asset totaling $3.4 million
will be realized at any point in the future. Accordingly, at December 31, 2005,
the Company has offset a portion of the asset with a valuation allowance
totaling $2.6 million, resulting in a net deferred tax asset from net operating
loss carryforwards of approximately $0.8 million. During 2005 the valuation
allowance was reduced by approximately $1.3 million, net due to a variety of
factors including the Company utilizing recorded net operating loss benefits of
approximately $0.1 million for its Canadian operations, and $0.2 million related
to the reversal of the remaining Canadian valuation allowance due to a change in
estimate. In 2005, The Netherlands tax authorities settled an audit of the
Company's Dutch foreign subsidiary's 2001 income tax return. A resulting
decrease in The Netherlands Company's net operating loss carry forward of $0.9
million was due primarily to the disallowance of interest expense on an
intercompany loan with its US parent under thin capitalization rules recently
affirmed by The Netherlands court system. This change had no net effect on the
net deferred asset after a corresponding adjustment in the valuation allowance
which fully offsets the deferred tax asset.
During 2004, the Company adopted a tax planning strategy for state tax purposes
whereby it combined its operating subsidiary in the United States into the
parent corporation. This combination allows the Company to utilize its net
operating loss in many of the various states where a net operating loss
carryforward exists. Due to the adoption of this strategy at the end of the
fourth quarter of 2004, the Company was able to recognize $0.5 million for state
tax net operating loss tax benefits that had previously been fully offset by a
valuation allowance. At December 31, 2005, there is approximately $0.4 million
of valuation allowance remaining that offsets the state net operating loss
deferred tax asset.
Undistributed earnings of the Company's foreign subsidiaries were minimal at
December 31, 2005, and are considered to be indefinitely reinvested.
Accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of these earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. In the event that the foreign entities' earnings were
distributed, it is estimated that U.S. federal and state income taxes, net of
foreign credits, would be immaterial. The Company has reviewed the provisions of
the American Jobs Creation Act of 2004 and determined that its provisions have
no effect on the operations of the Company.
In 2005, 2004, and 2003, 74,000, 37,000, and 13,000 shares of common stock,
respectively, were issued through the exercise of non-qualified stock options or
through the disqualifying disposition of incentive stock options. The tax
benefit to the Company from these transactions, which is credited to capital in
excess of par value rather than recognized as a reduction of income tax expense,
was $31,000, $18,000, and $4,000 in 2005, 2004, and 2003, respectively. These
tax benefits have also been recognized in the consolidated balance sheets as a
reduction of current taxes payable.
The Company has established reserves for tax contingencies based upon the
probable outcome of tax positions taken for financial statement purposes
compared to positions taken on the Company's tax returns. The Company reviews
its tax-contingency reserves on a quarterly basis to ensure they are
appropriately stated. Such reviews include consideration of factors such as the
cause of the action, the degree of probability of an unfavorable outcome, the
Company's ability to estimate the liability, and the timing of the liability and
how it will impact the Company's other tax attributes. At December 31, 2005, the
Company believes it has adequately provided for its tax-related liabilities.
43
7. LEASE COMMITMENTS
At December 31, 2005, the Company was obligated under a number of long-term
operating leases. Minimum future obligations under such leases are summarized as
follows:
YEAR ENDING DECEMBER 31,
- ------------------------
(amounts in thousands)
2006 $ 4,594
2007 3,661
2008 2,420
2009 1,195
2010 611
Later years 1,648
-------
Minimum future obligations $14,129
=======
The operating lease obligations relate to the rental of office space, office
equipment, and automobiles leased in Europe. Total rental expense under such
operating leases for 2005, 2004, and 2003 was approximately $6.3 million, $7.4
million, and $7.5 million, respectively.
8. DEFERRED COMPENSATION BENEFITS
The Company maintains a non-qualified defined-benefit Executive Supplemental
Benefit Plan (ESBP) that provides a current and certain former key executives
with deferred compensation benefits, based on years of service and base
compensation, payable during retirement. The plan was amended as of November 30,
1994, to freeze benefits for participants at that time.
Net periodic pension cost for the years ended December 31, 2005, 2004, and 2003
for the ESBP is as follows:
NET PERIODIC PENSION COST - ESBP 2005 2004 2003
- -------------------------------- ---- ---- ----
(amounts in thousands)
Interest cost $513 $532 $538
Amortization of unrecognized net loss 108 87 22
---- ---- ----
Net periodic pension cost $621 $619 $560
==== ==== ====
The Company also retained a contributory defined-benefit plan for its previous
employees located in The Netherlands (NDBP) when the Company disposed of its
subsidiary, CTG Nederland, B.V., in the first quarter of 2004. Benefits paid are
a function of a percentage of career average pay. The Plan was curtailed for
additional contributions in January 2003.
44
Net periodic pension cost for the twelve month periods ended September 30, 2005,
October 1, 2004, and September 26, 2003 for the NDBP is as follows:
NET PERIODIC PENSION COST (BENEFIT) - NDBP 2005 2004 2003
- ------------------------------------------ ----- ----- -----
(amounts in thousands)
Service cost $ -- $ -- $ 110
Interest cost 252 232 216
Expected return on plan assets (281) (285) (251)
Amortization of actuarial loss 1 -- --
Employee contributions -- -- (60)
----- ----- -----
Net periodic pension cost (benefit) $ (28) $ (53) $ 15
===== ===== =====
The change in benefit obligation and reconciliation of fair value of plan assets
for the year ended December 31, 2005 and 2004 for the ESBP, and for the twelve
month period ended September 30, 2005 and October 1, 2004 for the NDBP are as
follows:
ESBP NDBP
----------------- ---------------
CHANGES IN BENEFIT OBLIGATION 2005 2004 2005 2004
- ----------------------------- ------- ------- ------ ------
(amounts in thousands)
Benefit obligation at
beginning of period $ 9,103 $ 8,833 $4,869 $4,321
Service cost, net -- -- -- --
Interest cost 513 532 252 232
Benefits paid (698) (646) (23) (20)
Actuarial (gain) loss 241 384 250 (107)
Effect of exchange rate changes -- -- 426 443
------- ------- ------ ------
Benefit obligation at end of period 9,159 9,103 5,774 4,869
------- ------- ------ ------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of period -- -- 5,511 4,827
Actual return on plan assets -- -- 441 208
Employer contributions 698 646 -- --
Employee contributions -- -- -- --
Benefits paid (698) (646) (23) (20)
Effect of exchange rate changes -- -- (195) 496
------- ------- ------ ------
Fair value of plan assets at end of period -- -- 5,734 5,511
------- ------- ------ ------
Unfunded (funded) status 9,159 9,103 40 (642)
Unrecognized net actuarial gain (loss) (2,448) (2,315) (664) 25
------- ------- ------ ------
Accrued benefit cost (asset) $ 6,711 $ 6,788 $ (624) $ (617)
------- ------- ------ ------
Discount rate:
Benefit obligation 5.60% 5.85% 4.10% 5.00%
Net periodic pension cost 5.85% 6.25% 4.10% 5.00%
Salary increase rate -- -- -- --
Expected return on plan assets -- -- 5.00% 5.50%
For the ESBP, the accumulated benefit obligation at December 31, 2005 and 2004
was $9.2 million and $9.1 million, respectively. The amounts included in other
comprehensive income (loss) relating to the adjustment to the minimum pension
liability for the years ended December 31, 2005 and 2004, net of tax, were
approximately $(0.1) million and $(0.2) million, respectively. Benefits paid to
participants are funded by the Company as needed. The plan is deemed unfunded as
the Company has not specifically identified Company assets to be used to
discharge the deferred compensation benefit liabilities. The Company has
purchased insurance on the lives of certain plan participants in amounts
considered sufficient to reimburse the Company for the costs associated with the
plan for those participants. The Company does not anticipate making
contributions to the plan in 2006 and future years to fund the plan.
45
For the NDBP, the accumulated benefit obligation at September 30, 2005 and
October 1, 2004 was $5.8 million and $4.9 million, respectively. The assets in
the NDBP are 20% invested in the Aegon World Equity Fund. This fund invests in
global equities, with a small portion of the fund in new or emerging economies.
The remaining 80% of the assets are invested as determined by Aegon with no
direction from the Company, with a guaranteed minimum return to the Company of
4%. The historical return to the Company on these investments has been
approximately 4.5%. The Company's investments were allocated as indicated above
in both 2004 and 2005, and the Company does not anticipate changing these
allocation percentages in 2006. The expected return on plan assets for 2004 and
2005 was a function of the average historical return of 4.5% on the 80% of the
funds invested by Aegon, and a historical return of 9% on the 20% of the funds
invested in the Aegon Equity Fund. The Company does not anticipate making
significant additional contributions to the plan in 2006 and future years, as
the plan is currently nearly fully funded.
Anticipated benefit payments for the ESBP and the NDBP are expected to be paid
in future years as follows:
YEAR ENDING DECEMBER 31, ESBP NDBP
- ------------------------ ------ ----
(amounts in thousands)
2006 $ 703 $ 31
2007 736 31
2008 759 41
2009 779 46
2010 761 61
2011-2015 3,607 518
------ ----
$7,345 $728
====== ====
The Company also maintains a non-qualified defined-contribution deferred
compensation plan for certain key executives. The Company contributions to this
plan, if any, are based on annually defined financial performance objectives.
There were no contributions to the plan in 2005, 2004, or 2003. The Company
anticipates making contributions totaling approximately $0.2 million in 2006 to
this plan for amounts earned in 2005.
9. EMPLOYEE BENEFITS
401(K) PROFIT-SHARING RETIREMENT PLAN
The Company maintains a contributory 401(k) profit-sharing retirement plan
covering substantially all U.S. employees. Company contributions, which are
discretionary, consist of cash, and may include the Company's stock, were funded
and charged to operations in the amounts of $2.1 million, $1.3 million, and $1.6
million for 2005, 2004, and 2003, respectively.
OTHER RETIREMENT PLANS
The Company maintains various other defined contribution retirement plans
covering substantially all of the remaining European employees. Company
contributions charged to operations were $0.2 million in 2005, $0.1 million in
2004, and $0.1 million in 2003.
OTHER POSTRETIREMENT BENEFITS
The Company provides limited healthcare and life insurance benefits to one
current and nine retired employees and their spouses, totaling 16 participants,
pursuant to contractual agreements.
Net periodic postretirement benefit cost for the years ended December 31, 2005,
2004, and 2003 is as follows:
NET PERIODIC POSTRETIREMENT BENEFIT COST 2005 2004 2003
- ---------------------------------------- ---- ---- ----
(amounts in thousands)
Interest cost $37 $38 $35
Amortization of transition amount 29 29 29
--- --- ---
Net periodic postretirement benefit cost $66 $67 $64
=== === ===
No adjustments were made to the 2005 net periodic postretirement benefit cost
due to Medicare reform as the amounts were deemed to be insignificant.
46
The change in postretirement benefit obligation at December 31, 2005 and 2004 is
as follows:
CHANGE IN POSTRETIREMENT BENEFIT OBLIGATION 2005 2004
- ------------------------------------------- ----- -----
(amounts in thousands)
Postretirement benefit obligation
at beginning of year $ 666 $ 637
Interest cost 37 38
Plan amendment (2) --
Benefits paid (42) (16)
Actuarial loss 114 7
----- -----
Postretirement benefit obligation at end of year 773 666
Fair value of plan assets at end of year -- --
----- -----
Unfunded status 773 666
Unrecognized transition obligation (205) (234)
Plan amendment 2 --
Unrecognized loss (178) (64)
----- -----
Accrued postretirement benefit obligation $ 392 $ 368
----- -----
Discount rate:
Benefit obligation 5.60% 5.85%
Net periodic postretirement benefit cost 5.85% 6.25%
Salary increase rate -- --
Benefits paid to participants are funded by the Company as needed. Anticipated
benefit payments for the postretirement medical plan are expected to be paid in
future years as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
(amounts in thousands)
2006 $ 78
2007 68
2008 73
2009 71
2010 60
2011-2015 281
----
$631
====
The rate of increase in healthcare costs is assumed to be 12% for medical, 7%
for dental, and 12% for Medicare Part B in 2006, gradually declining to 5% by
the year 2013 and remaining at that level thereafter. Increasing the assumed
healthcare cost trend rate by one percentage point would increase the accrued
postretirement benefit obligation by $56,000 at December 31, 2005, and the net
periodic postretirement benefit cost by $2,600 for the year. A
one-percentage-point decrease in the healthcare cost trend would decrease the
accrued postretirement benefit obligation by $49,000 at December 31, 2005, and
the net periodic postretirement benefit cost by $2,300 for the year.
47
10. SHAREHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's First Employee Stock Purchase Plan (Plan), employees may
apply up to 10% of their compensation to purchase the Company's common stock.
Shares are purchased at the closing market price on the business day preceding
the date of purchase. During 2001, an additional 0.5 million shares were
authorized under the Plan. As of December 31, 2005, approximately 184,000 shares
remain unissued under the Plan, of the total of 11.5 million shares that had
been authorized under the Plan. During 2005, 2004, and 2003, approximately
39,000, 41,000, and 73,000 shares, respectively, were purchased under the plan
at an average price of $3.66, $3.92, and $2.92 per share, respectively.
SHAREHOLDER RIGHTS PLAN
The Board of Directors adopted a Shareholder Rights Plan in January 1989. Under
the plan, one right was distributed for each share of common stock outstanding
on January 27, 1989, and on each additional share of common stock issued after
that date and prior to the date the rights become exercisable. The rights become
exercisable when 20% or more of the Company's outstanding common stock is
acquired by a person or group, other than Company-provided employee benefit
plans, and when an offer to acquire is made. Each right entitles the holder to
purchase Series A preferred stock (which is essentially equivalent to common
stock) at a 50% discount from the then-market price of the common stock or, in
the event of a merger, consolidation, or sale of a major part of the Company's
assets, to purchase common stock of the acquiring company at a 50% discount from
its then-market price. The Shareholder Rights Plan was amended in 1999 to
provide that the rights expire in November 2008. The rights may be redeemed by
the Company at a price of $.01 per right.
STOCK TRUSTS
The Company maintains a Stock Employee Compensation Trust (SECT) to provide
funding for existing employee stock plans and benefit programs. Shares are
purchased by and released from the SECT by the trustee of the SECT at the
request of the compensation committee of the Board of Directors. As of December
31, 2005, all shares remaining in the SECT were unallocated and, therefore, are
not considered outstanding for purposes of calculating earnings per share.
SECT activity for 2005, 2004, and 2003 is as follows:
2005 2004 2003
----- ----- -----
(amounts in thousands)
Share balance at beginning of year 3,999 4,093 4,187
Shares purchased -- -- --
Shares released:
Stock option plans (79) (53) (21)
Employee Stock Purchase Plan (39) (41) (73)
----- ----- -----
Share balance at end of year 3,881 3,999 4,093
===== ===== =====
During 1999, the Company created an Omnibus Stock Trust (OST) to provide funding
for various employee benefit programs. During 1999, the OST purchased 59,000
shares for $1 million. Shares are released from the OST by the trustee at the
request of the compensation committee of the Board of Directors. During 2005,
2004, and 2003, no shares were purchased or released by the OST.
RESTRICTED STOCK PLAN
Under the Company's Restricted Stock Plan, 800,000 shares of restricted stock
may be granted to certain key employees. At December 31, 2005, there are no
restricted stock grants outstanding, and there was no restricted stock activity
in 2003, 2004, or 2005.
PREFERRED STOCK
At December 31, 2005 and 2004, the Company has 2,500,000 shares of par value
$0.01 preferred stock authorized for issuance, but none outstanding.
48
11. STOCK OPTION PLANS
On April 26, 2000, the shareholders approved the Company's Equity Award Plan
(Equity Plan). Under the provisions of the plan, stock options, stock
appreciation rights, and other awards may be granted or awarded to employees and
directors of the Company. The compensation committee of the Board of Directors
determines the nature, amount, pricing, and vesting of the grant or award. All
options and awards remain in effect until the earlier of the expiration,
exercise, or surrender date.
On April 24, 1991, the shareholders approved the Company's 1991 Employee Stock
Option Plan (1991 Plan), which came into effect after the Company's 1981
Employee Stock Option Plan (1981 Plan) terminated on April 21, 1991. Under the
provisions of the plan, options may be granted to employees and directors of the
Company. The option price for options granted under each plan is equal to or
greater than the fair market value of the Company's common stock on the date the
option is granted. Incentive stock options generally become exercisable in four
annual installments of 25% of the shares covered by the grant, beginning one
year from the date of grant, and expire six years after becoming exercisable.
Nonqualified stock options generally become exercisable in either four or five
annual installments of 20 or 25% of the shares covered by the grant, beginning
one year from the date of grant, and expire up to 15 years from the date of
grant. All options remain in effect until the earlier of the expiration,
exercise, or surrender date.
The per-option weighted-average fair value on the date of grant of stock options
granted in 2005, 2004, and 2003, using the Black-Scholes option pricing model,
was $2.12, $2.32, and $1.85, respectively. The fair value of the options at the
date of grant was estimated with the following weighted-average assumptions:
2005 2004 2003
---- ---- ----
Expected life (years) 3.4 3.8 3.5
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 3.7% 2.8% 2.3%
Expected volatility 68.0% 78.4% 84.9%
The Company accounts for its stock-based employee compensation plans in
accordance with the provisions of FAS No. 123, "Accounting for Stock-Based
Compensation," and FAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which allows entities to continue to apply the
recognition and measurement provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in the
net income (loss) of the Company for the periods presented in these consolidated
financial statements, as all options granted by the Company had an exercise
price that was equal to or greater than the underlying common stock at the date
of grant.
On November 16, 2005, the Board of Directors of the Company approved the
acceleration of the vesting of all unvested out-of-the money stock options
previously awarded to its employees, including its executive officers and its
directors under the Company's equity compensation plans having an exercise price
greater than $3.48, which was the closing price of the Company's common stock on
that date. Options to purchase approximately 1.1 million shares of the Company's
common stock became exercisable immediately. The weighted-average exercise price
of the options subject to the acceleration was $4.69.
The purpose of the acceleration was to enable the Company to eliminate future
compensation expense the Company would otherwise recognize in its statements of
operations with respect to these accelerated options upon the adoption of FASB
No. 123R "Share-Based Payment" (FAS No. 123R). The Board of Directors took the
action in the belief that it is in the best interest of the shareholders to
minimize future compensation expense associated with stock options upon adoption
of FAS No.123R. FAS No. 123R is effective for the Company beginning in the first
quarter of 2006 and will require that compensation expense associated with stock
options be recognized in the statement of operations, rather than as a footnote
disclosure in the Company's consolidated financial statements. It is estimated
that the maximum future compensation expense that would have been recorded in
the Company's statements of operations had the vesting of these options not been
accelerated is approximately $1.4 million.
49
The following table details the effect on net income (loss) and basic and
diluted net income (loss) per share as if the Company had adopted the fair value
recognition provisions of FAS No. 123 as they apply to stock-based employee
compensation:
2005 2004 2003
------- ------- -------
(amounts in thousands, except per share data)
Net income (loss), as reported $ 2,423 $(1,444) $ 2,744
Stock-based employee compensation
expense as calculated under the fair
value method for all awards, net of tax (2,502) (1,082) (1,253)
------- ------- -------
Pro forma net income (loss) $ (79) $(2,526) $ 1,491
======= ======= =======
Basic net income (loss) per share:
As reported $ 0.14 $ (0.09) $ 0.16
======= ======= =======
Pro forma $ (0.00) $ (0.15) $ 0.09
======= ======= =======
Diluted net income (loss) per share:
As reported $ 0.14 $ (0.08) $ 0.16
======= ======= =======
Pro forma $ (0.00) $ (0.15) $ 0.09
======= ======= =======
Pro forma amounts for compensation cost may not be indicative of the effects on
earnings for future years. The Company's pro forma amounts of compensation
expense, net of tax, are calculated using the straight-line method of
calculating expense for the pro rata vesting that occurs for the Company's
outstanding stock options.
A summary of stock option activity under these plans is as follows:
EQUITY PLAN WEIGHTED-AVERAGE 1991 PLAN WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ---------------- ---------- ----------------
OUTSTANDING AT DECEMBER 31, 2002 1,654,750 $3.52 1,376,750 $14.22
Granted 507,000 $3.14 -- --
Exercised (15,000) $2.35 (5,625) $ 2.88
Canceled, expired, and forfeited (161,500) $3.92 (169,750) $15.16
--------- ----- --------- ------
OUTSTANDING AT DECEMBER 31, 2003 1,985,250 $3.40 1,201,375 $14.14
Granted 944,500 $4.05 -- --
Exercised (28,250) $3.16 (24,750) $ 2.87
Canceled, expired, and forfeited (167,500) $3.54 (226,587) $17.07
--------- ----- --------- ------
OUTSTANDING AT DECEMBER 31, 2004 2,734,000 $3.62 950,038 $13.74
Granted 733,500 $4.18 -- --
Exercised (69,500) $2.89 (9,375) $ 2.87
Canceled, expired, and forfeited (173,250) $3.71 (71,699) $18.85
--------- ----- --------- ------
OUTSTANDING AT DECEMBER 31, 2005 3,224,750 $3.76 868,964 $13.43
At December 31, 2005, 2004, and 2003, the number of options exercisable under
the Equity Plan was 2,509,000, 965,625, and 615,000, respectively, and the
weighted-average exercise price of those options was $3.95, $3.37 and $3.37,
respectively. At December 31, 2005, 2004, and 2003, the number of options
exercisable under the 1991 Plan was 868,964, 913,288, and 1,019,875,
respectively, and the weighted-average exercise price of those options was
$13.43, $14.05, and $15.38, respectively.
50
A summary of the range of exercise prices and the weighted-average remaining
contractual life of outstanding options at December 31, 2005 for the Equity and
1991 Plans is as follows:
OPTIONS WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT WEIGHTED-AVERAGE REMAINING CONTRACTUAL
EXERCISE PRICES DECEMBER 31, 2005 EXERCISE PRICE LIFE (YEARS)
---------------- ----------------- ---------------- ---------------------
EQUITY PLAN $ 1.40 to $ 1.96 280,000 $1.60 5.9
$ 2.24 to $ 3.26 1,328,875 $3.07 9.7
$ 3.48 to $ 4.90 1,155,875 $4.35 7.9
$ 5.30 to $ 5.94 460,000 $5.56 8.7
1991 PLAN $ 2.88 109,750 $2.88 3.3
$ 5.13 to $ 6.13 260,000 $5.93 6.9
$ 9.44 12,500 $9.44 0.1
$14.88 to $21.94 425,688 $18.29 2.0
$26.06 to $37.19 61,026 $31.31 3.4
At December 31, 2005, there were 1,162,500 and 0 shares available for grant
under the Equity Plan and 1991 Plan, respectively.
12. SIGNIFICANT CUSTOMER
International Business Machines (IBM) is the Company's largest customer. IBM
accounted for $105.5 million or 35.8%, $52.6 million or 22.2%, and $51.9 million
or 21.1% of consolidated 2005, 2004, and 2003 revenue, respectively. The
Company's accounts receivable from IBM at December 31, 2005 and 2004 amounted to
$33.9 million and $10.9 million, respectively. The Company expects to continue
to derive a significant portion of its revenue from IBM in 2006 and in future
years. While a decline in revenue from IBM would have 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. No other customer
accounted for more than 10% of revenue in 2005, 2004, or 2003.
13. LITIGATION
The Company and its subsidiaries are involved from time to time in various legal
proceedings arising in the ordinary course of business. Although the outcome of
lawsuits or other proceedings involving the Company and its subsidiaries cannot
be predicted with certainty and the amount of any liability that could arise
with respect to such lawsuits or other proceedings cannot be predicted
accurately, management does not expect these matters to have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company.
51
14. ENTERPRISE-WIDE DISCLOSURES
The Company operates in one industry segment, providing information technology
(IT) professional services to its clients. The services provided include
flexible and strategic staffing and the planning, design, implementation, and
maintenance of comprehensive IT solutions. All of the Company's revenues are
generated from these services. CTG's reportable information is based on
geographical areas. The accounting policies of the individual geographical areas
are the same as those described in note 1, "Summary of Significant Accounting
Policies." All information has been revised as applicable to reflect the results
from continuing operations only and therefore exclude the results of CTG
Nederland, B.V. which was sold with an effective date of January 1, 2004 (see
note 3 - "Discontinued Operations").
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
2005 2004 2003
-------- -------- --------
(amounts in thousands)
Revenue from External Customers
United States $243,223 $191,648 $210,490
Belgium 32,940 28,694 22,967
Other European countries 15,384 14,724 10,472
Other countries 2,918 2,056 1,585
-------- -------- --------
Total revenue $294,465 $237,122 $245,514
======== ======== ========
Long-lived Assets
United States $ 5,950 $ 5,309 $ 5,840
Europe 666 766 1,006
-------- -------- --------
Total long-lived assets $ 6,616 $ 6,075 $ 6,846
======== ======== ========
Deferred Tax Assets, Net of Valuation Allowance
United States $ 6,301 $ 5,778 $ 5,459
Europe 325 740 963
Other countries 161 -- --
-------- -------- --------
Total deferred tax assets, net $ 6,787 $ 6,518 $ 6,422
======== ======== ========
52
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Information reported as follows has been revised, as applicable, to reflect the
disposal of CTG Nederland, B.V., which was effective on January 1, 2004. All
activities related to this subsidiary have been removed from the Company's
individual accounts and subsequently combined and included on the line entitled
"Income (loss) from discontinued operations."
QUARTERS
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- -------- ------- --------
(amounts in thousands, except per-share data)
2005
Revenue $68,683 $72,910 $74,805 $78,067 $294,465
Direct costs 52,170 56,505 57,920 60,068 226,663
------- ------- ------- ------- --------
Gross profit 16,513 16,405 16,885 17,999 67,802
Selling, general, and administrative expenses 15,585(1) 15,247 15,452 16,593 62,877
------- ------- ------- ------- --------
Operating income 928 1,158 1,433 1,406 4,925
Interest and other expense, net (222) (372) (362) (415) (1,371)
------- ------- ------- ------- --------
Income before income taxes 706 786 1,071 991 3,554
Provision for income taxes(2) 222(1) 163 431 315(3) 1,131
------- ------- ------- ------- --------
Net income $ 484 $ 623 $ 640 $ 676 $ 2,423
======= ======= ======= ======= ========
Basic net income per share(2) $ 0.03 $ 0.04 $ 0.04 $ 0.04 $ 0.14
------- ------- ------- ------- --------
Diluted net income per share(2) $ 0.03 $ 0.04 $ 0.04 $ 0.04 $ 0.14
------- ------- ------- ------- --------
(1) Includes a net increase of approximately $108,000 in the cash surrender
value for company owned life insurance policies that had previously not
been recorded, and which created a tax benefit of approximately $34,000.
(2) During the quarter ended July 1, 2005, the Company changed its method of
accounting for reporting changes in liabilities in interim periods
resulting from changes in judgments or settlements of tax exposure items.
The Company had previously accounted for such changes in judgments or
settlements as adjustments to the estimated annual ETR. However, effective
for the second quarter of 2005 the Company changed its method of
accounting for such changes in judgments or settlements so that they are
recorded as discrete items in the interim period in which the change
occurs. As a result of the change in method of accounting, income tax
expense was reduced by $114,000 in the second quarter of 2005, and
increased by $59,000 and $55,000 in the third and fourth quarters of 2005,
respectively. Net income per basic and diluted share was increased by less
than $0.01 in the second quarter of 2005, and decreased by less than $0.01
per basic and diluted share in each of the third and fourth quarters of
2005. If the Company had implemented the discrete method of accounting for
changes in tax exposure items during 2004, income tax expense related to
continuing operations would have been reduced by $271,000 in the second
quarter of 2004, and increased by $201,000 and $70,000 in the third and
fourth quarters of 2004, respectively. Net income per basic and diluted
share would have been increased by less than $0.02 in the second quarter of
2004, and decreased by approximately $0.01 per basic and diluted share in
the third quarter of 2004, and by less than $0.01 in the fourth quarter of
2004.
(3) During the fourth quarter of 2005, the Company released approximately $0.2
million for the reversal of the remaining valuation allowance that
previously offset the net operating loss for Canada due to a change in
estimate, offset by $0.1 million of additional tax risk reserve items.
53
QUARTERS
---------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
(amounts in thousands, except per share data) ------- ------- ------- ------- --------
2004
Revenue $61,447 $59,047 $57,857 $58,771 $237,122
Direct costs 44,853 43,196 42,581 42,395 173,025
------- ------- ------- ------- --------
Gross profit 16,594 15,851 15,276 16,376 64,097
Selling, general, and administrative expenses 15,163 15,033 14,602 16,201 60,999
------- ------- ------- ------- --------
Operating income 1,431 818 674 175 3,098
Interest and other expense, net (127) (185) (147) (218) (677)
------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes 1,304 633 527 (43) 2,421
Provision (benefit) for income taxes(2) 522 (34) (91) (943)(4) (546)
------- ------- ------- ------- --------
Income from continuing operations 782 667 618 900 2,967
Loss from discontinued operations (including
loss on disposal of $3.7 million in the
first quarter of 2004) (4,316) (62) (14) (19) (4,411)
------- ------- ------- ------- --------
Net income (loss) $(3,534) $ 605 $ 604 $ 881 $ (1,444)
======= ======= ======= ======= ========
Basic net income (loss) per share:
Continuing operations(2) $ 0.05 $ 0.04 $ 0.04 $ 0.05 $ 0.18
Discontinued operations (0.26) -- -- -- (0.27)
------- ------- ------- ------- --------
Basic net income (loss) per share(2) $ (0.21) $ 0.04 $ 0.04 $ 0.05 $ (0.09)
======= ======= ======= ======= ========
Diluted net income (loss) per share:
Continuing operations(2) $ 0.05 $ 0.04 $ 0.04 $ 0.05 $ 0.17
Discontinued operations (0.25) -- -- -- (0.25)
------- ------- ------- ------- --------
Diluted net income (loss) per share(2) $ (0.20) $ 0.04 $ 0.04 $ 0.05 $ (0.08)
======= ======= ======= ======= ========
(4) During the fourth quarter of 2004, several tax matters that had previously
been in process were favorably resolved which allowed the Company to record
a significant benefit for income taxes. These items included a release of
approximately $0.2 million of previously recorded tax liabilities primarily
related to the Company's interpretation of recently issued tax legislation
enacted in Europe, $0.4 million for state net operating loss benefits that
had previously been offset by a valuation allowance, and a net amount of
approximately $0.2 million from the release of other deferred tax items.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management has evaluated, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operations of the Company's
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)), as of the end of the period covered by this annual report. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this annual report.
(A) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may deteriorate.
Management of the Company conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on that evaluation, the Company's management
did not identify any control deficiencies it considered to be material
weaknesses under the rules specified by the Public Company Accounting Oversight
Board's Auditing Standard No. 2, and therefore concluded that its internal
control over financial reporting was effective as of December 31, 2005.
KPMG LLP, an independent registered public accounting firm, has issued a report
on management's assessment of the Company's internal control over financial
reporting, which is included herein.
55
(B) ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Computer Task Group, Incorporated:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting (Item 9A(a)),
that Computer Task Group, Incorporated (the Company) maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by COSO. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control - Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company and its subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2005, and our report dated March 10, 2006, expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Buffalo, New York
March 10, 2006
56
(C) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company continues to review, revise and improve the effectiveness of the
Company's internal controls on a continuous basis. There have been no
significant changes in the Company's internal controls over financial reporting
in connection with the Company's fourth quarter evaluation that would materially
affect, or are reasonably likely to materially affect the Company's internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated herein by
reference to the information set forth under "Election of Directors," "Section
16(a) Beneficial Ownership Reporting Compliance," "The Board of Directors and
Committees" in relation to the "Audit Committee" subsection, and "Corporate
Governance and Website Information" in the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 3, 2006 (the Proxy Statement)
to be filed with the Securities and Exchange Commission not later than 120 days
after the end of the year ended December 31, 2005, except insofar as information
with respect to executive officers is presented in Part I, Item 1 hereof
pursuant to General Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated herein by
reference to the information under the caption "Executive Compensation and Other
Information" presented in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as set forth below, the information required in response to this item is
incorporated herein by reference to the information under the caption "Security
Ownership of the Company's Common Shares by Certain Beneficial Owners and by
Management" presented in the Proxy Statement.
The following table sets forth, as of December 31, 2005, certain information
related to the Company's compensation plans under which shares of its Common
Stock are authorized for issuance:
Equity Compensation Plan Information as of December 31, 2005
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding options, future issuance under
options, warrants warrants and equity compensation
and rights rights plans
----------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders -
Equity Award Plan 3,224,750 $ 3.76 1,162,500
1991 Stock Option Plan 868,964 $13.43 --
Equity compensation plans not
approved by security holders -
None -- -- --
--------- ------ ---------
Total 4,093,714 $ 5.77 1,162,500
========= ====== =========
At December 31, 2005, the Company did not have any outstanding rights or
warrants. All awards outstanding are options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated herein by
reference to the information under the caption "Certain Relationships and
Related Transactions" presented in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item is incorporated herein by
reference to the information under the caption "Change in Independent Public
Accountants and Fees" presented in the Proxy Statement.
58
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(A) Index to Consolidated Financial Statements and Financial Statement Schedule
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm 28
Consolidated Statements of Operations 29
Consolidated Balance Sheets 30
Consolidated Statements of Cash Flows 31
Consolidated Statements of Changes in Shareholders' Equity 32
Notes to Consolidated Financial Statements 33
(2) Index to Consolidated Financial Statement Schedule
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule 60
Financial statement schedule:
Schedule II - Valuation and Qualifying Accounts 61
(B) Exhibits
The Exhibits to this Form 10-K Annual Report are listed on the attached
Exhibit Index appearing on pages 63 to 65.
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Computer Task Group, Incorporated:
Under date of March 10, 2006, we reported on the consolidated balance sheets of
Computer Task Group, Incorporated and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Buffalo, New York
March 10, 2006
60
COMPUTER TASK GROUP, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
BALANCE AT BALANCE AT
DESCRIPTION JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ----------- ---------- --------- ---------- -----------
2005
Accounts deducted from accounts receivable
Allowance for doubtful accounts $1,327 $ 179(A) $ (419)(A) $1,087
Accounts deducted from deferred tax assets
Deferred tax asset valuation allowance $3,899 $ 195(B) $(1,535)(B) $2,559
Accounts deducted from other assets
Reserves $ 575 $ - $ -- $ 575
2004
Accounts deducted from accounts receivable
Allowance for doubtful accounts $1,174 $ 374(A) $ (221)(A) $1,327
Reserve for projects $ 87 $ 39(C) $ (126)(C) $ --
Accounts deducted from deferred tax assets
Deferred tax asset valuation allowance $4,446 $ 402(B) $ (949)(B) $3,899
Accounts deducted from other assets
Reserves $ 450 $ 125(C) $ -- $ 575
2003
Accounts deducted from Accounts Receivable
Allowance for doubtful accounts $ 884 $ 516(A) $ (226)(A) $1,174
Reserve for projects $ 400 $ 212(C) $ (525)(C) $ 87
Accounts deducted from deferred tax assets
Deferred tax asset valuation allowance $ 403 $4,043(D) $ -- $4,446
Accounts deducted from other assets
Reserves $ -- $ 450(C) $ -- $ 450
(A) Reflects additions charged to costs and expenses, less deductions for
accounts written off or collected, and foreign currency translation
(B) Reflects additions and deductions for foreign currency translation, and
deductions credited to expense
(C) Reflects additions charged to costs and expenses, less deductions for
accounts written off or collected
(D) Reflects additions charged to costs and expenses
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ James R. Boldt
------------------------------------
James R. Boldt,
Chairman and Chief Executive Officer
Dated: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
(i) Principal Executive Officer: Chairman and
Chief Executive Officer March 15, 2006
/s/ James R. Boldt
----------------------------
James R. Boldt
(ii) Principal Accounting and Interim Chief March 15, 2006
Financial Officer Financial Officer
/s/ Brendan M. Harrington
----------------------------
Brendan M. Harrington
(iii) Directors
/s/ Thomas E Baker Director March 15, 2006
----------------------------
Thomas E. Baker
/s/ George B. Beitzel Director March 15, 2006
----------------------------
George B. Beitzel
/s/ James R. Boldt Director March 15, 2006
----------------------------
James R. Boldt
/s/ Randall L. Clark Director March 15, 2006
----------------------------
Randall L. Clark
/s/ Randolph A. Marks Director March 15, 2006
----------------------------
Randolph A. Marks
/s/ John M. Palms Director March 15, 2006
----------------------------
John M. Palms
/s/ Daniel J. Sullivan Director March 15, 2006
----------------------------
Daniel J. Sullivan
62
EXHIBIT INDEX
Page Number
Exhibit Description or (Reference)
- ------- ----------- --------------
2. Plan of acquisition, reorganization, arrangement, *
liquidation or succession
3. (a) Restated Certificate of Incorporation of Registrant (1)
(b) Restated By-laws of Registrant (2)
4. (a) Specimen Common Stock Certificate (2)
(b) Rights Agreement dated as of January 15, 1989, and (1)
amendment dated June 28, 1989, between Registrant
and The First National Bank of Boston, as Rights Agent
(c) Form of Rights Certificate (2)
9. Voting Trust Agreement *
10. (a) Non-Compete Agreement, dated as of March 1, 1984, (2) +
between Registrant and Randolph A. Marks
(b) Stock Employee Compensation Trust Agreement, dated (2) +
May 3, 1994, between Registrant and Thomas R. Beecher,
Jr., as trustee
(c) Demand Grid Note, dated October 29, 1997, between Registrant (2) +
and Computer Task Group, Incorporated Stock Employee
Compensation Trust
(d) Pledge Agreement, between the Registrant and Thomas R. (2) +
Beecher, Jr., as Trustee of the Computer Task Group, Incorporated
Stock Employee Compensation Trust
(e) Stock Purchase Agreement, dated as of February 25, 1981, (3) +
between Registrant and Randolph A. Marks
- ----------
* None or requirement not applicable
+ Management contract or compensatory plan or arrangement
(1) Filed as an Exhibit to the Registrant's Form 8-A/A filed on January 13,
1999, and incorporated herein by reference
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference
(3) Filed as an Exhibit to the Registrant's Registration Statement No. 2 -
71086 on Form S-7 filed on February 27, 1981, and incorporated herein by
reference
63
EXHIBIT INDEX (Continued)
Page number
Exhibit Description or (Reference)
- ------- ----------- --------------
10. (f) Description of Disability Insurance and Health (4) +
Arrangements for Executive Officers
(g) 2005 Key Employee Compensation Plans. (5) +
(h) Computer Task Group, Incorporated Non-Qualified Key Employee (2) +
Deferred Compensation Plan
(i) 1991 Restricted Stock Plan (6) +
(j) Computer Task Group, Incorporated 2000 Equity Award Plan (7) +
(k) Executive Supplemental Benefit Plan 1997 Restatement (6) +
(l) First Amendment to the Computer Task Group, Incorporated (6) +
Executive Supplemental Benefit Plan 1997 Restatement
(m) Compensation Arrangements for the Named Executive Officers 66 +
(n) Change in Control Agreement, dated July 16, 2001, between (6) +
the Registrant and James R. Boldt
(o) Employment Agreement, dated July 16, 2001, between the (6) +
Registrant and James R. Boldt
(p) First Employee Stock Purchase Plan (Eighth Amendment and (8) +
Restatement)
(q) Loan Agreement By and Among Manufacturers and Traders Trust (9)
Company and Computer Task Group, Incorporated
- ----------
(4) Filed as an Exhibit to Amendment No. 1 to Registration Statement No.
2-71086 on Form S-7 filed on March 24, 1981, and incorporated herein by
reference
(5) Included in the Registrant's definitive Proxy Statement dated April 2006
under the caption entitled "Annual Cash Incentive Compensation," and
incorporated herein by reference
(6) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001, and incorporated herein by reference
(7) Included in the Registrant's definitive Proxy Statement dated April 2004 as
Exhibit A, and incorporated herein by reference
(8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002, and incorporated herein by reference
(9) Filed as an Exhibit to the Registrants Form 8-K on April 21, 2005, and
incorporated herein by reference
64
EXHIBIT INDEX (Continued)
Page number
Exhibit Description or (Reference)
- ------- ----------- --------------
11. Statement re: computation of per share earnings *
12. Statement re: computation of ratios *
13. Annual Report to Shareholders *
14. Code of Ethics (10)
16. Letter re: change in certifying accountant *
18. Letter re: change in accounting principles *
21. Subsidiaries of the Registrant 67
22. Published report regarding matters submitted to a vote *
of security holders
23. Consent of experts and counsel 68
24. Power of Attorney *
31. (a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 69
(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 70
32. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 71
33. Report on assessment of compliance with servicing criteria for *
asset backed securities
34. Attestation report on assessment of compliance with servicing *
criteria for asset backed securities
35. Service compliance statement *
- ----------
(10) Included in the Registrant's definitive Proxy Statement dated April 2006
under the caption entitled "Corporate Governance and Website Information,"
and incorporated herein by reference
65