UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 1-9410
COMPUTER TASK GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
New York 16-0912632
(State of incorporation) (IRS Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 882-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
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 Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUEERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Title of each class Shares outstanding at April 27, 2006
------------------- ------------------------------------
Common stock, par value $.01 per share 20,410,334
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED
----------------------
MARCH 31, APRIL 1,
2006 2005
--------- --------
(amounts in thousands,
except per share data)
Revenue $83,643 $68,683
Direct costs 65,525 52,170
Selling, general and administrative expenses 16,557 15,585
------- -------
Operating income 1,561 928
Interest and other income 50 21
Interest and other expense (372) (243)
------- -------
Income before income taxes 1,239 706
Provision for income taxes 452 222
------- -------
Net income $ 787 $ 484
======= =======
Net income per share:
Basic $ 0.05 $ 0.03
======= =======
Diluted $ 0.05 $ 0.03
======= =======
Weighted average shares outstanding:
Basic 16,549 16,813
Diluted 16,831 17,242
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,809 $ 2,556
Accounts receivable, net of allowances of $981 and $1,087
in 2006 and 2005, respectively 53,108 71,940
Prepaids and other 2,482 1,978
Deferred income taxes 1,344 1,767
-------- --------
Total current assets 59,743 78,241
Property and equipment, net of accumulated depreciation of $26,001
and $25,377 in 2006 and 2005, respectively 6,515 6,616
Investment 783 807
Goodwill 35,678 35,678
Deferred income taxes 5,125 4,685
Other assets 2,368 2,273
-------- --------
Total assets $110,212 $128,300
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,820 $ 9,277
Accrued compensation 26,604 22,153
Advance billings on contracts 1,663 1,312
Other current liabilities 4,850 4,773
Income taxes payable 295 70
-------- --------
Total current liabilities 41,232 37,585
Long-term debt 995 23,150
Deferred compensation benefits 8,906 8,842
Other long-term liabilities 831 1,232
-------- --------
Total liabilities 51,964 70,809
-------- --------
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 111,283 111,172
Retained earnings 42,527 41,740
Less: Treasury stock of 6,607,490 and 6,525,890 shares at cost, respectively (33,153) (32,811)
Stock Trusts of 3,917,574 and 3,939,664 shares at cost, respectively (57,448) (57,542)
Accumulated other comprehensive income (loss):
Unrealized gain on investment, net of tax 368 382
Foreign currency adjustment (4,100) (4,221)
Minimum pension liability adjustment, net of tax (1,499) (1,499)
-------- --------
Accumulated other comprehensive loss (5,231) (5,338)
-------- --------
Total shareholders' equity 58,248 57,491
-------- --------
Total liabilities and shareholders' equity $110,212 $128,300
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED
--------------------
MARCH 31, APRIL 1,
2006 2005
--------- --------
(amounts in
thousands)
Cash flows from operating activities:
Net income $ 787 $ 484
Adjustments:
Depreciation expense 647 709
Equity-based compensation expense 120 --
Deferred income taxes (3) 171
Tax benefit on stock option exercises -- 1
Excess tax benefits from equity-based compensation (1) --
(Gain) loss on sales of property and equipment 2 (2)
Deferred compensation 64 (32)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 19,049 (20,396)
Increase in prepaids and other (495) (97)
Increase in other assets (83) (23)
Increase (decrease) in accounts payable 661 (609)
Increase in accrued compensation 4,373 11,793
Increase in income taxes payable 218 88
Increase in advance billings on contracts 348 41
Increase in other current liabilities 50 1,625
Increase (decrease) in other long-term liabilities (401) 69
-------- --------
Net cash provided by (used in) operating activities 25,336 (6,178)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (539) (1,846)
Proceeds from sales of property and equipment 4 76
-------- --------
Net cash used in investing activities (535) (1,770)
-------- --------
Cash flows from financing activities:
Proceeds from (payments on) long-term revolving debt, net (22,155) 7,621
Change in cash overdraft, net (2,180) (263)
Proceeds from Employee Stock Purchase Plan 37 33
Purchase of stock for treasury (342) --
Excess tax benefits from equity-based compensation 1 --
Proceeds from other stock plans 47 5
-------- --------
Net cash provided by (used in) financing activities (24,592) 7,396
-------- --------
Effect of exchange rate changes on cash and cash equivalents 44 (251)
-------- --------
Net increase (decrease) in cash and cash equivalents 253 (803)
Cash and cash equivalents at beginning of quarter 2,556 4,488
-------- --------
Cash and cash equivalents at end of quarter $ 2,809 $ 3,685
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein reflect, in
the opinion of the management of Computer Task Group, Incorporated ("CTG" or
"the Company"), all normal recurring adjustments necessary to present fairly the
condensed consolidated financial position, results of operations and cash flows
for the periods presented. Certain amounts in the prior period's condensed
consolidated financial statements have been reclassified to conform to the
current year presentation.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC rules and regulations. 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 condensed consolidated financial
statements and accompanying notes. Management believes that the information and
disclosures provided herein are adequate to present fairly the consolidated
financial position, results of operations and cash flows of the Company. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K filed with the SEC.
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.
3. ADJUSTMENT TO PRIOR YEAR'S SHAREHOLDERS' EQUITY
During the first quarter of 2006, the Company determined that it owned but
had previously not recorded marketable securities that were issued to the
Company in 2001 resulting from the demutualization of an insurance company.
During the late 1990's and early 2000's, CTG purchased medical benefits for its
employees from this company through a broker. The company converted from a
mutual to a public company in late 2001, and CTG was issued shares in the new,
publicly traded entity. However, due to an error on the part of the issuing
company, CTG did not receive notification of the ownership of such shares until
late March 2006.
CTG has determined that an asset of approximately $0.2 million, and an
increase to retained earnings of $0.1 million, net of tax, should have been
recorded at December 31, 2001. The Company has recorded this asset and
adjustment to increase its retained earnings balance as of December 31, 2001,
and has subsequently accounted for this investment as an available for sale
security in succeeding years. The investment, retained earnings, and accumulated
other comprehensive income - unrealized gain on investment, net of tax account
balances as displayed on the Company's condensed consolidated balance sheets in
this quarterly report for the periods ended March 31, 2006 and December 31, 2005
reflect the accounting for this investment as if it had been recorded in 2001,
as well as the current valuation of the investment on those dates (see note 4).
Additionally, in the first quarter of 2006, the Company recorded a minor
adjustment to retained earnings related to the lease liability previously
recorded in the fourth quarter of 2005 for the straight-line recognition of
operating lease expense.
5
4. INVESTMENT
The Company accounts for its investment balance as an "available for sale"
security as defined under FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The balance consists of one security, and the
Company has held and intends to hold the security for the foreseeable future.
The carrying amount of this security was approximately $0.8 million at both
March 31, 2006 and December 31, 2005, while the amount of unrealized gain, net
of tax, on this security was approximately $0.4 million on such dates. The
unrealized gain, net of tax, is presented as a separate component of
shareholders' equity. The Company did not sell any portion of this security
during the first quarter of either 2005 or 2006, nor were any dividends
received. Accordingly, the Company did not realize any gain, loss or income on
this investment in its condensed consolidated income statements for these
periods. The amount of unrealized gain (loss), net of tax, included in
comprehensive income in the first quarter of 2006 and 2005 was $(14,000) and
$30,000, respectively.
5. NET INCOME PER SHARE
Basic and diluted earnings per share for the quarters ended March 31, 2006
and April 1, 2005 is as follows:
QUARTER ENDED
----------------------
MARCH 31, APRIL 1,
2006 2005
--------- --------
(amounts in thousands,
except per share data)
Weighted-average number of shares outstanding during period 16,549 16,813
Common Stock equivalents -
Incremental shares under stock option plans 282 429
------- -------
Number of shares on which diluted earnings per share is based 16,831 17,242
======= =======
Net income $ 787 $ 484
======= =======
Net income per share:
Basic $ 0.05 $ 0.03
======= =======
Diluted $ 0.05 $ 0.03
======= =======
Certain options to purchase 2.2 million and 2.4 million shares of common
stock were outstanding at March 31, 2006 and April 1, 2005, 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 common
shares for the respective periods.
6. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss totaled $(5,231,000) and $(5,338,000)
at March 31, 2006 and December 31, 2005, respectively. Total comprehensive
income (loss) for the quarters ended March 31, 2006 and April 1, 2005 is as
follows:
QUARTER ENDED
----------------------
MARCH 31, APRIL 1,
2006 2005
--------- --------
(amounts in thousands)
Net income $787 $ 484
Unrealized gain (loss) on investment, net of tax (14) 30
Foreign currency 121 (362)
Minimum pension liability -- (23)
---- -----
Comprehensive income $894 $ 129
==== =====
6
7. INCOME TAXES
The effective tax rate (ETR) used to calculate the provision for income
taxes was 36.5% in the first quarter of 2006 as compared to 31.4% in the first
quarter of 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 in 2006 was primarily affected by a reversal of a valuation
allowance of approximately $62,000 previously offsetting state deferred tax net
operating loss carryforwards. Without the reversal of this valuation allowance,
the ETR in the first quarter of 2006 would have been approximately 41.4%. The
ETR in the first quarter of 2005 of 31.4% was primarily affected by several
items that created tax benefits in 2005 totaling approximately $67,000. Without
these items, the Company's ETR in 2005 would have been approximately 41%.
8. DEFERRED COMPENSATION AND OTHER BENEFITS
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 quarters ended March 31, 2006 and April
1, 2005 for the ESBP is as follows:
MARCH 31, APRIL 1,
NET PERIODIC PENSION COST - ESBP 2006 2005
- -------------------------------- --------- --------
(amounts in thousands)
Interest cost $123 $128
Amortization of unrecognized net loss 29 27
---- ----
Net periodic pension cost $152 $155
==== ====
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 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
ESBP.
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.
Net periodic pension benefit for the quarters ended March 31, 2006 and
April 1, 2005 for the NDBP is as follows:
MARCH 31, APRIL 1,
NET PERIODIC PENSION COST (BENEFIT) - NDBP 2006 2005
- ------------------------------------------ --------- --------
(amounts in thousands)
Interest cost $ 59 $ 64
Expected return on plan assets (71) (79)
---- ----
Net periodic pension benefit $(12) $(15)
==== ====
The Company does not anticipate making contributions to the NDBP in 2006 or
future years as the NDBP is currently over-funded.
7
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 amount of $0.7 million and $ 0.5 million for
the quarters ended March 31, 2006 and April 1, 2005, respectively.
OTHER RETIREMENT PLANS
The Company maintains various other defined contribution retirement plans
other than the NDBP discussed above, covering substantially all of the remaining
European employees. Company contributions charged to operations were less than
$0.1 million in each of the quarters ended March 31, 2006 and April 1, 2005.
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 quarters ended March 31,
2006 and April 1, 2005 is as follows:
MARCH 31, APRIL 1,
NET PERIODIC POSTRETIREMENT BENEFIT COST 2006 2005
- ---------------------------------------- --------- --------
(amounts in thousands)
Interest cost $10 $ 9
Amortization of transition amount 7 7
--- ---
Net periodic postretirement benefit cost $17 $16
=== ===
No adjustments were made to the net periodic postretirement benefit cost
indicated above due to Medicare reform as the amounts were deemed to be
insignificant. The Company does not anticipate making contributions to fund the
plan in 2006 or future years.
9. STOCK-BASED EMPLOYEE COMPENSATION
On January 1, 2006, the Company adopted the provisions of FAS No. 123R,
"Share-Based Payment" on a modified prospective basis, which requires the
Company to record equity-based compensation expense for all awards granted after
the date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. 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. With the adoption of the standard, the calculated cost of its
stock-based compensation awards will be recognized in the Company's income
statement 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. The Company
recognizes the expense for equity-based compensation in its income statements on
a straight-line basis based upon awards that are ultimately expected to vest. As
part of the adoption of the standard, the Company was required to estimate
forfeitures. These estimates will be revised, as applicable, in subsequent
periods if actual forfeitures differ from those estimates. In the Company's pro
forma information related to stock-based compensation for periods prior to
January 1, 2006, the Company accounted for forfeitures as they occurred.
8
For the quarter ended March 31, 2006, the Company recognized compensation
expense of $120,000 in its statement of income as selling, general and
administrative expense. The tax benefit recorded for this compensation expense
was $30,000, resulting in a net after tax cost to the Company of $90,000 in the
quarter. No compensation cost was recognized in the statement of income for the
period ended April 1, 2005 as the Company continued to apply the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25) and related
interpretations. No stock-based employee compensation cost was reflected in the
net income for this period 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.
As of March 31, 2006, the Company has two stock-based incentive 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. For the most part, options generally become
exercisable in three or four equal annual installments, beginning one year from
the date of grant. In certain limited instances, options granted with market
price conditions are expected to vest nine and one-half years from the date of
grant. As of March 31, 2006, a total of 3,500,000 shares may be awarded under
this plan, and 1,193,250 shares are available for grant as of that date.
On April 24, 1991, the shareholders approved the Company's 1991 Employee
Stock Option Plan (1991 Plan). 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. There
are no options available for grant under this plan as of March 31, 2006.
The Company utilizes the Black-Scholes option-pricing model to estimate the
fair value of stock options granted on the date of grant. There were no grants
of stock options (or any other equity-based compensation) in the first quarter
of 2006. For the first quarter of 2005, the per-option weighted-average fair
value of options granted on the date of grant was $2.40. The fair value of the
options at the date of grant was estimated using the following assumptions:
THREE MONTHS ENDED
APRIL 1, 2005
------------------
Expected volatility 65.5% - 78.2%
Risk-free interest rate 3.5% - 4.5%
Expected term (years) 3.6 - 10.6
Expected dividend yield 0.0%
The Company used historical volatility calculated using daily closing prices for
its common stock over periods that match the expected term of the option granted
to estimate the expected volatility for the grants made in the first quarter of
2005. The risk-free interest rate assumption was based upon U.S. Treasury yields
appropriate for the expected term of the Company's stock options based upon the
date of grant. The expected term of the stock options granted was based upon the
options expected vesting schedule and historical exercise patterns. The expected
dividend yield was based upon the Company's recent history of paying dividends,
and the expectation of paying dividends in the foreseeable future.
9
The following table details the effect on net income and basic and diluted net
income per share for the three months ended March 31, 2006 compared with the pro
forma information for the three months ended April 1, 2005:
THREE MONTHS ENDED
------------------------------
MARCH 31, 2006 APRIL 1, 2005
-------------- -------------
(amounts in thousands,
except per share data)
Net income, as reported for the prior period (a) N/A $ 484
-----
Stock-based compensation expense $ 120 362
Tax benefit (30) (62)
----- -----
Stock-based compensation, net of tax (b) $ 90 $ 300
===== -----
Net income, including stock-based compensation (a) $ 787 $ 184
===== =====
Basic net income per share, as reported for the
prior period (a) N/A $0.03
=====
Basic net income per share, including the effect
of stock-based compensation expense (b) $0.05 $0.01
===== =====
Diluted net income per share, as reported for the
prior period (a) N/A $0.03
=====
Diluted net income per share, including the effect
of stock-based compensation expense (b) $0.05 $0.01
===== =====
(a) Net income, net income including stock-based compensation, and basic and
diluted net income per share prior to January 1, 2006 did not include
stock-based compensation expense as the Company continued to apply the
recognition and expensing provisions of APB No. 25.
(b) Prior to January 1, 2006, stock-based compensation was only reported on a
pro forma basis in the Company's footnotes.
As of March 31, 2006, total remaining stock-based compensation expense for
non-vested stock options is approximately $0.7 million, which is expected to be
recognized on a weighted-average basis over the next 16 months. Historically,
the Company has issued shares out of its Stock Employee Compensation Trust to
fulfill the share requirements from stock option exercises.
Stock-based compensation expense decreased significantly from the first quarter
of 2005 to the first quarter of 2006 as the Board of Directors of the Company
approved the acceleration in the fourth quarter of 2005 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 the date of acceleration. In
total, 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 FAS
No. 123R "Share-Based Payment." The Board of Directors took the action in the
belief that it was in the best interest of the shareholders to minimize future
compensation expense associated with stock options upon adoption of FAS No.123R.
It is estimated that the maximum future compensation expense that would have
been recorded in the Company's statements of income had the vesting of these
options not been accelerated into the fourth quarter of 2005 was approximately
$1.4 million.
10
A summary of stock option activity for the quarter ended March 31, 2006 under
these plans is as follows:
EQUITY PLAN WEIGHTED-AVERAGE 1991 PLAN WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ---------------- --------- ----------------
OUTSTANDING AT DECEMBER 31, 2005 3,224,750 $3.76 868,964 $13.43
Granted -- -- -- --
Exercised (12,000) $3.71 (1,000) $ 2.88
Canceled and forfeited (30,750) $3.77 (1,000) $16.19
Expired -- -- (26,250) $15.92
--------- ----- ------- ------
OUTSTANDING AT MARCH 31, 2006 3,182,000 $3.76 840,714 $13.37
========= =======
OPTIONS EXERCISABLE AT MARCH 31, 2006 2,553,375 $3.93 840,714 $13.37
========= =======
For the quarter ended March 31, 2006, the intrinsic value of the options
exercised under the Equity Plan was approximately $5,000, while the intrinsic
value of the options exercised under the 1991 Plan was $1,000.
A summary of outstanding options as of March 31, 2006 for the Equity and 1991
Plans is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------- ----------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AGGREGATE AVERAGE AGGREGATE
RANGE OF NUMBER EXERCISE CONTRACTUAL INTRINSIC NUMBER EXERCISE INTRINSIC
EXERCISE PRICES OUTSTANDING PRICE LIFE (YEARS) VALUE EXERCISABLE PRICE VALUE
- --------------- ----------- -------- ------------ ---------- ----------- -------- ---------
EQUITY PLAN
$1.40 - $1.96 280,000 $ 1.60 9.7 $ 742,000 250,000 $ 1.56 $673,300
$2.24 - $3.26 1,307,500 $ 3.07 9.4 $1,547,825 708,875 $ 3.03 $865,096
$3.48 - $4.90 1,134,500 $ 4.35 7.7 $ 153,300 1,134,500 $ 4.35 $153,300
$5.30 - $5.94 460,000 $ 5.56 8.8 -- 460,000 $ 5.56 --
1991 PLAN
$2.88 108,750 $ 2.88 3.1 $ 149,531 108,750 $ 2.88 $149,531
$5.13 - $6.13 260,000 $ 5.93 6.8 -- 260,000 $ 5.93 --
$14.88 - $21.94 410,938 $18.18 1.9 -- 410,938 $18.18 --
$26.06 - $37.19 61,026 $31.31 3.2 -- 61,026 $31.31 --
The aggregate intrinsic value as calculated in the above chart is based upon the
Company's closing stock price on March 31, 2006 of $4.25 per share.
10. TREASURY STOCK
During the first quarter of 2006, the Company used approximately $342,000
to purchase approximately 82,000 shares of its stock for treasury. At March 31,
2006, approximately 751,000 shares remain in the existing authorization for
future purchases.
11. SIGNIFICANT CUSTOMER
In the first quarter of 2006, IBM was the Company's largest customer,
accounting for $31.6 million or 37.8% of consolidated revenue as compared to
$21.8 million or 31.7% of first quarter 2005 revenue. No other customer
accounted for more than 10% of the Company's revenue in either the first quarter
of 2006 or 2005. The Company's accounts receivable from IBM at March 31, 2006
and April 1, 2005 amounted to $14.9 million and $32.0 million, respectively.
11
12. ACCOUNTING STANDARDS PRONOUNCEMENTS
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 adopted
this standard on January 1, 2006, and there was no impact on the Company's
financial condition or results of operations resulting from this adoption.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2006
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,
revenue, 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 the Company 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 elsewhere
herein 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. 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 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.
13
STOCK-BASED EMPLOYEE COMPENSATION
On January 1, 2006, the Company adopted the provisions of FAS No. 123R,
"Share-Based Payment" on a modified prospective basis, which requires the
Company to record equity-based compensation expense for all awards granted after
the date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. 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. With the adoption of the standard, the calculated cost of its
stock-based compensation awards will be recognized in the Company's income
statement 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. The Company
recognizes the expense for equity-based compensation in its income statements on
a straight-line basis based upon awards that are ultimately expected to vest. As
part of the adoption of the standard, the Company was required to estimate
forfeitures. These estimates will be revised, as applicable, in subsequent
periods if actual forfeitures differ from those estimates. In the Company's pro
forma information related to stock-based compensation for the periods prior to
January 1, 2006, the Company accounted for forfeitures as they occurred.
For the quarter ended March 31, 2006, the Company recognized compensation
expense of $120,000 in its statement of income as selling, general and
administrative expense. The tax benefit recorded for this compensation expense
was $30,000, resulting in a net after tax cost to the Company of $90,000 in the
quarter. No compensation cost was recognized in the statement of income for the
period ended April 1, 2005 as the Company continued to apply the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25) and related
interpretations. No stock-based employee compensation cost was reflected in the
net income for this period 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.
RESULTS OF OPERATIONS
The table below sets forth data as contained on the condensed consolidated
statements of operations, with the percentage information calculated as a
percentage of consolidated revenues.
Quarter ended:
MARCH 31, APRIL 1,
2006 2005
---------------- ----------------
Revenue 100.0% $83,643 100.0% $68,683
Direct costs 78.3% 65,525 76.0% 52,170
Selling, general, and administrative expenses 19.8% 16,557 22.7% 15,585
----- ------- ----- -------
Operating income 1.9% 1,561 1.3% 928
Interest and other expense, net (0.4)% (322) (0.3)% (222)
----- ------- ----- -------
Income before income taxes 1.5% 1,239 1.0% 706
Provision for income taxes 0.6% 452 0.3% 222
----- ------- ----- -------
Net income 0.9% $ 787 0.7% $ 484
===== ======= ===== =======
In the first quarter of 2006, the Company recorded revenue of $83.6
million, an increase of 21.7% compared to revenue of $68.7 million recorded in
the first quarter of 2005. Revenue from the Company's North American operations
totaled $69.4 million in the first quarter of 2006, an increase of 24.2% when
compared to revenue in the first quarter of 2005 of $55.9 million. Revenue from
the Company's European operations in the first quarter of 2006 totaled $14.2
million, an increase of 10.9% when compared to revenue in the first quarter of
2005 of $12.8 million. The European revenue represented 17.0% and 18.6% of 2006
and 2005 consolidated revenue, respectively. The Company's revenue includes
reimbursable expenses billed to customers. These expenses totaled $2.4 million
and $2.5 million in the first quarter of 2006 and 2005, respectively.
14
In North America, the revenue increase in 2006 over 2005 is primarily the
result of adding in excess of 1,000 billable staff from the end of 2004 to the
end of the first quarter of 2006, primarily in the Company's staffing business.
The Company anticipates that revenue in North America will continue to increase
during 2006 as the Company has begun the process of increasing its current
number of recruiters in its staffing organization by 10% in order to respond to
the current level of demand. In the first quarter of 2006, the revenue increase
in North America was slightly offset as the Company entered an advance payment
program with a significant customer which reduced quarterly revenue by
approximately $0.4 million.
The significant increase in revenue in the Company's European operations
was also primarily due to the addition of billable staff as compared to the
prior year as demand for the Company's offerings, primarily in the testing area,
remains strong. Offsetting the increase in year-over-year revenue was the
weakness 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
function currency is the British pound. Had there been no change in these
exchange rates from the first quarter of 2005 to the first quarter of 2006,
total European revenue would have been approximately $1.3 million greater, or
$15.5 million as compared to the $14.2 million reported.
In the first quarter of 2006, IBM was the Company's largest customer,
accounting for $31.6 million or 37.8% of consolidated revenue as compared to
$21.8 million or 31.7% of first quarter 2005 revenue. A significant portion of
the staff added in North America during the past 15 months was with IBM. 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
which has driven a large portion of the increase in the demand for the Company's
staffing services. This addendum has an expiration date of December 31, 2007. No
other customer accounted for more than 10% of the Company's revenue in either
the first quarter of 2006 or 2005.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 78.3% of revenue in the first quarter of 2006 as
compared to 76.0% of revenue in the first quarter of 2005. The increase in
direct costs as a percentage of revenue in 2006 as compared to 2005 is primarily
due to a significant increase in 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 19.8% of revenue
in the first quarter of 2006 as compared to 22.7% of revenue in the first
quarter of 2005. The decrease in SG&A expense as a percentage of revenue
reflects a higher concentration of staffing business in the Company's revenue
mix in 2006, which requires a lower level of support from the Company's SG&A
staff than the remainder of the Company's business. On January 1, 2006, the
Company adopted the provisions of FAS 123R, "Share-Based Payment." With the
adoption of the standard, the calculated cost of its stock-based compensation
awards will be recognized in the Company's income statement over the period in
which an employee or director is required to provide the services for the award.
For the quarter ended March 31, 2006, the Company recognized compensation
expense of $120,000 in its statement of income as SG&A expense.
Operating income was 1.9% of revenue in the first quarter of 2006 as
compared to 1.3% of revenue in the first quarter of 2005. Operating income from
North American operations was $0.6 million and $0.1 million in the first quarter
of 2006 and 2005, respectively, while European operations recorded operating
income of $1.0 million and $0.8, respectively, in such periods.
Interest and other expense, net was (0.4)% of revenue in the first quarter
of 2006 and (0.3)% in the first quarter of 2005. The increase as a percentage of
revenue from 2005 to 2006 is primarily due to higher average outstanding
balances on the Company's revolving line of credit, and higher interest rates in
2006. Offsetting this increase was a partial reduction of the Company's interest
expense in the quarter as the Company entered an advance payment program with a
significant customer which, by the end of the quarter, reduced the Company's
outstanding debt to just under $1.0 million from slightly over $23 million at
December 31, 2005.
15
The effective tax rate (ETR) used to calculate the provision for income
taxes was 36.5% in the first quarter of 2006 as compared to 31.4% in the first
quarter of 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 in 2006 was primarily affected by a reversal of a valuation
allowance of approximately $62,000 previously offsetting state deferred tax net
operating loss carryforwards. Without the reversal of this valuation allowance,
the ETR in the first quarter of 2006 would have been approximately 41.4%. The
ETR in the first quarter of 2005 of 31.4% was primarily affected by several
items that created tax benefits in 2005 totaling approximately $67,000. Without
these items, the Company's ETR in 2005 would have been approximately 41%.
Net income from continuing operations for the first quarter of 2006 was
0.9% of revenue or $0.05 per diluted share, compared to net income of 0.7% of
revenue or $0.03 per diluted share in the first quarter of 2005. Diluted
earnings per share were calculated using 16.8 million and 17.2 million
weighted-average equivalent shares outstanding for the first quarter ended March
31, 2006 and April 1, 2005, respectively. The decrease in equivalent shares
outstanding in 2006 as compared to 2005 is due to the Company purchasing
approximately 460,000 of its shares for treasury over the past year, and a
smaller dilutive effect of outstanding, in-the-money stock options.
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, 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 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, 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 the first quarter of 2005 or 2006 that led
management to believe the goodwill was impaired. Accordingly, the Company
believes no impairment was required to be recorded in its condensed 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 March 31, 2006,
the Company had a total of approximately $6.5 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 income in future
periods will be sufficient to recognize all or a part of any gross deferred tax
asset of the Company.
16
At March 31, 2006, 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 $2.2 million, and approximately $0.4 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 March 31, 2006, the Company
has offset a portion of these assets with a valuation allowance totaling $2.4
million, resulting in a net deferred tax asset from net operating loss
carryforwards of approximately $0.8 million.
During the first quarter of 2006, the valuation allowance was reduced by
approximately $0.2 million, net due to the weakening of the Euro which caused
the valuation allowance offsetting the net operating loss carryforward in the
Netherlands to decrease by approximately $0.1 million, and due to the
anticipated additional utilization of approximately $62,000 of the net operating
losses in various states due to a change in estimate.
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 $62,000 for the net operating losses in
various states reduced the ETR by approximately 5%. An additional 1% decrease in
the ETR would have equaled approximately $12,000 of additional net income in the
first quarter of 2006.
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. For 2006, the Company anticipates using
the same methodology to determine the value for the discount rate to calculate
the plan's benefit obligation. For the first quarter of 2006, the Company made
payments totaling approximately $0.2 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.
17
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. For 2006, the Company
anticipates using the same methodology to determine the value for the discount
rate to calculate the plan's benefit obligation. There is no salary increase
rate assumption for the plan as it is frozen for additional benefits. 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 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%.
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.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities was $25.3 million in the first
quarter of 2006. Net income totaled $0.8 million, while other non-cash
adjustments, primarily consisting of depreciation expense, equity-based
compensation expense, and deferred compensation totaled $0.8 million. The
accounts receivable balance decreased $19.0 million as compared to December 31,
2005 primarily due to the Company entering into an advance payment program with
a significant customer. Accordingly, the decrease in the timing of the
collection of outstanding invoices resulted in a decrease in days sales
outstanding to 57 days at March 31, 2006 from 85 days at December 31, 2005.
Accounts payable increased $0.7 million primarily due to the timing of certain
payments near quarter-end. Accrued compensation increased $4.4 million in 2006
due to the timing of the U.S. bi-weekly payroll. Income taxes payable primarily
increased $0.2 million due to additional income in 2006 as compared to the prior
period. Advance billings on contracts increased $0.3 million due to the timing
of billings on customer accounts near quarter-end.
Investing activities used $0.5 million in the first quarter of 2006, which
primarily represented the additions to property and equipment. The Company has
no significant commitments for the purchase of property or equipment at March
31, 2006.
Financing activities used $24.6 million of cash in the first quarter of
2006. For the first quarter of 2006, net payments under the Company's revolving
credit lines totaled $22.2 million. 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 March 31, 2006. 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 the first quarter of 2006
were $13.8 million.
During the first quarter of 2006, the Company used approximately $342,000
to purchase approximately 82,000 shares of its stock for treasury. At March 31,
2006, approximately 751,000 shares remain in the existing authorization for
future purchases.
At March 31, 2006, consolidated shareholders' equity totaled $58.2 million,
an increase of $0.7 million from the December 31, 2005 total of $57.5 million.
The increase is primarily due to net income of $0.8 million, and the favorable
effect of foreign currency translation of $0.1 million offset by the $342,000
spent to purchase approximately 82,000 shares of the Company's stock for
treasury.
18
During the first quarter of 2006, the Company determined that it owned but
had previously not recorded marketable securities that were issued to the
Company in 2001 resulting from the demutualization of an insurance company.
During the late 1990's and early 2000's, CTG purchased medical benefits for its
employees from this company through a broker. The company converted from a
mutual to a public company in late 2001, and CTG was issued shares in the new,
publicly traded entity. However, due to an error on the part of the issuing
company, CTG did not receive notification of the ownership of such shares until
late March 2006.
CTG has determined that an asset of approximately $0.2 million, and an
increase to retained earnings of $0.1 million, net of tax, should have been
recorded at December 31, 2001. The Company has recorded this asset and
adjustment to increase its retained earnings balance as of December 31, 2001,
and has subsequently accounted for this investment as an available for sale
security in succeeding years. The investment, retained earnings, and accumulated
other comprehensive income - unrealized gain on investment, net of tax account
balances as displayed on the Company's condensed consolidated balance sheets in
this quarterly report for the periods ended March 31, 2006 and December 31, 2005
reflect the accounting for this investment as if it had been recorded in 2001,
as well as the current valuation of the investment on those dates (see note 4).
Additionally, in the first quarter of 2006, the Company recorded a minor
adjustment to retained earnings related to the lease liability previously
recorded in the fourth quarter of 2005 for the straight-line recognition of
operating lease expense.
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 $33.7 million at March 31, 2006,
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 the first quarter of 2006 or 2005.
CONTRACTUAL OBLIGATIONS
There have been no significant additional contractual obligations entered
into by the Company during the first quarter of 2006. The Company reduced its
obligation under its revolving credit agreement during the first quarter of 2006
by approximately $22.2 million primarily by utilizing the cash provided from
operations from reduced accounts receivable balances.
19
ITEM 3. 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 March 31, 2006, there was a total of $1.0 million outstanding under the
Company's revolving credit agreement. Daily average borrowings for the first
quarter of 2006 were $13.8 million. Accordingly, a 1% increase or decrease in
interest rates would increase or decrease annual interest expense by
approximately $138,000.
For the first quarter of 2006 as compared to the first quarter of 2005,
there was a weakening 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. Had there been no
change in these exchange rates from the first quarter of 2005 to the first
quarter of 2006, total European revenue would have been approximately $1.3
million greater, or $15.5 million as compared to the $14.2 million reported. The
Company has historically not used any market risk sensitive instruments to hedge
its foreign currency exchange risk.
The value of the Company's investment in a publicly traded company (See
note 4 in Item 1. Financial Statements) of $0.8 million is subject to market
price volatility. This security is held for purposes other than trading. There
was no impairment of this security in the first quarter of 2006.
ITEM 4. 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 Interim 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 periodic
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
periodic report.
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 first quarter of 2006 evaluation that would
materially affect, or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There were no material changes in the Company's risk factors from those
previously disclosed in the Company's Form 10-K for the period ended
December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUERS PURCHASE OF EQUITY SECURITIES
Total Number of Maximum
Shares Purchased Number of
as Part of Shares that may
Publicly yet be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Agreements
- ------------ ---------------- -------------- ---------------- ----------------
January 1 -
January 31 -- -- -- 832,982
February 1 -
February 28 -- -- -- 832,982
March 1 -
March 31 81,600 $4.20 81,600 751,382
------ ------
Total 81,600 $4.20 81,600 751,382
During May 2005, the Company announced a 1.0 million share repurchase
authorization. This 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 first
quarter of 2006. 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.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
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.
ITEM 6. EXHIBITS
Exhibit Description Page
- ------- ----------- ----
31. (a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 23
31. (b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 24
32. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25
* * * * * * *
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER TASK GROUP, INCORPORATED
By: /s/ Brendan M. Harrington
------------------------------------
Brendan M. Harrington
Title: Interim Chief Financial Officer
Date: May 8, 2006
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