1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
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) (I.R.S. Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 882-8000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Number of shares of common stock outstanding:
Shares outstanding
Title of each class June 30, 1995
------------------- ------------------
Common stock, par value
$.01 per share 10,140,110
2
PART I. FINANCIAL INFORMATION
--------------------------------
ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Quarter Ended Two Quarters Ended
June 30, July 1, June 30, July 1,
1995 1994 1995 1994
--------- -------- --------- ---------
Revenue $ 84,613 $ 77,950 $ 166,839 $ 154,956
Direct costs 61,731 57,628 122,056 113,378
Selling, general and
administrative expenses 19,751 18,628 38,711 37,709
--------- -------- --------- ---------
Total operating expenses 81,482 76,256 160,767 151,087
--------- -------- --------- ---------
Operating income 3,131 1,694 6,072 3,869
Interest and other income 88 756 215 1,033
Interest and other expense 379 410 789 634
--------- -------- --------- ---------
Income before income taxes 2,840 2,040 5,498 4,268
Provision for income taxes 941 897 2,005 1,877
--------- -------- --------- ---------
Net income $ 1,899 $ 1,143 $ 3,493 $ 2,391
========= ======== ========= =========
Net income per share $ 0.22 $ 0.13 $ 0.41 $ 0.24
========= ======== ========= =========
Weighted average shares outstanding 8,608 9,092 8,608 9,904
Cash dividend per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
The accompanying notes are an integral part of these financial statements.
2
3
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1995 1994
------------ -------------
(Audited)
ASSETS (Amounts in thousands)
Current Assets:
Cash and temporary cash investments $ 4,223 $ 5,112
Accounts receivable, net of allowance for doubtful accounts 68,540 55,373
Prepaid and other 3,083 2,004
Deferred income taxes 2,022 2,809
Income taxes receivable - 2,895
---------- ----------
Total Current Assets 77,868 68,193
Property and equipment, net of
accumulated depreciation and amortization 17,033 17,790
Acquired intangibles, net of accumulated amortization 6,161 6,267
Deferred income taxes 2,345 2,345
Other assets 758 895
---------- ----------
Total Assets $ 104,165 $ 95,490
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,296 $ 2,296
Accounts payable 8,711 9,287
Accrued compensation 10,552 5,999
Short-term borrowings 5,500 4,500
Income taxes payable 1,916 -
Advance billings on contracts 2,174 1,717
Other current liabilities 3,666 5,547
---------- ----------
Total Current Liabilities 34,815 29,346
Long-term debt 5,019 6,114
Deferred compensation benefits 6,927 6,626
Other long-term liabilities 2,759 2,746
---------- ----------
Total Liabilities 49,520 44,832
Shareholders' Equity
Common stock, par value $.01 per share 128 127
Capital in excess of par value 88,794 87,327
Retained earnings 8,404 5,734
Foreign currency adjustment (1,950) (2,441)
Less: Treasury stock, at cost (24,414) (24,413)
Less: Loans to employees (480) (557)
Less: Stock Employee Compensation Trust (15,615) (14,881)
Less: Minimum pension liability adjustment (222) (238)
---------- ----------
Total Shareholders' Equity 54,645 50,658
---------- ----------
Total Liabilities and Shareholders' Equity $ 104,165 $ 95,490
========== ============
The accompanying notes are an integral part of these financial statements.
3
4
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Two Quarters Ended
June 30, July 1,
1995 1994
--------- ----------
(Amounts in thousands)
Cash flows from operating activities:
Net income $ 3,493 $ 2,391
Adjustments:
Depreciation and amortization expense 2,880 2,868
Net gain on sales of securities - (55)
Deferred compensation expense 261 537
Changes in assets and liabilities:
Increase in accounts receivable (12,631) (4,997)
Increase in prepaids and other (939) (2,635)
Decrease in deferred income taxes 787 1,359
Decrease in other assets 144 979
(Decrease) increase in accounts payable (869) 403
Increase in accrued compensation 4,433 2,751
Increase (decrease) in income taxes receivable/payable 4,829 (1,774)
Increase in advance billings on contracts 457 2,052
Decrease in other current liabilities (2,098) (2,007)
Increase (decrease) in other long-term liabilities 53 (455)
------------ ------------
Net cash provided by operating activities 800 1,417
Cash flows from investing activities:
Additions to property and equipment (1,630) (2,575)
Purchases of marketable securities - (1,026)
Sales of marketable securities - 7,424
------------ ------------
Net cash provided by (used in) investing activities (1,630) 3,823
Cash flows from financing activities:
Net proceeds from short-term borrowings 1,000 11,492
Principal payments on long-term debt (1,095) (1,091)
Proceeds from Employee Stock Purchase Plan 259 519
Purchase of treasury stock - (3,515)
Purchase of stock held by the Stock
Employee Compensation Trust (734) (13,400)
Proceeds from other stock plans 1,285 254
Dividends paid (823) (855)
------------ ------------
Net cash used in financing activities (108) (6,596)
Effect of exchange rate changes on cash
and temporary cash investments 49 (66)
------------ ------------
Net decrease in cash and temporary cash investments (889) (1,422)
Cash and temporary cash investments at beginning of year 5,112 5,355
------------ ------------
Cash and temporary cash investments at end of quarter $ 4,223 $ 3,933
============ ============
The accompanying notes are an integral part of these financial statements.
4
5
COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements
The consolidated financial statements included herein reflect, in the
opinion of the management of Computer Task Group, Incorporated (the Company),
all normal recurring adjustments necessary to present fairly the financial
position, results of operations and of cash flows for the periods presented.
2. Basis of Presentation
The consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations. Management believes that the information and disclosures provided
herein are adequate to present fairly the financial position, results of
operations and of cash flows of the Company. It is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-K filed with the SEC.
Certain amounts in the prior year's consolidated statements of income
and of cash flows have been reclassified to conform with the current year
presentation.
5
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND TWO QUARTERS ENDED JUNE 30, 1995
Results of Operations
---------------------
The Company reported second quarter revenues of $84.6 million, the
highest quarterly revenues in its history, and net income of $1.9 million, an
increase of 66 percent over 1994 second quarter net income of $1.1 million. The
Company reported year-to-date revenues of $166.8 million and net income of $3.5
million, an increase of 46 percent over the year-to-date 1994 net income of
$2.4 million.
Second quarter 1995 revenue increased $6.7 million or 8.5 percent from
the second quarter of 1994 while year-to-date 1995 revenue increased $11.9
million or 7.7 percent compared to 1994. Included in second quarter and
year-to-date 1994 revenue is $8.7 million and $16.3 million, respectively, from
businesses that were sold during the second half of 1994. Revenue from ongoing
operations increased $15.4 million or 22.1 percent during the second quarter
1995 and $28.2 million or 20.3 percent during the first six months of 1995 over
the comparable periods in 1994.
The majority of the increase is from North American operations. The
North American increase is primarily attributable to an increase in demand for
the Company's services. The Company's billable staff increased 23 percent from
the second quarter of 1994 to the second quarter of 1995, and increased by 248
people or 6 percent from the end of 1994 to the end of the second quarter.
European revenue increased by $1.9 million or 31.3 percent during the second
quarter and $3.8 million or 30.6 percent year-to-date over the comparable
periods in 1994. For the year-to-date period, in local currency, European
revenue increased 22.4 percent in the Netherlands, 14.2 percent in Belgium and
5.0 percent in the United Kingdom, which accounts for approximately $2.0
million of the year-to-date increase. The remaining $1.8 million of the
increase is due to foreign exchange as the U. S. dollar weakened against other
currencies in the first and second quarters of 1995. IBM continues to be the
Company's largest customer, accounting for $17.8 million or 21 percent of
second quarter revenue and $34.6 million or 20.7 percent of year- to-date
revenue. Revenue from IBM accounted for 21.4 percent and 22.9 percent,
respectively, of second quarter and year-to-date 1994 revenue. The Company
recently became a preferred vendor to IBM and, therefore, expects to retain or
increase the volume of revenue derived from IBM. It is the Company's goal to
increase annual revenue by 10 percent in 1995 as compared to 1994 revenue from
ongoing operations and the results in the first half of 1995 are in line with
this objective.
Direct costs (defined as costs for billable staff) in the second quarter
were 73.0 percent of revenue compared to 73.9 percent of revenue in the second
quarter of 1994 and were consistent at 73.2 percent of revenue for the
year-to-date period 1995 compared to the same period in 1994. The Company
currently experiences continued competitive pricing pressures within the
marketplace from both clients and competitors.
Selling, general and administrative expenses were $19.8 million or 23.3
percent of revenue in the second quarter of 1995 and $18.6 million or 23.9
percent of revenue in the second quarter of 1994. Selling, general and
administrative expenses were $38.7 million or 23.2 percent of revenue in the
year-to-date period 1995 compared to $37.7 million or 24.3 percent of revenue a
year earlier. The Company is focused on containing these expenses and reducing
them as a percentage of revenue. The decreased percentages are primarily
attributed to increased revenues.
6
7
Operating income was $3.1 million in the second quarter of 1995 compared
to $1.7 million in the second quarter of 1994. Operating income for the 1995
year-to-date period was $6.1 million compared to $3.9 million during the same
period in 1994. It increased as a percentage of revenue from 2.2 percent to
3.7 percent in the quarter-to-quarter period and increased from 2.5 percent to
3.6 percent for the year-to-date periods, due to the reduction in both direct
costs and selling, general and administrative expenses as percentages of
revenue. Operating income from ongoing operations in North America increased
$2.0 million or 187 percent during the second quarter compared to the second
quarter 1994 and $2.6 million or 86 percent for the year-to-date periods.
European operations showed a $.3 million profit during the year-to-date period
versus break-even in the same period of 1994.
Interest and other income decreased by $668,000 or 88 percent to $88,000
and by $818,000 or 79 percent to $215,000 for the quarter and year-to-date
periods, respectively. In the second quarter of 1994, the Company sold its
investment in SerCon, a joint venture in which the Company had a 16 percent
interest, to IBM at a gain of $638,000. The Company also liquidated its
investment portfolio during the first half of 1994, resulting in a decrease in
investment income in 1995. The Company reported net realized and unrealized
gains on securities of $55,000 in the first half of 1994.
Interest and other expense decreased $31,000 or 8 percent for the
quarter and increased $155,000 or 24 percent for the quarter and year-to-date
periods, respectively. The Company's average daily bank borrowings increased
during the first half of 1995 due to increased accounts receivable and the
repurchase of the Company's stock during 1994 to establish its Stock Employee
Compensation Trust. There were no material gains or losses due to foreign
exchange on currency.
Income before income taxes increased by $.8 million or 39 percent during
the second quarter of 1995 compared to the second quarter 1994 and $1.2 million
or 29 percent during the 1995 year-to-date period compared to the same period
in 1994. The provision for income taxes for the second quarter of 1995 was 33
percent compared to 44 percent in the second quarter of 1994. The provision
for income taxes for the six months ended June 30, 1995 was 37 percent compared
to 44 percent for the six months ended July 1, 1994. The reduction in the
income tax rate for the second quarter is primarily due to a decrease in the
Company's reserve for potential income tax assessments in the current year. In
addition, the rate is lower compared to the prior year because of the European
earnings. In 1994, there were annual losses for which no benefit was provided.
Net income for the second quarter was $1.9 million or $0.22 per share,
compared to $1.1 million or $0.13 per share for the second quarter of 1994.
For the year-to-date periods, net income increased to $3.5 million or $0.41 per
share from $2.4 million or $0.24 per share. Although net income increased 66
percent and 46 percent during the quarter and year-to-date periods,
respectively, earnings per share increased 69 percent and 71 percent because
weighted average shares outstanding decreased from 9.1 million and 9.9 million,
respectively, to 8.6 million. Beginning in May 1994, the Company and its Stock
Employee Compensation Trust purchased approximately 2.5 million of its common
shares. These shares are not considered outstanding for purposes of
calculating earnings per share.
The Company expects to continue to increase billable headcount to meet
market demand. It is the Company's goal to reduce direct costs as a percentage
of revenue. The Company continues to review its operations and may dispose of
any businesses that are not strategic.
7
8
Financial Condition
-------------------
During the first half of 1995, the Company's working capital increased
by $4.2 million to $43.1 million. Accounts receivable increased $12.6 million,
offset by a $4.4 million increase in accrued compensation and a $4.8 million
decrease in income taxes receivable. Cash and temporary cash investments also
decreased $.9 million and the Company borrowed a net additional $1.0 million in
short-term borrowings.
Cash provided by operations was $.8 million for the first half of 1995.
The $12.6 million or 23 percent increase in accounts receivable is related to
the 20 percent increase in revenue from ongoing operations. Accrued
compensation increased $4.4 million due to the Company's increased headcount in
addition to a higher balance of accrued vacation at June 30, 1995. Prepaid
assets increased $.9 million due to the prepayment of items that will be
expensed in the remainder of the year. At year end, the Company was due net tax
refunds of $2.9 million and these were received during the first quarter. At
the end of the second quarter, the Company has income taxes payable of $1.9
million. Current and noncurrent deferred income taxes decreased by $.8 million
as a result of the payment of restructuring expenses which are deductible for
tax purposes when paid. Advance billings on contracts increased $.5 million
due to the timing of billings in accordance with terms of contractual
agreements.
Other current liabilities decreased $2.1 million, primarily attributable
to payments of restructuring expenses and severance costs. Amounts accrued for
restructuring and severance and other costs were $.6 million and $1.6 million,
respectively, at the end of 1994 and $.3 million and $.6 million at the end of
the second quarter of 1995. Severance costs related to the 1993 restructuring
plan of $.3 million were charged against the restructuring accrual in the first
six months. Severance costs of $1.0 million related to terminations which
occurred during 1994 were paid during the first half. The remaining $.8
million decrease in other current liabilities is a result of foreign currency
translation and normal operating activities of the Company.
Net property and equipment decreased $.8 million. Additions to property
and equipment were $1.6 million offset by year-to-date depreciation of $2.4
million. Additions decreased by $.9 million compared to the first half of 1994
because the Company was equipping its recruiting centers during the beginning
of 1994. Net acquired intangibles decreased $.1 million, caused by $.5 million
in translation adjustments reflecting the weakening of the U.S. dollar during
the year offset by year-to-date amortization of $.6 million.
Cash used in financing activities was $.1 million for the first half of
1995. The Company repaid $1.1 million of long-term debt in accordance with its
various loan agreements and borrowed an additional $1.0 million of short-term
borrowings to fund working-capital requirements. As of the end of the quarter,
the Company is in compliance with all applicable debt agreement financial
ratios and covenants, the most restrictive being the maintenance of a minimum
current ratio of 1.5 to 1.
During the first half of 1995, the Company received $.3 million from
employees for 22,000 shares of stock purchased under the Employee Stock
Purchase Plan. The Company also received $77,000 in proceeds from the
repayment of loans under its Management Stock Purchase Plan and $1.2 million
for the exercise of stock options. In May 1995, the Company's Stock Employee
Compensation Trust repurchased approximately 60,000 shares of the Company's
common stock for $734,000. The Company paid $823,000 in dividends to
shareholders on a $.10 per share dividend.
The Company has $53.8 million in aggregate lines of credit, $10.1
million of which was borrowed at the end of the quarter.
8
9
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit Description Page
------- ----------- ----
11. Statement re: computation of earnings per share 10
27. Financial Data Schedule
* * * * * * * *
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/ Samuel D. Horgan
--------------------------
Samuel D. Horgan
Principal Accounting and
Financial Officer
Title: Vice President - Finance
Date: August 11, 1995
9