1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1997
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
--- ---
Number of shares of common stock outstanding:
Shares outstanding
Title Of Each Class at March 28, 1997
------------------- -----------------
Common stock, par value
$.01 per share 10,340,972
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED
MARCH 28, MARCH 29,
1997 1996
(amounts in thousands,
except per share data)
Revenue $ 94,935 $ 90,005
Direct costs 68,235 65,160
Selling, general and administrative expenses 20,876 21,147
-------- ---------
Operating income 5,824 3,698
Interest and other income 479 268
Interest and other expense (187) (278)
- ---------------------------------------------------------------------------------------------
Income before income taxes 6,116 3,688
Provision for income taxes 2,447 1,475
- ---------------------------------------------------------------------------------------------
Net income $ 3,669 $ 2,213
======== =========
Net income per share $ 0.41 $ 0.25
======== =========
Common equivalent shares outstanding 8,974 8,736
The accompanying notes are an integral part of these consolidated financial
statements.
2
3
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 29, DECEMBER 31,
1997 1996
-----------------------------
(Unaudited) (Audited)
(amounts in thousands)
ASSETS
- -------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 33,386 $ 41,516
Accounts receivable, net of allowance for doubtful
accounts of $966,000 and $975,000, respectively 69,657 55,948
Prepaids and other 3,145 2,630
Deferred income taxes 1,101 1,088
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 107,289 101,182
Property and equipment, net of
accumulated depreciation and amortization 12,280 12,380
Acquired intangibles, net of accumulated amortization
of $6,275,000 and $6,236,000, respectively 4,135 4,533
Deferred income taxes 2,556 2,608
Other assets 332 578
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 126,592 $ 121,281
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 12,661 $ 9,491
Accrued compensation 20,340 17,572
Income taxes payable 7,298 5,180
Advance billings on contracts 1,822 2,484
Other current liabilities 5,740 4,924
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 47,861 39,651
Deferred compensation benefits 9,056 8,889
Other long-term liabilities 1,237 1,237
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 58,154 49,777
Shareholders' Equity:
Common stock, par value $.01 per share, 25,000,000
shares authorized; 13,472,637 and 13,467,449 shares issued 135 135
Capital in excess of par value 145,927 159,512
Retained earnings 29,583 25,914
Less: Treasury stock of 3,131,665 and 3,131,418 shares, at cost (31,667) (31,655)
Stock Employee Compensation Trust of 1,992,929
and 1,825,272 shares, at market (71,247) (78,715)
Foreign currency adjustment (2,603) (2,039)
Minimum pension liability adjustment (1,594) (1,594)
Loans to employees (54) (54)
Unearned portion of restricted stock (42) -
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 68,438 71,504
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 126,592 $ 121,281
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED
MARCH 28, MARCH 29,
1997 1996
--------- ---------
(amounts in thousands)
Cash flows from operating activities:
Net income $ 3,669 $ 2,213
Adjustments:
Depreciation and amortization expense 1,316 1,505
Deferred compensation expense 167 79
Changes in assets and liabilities:
Increase in accounts receivable (14,485) (7,142)
Increase in prepaids and other (621) (854)
(Increase) decrease in deferred income taxes 39 (42)
Increase in income taxes payable 2,114 1,303
Decrease in other assets 246 53
Increase in accounts payable 3,504 3,307
Increase in accrued compensation 3,006 6,431
Decrease in advance billings on contracts (662) (555)
Increase in other current liabilities 919 132
---------- -----------
Net cash provided by (used in) operating activities (788) 6,430
- -------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities -
additions to property and equipment (1,097) (691)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on long-term debt - (541)
Proceeds from Employee Stock Purchase Plan 200 134
Purchase of treasury stock (12) (649)
Purchase of stock by Stock Employee Compensation Trust (6,553) -
Issuance of stock from Stock Employee Compensation Trust 111 -
Proceeds from other stock plans 83 674
---------- -----------
Net cash used in financing activities (6,171) (382)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments (74) 23
---------- -----------
Net increase (decrease) in cash and temporary cash investments (8,130) 5,380
Cash and temporary cash investments at beginning of year 41,516 16,545
- -------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 33,386 $ 21,925
========== ===========
The accompanying notes are an integral part of these consolidated 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 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 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.
5
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 28, 1997
Results Of Operations
- ---------------------
Statements included in this Management's Discussion and Analysis and
elsewhere in this document that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and of Section 21F of the
Securities Exchange Act of 1934, as amended. Additional oral or written
forward-looking statements may be made by the Company from time to time, and
such statements may be included in documents that are filed with the Securities
and Exchange Commission. Such forward-looking statements involve risks and
uncertainties that could cause results or outcomes to differ materially from
those expressed in such forward-looking statements. Forward-looking statements
may include, without limitation, statements relating to the Company's plans,
strategies, objectives, expectations and intentions and are intended to be made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Words such as "believes," "forecasts," "intends,"
"possible," "expects," "estimates," "anticipates," or "plans" and similar
expressions are intended to identify forward-looking statements. Among the
important factors on which such statements are based are assumptions concerning
the anticipated growth of the information technology industry, the continued
need of current and prospective customers for the Company's services, the
availability of qualified professional staff, and price and wage inflation.
CTG recorded first quarter 1997 revenue of $94.9 million, the highest
in the Company's history, and an increase of 5.5 percent when compared to first
quarter 1996 revenue of $90 million. North American revenue increased by $2.9
million or 3.6 percent in 1997 as compared to 1996, while revenue from European
operations increased by $2 million, or 22.9 percent. The increase in revenue
from the European operations is due to a significant increase in billable
personnel.
During the first quarter of 1997, the Company continued the
implementation of its Key Client strategy. As a result, quarterly revenue from
IBM, the Company's largest customer, increased by $9.9 million from 1996 to
1997. Revenue from the Company's Key Clients, which includes revenue from IBM,
grew at a rate in excess of 20% during the first quarter of 1997 as compared to
the first quarter of 1996. As part of the strategy, the Company continued to
disengage from non-strategic customers, causing those not designated as Key
Clients to post a negative revenue growth rate during the quarter. The continued
implementation of CTG's Key Client strategy in the first quarter of 1997
resulted in negative revenue growth for non-Key Clients, positive growth for Key
Clients, and higher overall profitability.
In the third quarter of 1995, CTG was awarded a two-year contract as
one of IBM's nine national technical service providers for the United States.
This contract expires in July 1997, and the Company anticipates renewal of the
contract for two additional years. IBM continues to be the Company's largest
customer, accounting for $33.9 million or 35.7 percent of first quarter 1997
total revenue as compared to $24 million or 26.7 percent of first quarter 1996
revenue. The Company expects to continue to derive a significant portion of its
revenue from IBM throughout the remainder of 1997. While a significant decline
in revenue from IBM would have a material adverse 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.
6
7
Direct costs, defined as costs for billable staff, were $68.2 million
or 71.9 percent of revenue in the first quarter of 1997 as compared to $65.2
million or 72.4 percent of first quarter 1996 revenue. The decrease in direct
costs as a percentage of revenue in 1997 as compared to 1996 is primarily due to
a trend toward higher value added services and an increase in billing rates.
Selling, general and administrative expenses were $20.9 million or 22
percent of revenue in 1997 as compared to $21.1 million or 23.5 percent of
revenue in 1996. The decrease from 1996 to 1997 is primarily due to a
concentrated effort to reduce overhead costs as a percentage of revenue.
Operating income was $5.8 million or 6.1 percent of revenue in 1997
compared to $3.7 million or 4.1 percent of revenue in 1996. The increase is
primarily due to the factors discussed above. Operating income from North
American operations increased $1.5 million or 47.1 percent from 1996 to 1997.
European operations recorded operating income of $1 million in 1997 as compared
to $0.4 million in 1996. The European improvement in profitability is primarily
due to the 22.9 percent increase in revenue discussed above and an increase in
higher value-added services performed in 1997.
Interest and other income increased $0.2 million to $0.5 in 1997 from
$0.3 million in 1996. The increase was a result of an increase in cash and
temporary cash investments during the first quarter of 1997 as compared to the
first quarter of 1996.
Income before income taxes increased by $2.4 million from $3.7 million
or 4.1 percent of revenue in 1996 to $6.1 million or 6.4 percent of revenue in
1997. The provision for income taxes was 40 percent in both 1997 and 1996.
Net income for the first quarter of 1997 was $3.7 million or $0.41 per
share, compared to $2.2 million or $0.25 per share in 1996. Earnings per share
was calculated using 9 million and 8.7 million equivalent shares outstanding in
1997 and 1996, respectively. The increase in equivalent shares outstanding is
primarily due to the dilutive effect of outstanding stock options on the
earnings per share calculation and shares issued under the Employee Stock
Purchase Plan, offset by stock purchased by the Stock Employee Compensation
Trust.
Financial Condition
- -------------------
Cash used by operations was $0.8 million for the quarter. Net income
totaled $3.7 million, and non-cash adjustments for depreciation and amortization
expense and deferred compensation expense totaled $1.5 million. Accounts
receivable increased $14.5 million as compared to December 31, 1996, as a result
of increases in revenue and slower accounts receivable turnover in the first
quarter of 1997. Prepaid assets increased $0.6 million due to the prepayment of
items that will be expensed throughout the remainder of 1997. The $2.1 million
increase in taxes payable is primarily attributable to an increase in net
income. Accounts payable increased $3.5 million due to the timing of certain
payments. Accrued compensation and other current liabilities increased $3.9
million due to the timing of the company's U.S. biweekly payroll.
Net property and equipment decreased $0.1 million. Additions to
property and equipment were $1.1 million offset by depreciation of $1.2 million.
The Company has no material commitments for capital expenditures at March 28,
1997. Net acquired intangibles decreased $0.4 million, caused by amortization of
$0.1 million and $0.3 million in translation adjustments.
7
8
Financing activities used $6.2 million of cash in the first quarter of
1997. The Company's Stock Employee Compensation Trust purchased 176,800 shares
of stock for $6.6 million. During the first quarter of 1997, the Company
received $0.2 million from employees for 5,000 shares of stock purchased under
the Employee Stock Purchase Plan. The Company also received $0.2 million for the
exercise of stock options. At March 28, 1997, the Company's current ratio is 2.2
to 1.
The Company has approximately $53.5 million in aggregate lines of
credit, which are renewable annually at various times throughout the year.
On October 26, 1994, the Company authorized the repurchase of one
million shares and on July 21, 1995 authorized the repurchase of another 0.7
million shares of its Common Stock. At March 28, 1997, approximately 0.8 million
shares have been repurchased under the authorizations, leaving 0.9 million
shares authorized for future purchases.
The Company believes existing internally available funds, cash
generated by operations, and borrowings will be sufficient to meet foreseeable
working capital, stock repurchase and capital expenditure requirements and to
allow for future internal growth and expansion.
8
9
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters To A Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders was held on April 30, 1997
at the Company's Headquarters, 800 Delaware Avenue, Buffalo,
New York at 10:00 a.m.
The Company submitted for shareholder approval the election of
Class I directors and two amendments of the Company's
Certificate of Incorporation.
Election of Directors
- Three Class I directors (Gale S. Fitzgerald, Paul W. Joy
and Randolph A. Marks) were elected to hold office for two
years until the 1999 annual meeting of shareholders and
until their successors are elected and qualified. The
results of the voting are as follows:
Total Vote Total Vote
For Against
---------- ----------
Gale S. Fitzgerald 8,666,910 170,268
Paul W. Joy 8,665,480 171,698
Randolph A. Marks 8,667,121 170,057
- The Class II directors of the Company, whose terms of
office extend until the 1998 annual meeting of
shareholders and until their successors are elected and
qualified, are George B. Beitzel, Richard L. Crandall
and Barbara Z. Shattuck.
Amendments to the Company's Certificate of Incorporation
- An amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the
Company's Common Stock from 25,000,000 to 150,000,000
shares. The total vote for the amendment was 6,517,025,
the total vote against was 2,300,479, and abstaining votes
totaled 19,674.
- An amendment to the Company's Certificate of Incorporation
to remove the authorization for 2,300,000 shares of a
series of Preferred Stock designated as Series B Preferred
Stock. The total vote for the amendment was 7,342,245, the
total vote against was 730,263, broker non-votes totaled
731,990, and abstaining votes totaled 32,680.
- The total number of the Company's common shares issued and
outstanding and entitled to vote at the annual meeting of
shareholders was 10,341,804. The total number of shares
voted at the annual meeting was 8,837,178 or 85.5 percent
of the total issued and outstanding.
9
10
Item 6. Exhibits And Reports On Form 8-K
--------------------------------
Exhibit Description Page
------- ----------- ----
10. Executive Supplemental Benefit Plan 1997 Restatement 10
11. Statement re: computation of earnings per share 40
27. Financial Data Schedule 42
* * * * * * *
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/ James R. Boldt
--------------------------
James R. Boldt
Principal Accounting and
Financial Officer
Title: Vice President - Finance
Date: May 9, 1997
10