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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 JUNE 25, 1999
Commission file number 1-9410
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COMPUTER TASK GROUP, INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0912632
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(State of incorporation) (IRS Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
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(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
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Number of shares of common stock outstanding:
Shares outstanding
Title of each class at June 25, 1999
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Common stock, par value
$.01 per share 20,876,063
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER ENDED TWO QUARTERS ENDED
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
1999 1998 1999 1998
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(amounts in thousands, except per share data)
Revenue $ 125,464 $ 117,646 $ 242,082 $ 227,329
Direct costs 82,672 80,472 160,869 156,546
Selling, general and administrative expenses 31,052 27,359 61,457 52,579
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Operating income* 11,740 9,815 19,756 18,204
Interest and other income 49 244 481 500
Interest and other expense (693) (171) (945) (211)
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Income before income taxes* 11,096 9,888 19,292 18,493
Provision for income taxes 4,779 4,054 8,276 7,582
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Net income* $ 6,317 $ 5,834 $ 11,016 $ 10,911
========= ========= ========= =========
Net income per share:*
Basic $ 0.38 $ 0.36 $ 0.67 $ 0.68
========= ========= ========= =========
Diluted $ 0.38 $ 0.34 $ 0.66 $ 0.64
========= ========= ========= =========
Weighted average shares outstanding:
Basic 16,517 16,196 16,472 16,151
Diluted 16,796 16,939 16,813 16,968
Cash dividend per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
* The two quarters ended June 25, 1999 include the expense of a non-recurring
arbitration award which lowered operating income and income before income
taxes by approximately $2.5 million, and net income and net income per
share by approximately $1.5 million and $0.09, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
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COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
JUNE 25, DECEMBER 31,
1999 1998
------------------------
(Unaudited) (Audited)
(amounts in thousands)
ASSETS
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Current Assets:
Cash and temporary cash investments $ 4,810 $ 57,748
Accounts receivable, net of allowances and reserves 93,938 73,932
Prepaids and other 2,900 4,000
Deferred income taxes 1,797 1,654
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TOTAL CURRENT ASSETS 103,445 137,334
Property and equipment, net of
accumulated depreciation and amortization 14,225 13,146
Acquired intangibles, net of accumulated amortization
of $7,194,000 and $6,002,000, respectively 86,080 2,808
Deferred income taxes 2,721 2,801
Other assets 1,084 720
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TOTAL ASSETS $ 207,555 $ 156,809
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
Accounts payable $ 9,280 $ 14,265
Accrued compensation 26,380 29,258
Short-term borrowings 41,845 --
Income taxes payable 9,443 9,157
Advance billings on contracts 1,163 384
Other current liabilities 12,990 9,409
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TOTAL CURRENT LIABILITIES 101,101 62,473
Deferred compensation benefits 10,774 10,300
Other long-term liabilities 698 587
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TOTAL LIABILITIES 112,573 73,360
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 109,912 106,010
Retained earnings 76,361 66,172
Less: Treasury stock of 6,141,761 and 6,269,668 shares, at cost (31,278) (31,850)
Stock Employee Compensation Trust of 4,382,746
and 4,422,500 shares, at cost (53,720) (52,463)
Unearned portion of restricted stock to related parties (56) (69)
Other comprehensive income:
Foreign currency adjustment (4,260) (2,374)
Minimum pension liability adjustment (2,247) (2,247)
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Accumulated other comprehensive income (6,507) (4,621)
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TOTAL SHAREHOLDERS' EQUITY 94,982 83,449
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 207,555 $ 156,809
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWO QUARTERS ENDED
JUNE 25, JUNE 26,
1999 1998
(amounts in thousands)
Cash flows from operating activities:
Net income $ 11,016 $ 10,911
Adjustments:
Depreciation expense 2,422 2,064
Amortization expense 1,442 314
Deferred compensation expense 247 251
Changes in assets and liabilities, net of assets acquired and liabilities
assumed:
Increase in accounts receivable (11,713) (21,437)
(Increase) decrease in prepaids and other 863 (802)
(Increase) decrease in deferred income taxes 220 (43)
Increase in other assets (101) (530)
Increase (decrease) in accounts payable (6,026) 3,805
Decrease in accrued compensation (5,100) (18)
Increase in income taxes payable 529 771
Increase (decrease) in advance billings on contracts 779 (625)
Increase in other current liabilities 2,018 350
Decrease in other long-term liabilities (129) (152)
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Net cash used in operating activities (3,533) (5,141)
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Cash flows from investing activities:
Acquisition (86,775) --
Additions to property and equipment (2,551) (2,836)
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Net cash used in investing activities (89,326) (2,836)
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Cash flows from financing activities:
Short-term borrowings, net 41,845 --
Proceeds from Employee Stock Purchase Plan 582 766
Purchase of stock for treasury (12) (22)
Purchase of stock by Stock Employee Compensation Trust (1,893) (1,617)
Proceeds from other stock plans, inclusive of related tax benefit 1,353 2,971
Dividends paid (827) (812)
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Net cash provided by financing activities 41,048 1,286
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Effect of exchange rate changes on cash and temporary cash investments (1,127) (17)
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Net decrease in cash and temporary cash investments (52,938) (6,708)
Cash and temporary cash investments at beginning of year 57,748 25,033
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Cash and temporary cash investments at end of quarter $ 4,810 $ 18,325
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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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 ("CTG" or "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
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K filed with the SEC.
3. Comprehensive Income
At June 25, 1999, accumulated other comprehensive income totaled
$(6,507,000), including an adjustment of $(558,000) related to foreign currency
translation made in the second quarter of 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE TWO QUARTERS ENDED JUNE 25, 1999
Forward-Looking Statements
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Statements included in this Management's Discussion and Analysis of
Results of Operations and Financial Condition and elsewhere in this document
that do not relate to present or historical conditions are "forward-looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934,
as amended. Additional oral or written forward-looking statements may be made by
the Company from time to time, and such statements may be included in documents
that are filed with the Securities and Exchange Commission. Such forward-looking
statements involve risks and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements.
Forward-looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. Among
the important factors on which such statements are based are assumptions
concerning the anticipated growth of the information technology industry, the
continued need of current and prospective customers for the Company's services,
the availability of qualified professional staff, and price and wage inflation.
Results of Operations
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To aid in understanding the operating trends of the Company, the
following table is presented to set forth data as contained on the consolidated
statements of income, with the information calculated as a percentage of
consolidated revenues.
Quarter Ended Two Quarters Ended
June 25, June 26, June 25, June 26,
(percentage of revenue) 1999 1998 1999 1998
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Revenue 100.0% 100.0% 100.0% 100.0%
Direct costs 65.9% 68.4% 66.5% 68.9%
Selling, general, and administrative expenses,
less non-recurring charge 24.7% 23.3% 24.3% 23.1%
Non-recurring charge -- -- 1.0% --
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Operating income 9.4% 8.3% 8.2% 8.0%
Interest and other income (expense) (0.6)% 0.1% (0.2)% 0.1%
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Income before income taxes 8.8% 8.4% 8.0% 8.1%
Provision for income taxes 3.8% 3.4% 3.4% 3.3%
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Net income 5.0% 5.0% 4.6% 4.8%
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On February 23, 1999, during CTG's first quarter of 1999, the Company
completed the acquisition of Elumen Solutions, Inc. (Elumen). The transaction
was valued at $89 million, of which $86 million was paid in cash or through the
assumption of debt, and the remainder was satisfied through the issuance of
approximately 128,000 shares of CTG common stock. The acquisition was accounted
for as a purchase, with approximately $85 million of goodwill and other
identifiable intangibles, from the total cost of $89 million, arising from the
transaction.
Elumen was one of the largest privately held consulting firms
specializing in information technology services for health care organizations,
generating revenues of approximately $36 million for the year ended December 31,
1998. As the acquisition was completed on February 23, 1999, all of the second
quarter operating results for Elumen were included in CTG's consolidated
financial statements for the quarter ended June 25, 1999.
The market for health care IT services was estimated at $3.4 billion
annually in 1997. Several of the factors driving growth in excess of 20%
annually in this sector (Piper Jaffray, 1997 and Dorenfest and Associates, 1997)
include the creation of large integrated health care delivery systems, the
consolidation of health care providers and systems, the impact of managed care,
and the need to invest in information technology to improve patient care and
achieve cost and operating efficiencies. The acquisition of Elumen by CTG is
intended to capitalize on these impressive growth rates which are greater than
the growth rates for the IT services industry as a whole. Additionally, as
Elumen was one of the leading firms in the health care IT sector, its growth
rate exceeded the 20% mentioned above in 1998, and is expected to continue to
exceed this rate in 1999.
CTG recorded second quarter 1999 revenue of $125.5 million, an increase
of 6.6 percent when compared to second quarter 1998 revenue of $117.6 million.
Revenue from North American operations increased by $5 million or 5 percent in
1999 as compared to 1998, while revenue from European operations increased by
$2.9 million, or 17.5 percent. Revenues for the two quarters ended June 25, 1999
increased $14.8 million, or 6.5 percent, over the comparable 1998 period. The
consolidated revenue increase is mainly due to the Company providing
higher-value services to its customers and the acquisition of Elumen, partially
offset by constrained revenues from the Company's oil and gas customers and
International Business Machines, Inc. (IBM).
The 1998 to 1999 second quarter-to-quarter revenue growth rate was
impacted slightly by the strengthening of the U.S. dollar as compared to the
currencies of the Netherlands, Belgium, the United Kingdom, and Luxembourg. If
there had been no change in these foreign currency exchanges rates from the
second quarter of 1998 to 1999, total consolidated revenues would have been $0.6
million higher, resulting in a quarter-to-quarter consolidated revenue growth
rate of 7.2 percent. This additional $0.6 million increase in revenue in Europe
would have increased the European revenue growth rate to 21.1 percent.
In January 1999, the Company renewed a contract with IBM for one year
as one of IBM's national technical service providers for the United States. In
the second quarter of 1999, IBM continued to be the Company's largest customer,
accounting for $34.2 million or 27.3 percent of total revenue as compared to
$38.9 million or 33.1 percent of second quarter 1998 revenue. The Company
expects to continue to derive a significant portion of its revenue from IBM
throughout 1999 and in future years. 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 recent renewal of the national contract, the number of other
contracts presently in existence with IBM, the diversity of the projects
performed for IBM, and the number of locations and divisions involved.
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Direct costs, defined as costs for billable staff, were 65.9 percent of
revenue in the second quarter of 1999 as compared to 68.4 percent of revenue in
the second quarter of 1998. Direct costs for the two quarters ended June 25,
1999 were 66.5 percent of revenue as compared to 68.9 percent of revenue in the
comparable 1998 period. The decrease in direct costs as a percentage of revenue
in 1999 as compared to 1998 is also primarily due to the trend toward CTG
providing higher-value services to its clients.
Selling, general and administrative expenses were 24.7 percent of
revenue in the second quarter of 1999 as compared to 23.3 percent of revenue in
the second quarter of 1998. Selling, general and administrative expenses for the
two quarters ended June 25, 1999, less the non-recurring charge taken in the
first quarter of 1999, were 24.3 percent of revenue as compared to 23.1 percent
of revenue in the comparable 1998 period. The increase from 1998 to 1999 is
primarily due to a continued investment in 1999 in sales and marketing,
recruiting, and training programs, as well as goodwill amortization expense
related to the acquisition of Elumen.
During the first quarter of 1999, CTG recorded a non-recurring charge
of $2.5 million to provide for a preliminary arbitration award related to a
contract dispute between the Company and one of its customers. As a percentage
of consolidated revenue, this charge lowered operating income and income before
taxes for the year-to-date 1999 period by 1.0 percent, net income by 0.6
percent, and diluted earnings per share by $0.09.
Operating income was 9.4 percent of revenue in the second quarter of
1999 compared to 8.3 percent of revenue in the second quarter of 1998. Operating
income for the two quarters ended June 25, 1999 was 8.2 percent of revenue as
compared to 8.0 percent of revenue in the comparable 1998 period. Without the
non-recurring charge, operating income would have been 9.2 percent of revenue
for the two quarters ended June 25, 1999. The quarter-to-quarter increase is
primarily due to the factors discussed above. Operating income from North
American operations in the second quarter increased $1.3 million or 15.7 percent
from 1998 to 1999. European operations recorded operating income of $2.1 million
in 1999 as compared to $1.5 million in 1998. The European improvement in
profitability is primarily due to the 17.5 percent increase in revenue discussed
above and an increase in higher-value services performed in 1999.
Interest and other income (expense) was (0.2) percent of revenue for
the two quarters ended June 25, 1999, and 0.1 percent in the comparable 1998
period. In 1999, interest expense on indebtedness related to the acquisition
of Elumen was partially offset by interest income on available cash and
temporary cash investments.
Income before income taxes was 8.8 percent of revenue in the second
quarter of 1999 as compared to 8.4 percent of revenue in the second quarter of
1998. Without the non-recurring charge, income before income taxes would have
been 9.0 percent of revenue for the two quarters ended June 25, 1999. The
provision for income taxes was 42.9 percent in 1999 and 41 percent in 1998. The
increase in the effective income tax rate in 1999 is due to an increase in
non-deductible expenses related to the Elumen acquisition.
Net income for the second quarter of 1999 was 5.0 percent of revenue or
$0.38 per diluted share, compared to 5.0 percent of revenue or $0.34 per diluted
share in 1998. Without the non-recurring charge, net income would have been 5.2
percent of revenue and $0.75 per diluted share for the two quarters ended June
25, 1999. Diluted earnings per share was calculated using 16.8 million and 16.9
million equivalent shares outstanding in 1999 and 1998, respectively.
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In 1996, CTG conducted an assessment of its potential year 2000 issues
by examining all of its internal and third-party applications, operating
systems, interfaces, and hardware (collectively referred to hereafter as
computer systems) and its non-information technology (non-IT) systems. During
1997, the Company generated a complete inventory of its computer systems and
non-IT systems that may be impacted by year 2000 issues, and further refined the
inventory into mission critical and non-mission critical categories.
To address its year 2000 issues, CTG established a year 2000 committee,
a compliance program, and a budget. The committee meets regularly, and reviews
and updates, as necessary, the compliance program at each meeting. The Company's
year 2000 compliance program consists of six primary phases: assessment, systems
inventory, remediation, contingency planning, systems testing, and systems
evaluation and monitoring. As mentioned above, the systems inventory and
assessment phases were completed in 1997, and as of the end of the second
quarter of 1999 significant progress has been made with respect to the
contingency planning and systems testing phases.
The Company has determined that mission critical systems or vendors
are those that are vital to the operations of the Company. The Company has
completed all of its remediation and systems testing with respect to its
mission critical computer systems and mission critical non-IT systems. As
part of CTG's compliance program, the Company does not intend to make any
changes to its hardware or software for its mission critical computer systems
into the year 2000. The total amount spent in 1998 and through June 25, 1999,
and estimated to be spent throughout the remainder of 1999 to address year 2000
issues totals less than $500,000.
CTG, as part of its year 2000 compliance program, has been, and
continues to be throughout 1999, in communication with vendors providing
third-party computer systems or services to the Company, in order to receive
assurance that these computer systems and vendors will be year 2000 compliant on
or before December 31, 1999. In the event the Company did not receive reasonable
assurance from its mission critical vendors as to year 2000 compliance, CTG is
seeking to establish relationships with other vendors that are year 2000
compliant. With respect to purchases of upgrades of existing computer systems,
and new hardware and software computer systems, it is the Company's practice to
formally request and receive year 2000 certification from the vendor prior to
completion of the purchase.
CTG operates in one industry segment, providing IT services to its
clients. The services provided typically encompass the IT business solution life
cycle, including phases for planning, development, and managing and maintaining
the IT solution. A portion of the IT services the Company provides involves
assessment, planning, remediation, testing, and contingency planning services
for year 2000 compliance. CTG actively manages the inherent risk in the services
it provides to its clients through a thorough contract review process, and by
including contractual provisions in its contracts that are designed to mitigate
risk to the Company. Revenues generated from year 2000 compliance services were
less than 15% of CTG's consolidated revenues for the quarter ended June 25,
1999. It is anticipated that year 2000 compliance providers such as CTG will
continue to generate revenues from year 2000 compliance services after the year
2000. Accordingly, the Company does not anticipate an immediate significant
decline in revenues after January 1, 2000.
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CTG believes that already completed and planned remediation of its
mission critical computer systems and non-IT systems will allow it to be year
2000 compliant as planned. There can be no guarantee, however, that the
Company's mission critical computer systems and non-IT systems, or those of
mission critical vendors upon which CTG relies, will be year 2000 compliant by
December 31, 1999. Additionally, there can be no guarantee that the CTG's
contingency plans, which the Company intends to complete by December 31, 1999,
or that of its mission critical vendors, will eliminate the effects of any year
2000 non-compliance. The failure of CTG's mission critical systems, non-IT
systems, or those of its mission critical vendors, could effect the operations
of the Company and could have a materially adverse effect on the Company's
results of operations.
Financial Condition
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Cash used by operations was $3.5 million in 1999. Net income totaled
$11.0 million, and non-cash adjustments for depreciation expense, amortization
expense, and deferred compensation expense totaled $4.1 million. Accounts
receivable increased $11.7 million as compared to December 31, 1998, as a result
of increases in revenue and slower accounts receivable turnover in 1999.
Accounts payable decreased $6.0 million, and other current liabilities increased
$2.0 million, primarily due to the timing of certain payments. The $5.1 million
decrease in accrued compensation is primarily attributable to the timing of the
U.S. bi-weekly payroll.
Net property and equipment increased $1.1 million. Additions to
property and equipment were $2.6 million, and assets acquired with the
acquisition of Elumen were $1.1 million, offset by depreciation of $2.4 million
and foreign currency translation adjustments of $0.2 million. The Company has no
material commitments for capital expenditures at June 25, 1999. Net acquired
intangibles increased $83.3 million, caused primarily by the acquisition of
Elumen.
Financing activities provided $41.0 million of cash in 1999. Short-term
borrowings increased $41.8 million due to the acquisition of Elumen. The Company
received $1.4 million for the exercise of stock options, inclusive of the
related tax benefit. The Company also received $0.6 million from employees for
stock purchased under the Employee Stock Purchase Plan. The Company's SECT
utilized approximately $1.9 million for the purchase of the Company's stock on
the open market.
The Company has approximately $102 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 two
million shares and on July 21, 1995 authorized the repurchase of another 1.4
million shares of its Common Stock. At June 25, 1999, approximately 2.6 million
shares have been repurchased under the authorizations, leaving 0.8 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.
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ITEM 6. Exhibits And Reports On Form 8-K
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Exhibit Description Page
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11. Statement re: computation of earnings per share 12
27. a.) Financial Data Schedule - June 25, 1999 13
b.) Financial Data Schedule - June 26, 1998 14
* * * * * * *
SIGNATURE
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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 and Chief Financial Officer
Date: August 3, 1999
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