10-Q 1 l89554ae10-q.txt COMPUTER TASK GROUP, INC. 10-Q 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 JUNE 29, 2001 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 June 29, 2001 --------------------------- ------------------ Common stock, par value $.01 per share 20,870,014
2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS COMPUTER TASK GROUP, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE QUARTER ENDED FOR THE TWO QUARTERS ENDED JUNE 29, JUNE 30, JUNE 29, JUNE 30, 2001 2000 2001 2000 --------- --------- --------- --------- Revenue $ 83,756 $ 86,468 $ 166,524 $ 182,463 Direct costs 59,092 61,501 118,280 131,017 Selling, general and administrative expenses 23,225 27,169 50,027 55,046 Restructuring charge -- -- -- 5,695 --------- --------- --------- --------- Operating income (loss) 1,439 (2,202) (1,783) (9,295) Interest and other income 134 79 405 129 Interest and other expense (1,540) (753) (2,538) (1,585) --------- --------- --------- --------- Income (loss) before income taxes 33 (2,876) (3,916) (10,751) Provision (benefit) for income taxes 1,390 (2,024) (1,179) (5,128) --------- --------- --------- --------- Net loss $ (1,357) $ (852) $ (2,737) $ (5,623) ========= ========= ========= ========= Net loss per share: Basic and Diluted $ (0.08) $ (0.05) $ (0.17) $ (0.35) ========= ========= ========= ========= Weighted average shares outstanding: Basic and Diluted 16,418 16,137 16,401 16,107 Cash dividend per share $ 0.00 $ 0.05 $ 0.00 $ 0.05
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 3 COMPUTER TASK GROUP, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 29, DECEMBER 31, 2001 2000 ----------- ------------ (Unaudited) (Audited) (amounts in thousands) ASSETS ------------------------------------------------------------------------------------------------------------------------------------ Current Assets: Cash and temporary cash investments $ 5,502 $ 2,562 Accounts receivable, net of allowances and reserves 68,485 57,968 Prepaids and other 2,905 2,736 Deferred income taxes 1,988 2,799 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 78,880 66,065 Property and equipment, net of accumulated depreciation and amortization 13,631 13,784 Acquired intangibles, net of accumulated amortization of $15,865,000 and $14,130,000, respectively 76,679 78,771 Deferred income taxes 3,016 3,095 Other assets 1,302 652 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 173,508 $ 162,367 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ Current Liabilities: Accounts payable $ 10,436 $ 12,563 Accrued compensation 27,931 26,121 Income taxes payable 2,507 3,806 Advance billings on contracts 270 642 Other current liabilities 7,317 10,389 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 48,461 53,521 Long-term debt 28,920 9,700 Deferred compensation benefits 9,721 9,642 Other long-term liabilities 1,222 711 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 88,324 73,574 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 111,647 111,564 Retained earnings 72,838 75,575 Less: Treasury stock of 6,147,810 and 6,146,759 shares, at cost (31,410) (31,404) Stock Trusts of 4,427,119 and 4,507,903 shares, at cost (59,619) (59,964) Other comprehensive income: Foreign currency adjustment (7,700) (6,406) Minimum pension liability adjustment (842) (842) ------------------------------------------------------------------------------------------------------------------------------------ Accumulated other comprehensive income (8,542) (7,248) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 85,184 88,793 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 173,508 $ 162,367 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 COMPUTER TASK GROUP, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWO QUARTERS ENDED JUNE 29, JUNE 30, 2001 2000 -------- -------- (amounts in thousands) Cash flows from operating activities: Net loss $ (2,737) $ (5,623) Adjustments: Depreciation expense 2,429 2,391 Amortization expense 1,988 2,826 Deferred income taxes 890 270 Tax benefit from stock option exercises 27 54 Loss on sales or disposals of fixed assets 32 33 Deferred compensation expense (forfeitures) 79 (31) Changes in assets and liabilities, net of assets acquired and liabilities assumed: (Increase) decrease in accounts receivable (11,734) 16,310 Increase in prepaids and other (198) (846) (Increase) decrease in other assets (650) 82 Increase (decrease) in accounts payable (1,779) 525 Increase (decrease) in accrued compensation 2,146 (3,703) Decrease in income taxes payable (1,040) (6,840) Decrease in advance billings on contracts (372) (118) Increase (decrease) in other current liabilities (2,893) 1,407 Increase (decrease) in other long-term liabilities 511 (44) -------- -------- Net cash provided by (used in) operating activities (13,301) 6,693 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Additions to property and equipment (2,506) (3,138) Proceeds from sales of fixed assets 35 8 ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (2,471) (3,130) ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from (payments on) long-term revolving debt, net 19,220 (10,015) Proceeds from Employee Stock Purchase Plan 277 416 Purchase of stock for treasury (6) (21) Proceeds from other stock plans 124 811 Dividends paid -- (810) -------- -------- Net cash provided by (used in) financing activities 19,615 (9,619) ------------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and temporary cash investments (903) (345) -------- -------- Net increase (decrease) in cash and temporary cash investments 2,940 (6,401) Cash and temporary cash investments at beginning of year 2,562 10,684 ------------------------------------------------------------------------------------------------------------------------------------ Cash and temporary cash investments at end of quarter $ 5,502 $ 4,283 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 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 financial position, results of operations and cash flows for the periods presented. 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 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 condensed 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 29, 2001, accumulated other comprehensive income totaled $(8,542,000), including an adjustment of $(332,000) related to foreign currency translation made in the second quarter of 2001. 4. Debt As of April 2, 2001, the date of the filing of the Company's Form 10-K for the year ended December 31, 2000 with the Securities and Exchange Commission, the Company had received a commitment from its bank group for a new credit agreement, due in 2003, having an initial aggregate borrowing limit of $50 million, and totaling $55 million at June 29, 2001. The new agreement has interest rates similar to the previous agreement, and provides certain of the Company's assets as security for outstanding borrowings. The new agreement also contains provisions that will increase the aggregate borrowing limit to $65 million during 2001 upon the Company's achievement of certain financial conditions. On May 11, 2001, the Company and its bank group entered into the new agreement. 5. Accounting Standards Pronouncements On January 1, 2001, the Company adopted the provisions of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and those of FAS No. 137 and No. 138, which deferred the effective date and amended FAS No. 133, respectively. These standards provide accounting and reporting guidelines for derivative instruments, including those embedded in other contracts, and for hedging activities. The Company evaluated each of these standards and compared the guidance provided to its current accounting practices, and determined the adoption of the standards had no effect on the consolidated financial condition and required minimal disclosure by the Company. In July 2001, the FASB issued FAS No. 141, "Business Combinations", and FAS No. 142, "Goodwill and Other Intangible Assets". These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. FAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations with limited exceptions for combinations initiated prior to July 1, 2001. In addition, it clarifies the criteria for recognition of intangible assets apart from goodwill. This statement is effective for business combinations completed after June 30, 2001. FAS No. 142 discontinues the practice of amortizing goodwill and indefinite-lived intangible assets and initiates a review, at least annually, for impairment. Intangible assets with a determinable useful life will continue to be amortized over their useful lives. FAS No. 142 applies to goodwill and intangible assets acquired after June 30, 2001. Goodwill and intangible assets existing prior to July 1, 2001 will be affected when the Company adopts the statement. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its financial position and results of operations. 5 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE QUARTER AND TWO QUARTERS ENDED JUNE 29, 2001 Forward-Looking Statements 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 To better understand the financial trends of the Company, the following tables set forth data as contained on the consolidated statements of operations, with the percentage information calculated as a percentage of consolidated revenues.
FOR THE QUARTER ENDED: JUNE 29, JUNE 30, 2001 2000 ---- ---- Revenue 100.0% $ 83,756 100.0% $ 86,468 Direct costs 70.6% 59,092 71.1% 61,501 Selling, general, and administrative expenses 27.7% 23,225 31.4% 27,169 ------------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) 1.7% 1,439 (2.5)% (2,202) Interest and other expense, net (1.7)% (1,406) (0.8)% (674) ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 0.0% 33 (3.3)% (2,876) Provision (benefit) for income taxes 1.7% 1,390 (2.3)% (2,024) ------------------------------------------------------------------------------------------------------------------------------------ Net loss (1.7)% $ (1,357) (1.0)% $ (852) ======== ======== ======== ========
6 7
FOR THE TWO QUARTERS ENDED: JUNE 29, JUNE 30, 2001 2000 ---- ---- Revenue 100.0% $ 166,524 100.0% $ 182,463 Direct costs 71.0% 118,280 71.8% 131,017 Selling, general, and administrative expenses 30.1% 50,027 30.2% 55,046 Restructuring charge 0.0% -- 3.1% 5,695 ------------------------------------------------------------------------------------------------------------------------------------ Operating loss (1.1)% (1,783) (5.1)% (9,295) Interest and other expense, net (1.3)% (2,133) (0.8)% (1,456) ------------------------------------------------------------------------------------------------------------------------------------ Loss before income taxes (2.4)% (3,916) (5.9)% (10,751) Benefit for income taxes (0.7)% (1,179) (2.8)% (5,128) ------------------------------------------------------------------------------------------------------------------------------------ Net loss (1.7)% $ (2,737) (3.1)% $ (5,623) ========= ========= ========= =========
CTG's second quarter 2001 revenue was $83.8 million, a decrease of 3.1 percent when compared to second quarter 2000 revenue of $86.5 million, while year-to-date 2001 revenues were $166.5 million, a decrease of 8.8 percent when compared to year-to-date 2000 revenues of $182.5 million. The year over year revenue decrease in both the second quarter and the year-to-date period is a result of the economic slowdown in the past year, which has negatively affected the purchase of IT services by companies worldwide. Second quarter 2001 revenue was 1.2 percent higher, however, than first quarter 2001 revenue of $82.8 million. This sequential revenue increase is a reflection of improvements the Company has made in its operations, including improving its fulfillment rate on client requirements, which have largely offset the effects of the economic slowdown. The Company anticipates the slowdown to continue through the 2001 third quarter, and may continue through all of 2001. North American revenue decreased by $7.2 million or 4.9 percent in the year-to-date 2001 period as compared to 2000, while revenue from European operations decreased by $8.8 million, or 25.5 percent in the same time period. The European revenue decline is primarily due to a helpdesk contract that ended in the second quarter of 2000. The 2000 to 2001 quarter-to-quarter and year-to-date revenue decline was impacted 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 2000 to 2001, total consolidated revenues would have been $0.8 million higher, resulting in a quarter-to-quarter consolidated revenue decline of 2.2 percent. If there had been no change in these foreign currency exchange rates for the year-to-date 2001 period as compared to the 2000 year-to-date period, total consolidated revenues would have been $1.8 million higher, resulting in a year-to-date revenue decline of 7.8 percent. This additional $1.8 million increase in revenue would have decreased the European revenue decline in 2001 from 2000 to 20.3 percent. In November 2000, the Company signed a new contract with IBM for three years as one of IBM's national technical service providers for the United States. In the second quarter of 2001, IBM continued to be the Company's largest customer, accounting for $22.1 million or 26.4 percent of total revenue as compared to $24.1 million or 27.9 percent of second quarter 2000 revenue. For the 2001 year-to-date period, IBM revenues have totaled $45.7 million or 27.4 percent of revenue, as compared to $51.1 million or 28.0 percent of revenue in the year-to-date 2000 period. Although revenues from IBM have been constrained in 2001, CTG expects to continue to derive a significant portion of its revenue from IBM throughout the remainder of 2001 and in future years. While the decline in revenue from IBM has had an 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 existence of the national contract, the diversity of the projects performed for IBM, and the number of locations and divisions involved. 7 8 Direct costs, defined as costs for billable staff, were 70.6 percent of revenue in the second quarter of 2001 as compared to 71.1 percent of second quarter 2000 revenue, and 71.0 percent of the 2001 year-to-date revenue as compared to 71.8 percent of the 2000 year-to-date revenue. The decrease in direct costs as a percentage of revenue in 2001 as compared to 2000 is primarily due an increase in the utilization of its billable employees. Selling, general and administrative expenses were 27.7 percent of revenue in the second quarter of 2001 as compared to 31.4 percent of second quarter 2000 revenue, and 30.1 percent of the 2001 year-to-date revenue as compared to 30.2 percent of the 2000 year-to-date revenue. The percentage decline in selling, general and administrative expense from the second quarter of 2000 to the second quarter of 2001 is due to the Company implementing expense reductions during the quarter to better align CTG's cost structure with current revenue levels. While selling, general and administrative expenses decreased 9.1 percent year over year, there was only a slight decrease as a percentage of revenue from 2000 to 2001 due to the revenue decline discussed above. In the first quarter of 2000, the Company recorded a restructuring charge of $5.7 million, which consisted primarily of severance and related costs of $4.2 million for approximately 400 employees, costs associated with the consolidation of facilities of $0.7 million, and $0.8 million for other exit costs related to the restructuring plan. On an after-tax basis, the charge was $3.8 million, or $0.23 per diluted share. At June 30, 2000, approximately $3.1 million of the total charge of $5.7 million was included in other current liabilities on the consolidated balance sheet. The Company completed its restructuring plan as of March 30, 2001. Operating income (loss) was 1.7 percent of revenue in the second quarter of 2001 as compared to (2.5) percent of second quarter 2000 revenue, and (1.1) percent of 2001 year-to-date revenue as compared to (5.1) percent of 2000 year-to-date revenue. Without the restructuring charge in 2000, the operating loss would have been (2.0) percent for the year-to-date period. The second quarter year over year increase from an operating loss in 2000 to operating income in 2001 is primarily due to the factors discussed above in selling, general and administrative expenses. Operating income (loss) from North American operations was $1.9 million in the 2001 second quarter, and $(0.7) million in the 2001 year-to-date period, while European operations recorded an operating loss of $(0.5) million in the 2001 second quarter, and $(1.1) million in the 2001 year-to-date period. Interest and other expense, net was 1.3 percent of revenue in 2001 and 0.8 percent in 2000. The increase as a percentage of revenue from 2000 to 2001 is primarily due to an increase in interest expense related to outstanding long-term debt and the revenue decline discussed above. Income (loss) before income taxes was 0 percent of revenue in the second quarter of 2001 as compared to (3.3) percent of revenue in 2000, and (2.4) percent of 2001 year-to-date revenue as compared to (5.9) percent of 2000 year-to-date revenue. Without the restructuring charge in 2000, the loss before income taxes would have been 2.8 percent. The benefit for income taxes was 30.1 percent in 2001 and 47.7 percent in 2000. The benefit rate in each quarter is calculated based upon the estimated tax (benefit) rate for the entire year, and is adjusted each quarter as needed. The net loss for the 2001 year-to-date period was 1.7 percent of revenue or $(0.17) per diluted share, compared to a loss of 3.1 percent of revenue or $(0.35) per diluted share in 2000. Without the restructuring charge, the net loss in 2000 would have been $(0.12) per diluted share. Diluted earnings per share were calculated using 16.4 million and 16.1 million equivalent shares outstanding in 2001 and 2000, respectively. 8 9 Financial Condition Cash used in operating activities was $13.3 million for the year-to-date 2001 period. The net loss totaled $2.7 million, and non-cash adjustments consisting primarily of depreciation and amortization expense and deferred taxes totaled $5.4 million. Accounts receivable increased by $11.7 million as compared to December 31, 2000, as a result of slower accounts receivable turnover in the second quarter of 2001 as compared to the fourth quarter of 2000. Accounts payable and other current liabilities decreased $1.8 and $2.9 million, respectively, primarily due to the timing of certain payments. Accrued compensation increased $2.1 due to the timing of the US biweekly payroll, offset by fewer total employees. Income taxes payable decreased $1.0 million due to the taxable loss incurred in 2001. Net property and equipment decreased $0.2 million. Additions to property and equipment were $2.5 million, offset by depreciation expense of $2.4 million and $0.3 million of translation adjustments. The Company has no material commitments for capital expenditures at June 29, 2001. Financing activities provided $19.6 million of cash in 2001. Net proceeds from long-term revolving debt totaled $19.2 million. The Company received $0.3 million from employees for stock purchased under the Employee Stock Purchase Plan, and $0.1 million from other stock plans. The Company is authorized to repurchase a total of 3.4 million shares of its common stock for treasury and the Company's stock trusts. At June 29, 2001, approximately 3.2 million shares have been repurchased under the authorizations, leaving 0.2 million shares authorized for future purchases. No share purchases have been made in 2001. The Company believes existing internally available funds, cash generated by operations, and available borrowings will be sufficient to meet foreseeable working capital, stock repurchase, and capital expenditure requirements and to allow for future internal growth and expansion. 9 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is nominally exposed to market risk in the normal course of its business operations. The Company has $28.9 million of borrowings at June 29, 2001, primarily under a revolving credit agreement, which exposes the Company to risk of earnings or cash flow loss due to changes in market interest rates. Additionally, as the Company sells its services in North America and in Europe, financial results could be affected by weak economic conditions in those markets. 10 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description Page 10. Credit Agreement by and among Computer Task Group, Incorporated and The Chase Manhattan Bank 11. Statement re: computation of earnings per share Reports on Form 8-K
Date Description April 12, 2001 Press release entitled "CTG Announces 2001 First Quarter Conference Call Information" June 25, 2001 Press release entitled "James R. Boldt Named President of CTG, Boldt Also Appointed to CTG Board of Directors" * * * * * * * 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: President, Chief Executive Officer and Chief Financial Officer Date: August 13, 2001 11