<PAGE> 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 SEPTEMBER 26, 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 September 26, 1997
------------------- ---------------------
Common stock, par value
$.01 per share 20,751,092
<PAGE> 2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 101,132 $ 89,410 $ 296,172 $ 270,735
Direct costs 70,911 63,295 209,725 193,797
Selling, general and administrative expenses 22,749 21,255 65,808 63,696
---------- ---------- ---------- ----------
Operating income 7,472 4,860 20,639 13,242
Interest and other income 649 210 1,597 930
Interest and other expense (142) (47) (421) (1,062)
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 7,979 5,023 21,815 13,110
Provision for income taxes 3,262 2,009 8,944 5,244
- ---------------------------------------------------------------------------------------------------------------
Net income $ 4,717 $ 3,014 $ 12,871 $ 7,866
========== ========== ========== ==========
Net income per share $ 0.26 $ 0.17 $ 0.71 $ 0.45
========== ========== ========== ==========
Common equivalent shares outstanding 18,091 17,678 18,026 17,640
Cash dividend per share $ - $ - $ 0.05 $ 0.05
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
1997 1996
-------------- -------------
(Unaudited) (Audited)
(amounts in thousands)
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 49,237 $ 41,516
Accounts receivable, net of allowance for doubtful
accounts of $953,000 and $975,000, respectively 64,211 55,948
Prepaids and other 2,806 2,630
Deferred income taxes 1,123 1,088
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 117,377 101,182
Property and equipment, net of
accumulated depreciation and amortization 12,069 12,380
Acquired intangibles, net of accumulated amortization
of $5,996,000 and $6,236,000, respectively 3,491 4,533
Deferred income taxes 2,450 2,608
Other assets 711 578
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 136,098 $ 121,281
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 13,582 $ 9,491
Accrued compensation 23,048 17,572
Income taxes payable 4,429 5,180
Advance billings on contracts 1,105 2,484
Other current liabilities 6,689 4,924
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 48,853 39,651
Deferred compensation benefits 9,287 8,889
Other long-term liabilities 1,000 1,237
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 59,140 49,777
Shareholders' Equity:
Common stock, par value $.01 per share, 150,000,000
shares authorized; 27,018,124 and 26,934,898 shares issued 270 135
Capital in excess of par value 242,974 159,512
Retained earnings 37,947 25,914
Less: Treasury stock of 6,267,032 and 6,262,836 shares, at cost (31,773) (31,655)
Stock Employee Compensation Trust of 3,877,534
and 3,650,544 shares, at market (167,946) (78,715)
Foreign currency adjustment (2,830) (2,039)
Minimum pension liability adjustment (1,594) (1,594)
Loans to employees (54) (54)
Unearned portion of restricted stock (36) -
- -----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 76,958 71,504
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 136,098 $ 121,281
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
SEPTEMBER 26, SEPTEMBER 27,
1997 1996
------------- -------------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,871 $ 7,866
Adjustments:
Depreciation and amortization expense 3,904 4,280
Loss on disposal of property and equipment - 406
Deferred compensation expense 398 233
Changes in assets and liabilities:
Increase in accounts receivable (9,516) (959)
Increase in prepaids and other (359) (349)
Decrease in deferred income taxes 123 1,049
Increase in other assets (133) (99)
Increase in income taxes payable (748) (644)
Increase in accounts payable 4,595 1,920
Increase in accrued compensation 5,855 9,340
Decrease in advance billings on contracts (1,379) (925)
Increase in other current liabilities 1,905 2,684
Decrease in other long-term liabilities (237) -
--------- ---------
Net cash provided by operating activities 17,279 24,802
- ---------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Additions to property and equipment (2,979) (2,196)
Proceeds from disposal of property and equipment - 1,474
-------- ---------
Net cash used in investing activities (2,979) (722)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on long-term debt - (5,929)
Proceeds from Employee Stock Purchase Plan 764 490
Purchase of treasury stock (118) (3,035)
Purchase of stock by Stock Employee Compensation Trust (10,198) -
Issuance of stock from Stock Employee Compensation Trust 985 -
Dividends paid (837) (853)
Proceeds from other stock plans 2,778 1,703
-------- ---------
Net cash used in financing activities (6,626) (7,624)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments 47 68
-------- ---------
Net increase in cash and temporary cash investments 7,721 16,524
Cash and temporary cash investments at beginning of year 41,516 16,545
- ---------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 49,237 $ 33,069
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 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
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND THREE QUARTERS ENDED SEPTEMBER 26, 1997
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 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
needs of current and prospective customers for the Company's services, the
availability of qualified professional staff, and price and wage inflation.
Results of Operations
- ---------------------
CTG recorded third quarter 1997 revenue of $101.1 million, the highest
in the Company's history, and an increase of 13.1 percent when compared to third
quarter 1996 revenue of $89.4 million. CTG recorded year-to-date revenue of
$296.2 million, an increase of 9.4 percent when compared to 1996 year-to-date
revenue of $270.7 million. For the third quarter, North American revenue
increased by $10.7 million or 13.5 percent in 1997 as compared to 1996, while
revenue from European operations increased by $1.0 million, or 9.8 percent. The
increases were primarily due to bill rate increases and additional billable
personnel in 1997 as compared to 1996. The increase in Europe was partially
offset by unfavorable foreign currency exchange fluctuations during the quarter.
During the third 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 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 third quarter of 1997 as compared to the
third 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. Accordingly,
the continued implementation of CTG's Key Client strategy in the third quarter
of 1997 resulted in positive revenue growth for Key Clients, negative revenue
growth for non-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 on November 30, 1997, and the Company anticipates renewal
of the contract for two additional years. IBM continues to be the Company's
largest customer, accounting for $35.8 million or 35.4 percent of third quarter
1997 revenue as compared to $26.8 million or 30 percent of third 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
6
<PAGE> 7
due to the significant number of contracts under which the Company does business
with IBM, the diversity of the projects performed and the number of locations
and divisions involved.
Direct costs, defined as costs for billable staff, were $70.9 million
or 70.1 percent of revenue in the third quarter of 1997 as compared to $63.3
million or 70.8 percent of third quarter 1996 revenue. Direct costs for the 1997
year-to-date period were 70.8 percent of revenue, as compared to 71.6 percent
for the 1996 year-to-date period. The decrease in direct costs as a percentage
of revenue in 1997 as compared to 1996 is primarily due to a trend toward CTG
providing higher value added managed support services to key clients and an
increase in billing rates.
Selling, general and administrative (SG&A) expenses were $22.7 million
or 22.5 percent of revenue in the third quarter of 1997 as compared to $21.3
million or 23.8 percent of revenue in the third quarter of 1996. SG&A expenses
for the 1997 year-to-date period were 22.2 percent of revenue, as compared to
23.5 percent for the 1996 year-to-date period. The decrease as a percentage of
revenue from 1996 to 1997 is primarily due to an ongoing effort to reduce
overhead costs as a percentage of revenue.
Operating income was $7.5 million or 7.4 percent of revenue in the
third quarter of 1997 compared to $4.9 million or 5.4 percent of revenue in the
third quarter of 1996. Operating income was $20.6 million or 7.0 percent of
year-to-date 1997 revenue compared to $13.2 million or 4.9 percent of
year-to-date 1996 revenue. The increase is primarily due to additional revenue
in 1997 as compared to 1996 and the other factors discussed above. Operating
income from North American operations for the third quarter increased $2.5
million or 61.6 percent from 1996 to 1997. Europe recorded operating income of
$.9 and $.8 million in the third quarter of 1997 and 1996, respectively.
Interest and other income increased $0.4 million to $0.6 in the third
quarter of 1997 from $0.2 million in the third quarter of 1996. The increase was
a result of higher cash and temporary cash investment balances in 1997 as
compared to 1996.
Income before income taxes increased by $3 million from $5 million or
5.6 percent of revenue in the third quarter of 1996 to $8 million or 7.9 percent
of third quarter revenue in 1997, and by $8.7 million from $13.1 million or 4.8
percent of year-to-date 1996 revenue to $21.8 million or 7.4 percent of
year-to-date 1997 revenue. The provision for income taxes was 41 percent for the
year-to-date period in 1997 and 40 percent for the year-to-date period in 1996.
The increase in the tax rate is due to additional taxable income in 1997 which
is subject to higher tax rates, as compared to 1996.
Net income for the third quarter of 1997 was $4.7 million or $0.26 per
share, compared to $3.0 million or $0.17 per share in 1996. Net income for the
1997 year-to-date period was $12.9 million or $.71 per share, compared to $7.9
million or $0.45 per share. Earnings per share for the third quarter was
calculated using 18.1 million and 17.7 million common 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.
During 1997, the Company will adopt the provision of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Management
believes the adoption of this standard will not have a material effect on the
operations of the Company.
Financial Condition
- -------------------
Cash provided by operations was $17.3 million for the first three
quarters of 1997. Net income totaled $12.9 million, and non-cash adjustments for
depreciation and amortization expense and deferred compensation expense totaled
$4.3 million. Accounts receivable increased $9.5 million as compared to December
31, 1996, as a result of an increase in revenue. Prepaid assets increased $0.4
million due to the
7
<PAGE> 8
prepayment of items that will be expensed throughout the remainder of 1997.
Accounts payable increased $4.6 million due to the timing of certain payments.
Accrued compensation and other current liabilities increased $7.8 million due to
the timing of the Company's U.S. bi-weekly payroll. Advance billings on
contracts decreased $1.4 million due to the mix of contracts outstanding at
September 26, 1997 compared to December 31, 1996.
Net property and equipment decreased $0.3 million. Additions to
property and equipment were $3.0 million offset by depreciation of $3.3 million.
The Company has no material commitments for capital expenditures at September
26, 1997. Net acquired intangibles decreased $1.0 million, caused by
amortization of $0.6 million and $0.4 million in translation adjustments.
Financing activities used $6.6 million of cash in the first three
quarters of 1997. The Company's Stock Employee Compensation Trust purchased
457,300 shares of stock for $10.2 million, and the Company paid an annual
dividend of $837,000 to shareholders on a $0.05 per share basis. During the
first three quarters of 1997, the Company received $0.8 million from employees
for 22,000 shares of stock purchased under the Employee Stock Purchase Plan. The
Company also received $2.8 million for the exercise of stock options. At
September 26, 1997, the Company's current ratio is 2.4 to 1.
During the second quarter of 1997, CTG's Board of Directors authorized
a 2-for-1 stock split, effective June 2, 1997 to shareholders of record as of
May 19, 1997. Common equivalent shares outstanding and net income per share for
1996, and authorizations to repurchase shares, have been restated to reflect
this stock split.
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 two
million shares and on July 21, 1995 authorized the repurchase of another 1.4
million shares of its Common Stock. At September 26, 1997, approximately 1.6
million shares have been repurchased under the authorizations, leaving 1.8
million shares authorized for future purchases. During October 1997, subsequent
to the end of the third quarter, the Company repurchased an additional 300,000
shares, leaving 1.5 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
<PAGE> 9
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. Exhibits And Reports On Form 8-K
--------------------------------
Exhibit Description Page
------- ----------- ----
<S> <C> <C> <C>
11. Statement re: computation of earnings per share 10
27. Financial Data Schedule 12
</TABLE>
* * * * * * *
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: November 10, 1997
9
<PAGE> 1
EXHIBIT 11
----------
COMPUTER TASK GROUP, INCORPORATED
---------------------------------
Computation of fully diluted earnings per share under treasury stock
method set forth in Accounting Principles Board Opinion No. 15.
10
<PAGE> 2
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
UNDER TREASURY STOCK METHOD SET FORTH IN
ACCOUNTING PRINCIPLES BOARD OPINION NO. 15
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Weighted-average number of shares
outstanding during period 20,751 20,600 20,736 20,634
Add Common Stock equivalents -
Incremental shares under stock option plans 1,210 740 1,195 668
Weighted-average number of shares held
by Stock Employee Compensation Trust (3,870) (3,662) (3,905) (3,662)
--------- --------- --------- --------
Number of shares on which fully diluted
earnings per share is based 18,091 17,678 18,026 17,640
========= ========= ========= ========
Net income for the period $ 4,717 $ 3,014 $ 12,871 $ 7,866
Fully diluted earnings per share $ 0.26 $ 0.17 $ 0.71 $ 0.45
Primary earnings per share $ 0.26 $ 0.17 $ 0.72 $ 0.45
</TABLE>
All 1996 amounts above, except for "Net income for the period", have been
restated to reflect the effect of a 2-for-1 stock split, effective June 2, 1997.
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-26-1997
<CASH> 49,237,000
<SECURITIES> 0
<RECEIVABLES> 65,164,000
<ALLOWANCES> 953,000
<INVENTORY> 0
<CURRENT-ASSETS> 117,377,000
<PP&E> 40,873,000
<DEPRECIATION> 28,804,000
<TOTAL-ASSETS> 136,098,000
<CURRENT-LIABILITIES> 48,853,000
<BONDS> 0
0
0
<COMMON> 270,000
<OTHER-SE> 76,688,000
<TOTAL-LIABILITY-AND-EQUITY> 136,098,000
<SALES> 0
<TOTAL-REVENUES> 296,172,000
<CGS> 0
<TOTAL-COSTS> 209,725,000
<OTHER-EXPENSES> 65,808,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262,000
<INCOME-PRETAX> 21,815,000
<INCOME-TAX> 8,944,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,871,000
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.71
</TABLE>
