<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 JUNE 26, 1998
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 26, 1998
------------------- ------------------
Common stock, par value
$.01 per share 20,750,003
<PAGE> 2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED TWO QUARTERS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
--------- --------- -------- --------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 117,646 $ 100,105 $ 227,329 $ 195,040
Direct costs 80,472 70,579 156,546 138,814
Selling, general and administrative expenses 27,359 22,183 52,579 43,059
--------- --------- --------- ---------
Operating income 9,815 7,343 18,204 13,167
Interest and other income 244 469 500 948
Interest and other expense (171) (92) (211) (279)
--------- --------- --------- ---------
Income before income taxes 9,888 7,720 18,493 13,836
Provision for income taxes 4,054 3,235 7,582 5,682
--------- --------- --------- ---------
Net income $ 5,834 $ 4,485 $ 10,911 $ 8,154
========= ========= ========= =========
Net income per share:
Basic $ 0.36 $ 0.27 $ 0.68 $ 0.48
========= ========= ========= =========
Diluted $ 0.34 $ 0.26 $ 0.64 $ 0.46
========= ========= ========= =========
Weighted average shares outstanding:
Basic 16,196 16,732 16,151 16,867
Diluted 16,939 17,582 16,968 17,674
Cash dividend per share $ 0.05 $ 0.05 $ 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>
JUNE 26, DECEMBER 31,
1998 1997
-------------- ------------
(Unaudited) (Audited)
(amounts in thousands)
ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 18,325 $ 25,033
Accounts receivable, net of allowance for doubtful
accounts of $951,000 81,584 60,176
Prepaids and other 3,217 2,420
Deferred income taxes 1,108 1,244
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 104,234 88,873
Property and equipment, net of
accumulated depreciation and amortization 13,216 12,445
Acquired intangibles, net of accumulated amortization
of $6,431,000 and $6,124,000, respectively 2,947 3,280
Deferred income taxes 2,725 2,546
Other assets 1,127 597
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 124,249 $ 107,741
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 12,922 $ 9,207
Accrued compensation 21,644 21,641
Income taxes payable 5,394 4,620
Advance billings on contracts 533 1,158
Other current liabilities 5,467 5,145
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 45,960 41,771
Deferred compensation benefits 10,003 9,752
Other long-term liabilities 739 892
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 56,702 52,415
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 190,311 216,028
Retained earnings 53,038 42,939
Less: Treasury stock of 6,267,821 and 6,267,289 shares, at cost (31,795) (31,773)
Stock Employee Compensation Trust of 4,549,495
and 4,693,948 shares, at fair value (139,044) (166,929)
Foreign currency adjustment (3,182) (3,206)
Minimum pension liability adjustment (1,915) (1,915)
Loans to related parties (54) (54)
Unearned portion of restricted stock to related parties (82) (34)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 67,547 55,326
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 124,249 $ 107,741
========== ===========
</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>
TWO QUARTERS ENDED
JUNE 26, JUNE 27,
1998 1997
--------- ----------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,911 $ 8,154
Adjustments:
Depreciation and amortization expense 2,378 2,526
Deferred compensation expense 251 322
Changes in assets and liabilities:
Increase in accounts receivable (21,437) (6,114)
Increase in prepaids and other (802) (643)
(Increase) decrease in deferred income taxes (43) 81
Increase in other assets (530) (184)
Increase in accounts payable 3,805 4,090
Decrease in accrued compensation (18) (824)
Increase in income taxes payable 771 419
Decrease in advance billings on contracts (625) (1,169)
Increase in other current liabilities 350 1,287
Decrease in other long-term liabilities (152) (158)
--------- ----------
Net cash provided by (used in) operating activities (5,141) 7,787
- -------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities -
additions to property and equipment (2,836) (1,893)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from Employee Stock Purchase Plan 766 468
Purchase of stock for treasury (22) (118)
Purchase of stock by Stock Employee Compensation Trust (1,617) (7,114)
Proceeds from other stock plans, inclusive of related tax benefit 2,971 1,800
Dividends paid (812) (837)
--------- ----------
Net cash provided by (used in) financing activities 1,286 (5,801)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments (17) (82)
--------- ----------
Net increase (decrease) in cash and temporary cash investments (6,708) 11
Cash and temporary cash investments at beginning of year 25,033 41,516
- -------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 18,325 $ 41,527
======== =========
</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.
3. Comprehensive Income
During the first quarter of 1998, the Company adopted the Provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," as they apply to interim reporting periods. For the first two quarters
of 1998, comprehensive income totaled $10,935,000, including $24,000 related to
foreign currency adjustments.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER AND TWO QUARTERS ENDED JUNE 26, 1998
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 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 second quarter 1998 revenue of $117.6 million, the highest
in the Company's history, and an increase of 17.5 percent when compared to
second quarter 1997 revenue of $100.1 million. CTG recorded year-to-date 1998
revenue of $227.3 million, an increase of 16.6 percent when compared to
year-to-date 1997 revenue of $195 million. In the second quarter of 1998, as
compared to 1997, North American revenue increased by $11.8 million, or 13.2
percent, while revenue from European operations increased by $5.7 million, or
51.9 percent. The year-to-date 1998 consolidated revenue increase as compared to
year-to-date 1997 is mainly due to the Company providing higher value added
services to its customers, billing rate adjustments and additional billable
personnel.
The 1997 to 1998 second quarter-to-quarter revenue growth rate was
negatively impacted by the strength of the U.S. dollar. If there had been no
change in the foreign currency exchange rates from the second quarter of 1997 to
the second quarter of 1998, total consolidated revenues would have increased by
an additional $0.7 million, resulting in a quarter-to-quarter consolidated
revenue growth rate of 18.2 percent. This $0.7 million of additional revenue in
Europe would have increased the European revenue growth rate to 58.3 percent.
6
<PAGE> 7
In December 1997, the Company renewed a contract with IBM for three
additional years as one of IBM's national technical service providers for the
United States. In the second quarter of 1998, IBM continued to be the Company's
largest customer accounting for $38.9 million or 33.1 percent of total revenue
as compared to $36 million or 35.9 percent of the second quarter 1997 revenue.
The Company expects to continue to derive a significant portion of its revenue
from IBM throughout 1998 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.
Direct costs, defined as costs for billable staff, were $80.5 million
or 68.5 percent of revenue in the second quarter of 1998 as compared to $70.6
million or 70.5 percent of second quarter 1997 revenue. Direct costs were 68.9
percent of year-to-date 1998 revenue as compared to 71.2 percent of year-to-date
1997 revenue. The decrease in direct costs as a percentage of revenue in 1998 as
compared to 1997 is also primarily due to a trend toward higher value added
services and billing rate adjustments.
Selling, general and administrative (SG&A) expenses were $27.4 million
or 23.3 percent of revenue in the second quarter of 1998 as compared to $22.2
million or 22.2 percent of revenue in the second quarter of 1997. SG&A expenses
were 23.1 percent of year-to-date 1998 revenue, as compared to 22.1 percent of
year-to-date 1997 revenue. The increase as a percentage of revenue from 1997 to
1998 is primarily due to an investment in 1998 in sales and marketing,
recruiting, and training programs.
Operating income was $9.8 million or 8.3 percent of revenue in the
second quarter of 1998 as compared to $7.3 million or 7.3 percent of revenue in
the second quarter of 1997. Operating income was 8 percent of year-to-date 1998
revenue, as compared to 6.8 percent of year-to-date 1997 revenue. The increase
is primarily due to the factors discussed above. Operating income from North
American operations for the second quarter increased $2.3 million or 38.1
percent from 1997 to 1998. European operations recorded operating income of $1.5
and $1.3 million in the second quarter of 1998 and 1997, respectively.
Interest and other income decreased $0.4 million to $0.5 in 1998 from
$0.9 million in 1997. The decrease was a result of the Company utilizing a large
portion of its available cash and temporary cash investment balances in the
fourth quarter of 1997 to purchase the Company's stock through the Stock
Employee Compensation Trust (SECT).
Income before income taxes increased by $2.2 million from $7.7 million
or 7.7 percent of revenue in the second quarter of 1997 to $9.9 million or 8.4
percent of second quarter revenue in 1998, and by $4.7 million from $13.8
million or 7.1 percent of year-to-date 1997 revenue to $18.5 million or 8.1
percent of year-to-date 1998 revenue. The provision for income taxes was 41
percent in both 1998 and 1997.
Net income for the second quarter of 1998 was $5.8 million or $0.34 per
diluted share, compared to $4.5 million or $0.26 per diluted share in 1997. Net
income for the year-to-date 1998 period was $10.9 million or $0.64 per diluted
share, compared to $8.2 million or $0.46 per diluted share. Diluted earnings per
share for the second quarter was calculated using 16.9 million and 17.6 million
weighted average shares outstanding in 1998 and 1997, respectively. The decrease
in weighted average shares outstanding is primarily due to the purchase of the
Company's stock in 1997 through the SECT, as mentioned above, offset by the
dilutive effect of outstanding stock options on the earnings per share
calculation.
7
<PAGE> 8
Financial Condition
- -------------------
Cash used by operations was $5.1 million for the first two quarters of
1998. Net income totaled $10.9 million, and non-cash adjustments for
depreciation and amortization expense and deferred compensation expense totaled
$2.6 million. As compared to December 31, 1997, accounts receivable increased
$21.4 million as a result of an increase in revenue and slower accounts
receivable turnover. Prepaid assets increased $0.8 million due to the prepayment
of items that will be expensed throughout the remainder of 1998 and 1999.
Accounts payable increased $3.8 million due to the timing of certain payments.
Income taxes payable increased $0.8 million due to an increase in taxable
income. Advance billings on contracts decreased $0.6 million due to the mix of
contracts outstanding at June 26, 1998, as compared to December 31, 1997.
Net property and equipment increased $0.8 million. Additions to
property and equipment were $2.8 million offset by depreciation of $2.1 million
and $0.1 million in translation adjustments. The Company has no material
commitments for capital expenditures at June 26, 1998. Net acquired intangibles
decreased $0.3 million, caused by amortization of $0.3 million.
Financing activities provided $1.3 million of cash in the first two
quarters of 1998. The Company received $3.0 million for the exercise of stock
options, inclusive of the related tax benefit. The Company also received $0.8
million from employees for 21,000 shares of stock purchased under the Employee
Stock Purchase Plan. The Company's Stock Employee Compensation Trust purchased
50,000 shares of stock for $1.6 million, and the Company paid an annual dividend
of $812,000 to shareholders on a $0.05 per share basis. At June 26, 1998, the
Company's current ratio is 2.3 to 1.
The Company has approximately $53 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 26, 1998, approximately 2.5 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
<PAGE> 9
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits And Reports On Form 8-K
--------------------------------
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
11. Statement re: computation of earnings per share 10
27. a.) Financial Data Schedule - June 26, 1998 12
b.) Financial Data Schedule - June 27, 1997 - RESTATED 13
</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: August 10, 1998
9
<PAGE> 1
EXHIBIT 11
----------
COMPUTER TASK GROUP, INCORPORATED
---------------------------------
Computation of diluted earnings per share under treasury stock method
set forth in Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
10
<PAGE> 2
COMPUTATION OF DILUTED EARNINGS PER SHARE
UNDER TREASURY STOCK METHOD SET FORTH IN
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,
"EARNINGS PER SHARE"
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED TWO QUARTERS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted-average number of shares
outstanding during period 16,196 16,742 16,151 16,805
Add Common Stock equivalents -
incremental shares under stock option plans 743 840 817 869
------ ------ ------ ------
Number of shares on which diluted
earnings per share is based 16,939 17,582 16,968 17,674
====== ====== ====== ======
Net income for the period $5,834 $4,485 $10,911 $8,154
Diluted earnings per share $ 0.34 $ 0.26 $ 0.64 $ 0.46
Basic earnings per share $ 0.36 $ 0.27 $ 0.68 $ 0.48
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-26-1998
<CASH> 18,325,000
<SECURITIES> 0
<RECEIVABLES> 82,535,000
<ALLOWANCES> 951,000
<INVENTORY> 0
<CURRENT-ASSETS> 104,234,000
<PP&E> 39,598,000
<DEPRECIATION> 26,382,000
<TOTAL-ASSETS> 124,249,000
<CURRENT-LIABILITIES> 45,960,000
<BONDS> 0
0
0
<COMMON> 270,000
<OTHER-SE> 67,277,000
<TOTAL-LIABILITY-AND-EQUITY> 124,249,000
<SALES> 0
<TOTAL-REVENUES> 227,329,000
<CGS> 0
<TOTAL-COSTS> 156,546,000
<OTHER-EXPENSES> 52,579,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> 18,493,000
<INCOME-TAX> 7,582,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,911,000
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-27-1997
<CASH> 41,527,000
<SECURITIES> 0
<RECEIVABLES> 61,934,000
<ALLOWANCES> 955,000
<INVENTORY> 0
<CURRENT-ASSETS> 106,741,000
<PP&E> 39,883,000
<DEPRECIATION> 27,852,000
<TOTAL-ASSETS> 125,907,000
<CURRENT-LIABILITIES> 42,507,000
<BONDS> 0
0
0
<COMMON> 270,000
<OTHER-SE> 72,840,000
<TOTAL-LIABILITY-AND-EQUITY> 125,907,000
<SALES> 0
<TOTAL-REVENUES> 195,040,000
<CGS> 0
<TOTAL-COSTS> 138,814,000
<OTHER-EXPENSES> 43,059,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,000
<INCOME-PRETAX> 13,836,000
<INCOME-TAX> 5,682,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,154,000
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.46
</TABLE>
