<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 MARCH 27, 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 March 27, 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
MARCH 27, MARCH 28,
1998 1997
--------- ---------
(amounts in thousands,
except per share data)
<S> <C> <C>
Revenue $ 109,683 $ 94,935
Direct costs 76,074 68,235
Selling, general and administrative expenses 25,220 20,876
--------- ---------
Operating income 8,389 5,824
Interest and other income 256 479
Interest and other expense (40) (187)
--------- ---------
Income before income taxes 8,605 6,116
Provision for income taxes 3,528 2,447
--------- ---------
Net income $ 5,077 $ 3,669
========= =========
Net income per share:
Basic $ 0.32 $ 0.22
========= =========
Diluted $ 0.30 $ 0.21
========= =========
Weighted average shares outstanding:
Basic 16,104 17,003
Diluted 16,994 17,766
</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>
MARCH 27, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
(amounts in thousands)
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 17,412 $ 25,033
Accounts receivable, net of allowance for doubtful
accounts of $950,000 and $951,000, respectively 82,217 60,176
Prepaids and other 3,565 2,420
Deferred income taxes 1,177 1,244
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 104,371 88,873
Property and equipment, net of
accumulated depreciation and amortization 13,127 12,445
Acquired intangibles, net of accumulated amortization
of $6,268,000 and $6,124,000, respectively 3,086 3,280
Deferred income taxes 2,655 2,546
Other assets 832 597
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 124,071 $ 107,741
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 11,718 $ 9,207
Accrued compensation 24,766 21,641
Income taxes payable 6,656 4,620
Advance billings on contracts 688 1,158
Other current liabilities 6,590 5,145
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 50,418 41,771
Deferred compensation benefits 9,859 9,752
Other long-term liabilities 816 892
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 61,093 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 244,985 216,028
Retained earnings 48,016 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 4,566,227
and 4,693,948 shares, at fair value (193,208) (166,929)
Foreign currency adjustment (3,232) (3,206)
Minimum pension liability adjustment (1,915) (1,915)
Loans to related parties (54) (54)
Unearned portion of restricted stock to related parties (89) (34)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 62,978 55,326
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 124,071 $ 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>
QUARTER ENDED
MARCH 27, MARCH 28,
1998 1997
----------- -----------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,077 $ 3,669
Adjustments:
Depreciation and amortization expense 1,147 1,316
Deferred compensation expense 107 167
Changes in assets and liabilities:
Increase in accounts receivable (22,179) (14,485)
Increase in prepaids and other (1,154) (621)
(Increase) decrease in other assets (235) 246
(Increase) decrease in deferred income taxes (42) 39
Increase in income taxes payable 2,032 2,114
Increase in accounts payable 2,631 3,504
Increase in accrued compensation 3,157 3,006
Decrease in advance billings on contracts (470) (662)
Increase in other current liabilities 1,445 919
Decrease in other long-term liabilities (75) -
----------- -----------
Net cash used in operating activities (8,559) (788)
- -------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities -
additions to property and equipment (1,678) (1,097)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from Employee Stock Purchase Plan 355 200
Purchase of stock for treasury (22) (12)
Purchase of stock by Stock Employee Compensation Trust - (6,553)
Proceeds from other stock plans, inclusive of related tax benefit 2,268 194
---------- -----------
Net cash provided by (used in) financing activities 2,601 (6,171)
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments 15 (74)
---------- ------------
Net decrease in cash and temporary cash investments (7,621) (8,130)
Cash and temporary cash investments at beginning of year 25,033 41,516
- -------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 17,412 $ 33,386
========== ===========
</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
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
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 quarter of
1998, comprehensive income totaled $5,051,000, including ($26,000) 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 ENDED MARCH 27, 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 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
- ---------------------
CTG recorded first quarter 1998 revenue of $109.7 million, an increase
of 15.5 percent when compared to first quarter 1997 revenue of $94.9 million.
North American revenue increased by $10.9 million or 13 percent in 1998 as
compared to 1997, while revenue from European operations increased by $3.9
million, or 35.5 percent. The consolidated revenue increase is mainly due to the
Company providing higher value added services to its customers, which increased
billing rates, and additional billable personnel in 1998 as compared to 1997.
The 1997 to 1998 quarter-to-quarter revenue growth rate was negatively
impacted by two main items. First, the strength of the U.S. dollar reduced
revenue from our European operations. If there had been no change in the foreign
currency exchange rates from the first quarter of 1997 to the first quarter of
1998, total consolidated revenues would have increased by an additional $1.2
million, resulting in a quarter-to-quarter consolidated revenue growth rate of
16.9 percent. This $1.2 million of additional revenue in Europe would have
increased the European revenue growth rate to 46.4 percent.
Second, due to the Company's month-end closing cycle, there was one
additional billing day in the first quarter of 1997 as compared to the first
quarter of 1998. Each billing day represents $1.8 million of revenue. If this
amount and the foreign currency exchange amount of $1.2 million were added to
revenue for the first quarter of 1998, the total 1997 to 1998
quarter-to-quarter revenue increase would have been $17.8 million, or 18.8
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 first quarter of 1998, IBM continued to be the Company's
largest customer, accounting for $37.0 million or 33.7 percent of total revenue
as compared to $33.9 million or 35.7 percent of first 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 $76.1 million
or 69.4 percent of revenue in the first quarter of 1998 as compared to $68.2
million or 71.9 percent of first quarter 1997 revenue. The decrease in direct
costs as a percentage of revenue in 1998 as compared to 1997 is also primarily
due to the trend toward higher value added services and billing rate
adjustments.
Selling, general and administrative expenses were $25.2 million or 23
percent of revenue in 1998 as compared to $20.9 million or 22 percent of revenue
in 1997. The increase from 1997 to 1998 is primarily due to an investment in
1998 in sales and marketing, recruiting, and training programs.
Operating income was $8.4 million or 7.6 percent of revenue in 1998
compared to $5.8 million or 6.1 percent of revenue in 1997. The increase is
primarily due to the factors discussed above. Operating income from North
American operations increased $2.4 million or 50 percent from 1997 to 1998.
European operations recorded operating income of $1.2 million in 1998 as
compared to $1.0 million in 1997. The European improvement in profitability is
primarily due to the 35.5 percent increase in revenue discussed above and an
increase in higher value-added services performed in 1998.
Interest and other income decreased $0.2 million to $0.3 in 1998 from
$0.5 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 $2.5 million from $6.1 million
or 6.4 percent of revenue in 1997 to $8.6 million or 7.8 percent of revenue in
1998. The provision for income taxes was 41 percent in 1998 and 40 percent in
1997.
Net income for the first quarter of 1998 was $5.1 million or $0.30 per
diluted share, compared to $3.7 million or $0.21 per diluted share in 1997.
Earnings per share was calculated using 17 million and 17.8 million equivalent
shares outstanding in 1998 and 1997, respectively. The decrease in equivalent
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.
Financial Condition
- -------------------
Cash used by operations was $8.6 million for the quarter. Net income
totaled $5.1 million, and non-cash adjustments for depreciation and amortization
expense and deferred compensation expense totaled $1.3 million. Accounts
receivable increased $22.2 million as compared to December 31, 1997, as a result
of increases in revenue and slower accounts receivable turnover in the first
quarter of 1998. Prepaid assets increased $1.2 million due to the prepayment of
items that will be expensed throughout the remainder of 1998 and 1999. The $2
million increase in taxes payable is primarily attributable to an increase in
net income and the timing of required tax payments. Accounts payable increased
$2.6 million due to the timing of certain payments. Accrued compensation and
other current liabilities increased $4.6 million primarily due to the timing
of the company's U.S. biweekly payroll.
7
<PAGE> 8
Net property and equipment increased $0.7 million. Additions to
property and equipment were $1.7 million offset by depreciation of $1 million.
The Company has no material commitments for capital expenditures at March 27,
1998. Net acquired intangibles decreased $0.2 million, caused by amortization of
$0.1 million and $0.1 million in translation adjustments.
Financing activities provided $2.6 million of cash in the first quarter
of 1998. The Company received $2.3 million for the exercise of stock options,
inclusive of the related tax benefit. The Company also received $0.4 million
from employees for 9,000 shares of stock purchased under the Employee Stock
Purchase Plan. At March 27, 1998, the Company's current ratio is 2.1 to 1.
The Company has approximately $53.5 million in aggregate lines of
credit, which are renewable annually at various times throughout the year.
On October 26, 1994, the Company authorized the repurchase of two
million shares and on July 21, 1995 authorized the repurchase of another 1.4
million shares of its Common Stock. At March 27, 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 4. Submission of Matters To A Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders was held on April 29, 1998
at the Company's Headquarters, 800 Delaware Avenue, Buffalo,
New York at 10:00 a.m.
The Company submitted for shareholder approval the election of
Class II directors.
Election of Directors
- Three Class II directors (George B. Berizel, Richard L.
Crandall, and Barbara Z. Shattuck) were elected to hold
office for two years until the 2000 annual meeting of
shareholders and until their successors are elected and
qualified. The results of the voting are as follows:
<TABLE>
<CAPTION>
Total Vote Total Vote
For Against
---------- -------
<S> <C> <C>
George B. Beitzel 16,118,421 158,803
Richard L. Crandall 16,133,610 143,614
Barbara Z. Shattuck 16,136,610 140,614
</TABLE>
- The Class I directors of the Company, whose terms of
office extend until the 1999 annual meeting of
shareholders and until their successors are elected and
qualified, are Gale S. Fitzgerald, Randolph A. Marks,
and R. Keith Elliott.
9
<PAGE> 10
Item 6. Exhibits And Reports On Form 8-K
--------------------------------
Exhibit Description Page
------- ----------- ----
11. Statement re: computation of earnings per share 11
27. a.) Financial Data Schedule - March 27, 1998 13
b.) Financial Data Schedule - March 28, 1997 - RESTATED 14
* * * * * * *
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTER TASK GROUP, INCORPORATED
By: /s/ James R. Boldt
--------------------
James R. Boldt
Principal Accounting and
Financial Officer
Title: Vice President - Finance
Date: May 8, 1998
10
<PAGE> 1
EXHIBIT 11
----------
COMPUTER TASK GROUP, INCORPORATED
---------------------------------
Computation of diluted earnings per share under the treasury stock
method set forth in Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
11
<PAGE> 2
COMPUTATION OF DILUTED EARNINGS PER SHARE
UNDER THE 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
MARCH 27, MARCH 28,
1998 1997*
------- -------
<S> <C> <C>
Weighted-average number of shares outstanding during period 16,104 17,003
Common Stock equivalents -
Incremental shares under stock options plans 890 763
------- -------
Number of shares on which diluted earnings per share is based 16,994 17,766
======= =======
Net income for the period $ 5,077 $ 3,669
======= =======
Diluted earnings per share $ 0.30 $ 0.21
======= =======
Basic earnings per share $ 0.32 $ 0.22
======= =======
<FN>
* Restated to reflect a 2-for-1 stock split effective June 2, 1997.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-27-1998
<CASH> 17,412,000
<SECURITIES> 0
<RECEIVABLES> 83,167,000
<ALLOWANCES> 950,000
<INVENTORY> 0
<CURRENT-ASSETS> 104,371,000
<PP&E> 39,198,000
<DEPRECIATION> 26,071,000
<TOTAL-ASSETS> 124,071,000
<CURRENT-LIABILITIES> 50,418,000
<BONDS> 0
0
0
<COMMON> 270,000
<OTHER-SE> 62,708,000
<TOTAL-LIABILITY-AND-EQUITY> 124,071,000
<SALES> 0
<TOTAL-REVENUES> 109,683,000
<CGS> 0
<TOTAL-COSTS> 76,073,000
<OTHER-EXPENSES> 25,221,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 8,605,000
<INCOME-TAX> 3,528,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,077,000
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<CASH> 33,386,000
<SECURITIES> 0
<RECEIVABLES> 70,623,000
<ALLOWANCES> 966,000
<INVENTORY> 0
<CURRENT-ASSETS> 107,289,000
<PP&E> 39,709,000
<DEPRECIATION> 27,429,000
<TOTAL-ASSETS> 126,592,000
<CURRENT-LIABILITIES> 47,861,000
<BONDS> 0
0
0
<COMMON> 135,000
<OTHER-SE> 68,303,000
<TOTAL-LIABILITY-AND-EQUITY> 126,592,000
<SALES> 0
<TOTAL-REVENUES> 94,935,000
<CGS> 0
<TOTAL-COSTS> 68,235,000
<OTHER-EXPENSES> 20,876,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,000
<INCOME-PRETAX> 6,116,000
<INCOME-TAX> 2,447,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,669,000
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
