<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 30, 2000
Commission file number 1-9410
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COMPUTER TASK GROUP, INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0912632
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(State of incorporation) (IRS Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 882-8000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding:
Shares outstanding
Title of each class at June 30, 2000
------------------- ----------------
Common stock, par value
$.01 per share 20,874,565
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE TWO QUARTERS ENDED
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 86,468 $ 125,464 $ 182,463 $ 242,082
Direct costs 61,501 82,672 131,017 160,869
Selling, general and administrative expenses 27,169 31,052 55,046 61,457
Restructuring charge -- -- 5,695 --
--------- --------- --------- ---------
Operating income (loss) (2,202) 11,740 (9,295) 19,756
Interest and other income 79 49 129 481
Interest and other expense (753) (693) (1,585) (945)
--------- --------- --------- ---------
Income (loss) before income taxes (2,876) 11,096 (10,751) 19,292
Provision (benefit) for income taxes (2,024) 4,779 (5,128) 8,276
--------- --------- --------- ---------
Net income (loss) $ (852) $ 6,317 $ (5,623) $ 11,016
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.05) $ 0.38 $ (0.35) $ 0.67
========= ========= ========= =========
Diluted $ (0.05) $ 0.38 $ (0.35) $ 0.66
========= ========= ========= =========
Weighted average shares outstanding:
Basic 16,137 16,517 16,107 16,472
Diluted 16,188 16,796 16,224 16,813
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 30, DECEMBER 31,
2000 1999
--------- ---------
(Unaudited) (Audited)
(amounts in thousands)
<S> <C> <C>
ASSETS
-------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 4,283 $ 10,684
Accounts receivable, net of allowances and reserves 63,345 80,773
Prepaids and other 3,598 2,821
Deferred income taxes 2,688 3,041
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 73,914 97,319
Property and equipment, net of
accumulated depreciation and amortization 14,105 13,483
Acquired intangibles, net of accumulated amortization
of $11,857,000 and $9,151,000, respectively 81,096 84,008
Deferred income taxes 3,768 3,685
Other assets 582 664
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 173,465 $ 199,159
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 11,148 $ 10,834
Accrued compensation 23,817 27,567
Income taxes payable 3,336 10,423
Advance billings on contracts 643 761
Other current liabilities 13,841 12,532
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TOTAL CURRENT LIABILITIES 52,785 62,117
Long-term debt 21,365 31,380
Deferred compensation benefits 9,922 9,953
Other long-term liabilities 741 785
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TOTAL LIABILITIES 84,813 104,235
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 111,623 110,895
Retained earnings 75,613 82,046
Less: Treasury stock of 6,143,259 and 6,141,823 shares, at cost (31,300) (31,279)
Stock Trusts of 4,695,578 and 4,823,173 shares, at cost (60,765) (61,306)
Unearned portion of restricted stock to related parties (31) (43)
Other comprehensive income:
Foreign currency adjustment (5,885) (4,786)
Minimum pension liability adjustment (873) (873)
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Accumulated other comprehensive income (6,758) (5,659)
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TOTAL SHAREHOLDERS' EQUITY 88,652 94,924
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 173,465 $ 199,159
========= =========
</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 30, JUNE 25,
2000 1999
----------- ------------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,623) $ 11,016
Adjustments:
Depreciation expense 2,391 2,422
Amortization expense 2,826 1,442
Loss on sales or disposals of assets 33 -
Deferred compensation expense (forfeitures) (31) 247
Changes in assets and liabilities,
net of assets acquired and liabilities assumed:
(Increase) decrease in accounts receivable 16,310 (11,713)
(Increase) decrease in prepaids and other (846) 863
Decrease in deferred income taxes 270 220
(Increase) decrease in other assets 82 (101)
Increase (decrease) in accounts payable 525 (6,026)
Decrease in accrued compensation (3,703) (5,100)
Increase (decrease) in income taxes payable (6,840) 529
Increase (decrease) in advance billings on contracts (118) 779
Increase in other current liabilities 1,407 2,018
Decrease in other long-term liabilities (44) (129)
----------- ------------
Net cash provided by (used in) operating activities 6,639 (3,533)
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition - (86,775)
Additions to property and equipment (3,130) (2,551)
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Net cash used in investing activities (3,130) (89,326)
-------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Short-term borrowings, net - 41,845
Payments on long-term revolving debt, net (10,015) -
Proceeds from Employee Stock Purchase Plan 416 582
Purchase of stock for treasury (21) (12)
Purchase of stock by Stock Trusts - (1,893)
Proceeds from other stock plans, inclusive of related tax benefit 865 1,353
Dividends paid (810) (827)
----------- ------------
Net cash provided by (used in) financing activities (9,565) 41,048
-------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments (345) (1,127)
----------- ------------
Net decrease in cash and temporary cash investments (6,401) (52,938)
Cash and temporary cash investments at beginning of year 10,684 57,748
-------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 4,283 $ 4,810
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Financial Statements
The consolidated financial statements included herein reflect, in the
opinion of the management of Computer Task Group, Incorporated ("CTG" or "the
Company"), all normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows for the periods
presented.
2. Basis of Presentation
The consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations. Management believes that the information and disclosures provided
herein are adequate to present fairly the financial position, results of
operations and cash flows of the Company. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest Annual
Report on Form 10-K filed with the SEC.
3. Comprehensive Income
At June 30, 2000, accumulated other comprehensive income totaled
$(6,758,000), including an adjustment of $(231,000) related to foreign
currency translation made in the second quarter of 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED JUNE 30, 2000
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
table sets forth data as contained on the consolidated statements of operations,
with the information calculated as a percentage of consolidated revenues.
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
June 30, June 25, June 30, June 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Direct costs 71.1% 65.9% 71.8% 66.5%
Selling, general, and administrative expenses 31.4% 24.7% 30.2% 25.3%
Restructuring charge - - 3.1% -
---------------------------------------------------------------------------------------------
Operating income (loss) (2.5)% 9.4% (5.1)% 8.2%
Interest and other expense, net 0.8% 0.6% 0.8% 0.2%
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (3.3)% 8.8% (5.9)% 8.0%
Provision (benefit) for income taxes (2.3)% 3.8% (2.8)% 3.4%
---------------------------------------------------------------------------------------------
Net income (loss) (1.0)% 5.0% (3.1)% 4.6%
====== ==== ====== ====
</TABLE>
6
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CTG recorded second quarter 2000 revenue of $86.5 million, a decrease
of 31.1 percent when compared to second quarter 1999 revenue of $125.5 million.
2000 year-to-date revenue of $182.5 million was a decrease of 24.6 percent from
1999 year-to-date revenue of $242.1 million. The year-over-year quarterly
decrease in revenue is due to the continued softness in demand for IT services
worldwide, and weakness in the Euro currency. Additionally, in 1999, the Company
recorded revenue from the completion of year 2000 remediation services, while
similar services were not provided to clients in 2000. North American revenue
for the second quarter decreased by $35.1 million or 33.1 percent in 2000 as
compared to 1999, while revenue from European operations decreased by $3.9
million, or 20 percent.
The 1999 to 2000 second quarter-to-quarter 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 exchange rates from the second quarter of 1999
to 2000, total consolidated revenues would have been $1.8 million higher,
resulting in a quarter-to-quarter consolidated revenue decline of 29.6 percent.
This additional $1.8 million increase in revenue in Europe would have decreased
the European revenue decline rate to 10.8 percent. On a year-to-date basis, the
revenue decrease due to the change in the foreign exchange rates year-over-year
was $4.1 million. This additional $4.1 million increase in revenue in Europe
would have decreased the European revenue decline rate to 2.3 percent.
In March 2000, the Company renewed a contract with IBM for six months
as one of IBM's national technical service providers for the United States. In
the second quarter of 2000, IBM continued to be the Company's largest customer,
accounting for $24.1 million or 27.9 percent of total revenue as compared to
$34.2 million or 27.3 percent of second quarter 1999 revenue. On a year-to-date
basis, revenue from IBM in 2000 was $51.1 million, or 28 percent of consolidated
revenue, as compared to $68.5 million, or 28.2 percent of 1999 consolidated
revenue. Although revenues from IBM have been constrained in 2000, CTG expects
to continue to derive a significant portion of its revenue from IBM throughout
the remainder of 2000 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.
Direct costs, defined as costs for billable staff, were 71.1 percent of
revenue in the second quarter of 2000 as compared to 65.9 percent of second
quarter 1999 revenue. On a year-to-date basis, direct costs were 71.8 percent of
revenue in 2000 as compared to 66.5 percent in 1999. The increase in direct
costs as a percentage of revenue in 2000 as compared to 1999 is primarily due to
the IT services industry spending slowdown mentioned above and the retention of
a higher percentage of non-billable staff in 2000 in anticipation of the IT
services market recovering.
Selling, general and administrative expenses were 31.4 percent of
revenue in the second quarter of 2000 as compared to 24.7 percent of second
quarter 1999 revenue. On a year-to-date basis, excluding the restructuring
charge taken in the first quarter of 2000 that equaled 3.1 percent of
consolidated revenue, selling, general and administrative expenses were 30.2
percent of revenue in 2000, as compared to 25.3 percent in 1999. While selling,
general and administrative expenses decreased year over year, the increase as a
percentage of revenue from 1999 to 2000 is primarily due to the significant
revenue decline discussed above, and a continued strategic investment in
e-business and enterprise wide solutions. Additionally, goodwill amortization
expense related to the acquisition of Elumen Solutions, Inc. (Elumen) increased
selling, general and administrative expense year over year.
7
<PAGE> 8
In the first quarter of 2000, the Company recorded an after-tax
restructuring charge of $3.8 million, or $0.23 per diluted share. On a pre-tax
basis, the charge was $5.7 million, and 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. At June 30, 2000, approximately
$3.1 million of the total charge of $5.7 million is included in other current
liabilities on the consolidated balance sheet. The Company expects to complete
its restructuring plan within the next nine months.
Operating income (loss) was (2.5) percent of revenue in the second
quarter of 2000 compared to 9.4 percent of revenue in the second quarter of
1999, and (5.1) percent for the 2000 year-to-date period as compared to 8.2
percent in 1999. The quarter-to-quarter and year-over-year decrease is primarily
due to the factors discussed above. On a year-to-date basis, excluding the
restructuring charge of $5.7 million, the operating loss from North American
operations was $4.7 million, while European operations recorded operating income
of $1.1 million.
Interest and other expense was 0.8 percent of revenue for the two
quarters ended June 30, 2000, and 0.2 percent in the comparable 1999 period.
During the first two quarters ended June 30, 2000, interest expense on
indebtedness related to the acquisition of Elumen was partially offset by
interest income on available cash and temporary cash investments. In 1999, as
the acquisition of Elumen was completed in late February, the Company did not
have outstanding indebtedness for the entire year-to-date period.
Income before income taxes was (3.3) percent of revenue in the second
quarter of 2000 as compared to 8.8 percent of revenue in the second quarter of
1999, and (5.9) percent in the 2000 year-to-date period as compared to 8.0
percent in the comparable 1999 period. Without the non-recurring charge, income
before income taxes would have been (2.8) percent of revenue for the two
quarters ended June 30, 2000. The provision (benefit) for income taxes,
calculated as a percentage of income (loss) before income taxes, was (47.7)
percent in 2000 and 42.9 percent in 1999.
Net income (loss) for the second quarter of 2000 was (1.0) percent of
revenue or $(0.05) per diluted share, compared to 5.0 percent of revenue or
$0.38 per diluted share in 1999. For the 2000 year-to-date period, the net
income (loss) was (3.1) percent of revenue or $(0.35) per diluted share, as
compared to net income of 4.6 percent of revenue, or $0.66 per diluted share.
Diluted earnings per share was calculated using 16.2 million and 16.8 million
equivalent shares outstanding in 2000 and 1999, respectively. The decrease in
equivalent shares outstanding from 1999 to 2000 is due to a reduction in the
dilutive effect of outstanding stock options.
The Company has reviewed the guidance provided under Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements, and determined its
existing revenue recognition policies are consistent with the guidance provided
in that Bulletin.
8
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Financial Condition
-------------------
In 2000, cash provided by operating activities was $6.6 million for the
two quarters ended June 30, 2000. Net loss totaled $5.6 million, and non-cash
adjustments for depreciation expense, amortization expense, and deferred
compensation expense totaled $5.2 million. Accounts receivable decreased $16.3
million as compared to December 31, 1999, as a result of a decrease in revenue,
offset by slower accounts receivable turnover throughout 2000. Prepaid and other
assets increased $0.8 million due to payments made in 2000 that will be
amortized throughout the remainder of the year. Accounts payable increased $0.5
million primarily due to the timing of certain payments. Accrued compensation
decreased $3.7 million due to the timing of the U.S. biweekly payroll and fewer
total employees. Income taxes payable decreased $6.8 million due to the taxable
loss incurred throughout 2000. Other current liabilities increased $1.4 million,
primarily due to the restructuring charge recorded in the first quarter of 2000.
Net property and equipment increased $0.6 million. Additions to
property and equipment were $3.1 million, offset by depreciation expense of $2.4
million and translation adjustments of $0.1 million. The Company has no material
commitments for capital expenditures at June 30, 2000.
Financing activities used $9.6 million of cash in 2000. Net payments on
long-term revolving debt totaled $10.0 million. The Company received $0.4
million from employees for stock purchased under the Employee Stock Purchase
Plan, and $0.9 million from other stock plans, inclusive of the related tax
benefit. Consistent with prior years, the Company issued a $0.05 per share
dividend in the second quarter of 2000. The dividend payment to shareholders
totaled $0.8 million.
As of the filing date of this Form 10-Q with the SEC, including
unsecured lines of credit, the Company had approximately $82.0 million in total
credit. At June 30, 2000, $21.4 million of the total available credit was
outstanding.
On October 26, 1994, the Company authorized the repurchase of 2.0
million shares and on July 21, 1995 authorized the repurchase of another 1.4
million shares of its Common Stock. At June 30, 2000, 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
2000.
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
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Item 6. Exhibits And Reports On Form 8-K
--------------------------------
Exhibit Description Page
------- ----------- ----
3. ii) Restatement of company By-laws 11
11. Statement re: computation of earnings per share 20
27. a.) Financial Data Schedule - June 30, 2000 21
b.) Financial Data Schedule - June 25, 1999 22
Form 8-K
Date Description
---- -----------
June 22, 2000 Press release stating the Company has named a new
acting Chairman and a new acting Chief Executive
Officer
* * * * * * *
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 and Chief Financial
Officer
Date: August 9, 2000
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