<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 29, 2000
Commission file number 1-9410
------
COMPUTER TASK GROUP, INCORPORATED
--------------------------------------------------------------------------------
(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 September 29, 2000
------------------- ---------------------
Common stock, par value
$.01 per share 20,871,065
<PAGE> 2
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 THREE QUARTERS ENDED
SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $79,842 $114,526 $262,305 $356,608
Direct costs 55,190 75,429 186,207 236,298
Selling, general and administrative expenses 23,630 31,969 78,676 93,426
Restructuring charge (credit) (1,538) -- 4,157 --
------- -------- -------- --------
Operating income (loss) 2,560 7,128 (6,735) 26,884
Interest and other income 131 18 260 499
Interest and other expense (897) (602) (2,482) (1,547)
------- -------- -------- --------
Income (loss) before income taxes 1,794 6,544 (8,957) 25,836
Provision (benefit) for income taxes 2,003 3,014 (3,125) 11,290
------- -------- -------- --------
Net income (loss) $ (209) $ 3,530 $ (5,832) $ 14,546
======= ======== ======== ========
Net income (loss ) per share:
Basic $ (0.01) $ 0.21 $ (0.36) $ 0.88
======= ======== ======== ========
Diluted $ (0.01) $ 0.21 $ (0.36) $ 0.87
======= ======== ======== ========
Weighted average shares outstanding:
Basic 16,207 16,474 16,140 16,473
Diluted 16,213 16,721 16,220 16,783
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>
SEPT. 29, DECEMBER 31,
2000 1999
--------- ------------
(Unaudited) (Audited)
(amounts in thousands)
<S> <C> <C>
ASSETS
---------------------------------------------------------------------------------------------------
Current Assets:
Cash and temporary cash investments $ 6,671 $ 10,684
Accounts receivable, net of allowances and reserves 59,669 80,773
Prepaids and other 2,256 2,821
Deferred income taxes 2,593 3,041
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 71,189 97,319
Property and equipment, net of
accumulated depreciation and amortization 13,964 13,483
Acquired intangibles, net of accumulated amortization
of $12,687,000 and $9,151,000, respectively 80,002 84,008
Deferred income taxes 3,819 3,685
Other assets 886 664
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $169,860 $199,159
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 10,534 $ 10,834
Accrued compensation 21,536 27,567
Income taxes payable 3,859 10,423
Advance billings on contracts 610 761
Other current liabilities 11,618 12,532
-------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 48,157 62,117
Long-term debt 23,550 31,380
Deferred compensation benefits 9,686 9,953
Other long-term liabilities 723 785
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 82,116 104,235
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 111,636 110,895
Retained earnings 75,404 82,046
Less: Treasury stock of 6,146,759 and 6,141,823 shares, at cost (31,404) (31,279)
Stock Trusts of 4,572,448 and 4,823,173 shares, at cost (60,239) (61,306)
Unearned portion of restricted stock to related parties -- (43)
Other comprehensive income:
Foreign currency adjustment (7,050) (4,786)
Minimum pension liability adjustment (873) (873)
-------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (7,923) (5,659)
-------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 87,744 94,924
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $169,860 $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>
THREE QUARTERS ENDED
SEPT. 29, SEPT. 24,
2000 1999
--------- ---------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(5,832) $ 14,546
Adjustments:
Depreciation expense 3,493 3,686
Amortization expense 3,827 2,457
Loss on sales or disposals of assets 33 --
Deferred compensation expense (forfeitures) (267) 252
Changes in assets and liabilities,
net of assets acquired and liabilities assumed:
(Increase) decrease in accounts receivable 18,798 (9,861)
Decrease in prepaids and other 422 1,915
Decrease in deferred income taxes 314 35
(Increase) decrease in other assets (222) 288
Increase (decrease) in accounts payable 1,379 (5,253)
Decrease in accrued compensation (6,954) (314)
Increase (decrease) in income taxes payable (6,310) 735
Increase (decrease) in advance billings on contracts (151) 530
Increase (decrease) in other current liabilities (334) 2,610
Decrease in other long-term liabilities (62) (307)
------- --------
Net cash provided by operating activities 8,134 11,319
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition -- (86,775)
Additions to property and equipment (4,209) (3,464)
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,209) (90,239)
-----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (payments on) long-term revolving debt, net (7,830) 38,250
Proceeds from Employee Stock Purchase Plan 578 831
Purchase of stock for treasury (125) (13)
Purchase of stock by Stock Trusts -- (4,858)
Proceeds from other stock plans, inclusive of related tax benefit 1,273 2,061
Dividends paid (810) (827)
------- --------
Net cash provided by (used in) financing activities (6,914) 35,444
-----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and temporary cash investments (1,024) (1,077)
------- --------
Net decrease in cash and temporary cash investments (4,013) (44,553)
Cash and temporary cash investments at beginning of year 10,684 57,748
-----------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of quarter $ 6,671 $ 13,195
======= ========
</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 ("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 September 29, 2000, accumulated other comprehensive income totaled
$(7,923,000), including an adjustment of $(1,165,000) related to foreign
currency translation made in the third quarter of 2000.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED SEPTEMBER 29, 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 Three Quarters Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Direct costs 69.1% 65.9% 71.0% 66.3%
Selling, general, and administrative expenses 29.6% 27.9% 30.0% 26.2%
Restructuring charge (credit) (1.9)% -- 1.6% --
----------------------------------------------------------------------------------------------------------
Operating income (loss) 3.2% 6.2% (2.6)% 7.5%
Interest and other expense, net 1.0% 0.5% 0.8% 0.3%
----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2.2% 5.7% (3.4)% 7.2%
Provision (benefit) for income taxes 2.5% 2.6% (1.2)% 3.1%
----------------------------------------------------------------------------------------------------------
Net income (loss) (0.3)% 3.1% (2.2)% 4.1%
===== ===== ===== =====
</TABLE>
6
<PAGE> 7
CTG recorded third quarter 2000 revenue of $79.8 million, a decrease of
30.3 percent when compared to third quarter 1999 revenue of $114.5 million. 2000
year-to-date revenue of $262.3 million was a decrease of 26.4 percent from 1999
year-to-date revenue of $356.6 million. The year-to-date decrease in revenue in
2000 as compared to 1999 is due to the general softness in demand for IT
services worldwide throughout 2000, and weakness in the Euro currency.
Additionally, throughout 1999, the Company recorded revenue from the completion
of year 2000 remediation services, while similar services were not provided to
clients in 2000. However, during the 2000 third quarter, the Company experienced
an increase in demand for its services, and anticipates sequential revenue
growth in the 2000 fourth quarter. North American revenue for the third quarter
decreased by $29.7 million or 31.0 percent in 2000 as compared to 1999, while
revenue from European operations decreased by $5.0 million, or 26.8 percent in
the same time period.
The 1999 to 2000 third 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 third quarter of 1999
to 2000, total consolidated revenues would have been $2.4 million higher,
resulting in a quarter-to-quarter consolidated revenue decline of 28.2 percent.
This additional $2.4 million increase in revenue in Europe would have decreased
the European revenue quarter-to-quarter decline rate to 14.0 percent. On a 2000
year-to-date basis, the revenue decrease due to the change in the foreign
currency exchange rates year-over-year was $6.5 million. Absent the decline in
the rates, this additional revenue of $6.5 million would have lowered the
consolidated revenue decline to 24.6 percent, and decreased the European revenue
decline rate to 6.0 percent.
In November 2000, the Company renewed a contract with IBM for three
years as one of IBM's national technical service providers for the United
States. In the third quarter of 2000, IBM continued to be the Company's largest
customer, accounting for $22.2 million or 27.8 percent of total revenue as
compared to $30.3 million or 26.5 percent of third quarter 1999 revenue. On a
2000 year-to-date basis, revenue from IBM was $73.3 million, or 27.9 percent of
consolidated revenue, as compared to $98.8 million, or 27.7 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 69.1 percent of
revenue in the third quarter of 2000 as compared to 65.9 percent of third
quarter 1999 revenue. On a year-to-date basis, direct costs were 71.0 percent of
revenue in 2000 as compared to 66.3 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.
Excluding the restructuring credit taken in the third quarter of 2000,
selling, general and administrative expenses were 29.6 percent of revenue in the
third quarter of 2000 as compared to 27.9 percent of third quarter 1999 revenue.
On a year-to-date basis, excluding the restructuring charge taken in the first
quarter of 2000 that equaled 1.6 percent of consolidated revenue, selling,
general and administrative expenses were 30.0 percent of revenue in 2000, as
compared to 26.2 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.
7
<PAGE> 8
In the first quarter of 2000, the Company recorded a pre-tax
restructuring charge of $5.7 million. The charge primarily consisted of
severance and related costs of $4.2 million for approximately 400 employees,
costs associated with the consolidation of facilities of $0.7 million, and $0.8
million for other exit costs related to the restructuring plan. On an after-tax
basis, the restructuring charge equaled $3.8 million, or $0.23 per diluted
share.
During the third quarter of 2000, the Company recorded, on a pre-tax
basis, a restructuring credit of $1.5 million primarily consisting of a
reduction in the estimated amount of severance and related costs to be paid. On
a year-to-date basis, the net pre-tax restructuring charge is $4.2 million,
including $2.7 million for severance and related costs, $0.7 million for the
consolidation of facilities, and $0.8 million for other exit costs. On an after
tax basis, the restructuring charge equals $3.0 million, or $0.18 per diluted
share. At September 29, 2000, approximately $0.7 million of the total charge of
$4.2 million is included in other current liabilities on the consolidated
balance sheet. The Company expects to complete its restructuring plan within the
next six months.
Operating income (loss) was 3.2 percent of revenue in the third quarter
of 2000 compared to 6.2 percent of revenue in the third quarter of 1999, and
(2.6) percent for the 2000 year-to-date period as compared to 7.5 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 net pre-tax
restructuring charge of $4.2 million, the operating loss from North American
operations was $4.0 million, while European operations recorded operating income
of $1.4 million.
Interest and other expense was 0.8 percent of revenue for the three
quarters ended September 29, 2000, and 0.3 percent in the comparable 1999
period. During the three quarters ended September 29, 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 (loss) before income taxes was 2.2 percent of revenue in the
third quarter of 2000 as compared to 5.7 percent of revenue in the third quarter
of 1999, and (3.4) percent in the 2000 year-to-date period as compared to 7.2
percent in the comparable 1999 period. Without the non-recurring charge, income
(loss) before income taxes would have been (1.8) percent of revenue for the
three quarters ended September 29, 2000. On a year-to-date basis, the provision
(benefit) for income taxes, calculated as a percentage of income (loss) before
income taxes, was (34.9) percent in 2000 and 43.7 percent in 1999.
Net income (loss) for the third quarter of 2000 was (0.3) percent of
revenue or $(0.1) per diluted share, compared to 3.1 percent of revenue or $0.21
per diluted share in 1999. The third quarter 2000 results included the impact of
a reversal of $1.2 million, or $0.07 per diluted share, of tax benefits recorded
earlier in 2000. For the 2000 year-to-date period, the net income (loss) was
(2.2) percent of revenue or $(0.36) per diluted share, as compared to net income
of 4.1 percent of revenue, or $0.87 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 has
determined its existing revenue recognition policies are consistent with the
guidance provided in that Bulletin.
8
<PAGE> 9
Financial Condition
-------------------
In 2000, cash provided by operating activities was $8.1 million for the
three quarters ended September 29, 2000. Net loss totaled $5.8 million, and net
non-cash adjustments for depreciation expense, amortization expense, and
deferred compensation expense (forfeitures) totaled $7.1 million. Accounts
receivable decreased $18.8 million as compared to December 31, 1999, as a result
of a decrease in revenue. Prepaid and other assets decreased $0.4 million due to
the amortization of existing assets. Accounts payable increased $1.4 million
primarily due to the timing of certain payments. Accrued compensation decreased
$7.0 million due to the timing of the U.S. biweekly payroll and fewer total
employees. Income taxes payable decreased $6.3 million due to the taxable loss
incurred throughout 2000.
Net property and equipment increased $0.5 million. Additions to
property and equipment were $4.2 million, offset by depreciation expense of $3.5
million and translation adjustments of $0.2 million. The Company has no material
commitments for capital expenditures at September 29, 2000.
Financing activities used $6.9 million of cash in 2000. Net payments on
long-term revolving debt totaled $7.8 million. The Company received $0.6 million
from employees for stock purchased under the Employee Stock Purchase Plan, and
$1.3 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.
Including unsecured lines of credit, the Company has approximately $82
million in total credit. At September 29, 2000, $23.6 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
<PAGE> 10
Item 6. Exhibits And Reports On Form 8-K
--------------------------------
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C> <C>
11. Statement re: computation of earnings per share 11
27. a.) Financial Data Schedule - September 29, 2000 12
b.) Financial Data Schedule - September 24, 1999 13
</TABLE>
Form 8-K
Date Description
---- -----------
None
* * * * * * *
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: November 13, 2000
10
