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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2003
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Number of shares of common stock outstanding:
Shares outstanding
Title of each class at September 26, 2003
------------------- -------------------------
Common stock, par value
$.01 per share 20,868,834
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE THREE QUARTERS ENDED
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
2003 2002 2003 2002
--------- --------- --------- ---------
(amounts in thousands, except per share data)
Revenue $ 61,141 $ 62,149 $ 189,060 $ 199,710
Direct costs 44,757 45,250 138,745 144,385
Selling, general and administrative expenses 15,588 16,399 47,862 51,716
--------- --------- --------- ---------
Operating income 796 500 2,453 3,609
Interest and other income 13 38 60 206
Interest and other expense (223) (305) (913) (1,731)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 586 233 1,600 2,084
Provision for income taxes 246 92 672 823
--------- --------- --------- ---------
Net income before cumulative effect of change in
accounting principle 340 141 928 1,261
Cumulative effect of change in accounting principle -- -- -- (37,038)
--------- --------- --------- ---------
Net income (loss) $ 340 $ 141 $ 928 $ (35,777)
========= ========= ========= =========
Basic net income (loss) per share:
Net income before cumulative effect of change in
accounting principle $ 0.02 $ 0.01 $ 0.06 $ 0.08
Cumulative effect of change in accounting principle -- -- -- (2.24)
--------- --------- --------- ---------
Basic net income (loss) per share $ 0.02 $ 0.01 $ 0.06 $ (2.16)
========= ========= ========= =========
Diluted net income (loss) per share:
Net income before cumulative effect of change in
accounting principle $ 0.02 $ 0.01 $ 0.06 $ 0.08
Cumulative effect of change in accounting principle -- -- -- (2.19)
--------- --------- --------- ---------
Diluted net income (loss) per share $ 0.02 $ 0.01 $ 0.06 $ (2.11)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 16,677 16,575 16,649 16,555
Diluted 16,817 16,813 16,765 16,938
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 26, DECEMBER 31,
2003 2002
------------- ------------
(amounts in thousands)
ASSETS
Current Assets:
Cash and temporary cash investments $ 2,929 $ 69
Accounts receivable, net 44,670 43,696
Prepaids and other 2,107 2,406
Deferred income taxes 416 623
--------- ---------
Total current assets 50,122 46,794
Property and equipment, net of accumulated depreciation 7,664 8,939
Property held for sale -- 2,190
Goodwill 35,678 35,678
Deferred income taxes 4,259 4,412
Other assets 1,027 1,171
--------- ---------
Total assets $ 98,750 $ 99,184
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,568 $ 6,520
Accrued compensation 16,269 19,139
Income taxes payable 897 --
Advance billings on contracts 197 359
Other current liabilities 4,062 4,163
--------- ---------
Total current liabilities 29,993 30,181
Long-term debt 6,867 8,497
Deferred compensation benefits 7,607 7,786
Other long-term liabilities 60 350
--------- ---------
Total liabilities 44,527 46,814
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 111,346 111,465
Retained earnings 38,625 37,697
Less: Treasury stock of 6,148,990 shares at cost (31,416) (31,416)
Stock Trusts of 4,171,857 and 4,246,337 shares at cost, respectively (58,530) (58,848)
Accumulated other comprehensive loss:
Foreign currency adjustment (5,390) (6,116)
Minimum pension liability adjustment (682) (682)
--------- ---------
Accumulated other comprehensive loss (6,072) (6,798)
--------- ---------
Total shareholders' equity 54,223 52,370
--------- ---------
Total liabilities and shareholders' equity $ 98,750 $ 99,184
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE QUARTERS ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
------------- -------------
(amounts in thousands)
Cash flows from operating activities:
Net income (loss) $ 928 $(35,777)
Adjustments:
Depreciation expense 2,628 2,769
Change in accounting principle -- 37,038
Deferred income taxes 318 644
Loss on sales of property and equipment and property held for sale 227 142
Deferred compensation (179) 5
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (269) 5,658
(Increase) decrease in prepaids and other 388 (40)
(Increase) decrease in other assets 144 (130)
Increase (decrease) in accounts payable 1,810 (2,501)
Decrease in accrued compensation (3,120) (7,621)
Increase in income taxes payable 953 1,986
Increase (decrease) in advance billings on contracts (162) 20
Decrease in other current liabilities (223) (1,337)
Decrease in other long-term liabilities (290) (187)
-------- --------
Net cash provided by operating activities 3,153 669
-------- --------
Cash flows from investing activities:
Additions to property and equipment (1,509) (1,624)
Proceeds from sales of fixed assets 2,269 21
-------- --------
Net cash provided by (used in) investing activities 760 (1,603)
-------- --------
Cash flows from financing activities:
Payments on long-term revolving debt, net (1,630) (2,315)
Proceeds from Employee Stock Purchase Plan 170 267
Purchase of stock for treasury -- (6)
Proceeds from other stock plans 29 20
-------- --------
Net cash used in financing activities (1,431) (2,034)
-------- --------
Effect of exchange rate changes on cash and temporary cash investments 378 472
-------- --------
Net increase (decrease) in cash and temporary cash investments 2,860 (2,496)
Cash and temporary cash investments at beginning of year 69 3,362
-------- --------
Cash and temporary cash investments at end of quarter $ 2,929 $ 866
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COMPUTER TASK GROUP, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Financial Statements
The condensed 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 condensed consolidated financial position, results of operations and
cash flows for the periods presented. Certain amounts in the prior period's
condensed consolidated financial statements have been reclassified to conform to
the current period presentation.
2. Basis of Presentation
The condensed 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 consolidated financial
position, results of operations and cash flows of the Company. It is suggested
that these condensed 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 (Loss)
Accumulated other comprehensive loss totaled $(6,072,000) and
$(6,798,000) at September 26, 2003 and December 31, 2002, respectively. These
balances included adjustments of $726,000 and $776,000 related to foreign
currency translation in the three quarters ended September 26, 2003 and
September 27, 2002, respectively. Total comprehensive income for the quarters
ended September 26, 2003 and September 27, 2002 was $340,000 and $618,000,
respectively, while total comprehensive income (loss) for the three quarters
ended September 26, 2003 and September 27, 2002 totaled $1,654,000 and
$(35,001,000), respectively.
4. Stock-Based Employee Compensation
The Company accounts for its stock-based employee compensation plans in
accordance with the provisions of Financial Accounting Standard (FAS) No. 123,
"Accounting for Stock-Based Compensation," and FAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which allows entities to
continue to apply the recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, no stock-based employee
compensation cost is reflected in the net income or loss of the Company for the
periods presented in these condensed consolidated financial statements, as all
options granted by the Company had an exercise price that was equal to or
greater than the underlying common stock at the date of grant.
5
The following table details the effect on net income (loss) and basic
and diluted net income (loss) per share as if the Company had adopted the fair
value recognition provisions of FAS No. 123 as they apply to stock-based
employee compensation:
FOR THE QUARTER ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
------------ ------------
(amounts in thousands,
except per share data)
Net income, as reported $ 340 $ 141
Stock-based employee compensation
expense as calculated under the fair
value method for all awards, net of tax (286) (356)
------------ ------------
Pro forma net income (loss) $ 54 $ (215)
============ ============
Basic net income (loss) per share:
As reported $ 0.02 $ 0.01
============ ============
Pro forma $ 0.00 $ (0.01)
============ ============
Diluted net income (loss) per share:
As reported $ 0.02 $ 0.01
============ ============
Pro forma $ 0.00 $ (0.01)
============ ============
FOR THE THREE QUARTERS ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
------------ -------------
(amounts in thousands,
except per share data)
Net income (loss), as reported $ 928 $ (35,777)
Stock-based employee compensation
expense as calculated under the fair
value method for all awards, net of tax (875) (1,060)
------------ -------------
Pro forma net income (loss) $ 53 $ (36,837)
============ =============
Basic net income (loss) per share:
As reported $ 0.06 $ (2.16)
============ =============
Pro forma $ 0.00 $ (2.23)
============ =============
Diluted net income (loss) per share:
As reported $ 0.06 $ (2.11)
============ =============
Pro forma $ 0.00 $ (2.17)
============ =============
Pro forma amounts for compensation cost may not be indicative of the effects on
earnings for future quarters.
5. Accounting Standards Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
FAS No. 141, "Business Combinations," and FAS No. 142, "Goodwill and Other
Intangible Assets." The Company adopted these standards as of January 1, 2002.
In conjunction with the required adoption of FAS No. 142, the initial valuation
of the business unit for which the Company's goodwill relates was completed in
2002 by management with the assistance of an independent appraisal company. Such
valuation indicated that the carrying value of the business unit was greater
than the determined fair value. The goodwill on the Company's balance sheet
primarily related to the acquisition in February 1999 of the healthcare
information technology services provider Elumen Solutions, Inc. Although the
revenues and profits for this unit decreased in 2000 and 2001, in 2002 the
revenues and profits for that unit were similar to when the acquisition was
completed in 1999. However, the valuation of technology companies in 1999 was
relatively high as compared to the valuations at the beginning of 2002.
Accordingly, as a result of the valuation which considered the fair market
values of similar companies, the Company recorded a $37.0 million non-cash
charge for impairment of goodwill in that business unit in the Company's 2002
year-to-date financial results, as a cumulative effect of a change in accounting
principle. There was no tax associated with this impairment as the amortization
of this goodwill was not deductible for tax purposes.
6
As of January 1, 2003, the Company completed its annual valuation of
the business unit to which the Company's goodwill relates. This valuation
indicated that the estimated fair value of the business unit exceeded the
carrying value of this unit. Accordingly, the Company believes no additional
impairment is required to be recorded in its condensed consolidated financial
results.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies the financial accounting and reporting for derivative instruments,
including those embedded in other contracts, and for hedging activities under
FAS No. 133. The provisions of the statement, for the most part, were effective
for contracts entered into and hedging activities designated after June 30,
2003. The Company has reviewed the provisions of this statement and determined
that it does not have any effect on its financial position or results of
operations for the period ended September 26, 2003.
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how entities should measure and classify
financial instruments with characteristics of both liabilities and equity. The
provisions of this statement were effective for interim periods beginning after
June 15, 2003. The Company has reviewed the provisions of this statement and
determined that it does not have any effect on its financial position or results
of operations for the period ended September 26, 2003.
Recently, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements", addresses the consolidation by
business enterprises of certain variable interest entities. If applicable, the
provisions of this Interpretation were effective for interim periods beginning
after June 15, 2003. The Company has reviewed the provisions of this
Interpretation and determined that it does not have any effect on its financial
position or results of operations for the period ended September 26, 2003.
In early 2003, the Emerging Issues Task Force (EITF) issued Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables." This issue addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. The provisions of this
Issue were effective for interim periods beginning after June 15, 2003. The
Company has reviewed the provisions of this Issue and determined that those
provisions are consistent with the Company's existing policies, and therefore
the Implementation of this Issue did not have a significant effect on the
Company's financial position or results of operations for the period ended
September 26, 2003.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND THREE QUARTERS ENDED SEPTEMBER 26, 2003
Forward-Looking Statements
- --------------------------
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 (IT) 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 condensed consolidated statements of
operations, with the percentage information calculated as a percentage of
consolidated revenues.
FOR THE QUARTER ENDED SEPTEMBER 26, SEPTEMBER 27,
2003 2002
--------------------- ---------------------
Revenue 100.0% $ 61,141 100.0% $ 62,149
Direct costs 73.2% 44,757 72.8% 45,250
Selling, general, and administrative expenses 25.5% 15,588 26.4% 16,399
----- -------- ----- --------
Operating income 1.3% 796 0.8% 500
Interest and other expense, net (0.3)% (210) (0.4)% (267)
----- -------- ----- --------
Income before income taxes 1.0% 586 0.4% 233
Provision for income taxes 0.4% 246 0.2% 92
----- -------- ----- --------
Net income 0.6% $ 340 0.2% $ 141
===== ======== ===== ========
8
FOR THE THREE QUARTERS ENDED SEPTEMBER 26, SEPTEMBER 27,
2003 2002
--------------------- ---------------------
Revenue 100.0% $189,060 100.0% $199,710
Direct costs 73.4% 138,745 72.3% 144,385
Selling, general, and administrative expenses 25.3% 47,862 25.9% 51,716
----- -------- ----- --------
Operating income 1.3% 2,453 1.8% 3,609
Interest and other expense, net (0.4)% (853) (0.8)% (1,525)
----- -------- ----- --------
Income before income taxes and cumulative
effect of change in accounting principle 0.9% 1,600 1.0% 2,084
Provision for income taxes 0.4% 672 0.4% 823
----- -------- ----- --------
Net income before cumulative effect of
change in accounting principle 0.5% 928 0.6% 1,261
Cumulative effect of change in accounting principle -- -- (18.5)% (37,038)
----- -------- ----- --------
Net income (loss) 0.5% $ 928 (17.9)% $(35,777)
===== ======== ===== ========
CTG's third quarter 2003 revenue was $61.1 million, a decrease of 1.6
percent when compared to third quarter 2002 revenue of $62.1 million. Revenues
from the Company's North American operations totaled $51.5 million in the third
quarter of 2003, as compared to $53.2 million in the third quarter of 2002. The
Company's European operations accounted for $9.6 million or 15.7 percent of
third quarter 2003 revenue, as compared to $8.9 million or 14.3 percent of third
quarter 2002 revenue. On a consolidated basis, this year-over-year revenue
decrease is primarily a result of the ongoing recession in technology related
investments which has had an overall negative effect on customer spending for
information technology services. Although the third quarter of 2003 represented
the fifth consecutive quarter of increasing demand for the IT staffing services
provided by the Company, a general weakness in demand for the other services
offered by the Company resulted in the decrease in revenue year over year. The
revenue decline was offset by the strengthening of the currencies of the
Netherlands, Belgium, the United Kingdom, and Luxembourg (Europe), the countries
in which the Company's European subsidiaries operate. If there had been no
change in these foreign currency exchange rates from 2002 to 2003, total
consolidated revenues for the third quarter of 2003 would have been $1.9 million
lower.
Revenues for the 2003 year-to-date period were $189.1 million, a
decrease of 5.3 percent from 2002 year-to-date revenues of $199.7 million.
Revenues from the Company's North American operations totaled $159.8 million in
the 2003 year-to-date period, as compared to $172.4 million in the comparable
2002 period. The Company's European operations accounted for $29.3 million or
15.5 percent of year-to-date 2003 revenue, as compared to $27.3 million or 13.7
percent in the comparable 2002 period. The reason for the decline in revenue in
the 2003 year-to-date period from the comparable 2002 period is consistent with
that mentioned above for the quarterly periods. Additionally, if there had been
no change in the European foreign currency exchange rates from 2002 to 2003,
total consolidated revenues in the 2003 year-to-date period would have been $5.4
million lower.
9
In November 2000, the Company signed a contract with International
Business Machines (IBM) for three years as one of IBM's national technical
service providers for the United States. Currently, the Company is in
negotiation for the renewal of this contract with IBM. In the third quarter of
2003, IBM continued to be the Company's largest customer, accounting for $13.1
million or 21.4 percent of total revenue as compared to $12.2 million or 19.6
percent of third quarter 2002 revenue. For the 2003 year-to-date period,
revenues from IBM were $40.2 million or 21.3 percent of consolidated revenue as
compared to $38.9 million or 19.5 percent of consolidated 2002 revenues. The
Company expects to continue to derive a significant portion of its revenue from
IBM throughout the remainder of 2003 and in future years. While a decline in
revenue from IBM would have a negative 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 diversity of the projects performed for IBM and the
number of locations and divisions involved.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 73.2 percent of revenue in the third quarter of
2003 as compared to 72.8 percent of second quarter 2002 revenue, and 73.4
percent of revenue in the 2003 year-to-date period as compared to 72.3 percent
in the 2002 year-to-date period. The increase in direct costs as a percentage of
revenue in 2003 as compared to 2002 is primarily due to the recession previously
mentioned which has adversely affected the rates at which the company bills
customers for its services.
Selling, general and administrative (SG&A) expenses were 25.5 percent
of revenue in the third quarter of 2003 as compared to 26.4 percent of revenue
in the third quarter of 2002, and 25.3 percent in the 2003 year-to-date period
as compared to 25.9 percent in the 2002 year-to-date period. The decline in SG&A
expense year-over-year is due to the Company continuing to align and reduce its
cost structure to the current level of revenue.
Operating income was 1.3 percent of revenue in the 2003 third quarter
as compared to 0.8 percent of revenue in the 2002 third quarter, and 1.3 percent
in the 2003 year-to-date period as compared to 1.8 percent in the 2002
year-to-date period. Operating income from North American operations was $1.5
million and $4.1 million in the 2003 third quarter and year-to-date periods
respectively, while European operations recorded an operating loss of $0.7
million and $1.6 million, respectively, in such periods. Additionally, if there
had been no change in the European foreign currency exchange rates from 2002 to
2003, the operating loss in Europe in the 2003 year-to-date period would have
been $0.3 million lower.
Interest and other expense, net was 0.4 percent of revenue in the 2003
year-to-date period and 0.8 percent in the corresponding 2002 period. The
decrease as a percentage of revenue from 2002 to 2003 is primarily due to lower
average outstanding indebtedness balances and significantly lower interest rates
in 2003, partially offset by a loss of approximately $0.2 million on the sale of
the property held for sale in the second quarter of 2003. The provision for
income taxes was 42.0 percent in 2003 and 39.5 percent in 2002. The provision
rate in each year is calculated based upon the estimated tax rate for the entire
year.
Net income for the third quarter of 2003 was 0.6 percent of revenue or
$0.02 per diluted share, compared to net income for the third quarter of 2002 of
0.2 percent of revenue or $0.01 per diluted share. Net income for the 2003
year-to-date period was 0.5 percent of revenue or $0.06 per diluted share,
compared to a loss of 17.9 percent of revenue or $(2.11) per diluted share in
2002. The 2002 loss includes the cumulative effect of the change in accounting
principle relating to the valuation of the Company's goodwill which totaled 18.5
percent of revenue, or $(2.19) per diluted share. Diluted earnings per share
were calculated using 16.8 and 16.9 million equivalent shares outstanding in
2003 and 2002, respectively. The decrease in equivalent shares outstanding in
2003 is due to a lesser dilutive effect of outstanding stock options.
10
Critical Accounting Policies
- ----------------------------
The Company has determined that its sole critical accounting estimate
involves the valuation of its existing goodwill balance. With the required
adoption of FAS No. 142 in 2002, CTG recorded a charge of $37.0 million,
representing the cumulative effect of the change in accounting principle. Going
forward, the remaining goodwill balance will be evaluated annually or more
frequently if facts and circumstances indicate impairment may exist. These
evaluations will be based on estimates and assumptions that may analyze the
appraised value of similar transactions from which the goodwill arose, the
appraised value of similar companies, or estimates of future discounted cash
flows. The estimates and assumptions on which the Company's evaluations are
based necessarily involve judgments and are based on currently available
information, any of which could prove wrong or inaccurate when made, or become
wrong or inaccurate as a result of subsequent events.
As of January 1, 2003, the Company completed its annual valuation of
the business unit to which the Company's goodwill relates. This valuation
indicated that the estimated fair value of the business unit exceeded the
carrying value of this unit. Accordingly, the Company believes no additional
impairment is required to be recorded in its consolidated financial results.
Changes in future valuations, however, could lead to additional impairment
charges.
The Company has also made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these condensed consolidated
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Such estimates primarily relate to allowances for
doubtful accounts receivable and deferred tax assets, and estimates of progress
toward completion and direct profit or loss on fixed-price contracts. Actual
results could differ from these estimates.
11
Financial Condition and Liquidity
- ---------------------------------
Cash provided by operating activities was $3.2 million through the
first three quarters of 2003. Net income totaled $0.9 million, while other
non-cash adjustments, primarily consisting of depreciation expense, the loss on
sales of property and equipment and property held for sale, and deferred income
taxes, totaled $3.2 million. Additionally, accounts receivable decreased by $0.3
million as compared to December 31, 2002 primarily due to lower revenue in 2003,
offset by the timing of the collection of outstanding balances in the third
quarter of 2003 which resulted in an increase in days sales outstanding to 66
days from 65 days at December 31, 2002. Accounts payable increased $1.8 million
and taxes payable increased $1.0 million primarily due to the timing of certain
payments. Accrued compensation decreased $3.1 million due to the timing of the
payment of the U.S. biweekly payroll.
Net property and equipment and property held for sale decreased
approximately $3.5 million through the first three quarters of 2003. Additions
to property and equipment were $1.5 million, offset by depreciation expense of
$2.6 million and proceeds from the sales of property and equipment and property
held for sale of $2.3 million. The Company has no significant commitments for
capital expenditures at September 26, 2003.
Financing activities used $1.4 million of cash through the first three
quarters of 2003. Net payments on long-term revolving debt totaled approximately
$1.6 million, and the Company received $0.2 million from employees for stock
purchased under the Employee Stock Purchase Plan.
The Company is authorized to repurchase a total of 3.4 million shares
of its common stock for treasury and the Company's stock trusts. At September
26, 2003, approximately 3.2 million shares have been repurchased under the
authorizations, leaving 0.2 million shares authorized for future purchases. No
share purchases were made in 2003.
At September 26, 2003, consolidated shareholders' equity totaled $54.2
million, which is an increase of $1.8 million from December 31, 2002. The
increase is primarily due to net income of $0.9 million, and the favorable
effect of foreign currency translation of $0.7 million.
The Company believes existing internally available funds, cash
potentially generated by operations, and available borrowings under the
Company's revolving line of credit totaling approximately $43.0 million at
September 26, 2003 will be sufficient to meet foreseeable working capital,
capital expenditure, and possible stock repurchases, and to allow for future
internal growth and expansion.
The Company did not have any related party transactions in either the
first three quarters of 2003 or 2002.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is nominally exposed to market risk in the normal course of
its business operations. The Company has $6.9 million of borrowings at September
26, 2003 under a revolving credit agreement, which expose the Company to risk of
earnings or cash flow loss due to changes in market interest rates. Based upon
average bank borrowings of $14.2 million during 2003, a one percentage point
increase or decrease in market interest rates would increase or decrease the
Company's interest expense annually by $142,000. Additionally, as the Company
sells its services in North America and in Europe, financial results could be
affected by strong or weak economic conditions in those markets, particularly in
relation to the amount of technology spending that occurs in these markets.
Finally, results could be affected by the strengthening or weakening in the
currency of the Netherlands, Belgium, the United Kingdom, and Luxembourg, the
countries in which the Company's European subsidiaries operate.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation completed within 90 days prior to the filing of this
quarterly report with the SEC, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective for gathering and disclosing information as required
for reports filed under the Securities and Exchange Act of 1934. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of this
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
The Company's disclosure controls and procedures and internal controls provide
reasonable, but not absolute, assurance that all deficiencies in design or
operation of these control systems, or all instances of errors or fraud, will be
prevented or detected. These control systems are designed to provide reasonable
assurance of achieving the goals of these systems in light of the Company's
resources and nature of the Company's business operations. These control systems
remain subject to risks of human error and the risk that controls can be
circumvented for wrongful purposes by one or more individuals in management or
non-management positions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description Page
------- ----------- ----
11. Statement re: computation of earnings per share 15
31. (a) Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 16
31. (b) Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 17
32. Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 18
Reports on Form 8-K
The following reports on Form 8-K were filed during the third
quarter of 2003:
Date Description
---- -----------
July 7, 2003 Press release entitled "CTG Announces 2003 Second Quarter Conference
Call Information."
July 14, 2003 Press release entitled "CTG Reports 2003 Second Quarter Financial
Results."
July 16, 2003 Transcript of the "CTG Analyst Conference Call - Second Quarter 2003
Earnings."
September 29, 2003 A report detailing the change in the Company's Certifying Accountant as
Deloitte & Touche LLP was dismissed and KPMG LLP was engaged.
* * * * * * *
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/ Gregory M. Dearlove
-------------------------
Gregory M. Dearlove
Principal Accounting and
Financial Officer
Title: Senior Vice President and
Chief Financial Officer
Date: November 7, 2003
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