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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 APRIL 2, 2004
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 May 3, 2004
------------------- --------------
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)
QUARTER ENDED
APRIL 2, MARCH 28,
2004 2003
---------- ----------
(amounts in thousands,
except per share data)
Revenue $ 61,447 $ 62,089
Direct costs 44,853 45,711
Selling, general and administrative expenses 15,163 15,632
---------- ----------
Operating income 1,431 746
Interest and other income 43 19
Interest and other expense (170) (195)
---------- ----------
Income from continuing operations before income taxes 1,304 570
Provision for income taxes 522 239
---------- ----------
Income from continuing operations 782 331
Loss from discontinued operations (including loss on disposal
of $3.7 million in 2004) (4,316) (201)
---------- ----------
Net income (loss) $ (3,534) $ 130
========== ==========
Basic net income (loss) per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations (0.26) (0.01)
---------- ----------
Total basic income (loss) per share $ (0.21) $ 0.01
========== ==========
Diluted net income (loss) per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations (0.25) (0.01)
---------- ----------
Total diluted income (loss) per share $ (0.20) $ 0.01
========== ==========
Weighted average shares outstanding:
Basic 16,718 16,623
Diluted 17,243 16,765
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
COMPUTER TASK GROUP, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
APRIL 2, DECEMBER 31,
2004 2003
---------- ------------
(amounts in thousands)
ASSETS
Current Assets:
Cash and temporary cash investments $ 2,863 $ 2,230
Accounts receivable, net 46,660 39,932
Prepaids and other 1,725 2,256
Income taxes receivable 213 1,239
Deferred income taxes 505 502
Assets from discontinued operations - 2,549
---------- ----------
Total current assets 51,966 48,708
Property and equipment, net of accumulated depreciation 6,659 6,846
Goodwill 35,678 35,678
Deferred income taxes 5,134 4,511
Other assets 589 704
---------- ----------
Total assets $ 100,026 $ 96,447
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,009 $ 6,519
Accrued compensation 17,639 19,066
Advance billings on contracts 878 1,140
Other current liabilities 5,942 4,255
Liabilities from discontinued operations - 939
---------- ----------
Total current liabilities 29,468 31,919
Long-term debt 8,961 -
Deferred compensation benefits 8,389 8,337
Other long-term liabilities 60 60
---------- ----------
Total liabilities 46,878 40,316
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 111,332 111,333
Retained earnings 36,907 40,441
Less: Treasury stock of 6,148,990 shares at cost (31,416) (31,416)
Stock Trusts of 4,138,165 and 4,152,119 shares at cost, respectively (58,387) (58,446)
Accumulated other comprehensive loss:
Foreign currency adjustment (4,347) (4,840)
Minimum pension liability adjustment (1,211) (1,211)
---------- ----------
Accumulated other comprehensive loss (5,558) (6,051)
---------- ----------
Total shareholders' equity 53,148 56,131
---------- ----------
Total liabilities and shareholders' equity $ 100,026 $ 96,447
========== ==========
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)
QUARTER ENDED
APRIL 2, MARCH 28,
2004 2003
---------- ----------
(amounts in thousands)
Cash flows from operating activities:
Net income from continuing operations $ 782 $ 331
Adjustments:
Depreciation expense 732 907
Deferred income taxes (612) 125
Deferred compensation 50 (291)
Changes in assets and liabilities:
Increase in accounts receivable (6,725) (2,442)
(Increase) decrease in prepaids and other 530 (1,073)
Decrease in income taxes receivable 997 -
Decrease in other assets 115 450
Increase (decrease) in accounts payable (1,489) 63
Decrease in accrued compensation (1,382) (2,186)
Decrease in advance billings on contracts (262) (372)
Decrease in other current liabilities (128) (17)
---------- ----------
Net cash used in operating activities (7,392) (4,505)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (556) (457)
Proceeds from sales of fixed assets 4 262
---------- ----------
Net cash used in investing activities (552) (195)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term revolving debt, net 8,961 7,144
Proceeds from Employee Stock Purchase Plan 48 69
Proceeds from other stock plans 10 -
---------- ----------
Net cash provided by financing activities 9,019 7,213
---------- ----------
Net cash from discontinued operations (414) 50
Effect of exchange rate changes on cash and temporary cash investments (28) 72
---------- ----------
Net increase in cash and temporary cash investments 633 2,635
Cash and temporary cash investments at beginning of quarter 2,230 -
---------- ----------
Cash and temporary cash investments at end of quarter $ 2,863 $ 2,635
========== ==========
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 year 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. DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch
operating subsidiary, CTG Nederland B.V., in a transaction that sold the stock
and transferred the unit's business, staff, and lease and equipment obligations
to the unit's management team. The contractual effective date of the disposition
was January 1, 2004, and the transaction has been treated as discontinued
operations in these condensed consolidated financial statements. This unit had
previously been included in the financial results of the Company's European
operations.
The loss from discontinued operations resulting from this divestiture
totaled approximately $4.3 in the first quarter of 2004. The loss included a
loss on disposal of approximately $3.7 million, and approximately $0.5 million
from a foreign currency adjustment which has previously been reported as a
direct charge to shareholders' equity. Although the divestiture was effective
January 1, 2004, if the Company had included the revenues and losses from this
unit in its first quarter 2004 operating results rather than in the loss on
disposal of $3.7 million, revenues would have been approximately $1.8 higher and
the income before income taxes would have been approximately $0.5 million lower.
The assets divested in this transaction totaled approximately $2.5 million,
including $2.2 million of current assets (primarily accounts receivable of $1.6
million), and non-current assets of $0.3 million consisting of the net value of
property and equipment. The liabilities divested in the transaction totaled
approximately $0.9 million of current liabilities.
5
4. NET INCOME (LOSS) PER SHARE
Basic and diluted earnings (loss) per share for the quarters ended
April 2, 2004 and March 28, 2003 is as follows:
APRIL 2, MARCH 28,
QUARTER ENDED 2004 2003
- ---------------------------------------------------------------------- ---------- ----------
Weighted-average number of shares outstanding during period 16,718 16,623
Common Stock equivalents -
Incremental shares under stock options plans 525 142
---------- ----------
Number of shares on which diluted earnings per share is based 17,243 16,765
========== ==========
Income from continuing operations $ 782 $ 331
Loss from discontinued operations (4,316) (201)
---------- ----------
Net income (loss) $ (3,534) $ 130
========== ==========
Basic net income (loss) per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations (0.26) (0.01)
---------- ----------
Total basic income (loss) per share $ (0.21) $ 0.01
========== ==========
Diluted net income (loss) per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations (0.25) (0.01)
---------- ----------
Total diluted income (loss) per share $ (0.20) $ 0.01
========== ==========
5. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss totaled $(5,558,000) and
$(6,051,000) at April 2, 2004 and December 31, 2003, respectively. These
balances included adjustments of $(38,000) and $117,000 related to foreign
currency translation made in the first quarter of 2004 and 2003, respectively,
and an adjustment of $531,000 to foreign currency related to the disposition of
the Company's Dutch operating subsidiary in the first quarter of 2004. Total
comprehensive income (loss) for the quarters ended April 2, 2004 and March 28,
2003 was $(3,041,000) and $247,000, respectively.
6
6. DEFERRED COMPENSATION AND OTHER BENEFITS
DEFERRED COMPENSATION BENEFITS
The Company maintains a non-qualified defined-benefit Executive
Supplemental Benefit Plan (ESBP) that provides one current and certain former
key executives with deferred compensation benefits, based on years of service
and base compensation, payable during retirement. The plan was amended as of
November 30, 1994, to freeze benefits for participants at that time.
Net periodic pension cost for the quarters ended April 2, 2004 and March
28, 2003 for the ESBP is as follows:
2004 2003
NET PERIODIC PENSION COST - ESBP
(amounts in thousands)
Interest cost $ 144 $ 134
Amortization of unrecognized net loss 22 6
---------- ---------
Net periodic pension cost $ 166 $ 140
========== =========
The Company also maintains a contributory defined-benefit plan for its
employees located in the Netherlands (NDBP). Benefits paid are a function of a
percentage of career average pay. The Plan was curtailed for additional
contributions in January 2003, which resulted in the recording of a gain of $0.2
million in the first quarter of 2003.
Net periodic pension benefit for the quarters ended April 2, 2004 and
March 28, 2003 for the NDBP is as follows:
2004 2003
NET PERIODIC PENSION BENEFIT - NDBP
(amounts in thousands)
Service cost $ - $ -
Interest cost 54 50
Expected return on plan assets (66) (61)
--------- ---------
Net periodic pension benefit $ (12) $ (11)
========= =========
401(k) PROFIT-SHARING RETIREMENT PLAN
The Company maintains a contributory 401(k) profit-sharing retirement plan
covering substantially all U.S. employees. Company contributions, which are
discretionary, consist of cash, and may include the Company's stock, were funded
and charged to operations in the amounts of $0.5 million and $0.6 million for
the quarters ended April 2, 2004 and March 28, 2003, respectively.
OTHER RETIREMENT PLANS
The Company maintains various retirement plans other than the NDBP
discussed above, covering substantially all of the remaining European employees.
Company contributions charged to operations were $0.1 million in each of the
quarters ended April 2, 2004 and March 28, 2003.
7
OTHER POSTRETIREMENT BENEFITS
The Company provides limited healthcare and life insurance benefits to one
current and eight retired employees and their spouses, totaling 14 participants,
pursuant to contractual agreements.
Net periodic postretirement benefit cost for the quarters ended April 2,
2004 and March 28, 2003 is as follows:
2004 2003
NET PERIODIC POSTRETIREMENT
BENEFIT COST
(amounts in thousands)
Interest cost $ 9 $ 9
Amortization of transition amount 7 7
--------- ---------
$ 16 $ 16
========= =========
7. STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans in
accordance with the provisions of 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
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.
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
APRIL 2, MARCH 28,
2004 2003
----------- ----------
(amounts in thousands, except per share data)
Net income (loss), as reported $ (3,534) $ 130
Stock-based employee compensation
expense as calculated under the fair
value method for all awards, net of tax (257) (304)
----------- ----------
Pro forma net loss $ (3,791) $ (174)
=========== ==========
Basic net income (loss) per share:
As reported $ (0.21) $ 0.01
=========== ==========
Pro forma $ (0.23) $ (0.01)
=========== ==========
Diluted net income (loss) per share:
As reported $ (0.20) $ 0.01
=========== ==========
Pro forma $ (0. 22) $ (0.01)
=========== ==========
Pro forma amounts for compensation cost may not be indicative of the
effects on earnings for future quarters.
8
8. ACCOUNTING STANDARDS PRONOUNCEMENTS
During January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," and a revision of this Interpretation in
December 2003. These Interpretations of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," address the consolidation by business
enterprises of certain variable interest entities. If applicable, the provisions
of these Interpretations were effective for interim periods beginning after June
15, 2003. The Company has reviewed the provisions of these Interpretations and
determined that they did not have any effect on its financial position or
results of operations for the quarter ended April 2, 2004.
In December 2003, the FASB issued FAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." This revision of
FAS No. 132 requires additional quarterly disclosures about the net periodic
benefit costs of defined benefit plans and other defined benefit postretirement
plans, and other general disclosures. The provisions of the statement related to
interim period disclosures are effective for interim periods beginning after
December 15, 2003. The Company has included these additional required
disclosures, as applicable, in the notes to its condensed consolidated financial
statements under note 6, "Deferred Compensation and Other Benefits."
During December 2003, the SEC published Staff Accounting Bulletin No. 104
(SAB 104). This staff accounting bulletin revises or rescinds portions of the
interpretive guidance previously published relating to revenue recognition. The
Company has reviewed the interpretations as documented in SAB 104 and determined
that its current accounting for revenue recognition activities is consistent
with these interpretations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED APRIL 2, 2004
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 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.
Several important factors should be taken into consideration when
reviewing the operational results of the Company either on a quarterly or annual
basis. These include:
THE ANTICIPATED DEMAND FOR INFORMATION TECHNOLOGY (IT) SERVICES
There was a steady decline in demand in the technology services sector
from 2000-2003 as a recession in the technology industry has negatively affected
spending for information technology services. While the Company believes that
demand has begun to increase in 2004, additional declines in spending for IT
services later in 2004 and in future years may continue to adversely affect the
Company's operating results in the future.
THE AVAILABILITY OF QUALIFIED PROFESSIONAL STAFF
The Company currently actively competes with other IT services providers
for qualified professional staff. The availability, or lack thereof, of
qualified professional staff may affect the Company's ability to provide
services and meet the needs of its customers in the future. An inability to
fulfill customer requirements due to a lack of available qualified staff may
adversely impact the operations of the Company in the future.
RATE AND WAGE INFLATION OR DEFLATION
While the rates at which the Company billed its customers for its services
stabilized in the later part of 2003, there has been a general decline in these
rates over recent years as a result of the technology recession mentioned above.
Additionally, the Company actively competes against many other companies for
business with new and existing clients. A continuation of the recession and
competitive pressures may lead to a further decline in the rates that the
Company bills its customers for its services, which may adversely effect the
Company's operating results in the future.
OPERATIONS
The Company operates in one industry segment, providing IT services to its
clients. The services provided typically encompass the IT business solution life
cycle, including phases for planning, developing, implementing, managing, and
ultimately maintaining the IT solution. A typical customer is an organization
with large, complex information and data processing requirements. The Company
promotes a portion of its services through four vertical market focus areas:
Technology Service Providers, Financial Services, HealthCare, and Life Sciences.
CTG provides three primary services to all of the markets that it serves. These
services include IT Staffing, Application Management Outsourcing, and IT
Solutions.
10
DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch
operating subsidiary, CTG Nederland B.V., in a transaction that sold the stock
and transferred the unit's business, staff, and lease and equipment obligations
to the unit's management team. The contractual effective date of the disposition
was January 1, 2004, and the transaction has been treated as discontinued
operations in these condensed consolidated financial statements. This unit had
previously been included in the financial results of the Company's European
operations.
The loss from discontinued operations resulting from this divestiture
totaled approximately $4.3 in the first quarter of 2004. The loss included a
loss on disposal of approximately $3.7 million, and approximately $0.5 million
from a foreign currency adjustment which has previously been reported as a
direct charge to shareholders' equity. Although the divestiture was effective
January 1, 2004, if the Company had included the revenues and losses from this
unit in its first quarter 2004 operating results rather than in the loss on
disposal of $3.7 million, revenues would have been approximately $1.8 higher and
the income before income taxes would have been approximately $0.5 million lower.
The assets divested in this transaction totaled approximately $2.5 million,
including $2.2 million of current assets (primarily accounts receivable of $1.6
million), and non-current assets of $0.3 million consisting of the net value of
property and equipment. The liabilities divested in the transaction totaled
approximately $0.9 million of current liabilities.
RESULTS OF OPERATIONS
The table below sets forth data as contained on the consolidated
statements of operations, with the percentage information calculated as a
percentage of consolidated revenues. All activities related to the Company's
Dutch subsidiary, CTG Nederland B.V., which was sold during the first quarter of
2004, have been removed from the Company's individual accounts and subsequently
combined and included on the line entitled "Loss from discontinued operations."
Quarter ended:
APRIL 2, MARCH 28,
2004 2003
--------------------- -----------------
Revenue 100.0% $ 61,447 100.0% $ 62,089
Direct costs 73.0% 44,853 73.6% 45,711
Selling, general, and administrative expenses 24.7% 15,163 25.2% 15,632
----- ----------- ----- --------
Operating income 2.3% 1,431 1.2% 746
Interest and other expense, net (0.2)% (127) (0.3)% (176)
----- ----------- ----- --------
Income from continuing operations before income taxes 2.1% 1,304 0.9% 570
Provision for income taxes 0.8% 522 0.4% 239
----- ----------- ----- --------
Income from continuing operations 1.3% 782 0.5% 331
Loss from discontinued operations (7.1)% (4,316) (0.3)% (201)
----- ----------- ----- --------
Net income (loss) (5.8)% $ (3,534) 0.2% $ 130
===== =========== ===== ========
In the first quarter of 2004, CTG recorded revenue of $61.4 million in 66
billable days, while in the first quarter of 2003, CTG recorded revenue of $62.1
million in 62 billable days. On a year-over-year basis, revenue declined
approximately $0.6 million, or 1%. Revenues from the Company's North American
operations totaled $51.2 million in the first quarter of 2004, a decrease of
5.5% when compared to 2003 first quarter revenue of $54.2 million. Revenues from
the Company's European operations in the first quarter of 2004 totaled $10.2
million, an increase of 29.1% when compared to the first quarter 2003 revenue of
$7.9 million. The European revenue represented 16.6% and 12.7% of first quarter
2004 and 2003 consolidated revenue, respectively. The company's revenue includes
reimbursable expenses billed to customers. These expenses totaled $1.6 million
and $1.5 million in the first quarter of 2004 and 2003, respectively.
11
In North America, the consolidated 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 Company has seen an increase in demand for the
IT staffing services it provides to its customers in late 2003 and in the latter
part of the first quarter of 2004, a general weakness in demand for the other
services offered by the Company in North America resulted in the overall
decrease in revenue year-over-year.
The significant increase in revenue in the Company's European operations
was in large part due to the strengthening of the currencies of Belgium, the
United Kingdom, and Luxembourg, the countries in which the Company's European
subsidiaries operate. In Belgium and Luxembourg, the functional currency is the
Euro, while in the United Kingdom, the functional currency is the British pound.
If there had been no change in these foreign currency exchange rates from the
first quarter of 2003 to 2004, European and total consolidated revenues for the
first quarter of 2004 would have been $1.5 million lower. Without these exchange
gains in Europe, total European revenue would have increased $0.8 million or
10.1% when compared to the first quarter 2003 revenue.
In November 2003, the Company signed a contract with International
Business Machines (IBM) for one year as one of IBM's national technical service
providers for the United States. IBM has the right to extend the contract for
three additional one-year periods. In the first quarter of 2004, IBM was the
Company's largest customer, accounting for $14.2 million or 23.1% of total
revenue as compared to $13.1 million or 21.1% of first quarter 2003 revenue. The
Company expects to continue to derive a significant portion of its revenue from
IBM in the remainder of 2004 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 73.0% of revenue in the first quarter of 2004 as
compared to 73.6% of first quarter 2003 revenue. The decrease in direct costs as
a percentage of revenue in 2004 as compared to 2003 is due to improved
utilization of the Company's technical staff during 2004.
Selling, general and administrative (SG&A) expenses were 24.7% of revenue
in the first quarter of 2004 as compared to 25.2% of revenue in the first
quarter of 2003. The decline in SG&A expense year-over-year is due to the
Company continuing to reduce its cost structure in response to the ongoing
recession in technology related investments mentioned above, which has caused
overall Company revenue to decrease.
Operating income was 2.3% of revenue in the first quarter of 2004 as
compared to 1.2% of revenue in the first quarter of 2003. Operating income from
North American operations was $1.3 million and $0.9 million in the first quarter
of 2004 and 2003, respectively, while European operations recorded operating
income of $0.1 million and an operating loss of $0.2 million in the first
quarter of 2004 and 2003, respectively.
Interest and other expense, net was (0.2)% of revenue in the first quarter
of 2004 and (0.3)% in the first quarter of 2003. The decrease as a percentage of
revenue from 2003 to 2004 is primarily due to lower average outstanding
indebtedness balances. The provision for income taxes from continuing operations
was 40% in 2004 and 42% in 2003.
Net income from continuing operations for the first quarter of 2004 was
1.3% of revenue or $0.05 per diluted share, compared to net income of 0.5% of
revenue or $0.02 per diluted share in the first quarter of 2003. Diluted
earnings per share were calculated using 17.2 and 16.8 million equivalent shares
outstanding in 2004 and 2003, respectively. The increase in equivalent shares
outstanding in 2004 is due to an increase in the Company's stock price which
resulted in a greater dilutive effect of outstanding stock options.
12
CRITICAL ACCOUNTING POLICIES
Goodwill Valuation - 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. The remaining goodwill balance of $35.7
million, relating to the company's North American operations, 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 both January 1, 2003 and 2004, 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 at both January 1, 2003 and 2004. 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.
Income Taxes - At April 2, 2004, the Company had approximately $5.6
million of current and non-current net deferred tax assets recorded on its
balance sheet. The changes in deferred tax assets and liabilities from year to
year are determined based upon the changes in differences between the basis of
assets and liabilities for financial reporting purposes and the basis of assets
and liabilities for tax purposes, as measured by the enacted tax rates when
these differences are estimated to reverse. The Company has made certain
assumptions regarding the timing of the reversal of these assets and
liabilities, and whether taxable operating income in future periods will be
sufficient to recognize all or a part of any gross deferred tax asset of the
Company.
At April 2, 2004, the Company has a deferred tax asset resulting from the
net operating loss in The Netherlands of approximately $4.4 million. The Company
also has net operating loss benefits of approximately $0.8 million in various
other countries where it does business. Management of the Company has analyzed
each country's tax position and determined that it is unclear whether
approximately $4.0 million of this asset of $5.2 million will be realized at any
point in the future. Accordingly, at April 2, 2004, the Company has offset the
asset with a valuation allowance totaling $4.0 million. In the future, the
asset, and its potential realizability, will be evaluated each quarter to
determine if a portion of the valuation allowance should be reversed. Any
reversal of this valuation allowance in the future will result in a reduction of
the Company's effective tax rate. In the first quarter of 2004, a 1% decrease in
the effect tax rate would have equaled $13,000 of additional net income.
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, investment valuation, legal matters, and estimates of
progress toward completion and direct profit or loss on fixed-price contracts.
Actual results could differ from these estimates.
13
FINANCIAL CONDITION AND LIQUIDITY
Cash used by operating activities was $(7.4) million for the first quarter
2004. Net income from continuing operations totaled $0.8 million, while other
non-cash adjustments, primarily consisting of depreciation expense offset by
deferred income taxes totaled $0.2 million. Additionally, accounts receivable
increased by $6.7 million as compared to December 31, 2003 primarily due to the
timing of certain billings and the collection of outstanding balances in the
first quarter of 2004, which resulted in an increase in days sales outstanding
to 71 days from 62 days at December 31, 2003. Income taxes receivable decreased
$1.0 million primarily due to taxes payable on current year income. Accounts
payable decreased $1.5 million primarily due to the timing of certain payments
near quarter-end. Accrued compensation decreased $1.4 million due to the timing
of the U.S. bi-weekly payroll. As a result of the Company disposing of its Dutch
operating subsidiary, CTG Nederland B.V. in the first quarter of 2004, the
Company expects to incur approximately $1.8 million of cash outflows in the
remainder of 2004 to satisfy obligations related to transaction costs for the
disposition.
Investing activities used $(0.6) million in the first quarter of 2004,
which represented the additions to property and equipment. The Company has no
significant commitments for capital expenditures at April 2, 2004.
Financing activities provided $9.0 million of cash in the first quarter of
2004. Net proceeds from long-term revolving debt totaled approximately $9.0
million. The Company borrows or repays this revolving debt as needed based upon
its working capital obligations, including the timing of the U.S. bi-weekly
payroll. Daily average borrowings under this agreement for the first quarter of
2004 were $7.9 million. The Company also received approximately $0.1 million
from employees for stock purchased under the Employee Stock Purchase Plan and
other stock plans.
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 April 2, 2004,
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 2004.
At April 2, 2004, consolidated shareholders' equity totaled $53.1 million,
which is a decrease of $(3.0) million from December 31, 2003. The decrease is
primarily due to a net loss of $(3.5) million, offset by the foreign currency
adjustment of approximately $0.5 million resulting from the sale of the
Company's Dutch operations which had previously been reported as a direct charge
to shareholders' equity.
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 $35.9 million at April 2, 2004 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 or off-balance sheet
arrangements or transactions in either the first quarter of 2004 or 2003.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any off balance sheet market risk sensitive
instruments for which disclosure is required. Total long-term revolving debt
outstanding at the end of the quarter totaled approximately $9.0 million. The
Company borrows or repays this revolving debt as needed based upon its working
capital obligations, including the timing of the U.S. bi-weekly payroll. Daily
average borrowings under this agreement for the first quarter of 2004 were $7.9
million. Accordingly, a 1% increase or decrease in interest rates would increase
or decrease quarterly interest expense by approximately $20,000.
For the most part, prior to 2003, the Company had not been subject to
material effects from foreign currency exchange rate fluctuations. However, in
2003, there was a significant strengthening of the currencies of Belgium, the
United Kingdom, and Luxembourg, the countries in which the Company's European
subsidiaries operate. In Belgium and Luxembourg, the functional currency is the
Euro, while in the United Kingdom, the functional currency is the British pound.
If there had been no change in these foreign currency exchange rates from the
first quarter of 2003 to 2004, European and total consolidated revenues for the
first quarter of 2004 would have been $1.5 million lower than the $61.4 million
reported. Without these exchange gains in Europe, total European revenue would
have increased $0.8 million or 10.1% when compared to the first quarter 2003
revenue. The Company has historically not used any market risk sensitive
instruments to hedge its foreign currency exchange risk.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation completed as of the end of the period covered by
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 our
resources and nature of our 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.
15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 5, 2004, 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 two Class I
directors, and to approve and ratify an amendment to the Company's 2000
Equity Award Plan to increase the number of shares of the Company's common
stock authorized for purchase under such plan by 1,500,000 shares.
Election of Directors
- Two Class I directors (Randall L. Clark and Randolph A. Marks) were
elected to hold office until the 2007 annual meeting of shareholders
and until their successors are elected and qualified. The results of
the voting are as follows:
Total Vote Total Vote
Director For Withheld
- --------------------------- ---------- ---------
Randall L. Clark (Class I) 17,093,497 1,747,475
Randolph A. Marks (Class I) 16,588,916 2,252,056
- The Class II directors of the Company whose term of office extends
until the 2005 annual meeting of shareholders and until their
successors are elected and qualified are George B. Beitzel and James
R. Boldt.
- The Class III directors of the Company whose term of office extends
until the 2006 annual meeting of shareholders and until their
successors are elected and qualified are John M. Palms and Daniel J.
Sullivan.
Computer Task Group, Incorporated 2000 Equity Award Plan
Total Vote For 10,251,640
Total Vote Against 4,201,563
Total Votes Abstained 38,288
Broker No Vote 4,349,481
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description Page
- ------- ----------------------------------------------------------- ----
31.(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 18
31.(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 19
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 20
Reports on Form 8-K
The following reports on Form 8-K were filed during the first quarter of
2004:
Date Description
- ----------------- ---------------------------------------------------------------------------------------
February 2, 2004 Press release entitled "CTG Announces 2003 Fourth Quarter Conference Call Information."
February 9, 2004 Press release entitled "CTG Reports 2003 Fourth Quarter and Annual Results."
February 11, 2004 Transcript of the "CTG Analyst conference Call - Fourth Quarter 2003 Earnings."
* * * * * * *
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: Vice President and
Chief Financial Officer
Date: May 11, 2004
17