10-Q 1 l03437ae10vq.txt COMPUTER TASK GROUP, INCORPORATED 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. 13 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 14