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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______ to _______
Commission File No. 1-9410
COMPUTER TASK GROUP, INCORPORATED
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of New York 16-0912632
- -------------------------------- -----------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
800 Delaware Avenue, Buffalo, New York 14209
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716) 882-8000
--------------------------------------------------
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Rights to Purchase Series A
Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES [X] NO [ ]
The aggregate market value of the Registrant's voting and non-voting common
equity, computed by reference to the price at which the common equity was last
sold on the last business day of the Registrant's most recently completed second
quarter was $64.8 million. Solely for the purposes of this calculation, all
persons who are or may be executive officers or directors of the Registrant and
all persons who have filed a Schedule 13D or Schedule 13G with respect to the
Registrant's stock have been deemed to be affiliates.
The total number of shares of Common Stock of the Registrant outstanding at
March 15, 2005 was 20,868,834.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Company's definitive proxy statement to be filed under
the Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year ended December 31, 2004, are incorporated by reference into
1
Part III hereof. Except for those portions specifically incorporated by
reference herein, such document shall not be deemed to be filed with the
Commission as part of this Form 10-K.
2
PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements by management and the
Company that are subject to a number of risks and uncertainties. The
forward-looking statements contained in the report are based on information as
of the date of this report. The Company assumes no obligation to update these
statements based on information from and after the date of this report.
Generally, forward-looking statements include words or phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "could," "may," "might," "should," "will" and words and phrases of
similar impact. The forward-looking statements include, but are not limited to,
statements regarding future operations, industry trends or conditions and the
business environment, and statements regarding future levels of, or trends in,
revenues, operating expenses, capital expenditures, and financing. The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Numerous factors could cause
actual results to differ materially from those in the forward-looking
statements, including the following: (i) industry conditions, including
fluctuations in demand for IT services, (ii) the availability to us of qualified
professional staff, (iii) industry competition, (iv) rate and wage inflation or
deflation, (v) risks associated with operating in foreign jurisdictions, (vi)
the impact of current and future laws and government regulation, as well as
repeal or modification of same, affecting the IT solutions and staffing
industry, taxes and the Company's operations in particular, (vii)
renegotiations, nullification, or breaches of contracts with customers, vendors,
subcontractors or other parties, (viii) consolidation among the Company's
competitors or customers, and (ix) the risks described elsewhere herein and from
time to time in the Company's reports to the Securities and Exchange Commission.
ITEM 1. BUSINESS
Computer Task Group, Incorporated (the Company, CTG, or the Registrant) was
incorporated in Buffalo, New York on March 11, 1966, and its corporate
headquarters are located at 800 Delaware Avenue, Buffalo, New York 14209
(716-882-8000). CTG is an international information technology (IT) solutions
and staffing company. CTG employs approximately 2,500 people worldwide and
serves customers through an international network of offices in North America
and Europe. During 2004, the Company had five operating subsidiaries: CTG
HealthCare Solutions (Kansas), Inc., and Computer Task Group of Canada, Inc.,
primarily providing services in North America; and Computer Task Group Belgium
N.V., Computer Task Group Luxembourg S.A., and Computer Task Group (U.K.) Ltd.
primarily providing services in Europe. During 2004, the Company merged its
subsidiary CTG Services, Inc. into Computer Task Group, Incorporated.
DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch operating
subsidiary, CTG Nederland B.V., in a transaction in which the Company sold the
subsidiary's stock and transferred the unit's business, staff, and lease and
equipment obligations to the unit's management team. The effective date of the
disposition was January 1, 2004, and the transaction has been treated as
discontinued operations in the Company's consolidated financial statements
contained in this report. As part of the transaction, the Company retained the
assets and liabilities related to the defined-benefit plan for its previous
employees in The Netherlands (NDBP). At the time of the disposition, the net
asset of the plan totaled approximately $0.5 million. The activities of the NDBP
are discussed in note 7, "Deferred Compensation Benefits," included in the
Company's consolidated financial statements in this Form 10-K under Item no. 8,
"Financial Statements and Supplementary Data." 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 $4.4 million in 2004, with approximately $4.3 million of that loss
incurred in the first quarter of 2004. The loss includes a cumulative loss on
disposal of approximately $3.9 million, and approximately $0.5 million from a
foreign currency adjustment which had previously been reported as a direct
charge to shareholders' equity. All activities related to this subsidiary have
been removed from the Company's individual accounts and subsequently combined
and included on the line entitled "Income (loss) from discontinued operations"
on the Company's Consolidated Statements of Operations.
3
Revenue, loss before income taxes, and income (loss) from discontinued
operations for 2004, 2003, and 2002 are as follows:
(amounts in thousands) 2004 2003 2002
Revenue $ - $ 6,827 $ 7,151
Loss before income taxes $ - $ (1,762) $ (2,120)
Income (loss) from discontinued operations $ (4,411) $ 62 $ (1,397)
During 2003, the Company recorded a tax refund and interest thereon of
approximately $1.1 million and $0.6 million, respectively, resulting from the
resolution of a court case in The Netherlands which, for tax purposes, created a
net operating loss for the Company's Dutch subsidiaries. This refund was
received in 2004 and included above as part of the income from discontinued
operations in 2003.
Assets and liabilities of the discontinued operations were as follows at
December 31, 2003 and 2002:
(amounts in thousands) 2003 2002
Cash $ 304 $ 743
Accounts receivable $ 1,622 $ 1,383
Other current assets $ 282 $ 833
Property and equipment, net $ 341 $ 232
Current liabilities $ 939 $ 942
As the disposition was effective January 1, 2004, the assets and liabilities of
the disposed operation on that date approximated the balances at December 31,
2003.
AVAILABLE COMPANY INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and reports pertaining to the Company filed under Section 16 of the
Exchange Act are available without charge on the Company's website at
www.ctg.com as soon as reasonably practicable after the Company electronically
files the information with, or furnishes it to, the Securities and Exchange
Commission. The Company's code of ethics, committee charters and governance
policies are also available without charge on the Company's website at
www.ctg.com/investors/corporategov.htm.
4
BACKGROUND
The Company operates in one industry segment, providing IT services to its
clients. These services include IT Staffing, Application Management Outsourcing,
and IT Solutions. CTG provides these three primary services to all of the
markets that it serves. 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. Approximately 82% of consolidated 2004 revenue of $237.1 million
was generated in North America and 18% in Europe. The Company promotes a portion
of its services through four vertical market focus areas: Technology Service
Providers, Financial Services, HealthCare, and Life Sciences. A brief discussion
of the Company's IT Staffing, Application Management Outsourcing, and IT
Solutions services is as follows:
- IT STAFFING: CTG recruits, retains, and manages IT talent for its
clients. The Company services both large organizations with multiple
locations and high-volume IT requirements, and companies that need
to augment their own staff on a flexible basis. Our recruiting
organization works with customers to define their requirements and
develop the most competitive pricing to meet those requirements.
- APPLICATION MANAGEMENT OUTSOURCING (AMO): In an AMO project, a
client outsources the management of some or all of its applications
so that their internal management and staff can focus on projects
that will help them in creating and fostering initiatives that will
aid in delivering a competitive advantage to the company. CTG's
services in this area include support of single or multiple
applications, help desk, and facilities management through a full
suite of cost-effective maintenance, enhancement, and systems
development and integrated solutions.
- IT SOLUTIONS: CTG's services in this area range from helping clients
assess their business needs and identifying the right IT solutions
to meet them, to the delivery of services that include the selection
and implementation of packaged software and the design,
construction, testing, and integration of new systems.
International Business Machines Corporation (IBM) is CTG's largest customer. CTG
provides services to various IBM divisions in many locations. In November 2003,
the Company signed a contract with IBM for one year as one of IBM's national
technical service providers for the United States. The Company and IBM recently
completed the renewal of this contract for one additional year. This contract
accounted for approximately 93% of all of the services provided to IBM by the
Company in 2004. IBM accounted for $52.6 million or 22.2% of the Company's 2004
consolidated revenue, $51.9 million or 21.1% of 2003 consolidated revenue, and
$50.3 or 19.6% of 2002 consolidated revenue. The Company expects to continue to
derive a significant portion of its revenue from IBM in 2005 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. No other customer
accounted for more than 10% of the Company's revenues in 2004 or 2003.
The Company has registered its symbol and logo with the U.S. Patent and
Trademark Office. It has entered into agreements with various software and
hardware vendors from time to time in the normal course of business, none of
which are material to the business.
No employees are covered by a collective bargaining agreement or are represented
by a labor union. CTG is an equal opportunity employer.
5
PRICING AND BACKLOG
The majority of CTG's services are performed on a time-and-materials basis.
Rates vary based on the type and level of skill required by the customer, as
well as geographic location. Agreements for work performed on a
time-and-materials basis generally do not specify any dollar amount as services
are rendered on an "as required" basis.
The Company performs a portion of its business on a monthly fee basis, as well
as a small portion of its project business on a fixed-price basis. These
contracts generally have different terms and conditions regarding cancellation
and warranties, and are usually negotiated based on the unique aspects of the
project. Contract value for fixed-price contracts is generally a function of the
type and level of skills required to complete the related project and the risk
associated with the project. Risk is a function of the project deliverable,
completion date and CTG's management and staff performance. Fixed-price
contracts accounted for under the percentage of completion method represented
approximately four percent of 2004, three percent of 2003, and three percent of
2002 consolidated revenue, respectively. Revenue from all fixed-price contracts,
including those accounted for under the percentage of completion method and on a
monthly fee basis, represented 11%, 13%, and 14% of consolidated revenues in
2004, 2003, and 2002, respectively. As of December 31, 2004 and 2003, the
backlog for fixed-price and all managed-support contracts was approximately
$20.2 million and $75.3 million, respectively. The primary reason for the
significant decrease in backlog from December 31, 2003 to 2004 was due to the
loss of a large outsourcing engagement involving approximately 100 billable
staff ending at the end of July 2004 as the customer, who is in liquidation,
decided to in-source its IT department. Approximately 92% of the December 31,
2004 backlog of $20.2 million, or $18.6 million, is expected to be earned in
2005. Of the $75.3 million of backlog at December 31, 2003, approximately 35%,
or $26.3 million was earned in 2004. Revenue is subject to seasonal variations,
with a minor downturn in months of high vacation and legal holidays (July,
August, and December). Backlog does not tend to be seasonal; however, it does
fluctuate based upon the timing of long-term contracts.
COMPETITION
The IT services market is highly competitive. The market is also highly
fragmented with many providers with no single competitor maintaining a clear
market leadership. The Company's competition varies by location, the type of
service provided, and the customer to whom services are provided. Competition
comes from four major channels: large national or international vendors,
including major accounting and consulting firms; hardware vendors and suppliers
of packaged software systems; small local firms or individuals specializing in
specific programming services or applications; and a customer's internal data
processing staff. CTG competes against all four of these channels for its share
of the market. The Company believes that to compete successfully it is necessary
to have a local geographic presence, offer appropriate IT solutions, provide
skilled professional resources, and price its services competitively.
CTG has implemented a Global Management System, with a goal to achieve
continuous, measured improvements in services and deliverables. As part of this
program, CTG has developed specific methodologies for providing high value
services that result in unique solutions and specified deliverables for its
clients. The Company believes these methodologies will enhance its ability to
compete. CTG initially achieved worldwide ISO 9001:1994 certification in June
2000. CTG received its worldwide ISO 9001:2000 certification in January 2003.
The Company believes it is the only IT services company of its size to achieve
worldwide certification.
6
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
All information below has been revised as applicable to reflect the results from
continuing operations only and therefore exclude the results of CTG Nederland,
B.V. which was sold effective January 1, 2004.
2004 2003 2002
------ ------ ------
(amounts in thousands)
Revenue from External Customers:
North America $ 193,704 $ 212,075 $ 226,824
Belgium 28,694 22,967 18,611
Other European countries 14,724 10,472 10,690
----------- ----------- -----------
Total revenue $ 237,122 $ 245,514 $ 256,125
=========== =========== ===========
Operating Income (Loss):
North America $ 16,087 $ 18,401 $ 19,577
Europe 849 33 (1,742)
Corporate and other (13,838) (12,903) (11,857)
----------- ----------- -----------
Total operating income $ 3,098 $ 5,531 $ 5,978
=========== =========== ===========
Identifiable Assets:
North America $ 76,657 $ 74,197 $ 80,908
Europe 13,202 10,190 8,013
Corporate and other (1) 13,001 13,545 12,373
Discontinued operations - 2,549 3,191
----------- ----------- -----------
Total identifiable assets $ 102,860 $ 100,481 $ 104,485
=========== =========== ===========
(1) Corporate and other identifiable assets consist principally of cash and
temporary cash investments, deferred taxes, and other assets
7
EXECUTIVE OFFICERS OF THE COMPANY
As of December 31, 2004, the following individuals were executive officers of
the Company:
Period During Other Positions
Which Served as and Offices with
Name Age Office Executive Officer Registrant
- ---- --- ------ ----------------- ----------
James R. Boldt 53 Chairman, President and June 21, 2001 for President,
Chief Executive Officer July 16, 2001 for Chief
Executive Officer,
May 2002 for Chairman,
all to date Director
Executive Vice President February 2001 to June 2001
Vice President, Strategic Staffing December 2000 to
September 2001
Acting Chief Executive Officer June 2000 to November 2000
Vice President and February 12, 1996 to
Chief Financial Officer October 1, 2001
Arthur W. Crumlish 50 Senior Vice President September 24, 2001 to date None
Gregory M. Dearlove 50 Senior Vice President, October 1, 2001 to date Treasurer
Chief Financial Officer
Filip J.L. Gyde 44 Senior Vice President October 1, 2000 to date None
Michael J. McNees 52 Senior Vice President May 5, 2004 to date None
Joseph B. Murphy 48 Senior Vice President August 23, 2004 to date None
Thomas J. Niehaus 43 Senior Vice President July 22, 1999 to date None
Peter P. Radetich 51 Senior Vice President, April 28, 1999 to date Secretary
General Counsel
Mr. Boldt was appointed president and joined CTG's Board of Directors on June
21, 2001, and was appointed chief executive officer on July 16, 2001. Mr. Boldt
became the Company's Chairman in May 2002. Mr. Boldt joined the Company as a
vice president, chief financial officer and treasurer in February 1996.
Mr. Crumlish was promoted to senior vice president in September 2001, and is
currently responsible for the Company's Strategic Staffing Services
organization. Prior to that, he was controller of the Strategic Staffing
Services organization. Mr. Crumlish joined the Company in 1990.
Mr. Dearlove joined the Company as a senior vice president and its chief
financial officer in October 2001. Prior to that, Mr. Dearlove was the office
managing partner of Deloitte & Touche's (Deloitte) Upstate New York Offices from
June 1997 to September 2001. Mr. Dearlove had been a partner with Deloitte since
1986.
Mr. Gyde was promoted to senior vice president in October 2000, and is currently
responsible for all of the Company's European operations. Prior to that, Mr.
Gyde was managing director of the Company's Belgium operation. Mr. Gyde has been
with the Company since May 1987.
8
Mr. McNees joined the Company in September 1992 as a sales manager. He was
promoted to Director, Business Development in October 1996 for the Company's
mid-Atlantic region, promoted again for the same region to Managing Director in
July 1998, to Vice President of the Company's Life Sciences unit in June 2003,
and to senior vice president of the Company's Life Sciences unit in May 2004.
Mr. Murphy joined the Company in August 2004 as the senior vice president of the
Company's IT Solutions operations. Prior to joining the Company, in 2004 Mr.
Murphy was the Chief Sales Officer for E5 Systems, in 2003 was the vice
president of Application Management Services for North America for Sapient, and
from 1998 to 2003 was a managing director for Keane, Inc.
Mr. Niehaus joined the Company in February 1999, and was promoted to senior vice
president of CTG HealthCare Solutions in July 1999. Previously, Mr. Niehaus was
executive vice president of Elumen Solutions, Inc. from September 1997 to
February 1999. Prior to that, Mr. Niehaus was vice president of Exemplar
Systems.
Mr. Radetich joined the Company in June 1988 as associate general counsel, and
was promoted to general counsel and secretary in April 1999.
9
ITEM 2. PROPERTIES
The Company owns and occupies a headquarters building at 800 Delaware Avenue,
and an office building at 700 Delaware Avenue, both located in Buffalo, New York
and part of the Company's North American operations. The corporate headquarters
consists of approximately 40,000 square feet and is occupied by corporate
administrative operations. The office building consists of approximately 39,000
square feet and is also occupied by corporate administrative operations. During
December 2003, the Company paid off a term loan totaling $5 million that had
previously been collateralized by these properties. At December 31, 2004, these
properties were not mortgaged; however, they are pledged as collateral against
the Company's existing revolving credit agreement.
Previously, the Company also owned a 37,000 square foot building in Melbourne,
Florida with a net book value of $2.2 million, which, for approximately eight
months in 2002, was leased to a third party under a one-year lease. During the
first quarter of 2002, the Company began to actively market this property for
sale, and had classified this property as held for sale on its December 31, 2002
consolidated balance sheet. During 2002, the Company made an adjustment of
approximately $0.1 million to the carrying value of this asset in order to
write-down the property's value to the anticipated net fair value. The property
was subsequently sold during the second quarter of 2003 for approximately $2.2
million. The Company recorded an additional loss of approximately $0.2 million
at the time of the sale.
The remainder of the Company's locations are leased facilities. Most of these
facilities serve as sales and support offices and their size varies, generally
in the range of approximately 250 to 25,000 square feet, with the number of
people employed at each office. The Company's lease terms vary from periods of
less than a year to five years and generally have flexible renewal options. The
Company believes that its present owned and leased facilities are adequate to
support its current and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved from time to time in various legal
proceedings arising in the ordinary course of business. Although the outcome of
lawsuits or other proceedings involving the Company and its subsidiaries cannot
be predicted with certainty and the amount of any liability that could arise
with respect to such lawsuits or other proceedings cannot be predicted
accurately, management does not expect these matters to have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of 2004.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
STOCK MARKET INFORMATION
The Company's stock is traded on the New York Stock Exchange under the symbol
CTG, and is commonly abbreviated Cptr Task. The following table sets forth the
high and low sales prices for the Company's common stock on the New York Stock
Exchange for the previous two years.
STOCK PRICE HIGH LOW
YEAR ENDED DECEMBER 31, 2004
Fourth Quarter $ 6.55 $ 2.65
Third Quarter $ 4.05 $ 2.75
Second Quarter $ 5.72 $ 3.85
First Quarter $ 5.66 $ 3.75
YEAR ENDED DECEMBER 31, 2003
Fourth Quarter $ 4.41 $ 3.30
Third Quarter $ 3.80 $ 2.51
Second Quarter $ 2.92 $ 1.93
First Quarter $ 4.09 $ 2.00
On February 7, 2005, there were 2,819 record holders of the Company's common
shares. The Company has not paid a dividend since 2000. The Company paid an
annual cash dividend of $.05 per share from 1993 to 2000 and, prior to that,
paid $.025 per share annually since 1976 plus a 10% share dividend in 1980. The
determination of the timing, amount and payment of dividends on the Company's
common stock in the future is at the discretion of the Board of Directors and
will depend upon, among other things, the Company's profitability, liquidity,
financial condition and capital requirements.
For information concerning common stock to issued in connection with the
Company's equity compensation plans, see "Part III, Item 12. Security Ownership
of Certain Beneficial Owners and Management."
The Company did not repurchase any of its outstanding common stock during 2004.
11
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY - FIVE-YEAR SELECTED FINANCIAL INFORMATION
The selected consolidated statement of income data set forth below for each of
the years in the five-year period ended December 31, 2004 has been derived from
the Company's audited consolidated financial statements. This information should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in "Item 8. Financial Statements and Supplementary Data."
Information reported for the years 2000 to 2003 has been restated, as
applicable, to reflect the disposition of CTG Nederland, B.V. effective January
1, 2004.
2004 2003 2002 2001 2000
(amounts in millions, except per-share data)
OPERATING DATA
Revenue $ 237.1 $ 245.5 $ 256.1 $ 299.4 $ 319.1
Operating income (loss) $ 3.1 $ 5.5 $ 6.0 $ 1.4 $ (4.4)***
Income (loss) from continuing operations
before cumulative effect of change
in accounting principle $ 3.0 $ 2.7 $ 2.8 $ (1.3) $ (3.4)***
Net income (loss) $ (1.4)* $ 2.7 $ (35.7)** $ (2.2) $ (5.7)***
Basic net income (loss) per share from
continuing operations before cumulative
effect of change in accounting principle $ 0.18 $ 0.16 $ 0.17 $ (0.08) $ (0.21)***
Basic net income (loss) per share $ (0.09)* $ 0.16 $ (2.15)** $ (0.13) $ (0.35)***
Diluted net income (loss) per share from
continuing operations before cumulative
effect of change in accounting principle $ 0.17 $ 0.16 $ 0.16 $ (0.08) $ (0.21)***
Diluted net income (loss) per share $ (0.08)* $ 0.16 $ (2.11)** $ (0.13) $ (0.35)***
Cash dividend per share $ - $ - $ - $ - $ 0.05
FINANCIAL POSITION
Working capital $ 17.2 $ 15.9 $ 16.3 $ 20.5 $ 12.9
Total assets $ 102.9 $ 100.5 $ 104.5 $ 152.0 $ 165.5
Long-term debt $ - $ - $ 8.5 $ 15.5 $ 9.7
Shareholders' equity $ 56.5 $ 56.1 $ 52.4 $ 86.6 $ 88.8
* Includes a loss from discontinued operations of approximately $4.4
million, or $0.27 per basic share and $0.25 per diluted share, for the
disposition of CTG Nederland, B.V. effective January 1, 2004
** Includes a charge for the cumulative effect of a change in accounting
principle related to the adoption of Financial Accounting Standard (FAS)
No. 142, "Goodwill and Other Intangible Assets," which reduced net income
by $37.0 million, basic net income per share by $2.23, and diluted net
income per share by $2.19
*** Includes the net expense of a restructuring charge, which increased
operating loss by $4.2 million, net loss by $3.0 million, and basic and
diluted net loss per share by $0.18
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements by management and the Company
that are subject to a number of risks and uncertainties. The forward-looking
statements contained in the report are based on information as of the date of
this report. The Company assumes no obligation to update these statements based
on information from and after the date of this report. Generally,
forward-looking statements include words or phrases such as "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects," "could,"
"may," "might," "should," "will" and words and phrases of similar impact. The
forward-looking statements include, but are not limited to, statements regarding
future operations, industry trends or conditions and the business environment,
and statements regarding future levels of, or trends in, revenues, operating
expenses, capital expenditures, and financing. The forward-looking statements
are made pursuant to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Numerous factors could cause actual results to differ
materially from those in the forward-looking statements, including the
following: (i) industry conditions, including fluctuations in demand for IT
services, (ii) the availability to us of qualified professional staff, (iii)
industry competition, (iv) rate and wage inflation or deflation, (v) risks
associated with operating in foreign jurisdictions, (vi) the impact of current
and future laws and government regulation, as well as repeal or modification of
same, affecting the IT solutions and staffing industry, taxes and the Company's
operations in particular, (vii) renegotiations, nullification, or breaches of
contracts with customers, vendors, subcontractors or other parties, (viii)
consolidation among the Company's competitors or customers, and (ix) the risks
described elsewhere herein and from time to time in the Company's reports to the
Securities and Exchange Commission.
Several important factors should be taken into consideration when reviewing the
Company's operational results. These include:
THE ANTICIPATED DEMAND FOR INFORMATION TECHNOLOGY (IT) SERVICES
There was a steady decline in demand in the technology services sector from the
second half of 1999 through 2003 as a recession in the technology industry
negatively affected spending for information technology services. The Company
believes that demand began to increase in 2004, and staffing demand returned to
more normalized levels for the first time in five years. However, declines in
spending for IT services in 2005 and in future years may again adversely affect
the Company's operating results in the future as it has in the past.
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
somewhat stabilized in the later part of 2003, there had been a general decline
in these rates over recent years as a result of the technology recession
mentioned above. The Company did experience a reduction in the rates at which it
bills its customers for its services for one significant customer during the
first half of 2004. Additionally, the Company actively competes against many
other companies for business with new and existing clients. 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.
INTERNATIONAL OPERATIONS
The Company has operations in the United States and Canada in North America, and
in Belgium, the United Kingdom and Luxembourg in Europe. The Company's foreign
operations are subject to currency fluctuations, legislation and tax law
changes, and economic climates that are different than that of the United
States. Although the Company actively manages these foreign operations, economic
conditions or other changes beyond the Company's control may negatively effect
the Company's overall operating results.
13
OPERATIONS
The Company operates in one industry segment, providing IT staffing solutions
services to its clients. These services include IT Staffing, Application
Management Outsourcing, and IT Solutions. CTG provides these three primary
services to all of the markets that it serves. 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.
DISPOSITION OF OPERATIONS
During the first quarter of 2004, the Company disposed of its Dutch operating
subsidiary, CTG Nederland B.V., in a transaction in which the Company sold the
subsidiary's stock and transferred the unit's business, staff, and lease and
equipment obligations to the unit's management team. The effective date of the
disposition was January 1, 2004, and the transaction has been treated as
discontinued operations in the Company's consolidated financial statements
contained in this report. As part of the transaction, the Company retained the
assets and liabilities related to the defined-benefit plan for its previous
employees in The Netherlands (NDBP). At the time of the disposition, the net
asset of the plan totaled approximately $0.5 million. The activities of the NDBP
are discussed in note 7, "Deferred Compensation Benefits," included in the
Company's consolidated financial statements in this Form 10-K under Item no. 8,
"Financial Statements and Supplementary Data." 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 $4.4 million in 2004, with approximately $4.3 million of that loss
incurred in the first quarter of 2004. The loss includes a cumulative loss on
disposal of approximately $3.9 million, and approximately $0.5 million from a
foreign currency adjustment which had previously been reported as a direct
charge to shareholders' equity. All activities related to this subsidiary have
been removed from the Company's individual accounts and subsequently combined
and included on the line entitled "Income (loss) from discontinued operations"
on the Company's Consolidated Statements of Operations.
Revenue, loss before income taxes, and income (loss) from discontinued
operations for 2004, 2003, and 2002 are as follows:
(amounts in thousands) 2004 2003 2002
Revenue $ - $ 6,827 $ 7,151
Loss before income taxes $ - $ (1,762) $ (2,120)
Income (loss) from discontinued operations $ (4,411) $ 62 $ (1,397)
During 2003, the Company recorded a tax refund and interest thereon of
approximately $1.1 million and $0.6 million, respectively, resulting from the
resolution of a court case in The Netherlands which, for tax purposes, created a
net operating loss for the Company's Dutch subsidiaries. This refund was
received in 2004 and included above as part of the income from discontinued
operations in 2003.
Assets and liabilities of the discontinued operations were as follows at
December 31, 2003 and 2002:
(amounts in thousands) 2003 2002
Cash $ 304 $ 743
Accounts receivable $ 1,622 $ 1,383
Other current assets $ 282 $ 833
Property and equipment, net $ 341 $ 232
Current liabilities $ 939 $ 942
As the disposition was effective January 1, 2004, the assets and liabilities of
the disposed operation on that date approximated the balances at December 31,
2003.
14
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 as reported on the Company's Consolidated Statements of
Operations as included in this Form 10-K under Item 8, "Financial Statements and
Supplementary Data."
YEAR ENDED DECEMBER 31, 2004 2003 2002
(percentage of revenue)
Revenue 100.0% 100.0% 100.0%
Direct costs 73.0% 72.7% 72.0%
Selling, general, and administrative expenses 25.7% 25.0% 25.7%
----- ----- -----
Operating income 1.3% 2.3% 2.3%
Interest and other expense, net (0.3)% (0.4)% (0.6)%
----- ----- -----
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 1.0% 1.9% 1.7%
Provision (benefit) for income taxes (0.3)% 0.8% 0.6%
----- ----- -----
Income from continuing operations before cumulative
effect of change in accounting principle 1.3% 1.1% 1.1%
Income (loss) from discontinued operations (1.9)% - (0.6)%
----- ----- -----
Net income (loss) before cumulative effect of change
in accounting principle (0.6)% 1.1% 0.5%
Cumulative effect of change in accounting principle - - (14.4)%
----- ----- -----
Net income (loss) (0.6)% 1.1% (13.9)%
===== ===== =====
2004 AS COMPARED TO 2003
In 2004, the Company recorded revenue of $237.1 million, a decrease of 3.4%
compared to revenue of $245.5 million recorded in 2003. Revenue from the
Company's North American operations totaled $193.7 million in 2004, a decrease
of 8.7% when compared to 2003 revenue of $212.1 million. Revenue from the
Company's European operations totaled $43.4 million in 2004, an increase of
29.9% when compared to 2003 revenue of $33.4 million. The European revenue
represented 18.3% and 13.6% of 2004 and 2003 consolidated revenue, respectively.
The company's revenue includes reimbursable expenses billed to customers. These
expenses totaled $8.3 million and $6.7 million in 2004 and 2003, respectively.
In North America, the revenue decrease is primarily the result of a large
outsourcing engagement involving approximately 100 billable staff ending at the
end of July 2004 as the customer, who is in liquidation, decided to in-source
its IT department. Offsetting this engagement was stronger demand for the
staffing services the Company provides to its clients. Although demand for
staffing services increased during 2004, the addition of billable staff was
gradual throughout the year as compared to the large engagement ending at the
end of July, and therefore only partially offset the decline in revenue. The
Company has continued to see strong demand for its staffing services in the
first quarter of 2005.
The significant increase in revenue in the Company's European operations in 2004
as compared to 2003 was in part due to the addition of a large healthcare
project in the United Kingdom. This project accounted for approximately
one-third of the year-over-year revenue increase. Additionally, the increase in
year-over-year revenue was partially due to the strength 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 2003 to 2004, European and total consolidated
revenues in 2004 would have been $4.1 million lower, or $39.3 million in total
as compared to the $43.4 million reported in 2004.
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. The Company and IBM recently completed the renewal of
this contract for one additional year. This contract accounted for approximately
93% of all of the services provided to IBM by the Company in 2004. In 2004, IBM
was the Company's largest customer, accounting for $52.6 million or 22.2% of
total revenue as compared to $51.9 million or 21.1% of 2003 revenue. The Company
expects to continue to derive a significant portion of its revenue from IBM in
2005 and in future years. While a decline in revenue
15
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. No other customer accounted for more than 10%
of the Company's revenue in 2004 or 2003.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 73.0% of revenue in 2004 as compared to 72.7% of
2003 revenue. The increase in direct costs as a percentage of revenue in 2004 as
compared to 2003 is primarily due to higher medical benefit costs (0.4%), offset
by a change in the mix of services provided to clients.
Selling, general and administrative (SG&A) expenses were 25.7% of revenue in
2004 as compared to 25.0% of revenue in 2003. Although the percentages have
increased in 2004, total SG&A expenses have decreased from 2003 as the Company
continues to actively manage its cost structure in response to the revenue
pressures mentioned above, which has caused overall Company revenue to decrease.
In 2004, the Company did incur costs to continue to make investments in the
Company in the areas of recruiting and its service offerings in order to
capitalize on increases in market demand when they began to occur during 2004.
Also, in addition to the use of internal resources, the Company incurred in
excess of $0.5 million of costs to comply with the provisions of Section 404 of
the Sarbanes-Oxley Act of 2002, which were not incurred in 2003.
Operating income was 1.3% of revenue in 2004 as compared to 2.3% of revenue in
2003. Operating income from North American operations was $2.3 million in 2004
as compared to $5.5 million in 2003, while European operations recorded
operating income of $0.8 million in 2004 and $0 in 2003. Operating income in
Europe was positively effected by approximately $0.1 million due to the strength
of the currencies in the countries in which the Company's European subsidiaries
operate.
Interest and other expense, net was 0.3% of revenue in 2004 and 0.4% in 2003.
The decrease as a percentage of revenue from 2003 to 2004 is primarily due to
lower average outstanding indebtedness balances in 2004.
The estimated effective tax rate (ETR) used to calculate the provision for
income taxes from continuing operations was a benefit of (22.6) % in 2004 and
42% in 2003. The ETR is recalculated quarterly based upon current assumptions
relating to the full year's estimated operating results, and various tax related
items. The decrease in the rate in 2004 as compared to 2003 is primarily due to
the Company utilizing previously recorded net operating loss tax benefits of
approximately $0.5 million for its European and Canadian operations that had
been fully offset by a valuation allowance, a release of approximately $0.6
million of previously recorded tax liabilities resulting from the Company's
interpretation of recent tax legislation enacted in Europe, $0.4 million for
state tax net operating loss tax benefits that had previously been fully offset
by a valuation allowance, and a net amount of approximately $0.2 million from
the release of other deferred tax items. Without these adjustments to the ETR,
the rate would have been approximately 48% in 2004.
Net income from continuing operations for 2004 was 1.3% of revenue or $0.17 per
diluted share, compared to net income from continuing operations of 1.1% of
revenue or $0.16 per diluted share in 2003. Diluted earnings per share were
calculated using 17.1 million and 16.8 million equivalent shares outstanding in
2004 and 2003 periods, 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.
2003 AS COMPARED TO 2002
In 2003, CTG recorded revenue of $245.5 million, a decrease of 4.1% when
compared to 2002 revenue of $256.1 million. Revenues from the Company's North
American operations totaled $212.1 million in 2003, a decrease of 6.5 percent
when compared to 2002 revenue of $226.8 million. Revenues from the Company's
European operations totaled $33.4 million, an increase of 14% when compared to
2002 revenue of $29.3 million. The European revenue represented 13.6% and 11.4%
of 2003 and 2002 consolidated revenue, respectively. The Company's revenue
includes reimbursable expenses billed to customers. These expenses totaled $6.7
million and $6.8 million in 2003 and 2002, respectively.
Consistent in both North America and Europe, 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 2003 saw an 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 overall
decrease in revenue year-over-year. Additionally, a change in the mix of the
services provided to customers in 2003
16
towards providing more staffing services led to an aggregate decline in the
rates of approximately 6% for which the Company bills its customers for its
services.
Revenue was negatively impacted in Europe due to the technology recession;
however, this was fully offset by 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 2002 to 2003, European and total consolidated
revenues for 2003 would have been $5.0 million lower. Without these exchange
gains in Europe, total European revenue would have decreased $0.9 million or
3.1% from 2002.
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. This contract, and its predecessor, accounted for
approximately 89% of the services provided to IBM in 2003. In 2003, IBM
continued to be the Company's largest customer, accounting for $51.9 million or
21.1% of total revenue as compared to $50.3 million or 19.6% of 2002 revenue.
The increase in demand for staffing services that the Company experienced in
2003 was significantly impacted by IBM. However, this increase in demand was
partially offset by a decline in the rates that the Company billed IBM for its
services. The Company continued to derive a significant portion of its revenue
from IBM in 2004.
Direct costs, defined as costs for billable staff including billable
out-of-pocket expenses, were 72.7% of revenue in 2003 as compared to 72.0% of
2002 revenue. The increase in direct costs as a percentage of revenue in 2003 as
compared to 2002 is due to the shift to more staffing services in the Company's
sales mix and 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 25.0% of revenue in
2003 as compared to 25.7% of revenue in 2002. 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 2.3% of revenue in 2003 and 2002. Operating income from
North American operations was $5.5 million and $7.7 million in 2003 and 2002,
respectively, while European operations recorded operating income of $0 in 2003
and an operating loss of $1.7 in 2002.
Interest and other expense, net was (0.4) % of revenue in 2003 and (0.6) % in
2002. 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 from continuing operations was 42% in 2003 and
36.9% in 2002.
Net income for 2003 was 1.1% of revenue or $0.16 per diluted share, compared to
a loss of 13.9% 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 14.4% 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses the accounting and reporting for
costs associated with the exit from or disposal of a portion of a company's
operations. The provisions of this standard are effective for any exit or
disposal activities initiated after December 31, 2002. The Company has reviewed
the provisions of this standard and applied them, as applicable, to its disposal
of its Dutch operating subsidiary, CTG Nederland B.V., during the first quarter
of 2004. See note 2, "Discontinued Operations" included in the Company's
consolidated financial statements in this Form 10-K under Item no. 8, "Financial
Statements and Supplementary Data."
During 2003, the Emerging Issues Task Force (EITF) issued Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." This EITF addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. The provisions of this EITF
were effective for interim periods beginning
17
after June 15, 2003. The Company has reviewed the provisions of this EITF and
determined that those provisions are consistent with the Company's existing
policies, and therefore the implementation of this EITF did not have a
significant effect on the Company's financial position or results of operations
for either the year ended December 31, 2004 or December 31, 2003. See note 1,
"Summary of Significant Accounting Policies - Revenue and Cost Recognition"
included in the Company's consolidated financial statements in this Form 10-K
under Item no. 8, "Financial Statements and Supplementary Data." for a
discussion of the Company's application of this EITF to the Company's 2004
consolidated financial statements.
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 disclosures about the assets, obligations, the
cash flows, and the net periodic benefit costs of defined benefit plans and
other defined benefit postretirement plans. The provisions of the statement, for
the most part, were effective for periods ending after December 15, 2003. The
Company has included theses additional required disclosures, as applicable, in
the notes to its consolidated financial statements, including note 7, "Deferred
Compensation Benefits," and note 8, "Employee Benefits" included in the
Company's consolidated financial statements in this Form 10-K under Item no. 8,
"Financial Statements and Supplementary Data."
In December 2004, the FASB issued FAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29." This standard addresses the
measurement of exchanges of non-monetary assets, and amends the guidance in APB
Opinion No. 29, "Accounting for Non-monetary Exchanges." The standard is
effective for exchanges of non-monetary assets occurring in fiscal periods
beginning after June 15, 2005. The Company has reviewed the provisions of this
standard and, at this time, does not believe the adoption of the standard will
have any effect on the financial position or results of operations of the
Company.
In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
Payment." This FAS establishes standards for the accounting for transactions in
which the Company exchanges its equity instruments for goods or services. The
standard requires the Company to measure the cost of employee services received
in exchange for awards of equity instruments based upon the grant date fair
value of the award. Currently, the Company only issues stock options in exchange
for employee and director services. Under the new standard, the calculated cost
of the equity awards will be recognized in the Company's results of operations
over the period in which an employee or director is required to provide the
services for the award. Compensation cost will not be recognized for employees
or directors that do not render the requisite services.
Currently, the Company accounts for its stock-based employee compensation plans
as discussed above in note 1 - "Summary of Significant Accounting Policies -
Stock-Based Employee Compensation," and note 10 - "Stock Option Plans" included
in the Company's consolidated financial statements in this Form 10-K under Item
no. 8, "Financial Statements and Supplementary Data," and as allowed under
current guidance, does not record compensation cost in its statements of
operations for stock-based compensation. This new standard is effective for the
Company as of the beginning of its first interim period beginning after June 15,
2005. The Company is currently in the process of evaluating the effect on its
financial condition and results of operations of the adoption of this new
standard.
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 did not have any effect on its financial position or results of
operations for the year ended December 31, 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 did not have any effect on its financial position or results of
operations for the year ended December 31, 2003.
During 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
18
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 year ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles in the United States requires the
Company's management to make estimates, judgments and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes. The Company's significant accounting policies are included in Note 1 to
the consolidated financial statements contained in this report. These policies,
along with the underlying assumptions and judgments made by the Company's
management in their application, have a significant impact on the Company's
consolidated financial statements. The Company identifies its most critical
accounting policies as those that are the most pervasive and important to the
portrayal of the Company's financial position and results of operations, and
that require the most difficult, subjective and/or complex judgments by
management regarding estimates about matters that are inherently uncertain. The
Company's most critical accounting policies are those related to goodwill
valuation and income taxes.
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, is evaluated annually or
more frequently if facts and circumstances indicate impairment may exist. These
evaluations, as applicable, are 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, 2005 with the assistance of an outside third party valuation
expert, and as of January 1, 2004 and 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 in each period. Additionally, there are no facts
or circumstances that arose during 2004 that led management to believe the
goodwill was impaired. Accordingly, the Company believes no additional
impairment was required to be recorded in its consolidated financial results.
Changes in business conditions, which could impact future valuations, however,
could lead to additional impairment charges.
Income Taxes - At December 31, 2004, the Company had a total of approximately
$5.8 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 December 31, 2004, the Company has a deferred tax asset before the valuation
allowance resulting from net operating losses; in various states of
approximately $0.4 million, in The Netherlands of approximately $3.6 million,
and approximately $1.0 million in various other countries where it does
business. Management of the Company has analyzed each jurisdiction's tax
position, including forecasting potential operating profits in future years, and
the expiration of the net operating loss carryforwards as applicable, and
determined that it is unclear whether all of the deferred tax asset totaling
$5.0 million will be realized at any point in the future. Accordingly, at
December 31, 2004, the Company has offset a portion of the asset with a
valuation allowance totaling $3.9 million, resulting in a net deferred tax asset
from net operating loss carryforwards of approximately $1.1 million. During
2004, the valuation allowance was reduced by approximately $0.6 million, net due
to a variety of factors including the Company utilizing recorded net operating
loss benefits of approximately $0.5 million for its European and Canadian
operations, tax rate reductions in several European countries, adjustments to
discontinued operations related to The Netherlands, and $0.4 million related to
state tax net operating losses in the United States, offset by an increase in
the valuation allowance due to the strength of foreign currencies in the
countries where the Company operates and to which the valuation allowance
relates. The asset, and its potential realizability, is evaluated each quarter
to determine if any additional portion of the valuation allowance should be
reversed. Any additional change of this valuation allowance in the future will
result in a change of the Company's effective tax rate. The $0.9 million
reduction in the valuation allowance resulted in a
19
reduction in the ETR for 2004 of approximately 34%. Any additional 1% decrease
in the ETR would have equaled approximately $24,000 of additional net income in
2004.
The Company has also made a number of estimates and assumptions relating to the
reporting of other assets and liabilities and the disclosure of contingent
assets and liabilities to prepare the consolidated financial statements pursuant
to the rules and regulations of the Securities and Exchange Commission. 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.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities was $0.3 million in 2004. Net income from
continuing operations totaled $3.0 million, while other non-cash adjustments,
primarily consisting of depreciation expense of $2.6 million offset by deferred
taxes of $(0.2) million totaled $2.4 million. Accounts receivable increased by
$5.6 million as compared to December 31, 2003 primarily due to the timing of
certain billings and the collection of outstanding balances at year-end 2004,
which resulted in an increase in days sales outstanding to 72 days from 63 days
at December 31, 2003. The ending of the large outsourcing engagement in July
2004 also negatively affected the Company's days sales outstanding calculation
as the customer had prepaid its balances due to the Company. Income taxes
receivable decreased $0.9 million primarily due to the receipt of approximately
$1.5 million of tax refunds net of tax payments, and reduced taxes due on
current year income as compared to 2003. Accounts payable increased $0.7 million
and other current liabilities increased $0.8 million primarily due to the timing
of certain payments near year-end, while advance billings on contracts increased
$0.6 million due to the timing of billings near year-end. Accrued compensation
decreased $2.7 million due to the timing of the U.S. bi-weekly payroll which was
paid on the last day of the year in 2004.
Investing activities used $1.8 million in 2004, which represented additions to
property and equipment. The Company has no significant commitments for capital
expenditures at December 31, 2004.
Financing activities provided $2.9 million of cash in 2004. The Company's
current revolving credit agreement (Agreement) allows the Company to borrow up
to $45 million. The Agreement is due in May 2005. The Agreement has interest
rates ranging from 25 to 200 basis points over the prime rate and 125 to 300
basis points over Libor, and provides certain of the Company's assets as
security for outstanding borrowings. The Company is required to meet certain
financial covenants in order to maintain borrowings under the Agreement, pay
dividends, and make acquisitions. At December 31, 2004, and during 2004 and
2003, the Company was in compliance with these covenants.
At December 31, 2004, there was a total of $4.7 million outstanding under this
Agreement, up from $0 at December 31, 2003. 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 which totaled $4.9 million on December
31, 2004. Daily average borrowings under this agreement for 2004 were $8.6
million. As the Agreement is due in May 2005, the Company has recorded this
outstanding balance at December 31, 2004 as a current portion of long-term debt,
and included the balance in current liabilities. Prior to May 2004, the
outstanding balance had been recorded as long-term debt and recorded in
non-current liabilities. The Company is currently in the process of negotiating
with a number of financial institutions for a new, long-term agreement. Upon
signing a new agreement, the Company expects to again record the outstanding
amount under the new agreement as long-term debt.
The Company received approximately $0.3 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 December 31, 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 December 31, 2004, consolidated shareholders' equity totaled $56.5 million,
which is an increase of $0.4 million from December 31, 2003. The increase is
primarily due to a foreign currency adjustment of $1.6 million, offset by a net
loss of $1.4 million, which included approximately $0.5 million of a foreign
currency adjustment 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 current
revolving line of credit totaling approximately $40.1 million at December 31,
2004, and the new agreement the Company expects to put into place in early 2005,
will be sufficient to meet foreseeable
20
working capital, capital expenditure, and possible stock repurchases, and to
allow for future internal growth and expansion.
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not have off-balance sheet arrangements or transactions in
either 2004 or 2003.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004, there was a total of $4.7 million outstanding under the
Company's revolving credit agreement. The credit agreement has interest rates
ranging from 25 to 200 basis points over the prime rate and 125 to 300 basis
points over Libor. Daily average borrowings under this credit agreement for 2004
were $8.6 million. Accordingly, a 1% increase or decrease in interest rates
would increase or decrease annual interest expense by approximately $86,000.
Throughout 2004, 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 2003 to 2004, European and total consolidated
revenues in 2004 would have been $4.1 million lower, or $39.3 million in total
as compared to the $43.4 million reported in 2004. The Company has historically
not used any market risk sensitive instruments to hedge its foreign currency
exchange risk.
21
CONTRACTUAL OBLIGATIONS
A summary of the Company's contractual obligations at December 31, 2004 is as
follows:
Less than Years Years More than
(in millions) Total 1 year 2-3 4-5 5 years
---------- ---------- ---------- ---------- ----------
Current portion of long-term debt A $ 4.7 $ 4.7 $ - $ - $ -
Capital lease obligations B - - - - -
Operating lease obligations C 12.8 5.2 5.9 1.1 0.6
Purchase obligations D 0.7 0.7 - - -
Deferred compensation benefits
(United States) E 8.4 0.7 1.4 1.5 4.8
Deferred compensation benefits
(Europe) F - - - - -
Other long-term liabilities G 0.1 0.1 - - -
---------- ---------- ---------- ---------- ----------
Total $ 26.7 $ 11.4 $ 7.3 $ 2.6 $ 5.4
========== ========== ========== ========== ==========
A The Company has a committed revolving debt agreement with a bank group
totaling $45.0 million, due in May 2005. Borrowings under the agreement are
secured by certain of the Company's assets, and the Company is required to
meet certain financial covenants in order to maintain borrowings under the
agreement, pay dividends, and make acquisitions. At December 31, 2004 and
during 2004 and 2003, the Company was in compliance with these covenants.
The Company uses this facility to fund its working capital obligations as
needed, primarily including funding the US bi-weekly payroll. There were
$4.7 million of borrowings outstanding under this agreement at December 31,
2004.
The Company currently has two outstanding letters of credit totaling
approximately $0.2 million that collateralize an office lease and an
employee benefit program.
B The Company does not have any, and is not committed to enter any capital
lease obligations at this time.
C Operating lease obligations relate to the rental of office space, office
equipment, and automobiles leased in the Company's European operations.
Total rental expense under operating leases in 2004, 2003, and 2002 was
approximately $7.4 million, $7.5 million, and $7.6 million, respectively.
D The Company is currently obligated to spend in 2005 approximately $0.2
million for computer-based training courses, $0.3 million for software
maintenance and support fees, and $0.2 million for recruiting services.
E The Company is committed for deferred compensation benefits in the United
States under two plans. The Executive Supplemental Benefit Plan (ESBP)
provides a current and certain former key executives with deferred
compensation benefits. The ESBP was amended as of November 30, 1994 to
freeze benefits for participants at that time. Currently, 11 individuals
are receiving benefits under this plan. The ESBP is deemed to be unfunded
as the Company has not specifically identified Company assets to be used to
discharge the deferred compensation benefit liabilities.
The Company also has a non-qualified defined-contribution deferred
compensation plan for certain key executives. There were no contributions
to this plan in 2004, and only one executive currently has a vested balance
under the plan.
F The Company retained a contributory defined-benefit plan for its previous
employees located in The Netherlands when the Company disposed of its
subsidiary, CTG Nederland B.V., in the first quarter of 2004. This plan was
curtailed on January 1, 2003 for additional contributions. As this plan is
fully funded at December 31, 2004, the Company does not anticipate making
any additional payments to fund the Plan.
G The Company has other long-term liabilities totaling $0.1 million,
primarily reflecting the cost for access to informational databases
provided by a vendor to the Company.
22
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any off balance sheet market risk sensitive
instruments for which disclosure is required.
During 2002, the Company amended and restated its existing revolving line of
credit agreement (Agreement). At that time, the new Agreement had a borrowing
limit of $50 million. During December 2003, the Company paid off a $5 million
term loan, which reduced the overall borrowing limit of the Agreement to $45
million. As the Agreement is due in May 2005, the Company has recorded this
outstanding balance at December 31, 2004 as a current portion of long-term debt,
and included the balance in current liabilities. Prior to May 2004, the
outstanding balance had been recorded as long-term debt and recorded in
non-current liabilities. The Company is currently in the process of negotiating
with a number of financial institutions for a new, long-term agreement. Upon
signing a new agreement, the Company expects to again record the outstanding
amount under the new agreement as long-term debt. The Agreement has interest
rates ranging from 25 to 200 basis points over the prime rate and 125 to 300
basis points over Libor, and provides certain of the Company's assets as
security for outstanding borrowings. The Company is required to meet certain
financial covenants in order to maintain borrowings under the Agreement, pay
dividends, and make acquisitions. At December 31, 2004 and during 2004 and 2003,
the Company was in compliance with these covenants. At December 31, 2004 and
2003, there were $4.7 million and $0 outstanding, respectively, under the
Agreement. Additionally, at December 31, 2004 and 2003, there were $0.2 million
and $0.1 million, respectively, outstanding under letters of credit under this
Agreement.
The maximum amounts outstanding under the revolving credit agreements during
2004, 2003, and 2002 were $14.7 million, $20.7 million, and $29.7 million,
respectively. Average bank borrowings outstanding for the years 2004, 2003, and
2002 were $8.6 million, $12.4 million, and $20.5 million, respectively, and
carried weighted-average interest rates of 3.5%, 3.4%, and 4.1%, respectively.
Accordingly, during 2004, a one percent increase in the weighted average
interest rate would have cost the Company an additional $86,000. The Company
incurred commitment fees totaling approximately $0.1 million in each of 2004,
2003 and 2002 relative to the Agreement.
Throughout 2004, 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 2003 to 2004, European and total consolidated
revenues in 2004 would have been $4.1 million lower, or $39.3 million in total
as compared to the $43.4 million reported in 2004. Operating income in Europe
was positively effected by approximately $0.1 million in 2004 due to the
strength of the currencies in the countries in which the Company's European
subsidiaries operate. The Company has historically not used any market risk
sensitive instruments to hedge its foreign currency exchange risk.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Computer Task Group, Incorporated:
We have audited the accompanying consolidated balance sheets of Computer Task
Group, Incorporated and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computer Task Group,
Incorporated and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Buffalo, New York
March 14, 2005
24
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Computer Task Group, Incorporated
Buffalo, New York
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity, and cash flows of Computer Task Group, Incorporated and
Subsidiaries (the "Company") for the year ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Computer Task
Group, Incorporated and Subsidiaries for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ Deloitte & Touche LLP
Buffalo, New York
February 5, 2003
25
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(amounts in thousands, except per-share data)
2004 2003 2002
Revenue $ 237,122 $ 245,514 $ 256,125
Direct costs 173,025 178,530 184,335
Selling, general, and administrative expenses 60,999 61,453 65,812
----------- ---------- ----------
Operating income 3,098 5,531 5,978
Interest and other income 103 61 187
Interest and other expense (780) (968) (1,793)
----------- ---------- ----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle 2,421 4,624 4,372
Provision (benefit) for income taxes (546) 1,942 1,613
----------- ---------- ----------
Income from continuing operations before cumulative effect
of change in accounting principle 2,967 2,682 2,759
Income (loss) from discontinued operations (including loss
on disposal of $3.9 million in 2004) (4,411) 62 (1,397)
----------- ---------- ----------
Net income (loss) before cumulative effect
of change in accounting principle (1,444) 2,744 1,362
Cumulative effect of change in accounting principle - - (37,038)
----------- ---------- ----------
Net income (loss) $ (1,444) $ 2,744 $ (35,676)
=========== ========== ==========
Basic net income (loss) per share:
Continuing operations $ 0.18 $ 0.16 $ 0.17
Discontinued operations (0.27) - (0.09)
----------- ---------- ----------
Net income (loss) before cumulative effect
of change in accounting principle (0.09) 0.16 0.08
Cumulative effect of change in accounting principle - - (2.23)
----------- ---------- ----------
Basic net income (loss) per share $ (0.09) $ 0.16 $ (2.15)
=========== ========== ==========
Diluted net income (loss) per share:
Continuing operations $ 0.17 $ 0.16 $ 0.16
Discontinued operations (0.25) - (0.08)
----------- ---------- ----------
Net income (loss) before cumulative effect
of change in accounting principle (0.08) 0.16 0.08
Cumulative effect of change in accounting principle - - (2.19)
----------- ---------- ----------
Diluted net income (loss) per share $ (0.08) $ 0.16 $ (2.11)
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
26
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(amounts in thousands, except share balances)
2004 2003
ASSETS
Current assets:
Cash and temporary cash investments $ 4,488 $ 5,197
Accounts receivable, net 46,741 40,062
Prepaids and other 1,986 2,256
Income taxes receivable 225 1,239
Deferred income taxes 1,572 502
Assets from discontinued operations - 2,549
----------- ----------
Total current assets 55,012 51,805
Property and equipment, net of accumulated depreciation 6,075 6,846
Goodwill 35,678 35,678
Deferred income taxes 4,249 4,511
Other assets 1,846 1,641
----------- ----------
Total assets $ 102,860 $ 100,481
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,263 $ 10,423
Accrued compensation 16,831 19,066
Advance billings on contracts 1,892 1,270
Other current liabilities 5,170 4,255
Current portion of long-term debt 4,650 -
Liabilities from discontinued operations - 939
----------- ----------
Total current liabilities 37,806 35,953
Deferred compensation benefits 8,570 8,337
Other long-term liabilities - 60
----------- ----------
Total liabilities 46,376 44,350
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 111,272 111,333
Retained earnings 38,997 40,441
Less: Treasury stock of 6,148,990 shares at cost (31,416) (31,416)
Stock Trusts of 4,057,857
and 4,152,119 shares at cost, respectively (58,045) (58,446)
Accumulated other comprehensive loss:
Foreign currency adjustment (3,205) (4,840)
Minimum pension liability adjustment (1,389) (1,211)
----------- ----------
Accumulated other comprehensive loss (4,594) (6,051)
----------- ----------
Total shareholders' equity 56,484 56,131
----------- ----------
Total liabilities and shareholders' equity $ 102,860 $ 100,481
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(amounts in thousands)
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,444) $ 2,744 $ (35,676)
Cumulative effect of change in accounting principle - - (37,038)
Income (loss) from discontinued operations (4,411) 62 (1,397)
---------- ---------- -----------
Income from continuing operations 2,967 2,682 2,759
Adjustments:
Depreciation expense 2,625 3,226 3,742
Deferred income taxes (194) (86) 215
Tax benefit on stock option exercises 18 4 -
Loss on sales of property and equipment and
property held for sale 31 220 142
Deferred compensation 55 22 (499)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,607) 4,746 7,188
(Increase) decrease in prepaids and other 334 (716) 766
(Increase) decrease in income taxes receivable 873 (1,226) 22
(Increase) decrease in other assets (129) 38 (863)
Increase (decrease) in accounts payable 675 428 (2,117)
Decrease in accrued compensation (2,687) (275) (5,232)
Increase (decrease) in advance billings on contracts 622 (337) 303
Increase (decrease) in other current liabilities 772 227 (1,249)
Decrease in other long-term liabilities (60) (290) (187)
---------- ---------- -----------
Net cash provided by operating activities 295 8,663 4,990
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,841) (1,492) (1,821)
Proceeds from sales of property and equipment and
property held for sale 15 2,283 22
---------- ---------- -----------
Net cash provided by (used in) investing activities (1,826) 791 (1,799)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) long-term revolving debt, net 4,650 (8,497) (7,015)
Change in cash overdraft, net (2,094) (557) 2,040
Proceeds from Employee Stock Purchase Plan 162 215 331
Purchase of stock for treasury - - (6)
Proceeds from other stock plans 160 51 24
---------- ---------- -----------
Net cash provided by (used in) financing activities 2,878 (8,788) (4,626)
---------- ---------- -----------
Net cash from discontinued operations (2,308) 1,035 (387)
Effect of exchange rate changes on cash
and temporary cash investments 252 625 401
---------- ---------- -----------
Net increase (decrease) in cash and temporary
cash investments (709) 2,326 (1,421)
---------- ---------- -----------
Cash and temporary cash investments at beginning of year 5,197 2,871 4,292
Cash and temporary cash investments at end of year $ 4,488 $ 5,197 $ 2,871
========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
28
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK STOCK TRUSTS
(amounts in thousands) SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT SHARES AMOUNT
BALANCE AS OF DECEMBER 31, 2001 27,018 $270 $ 111,500 $73,373 6,148 $(31,410) 4,338 $(59,239)
Employee Stock Purchase Plan share issuance - - (27) - - - (84) 358
Stock Option Plan share issuance - - (8) - 1 (6) (8) 33
Comprehensive income (loss):
Net loss - - - (35,676) - - - -
Foreign currency adjustment - - - - - - - -
Minimum pension liability adjustment - - - - - - - -
------ ---- --------- ------- ----- -------- ----- --------
Total comprehensive income (loss) - - - (35,676) - - - -
------ ---- --------- ------- ----- -------- ----- --------
BALANCE AS OF DECEMBER 31, 2002 27,018 270 111,465 37,697 6,149 (31,416) 4,246 (58,848)
Employee Stock Purchase Plan share issuance - - (99) - - - (73) 314
Stock Option Plan share issuance - - (33) - - - (21) 88
Comprehensive income (loss):
Net income - - - 2,744 - - - -
Foreign currency adjustment - - - - - - - -
Minimum pension liability adjustment - - - - - - - -
------ ---- --------- ------- ----- -------- ----- --------
Total comprehensive income (loss) - - - 2,744 - - - -
------ ---- --------- ------- ----- -------- ----- --------
BALANCE AS OF DECEMBER 31, 2003 27,018 270 111,333 40,441 6,149 (31,416) 4,152 (58,446)
Employee Stock Purchase Plan share issuance - - (14) - - - (41) 176
Stock Option Plan share issuance - - (47) - - - (53) 225
Comprehensive income (loss):
Net loss - - - (1,444) - - - -
Foreign currency adjustment - - - - - - - -
Minimum pension liability adjustment - - - - - - - -
------ ---- --------- ------- ----- -------- ----- --------
Total comprehensive income (loss) - - - (1,444) - - - -
------ ---- --------- ------- ----- -------- ----- --------
BALANCE AS OF DECEMBER 31, 2004 27,018 $270 $ 111,272 $38,997 6,149 $(31,416) 4,058 $(58,045)
====== ==== ========= ======= ===== ======== ===== ========
MINIMUM
FOREIGN PENSION TOTAL
CURRENCY LIABILITY SHAREHOLDERS'
(amounts in thousands) ADJUSTMENT ADJUSTMENT EQUITY
BALANCE AS OF DECEMBER 31, 2001 $ (7,284) $ (583) $ 86,627
Employee Stock Purchase Plan share issuance - - 331
Stock Option Plan share issuance - - 19
Comprehensive income (loss):
Net loss - - (35,676)
Foreign currency adjustment 1,168 - 1,168
Minimum pension liability adjustment - (99) (99)
-------- ------- --------
Total comprehensive income (loss) 1,168 (99) (34,607)
-------- ------- --------
BALANCE AS OF DECEMBER 31, 2002 (6,116) (682) 52,370
Employee Stock Purchase Plan share issuance - - 215
Stock Option Plan share issuance - - 55
Comprehensive income (loss):
Net income - - 2,744
Foreign currency adjustment 1,276 - 1,276
Minimum pension liability adjustment - (529) (529)
-------- ------- --------
Total comprehensive income (loss) 1,276 (529) 3,491
-------- ------- --------
BALANCE AS OF DECEMBER 31, 2003 (4,840) (1,211) 56,131
Employee Stock Purchase Plan share issuance - - 162
Stock Option Plan share issuance - - 178
Comprehensive income (loss):
Net loss - - (1,444)
Foreign currency adjustment 1,635 - 1,635
Minimum pension liability adjustment - (178) (178)
-------- ------- --------
Total comprehensive income (loss) 1,635 (178) 13
-------- ------- --------
BALANCE AS OF DECEMBER 31, 2004 $ (3,205) $(1,389) $ 56,484
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Computer Task
Group, Incorporated, and its subsidiaries (the Company or CTG), located
primarily in North America and Europe. There are no unconsolidated entities, or
off balance sheet arrangements. All inter-company accounts and transactions have
been eliminated. Certain amounts in the prior years' consolidated financial
statements and notes have been reclassified to conform to the current year
presentation. Management of the Company has 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 consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Such estimates primarily relate to the
valuation of goodwill, allowances for doubtful accounts receivable and deferred
tax assets, investment valuation, legal matters, actuarial assumptions, and
estimates of progress toward completion and direct profit or loss on fixed-price
contracts. Actual results could differ from those estimates.
The Company operates in one industry segment, providing IT staffing solutions
services to its clients. These services include IT Staffing, Application
Management Outsourcing, and IT Solutions. CTG provides these three primary
services to all of the markets that it serves. 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.
REVENUE AND COST RECOGNITION
The Company primarily recognizes revenue on time-and-materials and monthly fee
contracts as hours are expended and costs are incurred. Fixed-price contracts
accounted for under the percentage-of-completion method represented
approximately four percent of 2004, three percent of 2003, and three percent of
2002 revenue, respectively. The amount of revenue recorded is a factor of the
percentage of labor and overhead costs incurred to date to total estimated labor
and overhead costs for each contract. Fixed-price contract costs include all
direct labor and material costs and those indirect costs related to contract
performance. Selling, general, and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. As required, the Company
includes billable expenses in its accounts as both revenue and direct costs.
These billable expenses totaled $8.3 million, $6.7 million, and $6.8 million in
2004, 2003 and 2002, respectively.
In 2003, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." This EITF addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities to determine if separate units of accounting exist
in such projects. The provisions of this EITF were effective for interim periods
beginning after June 15, 2003. The Company has reviewed the provisions of this
EITF and determined that those provisions are consistent with the Company's
existing policies, and therefore the implementation of this EITF did not have a
significant effect on the Company's financial position or results of operations
for the year ended December 31, 2004 or 2003.
30
Accounts receivable is reconciled to the consolidated balance sheets at December
31, 2004 and 2003 as follows:
December 31
(amounts in thousands) 2004 2003
- ------------------------------- -------- --------
Accounts receivable, gross $ 48,549 $ 41,562
Allowance for doubtful accounts (1,327) (1,174)
Discounts (481) (239)
Projects reserve - (87)
-------- --------
Accounts receivable, net $ 46,741 $ 40,062
======== ========
Bad debt expense (benefit) in 2004, 2003 and 2002 was $0.4 million, $0.5
million, and $(0.6) million, respectively. The benefit balance in 2002 reflects
the favorable resolution of several significant accounts during the year that
had been expensed in prior years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At December 31, 2004 and 2003, the carrying amounts of the Company's financial
instruments, which include cash and temporary cash investments ($4.5 million and
$5.2 million, respectively), accounts receivable, net ($46.7 million and $40.1
million, respectively), prepaid and other assets ($2.0 million and $2.3 million,
respectively), accounts payable ($9.3 million and $10.4 million, respectively),
and current portion of long-term debt ($4.7 million and $0, respectively),
approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are generally stated at historical cost less accumulated
depreciation (see "Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of"). Depreciation is computed using the straight-line method based on
estimated useful lives of one year to 30 years, and begins after an asset has
been put into service. The cost of property or equipment sold or otherwise
disposed of, along with related accumulated depreciation, is eliminated from the
accounts, and the resulting gain or loss is reflected in current earnings.
Maintenance and repairs are charged to expense when incurred, while significant
betterments to existing assets are capitalized.
GOODWILL
In July 2001, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard (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 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 fo