-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P+LR4HzkQxSj2IE/myotpCWlkLIJklVIfGNRpPW9Ty9s+J762pbRdCivxUXRh+4y NQqXCJBqc/bH4140AkM+7A== 0000950152-99-002907.txt : 19990402 0000950152-99-002907.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002907 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER TASK GROUP INC CENTRAL INDEX KEY: 0000023111 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 160912632 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09410 FILM NUMBER: 99582608 BUSINESS ADDRESS: STREET 1: 800 DELAWARE AVE CITY: BUFFALO STATE: NY ZIP: 14209 BUSINESS PHONE: 7168828000 MAIL ADDRESS: STREET 1: 800 DELAWARE AVE CITY: BUFFALO STATE: NY ZIP: 14209 FORMER COMPANY: FORMER CONFORMED NAME: MARKS BAER INC DATE OF NAME CHANGE: 19690128 10-K 1 COMPUTER TASK GROUP, INCORPORATED FORM 10-K 1 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, 1998 ------------------ 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) Registrant's telephone number, including area code: (716) 882-8000 ------------------ 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 ---- (Title of class) 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. [ ] The aggregate market value of the Registrant's voting stock held by non-affiliates at March 17, 1999 was $298,409,157. 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 with respect to the Registrant's stock have deemed to be affiliates. The total number of shares of Common Stock of the Registrant outstanding at March 17, 1999 was 20,876,063. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this report: Parts I, II and IV - the Registrant's 1998 Annual Report to Shareholders; Parts II and III - the Registrant's definitive Proxy Statement as filed with the Securities and Exchange Commission and as used in connection with the solicitation of proxies for the Registrant's annual meeting of shareholders to be held on April 28, 1999. 2 PART I FORWARD-LOOKING STATEMENTS Statements included in this document, or incorporated herein by reference, that do not relate to present or historical conditions are "forward looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission. Such forward looking statements involve risks and uncertainties which could cause results or outcomes to differ materially from those expressed in such forward looking statements. Forward-looking statements may include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology industry, the continued need of current and prospective customers for the Company's services, the availability of qualified professional staff, and price and wage inflation. 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 provides information technology (IT) services. CTG employs approximately 6,000 people worldwide and serves customers through an international network of offices in North America and Europe. The Company has six operating subsidiaries: CTG Services, Inc., providing services primarily in North America; Computer Task Group of Canada, Inc.; Computer Task Group (U.K.) Ltd.; Computer Task Group Nederland B.V.; Computer Task Group Luxembourg S.A.; and Computer Task Group Belgium N.V. BACKGROUND The Company operates in one industry segment, providing IT services. A typical customer is an organization with large, complex information and data processing requirements. CTG's customer base is large and diverse, consisting of approximately 430 customers in North America and Europe at the 1998 year-end. Approximately 84.3 percent of consolidated 1998 revenue of $467.8 million was generated in North America, and 15.7 percent in Europe. CTG works with customers to develop effective business solutions through information systems and technology. The Company's professional staff may support a customer's software development team on a specific application or project, or may manage the project entirely for the customer. The Company's range of services extends from managing multi-million dollar technology projects to flexible staffing engagements provided on a per diem basis. Most of CTG's services are provided on-site at the customer's facilities. CTG's network of offices throughout the United States, in Canada, and in four countries in Europe, provides wide geographical coverage with the capability of servicing large companies with multiple locations. Additionally, the services provided by the Company are consistent worldwide. 2 3 CTG's strategy is to focus its efforts and talents on building business relationships with specific clients. From our clients and prospects, CTG identifies Key Clients - those companies that present a significant opportunity for a long-term, high value business relationship. As the business relationship expands, our goal is to evolve those Key Client relationships into Strategic Partners. Strategic Partners are companies with whom CTG accepts responsibility for a defined deliverable, service level, or management process. These relationships deliver the highest value to our clients, and they, in turn, represent our strongest client relationships. CTG's services are sold and delivered on a local level through its network of geographically dispersed delivery teams made up of account executives, business consultants, recruiters, and career developers. Account executives monitor and develop the relationship with a client, while business consultants focus on identifying engagements. Recruiters utilize an electronic recruiting database to screen and qualify individuals who are available to work on CTG's clients' information technology needs. The Company maintains a database of qualified candidates available for assignments. Career developers focus on the development, training, and performance of the Company's employees. International Business Machines Corporation (IBM) is CTG's largest customer. CTG provides services to various IBM divisions in approximately 50 locations. In January 1999, CTG renewed a contract with IBM for one year as one of IBM's national technical service providers for the United States. The contract represents 59 percent of the total services provided to IBM by CTG in 1998. IBM accounted for a total of $151.4 million or 32.4 percent of 1998 consolidated revenue; a total of $142.2 million or 34.9 percent of 1997 consolidated revenue; and a total of $107.4 million or 29.4 percent of CTG's 1996 consolidated revenue. The Company expects to continue to derive a significant portion of its business from IBM in 1999 and future years, and to actively pursue new business with IBM. While a significant decline in revenue from IBM would have a material adverse impact on the Company's revenue and profits, the Company believes the simultaneous loss of all IBM business is unlikely to occur due to the recent renewal of the national contract, the number of contracts presently in existence with IBM, the diversity of the projects performed for IBM, and the number of locations and divisions involved. 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. ACQUISITION On February 23, 1999, subsequent to CTG's 1998 year-end, the Company completed the acquisition of the stock of Elumen Solutions, Inc. (Elumen). The transaction is valued at $89 million, of which $86 million was paid in cash or through the assumption of debt, and the remainder was satisfied through the issuance of approximately 128,000 shares of CTG common stock. The acquisition will be accounted for as a purchase. CTG estimates that approximately $85 million of goodwill and other identifiable intangibles, from the total cost of the acquisition of $89 million, will arise from the transaction. Elumen was the largest privately held consulting firm specializing in information technology services for health care organizations, generating revenues of approximately $36 million for the year ended December 31, 1998. The combination of Elumen and CTG's existing health care practice, if combined in 1998, would have accounted for approximately $44 million of total revenues in 1998, and comprised over 300 health care information technology consultants. The market for health care IT services was estimated at $3.4 billion annually in 1997. Several of the factors driving growth in excess of 20 percent annually (source: Piper Jaffray, 1997 and Dorenfest and Associates, 1997) in this sector include the creation of large integrated health care delivery systems, the consolidation of health care providers and systems, the impact of managed care, and the need to invest in information technology to improve patient care and achieve cost and operating efficiencies. The acquisition of Elumen by CTG is intended to capitalize on these impressive growth rates which are greater than the growth rates for the IT services industry as a whole. Additionally, as Elumen is one of the leading firms in the healthcare IT sector, its growth rate exceeded the 20 percent mentioned above in 1998, and is expected to continue to exceed this rate in 1999. 3 4 SERVICES CTG operates in one industry segment, providing IT services. Geographic and corporate area information is included on page 6 of this Form 10-K, and in CTG's 1998 Annual Report to Shareholders on page 32 and is incorporated herein by reference. Most companies follow a continuous process to create IT business solutions. The IT business solution life cycle begins with planning, as companies design strategies to meet overall business objectives by utilizing IT. Planning is followed by development, in which companies develop and implement IT solutions using their newly devised plans. Finally, these solutions must be managed and maintained to ensure systems and technologies are supported to preserve their effectiveness. CTG provides services in each of these three areas as follows: Business Consulting. Business consulting focuses on the planning phase of the IT life cycle. CTG's consultants help a customer develop the plan to reengineer its business processes, assess its technology needs, and choose the appropriate technology solution. Development & Integration. Development and integration supports the implementation phase of the IT life cycle, including custom application development and software package implementation. Managed Support. Managed support addresses the maintenance segment of the IT life cycle. It encompasses service offerings such as operations and network support (running or maintaining a customer's systems), application support (maintaining a company's programs and documentation), and installing and maintaining a help desk. SALES AND MARKETING On a corporate, regional, and local level, management performs business planning necessary to assess industry conditions, customer needs, and target markets. The Company sells its services at a local and regional level, consistent with its business planning process. Customers are served by local teams, comprised of account executives, business consultants, project managers, site managers, recruiters, and career developers -- the first two focus on identifying an engagement, the next two focus on delivery, and the latter two focus on recruiting and retaining appropriate, high-quality professionals for the engagement. Recruiters are backed by a national electronic database of professional computer consultants and programmers. Account executives are full-time employees who are paid based upon the amount and profitability of the business they sell. Each account executive is assigned a sales quota and is paid in relationship to this quota. Account executives, and the other professionals serving our customers, continually seek to identify new opportunities with existing and prospective customers. CTG publishes brochures that explain its services, produces customer newsletters, advertises in trade publications, and participates in trade shows. CTG has been using the Internet for several years as a communications tool. The Internet is a component of the Company's sales and marketing communications strategy. The Company is continuously refining and building new Internet functionality to provide current information to its customers, investors, and prospective employees. PRICING AND BACKLOG The majority of CTG's IT professional services business is 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. 4 5 The Company performs a portion of its business on a monthly fee basis, as well as a 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 one percent of the Company's 1998 revenue, and two percent of the Company's 1997 and 1996 revenue, respectively. Revenue from all fixed-price and monthly-fee contracts represented 16 percent of revenue in 1998, 17 percent of revenue in 1997, and 14 percent in 1996. As of December 31, 1998 and 1997, the backlog for fixed-price and managed-support contracts was approximately $42 million and $73 million, respectively. Approximately 81 percent of the December 31, 1998 backlog of $42 million, or $34 million, is expected to be earned in 1999. Of the $73 million of backlog at December 31, 1997, approximately 79 percent, or $58 million was earned in 1998. 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, does fluctuate based upon the timing of long-term contracts. COMPETITION The IT services market is highly competitive. The market is also highly fragmented among many providers with no single competitor maintaining clear market leadership. The Company's competition varies from city to city, by 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 for its share of the market. 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. Many of CTG's offices are already ISO 9001 certified and others are preparing for certification. 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. MANAGEMENT AND PROFESSIONAL STAFF As of December 31, 1998, CTG employed approximately 6,000 people. Qualified systems engineers and professionals with computer-related skills are in great demand and the Company faces considerable competition in attracting and retaining such individuals. Additionally, the supply of such individuals is limited. Management has developed a professional staff resources database, CTG-Smartsource, which contains information on approximately 190,000 qualified IT professionals. This database provides a pipeline of quality professional resources to assist management in providing customers with responsive, dependable, and cost-effective service to fulfill the needs required. The Company offers several employment options to enable it to attract and retain professional staff. The Company pays its employees on either a salaried or hourly basis and has a diverse and flexible benefits package. 5 6 CTG's service agreements with its customers generally state that neither party may hire the other's personnel for the term of the project and a stated period thereafter. The Company's employees are required to sign non-solicitation and non-disclosure agreements stating they will not accept employment directly or indirectly with a customer or solicit or hire another employee, for a specified period after termination of employment. The agreements also provide that the employee will not use or disclose Company or client confidential information. In addition, entry level staff who attend the Company's systems training course and more experienced staff who complete new technology training sign agreements to reimburse the Company for the cost of the training if they voluntarily terminate their employment within a defined period from the date the training program starts. No employees are covered by a collective bargaining agreement or are represented by a labor union. CTG is an equal opportunity employer. TECHNICAL AND MANAGEMENT TRAINING To ensure a steady supply of entry level IT professionals, the Company operates a training facility in Buffalo, New York where college graduates, as well as other individuals, are taught the skills required to become commercially proficient. In addition, the Company also provides ongoing educational programs so that its technical staff have the skills needed to respond to today's new demands. Instructor-based classroom training and video and computer-based training courses, are utilized. CTG also offers its employees management and sales training. These courses teach marketing and management practices and serve both as refresher courses and as training vehicles to ensure that staff members have the skills necessary to compete in the IT services industry. They also provide a forum for imparting Company policies to ensure consistency in the quality of services throughout the Company's organization. CTG believes its training and continuing education programs keep its technical staff current and provide the Company with the necessary management and marketing personnel to support future growth. CTG invested approximately $12.5 million, $8.4 million, and $5 million on education in 1998, 1997, and 1996, respectively, including compensation paid to technical staff while in training. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
(amounts in thousands) 1998 1997 1996 ---- ---- ---- Revenue from Unaffiliated Customers: North America $ 394,609 $ 360,849 $ 325,328 Europe 73,229 46,739 39,748 ----------- ----------- ----------- $ 467,838 $ 407,588 $ 365,076 =========== =========== =========== Operating Income (Expense): North America $ 46,427 $ 36,324 $ 29,460 Europe 8,243 3,663 3,265 Corporate and other (14,819) (11,031) (14,207) ------------ ------------ ------------ $ 39,851 $ 28,956 $ 18,518 =========== =========== =========== Identifiable Assets: North America $ 67,128 $ 57,519 $ 54,943 Europe 22,999 15,777 14,988 Corporate and Other 66,682 34,445 51,350 ------------ ------------ ------------ $ 156,809 $ 107,741 $ 121,281 =========== =========== ===========
Corporate and other identifiable assets consists principally of cash and temporary cash investments and other assets. 6 7 EXECUTIVE OFFICERS OF THE COMPANY - ---------------------------------
Period During Other Positions Which Served as And Offices with Name Age Office Executive Officer(1) Registrant - ---- --- ------ -------------------- ------------------- Gale S. Fitzgerald 48 Chairman of the Board May 6, 1991 to date Director and Chief Executive Officer Jonathan R. Asher 53 Vice President December 16, 1996 to date None James R. Boldt 47 Vice President and February 12, 1996 to date Treasurer, Chief Financial Officer Secretary Janice M. Cole 53 Vice President July 2, 1998 to date None Nico H. Molenaar 43 Vice President January 1, 1996 to date None John F. Moore 43 Vice President July 2, 1998 to date None
(1) BUSINESS EXPERIENCE Ms. Fitzgerald was appointed Chairman of the Board and chief executive officer as of October 3, 1994 and president and chief operating officer as of July 1, 1993. She joined the Company in May 1991 as senior vice president responsible for the Company's Northeastern U.S. and Canadian operations. She was previously vice president, Professional Services at International Business Machines Corporation (IBM), where she had worked for 18 years in various management positions. Mr. Asher joined the Company as a vice president in December 1996. He was previously director of information technology services with IBM from 1993 to 1996. Mr. Asher has over 20 years of experience, and is currently responsible for CTG's Managed Services operations in North America. Mr. Boldt joined the Company as a vice president in February 1996. He was previously vice president of finance, secretary and chief financial officer of Pratt and Lambert United, Inc., where he worked for 20 years in a variety of management positions. He is currently responsible for the Company's support services operation, including the finance, accounting and internal audit functions. Ms. Cole joined the Company in April 1980, and was promoted to Vice President, Career Development in July 1998. Prior to her promotion, Ms. Cole was a Director of Training Services. Mr. Molenaar was promoted to vice president in January 1996 and has been employed by the Company since 1985. He has held a variety of management positions and is presently responsible for the Company's European operations. Mr. Moore joined the Company in November 1984, and was promoted to Vice President in July 1998 and is responsible for CTG's North American Strategic Staffing business. Prior to his promotion, Mr. Moore was a Director of Business Development with CTG's IBM National Team. 7 8 ITEM 2. PROPERTIES The Company occupies a headquarters building at 800 Delaware Avenue, and an office building at 700 Delaware Avenue, both located in Buffalo, New York. Corporate headquarters consists of approximately 40,000 square feet and is occupied by the corporate administrative operations. The office building consists of approximately 39,000 square feet and is also occupied by corporate administrative operations. There are no mortgages on either of these buildings. The Company also owns a 37,000 square foot building in Melbourne, Florida with a net book value of $2.0 million which it has leased to a third party under a five-year lease. This lease expires in 2000. 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 1,000 to 16,000 square feet, with the number of people employed at each office. The Company's lease terms generally 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 is involved in litigation arising in the normal course of business. In the opinion of management, an adverse outcome to any of this litigation would not have a material effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Information relating to the market for, and market prices of, the Company's Common Stock, the approximate number of Company shareholders, and the Company's dividend history for the past two years is included under the caption "Stock Market Information" in the Company's Annual Report to Shareholders for the year ended December 31, 1998, submitted herewith as an exhibit, and incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA A five-year summary of certain financial information relating to the financial condition and results of operations of the Company is included under the caption "Consolidated Summary - Five-Year Selected Financial Information" in the Company's Annual Report to Shareholders for the year ended December 31, 1998, submitted herewith as an exhibit, and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is included in the Company's Annual Report to Shareholders for the year ended December 31, 1998, under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," submitted herewith as an exhibit, and incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSE ABOUT MARKET RISK The Company does not have any on or off balance sheet market risk sensitive instruments for which disclosure is required, and historically the Company has not been subject to material effects from foreign currency exchange rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the required Supplementary Data information are included in the Company's Annual Report to Shareholders for the year ended December 31, 1998, submitted herewith as an exhibit, and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information in response to this item is incorporated by reference to the information under the caption "Change in Independent Accountants from Prior Periods" presented in the Company's definitive Proxy Statement filed or to be filed under Regulation 14A and used in connection with the Company's 1999 Annual Meeting of Shareholders to be held on April 29, 1999. 9 II-1 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information in response to this item is incorporated herein by reference to the information set forth on pages 2 and 5 in the Company's definitive Proxy Statement filed or to be filed under Regulation 14A and used in connection with the Company's 1999 annual meeting of shareholders to be held on April 28, 1999, except insofar as information with respect to executive officers is presented in Part I, Item 1 hereof pursuant to General Instruction G(3) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information in response to this item is incorporated herein by reference to the information under the caption "Information about Management" presented in the Company's definitive Proxy Statement filed or to be filed under Regulation 14A and used in connection with the Company's 1999 annual meeting of shareholders to be held on April 28, 1999, excluding the Compensation Committee Report on Executive Compensation and the Company's Performance Graph. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in response to this item is incorporated herein by reference to the information under the caption "Security Ownership of the Company's Common Shares by Certain Beneficial Owners and by Management" presented in the Company's definitive Proxy Statement filed or to be filed under Regulation 14A and used in connection with the Company's 1999 annual meeting of shareholders to be held on April 28, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in response to this item is incorporated herein by reference to the information under the captions "Indebtedness of Management" and "Compensation Committee Interlocks and Insider Participation" presented in the Company's definitive Proxy Statement filed or to be filed under Regulation 14A and used in connection with the Company's 1999 annual meeting of shareholders to be held on April 28, 1999, excluding the Compensation Committee Report on Executive Compensation and the Company's Performance Graph. 10 III-1 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) The following Consolidated Financial Statements and related information are incorporated by reference from the 1998 Annual Report to Shareholders:
1998 Annual Report Page Reference -------------- Consolidated Statements of Income 19 Consolidated Balance Sheets 20 Consolidated Statements of Cash Flows 21 Consolidated Statements of Changes in Shareholders' Equity 22 Notes to Consolidated Financial Statements 24 Independent Auditors' Report 34
(2) Index to Consolidated Financial Statement Schedules
1998 Form 10-K Page Reference -------------- Report of Independent Auditors IV-2 Report of Independent Auditors on Financial Statement Schedule IV-3 Report of Independent Auditors on Financial Statement Schedule IV-4 Financial statement schedule: Valuation and Qualifying Accounts (Schedule VIII) IV-5
(B) REPORTS ON FORM 8-K None. (C) EXHIBITS The Exhibits to this Form 10-K Annual Report are listed on the attached Exhibit Index appearing on pages E-1 to E-3. 11 IV-1 12 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Computer Task Group, Incorporated: We have audited the consolidated balance sheet of Computer Task Group, Incorporated and subsidiaries, and the related consolidated statements of income, changes in shareholders' equity, and cash flows as of and for each of the years in the two year period ended December 31, 1997 (appearing on pages 19 through 32 of the Computer Task Group, Incorporated Annual Report to Shareholders referenced in this Form 10-K Annual Report). 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 generally accepted auditing standards. 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, and the results of their operations and their cash flows as of and for each of the years in the two year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG LLP February 4, 1998 Rochester, New York 12 IV-2 13 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE Board of Directors and Shareholders Computer Task Group, Incorporated Buffalo, New York We have audited the consolidated financial statements of Computer Task Group, Incorporated and subsidiaries as of December 31, 1998 and for the year then ended, and have issued our report thereon dated February 5, 1999 (February 23, 1999 as to Note 2). Such financial statements and report are included in your 1998 Annual Report to Shareholders and are incorporated herein by reference. Our audit also included the consolidated financial statement schedule of Computer Task Group, Incorporated and subsidiaries, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCH LLP Buffalo, New York February 5, 1999 (February 23, 1999 as to Note 2) IV-3 13 14 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Computer Task Group, Incorporated: Under date of February 4, 1998, we reported on the consolidated balance sheet of Computer Task Group, Incorporated and subsidiaries, and the related consolidated statements of income, changes in shareholders' equity, and cash flows as of and for each of the years in the two year period ended December 31, 1997, as contained in the 1998 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule insofar as it relates to the years ended December 31, 1997 and 1996, as listed in Item 14(A) of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule insofar as it relates to the years ended December 31, 1997 and 1996 based on our audits. In our opinion, such financial statement schedule, insofar as it relates to the years ended December 31, 1997 and 1996 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP February 4, 1998 Rochester, New York IV-4 14 15 COMPUTER TASK GROUP, INCORPORATED SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
Balance at Net Balance at Description January 1 Change December 31 - ----------- ---------- ------ ----------- 1998 ACCOUNTS DEDUCTED FROM ASSETS Allowance for Doubtful Accounts $ 951 $ 154 (A) $ 1,105 Reserve for projects $ 1,000 $ - $ 1,000 Net Deferred Tax Assets Valuation Allowance $ 927 $ (927) (B) $ 0 1997 ACCOUNTS DEDUCTED FROM ASSETS Allowance for Doubtful Accounts $ 975 $ (24) (A) $ 951 Reserve for projects $ - $ 1,000 (C) $ 1,000 Net Deferred Tax Assets Valuation Allowance $ 495 $ 432 (D) $ 927 1996 ACCOUNTS DEDUCTED FROM ASSETS Allowance for Doubtful Accounts $ 862 $ 113 (A) $ 975 Net Deferred Tax Assets Valuation Allowance $ 962 $ (467) (B) $ 495
(A) Reflects additions charged to costs and expenses less accounts written off and translation adjustments. (B) Reflects utilization of foreign net operating losses that were previously offset completely by the valuation allowance. (C) Reflects additions charged to costs and expenses. (D) Reflects a provision for additional foreign net operating losses for which no benefit was anticipated. IV-5 15 16 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER TASK GROUP, INCORPORATED By /s/ Gale S. Fitzgerald ----------------------------------------- Gale S. Fitzgerald, Chairman of the Board and chief executive officer Dated: March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- (i) Principal Executive Officer: Chairman of the March 29, 1999 Board and Chief /s/ Gale S. Fitzgerald Executive Officer ------------------------------- (Gale S. Fitzgerald) (ii) Principal Accounting and Vice President, March 29, 1999 Financial Officer Chief Financial Officer /s/ James R. Boldt -------------------------------- (James R. Boldt) (iii) Directors /s/ George B. Beitzel Director March 29, 1999 -------------------------------- (George B. Beitzel) /s/ Richard L. Crandall Director March 29, 1999 -------------------------------- (Richard L. Crandall) /s/ R. Keith Elliott Director March 29, 1999 -------------------------------- (R. Keith Elliott) /s/ Gale S. Fitzgerald Director March 29, 1999 -------------------------------- (Gale S. Fitzgerald) /s/ Randolph A. Marks Director March 29, 1999 -------------------------------- (Randolph A. Marks) /s/ Barbara Z. Shattuck Director March 29, 1999 -------------------------------- (Barbara Z. Shattuck)
16 17
EXHIBIT INDEX ------------- Page or Exhibit Description (Reference) - ------- ----------- ----------- 2. Plan of acquisition, reorganization, arrangement, * liquidation or succession. 3. (a) Restated Certificate of Incorporation of Registrant. (1) (b) Restated By-laws of Registrant. 20 4. (a) Specimen Common Stock Certificate. (2) (b) Rights Agreement dated as of January 15, 1989, and (1) amendment dated June 28, 1989, between Registrant and The First National Bank of Boston, as Rights Agent. (c) Form of Rights Certificate. (2) 9. Voting Trust Agreement. * 10. (a) Non-Compete Agreement, dated as of March 1, 1984, (2) between Registrant and Randolph A. Marks. (b) Stock Employee Compensation Trust Agreement, dated (2) May 3, 1994, between Registrant and Thomas R. Beecher, Jr., as trustee. (c) Promissory Notes, dated May 3, 1994, and December 7, 1994, (2) between Registrant and Thomas R. Beecher, Jr., as Trustee of the Computer Task Group, Incorporated Stock Employee Compensation Trust (d) Severance Compensation Agreement dated October 31, 1994, between (2) Registrant and Gale S. Fitzgerald. (e) Stock Purchase Agreement, dated as of February 25, (3) 1981, between Registrant and Randolph A. Marks. - -------------------------------------------------------------------------------------------------------------- * None or requirement not applicable. (1) Filed as an Exhibit to the Registrant's Form 8-A/A filed on January 13, 1999, and incorporated herein by reference. (2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (3) Filed as an Exhibit to the Registrant's Registration Statement No. 2- 71086 on Form S-7 filed on February 27, 1981, and incorporated herein by reference.
E-1 17 18 EXHIBIT INDEX (Continued) -------------
Page or Exhibit Description (Reference) - ------- ----------- ----------- 10. (f) Description of Disability Insurance and Health (4) Arrangements for Executive Officers. (g) Nondisclosure and Nonsolicitation Agreement, dated (5) July 1, 1993, between Registrant and Gale S. Fitzgerald. (h) 1998 Key Employee Compensation Plans. (6) (i) Management Stock Purchase Plan. (7) (j) CTG Non-Qualified Key Employee Deferred Compensation Plan (8) (k) 1991 Employee Stock Option Plan, as Amended (9) (l) 1991 Restricted Stock Plan (9) (m) Executive Supplemental Benefit Plan 1997 Restatement (10) (n) Executive Compensation Plans and Arrangements. 37 - ----------------------------------------------------------------------------------------------------------------- (4) Filed as an Exhibit to Amendment No. 1 to Registration Statement No. 2-71086 on Form S-7 filed on March 24, 1981, and incorporated herein by reference. (5) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (6) Included in the Registrant's definitive Proxy Statement dated April 1, 1999 on page 7 under the caption entitled "Annual Cash Incentive Compensation," and incorporated herein by reference. (7) Filed as an Appendix to the Registrant's definitive Proxy Statement dated March 27, 1992, and incorporated herein by reference. (8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. (9) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (10) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 1997, and incorporated herein by reference.
E-2 18 19 EXHIBIT INDEX (Continued) -------------
Page or Exhibit Description (Reference) - ------- ----------- ----------- 11. Statement re: computation of per share earnings 39 12. Statement re: computation of ratios * 13. Annual Report to Shareholders 41 16. Letter re: change in certifying accountant. (11) 18. Letter re: change in accounting principles. * 21. Subsidiaries of the Registrant. 80 22. Published report regarding matters submitted to a vote * of security holders. 23. (a) Consent of experts and counsel. 81 (b) Consent of experts and counsel. 82 24. Power of Attorney. * 27. (a) Financial Data Schedules - 1998. 83 (b) Financial Data Schedules - 1997. 84 99. Additional exhibits. *
- ------------------------------------------------------------------------------- (11) Filed as an Exhibit to the Registrants Current Report on Form 8-K as of July 7, 1998, and incorporated herein by reference. E-3 19 EX-3.B 2 EXHIBIT 3.B 1 Exhibit 3(b) RESTATED BY-LAWS of COMPUTER TASK GROUP, INCORPORATED (Last amended - 4/30/86) ARTICLE I Shareholders' Action Section 1. ANNUAL MEETING. The annual meeting of the shareholders of the Corporation, for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at the principal business office of the Corporation or at such other place as the Board of Directors shall determine at 2:00 o'clock P.M. on the last Wednesday of April in each year. If in any year that day is legal holiday, the meeting shall be held at the same hour on the next day following that is not a Saturday, Sunday or legal holiday. Section 2. SPECIAL MEETINGS. Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of the shareholders for any purpose or purposes may be called only by, and shall be held at such place, date and hour as shall be designated by, (i) the Chairman of the Board, (ii) the President or (iii) the Board of Directors. 21 2 Section 3. ORDER OF BUSINESS AND PROCEDURE. A. ANNUAL MEETINGS. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the meeting by or at the direction of the Board of Directors or (iii) brought before the meeting by a shareholder in accordance with the procedure set forth below. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to and received by the Secretary of the Corporation not later than 60 days in advance of the Originally Scheduled Date (as defined below) of such meeting; PROVIDED, HOWEVER, that if such annual meeting of shareholders is held on a date earlier than the last Wednesday in April, such written notice must be so given and received not later than the close of business on the tenth day following the date of the first public disclosure (which may be by a public filing by the Corporation with the Securities and Exchange Commission) of the Originally Scheduled Date of the annual meeting. Any such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and in the event that such business includes a proposal to amend either the Certificate of Incorporation or By-laws of the Corporation, the language of the proposed amendment, (b) the name and address of the shareholder proposing such business, (c) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business and (d) any material interest of any shareholder in such business. No business shall be conducted at an annual meeting except in accordance with this paragraph, and the chairman of any annual meeting of shareholders may refuse to permit any business to be brought before such annual meeting without compliance with the foregoing procedure. For purposes of these By-laws, the "Originally Scheduled Date" of any meeting of shareholders shall be the date such meeting is scheduled to occur in 22 3 the notice of such meeting first given to shareholders regardless of whether such meeting is continued or adjourned and regardless of whether any subsequent notice is given for such meeting or the record date of such meeting is changed. (B) SPECIAL MEETINGS. At a special meeting of the shareholders, only such business as is specified in the notice of such special meeting shall come before such meeting. (C) OTHER PROCEDURAL MATTERS. All other matters of procedure at every meeting of shareholders may be determined by the chairman of the meeting. Section 4. QUORUM. At every meeting of the shareholders, except as otherwise provided by law or these By-laws, a quorum must be present for the transaction of business and a quorum shall consist of the holders of record of not less than one-third of the outstanding shares of the Corporation entitled to vote, present either in person or by proxy. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders. Section 5. ADJOURNMENTS. The shareholders entitled to vote who are present in person or by proxy at any meeting of shareholders, whether or not they constitute a quorum, shall have power by a majority vote to adjourn the meeting from time to time. Subject to any notice required by law, at any adjourned meeting at which a quorum is present any business may be transacted which might have been transacted on the original date of the meeting. Section 6. VOTING; PROXIES. Except as otherwise provided by law or by the Certificate of Incorporation of the Corporation, each holder of record of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation shall be entitled at each meeting of shareholders of such number of votes, if any, for each share of such stock as may be fixed pursuant to resolutions adopted by the Board pursuant to Article 4 of the Certificate of Incorporation and each holder of record of Common Stock shall be entitled at each meeting of shareholders to one vote for each share of such stock, in each case registered in such holder's name on the books of the Corporation on the record date designated by the Board of Directors. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, all questions that shall come 23 4 before a meeting of shareholders shall be decided by a majority of the votes cast. A shareholder may vote either in person or by written proxy signed by such shareholder or such shareholder's attorney-in-fact and delivered to the secretary of the meeting. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the person executing it or his personal representatives, unless it is entitled "irrevocable proxy," in which event its revocability shall be determined by the law of the State of New York in effect at the time. Section 7. INSPECTORS OF ELECTIONS. Two inspectors of election, neither or whom shall be a candidate for the office of director if directors are to be elected at such meeting, may be appointed by the Board of Directors in advance of any meeting of shareholders or by the person presiding at such meeting, and shall be appointed by the person presiding if such appointment is requested by a shareholder present at such meeting and entitled to vote thereat. Such inspectors shall serve at such meeting and any adjournments thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. Section 8. SHAREHOLDERS' LIST. A list of shareholders as of the record date, certified by the corporate officer responsible for its preparation or by the transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. Section 9. ACTION WITHOUT A MEETING. Whenever shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. 24 5 ARTICLE II Notice of Meetings Section 1. SHAREHOLDERS' MEETINGS. Written notice of every meeting of shareholders shall be given in the manner required by law not less than ten (10) nor more than fifty (50) days before the date of the meeting to each shareholder of record entitled to vote at the meeting. If mailed, such notice is given when deposited in the United States Mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of share holders, or if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. The notice shall state the place, date and hour of the meeting and, unless it is the annual meeting, shall indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. If at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling statutory procedural requirements to receive payment for their shares, the notice of meeting shall include a statement of that purpose and to that effect, specifically designating the applicable statutory provisions. Section 2. BOARD MEETINGS. Written notice of each special meeting of the Board of Directors, stating the place, date and hour thereof, shall be given by the President, the Secretary or an Assistant Secretary, or by any member to each other member, not less than three (3) days before the meeting by mailing the same to each member at his residence or usual place of business, or not less than two (2) days before the meeting by delivering the same to each member personally or by telegraphing or delivering the same to his residence or usual place of business. Like notice of each regular meeting of the Board of Directors shall be given unless the Board by resolution has fixed the place, date and hour thereof and declared that notice thereof shall not be required. Notwithstanding the foregoing, the first meeting of a newly elected Board of Directors may be held without notice immediately after the annual meeting of shareholders, if a quorum of the Board is present. 25 6 Section 3. COMMITTEE MEETINGS. Unless the Board otherwise directs, notice requirements for meetings of committees of the Board shall be the same as notice requirements for meetings of the Board itself. Section 4. WAIVER OF NOTICE. Notice of a shareholders' meeting need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. Notice of a meeting of the Board of Directors or a committee thereof need not be given to any director who submits a signed waiver of notice, whether before or after the meeting. The attendance of any shareholder at a shareholders' meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, and the attendance of any director at a meeting of the Board or a committee thereof without protesting prior thereto or at its commencement the lack of notice to him, shall constitute a waiver of notice by him. 26 7 ARTICLE III Directors Section 1. NUMBER, QUALIFICATION AND ELECTION. Subject to the rights of the holders of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation, the number of directors of the Corporation shall be fixed from time to time by the vote of a majority of the entire Board. The directors, other than those who may be elected by the holders of shares of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into two classes as nearly equal in number as possible (but with not less than three directors in each class or such lesser number as may be permitted by law), as determined by the Board, one class of directors to be originally elected for a term expiring at the annual meeting of shareholders to be held in 1987 and another class of directors to be originally elected for a term expiring at the annual meeting of shareholders to be held in 1988, with each class to hold office until its successors are elected and qualified. At each annual meeting of the shareholders of the Corporation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the second year following the year of their election. Notwithstanding the immediately preceding paragraph, in the event that the number of directors of the Corporation (i ) shall be fixed at nine or a greater number or (ii) shall be fixed at a number that would, under law, permit the directors to be divided into three classes, then, at the next succeeding annual meeting of the shareholders of the Corporation (the "Three-Class Annual Meeting"), the directors, other than those who may be elected by the holders of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation, shall be divided into three classes, as nearly equal in number as possible (but with no less than three directors in each class or such lesser number as may be permitted by law) as shall be provided in or pursuant to the By-laws of the Corporation. At the Three-Class Annual Meeting, one class shall be originally elected for a term expiring at the second succeeding annual meeting and another class shall be originally elected for a term expiring at the third succeeding annual meeting. The class of directors whose term, pursuant to the immediately preceding paragraph, would not have expired until the annual meeting next succeeding the Three-Class Annual 27 8 Meeting shall complete the term for which such class was originally elected. At each annual meeting of the shareholders subsequent to the Three-Class Annual Meeting, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring in the third year following the year of their election. In any election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director or cause, directly or indirectly, a decrease in the number of classes of directors, except as required by law. All the directors shall be at least 21 years of age. Section 2. NOTIFICATION OF NOMINATIONS. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by or at the direction of the Board of Directors or by any shareholder entitled to vote for the election of directors who complies with the procedures set forth in this Section 2. Any shareholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to and received by the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 60 days in advance of the Originally Scheduled Date of such meeting (provided that if such annual meeting of shareholders is held on a date earlier than the last Wednesday in April, such written notice must be given and received not later than the close of business on the tenth day following the date of the first public disclosure (which may be by a public filing by the Corporation with the Securities and Exchange Commission) of the Originally Scheduled Date of the date of the annual meeting), and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; 28 9 (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 3. RESIGNATION. Any director of the Corporation may resign at any time by giving his resignation to any officer of the Corporation. Unless otherwise specified there in, the acceptance of a resignation shall not be necessary to make it effective. Section 4. REMOVAL. Subject to the rights of the holders of any class or series of capital stock having a preference over the Common Stock as to dividends or upon liquidation, any director may be removed from office (i) without cause by the affirmative vote of the holders of at least 66 2/3% of the combined voting power of the then outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class, (ii) for cause by the affirmative vote of the holders of at least a majority of the then outstanding Voting Stock or (iii) for cause by the affirmative vote of a majority of the entire Board of Directors. For purposes of this Section 4, "cause" shall mean the willful and continuous failure of a director substantially to perform such director's duties to the Corporation (other than any such failure resulting from incapacity due to physical or mental illness) or the willful engaging by a director in gross misconduct materially and demonstrably injurious to the Corporation. Section 5. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, 29 10 removal or other cause shall be filled by the vote of the Board of Directors; provided, that, if the number of directors then in office is less than a quorum, such newly-created directorships and vacancies shall be filled by the vote of a majority of the remaining directors then in office. Any director elected in accordance with the preceding sentence of this paragraph shall hold office until the next annual meeting of shareholders and until such director's successor shall have been elected and qualified. Section 6. COMPENSATION. No director as such shall receive any compensation, either by way of salary, fees for attendance at meetings, or otherwise, or shall be reimbursed for his expenses, except pursuant to authorization of the Board of Directors. This section shall not preclude any director from serving the Corporation in any other capacity or from receiving compensation for such services and reimbursement for his related expenses. Section 7. MEETINGS. Meetings of the Board of Directors shall be held at such times and at such places as may be determined by action of the Board of Directors or, in the absence of such action, by one-third of the directors then in office or by the President, or in his absence any Vice President, pursuant to such notice as is required by Article II of these By-laws. Section 8. QUORUM. At all meetings of the Board of Directors, except as otherwise provided by law, the Certificate of Incorporation or these By-laws, a quorum shall be required for the transaction of business and shall consist of not less than one-third of the entire Board, and the vote of a majority of the directors present shall decide any question that may come before the meeting. A majority of the directors present at any meeting, although less than a quorum, may adjourn the same from time to time, without notice other than announcement at the meeting. Section 9. PROCEDURE The order of business and all other matters of procedure at every meeting of directors may be determined by the presiding officer. 30 11 Section 10. COMMITTEES OF THE BOARD. The Board of Directors, by resolution or resolutions adopted by a majority of the entire Board, may designate from among its members one or more committees, each consisting of three or more directors, and each of which, to the extent provided in the applicable resolution, shall have all the authority of the Board, except insofar as its exercise of such authority may be inconsistent with any provision of law, the Certificate of Incorporation or these By-laws. The Board may designate one or more directors as alternate members of a committee, who may replace any absent member or members at any meeting of such committee. The committees shall keep regular minutes of their proceedings and make the same available to the Board upon request. Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 12. PRESENCE AT MEETING BY TELEPHONE. Members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation in a meeting by such means shall constitute presence in person at such meeting. 31 12 ARTICLE IV Officers Section 1. OFFICES; TERM OF OFFICE:. The Board of Directors shall annually, at the first meeting of the Board after the annual meeting of shareholders, appoint or elect a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer. The Board of Directors may from time to time elect or appoint such additional officers as it may determine. Such additional officers shall have such authority and perform such duties as the Board of Directors may from time to time prescribe. The Chairman of the Board, the President, each Vice President, the Secretary, and the Treasurer shall, unless otherwise determined by the Board of Directors, hold office until the first meeting of the Board following the next annual meeting of shareholders and until their successors have been elected or appointed and qualified. Each additional officer appointed or elected by the Board of Directors shall hold office for such term as shall be determined from time to time by the Board of Directors and until his successor has been elected or appointed and qualified. Any officer, however, may be removed or have his authority suspended by the Board of Directors at any time, with or without cause. If the office of any officer becomes vacant for any reason, the Board of Directors shall have the power to fill such vacancy. Section 2. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the chief executive officer of the Corporation. He shall have the general powers and duties of supervision and management of the Corporation. He shall preside at all meetings of shareholders and of the Board of Directors and shall be entitled to vote upon all questions. Section 3. THE PRESIDENT. In the absence of the Chairman of the Board, the President shall preside at all meetings of the shareholders and of the Board of Directors. Subject only to the direction of the Board of Directors and Chairman of the Board, he shall have the general powers and duties of supervision and management of the Corporation, and shall perform all such other duties as are properly required of him by the Board of Directors. 32 13 Section 4. THE VICE PRESIDENTS. The Vice Presidents may be designated by such title or titles as the Board of Directors may determine, and each Vice President in such order of seniority as may be determined by the Board shall, in the absence or at the request of the President, perform the duties and exercise the powers of the President. The Vice Presidents also shall have such powers and perform such duties as usually pertain to their office or as are properly delegated or assigned to them by the Board of Directors. Section 5. THE SECRETARY. The Secretary shall issue notices of meetings of shareholders and of directors when such notices are required by law or these By-laws. He shall attend all meetings of the shareholders and of the Board of Directors and keep the minutes thereof. He shall affix the corporate seal to such instruments as require the seal, and shall perform such other duties as usually pertain to his office or as are properly assigned to him by the Board of Directors. Section 6. THE TREASURER. The Treasurer shall have the care and custody of all monies and securities of the Corporation. He shall cause to be entered in records of the Corporation to be kept for that purpose full and accurate accounts of all monies received by him and paid by him on account of the Corporation. He shall make and sign such reports, statements and documents as may be required of him by the Board of Directors or by the laws of the United States, the State of New York or any other state or country, and shall perform such other duties as usually pertain to his office or as are properly assigned to him by the Board of Directors. Section 7. TEMPORARY TRANSFER OF POWERS AND DUTIES. In case of the absence or illness of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may delegate and assign, for the time being, the powers and duties of any officer to any other officer or to any director. 33 14 Section 8. COMPENSATION. The compensation of all officers shall be fixed by the Board of Directors or a committee thereof. The compensation of other employees shall be fixed by the President or other officers or employees, subject to any limitations prescribed by the Board of Directors or a committee thereof. ARTICLE V INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. RIGHT OF INDEMNIFICATION. Each director and officer of the corporation, whether or not then in office, and any person whose testator or intestate was such a director of officer, shall be indemnified by the corporation for the defense of, or in connection with, civil or criminal actions or proceedings, or appeals therein, in accordance with and to the fullest extent permitted by law. Section 2. OTHER RIGHTS OF INDEMNIFICATION.. The right of indemnification herein provided shall not be deemed exclusive of any other rights to which any such director, officer or other person may now or hereafter be otherwise entitled and specifically, without limiting the generality of the foregoing, shall not be deemed exclusive of any rights, pursuant to statute or otherwise, of any such director, officer or other person in any such action or proceeding to have assessed or allowed in his favor, against the corporation or otherwise, his costs and expenses incurred therein or in connection therewith or any part thereof. ARTICLE VI Shares Section 1. STOCK CERTIFICATES. The stock certificates of the Corporation shall be numbered and their issuance noted in the records of the Corporation as they are issued. They shall when issued contain the name of the person to whom issued, the number and class of shares issued and all other statements required by law, shall be signed by the President, a Vice President or the Chairman of the Board and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, and may 34 15 bear the corporate seal or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of issue. No certificate shall be valid unless countersigned by a transfer agent if the Corporation has a transfer agent, or until registered by a registrar if the Corporation has a registrar. Section 2. TRANSFER OF SHARES. Shares of the Corporation shall be transferable on the records of the Corporation by the holder thereof, in person or by duly authorized attorney, upon the surrender of the certificate representing the shares to be transferred, properly endorsed. The Corporation shall be entitled to treat the holder of record of any share as the owner thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as otherwise provided by the laws of the State of New York. The Board of Directors, to the extent permitted by law, shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates and may appoint one or more transfer agents and registrars of the shares of the Corporation. Section 3. FIXING RECORD DATE. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action the Board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty (50) nor less than ten (10) days before the date of such meeting, nor more than fifty (50) days prior to any other action. If no record date is fixed, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or if no notice is given, the day on which the meeting is held. 35 16 ARTICLE VII Miscellaneous Section 1. CORPORATE SEAL. The seal of the Corporation shall be circular in form with the name of the Corporation and the year of its Incorporation thereon, and such seal as impressed on the margin hereof is hereby adopted as the corporate seal of the Corporation. Section 2. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year unless otherwise provided by the Board of Directors. Section 3. AMENDMENTS. Any By-laws may be adopted, repealed, altered or amended by the Board of Directors at any meeting thereof, provided that such proposed action in respect thereof shall be stated in the notice of such meeting, and provided further that any amendment to the By-laws increasing or decreasing the number of directors of the Corporation shall require the affirmative vote of a majority of the entire Board of Directors. The shareholders of the Corporation shall have the power to adopt, amend, alter or repeal any provision of these By-laws only to the extent and in the manner provided in the Certificate of Incorporation of the Corporation. 36 EX-10.N 3 EXHIBIT 10.N 1 EXHIBIT 10 (n) ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Executive Compensation Plans and Arrangements. 37 2 EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS --------------------------------------------- The following is a list of all plans, management contracts and compensatory arrangements in which the executive officers of the Company participate and where they can be found: Stock Purchase Agreement with Randolph A. Marks - Registration Statement No. 2-71086 on Form S-7 filed on February 27, 1981. First Employee Stock Purchase Plan (Eighth Amendment and Restatement) - Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(p). Disability Insurance and Health Arrangements - Amendment No. 1 to Registration Statement No. 2-71086 on Form S-7 filed on March 24, 1981. Executive Supplemental Benefit Plan 1997 Restatement, - Quarterly Report on Form 10-Q for the quarter ended March 28, 1997. 1991 Employee Stock Option Plan, as Amended - Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(o). 1991 Restricted Stock Plan - Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(q). Management Stock Purchase Plan - definitive Proxy Statement dated March 27, 1992, Appendix A. CTG Non-Qualified Key Employee Deferred Compensation Plan - Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 10(cc). 38 EX-11 4 EXHIBIT 11 1 EXHIBIT 11 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Computation of diluted earnings per share under treasury stock method set forth in Statement of Financial Accounting Standards No. 128 "Earnings Per Share." 39 2 COMPUTATION OF DILUTED EARNINGS PER SHARE UNDER TREASURY STOCK METHOD SET FORTH IN STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE" (amounts in thousands, except per share data)
Year Ended December 31: - ---------------------- 1998 1997* 1996* 1995* 1994* --------- --------- --------- --------- ---------- Weighted-average number of shares outstanding during year................. 16,216 16,758 16,980 16,658 17,938 Add Common Stock equivalents -- Incremental shares under stock option plans............... 697 857 620 741 125 -- Incremental shares related to convertible preferred stock.................. - - - - 454 --------- --------- --------- --------- --------- Number of shares on which diluted earnings per share is based.......................... 16,913 17,615 17,600 17,399 18,517 Net income for the year................... $ 24,045 $ 17,862 $ 11,080 $ 10,776 $ 4,797 Diluted earnings per share................ $ 1.42 $ 1.01 $ 0.63 $ 0.62 $ 0.26 Basic earnings per share.................. $ 1.48 $ 1.07 $ 0.65 $ 0.65 $ 0.27
* Restated to reflect a 2-for-1 stock split effective June 2, 1997. 40 EX-13 5 EXHIBIT 13 1 EXHIBIT 13 COMPUTER TASK GROUP, INCORPORATED 1998 Annual Report to Shareholders. 41 2 ctg 1998 Annual Report INFORMATION TECHNOLOGY SOLUTIONS 3 Company Profile Founded in 1966, Computer Task Group, Incorporated (CTG or the Company) is a $468 million information technology (IT) services company that provides IT solutions to Fortune 1000 and other companies through strategic partnerships. Backed by more than 30 years' experience, CTG manages IT services for some of the world's leading companies so they can focus on their core businesses and use IT, which has become vital to competitiveness, to excel in their markets. CTG's resources include 55 offices in North America and Europe, 6,000 IT professionals, a suite of proprietary service methodologies, strong project management expertise, and a proactive recruiting approach, CTG-SmartSource. Company Mission Statement CTG's mission is to leverage information technology for our clients' success, while creating professional opportunities for our colleagues and value for our shareholders. TABLE OF CONTENTS 1 1998 Performance Highlights 2 Shareholders Letter 3 The Direction of IT: Outsourcing 6 The Nature of IT: Dynamic 8 The Key to IT: Knowledge 10 The Demand for IT: Global 12 Financial Section 13 Consolidated Summary Financial Information 14 Management's Discussion and Analysis 19 Consolidated Financial Statements 24 Notes to Consolidated Financial Statements 34 Auditors' Report 35 Corporate Information 36 Officers & Directors This Annual Report contains certain forward-looking statements concerning the Company's current expectations as to future results. Such forward-looking statements are contained in the sections of the Annual Report entitled Shareholders' Letter. The Director of IT: Outsourcing, The Nature of IT: Dynamic, The Key to IT: Knowledge, The Demand for IT: Global, and Management's Discussion and Analysis. Words such as "believes," "forecasts," "intends," possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements should be read in conjunction with the Company's disclosures set forth in the first paragraph of the Management's Discussion and Analysis Section, on page 14, which is incorporated herein by reference. 4 (1998) PERFORMANCE HIGHLIGHTS
(amounts in millions, except per share and percentage data) PERCENT 3-YEAR FINANCIAL HIGHLIGHTS 1998 1997 CHANGE CAGR* ---- ---- ------ ----- Revenue $467.8 $407.6 14.8% 11.3% Operating income 39.9 29.0 37.6% 28.4% Operating margin 8.5% 7.1% 19.7% 31.3% Income before income taxes 40.8 30.3 34.7% 50.4% Net income 24.0 17.9 34.1% 46.7% Diluted net income per share 1.42 1.01 40.6% 47.8% Shareholders' equity 83.4 55.3 50.8% 10.7% ------ ------ ---- ----
* compound annual growth rate - - Revenues increased 14.8% to a record $468 million. - - CTG's focus on Key Clients contributed to a 40.6% increase in diluted net income per share and a 34.1% increase in net income. - - CTG's Key Client strategy also produced growth in operating margin to 8.5% for 1998 and a record quarterly high of 9.1% in the fourth quarter of 1998. - - CTG signed a new one-year contract with IBM to continue as one of IBM's national technical services providers. - - Computerworld named CTG one of the 100 best places to work in information systems for the third consecutive year. - - CTG received two regional Best Practices Awards(SM) from Arthur Andersen, an international accounting firm. - - Twenty-three additional CTG offices achieved ISO 9001 certification, bringing the total number of certified offices to 37. - - CTG Europe hired 257 new employees, bringing the total number of European consultants to over 1,000, solidifying CTG's position as a major IT services company in Europe. REVENUE in millions $301.6 $339.4 $365.1 $407.6 $467.8 1994 1995 1996 1997 1998 NET INCOME in millions $4.8 $10.8* $11.1 $17.9 $24.0 1994 1995 1996 1997 1998 DILUTED NET INCOME PER SHARE $0.26 $0.62* $0.63 $1.01 $1.42 1994 1995 1996 1997 1998 (*)Includes a non-recurring tax benefit of $3.2 million ($0.18 diluted net income per share) relating to losses associated with the Company's European operations. 1 5 Gale S.Fitzgerald Chairman and CEO CTG's Vision: To be recognized as the most committed, responsive, and valued global business partner in information technology services Dear Fellow Shareholders, As we enter 1999, we can be proud of our past year's accomplishments. We continue to strengthen and expand our business and solidify our leadership position in the information technology (IT) services industry. CTG produced record revenues and profits in 1998. Revenues for the year were $467.8 million, an increase of 15% over 1997 revenues. Net income and diluted earnings per share (EPS) in 1998 were $24.0 million and $1.42, respectively, increases of 34% and 41% over 1997. Our Key Client strategy and commitment to delivering high-value managed services led to solid results in 1998. By providing IT services for clients whereby CTG takes management responsibility for specified deliverables or customized service levels, we are able to form higher-value, ongoing relationships. This approach has proven its worth, positioning CTG for further growth in revenues and profitability. After five years of steady financial improvement, we are prepared to accelerate our growth pace in 1999 and beyond. The IT services industry is projected to grow at a compound annual growth rate of 17% from 1997 to 2002, and CTG is determined to grow even faster. Our goal is to continue to increase our operating margins by increasing our managed services business. It is a challenging but attainable financial goal. Focusing on high-value services will provide greater value for our shareholders, stronger partnerships with our clients, and faster growth for CTG. Everyone benefits. SHAREHOLDERS' LETTER 2 6 In 1998, we appointed a new vice president of Marketing and Services to help drive our growth plan for providing IT managed services to clients. Our global Marketing and Services organization will research the services our clients need and value, and will ensure that CTG is fully equipped to deliver them. In 1999, we will be focusing our services in five major markets that represent exciting opportunities for us: Business Application Management, Enterprise Resource Planning (ERP), Electronic Business (E-Business), Supply Chain Management, and Health Care. Our decision to limit year 2000 business to less than 15% of our total business is enabling us to commit significant resources and energies in 1999 to these higher-growth markets. We see these markets as offering greater potential to build significant, ongoing business with both current and new Key Clients. In February 1999, CTG acquired Elumen Solutions, Inc. Based in Cincinnati, Ohio, Elumen is the largest privately held consulting firm specializing in information technology services for health care organizations. Elumen joined CTG's national health care group to form CTG HealthCare Solutions. With $44 million in combined health care revenues in 1998, CTG HealthCare Solutions has approximately 250 health care client relationships and comprises more than 300 health care IT consultants. This strategic acquisition created an extremely strong presence in a sector that has been growing in excess of 22% annually, or 30% faster than the IT services industry overall. We expect this business segment's significant growth to substantially contribute to CTG's overall growth in revenues and profitability. CTG's Global Approach, rolled out in 1998, is a framework shared by all CTG colleagues for performing their work. It applies to all primary business functions within CTG worldwide. Its objective is to drive further growth by making everything we do even more effective: sales, delivery, recruiting, career development, marketing and services, and support services. The results should be higher growth and productivity, more cost-effectiveness, and metrics that measure value not only to our clients, but also to CTG and our shareholders. Attracting and retaining the best IT professionals is another key to CTG's success. Commitment to our colleagues is demonstrated by the investments we make in education, training, leadership, and career development. In 1998, Computerworld magazine named CTG one of the 100 best places to work in information systems for the third consecutive year. This recognition is particularly important in view of the current shortage of IT professionals. It gives us an additional advantage over competitors in attracting and retaining top IT skills. Our extensive recruiting programs attract employees to CTG, and our commitment to being the industry's best employer helps us retain them. Our benefits ensure CTG stays at the top of our industry. Our education and training services keep our colleagues up on the most current IT and business knowledge. In 1997, we invested $8.4 million in training. In 1998 we increased training spending to $12.5 million, and during 1999 we will continue to invest in our colleagues. Through our intranet, CTG Central, we offer more than 400 downloadable computer-based training courses. Other innovative employee benefits programs include an enhanced 401(k) plan with an increased company match; interest-free loans for the purchase of PCs and software for our colleagues' personal use; and annual bonuses for our IT professionals, based on profits. We work hard at improving ourselves to retain our leadership position among top IT employers. We want our colleagues and potential employees to know that CTG is the best place to be in IT, which, in turn, helps us grow our business. With all the progress that we've made over the past several years, our mission remains clear and simple: to leverage information technology for our clients' success, while creating professional opportunities for our colleagues and value for our shareholders. Our vision is to be recognized as the most committed, responsive, and valued global business partner in IT services. With some of the world's most respected companies as our Key Clients, we have an excellent foundation for building and growing our business and making our vision a reality. This is an exciting time to be in the information technology industry. CTG is well prepared to capitalize on the future of information technology for the benefit of our clients, colleagues, and you--our shareholders. I look forward to the growth opportunities that lie ahead as we approach the new millennium. Thank you for your interest and continued support of CTG. Sincerely, Gale S. Fitzgerald Chairman and CEO 3 7 Businesses and organizations are expanding their use of outsourcing as they strive to realize maximum value from their IT assets and staff, align IT strategy and business goals, and build world-class processes. Dataquest expects worldwide outsourcing to grow to $471.7 billion by the year 2002 at a compound annual growth rate of 17.3%. GartnerGroup predicts that more than 60% of the Fortune 2000 will use external service providers for more than 50% of information technology activities by 2003. Tops Markets, Inc. CFO Spencer Deese (pictured at far right) says of his company's relationship with CTG, "We have been very pleased with the people, the processes, the systems. The ability to do other than just put in a system. The ability to think outside of that, and help us understand how to best apply IT to running a retail business." THE DIRECTION OF IT OUTSOURCING 4 8 CTG's 33-year history of successful outsourcing contracts was recognized by CIO magazine's "Outsourcing Buyer's Guide" when it named CTG as one of the country's top providers of application maintenance solutions in April 1997. In mid-1998, CTG further solidified its leadership position in the outsourcing market by refocusing operations toward application maintenance and other valued managed services. These services now comprise the company's largest, most profitable, and fastest-growing business, accounting for over 40% of business in 1998. CTG provides managed services to a blue-chip roster of customers that includes many Fortune 1000 companies. For clients in the planning phase of a business solution, CTG's valued managed services include strategic IT alignment, IT architecture, business process modeling, technology selection, and internetworking. As clients move into the design and development stage, CTG manages systems design, development, testing, implementation, and integration services. In the maintenance/ management phase, CTG supports, operates, and maintains application portfolios, help desks, systems, and data centers. All managed services are implemented by highly qualified project managers, equipped with a suite of proprietary methodologies, and backed by CTG's vertical industry and technology specialties. During 1998, a significant portion of CTG's valued services was generated by application management services, which address the full life-cycle needs of managing enterprise software, from rollout to subsequent updates, conversions, maintenance, and help desk activities. Application management contracts typically cover two to five years, with values ranging from $1 million to $20 million. Key application management clients include British Petroleum (BP). BP's exploration company outsourced its 80-person applications staff to CTG in 1994. In 1995, BP's oil operations outsourced its 300+ person information technology department to a federation of four IT industry suppliers that includes CTG. BP wanted to focus management attention on its core competencies, implement IT processes that would give it management `levers' to match service levels with business value, and obtain greater economies of scale in IT. CTG provides BP with application management processes, the applications manager, applications staff, as well as production support, 24-hour on-call support, maintenance, and user consulting. Another successful Key Client outsourcing partnership is CTG's four-year-old relationship with Bayer Corporation. A team of CTG technical specialists, including a project manager and two team leaders, maintains over 30 applications for Bayer. The outsourcing of certain production systems allows Bayer management to concentrate its own IT staff resources on the development of new mission critical systems while maintaining a high level of service to its current systems users. The CTG team is particularly proud of its client satisfaction record and the improvements it has made to Bayer's information systems' responsiveness. In addition to application management outsourcing, CTG teams are in place to provide our Key Clients with other valued services that we believe will present significant opportunities over the next few years. These include enterprise resource planning, e-business--with an emphasis on e-commerce, Web- and Internet-based development, and network architecture--and health care, where CTG is currently expanding its implementation capabilities with health care package providers. Supply chain management is another critical business area in today's marketplace, and CTG has responded by extending its pharmaceutical industry expertise to the consumer pack-aged goods, food processing, and distribution industries. This growing segment is exemplified by our Key Client partnership with Buffalo, NY-based Tops Markets, Inc., an operating company of Royal Ahold N.V. When Ahold decided to consolidate its information technology function at an enterprise level to gain economies of scale, Tops Markets and its sister companies were, in turn, required to refocus their own IT strategies. To achieve its aggressive goals, Tops chose CTG to provide the process and methodology for projects involving retail systems, corporate systems consolidation, marketing and merchandising systems, supply chain systems, mandatory/regulatory application upgrades, and year 2000 support. CTG also provides technology support for such key business enhancement initiatives as a customer loyalty card. The CTG Solution 5 9 In 1999 and beyond, helping clients stay ahead of technology's rapid changes will require the delivery of valued services on an enterprise-wide basis, ranging from complex IT projects to the management of ongoing IT functions like help desk operations and application management. THE CTG SOLUTION Addressing this challenge is CTG's Enterprise Resource Planning (ERP) group, specializing in the selection and implementation of ERP systems. These state-of-the-art systems integrate all the manufacturing and related applications for an enterprise, incorporating such advanced technologies as GUIs, CASE tools, 4GLs, and client/server architecture. ERP systems integrate business functions and enable improved responsiveness to customers, tighter cost controls, reduced inventory levels, increased productivity, and greater flexibility in conducting business. The CTG ERP group provides the experienced teams, processes, methodologies, technology-based toolkits, and organizational support needed to select and implement the right ERP software for each client. Our ERP teams are able to maximize our clients' information technology investment through application of our Joint Technology Selection (JTS) process. This process matches clients' knowledge of their business with CTG's ability to effectively accelerate decision-making, concentrating the selection effort on each client's critical business requirements, and then validating compliance with the finalist packages during a validation phase. As a result, JTS executes faster than a traditional package selection approach, yet the process is less risky. CTG recently applied this expertise to a project for Tower Group, an international customs broker. Tower Group needed a system that would create a single repository of reference, customer, vendor, financial management, and historical data from disparate platforms, as well as databases to enable it to perform financial and management analysis and improve customer service. Tower Group's vision was to make information available on demand to internal and external customers around the world. CTG helped Tower Group design, plan, and implement an information technology architecture to support these business requirements. Another dynamic sector of information technology growth and opportunity is health care. From the largest hospitals to physicians' private practices, health care industry IT requirements are proliferating. Hospital charts are being replaced by computer-based patient records and clinical repositories. Clinical information systems will augment the current chain of events in patient care. These innovations will help reduce costs while improving responsiveness and patient out-comes. CTG's HealthCare Solutions is dedicated to delivering technical solutions that facilitate more effective health care delivery. The HealthCare Solutions group has conducted large-scale implementation and customization of major vendor hospital information systems, managed care contract systems, and ancillary department systems. One such client, Ohio State University Medical Center (OSUMC), a large research and teaching hospital, engaged CTG to assist with the design and implementation of the SMS INVISION Physician Order Entry, Lifetime Clinical Record, Clinical Documentation, Patient Management, and Patient Accounting systems, as well as the Enterprise Access Directory. As the relationship expanded, OSUMC sought greater support and expertise from CTG's health care consultants, and multiple CTG teams are now supporting OSUMC in several projects. CTG's accomplishments at OSUMC include supporting the integration of multiple software systems, improving processes to take full advantage of system features, and training users and IT staff on the new systems. CTG's recent acquisition of Elumen Solutions, Inc., will provide additional opportunities for CTG as a leader in IT services for health care organizations, one of the fastest-growing sectors of the IT services industry. THE CTG SOLUTION 6 10 The Nature of IT Dynamic In today's ever-changing IT environment, businesses are hard-pressed to keep up with the rapid pace of technology and how to apply it to the best advantage for their business. What is the most efficient, cost-effective method for managing patient care? What are the best ways to track inventory? What is the fastest way to get a product to market? Companies and organizations are increasingly turning to information technology experts for IT solutions, ongoing support and maintenance, and the expertise to stay ahead of nonstop changes in technology. 7 11 The Key to IT Knowledge Businesses and organizations are faced with an escalating dependence on both information systems and the IT experts needed to design, develop, and maintain them. The primary business challenge confronting users of information technology is the fact that demand for IT professionals far outweighs the supply. A byproduct of this imbalance is that more companies are turning to information technology consulting and outsourcing firms whose core competency is providing IT services and talent. 8 12 As the 21st century approaches, success in the dynamic information technology services market increasingly depends on a company's ability to make strategic information widely and quickly available to the teams and individuals--often dispersed across many different cities on several continents--who need it. In 1997, CTG undertook a project to use our significant body of intellectual capital as the foundation for a strong knowledge-based culture, and during the past year the company intensified its focus on leveraging knowledge more effectively. The result is a rapidly expanding and diversifying Global Knowledge Management System that is enhancing the value CTG can provide to its clients and shareholders, as well as the opportunity it can offer its professionals. Keeping pace with the rapid changes in the information technology industry involves a concerted effort among several CTG supporting teams. A prime example is CTG's Enabling Technologies Virtual Team (ETVT), a select group of highly skilled IT professionals who support CTG clients by delivering leading-edge, high-demand technologies. The ETVT studies the IT landscape to assess emerging technologies, adapts CTG's methodologies for use with Key Clients, and mentors CTG professionals in building skills in high-demand areas. Closely associated with the Enabling Technologies Team is CTG's Knowledge Exchange Team, which provides resources and research support on technology, industries, and alliances. A third key group of specialists, CTG's E-Business Team, contributes expertise in Internet/intranet systems development, network architecture design and implementation, distributed systems management, security, project management, and systems architecture. CTG's success in recruiting and retaining higher-caliber IT professionals makes it one of the most responsive IT services firms in the industry. The Company's recruiting mechanism, CTG-SmartSource, combines a global team of recruiting experts, our leading-edge technology infrastructure, and proprietary processes to locate and track IT professionals with high-demand skills in any location. Due to the high cost of turnover, one of CTG's corporate goals for 1998 was--and continues to be--to optimize retention by developing programs and policies to address the professional and personal needs of its diverse workforce. CTG's emphasis on supporting career development has proven to be an essential element in recruitment and retention initiatives, and helps ensure that technical employees are highly qualified. A culture of professional challenge, competitive compensation, and diverse career paths, along with a nationally recognized training and education program, has produced measurable results. CTG professionals are encouraged to work with their managers to develop personal career plans and to maintain and expand their IT training. The goal is to ensure that all CTG colleagues are trained and experienced in state-of-the-art technologies. To remain competitive, CTG seeks ways to find, keep, and develop its growing pool of qualified IT colleagues. One cost-effective response to the challenge is the CTG Graduate Program. Working with over 80 colleges, universities, and technical schools from around the country, CTG's College Recruitment Team selects recent and upcoming college graduates on the basis of their educational qualifications, technical experience, and aptitude for information systems. The program's goal is to graduate students with proficiency in application development equivalent to six months' on-the-job experience. Graduates are readied to accept developer roles as junior members of a team, mentored by a senior CTG technical professional. In 1998, CTG doubled its capacity to train entry-level programmers. The Graduate Program satisfies several needs. First, it builds teams with varying levels of experience to handle the diversity of tasks in a typical project. That includes both colleagues with specialized or senior skills and those who have recently completed Graduate Program training. Second, it gives CTG the ability to appropriately balance the skills and experience needed, and make the solution for the client more cost-effective. Third, for the development of applications, it provides professionals who are trained in a consistent manner, according to established and accepted standards. The Graduate Program gives CTG the flexibility to creatively address customer requirements of both cost and skill. THE CTG SOLUTION 9 13 CTG provides IT solutions that link businesses to the global marketplace. The increasing complexity of today's technology solutions requires innovative and highly skilled IT professionals. CTG's 6,000 IT professionals are dedicated to identifying and serving our clients' needs. With our 55 offices in North America and Europe, we are well positioned to supply our clients with the wide range of services they need to help them become more competitive. Our clients count on us to provide cutting-edge global business solutions. CTG's e-business services specialize in Web and electronic commerce technologies. We provide our clients with comprehensive and innovative Web-based solutions that include infrastructure expertise, database design, and information management with controlled processes. CTG supports clients who are transitioning from traditional electronic data interchange (EDI) business-to-business transactions to Web-based transactions. We develop Web-enabled back office systems. CTG has extensive experience in e-commerce technologies such as EDI, e-mail, electronic funds transfer (EFT), and the Internet. These technologies enable consumers and businesses to participate in the global marketplace. One of our most significant e-business engagements is an Internet project for British Petroleum America. CTG designed, built, and implemented an intranet infrastructure that provided access to 53,000 local and remote users. Increasing communications and sharing intellectual capital companywide was the goal. Most of CTG's Key Clients are Fortune 1000 companies with multinational interests. These companies have the resources to invest in IT where it makes a difference to their business-- and they have a successful relationship with CTG. They turn to us to manage their IT needs because we have demonstrated our flexibility in structuring our IT services to respond to their needs. Strategic partnerships with CTG reduce both IT service costs and risk in IT projects, enhance the impact of IT on the organization, and give our clients immediate access to IT resources that are organized around their needs. Our IT talent learns our customer's business and captures follow-on work. Partnering with IBM Corporation reflects the value of linking with a large multinational company. IBM is CTG's largest Key Client, representing 32% of our business. In 1995, CTG was selected as one of nine preferred suppliers to provide IT services to IBM throughout the U.S. Building on the strength of our relationship in the U.S., in October 1996, CTG Canada was selected as a core supplier authorized to provide technical, IT support, engineering, and design services to IBM Global Services, Canada, in all seven of IBM Canada's regions. CTG's European operation supports an international help desk based in the Netherlands. Our success in Europe enhances our ability to expand our presence in the global marketplace. CTG's strategic partnerships with multinational firms contributed to the Company's explosive growth in Europe. In May 1998, we hired our 1,000(th) European colleague, doubling the number we had in 1997. CTG's European revenue increased at a compound annual growth rate of 30.1% over the past three years. Since becoming part of CTG in 1990, our European operation has developed a niche in the help desk operations and financial services markets. CTG's financial services expertise in Europe is reflected in our work for ABN AMRO Bank in the Netherlands. CTG staffed and managed one of the migration projects at the bank that involved designing, building, testing, and implementing a new state-of-the-art PC LAN environment. As businesses respond to the globalization of their markets, a strategic partnership with CTG enhances the impact of IT on their organization. The CTG Solution 10 14 As the new millennium approaches, IT touches every aspect of life around the world. The rising demand for IT solutions is fueled in part by e- commerce applications created in response to the expanding World Wide Web. By 2002, Dataquest expects PCs that regularly access the Internet and the Web to triple to over 300 million. Integrating websites, intranets, and other e-commerce applications into a company's core business is a challenge for IT services. Dataquest estimates that worldwide markets for IT professional services will grow from $217.6 billion in 1997 to about $471.7 billion by the year 2002 in response to this need. THE DEMAND FOR IT GLOBAL 11 15 (Financial) Section Table of Contents 13 Consolidated Summary Financial Information 14 Management's Discussion and Analysis 19 Consolidated Financial Statements 24 Notes to Consolidated Financial Statements 34 Auditors' Report Operating Income [GRAPH] (in millions) $3.7 $4.7 $4.9 $5.3 $5.8 $7.3 $7.5 $8.3 $8.4 $9.8 $10.3 $11.4 Q196 Q296 Q396 Q496 Q197 Q297 Q397 Q497 Q198 Q298 Q398 Q498 Operating Margin [GRAPH] 4.1% 5.1% 5.4% 5.6% 6.1% 7.3% 7.4% 7.5% 7.6% 8.3% 8.9% 9.1% Q196 Q296 Q396 Q496 Q197 Q297 Q397 Q497 Q198 Q298 Q398 Q498 Earnings Per Share (diluted) [GRAPH] $0.13 $0.15 $0.17 $0.18 $0.21 $0.26 $0.26 $0.29 $0.30 $0.34 $0.37 $0.41 Q196 Q296 Q396 Q496 Q197 Q297 Q397 Q497 Q198 Q298 Q398 Q498 12 16 Consolidated Summary - Five-Year Selected - ------------------------------------------------------------------------------- FINANCIAL INFORMATION
(amounts in millions, except per share data) 1998 1997 1996 1995 1994 OPERATING DATA Revenue $467.8 $407.6 $365.1 $339.4 $301.6 Operating income (loss) $ 39.9 $ 29.0 $ 18.5 $ 12.8 $ (2.2) Income before income taxes $ 40.8 $ 30.3 $ 18.5 $ 12.0 $ 8.1 Net income $ 24.0 $ 17.9 $ 11.1 $ 10.8(*) $ 4.8 Basic net income per share $ 1.48 $ 1.07 $ 0.65 $ 0.65(*) $ 0.27 Diluted net income per share $ 1.42 $ 1.01 $ 0.63 $ 0.62(*) $ 0.26 Cash dividend per share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 FINANCIAL POSITION Working capital $ 74.9 $ 47.1 $ 61.5 $ 49.5 $ 38.8 Total assets $156.8 $107.7 $121.3 $104.8 $ 95.5 Long-term debt $ -- $ -- $ -- $ 3.6 $ 6.1 Shareholders' equity $ 83.4 $ 55.3 $ 71.5 $ 61.5 $ 50.7
(*) Includes a non-recurring tax benefit of $3.2 million ($0.19 basic net income per share and $0.18 diluted net income per share) related to losses associated with the Company's European operations. 13 17 Management's Discussion and Analysis of Results of - ------------------------------------------------------------------------------- OPERATIONS AND FINANCIAL CONDITION Statements included in this Management's Discussion and Analysis of Results of Operations and Financial Condition and elsewhere in this document that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology (IT) industry, the continued need of current and prospective customers for the Company's services, the availability of qualified professional staff, and price and wage inflation. 1998 vs. 1997 To aid in understanding the operating trends of the Company, the following table is presented to set forth data as contained on the consolidated statements of income, with the information calculated as a percentage of consolidated revenues.
Year ended December 31, 1998 1997 1996 (percentage of revenue) - ------------------------------------------------------------------ Revenue 100.0% 100.0% 100.0% Direct costs 68.6% 70.9% 71.6% Selling, general, and administrative expenses 22.9% 22.0% 23.3% - ------------------------------------------------------------------ Operating income 8.5% 7.1% 5.1% Interest and other income, net 0.2% 0.3% 0.0% - ------------------------------------------------------------------ Income before income taxes 8.7% 7.4% 5.1% Provision for income taxes 3.6% 3.0% 2.1% - ------------------------------------------------------------------ Net income 5.1% 4.4% 3.0% ==================================================================
In 1998, CTG recorded revenue of $467.8 million, an increase of 14.8 percent when compared to 1997 revenue of $407.6 million. North American revenue increased by $33.8 million or 9.4 percent during the year, while revenue from European operations increased by $26.5 million, or 56.7 percent. In 1998, European revenues were 15.7 percent of total Company revenues. Overall, the consolidated revenue increase in 1998 as compared to 1997 was mainly due to the Company providing higher-value services to its customers, and additional billable personnel. During the past several years the Company has implemented its Key Client strategy. The first phase of the strategy was to identify and focus on selected Key Clients. To that end, CTG reduced the number of customers that it served from 1,200 in 1995 to approximately 430 at the end of 1997. The next phase of the strategy was to increase the percentage of higher-value services in the company's sales mix. CTG believes that its successful implementation of its Key Client strategy caused earnings to increase significantly faster than revenues during the past several years, and that the strategy has the potential to continue to improve the Company's earnings performance going forward. The 1997 to 1998 year-to-year revenue growth rate was impacted slightly by the strengthening of the U.S. dollar as compared to the currencies of the Netherlands, Belgium, the United Kingdom, and Luxembourg. If there had been no change in these foreign currency exchange rates from 1997 to 1998, total consolidated revenues would have been $0.4 million higher, resulting in a year-to-year consolidated revenue growth rate of 14.9 percent. This additional $0.4 million increase in revenue in Europe would have increased the European revenue growth rate to 57.6 percent. In January 1999, CTG renewed a contract with IBM for one year as one of IBM's national technical service providers for the United States. The contract covers 59 percent of the total services provided to IBM by the Company in 1998. IBM continued to be the Company's largest customer, accounting for $151.4 million or 32.4 percent of 1998 total revenue as compared to $142.2 million or 34.9 percent of 1997 revenue. The Company expects to continue to derive a significant portion of its revenue from IBM in 1999 and future years. While a significant decline in revenue from IBM would have a material adverse effect on the Company's revenues and profits, the Company believes a simultaneous loss of all IBM business 14 18 is unlikely to occur due to the recent renewal of the national contract, the number of contracts presently in existence with IBM, the diversity of the projects performed for IBM, and the number of locations and divisions involved. Direct costs, defined as costs for billable staff, were 68.6 percent of revenue in 1998 compared to 70.9 percent of revenue in 1997. The decrease in direct costs as a percentage of revenue in 1998 as compared to 1997 is primarily due to a trend toward providing higher-value services, consistent with CTG's Key Client focus. Selling, general, and administrative expenses were 22.9 percent of revenue in 1998 compared to 22.0 percent of revenue in 1997. The increase from 1997 to 1998 is primarily due to additional investments in 1998 in sales and marketing, recruiting, and training programs. Operating income was 8.5 percent of revenue in 1998 compared to 7.1 percent of revenue in 1997. In dollars, there was a 37.6 percent increase year over year. As mentioned above, CTG continued its focus on Key Clients, with particular emphasis on those relationships that were mutually profitable for CTG and its clients. The fourth quarter of 1998 marks the seventeenth straight quarter of operating income improvement for CTG. Operating income from North American and Corporate operations increased $6.3 million or 25 percent from 1997 to 1998. European operations recorded operating income of $8.2 million in 1998 as compared to $3.7 million in 1997. The European improvement in profitability is primarily due to the 56.7 percent increase in revenue discussed above and an increase in higher-value services performed in 1998. Due to its European operations, CTG is moderately affected by the implementation of the Euro currency in most of the countries in which it operates. However, this effect is financially immaterial as the Company has upgraded its internal systems to be Euro compliant with nominal cost to the company. Additionally, the Company does not anticipate pricing or competitive pressures from other IT services providers that would materially affect either revenues or profits for CTG as a whole. Interest and other income and expense was 0.2 percent of revenue in 1998 compared to 0.3 percent of revenue in 1997. This decrease was a result of having less cash and temporary cash investments on hand for most of 1998, as the Company's Stock Employee Compensation Trust (SECT) utilized a significant portion of the Company's available cash and temporary cash investments in the fourth quarter of 1997 to purchase CTG's stock on the open market. Income before income taxes was 8.7 percent of revenue in 1998 compared to 7.4 percent of revenue in 1997. The provision for income taxes for 1998 and 1997 was 41 percent. Net income for 1998 was 5.1 percent of revenue, or $1.48 basic earnings per share (EPS) and $1.42 diluted EPS, compared to 4.4 percent of revenue or $1.07 basic EPS and $1.01 diluted EPS in 1997. Earnings per share was calculated using 16.2 million (basic EPS) and 16.9 million (diluted EPS) and 16.8 million (basic EPS) and 17.6 million (diluted EPS) equivalent shares outstanding in 1998 and 1997, respectively. The decrease in equivalent shares outstanding for diluted earnings per share is primarily due to the stock purchases by the Company's SECT in the fourth quarter of 1997. In 1996, CTG conducted an assessment of its potential year 2000 issues by examining all of its internal and third-party applications, operating systems, interfaces, and hardware (collectively referred to hereafter as computer systems) and its non-information technology (non-IT) systems. During 1997, the Company generated a complete inventory of its computer systems and non-IT systems that may be impacted by year 2000 issues. To address its year 2000 issues, CTG established a year 2000 committee, a compliance program, and a budget. The committee meets regularly, and reviews and updates, as necessary, the compliance program at each meeting. The Company's year 2000 compliance program consists of six primary phases: assessment, systems inventory, remediation, contingency planning, systems testing, and systems evaluation and monitoring. As mentioned above, the systems inventory and assessment phases were completed in 1997, and progress has been made with respect to the contingency planning and systems testing phases. CTG expects all of its computer systems and non-IT systems to be ready for testing on or before March 31, 1999, and that all of its mission critical computer systems and mission critical non-IT systems will be year 2000 compliant prior to December 31, 1999. The Company has determined that mission critical systems or vendors are those that are vital to the operations of the Company. CTG estimates the total amount spent in 1998 and to be spent in 1999 to address year 2000 issues is less than $500,000. CTG, as part of its year 2000 compliance program, has been, and continued to be throughout 1998, in communication with vendors providing third-party computer systems or services to the Company, in order to receive assurance that these computer systems and vendors would be year 2000compliant on or before December 31, 1998. In the event the Company did not receive reasonable assurance 15 19 from its mission critical vendors as to year 2000 compliance by December 31, 1998, CTG is seeking to establish relationships with other vendors that are year 2000 compliant. With respect to purchases of upgrades of existing computer systems, and new hardware and software computer systems, it is the Company's practice to formally request and receive year 2000 certification from the vendor prior to completion of the purchase. As part of CTG's compliance program, the Company does not intend to make any changes to its hardware or software for its mission critical computer systems after June 30, 1999, and into the year 2000. CTG operates in one industry segment, providing IT services to its clients. The services provided typically encompass the IT business solution life cycle, including phases for planning, development, and managing and maintaining the IT solution. A portion of the IT services the Company provides involves assessment, planning, remediation, testing, and contingency planning services for year 2000 compliance. CTG actively manages the inherent risk in the services it provides to its clients through a thorough contract review process, and by including contractual provisions in its contracts that are designed to mitigate risk to the Company. Revenues generated from year 2000 compliance services were less than 15% of CTG's consolidated revenues for the year ended December 31, 1998. It is anticipated that year 2000 compliance providers such as CTG will continue to generate revenues from year 2000 compliance services after the year 2000. Accordingly, the Company does not anticipate an immediate significant decline in revenues after January 1, 2000. CTG believes that already completed and planned remediation of its mission critical computer systems and non-IT systems will allow it to be year 2000 compliant as planned. There can be no guarantee, however, that the Company's mission critical computer systems and non-IT systems, or those of mission critical vendors upon which CTG relies, will be year 2000 compliant by December 31, 1999. Additionally, there can be no guarantee that CTG's contingency plans, which the Company intends to complete by April 1999, or that of its mission critical vendors, will eliminate the effects of any year 2000 non-compliance. The failure of CTG's mission critical systems, non-IT systems, or those of its mission critical vendors, could affect the operations of the Company and could have a materially adverse effect on the Company's results of operations. On February 23, 1999, the Company completed the acquisition of Elumen Solutions, Inc. (Elumen). The transaction is valued at $89 million, of which $86 million was paid in cash or through the assumption of debt, and the remainder was satisfied through the issuance of approximately 128,000 shares of CTG common stock. The acquisition will be accounted for as a purchase. CTG estimates that approximately $85 million of goodwill and other identifiable intangibles, from the total cost of $89 million, will arise from the transaction. Elumen was the largest privately held consulting firm specializing in information technology services for health care organizations, generating revenues of approximately $36 million for the year ended December 31, 1998. The combination of Elumen and CTG's existing health care practice accounts for approximately $44 million of total revenues in 1998, and comprises over 300 health care information technology consultants. The market for health care IT services was estimated at $3.4 billion annually in 1997. Several of the factors driving growth in excess of 20% annually in this sector (Piper Jaffray, 1997 and Dorenfest and Associates, 1997) include the creation of large integrated health care delivery systems, the consolidation of health care providers and systems, the impact of managed care, and the need to invest in information technology to improve patient care and achieve cost and operating efficiencies. The acquisition of Elumen by CTG is intended to capitalize on these impressive growth rates which are greater than the growth rates for the IT services industry as a whole. Additionally, as Elumen is one of the leading firms in the health care IT sector, its growth rate exceeded the 20% mentioned above in 1998, and is expected to continue to exceed this rate in 1999. During the first quarter of 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items recognized as components of comprehensive income, such as foreign currency or minimum pension liability adjustments, to be reported in a financial statement equal to that of the other financial statements. The adoption of SFAS No. 130 resulted in additional disclosures, including a revision of previously disclosed information, but had no effect on the financial condition or results of operations of the Company. During 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of the Enterprise and Related Information." SFAS No. 131 requires disclosure of segments of a company's business based upon how a company is organized for making operating decisions and assessing performance. As the Company's disclosure of business segments did not change in 1998 from that disclosed in previous years, the adoption of SFAS No. 131 resulted in additional disclosures, but had no effect on the financial condition or results of operations of the Company. 16 20 During 1998, the Company adopted the provisions of SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The adoption of SFAS No. 132 resulted in additional disclosures about the Company's non-qualified defined-benefit plan and post-retirement benefit plan, but had no effect on the financial condition or results of operations of the Company. 1997 vs. 1996 In 1997, CTG recorded revenue of $407.6 million, an increase of 11.6 percent when compared to 1996 revenue of $365.1 million. North American revenue increased by $35.5 million or 10.9 percent during the year, while revenue from European operations increased by $7 million, or 17.6 percent. European revenues were 11.5 percent of total Company revenues. Overall, the revenue increase was primarily due to CTG providing higher-value services and additional billable personnel in 1997 as compared to 1996. During 1997, the Company continued the implementation of its Key Client strategy. From 1995 to the end of 1997, the Company reduced its total number of clients from over 1,200 to approximately 430. Offsetting the reduction in the total number of clients was growth in revenues from the Company's Key Clients. Revenue from the Company's Key Clients, which includes IBM, the Company's largest client, grew at a rate in excess of 20 percent during 1997. Additionally, the strength of the U.S. dollar reduced revenue from our European operations. If there had been no change in the foreign currency exchange rates from 1996 to 1997, in the countries in which the Company conducts business, those being the Netherlands, Belgium, the United Kingdom, and Luxembourg, total consolidated revenues would have increased by an additional $5.8 million, resulting in a consolidated year-over-year revenue growth rate of 13.2 percent. In December 1997, CTG renewed a contract with IBM for three additional years as one of IBM's national technical service providers for the United States. In January 1999, this contract was modified and re-signed for one year. The contract covered 59 percent of the total services provided to IBM by the Company in 1997. IBM continued to be the Company's largest customer, accounting for $142.2 million or 34.9 percent of 1997 total revenue as compared to $107.4 million or 29.4 percent of 1996 revenue. Direct costs, defined as costs for billable staff, were 70.9 percent of revenue in 1997 compared to 71.6 percent of revenue in 1996. The decrease in direct costs as a percentage of revenue in 1997 as compared to 1996 was primarily due to a trend toward higher-value services, consistent with the Company's Key Client strategy. Selling, general, and administrative expenses were 22.0 percent of revenue in 1997 compared to 23.3 percent of revenue in 1996. The decrease from 1996 to 1997 was primarily due to the ongoing effort to reduce overhead costs as a percentage of revenue in 1997, and additional software expense in 1996 due to an upgrade of the Company's internal systems. Operating income was 7.1 percent of revenue in 1997 compared to 5.1 percent of revenue in 1996. The increase was primarily due to the factors discussed above. Operating income from North American and corporate operations increased $10 million or 65.8 percent from 1996 to 1997. European operations recorded operating income of $3.7 million in 1997 as compared to $3.3 million in 1996. The European improvement in profitability was primarily due to the 17.6 percent increase in revenue discussed above and an increase in higher-value services performed in 1997. Interest and other income and expense was 0.3 percent of revenue in 1997 compared to 0.0 percent in 1996. The increase was a result of an increase in cash and temporary cash investments on hand for most of 1997. Income before income taxes was 7.4 percent of revenue in 1997 compared to 5.1 percent of revenue in 1996. The provision for income taxes for 1997 was 41 percent compared to 40.1 percent for 1996. The increase in the tax rate was due to additional taxable income in 1997, which was subject to higher marginal tax rates, as compared to 1996. During 1997, the Company declared a 2-for-1 stock split effective June 2, 1997. All earnings per share amounts prior to that date have been restated to reflect the stock split. Net income for 1997 was 4.4 percent of revenue or $1.07 basic EPS and $1.01 diluted EPS, compared to 3.0 percent of revenue or $0.65 basic EPS and $0.63 diluted EPS in 1996. Earnings per share were calculated using 16.8 million (basic EPS) and 17.6 million (diluted EPS) and 17 million (basic EPS) and 17.6 million (diluted EPS) equivalent shares outstanding in 1997 and 1996, respectively. The increase in equivalent shares outstanding for diluted earnings per share was primarily due to the dilutive effect of outstanding stock options on the earnings per share calculation. At December 31, 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per Share." The adoption of this standard did not have a material impact on the operations of the Company. 17 21 Financial Condition Cash provided by operating activities was $34.0 million for 1998. Net income totaled $24.0 million, and non-cash adjustments for depreciation expense, amortization expense, and deferred compensation expense totaled $5.2 million. Accounts receivable increased $12.8 million or 21.2 percent as a result of increases in revenue and a decline in accounts receivable turnover. Accounts payable increased by $4.8 million due to the timing of payments at year-end 1998 as compared to year-end 1997. Accrued compensation and other current liabilities increased $11.6 million due to an increase in the usage of outside contractors by the Company during 1998 and the timing of the company's U.S. biweekly payroll. Advanced billings on contracts decreased $0.8 million due to the mix of the contracts outstanding at December 31, 1998, as compared to December 31, 1997. At December 31, 1998, the Company's current ratio was 2.2 to 1. Net property and equipment increased $0.7 million. Additions to property and equipment were $5.1 million offset by depreciation of $4.4 million. The Company had no material commitments for capital expenditures at December 31, 1998. Net acquired intangibles decreased $0.5 million, caused by amortization of $0.6 million and $0.1 million in translation adjustments. Financing activities provided $3.6 million of cash in 1998. A total of 80,000 shares of the Company's stock were purchased in the open market by the Company's SECT for $2.5 million. At December 31, 1998, consolidated shareholders' equity totaled $83.4 million, which was an increase of $28.1 million, or 51 percent, from December 31, 1997. The increase was primarily due to 1998 net income of $24.0 million. During 1998, the Company received $1.4 million from employees for 45,000 shares of stock purchased under the Employee Stock Purchase Plan. The Company also received $4.3 million for the exercise of 272,000 stock options, inclusive of the related tax benefit. The Company paid an annual dividend of $0.05 per share totaling $0.8 million in 1998. At December 31, 1998, the Company had approximately $52.6 million in aggregate lines of credit, which were renewable annually at various times throughout the year. Subsequent to December 31, 1998, in anticipation of the Elumen acquisition, the Company increased its available lines of credit to $102.6 million, with terms on the increased amount of the lines consistent with those of the original lines. The Company completed the acquisition of Elumen on February 23, 1999. The transaction is valued at $89 million, of which $86 million was paid in cash or through the assumption of debt, and the remainder was satisfied through the issuance of approximately 128,000 shares of CTG common stock. The cash amount of $86 million was funded using the available lines of credit and existing cash and temporary cash investment balances. On October 26, 1994, the Company authorized the repurchase of 2.0 million shares and on July 21, 1995 authorized the repurchase of another 1.4 million shares of its common stock for treasury and by the Company's SECT. At December 31, 1998, approximately 2.5 million shares had been repurchased under the authorizations, leaving 0.9 million shares authorized for future purchases. The Company believes existing internally available funds, cash generated by operations, and borrowings will be sufficient to meet foreseeable working capital, stock repurchase, and capital expenditure requirements and to allow for future internal growth and expansion. 18 22 Consolidated Statements of Income
(amounts in thousands, except per share data) 1998 1997 1996 Revenue $ 467,838 $ 407,588 $ 365,076 Direct costs 320,673 288,848 261,583 Selling, general and administrative expenses 107,314 89,784 84,975 Operating income 39,851 28,956 18,518 Interest and other income 1,445 2,151 1,529 Interest and other expense (529) (809) (768) Loss on sales or disposals of assets (10) (30) (775) Income before income taxes 40,757 30,268 18,504 Provision for income taxes 16,712 12,406 7,424 Net income $ 24,045 $ 17,862 $ 11,080 Net income per share: Basic $ 1.48 $ 1.07 $ 0.65 Diluted $ 1.42 $ 1.01 $ 0.63
The accompanying notes are an integral part of these consolidated financial statements. 19 23 Consolidated Balance Sheets
(amounts in thousands) 1998 1997 ASSETS Current Assets: Cash and temporary cash investments $ 57,748 $ 25,033 Accounts receivable, net of allowances and reserves 73,932 60,176 Prepaids and other 4,000 2,420 Deferred income taxes 1,654 1,244 - ----------------------------------------------------------------------------------------------- Total current assets 137,334 88,873 Property and equipment, net of accumulated depreciation and amortization 13,146 12,445 Acquired intangibles, net of accumulated amortization of $6,002,000 and $6,124,000, respectively 2,808 3,280 Deferred income taxes 2,801 2,546 Other assets 720 597 - ----------------------------------------------------------------------------------------------- Total assets $ 156,809 $ 107,741 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 14,265 $ 9,207 Accrued compensation 29,258 21,641 Income taxes payable 9,157 4,620 Advance billings on contracts 384 1,158 Other current liabilities 9,409 5,145 - ----------------------------------------------------------------------------------------------- Total current liabilities 62,473 41,771 Deferred compensation benefits 10,300 9,752 Other long-term liabilities 587 892 - ----------------------------------------------------------------------------------------------- Total liabilities 73,360 52,415 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 106,010 216,028 Retained earnings 66,172 42,939 Less: Treasury stock of 6,269,668 and 6,267,289 shares, at cost (31,850) (31,773) Stock Employee Compensation Trust of 4,422,500 and 4,693,948 shares (52,463) (166,929) Unearned portion of restricted stock to related parties (69) (34) Loans to related parties -- (54) Other Comprehensive Income: Foreign currency adjustment (2,374) (3,206) Minimum pension liability adjustment (2,247) (1,915) - ----------------------------------------------------------------------------------------------- Accumulated other comprehensive income (4,621) (5,121) - ----------------------------------------------------------------------------------------------- Total shareholders' equity 83,449 55,326 - ----------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 156,809 $ 107,741 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 20 24 Consolidated Statements of Cash Flows
(amounts in thousands) 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,045 $ 17,862 $ 11,080 Adjustments: Depreciation expense 4,406 4,532 6,807 Amortization expense 596 896 844 Loss on sales or disposals of assets 10 30 775 Deferred compensation expense 216 542 476 Changes in assets and liabilities: (Increase) decrease in accounts receivable (12,830) (5,692) 2,132 (Increase) decrease in prepaids and other (1,551) 16 (1,080) (Increase) decrease in deferred income taxes (665) (94) 330 (Increase) in other assets (123) (19) (57) Increase in accounts payable 4,805 267 174 Increase in accrued compensation 7,431 4,493 7,362 Increase (decrease) in income taxes payable 4,546 (555) 3,107 Increase (decrease) in advance billings on contracts (774) (1,326) 301 Increase in other current liabilities 4,179 390 1,799 Decrease in other long-term liabilities (304) (345) (415) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 33,987 20,997 33,635 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (5,057) (4,770) (3,584) Proceeds from sales or disposals of property and equipment 22 15 1,512 - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (5,035) (4,755) (2,072) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt -- -- (5,929) Proceeds from Employee Stock Purchase Plan 1,448 1,155 720 Purchase of stock for treasury (77) (118) (3,061) Purchase of stock by Stock Employee Compensation Trust (2,455) (37,018) -- Proceeds from other stock plans, inclusive of the related tax benefit 5,474 4,266 2,120 Dividends paid (812) (837) (853) - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 3,578 (32,552) (7,003) - ----------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and temporary cash investments 185 (173) 411 - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and temporary cash investments 32,715 (16,483) 24,971 Cash and temporary cash investments at beginning of year 25,033 41,516 16,545 - ----------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of year $ 57,748 $ 25,033 $ 41,516 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 21 25
Common Stock Capital in Consolidated ------------------- Excess of Retained Statements of Changes in Shareholders' Equity Shares Amount Par Value Earnings ------ ------ --------- -------- (amounts in thousands, except per share data) Balance as of December 31, 1995 13,306 $ 133 $ 114,446 $ 15,687 Employee Stock Purchase Plan share issuance 20 -- 490 -- Stock Option Plan share issuance 141 2 1,801 -- Management Stock Purchase Plan repayments -- -- -- -- Purchase of stock -- -- -- -- Stock Employee Compensation Trust adjustment to fair value -- -- 42,775 -- Cash dividends--$.05 per share -- -- -- (853) Comprehensive Income: Net income -- -- -- 11,080 Foreign currency adjustment -- -- -- -- Minimum pension liability adjustment -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 11,080 - ------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1996 13,467 135 159,512 25,914 Two-for-one stock split 13,467 135 (135) -- Employee Stock Purchase Plan share issuance -- -- -- -- Stock Option Plan share issuance 82 -- 3,228 -- Deferred Compensation Plan share issuance -- -- -- -- Purchase of stock -- -- -- -- Restricted Stock Plan: Award 2 -- 44 -- Amortization -- -- -- -- Stock Employee Compensation Trust adjustment to fair value -- -- 53,379 -- Cash dividends--$.05 per share -- -- -- (837) Comprehensive Income Net income -- -- -- 17,862 Foreign currency adjustment -- -- -- -- Minimum pension liability adjustment -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 17,862 - ------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1997 27,018 270 216,028 42,939 Employee Stock Purchase Plan share issuance -- -- -- -- Stock Option Plan share issuance -- -- 2,359 -- Other share issuance -- -- -- -- Purchase of stock -- -- -- -- Restricted Stock Plan: Award -- -- -- -- Amortization -- -- -- -- Stock Employee Compensation Trust adjustment to cost -- -- (112,377) -- Management Stock Purchase Plan repayments -- -- -- -- Cash dividends--$.05 per share -- -- -- (812) Comprehensive Income: Net income -- -- -- 24,045 Foreign currency adjustment -- -- -- -- Minimum pension liability adjustment -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 24,045 - ------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1998 27,018 $ 270 $ 106,010 $ 66,172 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 22 26 Stock Employee Unearned Portion Loans to Foreign Minimum Total Treasury Stock Compensation Trust of Restricted Related Currency Pension Liability Shareholders' Shares Amount Shares Amount Stock Parties Adjustment Adjustment Equity 3,008 $(28,594) 1,830 $ (36,170) $-- $(371) $(1,735) $(1,920) $61,476 -- -- (5) 230 -- -- -- -- 720 37 (814) -- -- -- -- -- -- 989 -- -- -- -- -- 317 -- -- 317 86 (2,247) -- -- -- -- -- -- (2,247) -- -- -- (42,775) -- -- -- -- -- -- -- -- -- -- -- -- -- (853) -- -- -- -- -- -- -- -- 11,080 -- -- -- -- -- -- (304) -- (304) -- -- -- -- -- -- -- 326 326 - ------------------------------------------------------------------------------------------------------------------------- -- -- -- -- -- -- (304) 326 11,102 - ------------------------------------------------------------------------------------------------------------------------- 3,131 (31,655) 1,825 (78,715) -- (54) (2,039) (1,594) 71,504 3,131 -- 1,825 -- -- -- -- -- -- -- -- (39) 1,155 -- -- -- -- 1,155 -- -- (207) 955 -- -- -- -- 4,183 -- -- (3) 73 -- -- -- -- 73 5 (118) 1,293 (37,018) -- -- -- -- (37,136) -- -- -- -- (44) -- -- -- -- -- -- -- -- 10 -- -- -- 10 -- -- -- (53,379) -- -- -- -- -- -- -- -- -- -- -- -- -- (837) -- -- -- -- -- -- -- -- 17,862 -- -- -- -- -- -- (1,167) -- (1,167) -- -- -- -- -- -- -- (321) (321) - ------------------------------------------------------------------------------------------------------------------------- -- -- -- -- -- -- (1,167) (321) 16,374 - ------------------------------------------------------------------------------------------------------------------------- 6,267 (31,773) 4,694 (166,929) (34) (54) (3,206) (1,915) 55,326 - ------------------------------------------------------------------------------------------------------------------------- -- -- (45) 1,448 -- -- -- -- 1,448 -- -- (272) 1,985 -- -- -- -- 4,344 -- -- (32) 1,051 -- -- -- -- 1,051 3 (77) 80 (2,455) -- -- -- -- (2,532) -- -- (2) 60 (60) -- -- -- -- -- -- -- -- 25 -- -- -- 25 -- -- -- 112,377 -- -- -- -- -- -- -- -- -- -- 54 -- -- 54 -- -- -- -- -- -- -- -- (812) -- -- -- -- -- -- -- -- 24,045 -- -- -- -- -- -- 832 -- 832 -- -- -- -- -- -- -- (332) (332) - ------------------------------------------------------------------------------------------------------------------------- -- -- -- -- -- -- 832 (332) 24,545 - ------------------------------------------------------------------------------------------------------------------------- 6,270 $(31,850) 4,423 $(52,463) $(69) $ -- $(2,374) $(2,247) $83,449 =========================================================================================================================
23 27 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. All intercompany 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 generally accepted accounting principles. Such estimates primarily relate to allowances for doubtful accounts and deferred tax assets, a reserve for projects, and estimates of progress toward completion and gross profit or loss on fixed-price contracts. Actual results could differ from those estimates. CTG operates in one industry segment, providing information technology (IT) services to its clients. The services provided typically encompass the IT business solution life cycle, including phases for planning, development and implementation, and managing and maintaining the IT solution. REVENUE AND COST RECOGNITION The Company primarily recognizes revenue on monthly fee and time-and-materials contracts as hours are expended and costs are incurred. Fixed-price contracts accounted for under the percentage-of-completion method represented 1 percent of 1998 and 2 percent of 1997 and 1996 revenue, respectively. Such revenue is determined by 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. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. In addition to an allowance for doubtful accounts of approximately $1.1 million and $1.0 million at December 31, 1998 and 1997, respectively, accounts receivable is further reduced by a reserve for projects of $1.0 million at December 31, 1998 and 1997. Selling, general, and administrative costs are charged to expense as incurred. 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, 1998 and 1997, the carrying amounts of the Company's financial instruments, which include cash and temporary cash investments and accounts receivable, approximate fair value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of two years to thirty years. 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 are capitalized. During 1996, the Company re-evaluated its estimated useful lives on technology-related equipment and determined that, for several types of equipment, the estimated useful lives should be reduced. This change, which was effective at the beginning of the Company's 1996 fourth quarter, resulted in $0.4 million of incremental depreciation expense in the fourth quarter of 1996, reducing net income and earnings per share by $0.2 million and $.01 per diluted net income per share, respectively. The Company also expensed an additional $1.3 million of existing software in 1996 due to an upgrade of its internal systems. ACQUIRED INTANGIBLES Acquired intangibles consist of goodwill, which is being amortized using the straight-line method based on an estimated useful life of 15 years. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impair- 24 28 ment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. INCOME TAXES The Company provides deferred income taxes for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred income taxes relate principally to deferred compensation, non-deductible accrued expenses, and accelerated depreciation and amortization methods. Tax credits are accounted for by a reduction of the income tax provision in the year in which they are realized (flow-through method). STOCK-BASED COMPENSATION The Company accounts for its Stock-Based Compensation Plans in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value- based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. STOCK SPLIT During 1997, the Board of Directors approved a 2-for-1 split of the Company's common stock, effective June 2, 1997, to shareholders of record as of May 19, 1997. Shares of common stock, treasury stock, and shares held by the Stock Employee Compensation Trust (SECT) at December 31, 1996, have been restated to reflect this split on the Company's consolidated balance sheets. Shares for 1996 and prior periods were not restated on the consolidated statements of changes in share- holders' equity. All references elsewhere throughout this annual report to the number of shares, per share amounts, stock option data, and market prices of the Company's common stock give effect to the stock split. NET INCOME PER SHARE At December 31, 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per Share." This statement establishes standards for computing and disclosing earnings per share (EPS). Basic and diluted earnings per share for the years ended December 31, 1998, 1997, and 1996 are as follows:
Weighted (amounts in thousands, Average Earnings except per share data) Income Shares per Share For the Year Ended December 31, 1998 Basic EPS $24,045 16,216 $1.48 Dilutive effect of outstanding stock options -- 697 Diluted EPS $24,045 16,913 $1.42 For the Year Ended December 31, 1997 Basic EPS $17,862 16,758 $1.07 Dilutive effect of outstanding stock options -- 857 Diluted EPS $17,862 17,615 $1.01 For the Year Ended December 31, 1996 Basic EPS $11,080 16,980 $0.65 Dilutive effect of outstanding stock options -- 620 Diluted EPS $11,080 17,600 $0.63
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date, for equity accounts using historical exchange rates, and for revenue and expense activity using the applicable month's average exchange rates. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, cash and temporary cash investments are defined as cash on hand, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash. Interest paid during 1998, 1997, and 1996 amounted to $0.1 million, $0.3 million, and $0.9 million, respectively, while net income tax payments totaled $10.4 million, $9.7 million, and $3.4 million for the respective years. Income tax refunds received in 1996 totaling $1.0 million were primarily due to previously incurred impairment losses related to the Company's European operations. During 1998, as a non-cash financing activity, the shares of common stock held by the SECT were adjusted to original cost basis, with a decrease to capital in excess of par value of $(112.4) million. During 1997 and 1996, as a non-cash financing activity, the shares of common stock of the SECT were adjusted to fair value, with an increase to capital in excess of par value of $53.4 million and $42.8 million, respectively (see Note 10, Stock Employee Compensation Trust). 25 29 ACCOUNTING STANDARDS PRONOUNCEMENTS During the first quarter of 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items recognized as components of comprehensive income, such as foreign currency or minimum pension liability adjustments, to be reported in a financial statement equal to that of the other financial statements. The adoption of SFAS No. 130 resulted in additional disclosures, including a revision of previously disclosed information, but had no effect on the financial condition or results of operations of the Company. For the years ended December 31, 1998, 1997, and 1996, the tax benefit (expense) associated with the minimum pension liability adjustment was $(0.1) million, $(0.1) million, and $0.1 million, respectively. During 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures About Segments of the Enterprise and Related Information." SFAS No. 131 requires disclosure of segments of a company's business based upon how a company is organized for making operating decisions and assessing performance. As the Company's disclosure of business segments did not change in 1998 from that disclosed in previous years, the adoption of SFAS No. 131 resulted in additional disclosures, but had no effect on the financial condition or results of operations of the Company. During 1998, the Company adopted the provisions of SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The adoption of SFAS No. 132 resulted in additional disclosures about the Company's non-qualified defined-benefit plan and postretirement benefit plan, but had no effect on the financial condition or results of operations of the Company. 2. ACQUISITION On February 23, 1999, the Company completed the acquisition of the stock of Elumen Solutions, Inc. (Elumen). The transaction is valued at $89 million, of which $86 million was paid in cash or through the assumption of debt, and the remainder was satisfied through the issuance of approximately 128,000 shares of CTG common stock. The acquisition will be accounted for as a purchase. CTG estimated that approximately $85 million of good-will and other identifiable intangibles, from the total cost of $89 million, will arise from the acquisition. Elumen was the largest privately held consulting firm specializing in information technology services for health care organizations, generating revenues of approximately $36 million for the year ended December 31, 1998. 3. SALES OF ASSETS There were no significant sales of assets during 1998 or 1997. During the second quarter of 1996, CTG sold one of the four buildings it owned. The sale resulted in proceeds to the Company of $1.5 million, and a loss of $143,000. 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998 and 1997 are summarized as follows: December 31, 1998 1997 (amounts in thousands) Land $ 886 $ 886 Buildings 6,515 6,515 Equipment 23,984 20,958 Furniture 5,447 4,920 Software 3,739 3,582 Leasehold improvements 1,031 839 - ------------------------------------------------------------------------------- 41,602 37,700 Less accumulated depreciation (28,456) (25,255) - ------------------------------------------------------------------------------- $ 13,146 $ 12,445 =============================================================================== At December 31, 1998, the Company owned three buildings, two of which are in use by the Company. The third building, with a net book value of $2.0 million, is leased to a third party under a five-year lease, which ends in 2000. Receipts under this lease are estimated at $0.3 million and $0.2 million in 1999 and 2000, respectively. 5. DEBT The Company did not have any long-term debt outstanding at either December 31, 1998 or 1997. The Company had lines of credit available totaling $52.6 million, renewable annually at various times throughout the year, with interest at or below the equivalent of the prime rate. All borrowings under these agreements are unsecured and payable upon demand. There were no borrowings under these arrangements at either December 31, 1998 or 1997. There were no commitment fees paid on unused lines of credit during 1998, 1997, or 1996. Subsequent to December 31, 1998, in anticipation of the Elumen acquisition, the Company increased its available lines of credit to $102.6 million, with terms on the increased amount of the lines consistent with those of the original lines. The maximum amounts outstanding under short-term borrowings during 1998, 1997, and 1996 were $0.1 million, $2.2 million, and $2.3 million, respectively. Average bank borrowings outstanding for the years 1998, 1997, and 1996 were $0.1 million, $0.7 million, and $1.2 million, and carried weighted average interest rates of 5.5 percent, 5.0 percent, and 5.2 percent, respectively. 26 30 6. INCOME TAXES The provision (benefit) for income taxes for 1998, 1997, and 1996 consists of the following:
Domestic and foreign components of income before income taxes are as follows: (amounts in thousands) 1998 1997 1996 Domestic $ 34,027 $ 28,825 $ 16,674 Foreign 6,730 1,443 1,830 - ------------------------------------------------------------------------------------- $ 40,757 $ 30,268 $ 18,504 - ------------------------------------------------------------------------------------- The provision (benefit) for income taxes consists of: 1998 1997 1996 Current Tax: U.S. Federal $ 11,920 $ 10,176 $ 4,858 Foreign 1,782 90 886 U.S. State and Local 3,675 2,234 1,350 - ------------------------------------------------------------------------------------- 17,377 12,500 7,094 Deferred Tax: U.S. Federal (579) (82) 234 U.S. State and Local (86) (12) 96 - ------------------------------------------------------------------------------------- (665) (94) 330 - ------------------------------------------------------------------------------------- $ 16,712 $ 12,406 $ 7,424 ===================================================================================== The effective and statutory income tax rate can be reconciled as follows: 1998 1997 1996 Tax at statutory rate of 34 percent $ 13,857 $ 10,291 $ 6,291 Rate differential 408 303 85 State tax, net of federal benefits 2,333 1,445 891 Expenses for which no tax benefit is available 472 658 552 Change in estimate of nondeductible expenses (927) (475) (596) Other, net 569 184 201 - ------------------------------------------------------------------------------------- $ 16,712 $ 12,406 $ 7,424 Effective income tax rate 41.0% 41.0% 40.1% - -------------------------------------------------------------------------------------
The Company's deferred tax assets and liabilities at December 31, 1998 and 1997 consist of the following:
December 31, (amounts in thousands) 1998 1997 Assets Loss carryforwards $ -- $ 960 Deferred compensation 2,835 2,785 Accruals deductible for tax purposes when paid 1,561 1,087 Allowance for doubtful accounts 292 292 Other 444 376 - ------------------------------------------------------------------------------- Gross deferred tax assets 5,132 5,500 Liabilities Amortization 204 264 Depreciation 473 519 - ------------------------------------------------------------------------------- Gross deferred tax liabilities 677 783 Deferred tax assets valuation allowance -- (927) Net deferred tax assets $ 4,455 $ 3,790 - ------------------------------------------------------------------------------- Net deferred assets and liabilities including valuation allowances are recorded at December 31, 1998 and 1997 as follows: 1998 1997 Net current assets $ 1,654 $ 1,244 Net non-current assets 2,801 2,546 - -------------------------------------------------------------------------------- $ 4,455 $ 3,790 ================================================================================
The net change in the valuation allowance for deferred tax assets was a decrease of $927,000 from 1997 to 1998, which is included in the change in estimate of non-deductible expenses appearing in the effective and statutory income tax reconciliation above. The decrease is attributed to the utilization of foreign net operating losses that were previously offset completely by the valuation allowance. In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the years in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 1998. Accordingly, no valuation allowance is required. Undistributed earnings of the Company's foreign subsidiaries were minimal at December 31, 1998, and are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. In the event that the foreign entities' earnings were distributed, it is estimated that U.S. federal and state income taxes, net of foreign credits, would be immaterial. In 1998, 1997, and 1996, 193,000, 233,000, and 92,000 shares of common stock, respectively, were issued through the exercise of non-qualified stock options or through the disqualifying disposition of incentive stock options. The total tax benefit to the Company from these transactions, which is credited to capital in excess of par value rather than recognized as a reduction of income tax expense, was $2.4 million, $2.9 million, and $0.5 million in 1998, 1997, and 1996, respectively. These tax benefits have also been recognized in the consolidated balance sheets as a reduction of current taxes payable. 27 31 7. LEASE COMMITMENTS At December 31, 1998, the Company was obligated under a number of long-term operating leases. Minimum future obligations under such leases are summarized as follows:
YEAR ENDING DECEMBER 31, (amounts in thousands) 1999 $ 6,745 2000 5,247 2001 3,066 2002 1,399 2003 886 Later years 1,165 - -------------------------------- Minimum future obligations $18,508 ================================
The operating lease obligations to the left relate to the rental of office space, office equipment, and automobiles. Total rental expense under such operating leases for 1998, 1997, and 1996 was approximately $9.0 million, $6.8 million, and $7.8 million, respectively. 8. DEFERRED COMPENSATION BENEFITS The Company maintains a non-qualified defined-benefit Executive Supplemental Benefit Plan that previously provided certain current and former key executives with deferred compensation benefits, based on years of service and base compensation, payable during retirement. The plan was amended as of November 30, 1994, to freeze benefits for participants at that time. Net periodic pension cost for 1998, 1997, and 1996 is as follows:
Net Periodic Pension Cost (amounts in thousands) 1998 1997 1996 Interest cost $655 $633 $595 Amortization of unrecognized net loss 66 48 72 - -------------------------------------------------------------------------------- $721 $681 $667 ================================================================================
The change in benefit obligation at December 31, 1998 and 1997 is as follows:
Change in Benefit Obligation (amounts in thousands) 1998 1997 Benefit obligation at beginning of year $ 9,258 $ 8,627 Interest cost 655 633 Amortization of unrecognized net loss 66 48 Benefits paid (591) (371) Adjustment to minimum liability 332 321 Benefit obligation at end of year 9,720 9,258 Fair value of plan assets at end of year -- -- Funded status 9,720 9,258 Unrecognized net actuarial loss (2,247) (1,915) Accrued benefit cost $ 7,473 $ 7,343 Weighted average discount rate 6.75% 7.25% Salary increase rate 0% 0%
Benefits paid to participants are funded by the Company as needed. The plan is deemed unfunded as the Company has not specifically identified Company assets to be used to discharge the deferred compensation benefit liabilities. The Company has purchased insurance on the lives of certain plan participants in amounts considered sufficient to reimburse the Company for the costs associated with the plan for those participants. The Company maintains a non-qualified defined-contribution deferred compensation plan for certain key executives. The Company contributions to this plan, which were $107,000, $241,000, and $200,000 in 1998, 1997, and 1996, respectively, are based on annually defined financial performance objectives. 28 32 9. EMPLOYEE BENEFITS 401(K) PROFIT-SHARING RETIREMENT PLAN The Company maintains a contributory 401(k) profit-sharing retirement plan covering substantially all U.S. employees. Company contributions of cash and the Company's stock, which are discretionary, were funded and charged to operations in the amounts of $3.8 million, $2.4 million, and $1.9 million for 1998, 1997, and 1996, respectively. Other Postretirement Benefits The Company provides limited health care and life insurance benefits to 13 retired employees and their spouses, totaling 21 participants, pursuant to contractual agreements. Net periodic postretirement benefit costs for 1998, 1997, and 1996 are as follows:
Net Periodic Postretirement Benefit Cost (amounts in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------- Interest cost $ 33 $ 41 $ 46 Amortization of transition amount 29 29 30 Amortization of gain (14) (4) -- - ----------------------------------------------------------------------------------- $ 48 $ 66 $ 76 ====================================================================================
The change in postretirement benefit obligation at December 31, 1998 and 1997 are as follows:
Change in Postretirement Benefit Obligation (amounts in thousands) 1998 1997 Postretirement benefit obligation at beginning of year $ 485 $ 579 Interest cost 33 41 Amortization of transition amount 29 29 Benefits paid (32) (15) Amortization of gain (14) (4) Adjustment to unrecognized transition obligation (29) (29) Adjustment to unrecognized gain 80 (116) - ------------------------------------------------------------------------------- Postretirement benefit obligation at end of year 552 485 Fair value of plan assets at end of year -- -- - ------------------------------------------------------------------------------- Funded status 552 485 Unrecognized transition obligation (409) (438) Unrecognized gain 149 229 - ------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 292 $ 276 =============================================================================== Weighted average discount rate 6.75% 7.25% Salary increase rate 0% 0% - -------------------------------------------------------------------------------
Benefits paid to participants are funded by the Company as needed. The rate of increase in health care costs was assumed to be 7.4 percent and 7.8 percent in 1999 for pre-age 65 and post-age 65 benefits, respectively, gradually declining to 5 percent by the year 2003 and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation by $32,000 at December 31, 1998 and the net periodic cost by $2,000 for the year, while a one percentage point decrease in the health care cost trend would decrease the accumulated postretirement benefit obligation by $28,000 at December 31, 1998, and the net periodic pension by $2,000 for the year. 29 33 10. SHAREHOLDERS' EQUITY EMPLOYEE STOCK PURCHASE PLAN Under the Company's First Employee Stock Purchase Plan, employees may apply up to 10 percent of their compensation to purchase the Company's common stock. Prior to February 1, 1994, the purchase price of the Company's common stock was the lower of 85 percent of the market price at the beginning of the plan year (if employed at that date), or 85 percent of the market price on the business day preceding the date of purchase. Effective February 1, 1994, shares are purchased at the market price on the business day preceding the date of purchase. As of December 31, 1998, 241,000 shares remain unissued under the Plan, of the total of 11 million shares that have been authorized under the Plan. During 1998, 1997, and 1996, 45,000, 39,000, and 50,000 shares were purchased under the plan at an average price of $32.40, $29.96, and $14.23 per share, respectively. MANAGEMENT STOCK PURCHASE PLAN Under the Company's Management Stock Purchase Plan approved in 1992, 800,000 common shares have been designated (up to 400,000 shares from treasury) for purchase by certain key employees using loans from the Company. During 1998 and 1997, no loans were made to employees. In 1998, an employee repaid a loan representing 3,174 shares with a value of $54,900, reducing the outstanding loan balance to $0. The loans are classified as a reduction of shareholders' equity as they were used to purchase and were secured by common stock previously held in treasury. Interest was charged at 4 percent per annum, and the loan principal was payable in full no later than three years from the date of the loan. SHAREHOLDER RIGHTS PLAN The Board of Directors adopted a Shareholder Rights Plan in January 1989. Under the plan, one right was distributed for each share of common stock outstanding on January 27, 1989, and on each additional share of common stock issued after that date and prior to the date the rights become exercisable. The rights become exercisable when 20 percent or more of the Company's outstanding common stock is acquired by a person or group, other than Company provided employee benefit plans, and when an offer to acquire is made. Each right entitles the holder to purchase Series A preferred stock (which is essentially equivalent to common stock) at a 50 percent discount from the then-market price of the common stock or, in the event of a merger, consolidation, or sale of a major part of the Company's assets, to purchase common stock of the acquiring company at a 50 percent discount from its then-market price. The Shareholder Rights Plan was amended to provide that the rights expire in November 2008. The rights may be redeemed by the Company at a price of $.01 per right. STOCK EMPLOYEE COMPENSATION TRUST The Company maintains a SECT to provide funding for existing employee stock plans and benefit programs. Shares are purchased by and released from the SECT by the trustee at the request of the Compensation Committee of the Board of Directors. During 1998, the SECT purchased 80,000 shares for $2.5 million and released 272,000 shares to fund stock option exercises, 45,000 shares to fund Employee Stock Purchase Plan purchases, and 34,000 shares for other plans. During 1997, the SECT purchased 1.3 million shares for $37 million and used 207,000 shares to fund stock option exercises and 39,000 shares to fund Employee Stock Purchase Plan purchases. During 1996, 11,000 shares were released from the SECT to fund the fourth quarter Employee Stock Purchase Plan purchase. As of December 31, 1998, all shares remaining in the SECT were unallocated and therefore are not considered outstanding for purposes of calculating earnings per share. In 1998, the SECT was adjusted through capital in excess of par value from fair value to original cost basis based upon new interpretive guidance issued by the Financial Accounting Standards Board. The cost basis of the shares held by the SECT is reported as a reduction to shareholders' equity. During 1998, as a non-cash financing activity, the shares of common stock held by the SECT were adjusted to cost, with a decrease to capital in excess of par value of $(112.4) million. During 1997 and 1996, as a non-cash financing activity, the shares of common stock of the SECT were adjusted to fair value, with an increase to capital in excess of par value of $53.4 million and $42.8 million, respectively. RESTRICTED STOCK PLAN Under the Company's Restricted Stock Plan, 800,000 shares of restricted stock may be granted to certain key employees. During 1998 and 1997, 1,500 and 2,000 shares, respectively, were granted to an employee of the Company. The shares vest to the employee over 48 months from the date of grant, and are forfeited if the employee is no longer employed by the Company at the end of the vesting period. 30 34 11. STOCK OPTION PLANS On April 24, 1991, the shareholders approved the Company's 1991 Employee Stock Option Plan (1991 Plan), which came into effect after the Company's 1981 Employee Stock Option Plan (1981 Plan) terminated on April 21, 1991. Under the provisions of the plan, options may be granted to employees and directors of the Company. The option price for options granted under each plan is equal to or greater than the fair market value of the Company's common stock on the date the option is granted. Incentive stock options generally become exercisable in four annual installments of 25 percent of the shares covered by the grant, beginning one year from the date of grant, and expire six years after becoming exercisable. Nonqualified stock options generally become exercisable in either four or five annual installments of 20 or 25 percent of the shares covered by the grant, beginning one year from the date of grant, and expire up to 15 years from the date of the grant. All options remain in effect until the earlier of the expiration, exercise, or surrender date. The per share weighted-average fair value on the date of grant of stock options granted in 1998, 1997, and 1996, using the Black-Scholes option pricing model, was $10.64, $12.95, and $5.71, respectively. The fair value of the options at the date of grant was estimated with the following weighted-average assumptions:
1998 1997 1996 Expected life (years) 5.4 5.9 6.0 Dividend yield 0.23% 0.19% 0.45% Risk-free interest rate 4.62% 6.15% 5.89% Expected volatility 46.36% 42.36% 41.45%
The Company applies APB Opinion No. 25 in accounting for the 1991 and 1981 Plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
(amounts in thousands, except per share data) 1998 1997 1996 NET INCOME As reported $ 24,045 $ 17,862 $ 11,080 Pro forma $ 21,626 $ 15,959 $ 10,250 BASIC EARNINGS PER SHARE As reported $ 1.48 $ 1.07 $ 0.65 Pro forma $ 1.33 $ 0.95 $ 0.60 DILUTED EARNINGS PER SHARE As reported $ 1.42 $ 1.01 $ 0.63 Pro forma $ 1.28 $ 0.91 $ 0.58
Pro forma net income reflects only options granted subsequent to December 31, 1994. Accordingly, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above as compensation cost is reflected over the options' vesting period as discussed above, and compensation cost for options granted prior to January 1, 1995 is not considered. Pro forma amounts for compensation cost may not be indicative of the effects on earnings for future years. A summary of stock option activity under these plans follows:
Weighted Weighted 1981 Plan Average 1991 Plan Average Options Exercise Price Options Exercise Price Outstanding at December 31, 1996 20,324 $ 5.58 1,520,336 $ 8.17 Granted -- $ -- 626,950 $ 26.26 Exercised (5,952) $ 5.59 (282,474) $ 4.49 Canceled, expired, and forfeited -- $ -- (586) $ 3.75 - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1997 14,372 $ 5.58 1,864,226 $ 14.81 Granted -- $ -- 507,000 $ 22.39 Exercised (11,397) $ 5.63 (261,025) $ 7.36 Canceled, expired, and forfeited -- $ -- (163,875) $ 17.76 - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1998 2,975 $ 5.40 1,946,326 $ 17.54 =========================================================================================
At December 31, 1998 and 1997, the number of options exercisable under the 1991 Plan was 871,075 and 598,076, respectively, and the weighted average exercise price of those options was $13.84 and $10.92, respectively. At December 31, 1998 and 1997, the number of options exercisable under the 1981 Plan was 2,975 and 14,372, respectively, and the weighted average exercise price of those options was $5.40 and $5.58, respectively. A summary of the range of exercise prices and the weighted average remaining contractual life of outstanding options at December 31, 1998 for the 1991 and 1981 Plans follows:
Shares Weighted Weighted Average Outstanding at Average Remaining Contractual Range of Exercise Prices December 31, 1998 Exercise Price Life (years) 1991 Plan $3.4375 to $4.8125 133,851 $ 4.11 5.4 $6.125 to $9.00 440,700 $ 7.71 5.5 $9.4375 to $9.75 45,200 $ 9.51 5.6 $14.875 to $21.9375 1,024,250 $19.97 8.3 $26.00 to $37.1875 302,325 $30.78 9.4 1981 PLAN $4.5625 to $6.9375 2,975 $ 5.40 0.6 - -------------------------------------------------------------------------------
At December 31, 1998, there were 579,157 and 0 shares available for grant under the 1991 Plan and 1981 Plan, respectively. During 1998 and 1997, the Company acquired stock for treasury valued at $77,000 and $118,000, respectively, from employees through stock option exercise transactions. 31 35 12. SIGNIFICANT CUSTOMER International Business Machines (IBM) is the Company's largest customer. IBM accounted for $151.4 million or 32.4 percent, $142.2 million or 34.9 percent, and $107.4 million or 29.4 percent of consolidated 1998, 1997, and 1996 revenue, respectively. The Company's accounts receivable from IBM at December 31, 1998 and 1997 amounted to $20.8 million and $19.7 million, respectively. No other customer accounted for more than 10 percent of revenue in 1998, 1997, or 1996. 13. LITIGATION The Company is involved in litigation arising in the normal course of business. In the opinion of management, an adverse outcome to any of this litigation would not have a material effect on the financial condition of the Company. 14. SEGMENT INFORMATION The Company operates in one industry segment, providing IT services to its clients. The services provided typically encompass the IT business solution life cycle, including phases for planning, development and implementation, and managing and maintaining the IT solution. All of the Company's revenues are generated from these services. CTG's two reportable segments are based on geographical areas, which is consistent with prior years, prior to the adoption of SFAS No. 131, "Disclosure about Segments of the Enterprise and Related Information." The accounting policies of the individual segments are the same as those described in note one, "Summary of Significant Accounting Policies." CTG evaluates the performance of its segments at the operating income level. Corporate and other identifiable assets consist principally of cash and temporary cash investments and other assets.
Financial Information Relating to Domestic and Foreign Operations (amounts in thousands) 1998 1997 1996 Revenue North America $ 394,609 $ 360,849 $ 325,328 Europe 73,229 46,739 39,748 - ------------------------------------------------------------------------------- Total Revenue $ 467,838 $ 407,588 $ 365,076 ================================================================================ Depreciation and Amortization North America $ 2,404 $ 2,872 $ 3,550 Europe 848 630 569 Corporate and Other 1,750 1,926 3,532 - ------------------------------------------------------------------------------- Total Depreciation and Amortization $ 5,002 $ 5,428 $ 7,651 ================================================================================ Operating Income (Expense) North America $ 46,427 $ 36,324 $ 29,460 Europe 8,243 3,663 3,265 Corporate and Other (14,819) (11,031) (14,207) - ------------------------------------------------------------------------------- Total Operating Income $ 39,851 $ 28,956 $ 18,518 ================================================================================ Identifiable Assets North America $ 67,128 $ 57,519 $ 54,943 Europe 22,999 15,777 14,988 Corporate and Other 66,682 34,445 51,350 - ------------------------------------------------------------------------------- Total Identifiable Assets $ 156,809 $ 107,741 $ 121,281 ================================================================================ Capital Expenditures North America $ 2,591 $ 2,226 $ 1,468 Europe 1,158 648 904 Corporate and Other 1,308 1,896 1,212 - ------------------------------------------------------------------------------- Total Capital Expenditures $ 5,057 $ 4,770 $ 3,584 ================================================================================
32 36 15. Quarterly Financial Data (Unaudited)
QUARTERS (amounts in thousands, except per ------------------------------------------------------ share data FIRST SECOND THIRD FOURTH TOTAL 1998 Revenue $109,683 $117,646 $116,174 $124,335 $467,838 Direct costs 76,074 80,472 79,396 84,731 320,673 Selling, general, and administrative expenses 25,220 27,359 26,491 28,244 107,314 - --------------------------------------------------------------------------------------------------------- Operating income 8,389 9,815 10,287 11,360 39,851 Net interest and other income 216 73 246 371 906 - --------------------------------------------------------------------------------------------------------- Income before income taxes 8,605 9,888 10,533 11,731 40,757 Net income $ 5,077 $ 5,834 $ 6,216 $ 6,918 $ 24,045 Basic net income per share $ 0.32 $ 0.36 $ 0.38 $ 0.42 $ 1.48 Diluted net income per share $ 0.30 $ 0.34 $ 0.37 $ 0.41 $ 1.42
QUARTERS (amounts in thousands, except per --------------------------------------------------- share data FIRST SECOND THIRD FOURTH TOTAL 1997 Revenue $ 94,935 $100,105 $101,132 $111,416 $ 407,588 Direct costs 68,235 70,579 70,911 79,123 288,848 Selling, general, and administrative expenses 20,876 22,183 22,749 23,976 89,784 - --------------------------------------------------------------------------------------------------------- Operating income 5,824 7,343 7,472 8,317 28,956 Net interest and other income 292 377 507 136 1,312 - --------------------------------------------------------------------------------------------------------- Income before income taxes 6,116 7,720 7,979 8,453 30,268 Net income $ 3,669 $ 4,485 $ 4,717 $ 4,991 $ 17,862 Basic net income per share $ 0.22 $ 0.27 $ 0.28 $ 0.30 $ 1.07 Diluted net income per share $ 0.21 $ 0.26 $ 0.26 $ 0.29 $ 1.01 - ---------------------------------------------------------------------------------------------------------
33 37 Independent Auditors' Report Board of Directors and Shareholders Computer Task Group, Incorporated Buffalo, New York We have audited the accompanying consolidated balance sheet of Computer Task Group, Incorporated and subsidiaries as of December 31, 1998, and the related consolidated statement of income, changes in shareholders' equity, and cash flows for the year 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. The consolidated balance sheet as of December 31, 1997 and the consolidated statements of income, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1997 were audited by other auditors whose report, dated February 4, 1998, expressed an unqualified opinion of those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 1998 consolidated financial statements present fairly, in all material respects, the financial position of Computer Task Group, Incorporated and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepting accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Buffalo, New York February 5, 1999 (February 23, 1999 as to Note 2) 34 38 Corporate Information Stock Market Information
YEAR ENDED DECEMBER 31, 1998 HIGH LOW First Quarter $45 $32 9/16 Second Quarter $42 1/2 $28 3/4 Third Quarter $40 7/8 $23 Fourth Quarter $34 1/2 $18 1/2 YEAR ENDED DECEMBER 31, 1997 HIGH LOW First Quarter $23 5/8 $17 1/4 Second Quarter $39 1/2 $16 9/16 Third Quarter $49 3/8 $33 3/4 Fourth Quarter $44 1/2 $27
The Company's common shares are traded on the New York Stock Exchange under the symbol TSK, commonly abbreviated Cptr Task. The shares are listed on the Amsterdam Stock Exchange and are traded by means of the Amsterdam Security Account System (ASAS). On February 23, 1999, there were 3,536 record holders of the Company's common shares. The Company paid an annual cash dividend of $.05 per share from 1993 to 1998 and, prior to that, had paid $.025 per share annually since 1976 plus a 10 percent share dividend in 1980. The Company expects to continue to pay cash dividends subject to the availability of earnings, the financial condition of the Company, and other relevant factors at the time. ANNUAL MEETING The annual meeting of shareholders has been scheduled for April 28, 1999 in Buffalo, New York for shareholders of record on March 17, 1999. FORM 10-K AVAILABLE Copies of the Company's Form 10-K Annual Report, which is filed with the Securities and Exchange Commission, may be obtained without charge upon written or verbal request to: Computer Task Group, Incorporated Investor Relations Department 800 Delaware Avenue Buffalo, NY 14209-2094 (716) 887-7400 TRANSFER AGENT AND REGISTRAR EQUISERVE LIMITED PARTNERSHIP Our Transfer Agent is responsible for our shareholder records, issuance of stock certificates, and distribution of our dividends and the IRS Form 1099. Your requests, as shareholders, concerning these matters are most efficiently answered by corresponding directly with EquiServe Limited Partnership: Bank Boston, N.A. c/o EquiServe Limited Partnership P.O. Box 8040 Boston, Massachusetts 02266-8040 (781) 575-3170 (MA residents) (800) 730-4001 (781) 828-8813 (fax) www.equiserve.com INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Deloitte & Touche LLP Key Bank Tower, Suite 250 50 Fountain Plaza Buffalo, NY 14202 35 39 Officers JONATHAN R. ASHER,VICE PRESIDENT, MANAGED SERVICES, NORTH AMERICA Jonathan R. Asher is responsible for sales and delivery of managed services to CTG's Key Clients in North America. Mr. Asher joined CTG in 1996 as vice president of the IBM national team. He has more than 28 years' experience in application development, marketing, quality management, and business operations management. JAMES R. BOLDT,VICE PRESIDENT, GLOBAL SUPPORT SERVICES & CHIEF FINANCIAL OFFICER James R. Boldt is responsible for the management of CTG's global support services organization, comprised of finance, administration, human resources, information systems, benefits, compensation, legal, contracts, communications, public and investor relations, proposals, and quality. Mr. Boldt is also the Company's secretary and treasurer. Prior to joining CTG in February 1996,he was corporate vice president of finance, secretary, and chief financial officer of Pratt & Lambert United. JANICE M. COLE,VICE PRESIDENT, GLOBAL CAREER DEVELOPMENT Janice M. Cole is responsible for CTG's global organization devoted to career development of the Company's professionals. Ms. Cole joined CTG in 1980 as a systems engineer. Subsequently, she worked in business development and resource management. In 1994, she was promoted to vice president of CTG's Northeast region. In 1997, she was named vice president for education and development. GALE S. FITZGERALD,CHAIRMAN & CHIEF EXECUTIVE OFFICER During Gale S. Fitzgerald's four years as CEO, CTG has realigned its operations to focus on Key Clients, attracting and retaining IT professionals, and improving profitability. She joined the Company in 1991 as senior vice president of CTG's Northeast region, and was promoted to president and chief operating officer in July 1993. Previously, Ms. Fitzgerald was vice president for professional services at International Business Machines Corporation (IBM), where she worked for 18 years in various management positions. GARY M. GERSHON,VICE PRESIDENT, MARKETING AND SERVICES Gary M. Gershon joined CTG at the end of 1998, assuming leadership of the Company's Marketing and Services organization. Mr. Gershon came from an advanced software and consulting company he founded in 1991. Prior to this, Mr. Gershon held senior management roles at KPMG Peat Marwick and IBM. NICO MOLENAAR,VICE PRESIDENT, MANAGED SERVICES, EUROPE Nico Molenaar is responsible for all operations in the United Kingdom, Belgium, Luxembourg, and the Netherlands, accountable for sales and delivery of managed services to CTG's Key Clients in Europe. Mr. Molenaar joined the Company in 1990 when CTG acquired Rendeck International, where he was regional director, Benelux. Prior to joining Rendeck International, Mr. Molenaar served in a variety of sales and management roles at Dataserv, Sperry Univac, Prime Computer, and Hewlett-Packard. JOHN F. MOORE,VICE PRESIDENT, STRATEGIC STAFFING SERVICES John F. Moore is responsible for driving CTG's strategy to provide strategic staffing services to specific Key Clients. Mr. Moore joined CTG in 1984 as a systems engineer. Most recently, he served as director of operations for the Eastern U.S. and Canada for CTG's IBM national team. Prior to joining CTG, he was a systems analyst for a bank holding company and an information technology services firm. [PHOTO] From left: Janice Cole Jonathan Asher Gale Fitzgerald James Boldt Nico Molenaar John Moore Gary Gershon 36 40 DIRECTORS George B. Beitzel Mr. Beitzel has been an independent business consultant since his retirement from International Business Machines Corporation (IBM) in 1987, where he served as senior vice president and a member of IBM's board of directors from 1972 until 1985. He is a director of Bankers Trust New York Corporation and its subsidiary, Bankers Trust Company, Phillips Petroleum Company; Staff Leasing, Inc.; and Bitstream, Inc. Mr. Beitzel has been a director of CTG since 1994. [PHOTO] Richard L. Crandall Mr. Crandall has been managing director of Arbor Partners LLC since 1997. He served as chairman of Comshare, Inc., from 1994 until 1997, where he had been chief executive officer from 1966 until 1994. Mr. Crandall is also a director of Diebold, Inc., Giga Information Group, Inc.; Steeplechase Software, Inc.; Tacit Knowledge Systems, Inc.; and Edwards Brothers, Inc.; Mr. Crandall hat been a director of CTG since 1993. [PHOTO] R. Keith Elliott Mr. Elliott is chairman and chief executive officer of Hercules Incorporated. Mr. Elliott also serves on the boards of directors of PECO Energy and Wilmington Trust Company. He has been a director of CTG since 1998. [PHOTO] Gale S. Fitzgerald Ms. Fitzgerald has been chairman and chief executive officer of CTG since October 1994. She currently serves on the Business Council of New York State, the Advisory Board of the University of Buffalo's School of Management, the Information Technology Services Board of the Information Technology Association of America, and the Kaleida Health System Board of Directors. She also serves on the board of the Buffalo Niagara Partnership. Ms. Fitzgerald has been a director of CTG since 1993. [PHOTO] Randolph A. Marks Mr. Marks is co-founder and former chairman, president, and chief executive officer of CTG. Currently an independent business consultant, he served as chairman of the board of American Brass Company from 1985 to 1990. Mr. Marks is currently a directors of Marine Midland Bank Western New York Region and Columbus McKinnon Corporation. He has been a director of CTG since 1966. [PHOTO] Barbara Z. Shattuck Ms. Shattuck is the managing director of Shattuck Hammond, a division of PriceWaterhouseCoopers Securities. From 1993 to 1998, Ms. Shattuck was president and founding principal of Shattuck Hammond Partners, Inc. From 1982 to 1993, she was a founding partner and principal of Cain Brothers, Shattuck & Company, Inc. She is also on the board of directors of Tuffs Associated Health Plans. Ms. Shattuck has been a director of CTG since 1995. [PHOTO] 37 41 ctg COMPUTER TASK GROUP, INC. 800 Delaware Avenue Buffalo, New York 14209-2094 716-882-8000 800-992-2350 www.ctg.com EX-21 6 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF COMPUTER TASK GROUP, INCORPORATED ------------------------------------------------- The following is a list of all of the subsidiaries of the Registrant as of December 31, 1998. All financial statements of such subsidiaries are included in the consolidated financial statements of the Registrant, and all of the voting securities of each subsidiary are wholly-owned by the Registrant:
State/Country or Jurisdiction of Incorporation ---------------- - - Computer Task Group of Delaware, Inc. Delaware - - CTG Services, Inc. New York - - Computer Task Group (Holdings) Ltd. United Kingdom - - Computer Task Group of Kansas, Inc. (a subsidiary Missouri of Computer Task Group (Holdings) Ltd.) - - Computer Task Group of Canada, Inc. Canada - - Computer Task Group International, Inc. Delaware - - Computer Task Group Europe B.V. (a subsidiary The Netherlands of Computer Task Group International, Inc.) - - Computer Task Group (U.K.) Ltd. (a subsidiary United Kingdom of Computer Task Group Europe B.V.) - - Computer Task Group Nederland B.V. (a subsidiary The Netherlands of Computer Task Group Europe B.V.) - - Computer Task Group Belgium N.V. (a subsidiary Belgium of Computer Task Group Europe B.V.) - - Rendeck Macro-4 Software B.V. (a subsidiary The Netherlands of Computer Task Group Europe B.V.) - - Computer Task Group of Luxembourg S.A. (a subsidiary Luxembourg of Computer Task Group Europe B.V.)
EX-23.A 7 EXHIBIT 23(A) 1 EXHIBIT 23 (a) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements No. 33-41995, No. 33-61493, No. 33-50160 and No. 333-12237 on Form S-8 and No. 333-43263 on form S-3 of our reports dated February 5, 1999 (February 23, 1999 as to Note 2), appearing in and incorporated by reference in the Annual Report on Form 10-K of Computer Task Group, Incorporated and Subsidiaries for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Buffalo, New York March 29, 1999 EX-23.B 8 EXHIBIT 23(B) 1 EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS Computer Task Group, Incorporated: We consent to the incorporation by reference in the Registration Statements No. 33-41995, No. 33-61493, No. 33-50160 and No. 333-12237 on Form S-8 and No. 333-43263 on Form S-3 of Computer Task Group, Incorporated of our report dated February 4, 1998 which appears on page IV-2 in Computer Task Group, Incorporated's Annual Report on Form 10-K for the year ended December 31, 1998. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page IV-4 of such Annual Report on Form 10-K. KPMG LLP March 29, 1999 Rochester, New York EX-27 9 EXHIBIT 27
5 0000023111 COMPUTER TASK GROUP, INC. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 57,748,000 0 75,037,000 1,105,000 0 137,334,000 41,602,000 28,456,000 156,809,000 62,473,000 0 0 0 270,000 83,179,000 156,809,000 0 467,838,000 0 320,673,000 107,314,000 0 122,000 40,757,000 16,712,000 0 0 0 0 24,045,000 1.48 1.42
EX-27.1 10 EXHIBIT 27.1
5 0000023111 COMPUTER TASK GROUP, INC. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 25,033,000 0 61,127,000 951,000 0 88,873,000 37,700,000 25,255,000 107,741,000 41,771,000 0 0 0 270,000 55,056,000 107,741,000 0 407,588,000 0 288,848,000 89,784,000 0 296,000 30,268,000 12,406,000 0 0 0 0 17,862,000 1.07 1.01
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