-----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, H3uBBMJYNhdHfeY0lrhoWR2GnbVNvOolBco71fIaLJM4Ajysih0+i2AfKkMQmPOL UBiqdsAMpl8ZjTt6FYEPqg== 0000950152-97-002414.txt : 19970329 0000950152-97-002414.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950152-97-002414 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09410 FILM NUMBER: 97567795 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-K405 1 COMPUTER TASK GROUP, INCORPORATED / 10-K405 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, 1996 ----------------- 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. [ X ] The aggregate market value of the Registrant's voting stock held by non- affiliates at March 19, 1997 was $289,961,650. 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 19, 1997 was 10,341,804. 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 1996 Annual Report to Shareholders; Part 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 30, 1997. 2 PART I ------ Statements included 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 of 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 (Company or CTG or Registrant) was incorporated in Buffalo, New York on March 11, 1966, and its corporate headquarters are located at 800 Delaware Avenue, Buffalo, New York 14209 (716-882-8000). CTG is an information technology (IT) services company. CTG employs approximately 5,000 people and serves customers through an international network of offices in North America and Europe. The Company has six operating subsidiaries: CTG Services, Inc.; 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. As of July 1, 1994, the Company sold its petroleum industry subsidiaries, Profimatics, Inc. and Profimatics & Co., GmbH. BACKGROUND - ---------- The Company operates in one area of the computer industry -- 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 500 customers in North America and Europe. Of total 1996 revenue of $365.1 million, approximately 89 percent was generated in North America and 11 percent in Europe. The Company derives the majority of its revenue from services provided to companies in the Fortune 500. 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 flexible staffing provided on a per diem basis to managing multi-million dollar technology projects. Approximately 52 percent of the Company's services are provided to customers in the service sectors, followed by 21 percent in the manufacturing industry, 9 percent in the banking and finance sector and 18 percent in other industries. Most of CTG's services are provided on-site at the customer's facilities. CTG's network of offices provides wide geographical coverage with the capability of servicing large companies with multiple locations. CTG's strategy is to build the core of its business around its Key Clients. Key Clients are companies that present CTG with the greatest opportunity to add value to their business as a strategic partner. With Key Clients, CTG believes it can build a strong, lasting, high-value relationship. CTG's services are sold and delivered on a local level through its network of geographically dispersed delivery teams made up of account executives, resource managers, staffing managers and business consultants. The Company has a staff of recruiting specialists located in regional locations who 2 3 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. Staffing managers at the local delivery team level interview, hire and staff IT professionals on a client engagement and resource managers focus on their development, management, training and performance. International Business Machines Corporation (IBM) is CTG's largest customer. CTG provides services to various IBM divisions in approximately 50 locations. In 1995, CTG was awarded a two-year contract to be one of IBM's nine national technical service providers in the United States. This contract expires in July 1997, and the Company anticipates renewal of the contract for two additional years. IBM accounted for $104.7 million or 29.4 percent of 1996 revenue; $80 million or 23.7 percent of CTG's 1995 revenue; and $68 million or 22.7 percent of CTG's 1994 revenue. The Company expects to continue to derive a significant portion of its business from IBM in 1997 and to actively pursue new business with IBM. 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 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 is material to the business. SERVICES - -------- CTG operates in one industry segment, the services area of the IT industry. Geographic area information is included in CTG's 1996 Annual Report to Shareholders on page 24 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 using IT. Planning is followed by development, in which companies develop and implement IT solutions using their newly devised plans. Finally, managing and maintaining the engagement 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 application development, client/server 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 the business planning necessary to assess industry and customer needs and target markets. The Company sells its services at a local and regional level, consistent with the business planning process. Customers are served by local teams, comprised of account executives, business consultants, staffing managers and resource managers -- the first two focus on identifying an engagement and the latter two focus on recruiting and retaining appropriate, high-quality professionals for the engagement. Supporting 3 4 these local teams are recruiters backed by a national electronic database of professional computer consultants and programmers. Account executives are full-time employees who receive a base salary and are paid commissions based on objectives such as 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 professionals serving our customers, continually seek to identify new opportunities with existing and prospective customers. CTG publishes brochures that explain its services, produces informative customer newsletters, advertises in trade publications and participates in trade shows. The Internet is a component of the Company's sales and marketing strategy. The Company is continuously refining and building new Internet functionality to provide current information to its customers, investors and prospective employees. The Internet presents an opportunity for new business. CTG is currently developing internal and external Internet tools to support its clients. CTG has been using the Internet for several years as a communications tool. 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. The Company performs managed support activities on a monthly fee basis. The Company also performs project business in the realm of application development and maintenance 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 two percent of the Company's 1996 revenue, compared to four percent in 1995. Revenue from all fixed price contracts, including those accounted for on a monthly fee and cost plus basis represented 14 percent of revenue in 1996, compared to 13 percent in 1995. As of December 31, 1996 and 1995, the backlog for fixed-price contracts was approximately $99 million and $51 million, respectively. Approximately 49 percent of the December 31, 1996 backlog is expected to be earned in 1997. Revenue is subject to seasonal variations, with a minor downturn in months of high vacation and legal holidays (July, August and December). The backlog is not seasonal. 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 and by the type of service 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, which offer a variety of development services to a broad spectrum of commercial customers. CTG competes against all four of these for its share of the market. CTG has implemented a Total Quality Management Program, with a goal to achieve continuous, measured improvements in services and deliverables. As part of this program, CTG has developed specific methodologies for providing value added services that result in unique solutions and specified deliverables for its clients. The Company believes these methodologies will enhance its ability to compete. Several of CTG's offices are 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. 5 MANAGEMENT AND PROFESSIONAL STAFF - --------------------------------- As of December 31, 1996, CTG employed approximately 5,000 people, of whom 4,500 were billable technical professionals. 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 170,000 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 offers full-time or part-time employment, pays its employees on either a salaried or hourly basis, and has a diverse and flexible benefits package. 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 are taught the skills required to become commercially proficient. In addition, the Company also provides ongoing educational programs so that its technical staff has 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 has 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 $5 million, $4 million and $4.4 million, on education in 1996, 1995, and 1994, respectively, including compensation paid to technical staff while in training. 5 6
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS - ----------------------------------------------------------------- (amounts in thousands) 1996 1995 1994 ---- ---- ---- Revenue from Unaffiliated Customers North America $ 325,328 $ 306,156 $ 274,115 Europe 39,748 33,251 27,444 ----------- ----------- ----------- $ 365,076 $ 339,407 $ 301,559 =========== =========== =========== Operating Income (Loss) North America $ 15,253 $ 12,300 $ (2,348) Europe 3,265 450 128 ----------- ----------- ----------- $ 18,518 $ 12,750 $ (2,220) =========== =========== =========== Identifiable Assets North America $ 54,943 $ 61,771 $ 62,406 Europe 14,988 13,280 10,510 Corporate and Other 51,350 29,715 22,574 ----------- ----------- ----------- $ 121,281 $ 104,766 $ 95,490 =========== =========== ===========
6 7
Executive Officers of the Company --------------------------------- Term Of Period During Other Positions Office Which Served as And Offices with Name and Age Office Expires Executive Officer(1) Registrant - ------------ ------ ------- -------------------- ---------- Gale S. Fitzgerald Chairman of 4-30-97 5-6-91 to date Director 46 the Board and Chief Executive Officer Jonathan R. Asher Vice President 4-30-97 12-16-96 to date None 51 Richard A. Ballou Vice President 4-30-97 11-2-93 to date None 45 Charles A. Barbour Vice President 4-30-97 11-2-93 to date None 45 James R. Boldt Vice President 4-30-97 2-12-96 to date Treasurer 45 and Chief Financial Officer Louis J.F. Boyle Vice President 4-30-97 7-1-94 to date None 45 Beatrice DeRocco Vice President 4-30-97 4-26-95 to date None 52 Vincent J. Gallenti Vice President 4-30-97 7-1-96 to date None 47 Michael E. Grich Vice President 4-30-97 2-9-95 to date None 48 Joseph G. Makowski Vice President 4-30-97 9-30-89 to date Secretary 43 and General Counsel Nico H. Molenaar Vice President 4-30-97 1-2-96 to date None 41 - --------------- (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 an executive with IBM-Integrated Systems Solutions Corporation. Mr. Asher has over 20 years of experience, and is currently responsible for the IBM National Team. 7
8 Mr. Ballou was promoted to vice president in November 1993 and has been employed by the Company for 12 years. He has held a variety of technical and management positions and is presently responsible for the operations of the Company's Southeast region. Mr. Barbour was promoted to vice president in November 1993 and has been employed by the Company for 16 years. He has held a variety of management positions and is presently responsible for the operations of the Company's North region. 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 finance, accounting and internal audit functions. Mr. Boyle joined the Company as an officer in July 1994, and currently serves as vice president and chief information officer. He was Manager, Northern New England Consulting Practice with Coopers & Lybrand from 1992 to June 1994 and held a variety of technical consulting and management positions prior to that. Ms. DeRocco joined the Company as a vice president in April 1995. She previously held a variety of management positions at IBM and was responsible for the operations of the Company's West region until January 1, 1997 when she was appointed as vice president, sales and marketing. Mr. Gallenti joined the Company as a vice president in July 1996. He was previously vice president, human resources and quality of Fidelity Investments-Systems Company. He has over 20 years of experience, and he is currently responsible for the Company's human resource and organizational development functions. Mr. Grich was promoted to vice president in February 1995 and has been employed by the Company since 1991. He has held a variety of sales and management positions and is presently responsible for the operations of the Company's West region. Prior to joining the Company, he was employed by Cap Gemini as Northeastern director for sales and marketing. He also spent 20 years with IBM where his last position was branch manager for IBM's Hartford Professional Services office. Mr. Makowski was promoted to vice president in September 1993 and has been employed by the Company for 11 years. He has served as secretary and general counsel since September 1989. He has served as the Company's corporate counsel since 1985. Mr. Molenaar was promoted to vice president in January 1996 and has been employed by the Company since 1988. He has held a variety of management positions and is presently responsible for the Company's European operations. ITEM 2. PROPERTIES ---------- The Company occupies a headquarters building (approximately 40,000 square feet) at 800 Delaware Avenue, and an office building at 700 Delaware Avenue, both located in Buffalo, New York. The office building consists of approximately 39,000 square feet and is occupied by the Company's Buffalo sales office and 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 $1.8 million which it has leased to a third party under a five-year lease. 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 12,000 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. 8 9 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. 9 10 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, 1996, submitted herewith as an exhibit, and incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA ----------------------- A ten-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 - Ten-Year Selected Financial Information" in the Company's Annual Report to Shareholders for the year ended December 31, 1996, 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, 1996, under the heading "Management's Discussion and Analysis," submitted herewith as an exhibit, and incorporated herein by reference. 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, 1996, submitted herewith as an exhibit, and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ---------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- On October 16, 1995, the Company engaged KPMG Peat Marwick LLP (KPMG) as the principal accountants to audit the Company's financial statements for the fiscal year ending December 31, 1995. The Company did not consult with KPMG regarding accounting advice prior to its engagement. Price Waterhouse LLP (Price Waterhouse) had been engaged since 1977 as the principal accountants to audit the Company's financial statements. Price Waterhouse's report on the financial statements of the Company as of December 31, 1994 and 1993 and for the years then ended contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. Also, during the aforementioned period, there occurred no "reportable event" within the meaning of Item 304(a)(1)(v) of Regulation S-K of the Commission. The decision to change accountants was approved by the Board of Directors of the Company. During the Company's two most recent fiscal years and any subsequent interim period preceding the dismissal, there were no disagreements between the Company and Price Waterhouse on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of Price Waterhouse would have caused Price Waterhouse to make reference to the subject matter of the disagreement in connection with its report. II-1 10 11 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 pursuant to Regulation 14A and used in connection with the Company's 1997 annual meeting of shareholders to be held on April 30, 1997, 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 pursuant to Regulation 14A and used in connection with the Company's 1997 annual meeting of shareholders to be held on April 30, 1997, excluding the Compensation Committee Report on Executive Compensation and the Company's Performance Graph, as set forth in the Company's definitive Proxy Statement dated April 4, 1997. 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 pursuant to Regulation 14A and used in connection with the Company's 1997 annual meeting of shareholders to be held on April 30, 1997, as set forth in the Company's definitive Proxy Statement dated April 4, 1997. 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 pursuant to Regulation 14A and used in connection with the Company's 1997 annual meeting of shareholders to be held on April 30, 1997, excluding the Compensation Committee Report on Executive Compensation and the Company's Performance Graph, as set forth in the Company's definitive Proxy Statement dated April 4, 1997. III-1 11 12 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (A) Index to Financial Statements and Financial Statement Schedules --------------------------------------------------------------- The 1996, 1995 and 1994 consolidated financial statements, and the report of KPMG Peat Marwick LLP dated January 31, 1997, on the consolidated balance sheets as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended, appearing in the accompanying 1996 Annual Report to Shareholders, are incorporated by reference in this Form 10-K Annual Report. With the exception of the aforementioned information and the information incorporated in Parts I and II, the 1996 Annual Report to Shareholders is not to be deemed filed as part of this report. The following reports of Independent Accountants and financial statement schedule should be read in conjunction with the financial statements in such 1996 Annual Report to Shareholders. All other financial statement schedules have been omitted because they are not material or the required information is shown in the financial statements or the notes thereto.
Reference --------- Report of Independent Accountants IV-2 Report of Independent Accountants on IV-3 Financial Statement Schedule Report of Independent Accountants on Financial Statement Schedule IV-4 Financial statement schedule: Valuation and Qualifying Accounts IV-5 (Schedule VIII) (B) 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-4. IV-I 12 13 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Computer Task Group, Incorporated In our opinion, the consolidated statements of income, of cash flows and of changes in stockholders' equity for the year ended December 31, 1994 (appearing on page 11 and pages 13 through 25 of the Computer Task Group, Incorporated Annual Report to Shareholders which has been included in this Form 10-K Annual Report) present fairly, in all material respects, the results of operations and cash flows of Computer Task Group, Incorporated and its subsidiaries for the year ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Computer Task Group, Incorporated for any period subsequent to December 31, 1994. PRICE WATERHOUSE LLP Buffalo, New York February 10, 1995 IV-2 13 14 REPORT OF INDEPENDENT ACCOUNTANTS ON ------------------------------------ FINANCIAL STATEMENT SCHEDULE ---------------------------- To the Board of Directors and Stockholders of Computer Task Group, Incorporated Under date of January 31, 1997, we reported on the consolidated balance sheets of Computer Task Group, Incorporated and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended, as contained in the 1996 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts, insofar as it relates to the years ended December 31, 1996 and 1995. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, insofar as it relates to the years ended December 31, 1996 and 1995, 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 PEAT MARWICK LLP Buffalo, New York January 31, 1997 IV-3 14 15 REPORT OF INDEPENDENT ACCOUNTANTS ON ------------------------------------ FINANCIAL STATEMENT SCHEDULE ---------------------------- To the Board of Directors of Computer Task Group, Incorporated Our audit of the consolidated financial statements referred to in our report dated February 10, 1995 appearing on page IV-2 included in this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule for 1994 listed in Item 14. (A) of this Form 10-K. In our opinion, this Financial Statement Schedule for 1994 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Buffalo, New York February 10, 1995 IV-4 15 16
COMPUTER TASK GROUP, INCORPORATED SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands) Balance at Net Balance at Description January 1 Change December 31 - ----------- ---------- ------ ----------- 1996 Account deducted from assets Allowance for Doubtful Accounts $ 862 $ 113 (A) $ 975 Net Deferred Tax Assets Valuation Allowance $ 962 $ (467) (B) $ 495 1995 Account deducted from assets Allowance for Doubtful Accounts $ 1,045 $ (183) (A) $ 862 Net Deferred Tax Assets Valuation Allowance $ 1,087 $ (125) (B) $ 962 1994 Account deducted from assets Allowance for Doubtful Accounts $ 967 $ 78 (A) $ 1,045 Net Deferred Tax Assets Valuation Allowance $ 1,471 $ (384) (C) $ 1,087 (A) Includes 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) Includes benefit of unrealized capital loss carryforward that was realized during the year.
IV-5 16 17 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 24, 1997 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 24, 1997 Board and Chief /s/ Gale S. Fitzgerald Executive Officer -------------------------------- (Gale S. Fitzgerald) (ii) Principal Accounting and Vice President, March 24, 1997 Financial Officer Chief Financial Officer /s/ James R. Boldt -------------------------------- (James R. Boldt) (iii) Directors /s/ George B. Beitzel Director March 24, 1997 -------------------------------- (George B. Beitzel) /s/ Richard L. Crandall Director March 24, 1997 -------------------------------- (Richard L. Crandall) /s/ Gale S. Fitzgerald Director March 24, 1997 -------------------------------- (Gale S. Fitzgerald) /s/ Paul W. Joy Director March 24, 1997 -------------------------------- (Paul W. Joy) /s/ Randolph A. Marks Director March 24, 1997 -------------------------------- (Randolph A. Marks) /s/ Barbara Z. Shattuck Director March 24, 1997 -------------------------------- (Barbara Z. Shattuck)
IV-6 17 18 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) Form of Certificate of Amendment of the Restated (2) Certificate of Incorporation of Registrant, under Section 805 of the New York Business Corporation Law. (c) Certificate of Amendment of Certificate of Incorporation (1) of Registrant. (d) Restated By-laws of Registrant. (1) (e) Certificate of Amendment of Certificate of Incorporation (2) of Registrant. 4. (a) Specimen Common Stock Certificate. (2) (b) Rights Agreement dated as of January 15, 1989, and (2) 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) Line of Credit Agreement, dated December 21, 1987, (1) between Registrant and Manufacturers and Traders Trust Company. (b) Non-Compete Agreement, dated as of March 1, 1984, (2) between Registrant and Randolph A. Marks. (c) Description of Executive Supplemental Benefit Plan dated (2) March 3, 1984, as restated, as of November 30, 1994. (d) Stock Employee Compensation Trust Agreement, dated (2) May 3, 1994, between Registrant and Thomas R. Beecher, Jr., as trustee. - ---------------------------- * None or requirement not applicable. (1) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 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.
E-1 18 19 EXHIBIT INDEX (Continued)
Page or Exhibit Description Reference - ------- ----------- --------- 10. (e) 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. (f) Severance Compensation Agreement dated October 31, 1994, (2) between Registrant and Gale S. Fitzgerald. (g) Stock Purchase Agreement, dated as of February 25, (3) 1981, between Registrant and Randolph A. Marks. (h) Description of Disability Insurance and Health (4) Arrangements for Executive Officers. (i) Letter of Marine Midland Bank, N.A. dated May 25, 1988, (5) amending Line of Credit Agreement, dated December 12, 1984, between Registrant and Marine Midland Bank, N.A. (j) Line of Credit Agreement, dated March 3, 1988, between (5) Registrant and Chemical Bank, as amended by letter of Chemical Bank dated September 15, 1988. (k) Nondisclosure and Nonsolicitation Agreement, dated (5) July 1, 1993, between Registrant and Gale S. Fitzgerald. (l) 1996 Key Employee Compensation Plans. (6) (m) Management Stock Purchase Plan. (7) - -------------------------- (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. (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, 4, 1997 on page 11 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.
E-2 19 20 EXHIBIT INDEX (Continued) -------------
Page or Exhibit Description Reference - ------- ----------- --------- 10. CTG Non-Qualified Key Employee Deferred Compensation Plan (8) (o) 1991 Employee Stock Option Plan, as Amended. 21 (p) First Employee Stock Purchase Plan (Eighth Amendment 32 and Restatement). (q) 1991 Restricted Stock Plan. 37 (r) Executive Compensation Plans and Arrangements. 44 (s) Employment Agreememt. 46 11. Statement re: computation of per share earnings. 58 12. Statement re: computation of ratios. * 13. Annual Report to Shareholders. 60 16. Letter re: change in certifying accountant. 103 18. Letter re: change in accounting principles. * 21. Subsidiaries of the Registrant. 105 22. Published report regarding matters submitted to a vote * of security holders. 23. Consents of experts and counsel. 107 24. Power of Attorney. * 27. Financial Data Schedule. 110 99. Additional exhibits. * - -------------------------- (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.
E-4 20 EX-10.O 2 EXHIBIT 10(O) 1 EXHIBIT 10(o) ------------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- 1991 Employee Stock Option Plan, as Amended. 2 COMPUTER TASK GROUP, INCORPORATED 1991 STOCK OPTION PLAN, AS AMENDED - ------------------------------------------------------------------------------- ARTICLE I DEFINITIONS 1.1. For purposes of this Plan: (A) The term "BOARD" shall mean the Board of Directors of the Company. (B) The term "CODE" shall mean the Internal Revenue Code of 1986, as amended. (C) The term "COMMITTEE" shall mean the Compensation Committee of the Board. When taking action with respect to the Plan or Options granted under the Plan, the Committee shall be composed solely of two or more Non-Employee Directors. (D) The term "COMMON STOCK" shall mean the common stock, par value $.01 per share, of the Company and any shares of stock or other securities received as a result of the adjustments contemplated in this Plan. (E) The term "COMPANY" shall mean Computer Task Group, Incorporated. (F) The term "DISABILITY" shall mean permanent and total disability as defined in Section 22(e)(3) of the Code. (G) The term "FAIR MARKET VALUE" shall mean with respect to any given day, the closing price of the Common Stock as reported by the New York Stock Exchange - Composite Transactions Listing for the date as of which value is to be determined or if there is no closing price for that date, then on the last preceding date on which such closing price was reported. (H) The term "INITIAL GRANT" shall mean the grant of an Option to a New Outside Director pursuant to Section 7.1 hereof. (I) The term "KEY EMPLOYEE" shall mean an employee of the Company or its Subsidiaries who is in a position of responsibility and whose business decisions, in the sole judgment of the Committee, contributes to the overall success of the Company. (J) The term "ISO" shall mean an incentive stock option as defined in Section 422 of the Code or any successor provision. (K) The term "NEW OUTSIDE DIRECTOR" shall mean a person who (i) is appointed or elected to the Board after January 1, 1993, (ii) will be an Outside Director after such appointment or election and (iii) was not a member of the Board for a continuous period of one hundred eighty (180) days prior to such appointment or election. Such term does not include either (i) an employee director who terminates employment with the Company but remains a member of the Board or (ii) an 3 employee director who terminates employment with the Company and is then reelected to the Board without there being an intervening period of one hundred eighty (180) days during which such person is not a member of the Board. (L) The term "NON-EMPLOYEE DIRECTOR" shall mean a director who: (i) is not currently an officer (as defined in Rule 16a-1(f) of the Securities and Exchange Commission (the "SEC)) of the Company or a parent or subsidiary of the Company, or otherwise currently employed by the Company or a parent or subsidiary of the Company. (ii) does not receive compensation, either directly or indirectly, from the Company or a parent or subsidiary of the Company, for services rendered as a consultant or in a capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K of the SEC; (iii) does not possess an interest in any other transaction for which disclosure would be required pursuant to Item 404(a) of Regulation S-K of the SEC; and (iv) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) Regulation S-K of the SEC. (M) The term "NQSO" shall mean an Option that does not comply with the requirements set forth in Section 422 of the Code or any successor provision. (N) The term "OPTION" shall mean any option granted under this Plan. (O) The term "OPTIONEE" shall mean any person to whom an Option has been granted. (P) The term "OPTION AGREEMENT" shall mean an agreement entered into by the Optionee and the Company setting forth the terms of the Option as set forth in Article VIII and such other terms and conditions as may be required by the Committee. (Q) The term "OUTSIDE DIRECTOR" shall mean a member of the Board who is not currently an officer or employee of the Company or its Subsidiaries. (R) The term "PERIODIC GRANT" shall mean the grant of an Option to an Outside Director pursuant to Section 7.2 of this Plan. (S) The term "PLAN" shall mean the Computer Task Group, Incorporated 1991 Stock Option Plan, as amended. (T) The term "SUBSIDIARY" shall have the meaning as set forth in Section 424 of the Code or any successor provision and shall include any corporation which becomes a subsidiary after the date of adoption of the Plan. (U) The term "WITH CAUSE" shall mean conduct wherein an Optionee has willfully engaged in acts considered by the Committee to be injurious to the Company or its Subsidiaries or the continuing failure by an Optionee to perform his or her duties. Notwithstanding the foregoing, the term "With Cause" when applied to an individual in his or her capacity as a director of the 4 Company shall have the same meaning as the term "cause" as set forth in Article III of the Company's By-laws. ARTICLE II PURPOSE 2.1 The purpose of the Plan is to provide Key Employees, New Outside Directors and Outside Directors upon whose efforts the Company is largely dependent for the successful conduct of its business, additional incentive to continue and increase their efforts on the Company's behalf and to remain in the employ of the Company or its Subsidiaries. In addition, the Plan is designed to increase the ability of the Company to attract and retain individuals of exceptional skill upon whom its progress, growth and profitability depend. ARTICLE III EFFECTIVE DATE AND EXPIRATION OF PLAN 3.1. The Plan was adopted by the Board effective as of January 25, 1991 and was approved and ratified by the shareholders of the Company on April 24, 1991. ISO's and NQSO's may not be granted under the Plan after January 23, 2001. The period for exercise of Options granted prior to April 23, 2001, may extend beyond that date. ARTICLE IV ELIGIBILITY 4.1 Options may be granted by the Committee only to Key Employees, New Outside Directors and Outside Directors. ARTICLE V SHARES SUBJECT TO THE PLAN 5.1. The total number of shares of Common Stock for which Options may be granted under this Plan shall not exceed 1,750,000 shares, subject to adjustment in accordance with Article IX hereof. Such shares may be authorized and unissued shares, treasury shares or both, as the Board may from time to time determine. In the event an Option granted under the Plan or portion thereof expires, terminates or is canceled for any reason without having been exercised, the underlying shares with respect to such Option shall be available for future grants of Options. Shares that are deliverable to the Company in full or partial payment of an Option purchase price shall not become available for the grant of other Options under this Plan. ARTICLE VI 5 ADMINISTRATION 6.1. The Committee shall have full and exclusive authority to administer, construe and interpret the Plan, and to adopt such rules, regulations and guidelines and perform such other acts relating to the Plan, including the delegation of administrative responsibilities which it believes reasonable and proper. 6.2 The Committee shall have the exclusive right to grant Options pursuant to the terms of the Plan and shall, in its sole discretion, determine which Key Employees shall be granted Options, the number of shares of Common Stock subject to any such Options, the duration for which such Options may be exercised and the terms and conditions of the Options. All claims by Optionees arising under the Plan shall be presented to the Committee. The acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of the Plan, including the severability of any and all of the provisions hereof shall be conclusive, final and binding. Employees of the Company and its Subsidiaries shall not have any claim or right to be granted an Option and there shall be no obligation on the part of the Committee, in granting Options, to treat eligible employees uniformly. 6.3 In the event legal counsel to the Company determines, in its sole discretion, that the Company is in possession of material, nonpublic information about the Company, then any grants made pursuant to this Plan shall be suspended until the second trading day after public dissemination of such information. In such event, the Option shall be deemed to be granted on the second trading day after public dissemination of such information. ARTICLE VII GRANTS TO DIRECTORS 7.1 INITIAL GRANT. An Option to purchase 5,000 shares of Common Stock shall automatically be granted to each New Outside Director upon the later of (i) the day of the Company's annual meeting of shareholders at which this Plan is approved and ratified by the Company's shareholders and such director is serving as such, (ii) the day of the Company's annual meeting of shareholders at which such director is first elected or (iii) the day such New Outside Director is first appointed by the Board to be a director, whichever is applicable; provided, that if a New Outside Director who previously received such an Initial Grant terminates his or her service as a director and is subsequently elected or appointed to the Board, such director shall not be eligible to receive a second Initial Grant. 7.2 PERIODIC GRANTS. A NQSO to purchase 30,000 shares of Common Stock at their Fair Market Value shall automatically be granted to each Outside Director who is serving as such immediately following the 1996 annual meeting of shareholders and on the day of each annual meeting of shareholders every three years thereafter. In the event an individual shall become an Outside Director following the 1996 annual meeting of shareholders but prior to the end of such three year period, he or she shall automatically receive a NQSO to purchase 30,000 shares of Common Stock which shall be reduced on a pro rata basis for each full calendar month during 6 such three year period which such individual was not an Outside Director. The grant of a NQSO pursuant to this Section 7.2 shall be subject to adjustment pursuant to Article IX of this Plan. 7.3 VESTING OF PERIODIC GRANTS. Each Periodic Grant shall vest and become immediately exercisable as follows: (i) 10,000 shares or pro rata portion thereof of Common Stock shall become immediately exercisable on the initial date of grant set forth in Section 7.2 above and (ii) 10,000 shares or pro rata portion thereof of Common Stock shall become exercisable on May 1st of each succeeding year thereafter. For purposes of this Section 7.3, the term "pro rata portion" shall be determined in accordance with the terms set forth in Section 7.2. 7.4 TERMINATION OF DIRECTORSHIP. If a Outside Director shall cease to be a member of the Board, the following rules shall apply: (A) TERMINATION BY REASON OF DEATH. If an Outside Director shall die while a member of the Board, each Option held by such Outside Director shall, to the extent exercisable on such date of death, be exercisable by his or her legal representatives or beneficiaries until the sooner of (i) twelve months after the date of death or (ii) the date of termination set forth in the grant of such Option. (B) TERMINATION BY REASON OF DISABILITY. If the Committee shall determine that an Outside Director has suffered a Disability, each Option held by such Outside Director shall, to the extent exercisable on the date the Committee has determined that an Outside Director has suffered a Disability, continue to be exercisable until the sooner of (i) eighty-nine days after the date the Committee has determined that an Outside Director has suffered a Disability or (ii) the date of termination set forth in the grant of such Option. (C) TERMINATION WITH CAUSE. If an Outside Director shall cease to be a member of the Board because he or she is removed With Cause, all Options granted to the Outside Director shall be immediately forfeited. (D) TERMINATION WITHOUT CAUSE. If an Outside Director shall cease to be a member of the Board for any reason other than as set forth in Sections 7.4(a), (b) or (c), each Option held by such Outside Director shall, to the extent exercisable on such date of termination, continue to be exercisable until the sooner of (i) thirty-six months after the date of such termination or (ii) the date of termination set forth in the grant of such Option. ARTICLE VIII TERMS AND CONDITIONS OF OPTIONS 8.1 INCENTIVE AND NONSTATUTORY OPTIONS. Options granted under the Plan shall be designated by the Committee as either (i) ISOs or (ii) NQSOs. In no event shall a New Outside Director or Outside Director receive an ISO unless otherwise permitted under the Code. Grants of an Option for fractional shares shall not be made. 8.2 OPTION PRICE. The price at which Common Stock may be purchased upon exercise of an Option shall be established by the Committee; provided, however, that the option price per share 7 for an ISO, an Initial Grant and a Periodic Grant shall not be less that the Fair Market Value of a share of Common Stock on the date of grant. 8.3 TERM OF OPTIONS. The Committee shall determine the dates and terms upon which Options may be exercised, including whether such Options shall be exercisable in installments. The Committee may amend an Option to accelerate the dates after which Options may be exercised. In no event shall the expiration date of a NQSO granted pursuant to Article VII be later than the day preceding the tenth annual anniversary of the date on which the NQSO was granted. 8.4 TRANSFER OF OPTION SHARES. Except as otherwise set forth in this Plan, shares acquired by persons subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, pursuant to the exercise of an Option or portion thereof, shall not be sold or transferred for at least six months after the date of grant. 8.5 OPTION AGREEMENT. Options granted pursuant to this Plan shall be evidenced by written Option Agreements executed by both the Company and the Optionee. Option Agreements shall be subject to the terms and conditions of the Plan and shall contain such other provisions as the Committee may deem advisable and which are not inconsistent with the terms hereof. Option Agreements shall state the total number of shares of Common Stock subject to each grant, the purchase price of a share of Common Stock under an Option, the expiration date for the Option and whether the Option is an ISO or a NQSO. 8.6 ISOS GRANTED TO TEN PERCENT SHAREHOLDER EMPLOYEES. Notwithstanding anything in this Plan to the contrary, the Committee may not grant an ISO to any employee who, at the time the ISO is granted, owns (through application of attribution rules set forth in Code Section 425 (d)) more than ten percent of the total combined voting power of all classes of stock of the Company or its Subsidiaries, unless (i) the option price is at least 110 percent of the Fair Market Value of a share of Common Stock on the date the Option is granted and (ii) the expiration date of the Option is a date not later than the day preceding the fifth annual anniversary of the date on which the Option is granted. 8.7 EXERCISE OF OPTION. Each Option or portion thereof shall be exercised by delivery of a written notice of exercise to the Company on a form to be provided by the Company together with payment of the full price of the shares being acquired pursuant to the Option. An Optionee may exercise an Option with respect to less than the full number of shares for which an Option may then be exercised, but in no event may an Optionee exercise an Option with respect to a fractional share. The price of shares purchased pursuant to the exercise of an Option or portion thereof, may be paid (i) in United States dollars in cash or by check or bank draft payable to the order of the Company; (ii) through the delivery of shares of Common Stock with an aggregate Fair Market Value on the date of exercise equal to the option price; (iii) by arrangement with a broker which is acceptable to the Committee where payment of the option price is made pursuant to an irrevocable direction to the broker to deliver all or part of the proceeds from the sale of the shares to the Company; or (iv) by any combination of the above; provided, however, that the Committee shall within its sole discretion, determine whether Common Stock may be used to pay the Option exercise price and acceptable methods for tendering such stock. 8.8 NONTRANSFERABILITY OF OPTIONS. Options granted pursuant to the Plan shall not be transferable by any Optionee other than by will, the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code. 8 8.9 TERMINATION OF OPTIONS. If any one or more of the events set forth in this Section 8.9 shall occur, the following rules shall apply to an Optionee (other than an Outside Director): (A) TERMINATION BY REASON OF DEATH. If an Optionee shall die while employed by the Company or its Subsidiaries, each Option held by such Optionee shall, to the extent exercisable on such date of death, be exercisable by his or her legal representatives or beneficiaries until the sooner of (i) twelve months after the date of death or (ii) the date of termination set forth in the grant of such Option. (B) TERMINATION BY REASON OF DISABILITY. If the Committee shall determine that an Optionee has suffered a Disability while employed by the Company or its Subsidiaries, each Option held by such Optionee shall, to the extent exercisable on the date the Committee has determined that an Optionee has suffered a Disability, continue to be exercisable until the sooner of (i) eighty-nine days after the date the Committee has determined that an Optionee has suffered a Disability or (ii) the date of termination set forth in the grant of such Option. (C) TERMINATION WITH CAUSE. If during the time in which an Option is exercisable by an Optionee (i) an Optionee, without the prior written consent of the Committee (A) discloses any confidential information regarding the Company or its Subsidiaries to anyone outside the Company or uses such information other than in connection with services rendered to or on behalf of the Company, (B) renders services for any entity or otherwise engages in any business activity, directly or indirectly, which in the sole judgment of the Committee is or becomes competitive with the Company or which is or becomes otherwise in conflict with the interests of the Company, or (C) violates the terms of any non-solicitation and non-disclosure agreement between the Optionee and the Company, or (ii) an Optionee's employment with the Company or a Subsidiary terminates With Cause, then each such Option shall immediately terminate and be forfeited. (D) TERMINATION WITHOUT CAUSE. If an Optionee shall cease to be employed by the Company or its Subsidiaries for any reason other than as set forth in Sections 8.9(a), (b) or (c), each Option held by such Optionee shall, to the extent exercisable on such date of termination, continue to be exercisable until the sooner of (i) eighty-nine days after the date of termination or (ii) the date of termination set forth in the grant of such Option. 8.10 WITHHOLDING. The Company may make such provisions and take such steps as it deems necessary or appropriate for the withholding of any taxes which the Company is required by law or regulation of any governmental authority to withhold in connection with any Option or the exercise thereof. In accordance with any applicable administrative guidelines it establishes, the Committee may allow an Optionee to pay the amount of taxes required by law to be withheld by reason of an exercise of an Option by permitting the Optionee to deliver to the Company shares of Common Stock having a fair market value, as determined by the Committee, equal to the amount of such required withholding taxes. 8.11 NOTIFICATION OF SALE. Optionees shall immediately notify the Company in writing of any disposition and the amount realized thereon to the extent any Optionee disposes of shares of Common Stock acquired upon the exercise of an ISO (i) within two years after the date of the grant of the ISO under which the stock was acquired or (ii) within one year after the transfer of such shares to the Optionee. 9 8.12 LIMITATION ON ISOS. The aggregate Fair Market Value (determined as of the date an ISO is granted) of the shares of Common Stock for which any employee may first exercise ISO granted under this Plan and all other stock option plans of the Company and its Subsidiaries, in any calendar year, shall not exceed $100,000. 8.13 LIMITATION ON AWARDS OF OPTIONS. Notwithstanding any other provision of this Plan, an Optionee shall not receive an Option covering more than 250,000 shares of Common Stock during any calendar year. ARTICLE IX ADJUSTMENTS 9.1 In the event that at any time the Company shall enter into a transaction described in Section 424 of the Code, declare a stock dividend, stock split or otherwise enter into a transaction which in the sole judgment of the Committee requires action to adjust the terms of outstanding Options, the Committee may take such action to preserve the Optionee's rights substantially proportionate to the rights existing prior to such event. To the extent that such action shall include an increase or decrease in the number of outstanding shares of Common Stock, the number of shares available under this Plan shall be proportionately increased or decreased. Any adjustment may provide for the elimination of any fractional share which might otherwise become subject to an Option. In the event of a Change of Control, notwithstanding any other provision of the Plan or set forth in an Option Agreement, including without limitation any installment provisions in such Option Agreement, the right of an Optionee to exercise his or her Option shall be accelerated to a right to exercise the Option in full, or with respect to any portion thereof in the sole discretion of the Optionee, beginning with the date immediately prior to the Change of Control and ending with the termination date that otherwise would be applicable under the terms of the Option if there had not been any Change of Control, and in any event without regard to any installment provisions under the terms of the Option. 9.2 For purposes of Article IX, a "Change of Control" shall be deemed to have occurred if: (A) any Person, which shall mean a "person" as such term is used in Sections 13(d) and 24(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; (B) during any period of twenty-four (24) consecutive months, individuals who at the beginning of such period constitute the Board, and any new director whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors (other than in connection with a contested election) before the beginning of the period cease, for any reason, to constitute at least a majority thereof; (C) the stockholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) the sale or disposition by the Company of all or substantially all of the Company's 10 assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(i) or (d)(ii); or (D) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than (i) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation or (ii) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute more than 50% of the directors of the surviving entity immediately after such merger or consolidation. For purposes of this subparagraph (d), the term "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the twenty-four (24) consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director nominated in connection with a contested election or designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(ii), (d)(i) or (d)(ii) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. ARTICLE X MISCELLANEOUS 10.1 LIMITATION OF RIGHTS. Nothing in this Plan or any document describing or referring to this Plan shall be deemed to confer on any Optionee the right to continue in the employ of or as a director of the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment or directorship of any such person with or without cause. Neither the Optionee nor any person entitled to exercise the Optionee's rights as contemplated in this Plan shall have any rights of a shareholder with respect to the shares subject to each Option, except to the extent that and until such shares shall have been issued upon the exercise of each Option. 10.2 GOVERNING LAW. The obligation of the Company to issue or transfer and deliver shares for Options exercised pursuant to the Plan shall be subject to all laws, regulations and rules which are in effect from time to time and promulgated by applicable governmental entities and stock exchanges on which the Common Stock is listed and traded. Acceptance of an Option shall be deemed to constitute consent to the jurisdiction and venue of the Supreme Court of the State of New York located in Erie County, New York and the United States District Court for the Western District of New York for all purposes in connection with any suit, action, or other proceeding relating to such Option, including the enforcement of any rights under this Plan or any agreement or other document, and shall be deemed to constitute consent to any process or notice of motion in connection with such proceeding being served by certified or registered mail or personal service within or without the State of New York, provided a reasonable time for appearance is allowed. 11 10.3 USE OF PROCEEDS. The proceeds received by the Company from the sales of the shares pursuant to the exercise of Options granted under this Plan shall be added to the Company's general funds and used for general corporate purposes. Any Common Stock received in payment of shares pursuant to this Plan may be retired or retained in the Company's treasury and reissued. ARTICLE XI AMENDMENT OR TERMINATION OF PLAN 11.1 The Committee may, from time to time, amend, suspend, or terminate the Plan or any provision thereof; provided, however, to the extent required to qualify the Plan under Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended, no amendment shall be made more than once every six (6) months that would change the amount, price or timing of an Initial Grant or Periodic Grant other than to comport with changes in the Code, the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder; and provided, further, that no amendment to the Plan shall be made which would, without the prior approval of the shareholders of the Company: (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the number of securities which may be issued under the Plan, or (iii) materially modify the requirements as to eligibility for participation in the Plan. No amendment, suspension or termination of the Plan or any portion thereof shall, without the written consent of the Optionee, affect any Option or other right theretofore granted to such Optionee under the Plan. Notwithstanding anything herein to the contrary, the Committee may replace any existing Options and in connection therewith require the voluntary surrender of all or a portion of any Option granted under the Plan as a condition precedent to the grant of a replacement Option to an Optionee. Subject to the provisions of the Plan, such new Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted. Upon surrender, such Options shall be canceled and the shares previously subject to them shall be available for the grant of other Options. 11.2 To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan (i) establish special rules applicable to Options granted to Optionees who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Options to such Optionees in accordance with those rules. EX-10.P 3 EXHIBIT 10(P) 1 EXHIBIT 10(p) ------------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- First Employee Stock Purchase Plan (Eight Amendment and Restatement). 2 COMPUTER TASK GROUP, INCORPORATED FIRST EMPLOYEE STOCK PURCHASE PLAN (EIGHTH AMENDMENT AND RESTATEMENT) - -------------------------------------------------------------------------------- 1. NAME AND PURPOSE. The name of the plan is the Computer Task Group, Incorporated First Employee Stock Purchase Plan (the "Plan"). The Plan is intended to provide an opportunity for employees of Computer Task Group, Incorporated (the "Company") and its subsidiaries ("Subsidiaries") to purchase shares of common stock of the Company ("Shares") and thereby provide an incentive for them to remain in the employ of the Company and its Subsidiaries and to give them a proprietary interest in its success. The term "Subsidiary" shall have the meaning set forth in Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code and shall be interpreted and construed in accordance with such purpose. 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") who shall not receive any compensation for administering the Plan. The Compensation Committee may from time to time interpret, construe and amend the Plan, adopt rules and regulations relating to its administration and appoint one or more agents to assist it in the administration of the Plan. Any interpretation or construction of any provision of the Plan by the Compensation Committee shall be final, conclusive and binding. The Company shall pay all expenses of the administration of the Plan. 3. DURATION OF PLAN. The Plan shall remain in effect until terminated by the Compensation Committee or as otherwise set forth herein. Each calendar year shall be a Plan Year. 4. SHARES SUBJECT TO PLAN. The maximum aggregate number of Shares which can be purchased pursuant to the Plan by all employees of the Company and its subsidiaries shall be 5,500,000, except as adjusted pursuant to Section 15 hereof. 5. ELIGIBILITY. All employees of the Company and its Subsidiaries shall be eligible to participate in the Plan and to purchase Shares as hereafter set forth, except that no employee may participate in the Plan, if immediately after an option is granted to him or her hereunder, he or she would own (as defined in Section 424 of the Code) Shares of the Company (including shares of the Company which he or she may purchase under outstanding options) possessing five (5%) percent or more of the total combined voting power or value of all classes of shares of the Company. In addition, no employee may participate in the Plan if the option granted to him or her under the Plan would permit him or her to purchase Shares under all employee stock purchase plans (as defined in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of such Shares (determined at the time the option hereunder is granted) in any Plan Year. For purposes of this paragraph, the rules set forth in Section 423(b)(8)(A), (B) and (C) of the Code shall be applicable. 6. PURCHASE OF SHARES; GRANT OF OPTIONS. Shares shall be purchased under the Plan by the exercise of options granted hereunder. Each employee who participates in the Plan ("Plan Participant") shall be granted an option on each payday of the Company which shall entitle him or 3 her to purchase Shares under the Plan up to the maximum number of Shares which he or she can purchase with no more than ten (10%) percent of the total compensation paid to him or her by the Company or any of its Subsidiaries. Such amount shall be proportionately reduced to reflect the employee's maximum length of service with the Company or any of its subsidiaries in the Plan Year. The options shall be exercisable only in the manner set forth in Section 8 hereof. 7. PURCHASE PRICE. The purchase price for Shares purchased under this Plan shall be the fair market value of the Shares on the last day immediately preceding the payday on which the Shares are purchased (the "Price Date"). The term "fair market value" shall be the closing price for a Share as reported by the National Association of Securities Dealers listing for New York Stock Exchange Composite Transactions at the close of business on the Price Date. In the event that there was no such report for such day, the fair market value shall be such closing price on the first preceding day for which there is such a report. In no event shall the purchase price for Shares purchased hereunder be less than the par value thereof. 8. EXERCISE OF OPTIONS. The options granted hereunder shall be exercisable on each payday of the Company or if applicable, the relevant Subsidiary, but only by a payroll deduction authorized pursuant to Section 9 hereof, and only to purchase not more than the maximum number of Shares which, at the purchase price determined in accordance with Section 7 hereof, an employee can purchase pursuant to Section 6 hereof. If on any payday an employee fails to exercise an option, in whole or in part, the unexercised portion of the option shall lapse and cannot thereafter be exercised. 9. COMMENCEMENT OF PARTICIPATION IN THE PLAN. An employee may commence participation in the Plan at any time by completing and filing with the Company a "Payroll Deduction Authorization Form" authorizing payroll deductions from his or her pay. An employee who has withdrawn from the Plan may recommence participation in the Plan at any time by completing and filing a form with the Company. Participation in the Plan shall commence or recommence, as the case may be, on the first payday following receipt of the form by the Company's Benefits Department in Buffalo, New York or, in the case of a Subsidiary, at the applicable Benefits Department. 10. EMPLOYEE ACCOUNTS AND PAYROLL DEDUCTIONS. The Company shall maintain for each Plan Participant a separate bookkeeping account ("Account") to which shall be credited all payroll deductions made for him or her and from which shall be deducted amounts used to purchase Shares hereunder. On each payday a payroll deduction in the amount specified in the most recent Payroll Deduction Authorization Form filed with the Company or any of its Subsidiaries shall be made and the amount thereof shall be credited to the Plan Participant's Account. All amounts in the Account shall then be used to purchase the maximum number of whole Shares which can be purchased at the purchase price determined in accordance with Section 7 hereof. Any amounts remaining in the Account shall be held by the Company without payment of interest thereon until the next payday and shall then be used to purchase additional whole Shares. A Plan Participant may change the amount of his or her payroll deduction (subject always to the limitation set forth in this Plan) by completing and filing with the Company or the relevant Subsidiary a new Payroll Deduction Authorization Form with the Company's Benefits Department in Buffalo, New York or the relevant benefits department of a Subsidiary. 4 11. WITHDRAWAL FROM THE PLAN; TERMINATION OF PARTICIPATION IN THE PLAN. A Plan Participant may withdraw from the Plan at any time and for any reason by delivering a written notification of withdrawal to the Company or the relevant Subsidiary. Any withdrawal shall become effective immediately upon receipt of the written notification by the Company's Benefits Department in Buffalo, New York or the relevant benefits department of a Subsidiary. A Plan Participant's participation in the Plan shall automatically terminate upon his or her ceasing to be an employee of the Company or Subsidiary for any reason. An employee who has withdrawn from the Plan may recommence participation in the Plan by completing and filing with the Company or the relevant Subsidiary a new Payroll Deduction Authorization Form. Upon withdrawal or termination, all amounts held by the Company or a Subsidiary, if applicable, in the Account of an employee shall be returned to him or her or to his or her estate together with a certificate for Shares purchased hereunder, if requested. 12. NONTRANSFERABILITY. The options granted hereunder may not be assigned, transferred or hypothecated and are exercisable only by the Plan Participant. 13. RIGHTS AS A SHAREHOLDER. A Plan Participant shall have all the rights and privileges of a shareholder of the Company with respect to Shares purchased pursuant to the Plan (to the extent permitted by applicable law) on the date the Shares are purchased. 14. REPORTS; ISSUANCE OF CERTIFICATES FOR SHARES. On or before the last business day of June, September, December and March, a report as to the status of each Plan Participant's Account and certificates representing the Shares which he or she purchased in the first, second, third and fourth calendar quarters, if requested, will be sent to him or her. Shares issued hereunder shall be in the name of the Plan Participant. 15. ADJUSTMENTS. If there is any change in the outstanding Shares of the Company as a result of a stock dividend, stock split or combination of Shares or any other change, or exchange for other securities, by reclassification, reorganization, redesignation, merger, consolidation, or recapitalization or otherwise, the Compensation Committee may make appropriate adjustments in the number and kind of shares and prices per share of Shares subject to outstanding options in order to preserve the relative benefits to optionees. 16. AMENDMENT TO THE PLAN. The Compensation Committee may amend the Plan at any time in its sole discretion; provided, however, that without shareholder approval, the Plan may not be amended; (a) to materially increase the number of Shares which may be purchased pursuant to the Plan; (b) materially modify the requirements as to eligibility for participation in the Plan; (c) materially increase the benefits accruing to Participants under the Plan; or (d) if the effect of the amendment is to cause the Plan to no longer be qualified as an "employee stock purchase plan" under Section 423 of the Code. 17. TERMINATION OF THE PLAN. The Plan may be terminated by the Compensation Committee at any time in its sole discretion and shall terminate automatically, without Compensation Committee action: (i) whenever a required registration statement under the Securities Act of 1933, as amended, is not in effect with respect to the Shares offered pursuant to 5 the Plan or (ii) whenever the maximum number of Shares which may be purchased pursuant to the Plan have been purchased. EX-10.Q 4 EXHIBIT 10(Q) 1 EXHIBIT 10(q) ------------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- 1991 Restricted Stock Plan. 2 COMPUTER TASK GROUP, INCORPORATED 1991 RESTRICTED STOCK PLAN - -------------------------------------------------------------------------------- ARTICLE I DEFINITIONS 1.1. For purposes of this Plan: (A) The term "AWARD" shall mean a grant of Restricted Shares of the Company's Common Stock to a Recipient. (B) The term "BOARD" shall mean the Board of Directors of the Company. (C) The term "CODE" shall mean the Internal Revenue Code of 1986, as amended. (D) The term "COMMITTEE" shall mean the Compensation Committee of the Board. When taking action with respect to the Plan or Awards granted under the Plan, the Committee shall composed solely of two or more Non-Employee Directors. (E) The term "COMMON STOCK" shall mean the common stock, par value $.01 per share, of the Company and any shares of stock or other securities received as a result of the adjustments contemplated in this Plan. (F) The term "COMPANY" shall mean Computer Task Group, Incorporated. (G) The term "DISABILITY" shall mean permanent and total disability as defined in Section 22(e)(3) of the Code. (H) The term "NON-EMPLOYEE DIRECTOR" shall mean a director who: (i) is not currently an officer (as defined in Rule 16a-(f) of the Securities and Exchange Commission (the "SEC") of the Company or parent or subsidiary of the Company, or otherwise currently employed by the Company or a parent or subsidiary of the Company; (ii) does not receive compensation, either directly or indirectly, from the Company or a parent or subsidiary of the Company, for services rendered as a consultant or in a capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosures would be required pursuant to Item 404(a) of Regulation S-K of the SEC; (iii) does not posses an interest in any other transaction for which disclosures would be required pursuant to Item 404(a) of Regulation S-K of the SEC; and (iv) is not engaged in a business relationship for disclosures would be required pursuant to Item 404(b) of Regulation S-K of the SEC. 3 (I) The term "PLAN" shall mean the Computer Task Group, Incorporated 1991 Restricted Stock Plan, as amended from time to time. (J) The term "RECIPIENT" shall mean an employee of the Company or its Subsidiaries who receives an Award pursuant to this Plan. (K) The term "RESTRICTED PERIOD" shall mean the period established by the Committee commencing on the date an Award is granted to a Recipient during which the restrictions set forth in this Plan or a Restricted Stock Agreement shall be applicable. (L) The term "RESTRICTED SHARES" or "RESTRICTED STOCK" shall mean shares of Common Stock granted to a Recipient, subject to the restrictions set forth in Section 7.3 hereof and in each Award. (M) The term "RESTRICTED STOCK AGREEMENT" shall mean an agreement entered into by the Recipient and the Company setting forth the terms of the Award as set forth in Article VII. (N) The term "SUBSIDIARY" shall have the meaning as set forth in Section 424 of the Code or any successor provision and shall include any corporation which becomes a subsidiary after the date of adoption of the Plan. ARTICLE II PURPOSE 2.1. The purpose of the Computer Task Group, Incorporated 1991 Restricted Stock Plan is to promote the growth and profitability of the Company and its Subsidiaries by providing the incentive of long- term equity rewards consisting of Common Stock, subject to certain restrictions as provided herein, to key employees of the Company and its Subsidiaries who have had, and who are expected to continue to have a significant impact on the performance of the Company, to encourage such employees to remain with the Company and to further identify their interests with those of the Company's stockholders. ARTICLE III EFFECTIVE DATE AND EXPIRATION OF PLAN 3.1. This Plan has been adopted by the Board effective as of January 25, 1991. If this Plan is not approved within one year after the date of its adoption by the Board by the vote at a meeting of the stockholders of the Company of the holders of a majority of the shares of Common Stock present or represented at such meeting, this Plan and all Awards shall terminate at the time of such meeting or, if no such meeting is held, after the passage of one year from the date the Plan was adopted by the Board. Unless earlier terminated by the Board or the Committee, the Plan shall terminate when all Awards authorized under the Plan have been granted and all shares subject to such Awards have been issued and are no longer subject to forfeiture under the terms hereof. 4 ARTICLE IV ELIGIBILITY 4.1. Participation in and Awards under the Plan shall be limited to key employees of the Company and its Subsidiaries. Key employees will, in general, be those employees of the Company and its Subsidiaries in positions of responsibility whose business decisions, in the sole judgment of the Committee, contribute to the overall success of the Company and its Subsidiaries. ARTICLE V SHARES SUBJECT TO THE PLAN 5.1. The total number of Restricted Shares of Common Stock of the Company for which Awards may be granted under this Plan shall not exceed 400,000 shares, subject to adjustment in accordance with Article VIII hereof. Such shares shall be treasury shares of the Company. Shares of Common Stock issued as Restricted Shares under the Plan that are subsequently forfeited pursuant to Article VII hereof shall be available for grants of future Awards. ARTICLE VI ADMINISTRATION 6.1. The Committee shall have full and exclusive authority to administer, construe and interpret the Plan, and to adopt such rules, regulations and guidelines and perform such other acts relating to the Plan, including the delegation of administrative responsibilities which it believes reasonable and proper. 6.2. The Committee shall have the exclusive right to grant Awards pursuant to the terms of this Plan and shall, in its sole discretion, determine which employees of the Company and its Subsidiaries shall be granted Awards, the number of Restricted Shares of Common Stock subject to any Award, the times at which Awards will be granted and subject to forfeiture, and any other terms and conditions of such Awards. All claims by Recipients arising under this Plan shall be presented to the Committee. The acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of this Plan, including the severability of any and all of the provisions hereof shall be conclusive, final and binding. Employees of the Company and its Subsidiaries shall not have any claim or right to be granted an Award and there shall be no obligation on the part of the Committee, in granting Awards, to treat eligible employees uniformly. ARTICLE VII TERMS AND CONDITIONS OF AWARDS 5 7.1 AWARDS OF RESTRICTED SHARES. The Committee shall have the exclusive right and power to grant Awards of Restricted Shares at any time either alone or in connection with options or securities granted pursuant to other Company plans. Subject to the terms and conditions of this Plan, an Award shall be effective for the Restricted Period and shall not be revoked. Once an Award has been granted to a Recipient, share certificates representing the number of Restricted Shares shall be registered in the name of the Recipient but shall be held by the Company for the account of the Recipient. Each certificate evidencing the Restricted Shares subject to an Award may bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. 7.2 RESTRICTED STOCK AGREEMENT. Awards granted pursuant to this Plan shall be evidenced by a written agreement executed by both the Company and the Recipient which shall state the number of Restricted Shares granted, the Restricted Period, and such other terms, conditions and restrictions as the Committee shall approve. 7.3 RESTRICTED PERIOD. The Committee shall establish the Restricted Period for each Award or portion therof at the time an Award is granted and may establish a different Restricted Period for each Award or portion thereof. The Committee shall have the power, in its sole discretion, to accelerate the expiration of the Restricted Period with respect to any part or all of the Restricted Shares awarded to a Recipient, and may require, as a condition of any such Award, that the Recipient shall have delivered a stock power endorsed in blank relating to the shares covered by such Award. Stock powers delivered to the Company in connection with any Award shall be returned in accordance with the provisions of Section 7.6 hereof. A Recipient may be granted more than one Award. 7.4 TERMINATION OF EMPLOYMENT. Except as may otherwise be set forth in the grant of an Award, if a Recipient ceases to be an employee of the Company or its Subsidiaries prior to the expiration of the applicable Restricted Period by reason of death or Disability, all restrictions set forth in this Plan and Restricted Stock Agreement(s) shall terminate as to any Restricted Shares granted to such Recipient which are still subject to restriction, and certificates for the proper number of shares of Common Stock free of all restrictions described herein shall be delivered to a Recipient or his beneficiary or estate, as the case may be, in accordance with Section 7.6 hereof. If a Recipient ceases to be an employee prior to the end of the Restricted Period for any other reason, such Recipient shall immediately forfeit all Restricted Shares. 7.5 SHAREHOLDER RIGHTS. During the Restricted Period, the Recipient of an Award shall be entitled to receive all dividends and shall have the right to vote such Restricted Shares as the record owner thereof. 7.6 DELIVERY OF SHARES. Certificates for the proper number of shares of Common Stock free of the restrictions set forth in this Plan and any Restricted Stock Agreement, registered in the name of a Recipient, shall be delivered to a Recipient or his or her beneficiary or estate, as the case may be, upon termination of the Restricted Period or at such earlier time as provided for in accordance with Section 7.4 hereof. 7.7 DESIGNATION OF BENEFICIARY. Recipients shall have the right to designate one or more persons to receive, in the event of his or her death, any rights to which he or she would be entitled under this Plan. Designations shall be made in writing and filed with the Committee on a form to be provided by the Company. The designation of a beneficiary may be changed or revoked by a 6 Recipient at any time by filing a written statement of such change or revocation with the Committee. A Recipient's estate shall be deemed to be his or her beneficiary in the event a beneficiary is not otherwise designated. 7.8. TAXES. The Company may make such provisions and take such steps as it deems necessary or appropriate for the withholding of any taxes which the Company is required by law or regulation of any governmental authority to withhold in connection with any Award pursuant to this Plan. 7.9. RESTRICTIONS ON TRANSFERABILITY. The Restricted Shares granted pursuant to an Award shall not be sold, transferred, assigned, pledged or otherwise disposed of by a Recipient during the Restricted Period. ARTICLE VIII ADJUSTMENTS 8.1. In the event that at any time the Company shall enter into a transaction described in Section 424(a) of the Code, declare a stock dividend, stock split or otherwise enter into a transaction which in the sole judgment of the Committee requires action to adjust the terms of outstanding Awards, the Committee may take such action to preserve a Recipient's rights substantially proportionate to the rights existing prior to such event. To the extent that such action shall include an increase or decrease in the number of shares of Common Stock subject to outstanding Awards, the number of shares available under this Plan shall be proportionately increased or decreased. Any adjustment may provide for the elimination of any fractional share which might otherwise become subject to an Award. ARTICLE IX MISCELLANEOUS 9.1. CONTINUED EMPLOYMENT. Nothing in this Plan or any document describing or referring to this Plan shall be deemed to confer on any Recipient of an Award the right to continue in the employ of the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 9.2. GOVERNING LAW. This Plan and all actions taken hereunder shall be governed by the laws of the State of New York and all Awards granted pursuant thereto shall be subject to all applicable federal and state laws, rules and regulations and to such approval by any regulatory or governmental agency as may be required. ARTICLE X AMENDMENT OR TERMINATION OF PLAN 10.01. The Committee may, from time to time, amend, suspend, or terminate this Plan or any provision thereof; provided, however, that no amendment to this Plan shall be made which would, without the prior approval of the Shareholders of the Company: (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the 7 number of securities which may be issued under the Plan, or (iii) materially modify the requirements as to eligibility for participation in the Plan. EX-10.R 5 EXHIBIT 10(R) 1 EXHIBIT 10(r) ------------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Executive Compensation Plans and Arrangements. 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, as restated - Annual Report on Form 10-K for the year ended December 31, 1994, Exhibit 10(h). 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. 1996 Key Employee Compensation Plans - Annual Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(r). CTG Non-Qualified Key Employee Deferred Compensation Plan - Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 10(cc). EX-10.S 6 EXHIBIT 10.S 1 EXHIBIT 10(s) COMPUTER TASK GROUP, INCORPORATED --------------------------------- Employment Agreement. 2 EMPLOYMENT AGREEMENT -------------------- This Agreement made this th day of October, 1995 effective as of January 1, 1996 is by and between COMPUTER TASK GROUP EUROPE B.V., a Dutch corporation having its registered office at Neptunusstraat 20, 2132 JB Hoofddorp, The Netherlands, hereinafter referred to as the "Company"; and NICO H. MOLENAAR residing at 16231 GRAAN VOOR VISCH, HOOFDDORP, THE NETHERLANDS hereinafter referred to as "the Employee". WHEREAS, the Employee is to assume the position of Co-Managing Director of the Company effective January 1, 1996 and WHEREAS, the parties wish to embody in a written agreement the terms and conditions under which the Employee shall serve the Company; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Company and Employee agree as follows: ARTICLE 1: DURATION AND TERMINATION ----------------------------------- 1. The employment shall be entered into for an indefinite period of time. The employment may be terminated by the parties at any time, other than for urgent cause or weighty reason, subject to the provision that the Employer or Employee (as the case may be) shall give three (3) months' notice in the event of termination, and further subject to the provisions of Article 13 herein. The employment may be terminated only in writing. 2. The employment agreement shall in any event expire without prior notice at the end of the month in which the Employee reaches the age of 65. 3 ARTICLE 2: POSITION AND RESPONSIBILITIES ---------------------------------------- 1. The Employee shall hold the position of Co-Managing Director for Company. 2. The Employee will have the powers and duties set forth in the Articles of Association of the Company and he will be subject to the instruction and supervision of the Chairman and Chief Executive Officer of Computer Task Group, Inc., the penultimate parent corporation of Computer Task Group Europe B.V. The Chairman and Chief Executive Officer of Computer Task Group, Inc. shall be Co-Managing Director of the Company with the powers and duties as set forth in the Articles of Association of the Company. Except for actions taken in the ordinary course of business, consistent with past practice, employee shall obtain prior approval of the Co-Managing Director for any of the following actions: a. To appoint the auditors of the Company; b. To acquire, alienate or encumber real estate, capital assets or other assets; c. To lend monies, to issue guarantees and to grant credits; d. To contract money loans and credits in excess of a sum to be determined each year, not including the use of any credits already contracted or approved; e. To make investments the interest or value of which is in excess of a sum to be determined each year; f. To enter into contracts with a life of more than one year, unless the value involved is less than a sum to be determined each year by 50,000 DFL, or, if the contracts have been entered into for an indefinite period or for a term of less than one year, if the value involved is in excess of a sum to be determined each year by 50,000 DFL; 2 4 g. To determine bonuses and profit sharing arrangements, and to grant pension rights; h. To form reserves, whatever named; i. To perform any other transactions which have previously been clearly defined by the Articles of Association. 3. The responsibility of the Employee will be managing total operations of the Company, as a professional information technology company. The Employee will also have direct responsibility as head of Computer Task Group Belgium, Computer Task Group Nederland and Computer Task Group (U.K.) Limited. 4. The Employee reports to the Chairman and Chief Executive Officer of Computer Task Group, Inc. 5. The Employee covenants that he shall also perform duties other than the ones which are considered his usual duties, if such performance may be reasonably expected from him. 6. Absent prior written consent, the Employee shall not perform any other work for pay during his employment term, nor shall he, alone or with other persons, directly or indirectly, establish or conduct a business which is competitive with the Company's business or the business of the Company's affiliated companies, whatever its form, or take any financial interest in or perform work gratuitously or for remuneration for such a business. 7. The Employee covenants that he shall at all times be willing to perform work for a company affiliated with the Company. 3 5 ARTICLE 3: COMPENSATION ----------------------- 1. The Employee shall receive a gross base yearly salary of NLG 211,575 payable in 13 installments of DFL 16,275 (including 8% holiday allowance). This sum will be reviewed on an annual basis in writing between Employee and the Company to determine whether it will be increased. 2. The Employee shall be eligible to receive an annual incentive bonus of up to NLG 80,000 based upon and pro-rated against the attainment of annual operating profits by Computer Task Group Europe B.V. which will be established on an annual basis between the Managing Director and the Co-Managing Director. Such sum as is earned by the Employee will be paid by the Company no later than March 31 of each year. The payment of this bonus in any year shall not establish a precedent for any subsequent year. The incentive bonus amount may be adjusted annually in writing between the Company and the Employee. ARTICLE 4: WORKING HOURS AND WORKPLACE -------------------------------------- 1. The Employee shall perform his work at and from the Company's establishment in Hoofddorp, the Netherlands. 2. The Employee covenants that he shall work overtime outside the normal working hours whenever a proper performance of his duties so require. With respect to said overtime, no remuneration shall be paid. ARTICLE 5: COMPANY CAR ---------------------- 1. For the performance of work and personal use, the Company shall lease a car for use by the Employee. The Company car shall be of the type consistent for Employee's position as Co-Managing Director of the Company. 4 6 2. Subject to the provisions of Article 13, upon termination of the employment agreement, the Employee shall return the Company car to the Company, together with the keys, papers and other accessories. If the Employee is ill for a period longer than three (3) months, the Company shall be entitled to suspend the use of the car until the Employee resumes work. ARTICLE 6: PENSION ------------------ 1. The Employee shall take part in the existing pension scheme previously established by the Company for the Employee on the conditions specified in the pension plan. Notwithstanding the foregoing, the Employee understands and agrees that the Company reserves the right to amend the existing pension scheme. ARTICLE 7: HOLIDAYS ------------------- 1. The Employee shall be entitled to 29 holidays a year, which the Employee shall take in consultation with and after approval by the Company. 2. In addition to the holidays, the Employee is entitled to the following public holidays: - New Year's Day - Good Friday - Easter Monday - Queensday - Ascension Day - Whit Monday - Christmas Day - Boxing Day 5 7 ARTICLE 8: ILLNESS AND INCAPACITY FOR WORK ------------------------------------------ 1. If the Employee is ill or unable to perform work for any other reason, he shall be obliged to inform the Company thereof before 8:30 a.m. on the first day of absence. 2. The first six (6) weeks of illness the Company shall pay the Employee 100% of the agreed upon gross monthly salary. After the first six weeks of illness, and if the Employee receives a sickness benefit under the Sickness Benefits Act or the Disablement Insurance Act, the Company shall supplement such benefit for a period of twelve (12) months to the agreed upon gross monthly base salary. ARTICLE 9: INSURANCE -------------------- 1. The Employee, at Company's expense, will be a member of the medical group insurance (including family coverage), accident insurance and supplementary disablement insurance plan previously established by the Company. ARTICLE 10: NON-SOLICITATION AND NON-DISCLOSURE ----------------------------------------------- 1. CUSTOMER RELATIONSHIPS. Employee agrees that, except in the ordinary course of his employment with the Company, he will not, without the prior written consent of the Company, at any time during his employment with the Company and for one (1) year after termination of such employment, whether such termination be voluntary or involuntary, or with or without cause, directly or indirectly, either as an individual, officer, partner, consultant, contractor, employee, agent, shareholder, or financial backer of any firm or corporation: (a) sell or offer to sell, to any Customer of the Company, any goods or services of the type sold by the Company; (b) solicit any Customer of the Company to purchase any such goods or services from any person, firm or corporation other than the Company; 6 8 (c) solicit any Customer to terminate any existing business relationship with the Company or encourage any Prospective Customer not to enter into any business relationship with the Company, or (d) assist or encourage any person, firm or corporation in any way to do or attempt to do any of the foregoing. As used in this paragraph 1, a Customer shall mean and include any person, firm or corporation who (i) purchased any goods or services from the Company at any time during the last year of Employee's employment with the Company or (ii) at any time during the three (3) months after the termination of such employment. The term Prospective Customer shall mean any person, firm or corporation whose business was solicited by the Company for information technology services at anytime during the last year of the Employee's employment with the Company. 2. EMPLOYEE RELATIONSHIPS. Employee agrees that, except in the ordinary course of his employment with the Company, and for one (1) year after termination of such employment, whether such termination be voluntary or involuntary, or with or without cause, directly or indirectly, either as an individual, officer, partner, consultant, contractor, employee, agent, shareholder or financial backer of any firm or corporation: (a) enter into, with any employee of the Company, any business association or arrangement which competes or may be expected to compete with the Company; (b) solicit any employee of the Company to enter into any business association or arrangement which competes or may be expected to compete with the Company; (c) solicit any employee of the Company to leave the employment of the Company, or 7 9 (d) assist any person, firm or corporation, in any way, to do or attempt to do any of the foregoing. 3. CONFIDENTIAL AND PROPRIETARY INFORMATION. Employee agrees that, except in the ordinary course of his employment with the Company, he will not, without the prior written consent of the Company, at any time during his employment with the Company and after termination of such employment, whether such termination be voluntary or involuntary, or with or without cause, directly or indirectly, either as an individual, officer, partner, consultant, contractor, employee, agent, shareholder or financial backer of any firm or corporation: (a) disclose or furnish to any person, firm or corporation any Confidential Information; or (b) use any Confidential Information for his own benefit or for the benefit of any other person, firm or corporation. All records, files, memoranda, reports, drawings, plans, sketches, lists, documents and the like, operations information, financial information, business forecasts, marketing and business strategies, or confidential or proprietary information of the Company and any customer information, whether prepared by Employee or others, and any and all copies thereof, are the property of the Company and, in the event of the termination of Employee's employment with the Company, for any reason, he will promptly return to the Company any such materials in his possession. ARTICLE 11: RESTITUTION ----------------------- 1. Upon termination of the employment relationship, Employee shall be obligated to immediately return to the Company any materials, documents, information copied in whatever form, articles, keys and any other things belonging to the Company. 8 10 ARTICLE 12: INTELLECTUAL AND INDUSTRIAL PROPERTY RIGHTS ------------------------------------------------------- 1. Insofar as the rights specified hereinafter are not vested in the Company by operation of law on the grounds of the employment relationship between the parties, the Employee covenants that he shall transfer and, insofar as possible, hereby transfers to the Company any rights of whatever nature in or arising from inventions made by the Employee in the discharge of his duties, both in the Netherlands and abroad. 2. The Employee acknowledges that his salary includes reasonable compensation for the loss of intellectual and industrial property rights. ARTICLE 13: TERMINATION OF THE EMPLOYMENT AGREEMENT --------------------------------------------------- A. If the employment agreement is terminated at the request of the Company or its successors for a reason other than an urgent cause or a weighty reason (in the sense of a not used urgent cause) within the meaning of Article 7A:1637p and/or Article 7A:1639w of the Civil Code, the Company shall, upon termination of the employment agreement, grant the Employee compensation to substitute any present or future loss of income in the amount of one (1) times the last earned annual gross salary. It is expressly understood and agreed that earned incentive bonus and pension pay, shall be included in such annual salary for the purpose of the foregoing calculation. For purposes of this Agreement, no such purported termination shall be effective. ARTICLE 14: MISCELLANEOUS ------------------------- 1. This agreement constitutes the sole and exclusive agreement with respect to the subject matter hereof, and replaces and supersedes any prior written oral agreement between the parties with respect to the subject matter hereof. In no event may this agreement be modified, except in a writing executed between the parties. 2. This agreement shall be binding upon the successors and assigns of the Company. 9 11 3. This agreement shall be governed by the laws of the Netherlands. Drawn up in duplicate originals and signed in Hoofddorp, The Netherlands on the day and year first written above effective the day and year first written above. COMPUTER TASK GROUP EUROPE B.V. By: /s/ Nico H. Molenaar By: /s/ Gale S. Fitzgerald ------------------------- ----------------------------- Nico H. Molenaar Gale S. Fitzgerald Co-Managing Director Managing Director 10 EX-11 7 EXHIBIT 11 1 EXHIBIT 11 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Computation of fully diluted earnings per share under treasury stock method set forth in Accounting Principles Board Opinion No. 15. 2 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE UNDER TREASURY STOCK METHOD SET FORTH IN ACCOUNTING PRINCIPLES BOARD OPINION NO. 15 (amounts in thousands, except per share data)
Year Ended December 31: - ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Weighted-average number of shares outstanding during year................. 8,491 8,329 8,969 9,097 8,589 Add Common Stock equivalents -- Incremental shares under stock option plans............... 402 416 70 4 13 -- Incremental shares related to convertible preferred stock.................. - - 227 1,448 1,448 Number of shares on which fully diluted earnings per share based............................. 8,893 8,745 9,266 10,549 10,050 Net income/(loss) for the year............ $ 11,080 $ 10,776 $ 4,797 $(27,673) $ 5,602 Fully diluted earnings per share................................... $ 1.25 $ 1.23 $ 0.52 $ (2.62) $ 0.56 Primary earnings per share................................... $ 1.25 $ 1.23 $ 0.52 $ (2.62) $ 0.56
EX-13 8 EXHIBIT 13 1 EXHIBIT 13 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- 1996 Annual Report to Shareholders. 2 1996 ANNUAL REPORT CULTIVATING GROWTH Partners in Information Technology CTG is a leading provider of information technology (IT) services. Founded in 1966, CTG has 55 offices in North America and Europe and 5,000 talented IT professionals. CTG is listed on the NYSE under the symbol TSK. At CTG we have three major goals. First, to build strategic partnerships with our clients so we consistently provide value-added services that help them compete in their industries. Second, to attract and retain the best IT professionals and remain one of the best places to work in our industry. Third, to reward our shareholders by achieving solid returns. CTG's culture of knowledge exchange brings together the right people with the right tools, methodologies and quality-management processes to deliver the services our clients need, when they need them. CTG's customizable services extend from business consulting to development and integration to managed support, and include consulting services such as year 2000 compliance, internetworking services and applications outsourcing. Financial Highlights REVENUE FROM ONGOING OPERATIONS IN MILLIONS OF DOLLARS NET INCOME IN MILLIONS OF DOLLARS EARNINGS PER SHARE WORKING CAPITAL IN MILLIONS OF DOLLARS STOCK PRICE (at year end) *Excluding the effect of a non-recurring tax benefit of $3.2 million, or $0.36 per share, taken in the third quarter Contents Letter to Our Shareholders............................2 Frequently Asked Questions About CTG..................4 Consolidated Financial Statements....................11 3 Notes to Consolidated Financial Statements...........16 Report of Independent Auditors.......................26 Consolidated Summary -- Ten-Year Selected Financial Information...........27 Management's Discussion and Analysis.................27 Additional Information...............................30 Board of Directors & Officers........................31 CTG Locations........................................32 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 Letter to Our Shareholders, Frequently Asked Questions About CTG, 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 Management's Discussion and Analysis section, on page 27, which is incorporated by reference. Dear Fellow shareholders If you have been following CTG during 1996, I'm sure you are as pleased as I am at our progress and our accomplishments. Thanks to the efforts of more than 5,000 of my CTG colleagues, our success at attracting and retaining professionals, and strong business growth as a result of our Key Client strategy, we have reported the most profitable year in our history. Revenues for the year were $365.1 million, an increase of 7.6% over revenues from 1995. Net income and earnings per share (EPS) were $11.1 million and $1.25, respective increases of 46.3% and 43.7% over 1995, excluding the effect of a non-recurring $3.2 million tax benefit realized in the third quarter of 1995. As a result of our plans and performance, shareholder value has increased significantly. Last year we told you our primary strategic goals were to focus on Key Clients (i.e., companies who view CTG as a strategic partner), to attract and retain the best information technology (IT) professionals, and to improve profitability. We have done that and the results show it. We are obtaining more business from our Key Clients, we have increased the number of IT professionals in CTG and we are experiencing improved profitability. Today's businesses are increasingly dependent upon information systems to remain competitive; that dependence extends to those professionals who design, develop and maintain those information systems. While economics are dictating that IT professionals add more value, simultaneously, we are entering an era in which demand for computer professionals will grow faster than almost any other skill category. The year 2000 compliance challenge will only exacerbate that demand. Managing these issues is the core competency of CTG and, thus, is the value of having CTG 4 as a strategic partner. The company's proactive recruiting approach--CTG-SmartSource--provides access to more than 170,000 qualified IT professionals and gives CTG a distinct competitive advantage in the face of this supply-constrained environment. One of our most important goals is to improve profitability. In 1996 we made great strides in profit contributions, and we plan to continue along this path. Our year-end 1996 net income margin was 3.0%, compared to 2.2% at year-end 1995. So, as planned, we are making healthy, incremental progress. As we approached 1997, we believed our progress as a company would be advanced by emphasizing three critical factors: revenue growth, retention and recruiting of IT professionals. In 1996 we made significant operational changes to improve our performance in these three areas. These improvements include strengthening the resource management functions within our delivery teams, further developing sales and marketing functions, and optimizing retention and recruiting. Also, we are substantially increasing our training capabilities. In 1997 we expect to increase training and education budgets by 25% and to offer three to four times the number of entry-level training classes we offered in 1996. We expect these training and education changes to help us in recruiting, retaining and developing our professionals. We have been very successful in attracting and retaining professionals. A number of programs have been implemented to accommodate our professionals' desires for career development, communication, training and benefits. In 1996 we were officially recognized for our efforts when we were named one of the 100 best places to work in IT by Computerworld. We are extremely proud of this achievement. Our Key Client strategy has already increased our "value-added" contracts, and we discuss some of last year's most interesting contracts in this annual report. Value-added services involve the use of our proprietary methodologies and our strong consulting or project management abilities. These types of services provide additional value to our clients and help us build lasting client relationships. Good examples are application maintenance outsourcing, helpdesk services, year 2000 services and internetworking services. Our focus on Key Clients--those clients with whom CTG can build strong, lasting, high-value relationships--has resulted in 150 to 200 such partnerships and improved profitability. Business from our top 50 clients is growing faster than the industry (19%), and we expect this to continue to fuel our future growth. This industry continues to be one of the most dynamic. We remain committed to being a leader in IT services, and, given our performance in 1996 and our prospects for 1997 and beyond, we believe we are succeeding. With the creativity of our 5,000 talented professionals and the confidence of our shareholders, our opportunity is unlimited. Thank you for your continued support. Gale S. Fitzgerald Chairman and CEO 5 CULTIVATING GROWTH Over the past few years, we have been very pleased that CTG's growth has caught the attention of investors worldwide. With this attention have come many questions about the company, our industry and our operations. Indeed, our industry sector is unlike most. We are neither a temporary staffing firm nor a software producer nor a computer hardware manufacturer. We provide services that allow our clients to use information technology as a competitive tool. Understanding our industry's dynamics is vital to tracking your investment. So as we explore new avenues for growth, we thought our shareholders would find it helpful to hear the answers to the questions we are most frequently asked. Operational - ----------- What services does CTG provide? CTG's services revolve around the three major phases of any business solution: plan, develop and manage/maintain. Aligned to these phases are CTG's integrated services: Business Consulting, Development and Integration, and Managed Support. Our services are customized to add the greatest value to our clients' operations. Our services include, but are not limited to, strategic IT alignment, IT architecture, business process modeling, technology selection, software design, development, testing, integration, systems operation, management and maintenance, internetworking services and year 2000 services. Our value-added services are backed by a suite of proprietary methodologies. What types of contracts is CTG pursuing and winning? This year alone CTG has won many contracts to perform value-added services, and we continue to pursue this type of work with our Key Clients. We have publicly announced contracts with IBM Canada; Calvin Klein Cosmetics Company; Palm Beach County, Florida; and British Petroleum. Other projects won in 1996 are discussed elsewhere in this report. Very often our contracts involve competitive initiatives for our clients, and in these cases we are restricted from identifying the client by name. Does CTG specialize in any industries? Although we serve most industries, we have specialized talent in the service, manufacturing, pharmaceuticals, telecommunications, energy and healthcare industries. We are always expanding our industry expertise to be sure we're prepared to handle our Key Clients' most pressing business issues. What is your operational strategy? Our operations are structured to allow our local delivery teams to provide high-value IT services within a framework of quality assurance and long-term commitment, so our clients get the most from our talent and resources. Operationally, we reward relationship-building and client satisfaction, as well as employee satisfaction and retention, because these are the drivers of our growth. What is a Key Client, and how many do you have? Key Clients are companies that present CTG with the greatest opportunity to add value to their businesses as a strategic partner. Out of approximately 500 clients, 150 to 200 have been identified as representing strategic opportunities. What is the nature of CTG's relationship with IBM? CTG has a long-standing business relationship with IBM, and IBM is CTG's largest Key Client, representing 29% of CTG's business during 1996. We serve IBM in the U.S., Canada and Europe, and provide a variety of services ranging from software development to helpdesk support. In 1995, CTG was named one of nine authorized national technical services providers to IBM in the U.S. In 1996, CTG was named a core IT service provider to IBM Canada. To serve IBM's needs in the U.S., CTG created the IBM National Team. How is CTG using the Internet? 6 The Internet and the worldwide web are key components of our internal and external communications infrastructure. Our internal web site is the repository for much of CTG's packaged knowledge. Thousands of users have visited our public web site to learn about CTG. The Internet and the worldwide web present important opportunities for new business. Our InterNetworking Team and our interdisciplinary Web Team are developing Internet/intranet tools to support Key Clients, and looking for ways to use the web to improve employee and client satisfaction and revenue and profit growth. How is CTG doing on its strategy to move into value-added services? CTG's Key Client strategy has helped us quickly increase IT consulting contracts. In the past two years, we have won many contracts to perform services such as application outsourcing, helpdesk, year 2000 assessments and client/server development. We expect these types of services to make up a growing percentage of our business. Consulting or value-added services require that CTG manage to a specific deliverable or service level. Over the past several years, CTG has evolved to a point where we are structurally and procedurally well-equipped to provide deliverable- or service level-based services. Our Innovations in Quality program has built processes and formal methodologies for project management and service quality assessments, as well as for all of our value-added services. Our staff of professional project managers and directors is specifically focused on ensuring our projects are performed to meet client specifications. Who are your competitors? CTG's competitors are numerous and varied. They include companies such as Alternative Resources Corp.; American Management Systems; Analysts International Corp.; CIBER, Inc.; Computer Horizons Corp.; Compuware Corp.; Keane; and Technology Solutions Corp. What is CTG doing in the year 2000 arena? CTG views year 2000 compliance as a business issue, not a technology issue. Our Millennium Services Team provides year 2000 services to CTG's Key Clients only, and we are very focused in the way we deliver these services. CTG has been doing conversions for 30 years. We will use our year 2000 framework as well as other proprietary conversion/migration tools, utilities and approaches to provide these services. Our Key Clients value flexibility in solutions; we have many tool vendor alliances, none of which is exclusive. Rather, we partner with vendors only when it is right for our clients. What will be the financial impact of the year 2000? The financial opportunity is hard to assess. Our commitment is to apply our expertise for the benefit of our Key Clients. As one of the premier companies with proven expertise in year 2000 services, we expect this time-constrained situation to result in increased business for CTG for years to come. Professionals - ------------- How does CTG help its employees grow professionally? CTG has many programs that give our professionals new opportunities to build their careers. Our Career Management System is a formal process for identifying and pursuing career paths. Our Training Services Team assesses professional and technical education and makes it available to our widely dispersed professionals via the worldwide web and other media. CTG-Net, our internal tool for knowledge exchange, gives our employees access to professional and technical information. Each local delivery team and region has professionals dedicated to ensuring the satisfaction of our technical experts. Everyone at CTG is charged with attracting and retaining CTG's professionals, and improvements are being realized continuously. What are CTG's plans for dealing with the shortage of IT professionals? 7 CTG-SmartSource, the company's proactive recruiting approach, puts us head and shoulders above other firms by allowing us to identify talent and match it with the opportunity. We have more than 170,000 qualified IT professionals available to us through CTG-SmartSource and even more through the Internet, which has become a valuable recruiting tool. In the past two years we have hired more people than at any other time in our history. Our focus is on retaining and developing our professionals through initiatives geared toward improving professional development, career growth, communication and benefits. We're also investing in entry- level people through CTG's Graduate Program, an intensive curriculum geared toward recent college graduates and new entrants to the IT work force. Why was CTG named one of the 100 best places to work in IT by Computerworld? Computerworld surveyed 1,100 organizations to find exceptional I/S organizations. Rated categories included compensation, recognition, benefits, employee growth, diversity, financial growth and training. CTG was one of only six professional services companies that placed in the top 100. We believe we were chosen because we are a progressive employer that has undergone significant structural and strategic changes over the past several years, aimed at attracting and retaining the best IT professionals. Computerworld's recognition was significant for CTG and sets us apart from our competitors. How much do you plan to invest in education and training? In 1995, CTG spent $4 million on training and education. In 1996, that figure rose to $5 million. The company plans on increasing training expenditures by 25% in 1997. Financial - --------- What accounts for your modest revenue growth compared to the industry? As we became more focused on Key Clients, we had to transition away from others. This necessary transition slowed overall revenue growth but positively impacted Key Client revenue growth and overall profitability. How are your margins shaping up? Our strategy is to consistently and incrementally improve our margins. What is the impact of your Key Client strategy on revenue and profits? CTG's Key Client strategy has been the driver for our incremental improvements in profitability and revenue. What percentage of business comes from Europe? Approximately 11% of CTG's business is generated by our European operations. Is your European operation contributing to profitability? During the past year alone, Europe's profitability as a percentage of revenue has approached that of our U.S. operations and is a key contributor to CTG's improvements in overall profitability. Does CTG have plans to increase its annual dividend? CTG is positioned as a growth company. We are always looking for ways to improve shareholder value, and all options are continuously evaluated by the board of directors. What will you do with your cash? Do you have plans for acquisitions? In 1996, we repaid $6 million in long-term debt and ended the year with $41.5 million in cash. We are pleased with our performance in cash management. We are actively assessing appropriate acquisition opportunities and other good uses for the cash we have generated. 8 Does CTG have any investment analyst following? During 1996, we had captured the attention of three investment firms: Oppenheimer, Janney Montgomery Scott and Hanifen Imhoff. All had buy recommendations for TSK as of year-end 1996. How profitable is the IBM national technical contract? CTG was positively impacted by this contract. CTG had the foresight to build a national delivery structure that accommodated IBM's service level requirements at an acceptable profit level. The national team model is being used for IBM Canada and other national clients, such as British Petroleum. Do you have any plans to increase the stock float? Our stock has experienced continued good performance. During 1995, the average number of shares traded daily was 16,500. During 1996, that number rose to 40,000. We are pleased with the progress we've made so far. Do you have any plans to repurchase more stock? In 1996, we repurchased 86,000 shares in open market transactions. Our Stock Employee Compensation Trust (SECT), which was formed in 1994 to fund employee benefit programs, holds 1.8 million shares. We have a 1.1 million share repurchase authorization, and we go to the market when it makes good financial sense for the company. What are CTG's projections for revenue and net income? While we do not make projections on financial performance, we are committed to continuing incremental growth in revenue and profitability. IN 1996 With our Key Clients, CTG is winning more and more contracts to provide value-added services. Here's a snapshot of CTG's business from 1996. REVENUE BREAKDOWN BY INDUSTRY - -------------------------------------------------------------------------------- SERVICES 52% FINANCIAL 9% MANUFACTURING 21% OTHER 14% WHOLESALE/RETAIL 4% SERVICES - -------------------------------------------------------------------------------- Multinational computer hardware and software manufacturer CTG won multi-million dollar helpdesk contracts for this international computer hardware and software firm. After several years of success with this client, these contracts establish CTG's leadership in new geographical areas. CTG is responsible for daily operations and fulfillment at these support centers. 9 KPN Research (research subsidiary of Royal PTT Nederland, NV) CTG's European operation was selected as the sole vendor to KPN Research in its migration of 800 workstations to the Windows NT 4.0 operating system. CTG's services will range from requirements definition to company-wide rollout to user training and support. British Petroleum Outsourcing in the Americas As part of British Petroleum's (BP) efforts to reduce IT costs and focus on its core business, the company selected CTG, as part of a four-company federation, to manage applications support and development for all BP operations in North and South America. CTG created an international delivery team and, over the past few years, has supported BP in the areas of exploration, production, transportation, refining, distribution and petroleum retailing. As a strategic IT partner with BP, we operate under a shared risk and reward program and have helped BP reduce application maintenance costs by more than 40% over 21/2 years. Alyeska Pipeline Service Company In 1995, Alyeska Pipeline Service Company named CTG its sole IT services provider. CTG's Anchorage office has developed a strong alliance with Alyeska and is managing all of the company's service delivery for IT to meet its strategic goals. Additionally, in 1996, CTG won contracts to perform the following projects for Alyeska: quality plan; network security assessment project; VM replacement project; organizational assessment; technology selection; infrastructure assessment; strategic planning project; corrosion data management project; and intranet deployment project. Philadelphia Electric Co. CTG's Delaware Valley office developed and implemented an expense reimbursement system for Philadelphia Electric. Services ranged from the development of functional specifications through design, implementation and training for this mainframe-based system. Union Gas CTG's Toronto office was named one of Union Gas' selected vendors to provide a variety of professional and consulting services. Buffalo General Health Systems (BGHS) CTG's Buffalo office is assisting BGHS in defining their information requirements for the changing healthcare environment and providing recommendations to achieve their critical business objectives. MANUFACTURING - -------------------------------------------------------------------------------- Wyeth-Ayerst Laboratories CTG's Melbourne office was contracted by Wyeth-Ayerst Laboratories to conduct a Joint Technology Selection study and to implement a Product Data Management system for manufacturing and package specifications. CTG also facilitated development of information models to improve the supply chain processes. The project will involve the automation of 15 plants. Hoechst Celanese Chemical Group CTG's Dallas office won the contract to outsource this Key Client's system operations and support center. Calvin Klein Cosmetics Company (CKCC) CTG's Melbourne office successfully completed a three-year warehouse and manufacturing operations re-engineering project at CKCC's distribution and manufacturing centers in Mt. Olive, NJ. The project involved designing and implementing a warehouse management system and a manufacturing system to support CKCC's logistics and production missions. A worldwide soft drink manufacturer/distributor 10 CTG was selected as one of six Strategic Business Partners authorized to provide professional and value-added services to this client. Services provided by CTG include project management, client/server, database administration and mainframe development. Rich Products Corp. CTG's Buffalo office is assisting this client, through the use of CTG's Joint Technology Selection methodology, in the selection of a product and formula specification package for Rich's Research and Development department. Frito-Lay, Inc. CTG's Melbourne office completed a study to define Frito-Lay's system requirements and implementation planning for a custom warehouse management system. Following the study, CTG was contracted to develop, implement, install and support Frito-Lay's Inventory Control System in 24 U.S. sites, making Frito-Lay one of the industry's most advanced automated distributors. COBE Laboratories, Inc. CTG's Denver office was awarded a contract to perform application development and engagement management for an internal productivity application. Eastman Kodak Company CTG's Rochester office continues to support Eastman Kodak Company in a number of areas, the most recent being support of legacy system applications for Kodak's Worldwide Logistics Information Systems Division. Lone Star Steel Lone Star Steel has outsourced its I/S department to CTG's Dallas office. CTG is providing development, maintenance, and support, as well as external vendor management. Gallatin Steel CTG's Cincinnati office is providing industry-specific strategic IT consulting as well as existing system support to this client. Weyerhaeuser Canada Ltd. CTG's Toronto office is providing a variety of IT consulting services to Weyerhaeuser's Canadian operations. FINANCIAL - -------------------------------------------------------------------------------- ABN-AMRO Bank N.V. CTG's European offices are providing business consulting, managed support and other IT services to assist this Netherlands-based international bank in several key IT areas. As one of the preferred partners, we are conducting impact assessments and conversions in preparation for the year 2000 and Euro economic impact. We were selected for our knowledge of conversions and migrations, year 2000 issues and international business environments. First Security Information Technology, Inc. (FSITI), a subsidiary of First Security Bank CTG's Salt Lake City office is working with FSITI in their business design effort. Services include network architecture rollout, mainframe operations, and automation and helpdesk consulting. NationsBank CTG's Charlotte office was selected as one of nine preferred vendors to provide professional software services to NationsBank on a national basis. NationsBank operates in 38 states and is one of the largest banks in the U.S. OTHER: STATE AND LOCAL GOVERNMENT - -------------------------------------------------------------------------------- Palm Beach County 11 CTG's Atlanta office won a multi-million dollar contract with Palm Beach County, Fla., to create a new criminal justice computer system. CTG will integrate all of the county's criminal justice agencies on a single, efficient computer system. Alaska Industrial Development Export Authority CTG's Anchorage office provided conversion, development and training services as part of a project to install accounting software and convert an existing mortgage loan system to a client/server environment. CTG continues to provide support for the applications. 12 What Will Drive the Growth of the IT Services Industry? As companies increase their dependence upon information systems, their need for IT experts to design, develop and maintain those systems increases. But there is an acute shortage of qualified IT professionals, aggravated by a dwindling number of IT graduates, and a work force that is aging and changing in composition. CTG is ahead of the learning curve. We have spent 30 years building programs, tools and processes to ensure access to qualified IT professionals. There is a huge demand for IT professionals... - -------------------------------------------------------------------------------- - - Fifty percent of executives say the shortage of skilled/ trained workers is a barrier to growth. - - Forty percent of organizations will lose critical IT talent in the face of year 2000 demands. - - There are more than 190,000 unfilled IT positions nationwide. - - Demand for computer professionals will grow faster than almost any other category in the next 10 years. And while employment opportunities in the IT industry are growing... - -------------------------------------------------------------------------------- - - IT employment has grown to 2.5 million, three times the automotive industry and 10 times the steel industry. - - Each day 30,000 jobs are posted on the Internet, with the majority of those being for computer programmers. - - From 1984 to 1994, the number of computer jobs grew 150%. This sector is expected to grow another 150% in the next eight years. ...especially in certain technologies... - -------------------------------------------------------------------------------- - - The greatest number of opportunities exist for people skilled in new technologies such as Internet/ intranet, client/server, C++, rapid application development and object-oriented--as well as classic--technologies such as COBOL, CICS, DB2 and IMS. 13 the composition of the work force is changing... - - One baby boomer turns 50 every 71/2 seconds, and that will continue for the next 10 years. - - By 2005, most new entrants to the work force will be women and minorities, two groups that are underrepresented in IT. - - The number of employment-based visas increased from 54,000 to 140,000 in 1990, and immigrants are filling an increasing number of U.S. computer-related positions. and education is not keeping up... - -------------------------------------------------------------------------------- - - Two-thirds of IT companies believe that American universities are not producing enough students with sufficient IT skills. - - The number of university degrees awarded in computer and information technology sciences has been falling since the mid-80s. - - From 1986 to 1994 the number of computer science bachelor's degrees awarded at U.S. universities fell 43% (from 42,000 to 24,000). 14 With the shortage of IT professionals come several key challenges for IT organizations: - - Finding qualified IT professionals - - Providing competitive pay and benefits - - Providing continuous training - - Building career paths - - Helping IT professionals balance work and family - - Providing entry-level training Addressing these and other issues is critical to success in the IT services industry. (Sources: ITAA; Bureau of Labor Statistics; Computerworld; Deloitte & Touche Consulting Group Survey; The Washington Post; USA Today; Wall Street Journal) 15 CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data) Year ended December 31, 1996 1995 1994 Revenue $ 365,076 $ 339,407 $ 301,559 Direct costs 261,583 249,123 224,005 Selling, general and administrative expenses 84,975 77,534 79,774 Operating income (loss) 18,518 12,750 (2,220) Interest and other income 1,529 619 542 Interest and other expense (768) (1,328) (1,540) Gain (loss) on sales or disposals of assets (775) - 11,348 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 18,504 12,041 8,130 Provision for income taxes including a $ 3.2 million benefit related to foreign operations in 1995 (See note 5) 7,424 1,265 3,333 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 11,080 $ 10,776 $ 4,797 Net income per share $ 1.25 $ 1.23 $ 0.52
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS
(amounts in thousands) December 31, 1996 1995 ASSETS - --------------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and temporary cash investments $ 41,516 $ 16,545 Accounts receivable, net of allowance for doubtful accounts of $975,000 and $862,000, respectively 55,948 58,546 Prepaids and other 2,630 1,621 Deferred income taxes 1,088 2,057 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 101,182 78,769 Property and equipment, net of accumulated depreciation and amortization 12,380 17,981 Acquired intangibles, net of accumulated amortization of $6,236,000 and $5,568,000, respectively 4,533 5,526 Deferred income taxes 2,608 1,969 Other assets 578 521 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 121,281 $ 104,766 LIABILITIES AND SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------- Current Liabilities:
16
Current portion of long-term debt $ - $ 2,289 Accounts payable 9,491 9,365 Accrued compensation 17,572 9,961 Income taxes payable 5,180 2,080 Advance billings on contracts 2,484 2,168 Other current liabilities 4,924 3,397 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 39,651 29,260 Long-term debt - 3,640 Deferred compensation benefits 8,889 8,739 Other long-term liabilities 1,237 1,651 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 49,777 43,290 Shareholders' Equity: Common stock, par value $.01 per share, 25,000,000 shares authorized; 13,467,449 and 13,306,594 shares issued 135 133 Capital in excess of par value 159,512 114,446 Retained earnings 25,914 15,687 Foreign currency adjustment (2,039) (1,735) Less: Treasury stock of 3,131,418 and 3,008,456 shares, at cost (31,655) (28,594) Loans to employees (54) (371) Stock Employee Compensation Trust of 1,825,272 and 1,830,618 shares, at market (78,715) (36,170) Minimum pension liability adjustment (1,594) (1,920) - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 71,504 61,476 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 121,281 $ 104,766 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands) Year ended December 31, 1996 1995 1994 Cash flows from operating activities: Net income $ 11,080 $ 10,776 $ 4,797 Adjustments: Depreciation and amortization expense 7,651 6,146 5,888 Loss (gain) on disposal of assets 775 - (11,348) Deferred compensation expense 476 375 1,001 Realized and unrealized loss on securities - - 267 Changes in assets and liabilities, net of assets sold: (Increase) decrease in accounts receivable 2,132 (2,871) (2,427) (Increase) decrease in prepaids and other (1,080) 487 2,648 Decrease in deferred income taxes 330 1,128 637 (Increase) decrease in income taxes receivable/payable 3,107 4,993 (3,593) (Increase) decrease in other assets (57) 381 266 Increase (decrease) in accounts payable 174 (94) 690 Increase in accrued compensation 7,362 3,803 2,091 Increase in advance billings on contracts 301 451 1,255 Increase (decrease) in other current liabilities 1,799 (2,326) (3,587) Increase (decrease) in other long-term liabilities (415) (1,039) 563 Net cash provided by (used in) operating activities 33,635 22,210 (852) - --------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (3,584) (5,370) (4,222) Purchases of marketable securities - - (1,026) Proceeds from sales of marketable securities - - 7,240 Net proceeds from sales of assets 1,512 - 16,705 Net cash provided by (used in) investing activities (2,072) (5,370) 18,697 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings - (4,500) 3,625 Principal payments on long-term debt (5,929) (2,481) (2,290) Proceeds from Employee Stock Purchase Plan 720 515 850 Purchase of treasury stock (3,061) (4,181) (4,985) Purchase of stock held by Stock Employee Compensation Trust - (733) (14,881) Proceeds from other stock plans 2,120 6,240 562 Dividends paid (853) (823) (855) Net cash used in financing activities (7,003) (5,963) (17,974) - --------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and temporary cash investments 411 556 (114) Net increase (decrease) in cash and temporary cash investments 24,971 11,433 (243) Cash and temporary cash investments at beginning of year 16,545 5,112 5,355 - --------------------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of year $ 41,516 $ 16,545 $ 5,112
The accompanying notes are an integral part of these consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (amounts in thousands, except per share data)
CAPITAL IN FOREIGN PREFERRED STOCK COMMON STOCK EXCESS OF RETAINED CURRENCY SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS ADJUST - ----------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1993 1,448 $ 14 11,126 $ 111 $ 86,121 $ 1,792 $(2,730) Conversion of preferred stock (1,448) (14) 1,448 14 - - - Employee Stock Purchase Plan issuance - - 110 1 849 - - Stock Option Plan issuance - - 22 1 165 - - Restricted Stock Plan: Forfeiture - - - - - - - Adjustment to market - - - - 192 - - Management Stock Purchase Plan: Repurchase - - - - - - - Repayments - - - - - - - Purchase of treasury stock - - - - - - - Purchase of Stock Employee Compensation Trust stock - - - - - - - Net Income - - - - - 4,797 - Cash dividends - $.10 per share - - - - - (855) - Foreign currency adjustment - - - - 289 - 289 Minimum pension liability adjustment - - - - - - - - ----------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1994 - - 12,706 127 87,327 5,734 (2,441) Employee Stock Purchase Plan issuance - - 40 1 514 - - Stock Option Plan issuance - - 560 5 6,049 - - Management Stock Purchase Plan: Issuance - - - - - - - Repurchase - - - - - - - Repayments - - - - - - - Purchase of treasury stock - - - - - - - Stock Employee Compensation Trust: Purchase - - - - - - - Adjustment to Market - - - - 20,556 - - Net Income - - - - - 10,776 - Cash dividends - $.10 per share - - - - - (823) - Foreign currency adjustment - - - - - - 706 Minimum pension liability adjustment - - - - - - - - ----------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1995 - - 13,306 133 114,446 15,687 (1,735) Employee Stock Purchase Plan issuance - - 20 - 490 - - Stock Option Plan issuance - - 141 2 1,801 - - Management Stock Purchase Plan repayments - - - - - - - Purchase of treasury stock - - - - - - - Stock Employee Compensation Trust adjustment to market - - - - 42,775 - - Net Income - - - 11,080 - - - Cash dividends - $.10 per share - - - - - (853) - Foreign currency adjustment - - - - - - (304) Minimum pension liability adjustment - - - - - - - - ----------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1996 - $ - 13,467 $ 135 $159,512 $25,914 $(2,039) =======================================================================
STOCK EMPLOYEE TREASURY STOCK RESTRUCTED LOANS TO LIABILITY COMPENSATION TRUST SHARES AMOUNT STOCK EMPLOYEES ADJUST SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1993 1,753 $(17,348) $(1,792) $(1,050) $(2,605) _ $ - Conversion of preferred stock - - - - - - - Employee Stock Purchase Plan issuance - - - - - - - Stock Option Plan issuance 5 (48) - - - - - Restricted Stock Plan: Forfeiture 256 (1,984) 1,984 - - - - Adjustment to market - - (192) - - - - Management Stock Purchase Plan: Repurchase 7 (48) - 48 - - - Repayments - - - 445 - - - Purchase of treasury stock 698 (4,985) - - - - - Purchase of Stock Employee Compensation Trust stock - - - - - 1,770 (14,881) Net Income - - - - - - - Cash dividends - $.10 per share - - - - - - - Foreign currency adjustment - - - - - - - Minimum pension liability adjustment - - - - 2,367 - - - ------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1994 2,719 (24,413) - (557) (238) 1,770 (14,881) Employee Stock Purchase Plan issuance - - - - - - - Stock Option Plan issuance 35 (553) - - - - - Management Stock Purchase Plan: Issuance (10) 115 - (115) - - - Repurchase 8 (144) - - - - - Repayments - - - 301 - - - Purchase of treasury stock 256 (3,599) - - - - - Stock Employee Compensation Trust: Purchase - - - - - 60 (733) Adjustment to Market - - - - - - (20,556) Net Income - Cash dividends - $.10 per share - - - - - - - Foreign currency adjustment Minimum pension liability adjustment - - - - (1,682) - - - ------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1995 3,008 (28,594) - (371) (1,920) 1,830 (36,170) Employee Stock Purchase Plan issuance - - - - - (5) 230 Stock Option Plan issuance 37 (814) - - - - - Management Stock Purchase Plan repayments - - - 317 - - - Purchase of treasury stock 86 (2,247) - - - - - Stock Employee Compensation Trust adjustment to market - - - - - - (42,775) Net Income - - - - - - - Cash dividends - $.10 per share - - - - - - - Foreign currency adjustment - - - - - - - Minimum pension liability adjustment - - - - 326 - - - ------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1996 3,131 $(31,655) $ - $(54) $(1,594) 1,825 $(78,715) ================================================================================ The accompanying notes are an integral part of these consolidated financial statements.
18 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). 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 financial statements in conformity with generally accepted accounting principles. Such estimates primarily relate to allowances for doubtful accounts and deferred tax assets, and estimates of progress toward completion and gross profit or loss on fixed-price contracts. Actual results could differ from those estimates. The Company provides information technology services with a focus on technical services and business consulting. Revenue and Cost Recognition The Company recognizes revenue on time and materials contracts as hours are expended and costs are incurred. The Company also recognizes revenue on a monthly fee and fixed-price basis. Fixed-price contracts accounted for under the percentage-of-completion method represented two percent of 1996 revenue, as compared to four percent of 1995 revenue. 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, if any, on uncompleted contracts are made in the period in which such losses are determined. Accounts receivable at December 31, 1996 and 1995 is reduced by reserves for fixed-price contracts of $787,000 and $595,000, respectively. Selling, general and administrative costs are charged to expense as incurred. Fair Value of Financial Instruments On December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments." SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a 19 current transaction between willing parties. At December 31, 1996 and 1995, the carrying amounts of the Company's financial instruments, which include cash and temporary cash investments, accounts receivable and long-term debt, approximate fair value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is com-puted using the straight-line method based on estimated useful lives of two years to 30 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 gains or losses are reflected in current earnings. Maintenance and repairs are charged to expense when incurred and 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 $.03, respectively. The Company also expensed an additional $1.3 million of existing software 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. The Company evaluates the recoverability of the value of acquired intangibles and their estimated useful lives using discounted cash flows to determine whether the assets are impaired. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be 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 impairment 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. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. 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 net operating loss carryforwards, deferred compensation 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 Prior to January 1, 1996, the Company accounted for its Stock-Based Compensation Plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted 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 made in 1995 and future years 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. Net Income Per Share Net income per share is computed based on the weighted average common shares and common stock equivalents (stock options) of 8,893,000 (including common stock equivalents of 402,000), 8,745,000 (including common stock equivalents of 416,000), and 9,266,000 (including common stock equivalents of 297,000) in 1996, 1995 and 1994, respectively. The weighted average outstanding common and common stock equivalent shares do not include common shares held by the 20 Stock Employee Compensation Trust (Trust) as the shares are not considered outstanding until released from the Trust. Primary and fully diluted earnings per share amounts were $1.25, $1.23 and $.52 in 1996, 1995 and 1994, respectively. 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. Statement of Cash Flows For purposes of the statement 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 1996, 1995 and 1994 amounted to $902,000, $736,000 and $1,068,000, respectively, while net income tax payments (refunds), totaled $3.4 million, $(5.6 million) and $5.9 million for the respective years. Refunds received in 1996 and 1995 totaling $7.9 million related primarily to receipt of refunds for previously incurred impairment losses related to the Company's European operations. During 1996 and 1995, as a non-cash financing activity, the shares of common stock held by the Stock Employee Compensation Trust were remeasured to fair value, with an adjustment to capital in excess of par value of $42,775,000 and $20,556,000, respectively. 2. Sales of Assets During 1996, the Company sold one of the four buildings it owned. The sale resulted in proceeds of $1.5 million and a loss of $143,000 to the Company in the second quarter. On July 18, 1994, the Company sold Profimatics, Inc., its hydrocarbon processing industry subsidiary, to Honeywell, Inc., for $17 million with a pretax gain of approximately $10.6 million. The net proceeds from the sale were used to repay outstanding short-term indebtedness under the Company's various lines of credit. On July 11, 1994, the Company sold the hardware portion of its communications group to AmeriData, Inc., for $1.5 million. The sale resulted in a gain of $92,000 during the third quarter of 1994. The Company also sold its 16 percent interest in SerCon, a joint venture with IBM Germany. This investment, which was carried at its cost of $318,000, was sold to IBM Germany during the second quarter of 1994 for $956,000. 3. Property and Equipment Property and equipment are summarized as follows:
(amounts in thousands) December 31, 1996 1995 - -------------------------------------------------------------------------------- Land $ 886 $ 985 Buildings 6,508 8,501 Equipment 26,128 26,259 Furniture 6,692 7,716 Software 7,226 6,770 Leasehold improvements 809 1,691 48,249 51,922 Less accumulated depreciation (35,869) (33,941) $ 12,380 $ 17,981
At December 31, 1996, the Company owned three buildings, two of which are on the market as the Company looks for more efficient space. The two buildings for sale are still in use by the Company, which does not expect to incur a loss on the sale of these buildings. The third building, with a net book value of $1.8 million, is leased to a third party under a five-year lease. 21 4. Debt Debt is summarized as follows:
(amounts in thousands) December 31, 1996 1995 - -------------------------------------------------------------------------------- Promissory notes, repaid in 1996 $ - $ 5,633 Industrial revenue bonds, repaid in 1996 - 296 - 5,929 Less current portion of long-term debt - 2,289 $ - $ 3,640
The Company has lines of credit available totaling $53.5 million, renewable annually at various times throughout the year, with interest at or below the equivalent of prime rate. All borrowings under these agreements are unsecured and payable upon demand. There were no borrowings under these arrangements at either December 31, 1996 or 1995. There were no commitment fees paid on unused lines of credit during 1996 or 1995. The maximum amounts outstanding under short-term borrowings for 1996, 1995 and 1994 were $2,339,000, $16,221,000 and $16,000,000, respectively. Average bank borrowings outstanding for the years 1996, 1995 and 1994 were $1,240,000, $4,348,000 and $3,669,000, and carried weighted average interest rates of 5.2 percent, 6.5 percent and 6 percent, respectively. 5. Income Taxes The provision (benefit) for income taxes consists of the following:
(amounts in thousands) Domestic and foreign components of income (loss) before income taxes are: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Domestic $ 16,674 $ 13,461 $ 8,836 Foreign 1,830 (1,420) (706) ---------- --------- ---------- $ 18,504 $ 12,041 $ 8,130 ========== ========= ========== The provision (benefit) for income taxes consists of: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Current Tax: U.S. Federal $ 4,858 $ (2,367) $ 1,892 Foreign 886 2,195 110 U.S. State and Local 1,350 309 604 ---------- --------- ---------- 7,094 137 2,606 Deferred Tax: U.S. Federal 234 983 459 Foreign - - - U.S. State and Local 96 145 268 ---------- --------- ---------- 330 1,128 727 ---------- --------- ---------- $ 7,424 $ 1,265 $ 3,333 ========== ========= ========== The effective and statutory income tax rates (amounts in thousands) can be reconciled as follows: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Tax at statutory rate of 34 percent $ 6,291 $ 4,094 $ 2,764 Tax benefit for losses related to Company's European operations - (3,200) - State tax, net of federal benefits 891 204 576 Expenses for which no tax benefit is available 552 807 113 Change in estimate of nondeductible expenses (596) (514) - Other, net 286 (126) (120) ---------- --------- ---------- $ 7,424 $ 1,265 $ 3,333 ========== ========= ========== Effective income tax rate 40.1% 10.5% 41%
The Company's deferred tax assets (liabilities) included the following at:
December 31, December 31, Assets 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Loss carryforwards $ 574 $ 2,250 Deferred compensation 2,566 2,380 Restructuring charges - 145 Accruals deductible for tax purposes when paid 1,144 1,206 Allowance for doubtful accounts 292 293 Accrued loan interest - 105 Other 364 368 ---------- ---------- Gross deferred tax assets 4,940 6,747 Liabilities - --------------------------------------------------------------------------------------------------------------------------- Amortization 324 572 Depreciation 425 1,187 ---------- ---------- Gross deferred tax liabilities 749 1,759 Deferred tax assets valuation allowance (495) (962) ---------- ---------- Net deferred tax assets $ 3,696 $ 4,026 ========== ========== Net deferred assets and liabilities including valuation allowances are recorded at December 31, 1996 and 1995 as follows: Net current assets $ 1,088 $ 2,057 Net non-current assets 2,608 1,969 ---------- ---------- $ 3,696 $ 4,026 ========== ==========
The net change in the valuation allowance for deferred tax assets was a decrease of $467,000 from 1995 to 1996, 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 mainly attributed to a change in the estimated utilization of foreign net operating losses that were previously offset 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, net of the existing valuation allowances at December 31, 1996. Provision has not been made for U.S. or additional foreign taxes on the international subsidiaries as such operating profits have been offset by net operating loss (NOL) carryovers. In the event these operations were to generate earnings that were remitted as dividends, the additional taxes that would be imposed would be immaterial. CTG recognized a tax benefit of approximately $3.2 million in the third quarter of 1995 relating to the impairment losses associated with the Company's European operations, which were recognized for financial reporting purposes in 1993. The benefit was not recorded in 1993 as all of the criteria necessary to support a deduction for these losses for tax purposes had not been met, and there was no certainty of any tax benefit in the foreseeable future. In the third quarter of 1995, the criteria, including a determination of the value of these operations, were met and the benefit was recorded. 22 The Company has NOL carryforwards of approximately $1.7 million at December 31, 1996, which relate to the Company's foreign operations and generally have an unlimited carryforward period. 6. Lease Commitments At December 31, 1996, the Company was obligated under a number of long-term operating leases for property and equipment. Minimum future obligations under such leases are summarized as follows:
Year Ending December 31, (amounts in thousands) - -------------------------------------------------------------------------------- 1997 $ 4,658 1998 4,549 1999 2,250 2000 1,414 2001 969 Later years 1,462 ---------- Minimum future obligations $ 15,302 ==========
The above operating leases relate to the rental of office space and office equipment. Total rental expense under such operating leases for 1996, 1995 and 1994 was approximately $7,816,000, $7,508,000 and $7,574,000, respectively. 7. 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.
(amounts in thousands) Net Periodic Pension Cost 1996 1995 - ------------------------- ---- ---- Interest cost on projected benefit obligation $ 595 $ 557 Amortization of unrecognized net loss 72 - --------- --------- $ 667 $ 557 ========= ========= Reconciliation of Funded Status as of December 31, 1996 1995 - --------------------------- ---- ---- Accumulated benefit obligation - vested $ 8,627 $ 8,696 Effect of projected future salary increases - - --------- --------- Projected benefit obligation 8,627 8,696 Plan assets at fair value - - --------- --------- Projected benefit obligation in excess of plan assets 8,627 8,696 Unrecognized net obligation - - Adjustment needed to recognize minimum liability (1,594) (1,920) Unrecognized net loss 1,594 1,920 --------- --------- Accrued pension cost $ 8,627 $ 8,696 ========= ========= Weighted average discount rate 7.5% 7.0% Salary increase rate 0% 0%
The plan is deemed unfunded as the Company has not specifically identified Company resources 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. 23 During 1995, the Company established a non-qualified defined-contribution deferred compensation plan for certain key executives. The Company contributions to this plan, which were $200,000 and $10,000 in 1996 and 1995, respectively, are based on annual defined performance objectives. 8. Employee Benefits Profit-Sharing Retirement Plan The Company has a contributory profit-sharing retirement plan covering substantially all U.S. employees. Company contributions, which are discretionary, were funded and charged to operations in the amounts of $1,880,000, $1,816,000 and $2,159,000 for 1996, 1995 and 1994, respectively. Other Postretirement Benefits The Company provides limited health care and life insurance benefits to certain retired employees pursuant to contractual agreements.
Net Periodic Postretirement (amounts in thousands) Benefit Costs 1996 1995 - --------------------------- ---- ---- Service cost $ - $ 3 Interest cost 46 49 Amortization of unrecognized net obligations 30 29 ------ ------- Net periodic postretirement benefit cost $ 76 $ 81 ====== ======= Reconciliation of Funded Status as of December 31 1996 1995 - --------------------------- ---- ---- Accumulated postretirement benefit obligation: Retirees $ 579 $ 614 Eligible active plan participants - 96 ------ ------- Total accumulated postretirement benefit obligation 579 710 Less plan assets at fair value - - Less unrecognized transition obligation (467) (497) Plus unrecognized gain (loss) 113 (50) ------ ------- Accrued postretirement benefit liability $ 225 $ 163 ====== ======= Weighted average discount rate 7.5% 7.0% Salary increase rate 0% 1.0%
The rate of increase in health care costs was assumed to be 8.6% and 9.2% in 1996 for pre-age 65 and post-age 65 benefits, respectively, gradually declining to 5% 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 $34,200 at December 31, 1996 and the net periodic cost by $2,400 for the year. 24 9. 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. Shares are purchased at market price on the business day preceding the date of purchase. The maximum number of shares that can be purchased under the plan by all employees of the Company, as a group, totaled 5,500,000 as of December 31, 1996 of which 167,000 shares remain unissued. During 1996, Management Stock Purchase Plan -- Under the Company's Management Stock Purchase Plan approved in 1992, 400,000 common shares have been designated (up to 200,000 shares from treasury) for purchase by certain key employees. During 1996, no loans were made to employees, and employees repaid loans representing 50,911 shares with a value of $316,976. During 1995, the Company loaned $115,000 to an em-ployee to purchase 9,787 shares of the Company's Common Stock from treasury at a price of $11.75, and employees repaid loans representing 36,696 shares with a value of $301,420. During 1994, no loans were made to employees, and employees repaid loans representing 65,000 shares with a value of $493,000. The loans are classified as a reduction of shareholders' equity as they were used to purchase and are secured by Common Stock previously held in treasury. Interest is being charged at 4 percent per annum, and the loan principal is payable in full no later than three years from the date of the loan. The number of shares of Common Stock that secure the loans are sufficient to ensure repayment of the loans. 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 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 rights expire in January 1999 and may be redeemed by the Company at a price of $.01 per right. Stock Employee Compensation Trust -- On May 3, 1994, the Company established a Stock Employee Compensation Trust (SECT), which purchased 1,570,200 shares of the Company's Common Stock at a price of $13.4 million. The shares were repurchased from two major shareholders including Kastange Plantage N.V., previously the Company's largest shareholder. The SECT repurchased an additional 200,000 shares in December 1994 from International Business Machines Corporation (IBM) for $1.5 million. During 1995, the SECT purchased an additional 60,400 shares for $0.7 million. The stock may be used by the SECT to provide funding for existing employee stock plans and benefit programs. Shares are released from the SECT by the trustee at the request of the Compensation Committee of the Board of Directors. During 1996, 5,346 shares were released from the SECT to fund the fourth quarter First Employee Stock Purchase Plan share purchase. As of December 31, 1996, all shares remaining in the SECT are unallocated and therefore are not considered outstanding for purposes of calculating earnings per share. The shares of Common Stock are valued at market with changes in share price from prior reporting periods reflected as an adjustment to capital in excess of par value. This adjustment totaled $42.8 million and $20.6 million at December 31, 1996 and 1995, respectively. During 1995 and 1994, the Company loaned $0.7 million and $14.9 million, respectively, to the SECT for the purchase of the shares discussed above. During both 1996 and 1995, dividends paid by the Company to the SECT in the amount of $183,062 were used to repay a portion of the loan made by the Company to the SECT. 10. 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 annual installments of 25 percent of the shares covered by the grant on each of the first four anniversary dates from the date of the grant. Such options expire six years after becoming exercisable. Nonqualified stock options generally become exercisable in installments of 20 percent of the shares covered by the grant on each of the first five anniversary dates of the 25 grant. Such options expire 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 1996 and 1995 was $11.42 and $5.27, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
1996 1995 ---- ---- Expected life (years) 6 6 Dividend yield .45% .86% Risk-free interest rate 5.89% 6.99% Expected volatility 41.45% 39.76%
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 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 would have been reduced to the pro forma amounts indicated below:
(amounts in thousands, except per share data) 1996 1995 ---- ---- Net income As reported $ 11,080 $ 10,776 Pro forma $ 10,250 $ 10,557 Earnings As reported $ 1.25 $ 1.23 per share Pro forma $ 1.15 $ 1.21
Earnings per share in 1995 includes a $3.2 million ($.36 per share) non-recurring tax benefit related to foreign operations. Pro forma net income reflects only options granted in 1996 and 1995. Therefore, 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:
1981 Plan Weighted-Average 1991 Plan Weighted-Average Shares Exercise Price Shares Exercise Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1994 605,940 $ 10.44 432,575 $ 7.83 Granted - - 310,000 $ 12.54 Exercised (440,139) $ 9.99 (120,034) $ 8.09 Canceled or expired (83,118) $ 12.18 (61,848) $ 8.05 Outstanding at December 31, 1995 82,683 $ 11.09 560,693 $ 10.38 Granted - - 341,000 $ 23.85 Exercised (60,398) $ 11.18 (80,475) $ 8.77 Canceled or expired (12,123) $ 10.57 (61,050) $ 13.45 Outstanding at December 31, 1996 10,162 $ 11.17 760,168 $ 16.33
At December 31, 1996 and 1995, the number of options exercisable under the 1991 Plan was 212,775 and 88,619, respectively, and the weighted-average exercise price of those options was $14.91 and $7.82, respectively. At December 31, 1996 and 1995, the number of options exercisable under the 1981 Plan was 10,162 and 82,683, respectively, and the weighted-average exercise price of those options was $11.17 and $11.09, respectively. 26 A summary of the range of exercise prices and the weighted-average remaining contractual life of outstanding options at December 31, 1996, for the 1991 and 1981 Plans follows:
Weighted-Average Remaining Range of Shares Outstanding Weighted-Average Contractual Exercise Prices at December 31, 1996 Exercise Price Life (years) --------------- -------------------- ---------------- ---------------- 1991 Plan - --------- $6.875 to $9.625 226,293 $ 7.95 7.7 $12.25 to $18.00 338,875 $ 15.07 7.4 $18.875 to $25.50 35,000 $ 19.91 7.7 $28.625 to $41.50 160,000 $ 30.08 13.9 1981 Plan - --------- $8.625 to $11.00 7,725 $ 10.32 2.1 $13.875 2,437 $ 13.88 0.7
At December 31, 1996, there were 774,323 and 0 shares available for grant under the 1991 Plan and 1981 Plan, respectively. 11. Related Party Transactions IBM is the Company's largest customer. IBM accounted for $107.4 million or 29.4 percent, $80 million or 23.7 percent and $68 million or 22.7 percent of consolidated 1996, 1995 and 1994 revenue, respectively. The Company's accounts receivable from IBM at December 31, 1996 and 1995 amounted to $16.2 million and $9.6 million, respectively. No other customer accounted for more than 10 percent of revenue in 1996, 1995 or 1994. 12. 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. 27 13. Segment Information The Company operates in one segment, the services sector of the information technology industry.
Financial Information Relating to Domestic (amounts in thousands) and Foreign Operations 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Revenue North America $ 325,328 $ 306,156 $ 274,115 Europe 39,748 33,251 27,444 ----------- ----------- ----------- Total Revenue $ 365,076 $ 339,407 $ 301,559 =========== =========== =========== Operating Income (Loss) North America $ 29,460 $ 25,186 $ 14,502 Europe 3,265 450 128 Corporate and Other (14,207) (12,886) (16,850) ----------- ----------- ----------- Total Operating Income (Loss) $ 18,518 $ 12,750 $ (2,220) =========== =========== =========== Identifiable Assets North America $ 54,943 $ 61,771 $ 62,406 Europe 14,988 13,280 10,510 Corporate and Other 51,350 29,715 22,574 ----------- ----------- ----------- Total Identifiable Assets $ 121,281 $ 104,766 $ 95,490 =========== =========== =========== Capital Expenditures North America $ 1,468 $ 3,273 $ 2,050 Europe 904 273 123 Corporate and Other 1,212 1,824 2,049 ----------- ----------- ----------- Total Capital Expenditures $ 3,584 $ 5,370 $ 4,222 =========== =========== =========== Depreciation and Amortization North America $ 3,550 $ 2,618 $ 2,931 Europe 569 667 676 Corporate and Other 3,532 2,861 2,281 ----------- ----------- ----------- Total Depreciation and Amortization $ 7,651 $ 6,146 $ 5,888 =========== =========== ===========
Corporate and other identifiable assets consist principally of cash and temporary cash investments and other assets. 28 14. Quarterly FInancial Data (Unaudited)
(amounts in thousands, except per share data) Quarters 1996 First Second Third Fourth Total - --------------------------------------------------------------------------------------------------------------------------- Revenue $ 90,005 $ 91,320 $ 89,410 $ 94,341 $ 365,076 Direct costs 65,160 65,342 63,295 67,786 261,583 Selling, general and administrative expenses 21,147 21,294 21,255 21,279 84,975 Operating income 3,698 4,684 4,860 5,276 18,518 Net interest and other income (expense) (10) (285) 163 118 (14) Income before income taxes 3,688 4,399 5,023 5,394 18,504 Net income $ 2,213 $ 2,639 $ 3,014 $ 3,214 $ 11,080 Net income per share $ 0.25 $ 0.30 $ 0.34 $ 0.36 $ 1.25 Quarters 1995 First Second Third* Fourth Total - --------------------------------------------------------------------------------------------------------------------------- Revenue $ 82,226 $ 84,613 $ 85,609 $ 86,959 $ 339,407 Direct costs 60,325 61,731 62,358 64,709 249,123 Selling, general and administrative expenses 18,960 19,751 20,000 18,823 77,534 Operating income 2,941 3,131 3,251 3,427 12,750 Net interest and other expense (283) (291) (81) (54) (709) Income before income taxes 2,658 2,840 3,170 3,373 12,041 Net income $ 1,594 $ 1,899 $ 5,158 $ 2,125 $ 10,776 Net income per share $ 0.19 $ 0.22 $ 0.59 $ 0.24 $ 1.23 *Includes a $3.2 million non-recurring tax benefit related to foreign operations.
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Computer Task Group, Incorporated: We have audited the consolidated balance sheets of Computer Task Group, Incorporated, and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements of Computer Task Group, Incorporated, and consolidated subsidiaries as of and for the year ended December 31, 1994, were audited by other auditors whose report thereon dated February 10, 1995, expressed an unqualified opinion on 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 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, the 1996 and 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Computer Task Group, Incorporated, and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Buffalo, New York January 31, 1997 29 CONSOLIDATED SUMMARY - TEN-YEAR SELECTED FINANCIAL INFORMATION
(amounts in millions, except per share data) Operating Data 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------ Revenue $ 365.1 339.4 301.6 295.5 302.7 285.1 243.9 233.0 218.7 170.1 Operating income (loss) $ 18.5 12.8 (2.2) (29.4)** 10.6 3.1 11.2 (14.1)* 10.2 8.4 Income (loss) before income taxes $ 18.5 12.0 8.1 (30.7) 10.1 1.6 12.6 (11.6) 10.8 8.5 Net income (loss) $ 11.1 10.8*** 4.8 (27.7) 5.6 0.9 7.2 (7.8) 6.4 5.1 Net income (loss) per share $ 1.25 1.23*** 0.52 (2.62) 0.56 0.10 0.77 (0.88) 0.80 0.66 Equivalent shares outstanding 8.9 8.7 9.3 10.5 10.1 9.3 9.4 8.9 8.1 7.8 * Includes expenses of $17.4 million for restructuring. ** Includes expenses of $33.5 million for restructuring and impairment losses. *** Includes a non-recurring tax benefit of $3.2 million ($0.36 per share) related to losses associated with the Company's European operations.
Financial Position - ------------------------------------------------------------------------------------------------------------ Working capital $ 61.5 49.5 38.8 51.3 47.7 39.5 35.5 51.4 42.1 38.5 Total assets $ 121.3 104.8 95.5 108.6 138.2 139.3 134.0 106.8 111.3 78.0 Long-term debt $ - 3.6 6.1 8.4 10.5 13.8 11.6 1.4 12.1 0.9 Shareholders' equity $ 71.5 61.5 50.7 62.5 92.6 87.2 83.3 83.6 67.0 61.1
30 MANAGEMENT'S DISCUSSION AND ANALYSIS 1996 vs. 1995 Statements included in this Management's Discussion and Analysis 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 of 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 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. In 1996, CTG recorded revenue of $365.1 million, the highest in the Company's history, and an increase of 7.6 percent when compared to 1995 revenue of $339.4 million. North American revenue increased by $19.2 million or 6.3 percent during the year, while revenue from European operations increased by $6.5 million, or 19.5 percent. During 1996, the Company continued the implementation of its Key Client strategy. As a result, revenue from IBM, the Company's largest customer, increased by $27.4 million. Revenue from the Company's 50 largest customers, which includes revenue from IBM, from designated Key Clients, as well as revenue from certain customers that do not fit the Company's Key Client profile, grew at a rate in excess of 19% during 1996. As part of the strategy, the Company disengaged from several hundred non-strategic customers, causing those not ranked in the top 50 in the aggregate to post a negative revenue growth rate during the year. As planned, the implementation of CTG's Key Client strategy in 1996 resulted in lower or negative revenue growth for non-Key Clients, very positive growth for Key Clients, and higher profitability overall. In the third quarter of 1995, CTG was awarded a two-year contract as one of IBM's nine national technical service providers for the United States. The contract covers approximately 59 percent of the total services provided to IBM by the Company in 1996. This contract expires in July 1997, and the Company anticipates renewal of the contract for two additional years. IBM continues to be the Company's largest customer, accounting for $107.4 million or 29.4 percent of 1996 total revenue as compared to $80 million or 23.7 percent of 1995 revenue. The Company expects to continue to derive a significant portion of its revenue from IBM in 1997. 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 is unlikely to occur due to the diversity of the projects performed for IBM and the number of locations and divisions involved. Direct costs, defined as costs for billable staff, were $261.6 million or 71.7 percent of revenue in 1996 compared to $249.1 million or 73.4 percent of revenue in 1995. The decrease in direct costs as a percentage of revenue in 1996 as compared to 1995 is primarily due to a trend toward higher value added services, an increase in billing rates, and an increase in the utilization of professional staff. Selling, general and administrative expenses were $85 million or 23.3 percent of revenue in 1996 compared to $77.5 million or 22.8 percent of revenue in 1995. The increase from 1995 to 1996 is partially due to a change in the estimated useful lives of technology-related assets as of the beginning of the fourth quarter of 1996, which resulted in $0.4 million of incremental depreciation expense in the fourth quarter. The Company also expensed an additional $1.3 million of existing software due to an upgrade of its internal systems. Exclusive of this change in estimate and write-off, selling, general and administrative expense in 1996 would have been $83.3 million, or 22.8 percent of revenue, which is consistent with the 1995 percentage. Operating income was $18.5 million or 5.1 percent of revenue in 1996 compared to $12.8 million or 3.8 percent of revenue in 1995. The increase is primarily due to the factors discussed above. Operating income from North American operations increased $3 million or 24.2 percent from 1995 to 1996. European operations recorded operating income of $3.3 million in 1996 as compared to $0.5 million in 1995. The European improvement in profitability is primarily due to the 19.5 percent increase in revenue discussed above and an increase in higher value-added services performed in 1996. Interest and other income increased $0.9 million to $1.5 in 1996 from $0.6 million in 1995. The increase was a result of an increase in cash and temporary cash investments. Interest and other expense decreased $0.5 million to $0.8 in 1996 from $1.3 million in 1995 primarily due to the payment of all long-term indebtedness during 1996 and minimal short-term borrowings throughout the year. There were no material gains or losses from foreign exchange on currency. Income before income taxes increased by $6.5 million from $12 million or 3.5 percent of revenue in 1995 to $18.5 million or 5.1 percent of revenue in 1996. The provision for income taxes for 1996 was 40.1 percent compared to 10.5 percent for 1995. The 1995 provision included a tax benefit of $3.2 million related to losses associated with the Company's 31 European operations. Without this benefit, the tax rate would have approximated 37 percent. The 1995 rate reflected a decrease in the Company's reserve for potential income tax assessments taken in the second quarter of 1995. Net income for 1996 was $11.1 million or $1.25 per share, compared to $10.8 million or $1.23 per share in 1995. Excluding the non-recurring tax benefit of $3.2 million related to losses associated with the Company's European operations, 1995 net income was $7.6 million, or $.87 per share. Earnings per share was calculated using 8.9 million and 8.7 million equivalent shares outstanding in 1996 and 1995, respectively. The increase in equivalent shares outstanding is primarily due to the dilutive effect of outstanding stock options on the earnings per share calculation and shares issued under the Employee Stock Purchase Plan. During 1996, the Company adopted the provisions of Statements of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and No. 123, "Accounting for Stock-Based Compensation." The adoption of these standards did not have a material impact on the operations of the Company as the Company continued to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" to account for its stock-based employee compensation agreements. 1995 vs. 1994 CTG's 1995 performance resulted in then record revenue of $339.4 million, including fourth quarter revenue of $87 million, which, at the time, represented the highest quarterly revenue in the Company's history and the fifth consecutive quarter of revenue growth. The total revenue of $339.4 million was an increase of 13 percent over 1994 total revenue of $301.6 million. The majority of the 13 percent annual increase was caused by an 11.7 percent or $32 million increase in revenue from North American operations. European revenue increased 21.2 percent or $5.8 million. The aggregate revenue advance was a result of increases in volume of billable time. Billable staff at the end of 1995 increased by 15.5 percent over the 1994 year-end headcount. Billable staff in North America increased by 15.2 percent, and European billable staff increased by 18.6 percent. Due to the competitive marketplace, increases in the rates the Company charges its customers were not a significant factor contributing to the revenue increase. Additionally, the increases in revenue occurred despite the sale of several businesses in 1994, which accounted for $17.1 million of revenue in 1994. Accordingly, 1995 revenue from ongoing operations increased by $54.9 million or 19 percent over comparable 1994 figures. Management believed the increase in revenue was a result of its initial development and implementation of its Key Client focus, adoption of more flexible employment policies, and continued improvement of its sourcing approach and database. In addition, during the third quarter of 1995, CTG was awarded a contract as one of IBM's nine national technical service providers. The contract covers approximately 60 percent of the total services provided to IBM by the Company, and CTG expects to increase its revenue from IBM during the duration of this two-year contract. IBM was the Company's largest customer, accounting for $80 million or 23.7 percent of 1995 total revenue, up from $68 million in 1994 or 22.7 percent of 1994 total revenue. In addition, the Company continued to expand its non-IBM business, which grew by 11 percent or $25.8 million in 1995 compared to 1994. Direct costs (defined as costs for billable staff) for 1995 were $249.1 million or 73.4 percent of revenue, compared to $224 million or 74.2 percent of revenue in 1994. The decrease in direct costs as a percentage of revenue was consistent with the Company's goal to increase direct profit by increasing the value of its services. Selling, general and administrative expenses in 1995 were $77.5 million or 22.8 percent of revenue compared to $79.8 million or 26.5 percent of revenue in 1994. Included in the 1994 amount is $4.2 million in charges related to severance and other costs aimed at streamlining future overhead costs. Excluding these charges, 1994 selling, general and administrative expenses were 25.1 percent of revenue. The decrease in these costs as a percentage of revenue was consistent with the Company's continued efforts to streamline operations. Operating income in 1995 was $12.8 million or 3.8 percent of revenue compared to an operating loss of $2.2 million in 1994. The 1994 figure includes the $4.2 million discussed above and a $3 million adjustment to revenue for fixed-price project overruns. Excluding these charges, 1994 operating income would have been $5 million or 1.7 percent of revenue. The Company's operating income is primarily generated from its North American operations. European operating income increased from $0.1 million in 1994 to $0.5 million in 1995. The main reasons for the significant improvement in North American operating income is increased revenue of approximately $32 million, a 0.9 percent improvement in direct profit in 1995 as compared to 1994, and a reduced overhead structure as the Company has not only reduced overhead costs but also reallocated resources to sourcing, sales, and resource management. Interest and other income increased $77,000 or 14 percent to $619,000 in 1995 from $542,000 in 1994. 1995 fourth quarter interest and other income increased by $166,000 as the Company generated additional cash flow from collection of its receivables. Investment and other income had decreased by $115,000 through the first nine months of 1995 versus the comparable 1994 period due to the liquidation of the Company's investment portfolio during 1994. During 1994, the Company recognized gains on sales of assets totaling $11.3 million primarily from the sale of its Profimatics, Inc., subsidiary. 32 Interest and other expense decreased $212,000 or 14 percent to approximately $1.3 million in 1995 from approximately $1.5 million in 1994. This decrease was primarily attributable to $380,000 of realized and unrealized losses on marketable securities incurred during 1994. There were no material gains or losses due to foreign exchange on currency in either year. The provision for income taxes included a tax benefit of $3.2 million related to losses associated with the Company's European operations. During the third quarter of 1995, the Company completed an assessment of its alternatives for its European operations, including a determination of the value of these operations. Based on this assessment, the Company recorded tax benefits for these losses, which were previously recognized for financial reporting purposes in the fourth quarter of 1993. Without this benefit, the tax rate would approximate 37 percent compared to 41 percent in 1994. The reduction compared to the prior year, excluding the effect of the one-time benefit discussed above, is due to losses in 1994 in European operations for which no tax benefit was provided and a tax benefit for a change in estimate of non-deductible expenses. Combined, these tax benefits had a material impact on 1995 net income, and therefore the 10.5 percent effective income tax rate is not indicative of rates that will be experienced in the future. Net income for 1995 was $10.8 million or $1.23 per share, compared to $4.8 million or $0.52 per share in 1994. Excluding the tax benefit of $3.2 million related to losses associated with the Company's European operations, net income was $7.6 million, or $.87 per share. Earnings per share was calculated using 8,745,000 and 9,266,000 weighted-average shares outstanding in 1995 and 1994, respectively. Weighted-average shares outstanding decreased during 1995 due to share purchases during 1995 and 1994 by the Company and its Stock Employee Compensation Trust. These shares are not considered outstanding for purposes of calculating earnings per share. Financial Condition Cash provided by operations was $33.6 million for 1996. Net income totaled $11.1 million, and non-cash adjustments for depreciation and amortization expense and deferred compensation expense totaled $8.1 million. Accounts receivable decreased $2.1 million or 3.8 percent as a result of increases in revenue offset by improved accounts receivable turnover. Prepaid assets increased $1.1 million due to the prepayment of items that will be expensed in 1997. The $3.1 million increase in taxes payable is primarily attributable to the receipt of a $2.3 million tax receivable in 1996 that reduced taxes payable in the prior year. Accrued compensation and other current liabilities increased $9.2 million due to an increase in the usage of outside contractors by the Company during 1996, an accrual for an Information Technology professional bonus plan program and the timing of the company's U.S. biweekly payroll. Net property and equipment decreased $5.6 million. Additions to property and equipment were $3.6 million offset by depreciation of $6.9 million and disposals of $2.3 million. The Company has no material commitments for capital expenditures at December 31, 1996. Net acquired intangibles decreased $1 million, caused by amortization of $0.8 million and $0.2 million in translation adjustments. Financing activities used $7 million of cash for 1996. The Company repaid $5.9 million of long-term debt to reduce its outstanding balances at December 31, 1996 to zero. At December 31, 1996, the Company's current ratio is 2.6 to 1. During 1996, the Company received $0.7 million from employees for 25,000 shares of stock purchased under the Employee Stock Purchase Plan. The Company also received $1.8 million for the exercise of stock options. Payments totaling $3.1 million were made for the purchase of stock for treasury. The Company paid an annual dividend of $.10 per share totaling $853,000 in May 1996. The Company has approximately $53.5 million in aggregate lines of credit, which are renewable annually at various times throughout the year. On October 26, 1994, the Company authorized the repurchase of one million shares and on July 21, 1995 authorized the repurchase of another 0.7 million shares of its Common Stock for treasury. At December 31, 1996, approximately 0.6 million shares have been repurchased under the authorizations, leaving 1.1 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. ADDITIONAL INFORMATION
Stock Market Information Year ended December 31, 1996: High Low - -------------------------------------------------------------------------------- First Quarter 20 3/8 16 3/4 Second Quarter 31 7/8 19 7/8 Third Quarter 33 23 1/4 Fourth Quarter 43 1/2 30 3/8 Year ended December 31, 1995: High Low - --------------------------------------------------------------------------------
33
First Quarter 12 1/8 8 1/8 Second Quarter 14 1/8 10 3/8 Third Quarter 16 1/8 13 1/4 Fourth Quarter 22 14 1/4
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 January 31, 1997, there were 3,390 record holders of the Company's common shares. The Company paid an annual cash dividend of $.10 per share from 1993 to 1996 and prior to that had paid $.05 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 30, 1997 in Buffalo, New York for shareholders of record on March 19, 1997. Form 10K Available Copies of the Company's Form 10K 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 (716) 887-7400 Transfer Agent and Registrar Boston EquiServe 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 Boston EquiServe: Computer Task Group, Incorporated c/o Boston EquiServe Investor Relations Mail Stop: 45-02-64 P.O. Box 644 Boston, Massachusetts 02102-0644 (617) 575-3170 (MA residents) (800) 730-4001 Independent Certified Public Accountants KPMG Peat Marwick LLP 12 Fountain Plaza, Suite 601 Buffalo, New York 14202 CTG BOARD OF DIRECTORS George B. Beitzel Retired Senior Vice President and Director IBM Corporation Richard L. Crandall Chairman, Comshare, Inc. Gale S. Fitzgerald Chairman & Chief Executive Officer 34 Computer Task Group, Inc. Paul W. Joy Retired Vice Chairman, American Brass Company Randolph A. Marks Co-Founder, Computer Task Group, Inc., and Retired Chairman, American Brass Company Barbara Z. Shattuck Principal, Shattuck Hammond Partners, Inc. 35 CTG OFFICERS Gale S. Fitzgerald Chairman & Chief Executive Officer Jonathan R. Asher Vice President, Operations, IBM National Team Richard A. Ballou Vice President, Operations, South & Mid-Atlantic Regions Charles A. Barbour Vice President, Operations, Midwest Region James R. Boldt Vice President, Finance & Chief Financial Officer Louis J.F. Boyle Vice President & Chief Information Officer Janice Cole Vice President, Operations, Northeast Region Beatrice C. DeRocco Vice President, Operations, West Region Vincent J. Gallenti Vice President, Human Resources & Organizational Development Michael E. Grich Vice President, Operations, Central Region Joseph G. Makowski Vice President, General Counsel & Secretary Mark V. Megregian Vice President, Project Performance Nico H. Molenaar Vice President & Managing Director, CTG Europe CTG LOCATIONS Albany, NY (518) 456-9323 National Healthcare Group (518) 464-4147 Anchorage, AK (907) 261-6500 Atlanta, GA (800) 345-6855 or (770) 263-3400 36 Austin, TX (800) 553-8394 or (512) 502-0190 Baltimore, MD (410) 837-3700 Birmingham, AL (205) 979-7416 Boston, MA (617) 937-5564 Buffalo, NY (716) 888-3400 Corporate Headquarters (716) 882-8000 or (800) 992-5350 Central PA (717) 691-8999 Charlotte, NC (704) 527-6730 Chicago, IL (630) 434-0312 Cincinnati, OH (513) 793-6611 Cleveland, OH (216) 524-6441 37 Columbus, OH (614) 268-8883 Dallas, TX (800) 549-1635 or (972) 919-1555 Delaware Valley (800) 891-7270 or (610) 891-7200 Denver, CO (303) 770-8833 Des Moines, IA (515) 225-8379 Detroit, MI (810) 746-6090 Ft. Lauderdale, FL (954) 486-7105 Ft. Wayne, IN (219) 426-5101 Grand Rapids, MI (616) 956-0131 Greenville, SC (864) 297-4790 Hartford, CT (860) 828-2029 Indianapolis, IN (317) 578-5100 Jacksonville/Orlando, FL (904) 296-9100 Kansas City, KS (913) 469-4188 Melbourne, FL (407) 725-1300 38 Memphis, TN (901) 766-9335 Merrillville, IN (800) 508-8841 or (219) 738-1908 North Region HQ (219) 756-6360 Milwaukee, WI (414) 821-3320 Nashville, TN (615) 373-0794 New York/New Jersey (908) 685-5800 Omaha, NE (402) 342-0494 Phoenix, AZ (602) 604-6350 Pittsburgh, PA (412) 323-8600 Metals (412) 963-8288 Portland, OR (503) 222-2915 Poughkeepsie, NY (914) 462-5043 Raleigh, NC (includes South Region HQ) (800) 851-6577 or (919) 851-9008 Rochester, NY (716) 325-4220 Salt Lake City, UT (801) 363-0800 San Jose, CA (408) 441-6777 39 Seattle, WA (206) 827-8270 Southern California (714) 459-2152 St. Louis, MO (includes West Region HQ) (314) 469-7100 Syracuse, NY (315) 463-6276 or (800) 272-5852 Tampa, FL (813) 289-4471 Toronto, Ont., Canada (416) 360-3756 Washington, DC (703) 790-1557 Winston-Salem, NC (910) 724-4441 CTG EUROPE - -------------------------------------------------------------------------------- Belgium 32-2-720 51 70 England - Nottingham 44-1159-678-078 England - Reading 44-1734-750 877 Luxembourg 352-298 7271 The Netherlands (includes CTG Europe HQ) 31-23-5684100 Internet Address: http://www.ctg.com Computer Task Group, Inc. 800 Delaware Avenue Buffalo, New York 14209-2094 40 (716) 882-8000 (800) 992-5350 www.ctg.com EX-16 9 EXHIBIT 16 1 EXHIBIT 16 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Change in Certifying Accountant. 2 CHANGE IN CERTIFYING ACCOUNTANT ------------------------------- On October 16, 1995, the Company engaged KPMG Peat Marwick LLP (KPMG) as the principal accountants to audit the Company's financial statements for the fiscal year ending December 31, 1995. The Company did not consult with KPMG regarding accounting advice prior to its engagement. Price Waterhouse LLP (Price Waterhouse) had been engaged since 1977 as the principal accountants to audit the Company's financial statements. Price Waterhouse's report on the financial statements of the Company as of December 31, 1994 and 1993 and for the years then ended contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. Also, during the aforementioned period, there occurred no "reportable event" within the meaning of Item 304(a)(1)(v) of Regulation S-K of the Commission. The decision to change accountants was approved by the Board of Directors of the Company. During the Company's two most recent fiscal years and any subsequent interim period preceding the dismissal, there were no disagreements between the Company and Price Waterhouse on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of Price Waterhouse would have caused Price Waterhouse to make reference to the subject matter of the disagreement in connection with its report. EX-21 10 EXHIBIT 21 1 EXHIBIT 21 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Subsidiaries of Computer Task Group, Incorporated. 2 SUBSIDIARIES OF COMPUTER TASK GROUP, INCORPORATED ------------------------------------------------- The following is a list of all of the subsidiaries of the Registrant as of December 31, 1996. 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 11 EXHIBIT 23 1 EXHIBIT 23 ---------- COMPUTER TASK GROUP, INCORPORATED --------------------------------- Consents of Independent Accountants. 2 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 of Computer Task Group, Incorporated of our report dated January 31, 1997 which appears on page 26 of the 1996 annual report to shareholders, which is incorporated by reference in Computer Task Group, Incorporated's annual report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page IV-3 of such annual report on Form 10-K. KPMG PEAT MARWICK LLP Buffalo, New York March 24, 1997 3 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-41995, No. 33-50160 and No. 333-12237) of Computer Task Group, Incorporated of our report dated February 10, 1995 appearing on page IV-2 included in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page IV-4 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP Buffalo, New York March 24, 1997 EX-27 12 EXHIBIT 27
5 0000023111 COMPUTER TASK GROUP, INC. 1 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 41,516,000 0 56,923,000 975,000 0 101,182,000 48,249,000 35,869,000 121,281,000 39,651,000 0 135,000 0 0 71,369,000 121,281,000 0 365,076,000 0 261,583,000 84,975,000 113,000 902,000 18,504,000 7,424,000 0 0 0 0 11,080,000 1.25 1.25
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