<PAGE> 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, 1997
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:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.01 par value New York Stock Exchange
Rights to Purchase Series A
Participating Preferred Stock New York Stock Exchange
</TABLE>
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 16, 1998 was $628,872,156. 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 16, 1998 was 20,750,003.
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 1997 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 29, 1998.
<PAGE> 2
PART I
FORWARD-LOOKING STATEMENTS
Statements included in this document, or incorporated herein by reference,
that do not relate to present or historical conditions are "forward looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and Section 21F of the Securities Exchange Act of 1934, as
amended. Additional oral or written forward looking statements may be made by
the Company from time to time, and such statements may be included in documents
that are filed with the Securities and Exchange Commission. Such forward looking
statements involve risks and uncertainties which could cause results or outcomes
to differ materially from those expressed in such forward looking statements.
Forward-looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. Among
the important factors on which such statements are based are assumptions
concerning the anticipated growth of the information technology industry, the
continued need of current and prospective customers for the Company's services,
the availability of qualified professional staff, and price and wage inflation.
ITEM 1. BUSINESS
Computer Task Group, Incorporated (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 provides information technology (IT) consulting services.
CTG employs approximately 5,800 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
consulting services. A typical customer is an organization with large, complex
information and data processing requirements. CTG's customer base is large and
diverse, consisting of approximately 430 customers in North America and Europe.
Approximately 88.5 percent of consolidated 1997 revenue of $407.6 million was
generated in North America and 11.5 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 managing multi-million dollar technology projects to
flexible staffing provided on a per diem basis. Approximately 56 percent of the
Company's services are provided to customers in the services industry, followed
by 18 percent in the manufacturing industry, 8 percent in the banking and
finance industries 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.
<PAGE> 3
CTG's strategy is to focus its efforts and talents on building business
relationships with specific clients. From our clients and prospects, CTG
leadership identifies Key Clients - those companies that present a significant
opportunity for a long-term, value-added business relationship. As the business
relationship expands, our goal is to evolve those Key Client relationships into
Strategic Partners. Strategic Partners are companies with whom CTG accepts
responsibility for a defined deliverable, service level, or management process.
These relationships deliver the highest value to our clients, and they, in turn,
represent our strongest client relationships.
CTG's services are sold and delivered on a local level through its network
of geographically dispersed delivery teams made up of account executives,
business consultants, recruiters, and resource managers. Account executives
monitor and develop the relationship with a client, while business consultants
focus on identifying engagements. Recruiters utilize an electronic recruiting
database to screen and qualify individuals who are available to work on CTG's
clients' information technology needs. The Company maintains a database of
qualified candidates available for assignments. Resource managers focus on the
development, management, training, and performance of the Company's employees.
International Business Machines Corporation (IBM) is CTG's largest
customer. CTG provides services to various IBM divisions in approximately 50
locations. In 1997, IBM renewed the national contract with CTG for an additional
three years. The contract represents approximately 59 percent of the total
services provided to IBM by CTG in 1997. IBM accounted for $142.2 million or
34.9 percent of 1997 revenue; $107.4 million or 29.4 percent of 1996 revenue;
and $80 million or 23.7 percent of CTG's 1995 revenue. The Company expects to
continue to derive a significant portion of its business from IBM in 1998 and to
actively pursue new business with IBM. While a significant decline in revenue
from IBM would have a material adverse impact on the Company's revenue and
profits, the Company believes the simultaneous loss of all IBM business is
unlikely to occur due to the recent renewal of the national contract, the number
of contracts presently in existence with IBM, the diversity of the projects
performed for IBM, and the number of locations and divisions involved.
The Company has registered its symbol and logo with the U.S. Patent and
Trademark Office. It has entered into agreements with various software and
hardware vendors from time to time in the normal course of business, none of
which is material to the business.
SERVICES
CTG operates in one industry segment, the consulting services area of the
IT industry. Geographic area information is included in CTG's 1997 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, these solutions must be managed and maintained to
ensure systems and technologies are supported to preserve their effectiveness.
CTG provides services in each of these three areas as follows:
Business Consulting. Business consulting focuses on the planning phase of
the IT life cycle. CTG's consultants help a customer develop the plan to
reengineer its business processes, assess its technology needs, and choose the
appropriate technology solution.
Development & Integration. Development and integration supports the
implementation phase of the IT life cycle, including custom application
development and software package implementation.
Managed Support. Managed support addresses the maintenance segment of the
IT life cycle. It encompasses service offerings such as operations and network
support (running or maintaining a customer's systems), application support
(maintaining a company's programs and documentation), and installing and
maintaining a help desk.
<PAGE> 4
SALES AND MARKETING
On a corporate, regional, and local level, management performs the business
planning necessary to assess industry, 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, recruiters, 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. Recruiters
are 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 incentive compensation 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 other 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.
CTG has been using the Internet for several years as a communications tool.
The Internet is a component of the Company's sales and marketing communications
strategy. The Company is continuously refining and building new Internet
functionality to provide current information to its customers, investors, and
prospective employees.
PRICING AND BACKLOG
The majority of CTG's IT professional services business is performed on a
time-and-materials basis. Rates vary based on the type and level of skill
required by the customer, as well as geographic location. Agreements for work
performed on a time-and-materials basis generally do not specify any dollar
amount as services are rendered on an "as required" basis.
The Company performs a portion of its 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 1997 and 1996 revenue, respectively.
Revenue from all fixed-price and monthly-fee contracts represented 17 percent of
revenue in 1997 compared to 14 percent in 1996. As of December 31, 1997 and
1996, the backlog for fixed-price and managed-support contracts was
approximately $73 million and $99 million, respectively. Approximately 75
percent of the December 31, 1997 backlog is expected to be earned in 1998.
Revenue is subject to seasonal variations, with a minor downturn in months of
high vacation and legal holidays (July, August, and December). 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. CTG competes
against all four of these for its share of the market.
<PAGE> 5
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. Many of CTG's offices are already ISO 9001 certified and others are
preparing for certification.
The Company believes that to compete successfully it is necessary to have a
local geographic presence, offer appropriate IT solutions, provide skilled
professional resources, and price its services competitively.
MANAGEMENT AND PROFESSIONAL STAFF
As of December 31, 1997, CTG employed approximately 5,800 people, of whom
5,100 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 190,000 qualified
IT professionals. This database provides a pipeline of quality professional
resources to assist management in providing customers with responsive,
dependable, and cost-effective service to fulfill the needs required. The
Company offers several employment options to enable it to attract and retain
professional staff. The Company pays its employees on either a salaried or
hourly basis and has a diverse and flexible benefits package.
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
have the skills needed to respond to today's new demands. Instructor-based
classroom training and video and computer-based training courses are utilized.
CTG also offers its employees management and sales training. These courses
teach marketing and management practices and serve both as refresher courses and
as training vehicles to ensure that staff have the skills necessary to compete
in the IT services industry. They also provide a forum for imparting Company
policies to ensure consistency in the quality of services throughout the
Company's organization.
CTG believes its training and continuing education programs keep its
technical staff current and provide the Company with the necessary management
and marketing personnel to support future growth. CTG invested approximately
$8.4 million, $5 million and $4 million, on education in 1997, 1996, and 1995,
respectively, including compensation paid to technical staff while in training.
<PAGE> 6
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
<TABLE>
<CAPTION>
(amounts in thousands)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue from Unaffiliated Customers
North America $360,849 $325,328 $306,156
Europe 46,739 39,748 33,251
-------- -------- --------
$407,588 $365,076 $339,407
======== ======== ========
Operating Income
North America $ 25,293 $ 15,253 $ 12,300
Europe 3,663 3,265 450
-------- -------- --------
$ 28,956 $ 18,518 $ 12,750
======== ======== ========
Identifiable Assets
North America $ 57,519 $ 54,943 $ 61,771
Europe 15,777 14,988 13,280
Corporate and Other 34,445 51,350 29,715
-------- -------- --------
$107,741 $121,281 $104,766
======== ======== ========
</TABLE>
<PAGE> 7
Executive Officers of the Company
<TABLE>
<CAPTION>
Term Of Period During Other Positions
Office Which Served as And Offices with
Name and Age Office Expires Executive Officer(1) Registrant
- ------------ ------ ------- -------------------- ----------
<S> <C> <C> <C> <C>
Gale S. Fitzgerald Chairman of 4/29/98 5/6/91 to date Director
47 the Board and
Chief Executive Officer
Jonathan R. Asher Vice President 4/29/98 12/16/96 to date None
52
Richard A. Ballou Vice President 4/29/98 11/2/93 to date None
46
Charles A. Barbour Vice President 4/29/98 11/2/93 to date None
46
James R. Boldt Vice President 4/29/98 2/12/96 to date Treasurer
46 and Chief
Financial Officer
Louis J.F. Boyle Vice President 4/29/98 7/1/94 to date None
46
Beatrice DeRocco Vice President 4/29/98 4/26/95 to date None
53
Michael E. Grich Vice President 4/29/98 2/9/95 to date None
49
Joseph G. Makowski Vice President 4/29/98 9/30/89 to date Secretary
44 and General
Counsel
Nico H. Molenaar Vice President 4/29/98 1/2/96 to date None
42
</TABLE>
(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.
<PAGE> 8
Mr. Ballou was promoted to vice president in November 1993 and has been
employed by the Company since 1981. 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 since 1977. 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. 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 since 1985. 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 1985. He has held a variety of management
positions and is presently responsible for the Company's European operations.
<PAGE> 9
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 corporate administrative operations. There
are no mortgages on either of these buildings.
The Company also owns a 37,000 square foot building in Melbourne, Florida
with a net book value of $2.1 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 16,000 square feet, with the number of people
employed at each office. The Company's lease terms generally vary from periods
of less than a year to five years and generally have flexible renewal options.
The Company believes that its present owned and leased facilities are adequate
to support its current and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, an adverse outcome to any of this
litigation would not have a material effect on the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 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, 1997, submitted herewith as an exhibit, and incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
A five-year summary of certain financial information relating to the
financial condition and results of operations of the Company is included under
the caption "Consolidated Summary - Five-Year Selected Financial Information" in
the Company's Annual Report to Shareholders for the year ended December 31,
1997, 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, 1997, under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition," submitted herewith
as an exhibit, and incorporated herein by reference.
ITEM 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, 1997, submitted herewith as an
exhibit, and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
II-1
<PAGE> 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 1998 annual meeting of shareholders to be held on
April 29, 1998, 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 1998 annual meeting of
shareholders to be held on April 29, 1998, 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 1, 1998.
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 1998 annual meeting of
shareholders to be held on April 29, 1998, as set forth in the Company's
definitive Proxy Statement dated April 1, 1998.
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 1998 annual meeting of shareholders to be held
on April 29, 1998, 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 1, 1998.
III-1
<PAGE> 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 1997, 1996, and 1995 consolidated financial statements, and the report
of KPMG Peat Marwick LLP dated February 4, 1998, on the consolidated balance
sheets as of December 31, 1997 and 1996 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997, appearing in the accompanying
1997 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 1997 Annual Report to
Shareholders is not to be deemed filed as part of this report. The following
report of Independent Accountants and financial statement schedule should be
read in conjunction with the financial statements in such 1997 Annual Report to
Shareholders. All other financial statement schedules have been omitted as they
are not material or the required information is shown in the financial
statements or the notes thereto.
<TABLE>
<CAPTION>
Reference
---------
<S> <C>
Report of Independent Accountants on IV-2
Financial Statement Schedule
Financial statement schedule:
Valuation and Qualifying Accounts IV-3
(Schedule VIII)
(B) Form 8-K
None.
(C) Exhibits
</TABLE>
The Exhibits to this Form 10-K Annual Report are listed on the attached
Exhibit Index appearing on pages E-1 to E-3.
IV-1
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Computer Task Group, Incorporated
Under date of February 4, 1998, we reported on the consolidated balance sheets
of Computer Task Group, Incorporated and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997 as contained in the 1997 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 1997.
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. 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, 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
February 4, 1998
IV-2
<PAGE> 14
COMPUTER TASK GROUP, INCORPORATED
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Net Balance at
Description January 1 Change December 31
- ----------- ---------- ------ -----------
<S> <C> <C> <C>
1997
Account deducted from assets
Allowance for Doubtful
Accounts $ 975 $ (24)(A) $ 951
Net Deferred Tax Assets
Valuation Allowance $ 495 $ 432 (C) $ 927
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
</TABLE>
(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) Reflects a provision for additional foreign net operating losses for which
no benefit is anticipated.
IV-3
<PAGE> 15
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 30, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
(i) Principal Executive Officer: Chairman of the March 30, 1998
Board and Chief
/s/ GALE S. FITZGERALD Executive Officer
----------------------------------
(Gale S. Fitzgerald)
(ii) Principal Accounting and Vice President, March 30, 1998
Financial Officer Chief Financial
Officer
/s/ JAMES R. BOLDT
----------------------------------
(James R. Boldt)
(iii) Directors
/s/ GEORGE B. BEITZEL Director March 30, 1998
----------------------------------
(George B. Beitzel)
/s/ RICHARD L. CRANDALL Director March 30, 1998
----------------------------------
(Richard L. Crandall)
/s/ GALE S. FITZGERALD Director March 30, 1998
----------------------------------
(Gale S. Fitzgerald)
/s/ PAUL W. JOY Director March 30, 1998
----------------------------------
(Paul W. Joy)
/s/ RANDOLPH A. MARKS Director March 30, 1998
----------------------------------
(Randolph A. Marks)
/s/ BARBARA Z. SHATTUCK Director March 30, 1998
----------------------------------
(Barbara Z. Shattuck)
</TABLE>
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page or
Exhibit Description (Reference)
- ------- ----------- -----------
<S> <C> <C>
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) Stock Employee Compensation Trust Agreement, dated (2)
May 3, 1994, between Registrant and Thomas R. Beecher,
Jr., as trustee.
</TABLE>
- -----------
* 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
<PAGE> 17
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Page or
Exhibit Description (Reference)
- ------- ----------- -----------
<S> <C> <C>
10.(d) 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.
(e) Severance Compensation Agreement dated October 31, 1994, between (2)
Registrant and Gale S. Fitzgerald.
(f) Stock Purchase Agreement, dated as of February 25, (3)
1981, between Registrant and Randolph A. Marks.
(g) Description of Disability Insurance and Health (4)
Arrangements for Executive Officers.
(h) 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.
(i) 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.
(j) Nondisclosure and Nonsolicitation Agreement, dated (5)
July 1, 1993, between Registrant and Gale S. Fitzgerald.
(k) 1997 Key Employee Compensation Plans. (6)
(l) Management Stock Purchase Plan. (7)
</TABLE>
- -----------
(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, 1 1998
on page 7 under the caption entitled "Annual Cash Incentive Compensation,"
and incorporated herein by reference.
(7) Filed as an Appendix to the Registrant's definitive Proxy Statement dated
March 27, 1992, and incorporated herein by reference.
E-2
<PAGE> 18
EXHIBIT INDEX (Continued)
<TABLE>
<CAPTION>
Page or
Exhibit Description (Reference)
- ------- ----------- -----------
<S> <C> <C>
10.(m) CTG Non-Qualified Key Employee Deferred Compensation Plan (8)
(n) 1991 Employee Stock Option Plan, as Amended (9)
(o) First Employee Stock Purchase Plan (Eighth Amendment and Restatement) (9)
(p) 1991 Restricted Stock Plan (9)
(q) Executive Supplemental Benefit Plan 1997 Restatement (10)
(r) Executive Compensation Plans and Arrangements. 19
11. Statement re: computation of per share earnings. 21
12. Statement re: computation of ratios. *
13. Annual Report to Shareholders. 23
16. Letter re: change in certifying accountant. *
18. Letter re: change in accounting principles. *
21. Subsidiaries of the Registrant. 68
22. Published report regarding matters submitted to a vote *
of security holders.
23. Consents of experts and counsel. 70
24. Power of Attorney. *
27.(a) Financial Data Schedules - 1997. 72
27.(b) Financial Data Schedules - 1996 restated. 74
27.(c) Financial Data Schedules - 1995 restated. 76
99. Additional exhibits. *
</TABLE>
- -----------
(8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(9) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
(10) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 28, 1997, and incorporated herein by reference.
E-3
<PAGE> 1
EXHIBIT 10(r)
COMPUTER TASK GROUP, INCORPORATED
Executive Compensation Plans and Arrangements.
<PAGE> 2
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all plans, management contracts and compensatory
arrangements in which the executive officers of the Company participate and
where they can be found:
Stock Purchase Agreement with Randolph A. Marks - Registration Statement No.
2-71086 on Form S-7 filed on February 27, 1981.
First Employee Stock Purchase Plan (Eighth Amendment and Restatement) - Annual
Report on Form 10-K for the year ended December 31, 1996, Exhibit 10(p).
Disability Insurance and Health Arrangements - Amendment No. 1 to Registration
Statement No. 2-71086 on Form S-7 filed on March 24, 1981.
Executive Supplemental Benefit Plan 1997 Restatement, - Quarterly Report on Form
10-Q for the quarter ended March 28, 1997.
1991 Employee Stock Option Plan, as Amended - Annual Report on Form 10-K for the
year ended December 31, 1996, Exhibit 10(o).
1991 Restricted Stock Plan - Annual Report on Form 10-K for the year ended
December 31, 1996, Exhibit 10(q).
Management Stock Purchase Plan - definitive Proxy Statement dated March 27,
1992, Appendix A.
CTG Non-Qualified Key Employee Deferred Compensation Plan - Annual Report on
Form 10-K for the year ended December 31, 1995, Exhibit 10(cc).
<PAGE> 1
EXHIBIT 11
COMPUTER TASK GROUP, INCORPORATED
Computation of diluted earnings per share under treasury stock method set forth
in Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
<PAGE> 2
COMPUTATION OF DILUTED EARNINGS PER SHARE
UNDER TREASURY STOCK METHOD SET FORTH IN
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE"
(amounts in thousands, except per share data)
Year Ended December 31:
<TABLE>
<CAPTION>
1997 1996* 1995* 1994* 1993*
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Weighted-average number of shares
outstanding during year 16,758 16,980 16,658 17,938 18,194
Add Common Stock equivalents
-- Incremental shares under
stock option plans 857 620 741 125 8
-- Incremental shares
related to convertible
preferred stock -- -- -- 454 2,896
Number of shares on which
diluted earnings per
share is based 17,615 17,600 17,399 18,517 21,098
Net income/(loss) for the year $17,862 $11,080 $10,776 $ 4,797 $(27,673)
Diluted earnings per share $ 1.01 $ 0.63 $ 0.62 $ 0.26 $ (1.32)
Basic earnings per share $ 1.07 $ 0.65 $ 0.65 $ 0.27 $ (1.53)
</TABLE>
* Restated to reflect a 2-for-1 stock split effective June 2, 1997.
<PAGE> 1
EXHIBIT 13
COMPUTER TASK GROUP, INCORPORATED
1997 Annual Report to Shareholders.
<PAGE> 2
[CTG ARTWORK]
CTG 1 9 9 7 A N N U A L R E P O R T
<PAGE> 3
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Partnering for Competitiveness........................1
Letter to Our Shareholders............................2
Partnership Profiles..................................4
Financial Highlights.................................10
Consolidated Financial Statements....................11
Notes to Consolidated Financial Statements...........16
Report of Independent Auditors.......................26
Consolidated Summary --
Five-Year Selected Financial Information..........27
Management's Discussion and Analysis.................27
Additional Information...............................31
Board of Directors & Officers........................32
CTG Locations........................................33
</TABLE>
CTG's partnership approach has been responsible for our financial growth, as
well as this recent national recognition:
Computerworld's 100 Best Places to Work in I/S ('96 and '97)
Computerworld's Top 25 Employers in I/S Training ('97)
VAR Business 500's Top Consulting Firms ('97)
CIO magazine's Outsourcing Buyer's Guide:
Top Application Maintenance Service Providers ('97)
Arthur Andersen's Enterprise Award for Best Business Practices: "Building
Strategic Alliances" (Upstate New York, '97)
Upside magazine's "High-tech Top Value Creators" ('96)
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
Partnering for Competitiveness, Letter to Our Shareholders, Partnership
Profiles, and Management's Discussion and Analysis. Words such as "believes,"
"forecasts," "intends," "possible," "expects," "estimates," "anticipates," or
"plans" and similar expressions are intended to identify forward-looking
statements. Such forward-looking statements should be read in conjunction with
the Company's disclosures set forth in the first paragraph of the Management's
Discussion and Analysis section, on page 27, which is incorporated herein by
reference.
<PAGE> 4
PARTNERING FOR COMPETITIVENESS
Businesses are changing the way they compete. No longer can they rely solely on
their own resources. More and more companies are joining forces with customers,
competitors, employees, and vendors to share intellectual capital and business
resources in order to excel in their markets.
At nearly $200 billion in size, the worldwide information technology (IT)
services market is growing at 15%-20% per year. The segments in which CTG
competes -- Applications Management, Systems Development and Integration,
Consulting, Help Desk Management, Operations Management, and Business Process
Management, many of which involve year 2000 compliance services -- are among the
fastest growing in the market.
The opportunities presented by this fast-growing market are many and varied,
especially for CTG, whose business is applying the talent of our IT
professionals to clients' IT challenges. Currently, a worldwide shortage of
qualified IT professionals is aggravated by a flood of IT job openings as
companies adapt to technology changes; reductions in the number of computer
science college graduates; and the increased demand presented by the year 2000
challenge. According to the U.S. Department of Commerce, there will be 100,000
new computer-related positions each year for the next decade, yet the number of
computer-related degrees awarded each year by U.S. universities has declined 50%
in the last decade. Cost increases and system disruptions resulting from this
shortage have grown from an inconvenience to a genuine threat to
competitiveness. How can companies deal with these pressures? The answer lies in
building partnerships and alliances.
CTG'S PARTNERSHIP APPROACH
Mutually beneficial relationships between CTG and our clients, our vendors, and
our colleagues have strategic value. By sharing our knowledge and expertise with
our partners, we build career paths for our professionals, and respond more
effectively to our clients' need for IT skills and solutions. Partnership brings
us closer to our goals of revenue growth, recruiting, and retention of our
professionals.
CTG's Strategic Partner and Key Client focus has enhanced revenue growth. These
clients present CTG with the greatest opportunity to add value to their
businesses and, in 1997, revenue from Key Clients grew more than 20%, compared
to 1996.
Strong partnerships with our IT professionals positively affect recruiting and
retention. CTG excels at aggressively recruiting IT professionals with
CTG-SmartSource, our proactive recruiting approach, and a national network of
some of the industry's most creative recruiters. We strengthen our relationships
with our colleagues by offering excellent benefits, training, career
development, and incentive and recognition programs.
Additionally, we collaborate with key software, methodology, service, and tool
developers to strengthen our services for our clients, promote technology
innovation, and support the education of our technical professionals.
Through partnerships with those who drive our success -- clients, professionals,
and vendors --CTG can leverage our intellectual capital and knowledge-based
culture to the benefit of all.
<PAGE> 5
Dear Fellow
SHAREHOLDERS
Gale S. Fitzgerald
Chairman and CEO
We enter 1998 energized by the strong growth of the information technology (IT)
market. What is fueling this growth? It's the realization by companies in all
industries that IT is an essential tool in today's competitive business climate.
1997 was our best year ever in terms of net income and earnings per share (EPS),
and by year-end we had turned a new page in revenue growth. For 1997, revenue
was $407.6 million, an increase of 11.6% over 1996. Net income and diluted
earnings per share for 1997 were $17.9 million and $1.01, respectively,
increases of 61.2% and 60.3% over 1996.
Our financial performance is proof of our ability to capitalize on our market's
extraordinary growth. We continue to focus on Strategic Partners and Key
Clients, and attracting and retaining the best IT professionals. In 1997 we made
excellent progress toward these goals. We added hundreds of CTG colleagues,
trained 300 entry-level graduates, developed strategic partnerships with many
clients, and took our first steps toward leveraging our intellectual capital and
building a true knowledge-based culture.
Information technology solutions need to be business-driven and must make a
difference to our clients' businesses. As more companies recognize this, we are
seeing an increase in demand for our services, especially in project work and
outsourcing. As demand rises, however, the industry is experiencing a critical
shortage of qualified IT professionals. These challenges are the drivers of our
future success and we have a simple but powerful strategy for addressing them:
2
<PAGE> 6
o We will focus on Strategic Partners and Key Clients -- those clients we
believe are interested in partnering with CTG.
o We will attract and retain the best IT professionals by being the best
place to work in the IT services industry.
o We will use our collective intellectual capital and manage our knowledge
for the benefit of our clients.
o We will continue to improve our value to our clients, and thereby our
profitability, for our future investment and shareholder return.
In 1998 we'll concentrate on clients with the best potential for partnership. We
will give them the best overall value and help them attain their goals. We will
deliver more value-added services such as applications management, help desk
management, and year 2000, as well as systems development projects. This
strategy allows us to leverage our collective intellectual capital and provide
the best career opportunities for our professionals.
In 1998 we will continue to attract and retain the best IT professionals the
industry has to offer. The quality of CTG colleagues as individuals and as team
players is the primary reason we have been thriving in this highly competitive
industry. In fact, for two years in a row Computerworld magazine has ranked us
as one of the best places to work in IT. We are committed to retaining and
improving that reputation. This commitment is reflected in the many new benefits
and performance incentives we provide.
To enhance our value to clients, we must have the right professionals with the
best, most up-to-date IT and business skills. Education and training, therefore,
is a never-ending investment. Through our Graduate Program and other training
initiatives, we are developing the best-trained IT professionals in the
industry. In 1996, we spent $5 million on training our professionals, including
training 100 entry-level professionals. In 1997, we spent $8.4 million on
training. We tripled our capacity for entry-level instruction and graduated our
100th Graduate Program class. We opened our third corporate training facility
and doubled the size of our course library. We've also added new classes in
project management and business consulting. In 1998 our training budgets will
increase again. The excellence of our training was recognized by Computerworld
magazine in 1997 when it ranked CTG as one of the top 25 employers for IT
training.
In 1998 we are evolving our strategy, and managing our vast knowledge base for
the benefit of our clients. Our success at becoming the strategic IT services
provider depends on our ability to share our intellectual capital for the
betterment of our clients, our professionals, and our shareholders. This year we
will stay focused on managing our knowledge more effectively. As we do so, the
value we offer our clients and our shareholders, and the opportunities we offer
our professionals, will increase.
CTG's business is growing faster and more profitably than ever: Key Client
business grew more than 20% in 1997 and shows every sign of surpassing that in
1998. For 1998, we have challenging targets for revenue, hiring, and
profitability. With commitment and support, these targets are reachable, as long
as we follow the approaches, methodologies, and processes we've worked so hard
to build.
I look forward to sharing our forthcoming success with you. We thank you for
your continued support and interest in CTG.
Sincerely,
/s/ GALE S. FITZGERALD
- ---------------------------
Gale S. Fitzgerald
Chairman and CEO
3
<PAGE> 7
IBM
IBM AS A STRATEGIC PARTNER
For years, CTG has met industry leader IBM's demanding standards for IT service
quality. When IBM sought to reduce administrative costs and improve service
levels by dramatically reducing its 1,500 professional service vendors to only a
few in the U.S., they selected CTG. We made the cut because of our top-quality
people, processes, and track record in IT solutions. CTG has since extended its
relationship with IBM to provide technical, IT support, engineering, and design
services in the U.S., Canada, and Europe.
"When IBM cut its preferred vendor list from more than 1,500 providers to only a
few, our years of hard work and consistent quality paid off. We'd proved we
could work with IBM to provide value-added services to its organization and,
most important, to its clients. That's what strategic partnerships are all about
- --working together seamlessly."
BETTY DAVIS, NATIONAL SALES MANAGER
CTG, DALLAS, TEXAS
4
<PAGE> 8
STRATEGIC PARTNERS/KEY CLIENTS: REVENUE GROWTH
Corporations are looking at how the IT work force fits into their corporate
structure. CTG is in the forefront of IT organizations that are bringing IT
solutions to their businesses. Strategic Partners like IBM, where CTG is
providing a wide range of IT services, offer us the opportunity to clearly
identify our clients' requirements and structure our processes and organization
to meet their needs. In fact, in 1997 CTG was again selected as one of a handful
of authorized service providers to IBM in the U.S. Our strong relationship with
partners like IBM allows us to help them reduce contracting and administrative
costs, and provide a more consistent level of service and higher level of
customer satisfaction.
CTG's strategy is to focus its efforts and talents on building business
relationships with specific clients. From our clients and prospects, CTG
leadership identifies Key Clients -- those companies that present a significant
opportunity for a long-term, value-added business relationship. As the business
relationship expands, our goal is to evolve those Key Client relationships into
Strategic Partners. Strategic Partners are companies with whom CTG accepts
responsibility for a defined deliverable, service level, or management process.
These relationships deliver the highest value to our clients, and they, in turn,
represent our strongest client relationships.
Over the past several years, CTG has provided more and more managed IT services
to Key Clients, adding the most value and building lasting relationships. Good
examples are application maintenance outsourcing, help desk services, year 2000
services, and Internet/intranet services.
1997's high-water mark of 13 consecutive quarters of growth underlines the
success of our strategy to transition from staffing to higher-value engagements
with Strategic Partners and Key Clients.
Our strategy is to increase our Strategic Partner and Key Client business and to
reach revenue growth in line with our industry. In 1997, this business grew by
more than 20%. Our improved profitability will allow us to continue to invest in
the professional environment we want for ourselves and to generate solid returns
for our shareholders.
SERVICE DELIVERY PARTNERSHIPS:
DELIVERY TEAMS
CTG's delivery teams partner to provide the skills and experience to solve a
client's business and technology challenges. Typically, delivery teams consist
of a core group of programmers, consultants, and other technical professionals,
supported by professionals who manage sales, recruiting, business consulting,
projects, and CTG professionals.
PARTNERING WITH THE MARKET:
STRATEGIC TECHNOLOGY ALLIANCES
An important extension of partnership at CTG is our strategic alliance program.
CTG cultivates business relationships with key technology and service vendors to
enlarge the scope of our activities and offer the best IT solutions to our
Strategic Partners and Key Clients.
We have strategic alliances with many companies, including tool and software
developers, systems integrators, training firms, market research firms,
networking specialists, and vertical industry specialists.
5
<PAGE> 9
AGWAY
A GROWING PARTNERSHIP WITH AGWAY
For the 80,000 farmer-members of the agricultural cooperative Agway, CTG offers
the right ingredients for growth. A variable work force strategy allows CTG to
maintain applications and manage the company's application development teams
while Agway focuses on its business, which includes agricultural products,
retail services, natural food processing, energy products and services, lease
financing, and insurance. The result? Improved IT services at a reduced cost.
"CTG helps Agway retain its competitive position by reducing the expense of its
IT labor force. Our strategic partnership gives Agway access to more than 5,800
IT professionals, and now Agway's former IT staff is eligible for CTG benefits
including IT training and a formal career management program. It's a great
relationship that gives everyone new opportunities to grow."
LEN NAGY, ASSOCIATE SOFTWARE ENGINEER
CTG, SYRACUSE, NEW YORK
6
<PAGE> 10
ATTRACTING THE BEST: PARTNERING FOR RECRUITMENT
The worldwide shortage of IT talent demands that CTG employ aggressive,
innovative recruiting strategies to attract the best and the brightest. At
clients like Agway, partnership extends to the world of the IT professional and
the recruiters who find new employees and make them part of CTG.
Our recruiting is organized around a centralized, nationwide team of recruiting
experts; our leading-edge technology infrastructure; and our proactive
recruiting approach, CTG-SmartSource. CTG-SmartSource gives us access to more
than 190,000 pre-qualified IT professionals.
Frequent surveys of the market give our recruiters a solid sense of who's
available locally and nationally, and how to attract the top candidates.
Recruiters build strong relationships with candidates and qualify them for
employment.
IT professionals with cutting-edge skills demand competitive pay. CTG has
completed in-depth research of compensation patterns in various markets so we
are able to create compensation models that align candidate expectations and
market demand.
Our benefits plans allow our professionals to select the health and welfare,
retirement, and stock purchase programs that suit their individual lifestyles.
IT professionals know that having current skills equates to success, so they are
attracted to companies with excellent training capabilities. Our training
program, named one of the top 25 in the U.S. by Computerworld, includes our
Graduate Program, an intensive course for entry-level personnel. In 1997, we
trained 300 professionals through our Graduate Program -- many of them
non-traditional IT professionals. In 1998 we expect to train 600. Our Training
Services team helps CTG colleagues achieve educational goals through a wide
variety of services, including an extensive library of instructor-led,
computer-based, and video courses, and a generous tuition reimbursement program.
In 1997, more than 24,000 computer-based courses were taken by CTG
professionals.
All of this and more is why CTG was named one of the 100 best places to work in
IT by Computerworld, two years running.
PARTNERSHIP AT ITS BEST:
VIRTUAL TEAMS
The best example of partnership and knowledge sharing are CTG's Technology or
Industry Virtual Teams. These teams comprise CTG professionals from every area
of expertise, sharing best practices and professional knowledge through
discussion groups, bulletin boards, and special project teams. Their goal is to
share new ideas and approaches, the latest technologies, process improvements,
methods, and tactics.
7
<PAGE> 11
ABN AMRO BANK
SERVICE YOU CAN BANK ON
CTG's extensive experience in banking and international business expertise gave
ABN AMRO Bank both the specialized IT services and the business savvy it needed
to expand its services to customers worldwide. From year 2000 conversions of
legacy programs to business consulting, CTG provides the resources and
value-added services a growing international financial organization needs.
"Well-defined services, plus the ability to adapt those services to ABN AMRO
Bank's needs, made us a preferred supplier and partner. As they grow, our
relationship can grow to meet their strategic needs. That growth means
professional growth for me."
ERIK VAN IERSEL, PROJECT LEADER
CTG, HOOFDDORP, THE NETHERLANDS
8
<PAGE> 12
KEEPING THE BEST: PARTNERING FOR PROFESSIONAL RETENTION
Hiring leading-edge talent is just the first step in developing a partnership
with employees and clients. Keeping clients like international banking leader
ABN AMRO Bank satisfied is critical. Keeping the professionals who serve these
clients satisfied is an equal challenge. Our colleagues are essential to our
success, and we work hard to create and maintain an environment that meets their
needs and ambitions.
Our strategic focus on retention is monitored from the highest levels of the
corporation, and we conduct frequent surveys to determine what we have done well
and where we need to improve.
Our professional work environment features competitive wages and
flexible health and welfare benefits. Because we all need to balance our work
and family responsibilities, CTG offers a variety of employment options,
including telecommuting and flex time.
We believe in recognizing our professionals for their contributions to the
company's success. Our innovative IT Professional Bonus Program, for instance,
recognizes our billable professionals' tenure in correlation to the company's
financial performance. CTG provides a corporate-wide recognition framework for
all of our offices.
Helping our professionals enhance their technical skills -- and learn new ones
- -- is not just good for the professional, it's a wise business strategy. CTG
works with local universities to ensure our current and future colleagues
cultivate leading-edge skills.
Moreover, we provide some of the industry's best training through CTG's
computer-based and classroom training, or through external certificate programs,
tuition reimbursement, and degree programs.
SUPPORTING PARTNERSHIPS:
SUPPORT TEAMS
Regional and corporate CTG support teams partner with each other and with
delivery teams to ensure our technical professionals have the tools they need to
provide the highest value to our clients. Support teams provide service in such
areas as finance, human resources, recognition, compensation, project
management, market research, recruitment, knowledge management, methodologies
and tools, training, quality management, and technology infrastructure.
THE CTG EXPERIENCE
Together with our clients, colleagues, and vendors, we're realizing the benefits
of one of the most significant business concepts of the 20th century -
partnership. This, combined with the trust of our clients, the limitless talents
of our colleagues, and the support of our shareholders, is what makes CTG one of
the best places to be in IT.
9
<PAGE> 13
FINANCIAL HIGHLIGHTS
REVENUE IN MILLIONS
1995 1996 1997
- ----- ----- -----
$339.4 $365.1 $407.6
NET INCOME IN MILLIONS
1995 1996 1997
- ----- ----- -----
$7.6* $11.1 $17.9
STOCK PRICE YEAR-END CLOSE
1995 1996 1997
- ----- ----- -----
$9-7/8 $21-9/16 $35-9/16
EARNINGS PER SHARE DILUTED
1995 1996 1997
- ----- ----- -----
$0.44* $0.63 $1.01
NUMBER OF EMPLOYEES
1995 1996 1997
---- ---- ----
5,014 5,142 5,884
- --------------
* Excluding the effect of a non-recurring tax benefit of $3.2 million, or
$0.18 per diluted share, taken in the third quarter.
10
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 407,588 $ 365,076 $ 339,407
Direct costs 288,848 261,583 249,123
Selling, general and administrative expenses 89,784 84,975 77,534
--------- --------- ---------
Operating income 28,956 18,518 12,750
Interest and other income 2,151 1,529 619
Interest and other expense (809) (768) (1,328)
Loss on sales or disposals of assets (30) (775) --
--------- --------- ---------
Income before income taxes 30,268 18,504 12,041
Provision for income taxes including
a $3.2 million benefit related to foreign
operations in 1995 (See note 5) 12,406 7,424 1,265
--------- --------- ---------
Net income $ 17,862 $ 11,080 $ 10,776
========= ========= =========
Net income per share:
Basic $ 1.07 $ 0.65 $ 0.65
========= ========= =========
Diluted $ 1.01 $ 0.63 $ 0.62
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(amounts in thousands)
DECEMBER 31, 1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary cash investments $ 25,033 $ 41,516
Accounts receivable, net of allowance for
doubtful accounts of $951,000 and $975,000, respectively 60,176 55,948
Prepaids and other 2,420 2,630
Deferred income taxes 1,244 1,088
--------- ---------
TOTAL CURRENT ASSETS 88,873 101,182
Property and equipment, net of
accumulated depreciation and amortization 12,445 12,380
Acquired intangibles, net of accumulated
amortization of $6,124,000 and $6,236,000, respectively 3,280 4,533
Deferred income taxes 2,546 2,608
Other assets 597 578
--------- ---------
TOTAL ASSETS $ 107,741 $ 121,281
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,207 $ 9,491
Accrued compensation 21,641 17,572
Income taxes payable 4,620 5,180
Advance billings on contracts 1,158 2,484
Other current liabilities 5,145 4,924
--------- ---------
TOTAL CURRENT LIABILITIES 41,771 39,651
Deferred compensation benefits 9,752 8,889
Other long-term liabilities 892 1,237
--------- ---------
TOTAL LIABILITIES 52,415 49,777
Shareholders' Equity:
Common stock, par value $.01 per share, 150,000,000
shares authorized; 27,017,824 and 26,934,898 shares issued 270 135
Capital in excess of par value 216,028 159,512
Retained earnings 42,939 25,914
Less: Treasury stock of 6,267,289 and 6,262,836 shares, at cost (31,773) (31,655)
Stock Employee Compensation Trust of 4,693,948 and
3,650,544 shares, at fair value (166,929) (78,715)
Foreign currency adjustment (3,206) (2,039)
Minimum pension liability adjustment (1,915) (1,594)
Loans to related parties (54) (54)
Unearned portion of restricted stock to related parties (34) --
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 55,326 71,504
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 107,741 $ 121,281
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(amounts in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,862 $ 11,080 $ 10,776
Adjustments:
Depreciation and amortization expense 5,428 7,651 6,146
Loss on sales or disposals of assets 30 775 --
Deferred compensation expense 542 476 375
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,692) 2,132 (2,871)
(Increase) decrease in prepaids and other 16 (1,080) 487
(Increase) decrease in deferred income taxes (94) 330 1,128
(Increase) decrease in other assets (19) (57) 381
Increase (decrease) in accounts payable 267 174 (94)
Increase in accrued compensation 4,493 7,362 3,803
(Increase) decrease in income taxes payable (555) 3,107 4,993
Increase (decrease) in advance billings on contracts (1,326) 301 451
Increase (decrease) in other current liabilities 390 1,799 (2,326)
Decrease in other long-term liabilities (345) (415) (1,039)
-------- -------- --------
Net cash provided by operating activities 20,997 33,635 22,210
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (4,770) (3,584) (5,370)
Proceeds from sales or disposals of property and equipment 15 1,512 --
-------- -------- --------
Net cash used in investing activities (4,755) (2,072) (5,370)
-------- -------- --------
Cash flows from financing activities:
Net decrease in short-term borrowings -- -- (4,500)
Principal payments on long-term debt -- (5,929) (2,481)
Proceeds from Employee Stock Purchase Plan 1,155 720 515
Purchase of stock for treasury (118) (3,061) (4,181)
Purchase of stock by Stock Employee
Compensation Trust (37,018) -- (733)
Proceeds from other stock plans, inclusive of
related tax benefit 4,266 2,120 6,240
Dividends paid (837) (853) (823)
-------- -------- --------
Net cash used in financing activities (32,552) (7,003) (5,963)
-------- -------- --------
Effect of exchange rate changes on cash and
temporary cash investments (173) 411 556
-------- -------- --------
Net increase (decrease) in cash and temporary cash investments (16,483) 24,971 11,433
Cash and temporary cash investments at beginning of year 41,516 16,545 5,112
-------- -------- --------
Cash and temporary cash investments at end of year $ 25,033 $ 41,516 $ 16,545
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
13
<PAGE> 17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK
SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 12,706 $127 $ 87,327 $ 5,734 2,719 $(24,413)
Employee Stock Purchase Plan issuance 40 1 514 -- -- --
Stock Option Plan issuance 560 5 6,049 -- 35 (553)
Management Stock Purchase Plan:
Issuance -- -- -- -- (10) 115
Repurchase -- -- -- -- 8 (144)
Repayments -- -- -- -- -- --
Purchase of stock -- -- -- -- 256 (3,599)
Stock Employee Compensation Trust
adjustment to fair value -- -- 20,556 -- -- --
Net Income -- -- -- 10,776 -- --
Cash dividends - $.05 per share -- -- -- (823) -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- --------- -------- ------ --------
Balance as of December 31, 1995 13,306 133 114,446 15,687 3,008 (28,594)
Employee Stock Purchase Plan issuance 20 -- 490 -- -- --
Stock Option Plan issuance 141 2 1,801 -- 37 (814)
Management Stock Purchase Plan repayments -- -- -- -- -- --
Purchase of stock -- -- -- -- 86 (2,247)
Stock Employee Compensation Trust
adjustment to fair value -- -- 42,775 -- -- --
Net Income -- -- -- 11,080 -- --
Cash dividends - $.05 per share -- -- -- (853) -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- --------- -------- ------ --------
Balance as of December 31, 1996 13,467 135 159,512 25,914 3,131 (31,655)
Two-for-one stock split 13,467 135 (135) -- 3,131 --
Employee Stock Purchase Plan issuance -- -- -- -- -- --
Stock Option Plan issuance 82 -- 3,228 -- -- --
Deferred Compensation Plan stock issuance -- -- -- -- -- --
Purchase of stock -- -- -- -- 5 (118)
Restricted Stock Plan:
Award 2 -- 44 -- -- --
Amortization -- -- -- -- -- --
Stock Employee Compensation Trust
adjustment to fair value -- -- 53,379 -- -- --
Net Income -- -- -- 17,862 -- --
Cash dividends - $.05 per share -- -- -- (837) -- --
Foreign currency adjustment -- -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- --
------ ---- --------- -------- ------ --------
Balance as of December 31, 1997 27,018 $270 $ 216,028 $ 42,939 6,267 $(31,773)
====== ==== ========= ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 18
<TABLE>
<CAPTION>
MINIMUM UNEARNED
STOCK EMPLOYEE FOREIGN PENSION LOANS TO PORTION OF
COMPENSATION TRUST CURRENCY LIABILITY RELATED RESTRICTED
SHARES AMOUNT ADJUSTMENT ADJUSTMENT PARTIES STOCK
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 1,770 $ (14,881) $(2,441) $ (238) $(557) --
Employee Stock Purchase Plan issuance -- -- -- -- -- --
Stock Option Plan issuance -- -- -- -- -- --
Management Stock Purchase Plan:
Issuance -- -- -- -- (115) --
Repurchase -- -- -- -- -- --
Repayments -- -- -- -- 301 --
Purchase of stock 60 (733) -- -- -- --
Stock Employee Compensation Trust
adjustment to fair value -- (20,556) -- -- -- --
Net Income -- -- -- -- -- --
Cash dividends - $.05 per share -- -- -- -- -- --
Foreign currency adjustment -- -- 706 -- -- --
Minimum pension liability adjustment -- -- -- (1,682) -- --
----- --------- ------- ------- ----- ----
Balance as of December 31, 1995 1,830 (36,170) (1,735) (1,920) (371) --
Employee Stock Purchase Plan issuance (5) 230 -- -- -- --
Stock Option Plan issuance -- -- -- -- -- --
Management Stock Purchase Plan repayments -- -- -- -- 317 --
Purchase of stock -- -- -- -- -- --
Stock Employee Compensation Trust
adjustment to fair value -- (42,775) -- -- --
Net Income -- -- -- -- -- --
Cash dividends - $.05 per share -- -- -- -- -- --
Foreign currency adjustment -- -- (304) -- -- --
Minimum pension liability adjustment -- -- -- 326 -- --
----- --------- ------- ------- ----- ----
Balance as of December 31, 1996 1,825 (78,715) (2,039) (1,594) (54) --
Two-for-one stock split 1,825 -- -- -- -- --
Employee Stock Purchase Plan issuance (39) 1,155 -- -- -- --
Stock Option Plan issuance (207) 955 -- -- -- --
Deferred Compensation Plan stock issuance (3) 73 -- -- -- --
Purchase of stock 1,293 (37,018) -- -- -- --
Restricted Stock Plan:
Award -- -- -- -- -- (44)
Amortization -- -- -- -- -- 10
Stock Employee Compensation Trust
adjustment to fair value -- (53,379) -- -- -- --
Net Income -- -- -- -- -- --
Cash dividends - $.05 per share -- -- -- -- -- --
Foreign currency adjustment -- -- (1,167) -- -- --
Minimum pension liability adjustment -- -- -- (321) -- --
----- --------- ------- ------- ----- ----
Balance as of December 31, 1997 4,694 $(166,929) $(3,206) $(1,915) $ (54) $(34)
===== ========= ======= ======= ===== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 19
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 consolidated 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 consulting services.
REVENUE AND COST RECOGNITION
The Company recognizes revenue on monthly fee and time-and-materials contracts
as hours are expended and costs are incurred.
Fixed-price contracts accounted for under the percentage-of-completion
method represented 2 percent of 1997 and 1996 revenue, respectively. Such
revenue is determined by the percentage of labor and overhead costs incurred to
date to total estimated labor and overhead costs for each contract. Fixed-price
contract costs include all direct labor and material costs and those indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. In addition to an allowance for doubtful accounts of approximately
$1 million at December 31, 1997 and 1996, accounts receivable at December 31,
1997 and 1996 is further reduced by reserves for projects of $1.0 million and
$0.8 million, respectively. Selling, general and administrative costs are
charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At December 31, 1997 and 1996, the carrying amounts of the Company's financial
instruments, which include cash and temporary cash investments and accounts
receivable, approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on estimated
useful lives of two years to 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 gain or loss is 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 $.01 per diluted
net income per share, respectively. The Company also expensed an additional $1.3
million of existing software in 1996 due to an upgrade of its internal systems.
ACQUIRED INTANGIBLES
Acquired intangibles consist of goodwill which is being amortized using the
straight-line method based on an estimated useful life of 15 years. The Company
evaluates the recoverability of the value of acquired intangibles and their
estimated useful lives using discounted cash flows based on current interest
rates to determine whether the assets are impaired.
IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the 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.
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
16
<PAGE> 20
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 Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants 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.
STOCK SPLIT
During 1997, the Board of Directors approved a 2-for-1 split of the Company's
common stock, effective June 2, 1997 to shareholders of record as of May 19,
1997. Shares of common stock, treasury stock, and shares held by the Stock
Employee Compensation Trust at December 31, 1996, have been restated to reflect
this split on the Company's consolidated balance sheets. Shares for 1996 and
prior periods were not restated on the consolidated statements of changes in
shareholders' equity. All references elsewhere throughout this Annual Report to
the number of shares, per share amounts, stock option data and market prices of
the Company's common stock take into effect the stock split.
NET INCOME PER SHARE
At December 31, 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share." This statement establishes standards for computing and
disclosing earnings per share (EPS).
Basic and diluted earnings per share for the years ended December 31, 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
WEIGHTED
AVERAGE EARNINGS
INCOME SHARES PER SHARE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1997
Basic EPS $17,862 16,758 $1.07
=====
Dilutive effect
of outstanding
stock options -- 857
------- ------
Diluted EPS $17,862 17,615 $1.01
======= ====== =====
FOR THE YEAR ENDED
DECEMBER 31, 1996
Basic EPS $11,080 16,980 $0.65
=====
Dilutive effect
of outstanding
stock options -- 620
------- ------
Diluted EPS $11,080 17,600 $0.63
======= ====== =====
FOR THE YEAR ENDED
DECEMBER 31, 1995*
Basic EPS $10,776 16,658 $0.65
=====
Dilutive effect
of outstanding
stock options -- 741
------- ------
Diluted EPS 10,776 17,399 $0.62
====== ====== =====
</TABLE>
*Includes a $3.2 million, or $0.19 basic EPS and $0.18 diluted EPS,
non-recurring tax benefit related to foreign operations.
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 1997, 1996, and 1995 amounted to $0.3 million, $0.9
million, and $0.7 million, respectively, while net income tax payments (refunds)
totaled $9.7 million, $3.4 million, and $(5.6 million) for the respective years.
Income tax refunds received in 1996 and 1995 totaling $7.9 million were
primarily due to previously incurred impairment losses related to the Company's
European operations.
17
<PAGE> 21
During 1997, 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 $53.4
million, $42.8 million, and $20.6 million, respectively.
ACCOUNTING STANDARDS PRONOUNCEMENTS
During the first quarter of 1998, the Company will adopt the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items
recognized as components of comprehensive income, such as a foreign currency or
minimum pension liability adjustments, to be reported in a financial statement
equal to that of the other financial statements. The Company does not believe
that the adoption of this standard will have a material effect on the operations
of the Company.
During 1998, the Company will also adopt the provisions of SFAS No. 131,
"Disclosures About Segments of the Enterprise and Related Information." SFAS No.
131 requires disclosure of segments of a company's business based upon how a
company is organized for making operating decisions and assessing performance.
2. SALES OF ASSETS
There were no significant sales of assets during 1997. 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.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
DECEMBER 31, 1997 1996
-------- --------
<S> <C> <C>
Land $ 886 $ 886
Buildings 6,515 6,508
Equipment 20,958 26,128
Furniture 4,920 6,692
Software 3,582 3,802
Leasehold improvements 839 809
-------- --------
37,700 44,825
Less accumulated
depreciation (25,255) (32,445)
-------- --------
$ 12,445 $ 12,380
======== ========
</TABLE>
At December 31, 1997, the Company owned three buildings, two of which are in use
by the Company. The third building, with a net book value of $2.1 million, is
leased to a third party under a five-year lease which ends in 2000.
4. DEBT
The Company did not have any long-term debt outstanding at either December 31,
1997 or 1996.
The Company has lines of credit available totaling $53 million, renewable
annually at various times throughout the year, with interest at or below the
equivalent of the prime rate. All borrowings under these agreements are
unsecured and payable upon demand. There were no borrowings under these
arrangements at either December 31, 1997 or 1996. There were no commitment fees
paid on unused lines of credit during 1997 or 1996.
The maximum amounts outstanding under short-term borrowings during 1997,
1996 and 1995 were $2.2 million, $2.3 million and $16.2 million, respectively.
Average bank borrowings outstanding for the years 1997, 1996 and 1995 were $0.7
million, $1.2 million and $4.3 million, and carried weighted average interest
rates of 5.0 percent, 5.2 percent and 6.5 percent, respectively.
18
<PAGE> 22
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
DOMESTIC AND FOREIGN COMPONENTS OF (amounts in thousands)
INCOME (LOSS) BEFORE INCOME TAXES ARE AS FOLLOWS: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic $ 28,825 $ 16,674 $ 13,461
Foreign 1,443 1,830 (1,420)
-------- -------- --------
$ 30,268 $ 18,504 $ 12,041
======== ======== ========
THE PROVISION (BENEFIT) FOR INCOME TAXES CONSISTS OF: 1997 1996 1995
-------- -------- --------
Current Tax:
U.S. Federal $ 10,176 $ 4,858 $ (2,367)
Foreign 90 886 2,195
U.S. State and Local 2,234 1,350 309
-------- -------- --------
12,500 7,094 137
Deferred Tax:
U.S. Federal (82) 234 983
U.S. State and Local (12) 96 145
-------- -------- --------
(94) 330 1,128
-------- -------- --------
$ 12,406 $ 7,424 $ 1,265
======== ======== ========
THE EFFECTIVE AND STATUTORY INCOME TAX RATES
CAN BE RECONCILED AS FOLLOWS: 1997 1996 1995
-------- -------- --------
Tax at statutory rate of 34 percent $ 10,291 $ 6,291 $ 4,094
Rate differential 303 85 --
Tax benefit for losses related to the
Company's European operations -- -- (3,200)
State tax, net of federal benefits 1,445 891 204
Expenses for which no tax benefit is available 658 552 807
Change in estimate of nondeductible expenses (475) (596) (514)
Other, net 184 201 (126)
-------- -------- --------
$ 12,406 $ 7,424 $ 1,265
======== ======== ========
Effective income tax rate 41.0% 40.1% 10.5%
</TABLE>
The Company's deferred tax assets and liabilities included the following at:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
Assets 1997 1996
------------ ------------
<S> <C> <C>
Loss carryforwards $ 960 $ 574
Deferred compensation 2,785 2,566
Accruals deductible for tax purposes when paid 1,087 1,144
Allowance for doubtful accounts 292 292
Other 376 364
------- -------
Gross deferred tax assets 5,500 4,940
Liabilities
------- -------
Amortization 264 324
Depreciation 519 425
------- -------
Gross deferred tax liabilities 783 749
Deferred tax assets valuation allowance (927) (495)
------- -------
Net deferred tax assets $ 3,790 $ 3,696
======= =======
Net deferred assets and liabilities including valuation
allowances are recorded at December 31, 1997
and 1996 as follows:
Net current assets $ 1,244 $ 1,088
Net non-current assets 2,546 2,608
------- -------
$ 3,790 $ 3,696
======= =======
</TABLE>
19
<PAGE> 23
The net change in the valuation allowance for deferred tax assets was an
increase of $432,000 from 1996 to 1997, which is included in the change in
estimate of non-deductible expenses appearing in the effective and statutory
income tax reconciliation above. The increase reflects a provision for
additional foreign net operating losses for which no benefit is anticipated.
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 allowance at December 31, 1997.
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.
The Company has NOL carryforwards of approximately $2.8 million at December
31, 1997, which relate to the Company's foreign operations and generally have an
unlimited carryforward period.
In 1997, 1996, and 1995, 233,000, 92,000 and 514,000 shares of common
stock, respectively, were issued through the exercise of non-qualified stock
options or through the disqualifying disposition of incentive stock options. The
total tax benefit to the Company from these transactions, which is credited to
capital in excess of par value rather than recognized as a reduction of income
tax expense, was $2.9 million, $0.5 million, and $0.7 million in 1997, 1996 and
1995, respectively. These tax benefits have also been recognized in the
consolidated balance sheets as a reduction of current taxes payable.
6. LEASE COMMITMENTS
At December 31, 1997, 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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (amounts in thousands)
- ---------------------------------------------------
<S> <C>
1998 $ 5,648
1999 4,250
2000 2,638
2001 1,166
2002 354
Later years 1,360
-------
Minimum future obligations $15,416
=======
</TABLE>
The above operating leases relate to the rental of office space and office
equipment. Total rental expense under such operating leases for 1997, 1996 and
1995 was approximately $6.8 million, $7.8 million, and $7.5 million,
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.
Net periodic pension cost and a reconciliation of funded status at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
NET PERIODIC PENSION COST 1997 1996
------ ------
<S> <C> <C>
Interest cost on projected
benefit obligation $633 $595
Amortization of unrecognized
net loss 48 72
---- ----
$681 $667
==== ====
RECONCILIATION OF FUNDED STATUS 1997 1996
------ ------
Accumulated benefit
obligation - vested $ 9,258 $ 8,627
Effect of projected future
salary increases -- --
------- -------
Projected benefit obligation 9,258 8,627
Plan assets at fair value -- --
------- -------
Projected benefit obligation
in excess of plan assets 9,258 8,627
Unrecognized net obligation -- --
Adjustment needed to
recognize minimum liability (1,915) (1,594)
Unrecognized net loss 1,915 1,594
------- -------
Accrued pension cost $ 9,258 $ 8,627
======= =======
Weighted average discount rate 7.25% 7.50%
Salary increase rate 0% 0%
</TABLE>
20
<PAGE> 24
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.
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 $241,000, $200,000, and $10,000 in 1997, 1996, and
1995, respectively, are based on annually defined financial performance
objectives.
8. EMPLOYEE BENEFITS
401(K) PROFIT-SHARING RETIREMENT PLAN
The Company has a contributory 401(k) 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 $2.4
million, $1.9 million and $1.8 million for 1997, 1996 and 1995, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company provides limited health care and life insurance benefits to 13
retired employees and their spouses, totaling 20 participants, pursuant to
contractual agreements.
Net periodic postretirement benefit cost and a reconciliation of funded
status at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
NET PERIODIC POSTRETIREMENT (amounts in thousands)
BENEFIT COSTS 1997 1996
------ ------
<S> <C> <C>
Interest cost $ 41 $46
Amortization of unrecognized
net obligations 29 30
Other (4) --
---- ---
Net periodic postretirement
benefit cost $ 66 $76
==== ===
RECONCILIATION OF FUNDED STATUS 1997 1996
------ ------
Accumulated postretirement
benefit obligation:
Retirees $ 485 $ 579
Eligible active plan
participants -- --
----- -----
Total accumulated
postretirement benefit
obligation 485 579
Less plan assets at fair value -- --
Less unrecognized transition
obligation (438) (467)
Plus unrecognized gain 229 113
----- -----
Accrued postretirement
benefit liability $ 276 $ 225
===== =====
Weighted average discount rate 7.25% 7.50%
Salary increase rate 0% 0%
</TABLE>
The rate of increase in health care costs was assumed to be 8% and 8.5% in 1997
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 $27,000 at December 31, 1997
and the net periodic cost by $2,000 for the year.
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 11 million as of December 31,
1997, of which 286,000 shares remain unissued. During 1997, 1996 and 1995,
39,000, 50,000 and 80,000 shares were purchased under the plan at an average
price of $29.96, $14.23 and $6.39 per share, respectively.
MANAGEMENT STOCK PURCHASE PLAN
Under the Company's Management Stock Purchase Plan approved in 1992, 800,000
common shares have been designated (up to 400,000 shares from treasury) for
purchase by certain key employees. During 1997 and 1996, no loans were made to
employees. In 1996, employees repaid loans representing 101,822 shares with a
value of $316,976. During 1995, the Company loaned $115,000 to an employee to
purchase 19,574 shares of the Company's Common Stock from treasury at a price of
$5.88 per share, and employees repaid loans representing 73,392 shares with a
value of $301,420. 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 secures the loans is 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, other than Company-provided employee benefit
plans, and when an offer to acquire is made. Each right entitles the holder to
purchase
21
<PAGE> 25
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) 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 1997, the SECT
purchased 1.3 million shares for $37 million and used 207,000 shares to fund
stock option exercises and 39,000 shares to fund Employee Stock Purchase Plan
purchases. During 1996, 11,000 shares were released from the SECT to fund the
fourth quarter Employee Stock Purchase Plan purchase. As of December 31, 1997,
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 $53.4 million, $42.8 million, and $20.6 million
for the years ending December 31, 1997, 1996, and 1995, respectively.
RESTRICTED STOCK PLAN
Under the Company's Restricted Stock Plan, 800,000 shares of restricted stock
may be granted to certain key employees. During 1997, the Company granted 2,000
shares of restricted stock to one of its employees. The shares vest to the
employee over 48 months, and are forfeited if the employee is no longer employed
by the Company at the end of the vesting period.
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 four
annual installments of 25 percent of the shares covered by the grant, beginning
one year from the date of grant, and expire six years after becoming
exercisable. Nonqualified stock options either become exercisable in four or
five annual installments of 20 or 25 percent of the shares covered by the grant,
beginning one year from the date of grant, and expire 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 1997, 1996, and 1995 was $12.95, $5.71, and $2.64,
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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Expected life (years) 5.9 6.0 6.0
Dividend yield 0.19% 0.45% 0.86%
Risk-free interest rate 6.15% 5.89% 6.99%
Expected volatility 42.36% 41.45% 39.76%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for the 1991 and 1981 Plans
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and basic and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income
As reported $17,862 $11,080 $10,776
Pro forma $15,959 $10,250 $10,557
Basic earnings
per share
As reported $1.07 $0.65 $0.65
Pro forma $0.95 $0.60 $0.63
Diluted earnings
per share
As reported $1.01 $0.63 $0.62
Pro forma $0.91 $0.58 $0.61
</TABLE>
Pro forma net income reflects only options granted subsequent to December 31,
1994. Accordingly, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above as compensation cost is reflected over the options' vesting
period as discussed above, and compensation cost for options granted prior to
January 1, 1995 is not considered. Pro forma amounts for compensation cost may
not be indicative of the effects on earnings in future years.
22
<PAGE> 26
A summary of stock option activity under these plans follows:
<TABLE>
<CAPTION>
1981 PLAN WEIGHTED AVERAGE 1991 PLAN WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 165,366 $ 5.55 1,121,386 $ 5.19
Granted -- -- 682,000 $11.92
Exercised (120,796) $ 5.59 (160,950) $ 4.38
Canceled or expired (24,246) $ 5.29 (122,100) $ 6.72
-------- ---------
Outstanding at December 31, 1996 20,324 $ 5.58 1,520,336 $ 8.17
Granted -- -- 626,950 $26.26
Exercised (5,952) $ 5.59 (282,474) $ 4.49
Canceled or expired -- -- (586) $ 3.75
-------- ---------
Outstanding at December 31, 1997 14,372 $ 5.58 1,864,226 $14.81
</TABLE>
At December 31, 1997 and 1996, the number of options exercisable under the 1991
Plan was 598,076 and 425,550, respectively, and the weighted average exercise
price of those options was $10.92 and $7.45, respectively. At December 31, 1997
and 1996, the number of options exercisable under the 1981 Plan was 14,372 and
20,324, respectively, and the weighted average exercise price of those options
was $5.58 in both years.
A summary of the range of exercise prices and the weighted-average remaining
contractual life of outstanding options at December 31, 1997, for the 1991 and
1981 plans follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
RANGE OF OPTIONS OUTSTANDING WEIGHTED AVERAGE CONTRACTUAL
EXERCISE PRICES AT DECEMBER 31, 1997 EXERCISE PRICE LIFE (YEARS)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 Plan
$3.4375 to $4.8125 215,176 $ 4.16 5.8
$6.125 to $9.00 644,600 $ 7.53 6.1
$9.4375 to $12.75 57,500 $10.07 6.7
$14.3125 to $20.75 320,000 $15.04 12.9
$21.8125 to $30.3125 614,450 $26.05 9.0
$36.75 12,500 $36.75 8.0
1981 Plan
$4.5625 to $5.50 11,624 $ 5.26 1.3
$6.9375 2,748 $ 6.94 0.7
</TABLE>
At December 31, 1997, there were 922,282 and 0 shares available for grant under
the 1991 Plan and 1981 Plan, respectively.
During 1997, the Company acquired stock for treasury valued at $118,000 from
employees through stock option exercise transactions.
23
<PAGE> 27
11. SIGNIFICANT CUSTOMER
IBM is the Company's largest customer. IBM accounted for $142.2 million or 34.9
percent, $107.4 million or 29.4 percent and $80 million or 23.7 percent of
consolidated 1997, 1996 and 1995 revenue, respectively. The Company's accounts
receivable from IBM at December 31, 1997 and 1996 amounted to $19.7 million and
$16.2 million, respectively. No other customer accounted for more than 10
percent of revenue in 1997, 1996 or 1995.
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.
13. SEGMENT INFORMATION
The Company operates in one segment: the consulting services sector of the
information technology industry.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION RELATING TO DOMESTIC (amounts in thousands)
AND FOREIGN OPERATIONS 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue
North America $360,849 $325,328 $306,156
Europe 46,739 39,748 33,251
-------- -------- --------
Total Revenue $407,588 $365,076 $339,407
Operating Income (Loss)
North America $ 34,103 $ 29,460 $ 25,186
Europe 3,663 3,265 450
Corporate and Other (8,810) (14,207) (12,886)
-------- -------- --------
Total Operating Income $ 28,956 $ 18,518 $ 12,750
======== ======== ========
Identifiable Assets
North America $ 57,519 $ 54,943 $ 61,771
Europe 15,777 14,988 13,280
Corporate and Other 34,445 51,350 29,715
-------- -------- --------
Total Identifiable Assets $107,741 $121,281 $104,766
======== ======== ========
Capital Expenditures
North America $ 2,226 $ 1,468 $ 3,273
Europe 648 904 273
Corporate and Other 1,896 1,212 1,824
-------- -------- --------
Total Capital Expenditures $ 4,770 $ 3,584 $ 5,370
======== ======== ========
Depreciation and Amortization
North America $ 2,872 $ 3,550 $ 2,618
Europe 630 569 667
Corporate and Other 1,926 3,532 2,861
-------- -------- --------
Total Depreciation and Amortization $ 5,428 $ 7,651 $ 6,146
======== ======== ========
</TABLE>
Corporate and other identifiable assets consist principally of cash and
temporary cash investments and other assets.
24
<PAGE> 28
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
QUARTERS
1997 FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenue $94,935 $100,105 $101,132 $111,416 $407,588
Direct costs 68,235 70,579 70,911 79,123 288,848
Selling, general and
administrative expenses 20,876 22,183 22,749 23,976 89,784
------- -------- -------- -------- --------
Operating income 5,824 7,343 7,472 8,317 28,956
Net interest and other income 292 377 507 136 1,312
------- -------- -------- -------- --------
Income before income taxes 6,116 7,720 7,979 8,453 30,268
Net income $ 3,669 $ 4,485 $ 4,717 $ 4,991 $ 17,862
Basic net income per share $ 0.22 $ 0.27 $ 0.28 $ 0.30 $ 1.07
Diluted net income per share $ 0.21 $ 0.26 $ 0.26 $ 0.29 $ 1.01
</TABLE>
<TABLE>
<CAPTION>
QUARTERS
1996 FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
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
Basic net income per share $ 0.13 $ 0.15 $ 0.18 $ 0.19 $ 0.65
Diluted net income per share $ 0.13 $ 0.15 $ 0.17 $ 0.18 $ 0.63
</TABLE>
25
<PAGE> 29
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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Computer
Task Group, Incorporated and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- ---------------------------
KPMG Peat Marwick LLP
Buffalo, New York
February 4, 1998
26
<PAGE> 30
CONSOLIDATED SUMMARY - FIVE-YEAR SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(amounts in millions, except per share data)
OPERATING DATA 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue $407.6 365.1 339.4 301.6 295.5
Operating income (loss) $ 29.0 18.5 12.8 (2.2) (29.4)*
Income (loss) before income taxes $ 30.3 18.5 12.0 8.1 (30.7)
Net income (loss) $ 17.9 11.1 10.8** 4.8 (27.7)
Basic net income (loss) per share $ 1.07 0.65 0.65** 0.27 (1.53)
Equivalent shares outstanding
for basic net income (loss) per share 16.8 17.0 16.7 17.9 18.2
Diluted net income (loss) per share $ 1.01 0.63 0.62** 0.26 (1.32)
Equivalent shares outstanding
for diluted net income (loss) per share 17.6 17.6 17.4 18.5 21.1
Cash dividend per share $ 0.05 0.05 0.05 0.05 0.05
FINANCIAL POSITION
------ ----- ----- ----- -----
Working capital $ 47.1 61.5 49.5 38.8 51.3
Total assets $107.7 121.3 104.8 95.5 108.6
Long-term debt $ -- -- 3.6 6.1 8.4
Shareholders' equity $ 55.3 71.5 61.5 50.7 62.5
</TABLE>
* Includes expenses of $33.5 million for restructuring and impairment losses.
** Includes a non-recurring tax benefit of $3.2 million ($0.19 basic net
income per share and $0.18 diluted net income per share) related to losses
associated with the Company's European operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Statements included in this Management's Discussion and Analysis of Results of
Operations and Financial Condition and elsewhere in this document that do not
relate to present or historical conditions are "forward-looking statements"
within the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 21F of the Securities Exchange Act of 1934, as amended.
Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents that are
filed with the Securities and Exchange Commission. Such forward-looking
statements involve risks and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements.
Forward-looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. Among
the important factors on which such statements are based are assumptions
concerning the anticipated growth of the information technology 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.
1997 VS. 1996
In 1997, CTG recorded revenue of $407.6 million, an increase of 11.6 percent
when compared to 1996 revenue of $365.1 million. North American revenue
increased by $35.5 million or 10.9 percent during the year, while revenue from
European operations increased by $7 million, or 17.6 percent. European revenues
are 11.5 percent of total Company revenues. Overall, the revenue increase was
primarily due to an increase in billing rates and additional billable personnel
in 1997 as compared to 1996.
During 1997, the Company continued the implementation of its Key Client
strategy. From 1995 to the end of 1997, the Company reduced its total number of
clients from over 1,200 to approximately 430. Offsetting the reduction in the
total number of clients was growth in revenues from the Company's Key Clients.
Revenue from the Company's Key Clients, which includes IBM, the Company's
largest client, grew at a rate in excess of 20 percent during 1997.
Additionally, the strength of the U.S. dollar reduced revenue from our
European operations. If there had been no change in the foreign currency
exchange rates from December 31, 1996 to December 31, 1997 in the countries in
which the Company conducts business, those being Holland, Belgium, the United
Kingdom and Luxembourg, total consolidated revenues would have increased by an
additional $5.8 million, resulting in a consolidated year-over-year revenue
growth rate of 13.2 percent.
27
<PAGE> 31
In December 1997, CTG renewed a contract with IBM for three additional
years as one of IBM's national technical service providers for the United
States. The contract covers approximately 59 percent of the total services
provided to IBM by the Company in 1997. IBM continued to be the Company's
largest customer, accounting for $142.2 million or 34.9 percent of 1997 total
revenue as compared to $107.4 million or 29.4 percent of 1996 revenue. The
Company expects to continue to derive a significant portion of its revenue from
IBM in 1998 and future years. While a significant decline in revenue from IBM
would have a material adverse effect on the Company's revenues and profits, the
Company believes a simultaneous loss of all IBM business is unlikely to occur
due to the recent renewal of the national contract, the number of contracts
presently in existence with IBM, the diversity of the projects performed for IBM
and the number of locations and divisions involved.
Direct costs, defined as costs for billable staff, were $288.8 million or
70.9 percent of revenue in 1997 compared to $261.6 million or 71.7 percent of
revenue in 1996. The decrease in direct costs as a percentage of revenue in 1997
as compared to 1996 is primarily due to a trend toward higher value-added
consulting services and an increase in billing rates, consistent with the
Company's Key Client strategy.
Selling, general and administrative expenses were $89.8 million or 22.0
percent of revenue in 1997 compared to $85 million or 23.3 percent of revenue in
1996. The decrease from 1996 to 1997 is primarily due to an ongoing effort to
reduce overhead costs as a percentage of revenue in 1997, and additional
software expense in 1996 due to an upgrade of the Company's internal systems.
Operating income was $29 million or 7.1 percent of revenue in 1997 compared
to $18.5 million or 5.1 percent of revenue in 1996. The increase is primarily
due to the factors discussed above. Operating income from North American
operations increased $10 million or 65.8 percent from 1996 to 1997. European
operations recorded operating income of $3.7 million in 1997 as compared to $3.3
million in 1996. The European improvement in profitability is primarily due to
the 17.6 percent increase in revenue discussed above and an increase in higher
value-added consulting services performed in 1997.
Interest and other income increased $0.6 million to $2.1 million in 1997
from $1.5 million in 1996. The increase was a result of an increase in cash and
temporary cash investments on hand for most of 1997.
Income before income taxes was $30.3 million or 7.4 percent of revenue in
1997 compared to $18.5 million or 5.1 percent of revenue in 1996. The provision
for income taxes for 1997 was 41 percent compared to 40.1 percent for 1996. The
increase in the tax rate is due to additional taxable income in 1997 which is
subject to higher marginal tax rates, as compared to 1996.
During 1997, the Company declared a 2-for-1 stock split effective June 2,
1997. All earnings per share amounts prior to that date have been restated to
reflect the stock split.
Net income for 1997 was $17.9 million or $1.07 per share (basic) and $1.01
per share (diluted), compared to $11.1 million or $0.65 per share (basic) and
$0.63 per share (diluted) in 1996. Earnings per share was calculated using 16.8
million (basic) and 17.6 million (diluted) and 17 million (basic) and 17.6
million (diluted) equivalent shares outstanding in 1997 and 1996, respectively.
The increase in equivalent shares outstanding for diluted earnings per share is
primarily due to the dilutive effect of outstanding stock options on the
earnings per share calculation.
During the period 1993 through 1996, the Company expended considerable sums
replacing and upgrading existing hardware, applications, and operating systems.
In 1996, the Company conducted an assessment of the year 2000 issue by examining
all internal and third-party applications, interfaces, hardware, and operating
systems (hereinafter "computer systems"). During 1997, the Company, under the
direction of executive management, has generated a complete inventory of its
computer systems that may be impacted by the year 2000 issue. The Company's
compliance program is designed to assure that mission-critical computer systems,
materially necessary to the day-to-day operation of the business, are year 2000
compliant and ready for testing by December 31, 1998. To address the year 2000
issue, the Company has established a year 2000 budget and compliance plan. The
Company estimates that the total future amount to be spent to address the year
2000 issue is approximately $500,000.
Currently, the Company is in the process of evaluating and updating all
mission-critical computer systems. The Company, as part of its year 2000
compliance program, has been, and continues to be, in communication with vendors
providing third-party computer systems in order to receive necessary assurance
that such computer systems are or will be year 2000 compliant on or before
December 31, 1998. In any instance where the Company does not receive reasonable
assurance from vendors as to year 2000 compliance for any third-party computer
system on or before December 31, 1998, the Company will develop contingency
plans. With respect to purchases of new hardware upgrades of computer systems,
the Company's practice is to formally request year 2000 certification from all
of its vendors.
The Company expects all mission-critical computer systems to be ready for
testing on or before December 31, 1998. The Company expects that such computer
systems will be year 2000 compliant prior to December 31, 1999.
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." The adoption of this
standard did not have a material impact on the operations of the Company.
During the first quarter of 1998, the Company will adopt the provisions of
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires all items
recognized as components
28
<PAGE> 32
of comprehensive income, such as a foreign currency or minimum pension liability
adjustment, to be reported in a financial statement equal to that of the other
financial statements. The Company does not believe that the adoption of this
standard will have a material effect on the operations of the Company.
During 1998, the Company will also adopt the provisions of SFAS No. 131,
"Disclosures About Segments of the Enterprise and Related Information." SFAS No.
131 requires disclosure of segments of a company's business based upon how a
company is organized for making operating decisions and assessing performance.
1996 VS. 1995
In 1996, CTG recorded revenue of $365.1 million, at that time 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 very positive growth for Key Clients, lower or negative revenue
growth for non-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 covered approximately 59 percent of the total services provided to IBM
by the Company in 1996. This contract expired in December 1997, and was renewed
for three additional years. IBM continued 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.
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 was primarily due to a trend toward higher value-added
consulting 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 was
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 was
primarily due to the 19.5 percent increase in revenue discussed above and an
increase in higher value added consulting 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 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 $0.65 per share (basic) and $0.63
per share (diluted), compared to $10.8 million or $0.65 per share (basic) and
$.62 per share (diluted) 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 $0.46 per share (basic) and
$0.44 per share (diluted). Earnings per share was calculated using 17 million
(basic) and 17.6 million (diluted) and 16.7 million (basic) and 17.4 million
(diluted) equivalent shares outstanding in 1996 and 1995, respectively. The
increase in equivalent shares outstanding for diluted earnings per share is
primarily due to the dilutive effect of outstanding stock options on the
earnings per share calculation.
29
<PAGE> 33
FINANCIAL CONDITION
Cash provided by operating activities was $21 million for 1997. Net income
totaled $17.9 million, and non-cash adjustments for depreciation and
amortization expense and deferred compensation expense totaled $6 million.
Accounts receivable increased $5.7 million or 9.5 percent as a result of
increases in revenue offset by improved accounts receivable turnover. Accrued
compensation and other current liabilities increased $4.9 million due to an
increase in the usage of outside contractors by the Company during 1997 and the
timing of the Company's U.S. biweekly payroll. Advanced billings on contracts
decreased $1.3 million due to the mix of the contracts outstanding at December
31, 1997 as compared to December 31, 1996. At December 31, 1997, the Company's
current ratio is 2.1 to 1.
Net property and equipment increased $0.1 million. Additions to property
and equipment were $4.8 million offset by depreciation of $4.7 million. The
Company has no material commitments for capital expenditures at December 31,
1997. Net acquired intangibles decreased $1.3 million, caused by amortization of
$0.7 million and $0.6 million in translation adjustments.
Financing activities used $32.6 million of cash in 1997. Approximately 1.3
million shares of the Company's stock were purchased by the Company's SECT for
$37 million, principally in the fourth quarter. At December 31, 1997,
consolidated shareholders' equity totaled $55.3 million, which is a decrease of
$16.2 million, or 22.7 percent, from December 31, 1996. The decrease is
primarily due to the purchase of shares by the Company's SECT, offset by 1997
net income of $17.9 million.
During 1997, the Company received $1.2 million from employees for 39,000
shares of stock purchased under the Employee Stock Purchase Plan. The Company
also received $3.2 million for the exercise of 288,000 stock options, inclusive
of the related tax benefit. Payments totaling $0.1 million were made for the
purchase of stock for treasury. The Company paid an annual dividend of $.05 per
share totaling $0.8 million in May 1997.
The Company has approximately $53 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 two million
shares and on July 21, 1995 authorized the repurchase of another 1.4 million
shares of its Common Stock for treasury and by the Company's SECT. At December
31, 1997, approximately 2.5 million shares have been repurchased under the
authorizations, leaving 0.9 million shares authorized for future purchases.
The Company believes existing internally available funds, cash generated by
operations, and borrowings will be sufficient to meet foreseeable working
capital, stock repurchase and capital expenditure requirements and to allow for
future internal growth and expansion.
30
<PAGE> 34
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
STOCK MARKET INFORMATION
YEAR ENDED DECEMBER 31, 1997: HIGH LOW
- --------------------------------------------------------
<S> <C> <C>
First Quarter 23-5/8 17-1/4
Second Quarter 39-1/2 16-9/16
Third Quarter 49-3/8 33-3/4
Fourth Quarter 44-1/2 27
YEAR ENDED DECEMBER 31, 1996: HIGH LOW
- --------------------------------------------------------
First Quarter 10-3/16 8-3/8
Second Quarter 15-15/16 9-15/16
Third Quarter 16-1/2 11-5/8
Fourth Quarter 21-3/4 15-3/16
</TABLE>
The Company's common shares are traded on the New York Stock Exchange under the
symbol TSK, commonly abbreviated Cptr Task. The shares are listed on the
Amsterdam Stock Exchange and are traded by means of the Amsterdam Security
Account System (ASAS).
On February 4, 1998, there were 3,512 record holders of the Company's
common shares. The Company paid an annual cash dividend of $.05 per share from
1993 to 1997 and prior to that had paid $.025 per share annually since 1976 plus
a 10 percent share dividend in 1980. The Company expects to continue to pay cash
dividends subject to the availability of earnings, the financial condition of
the Company, and other relevant factors at the time.
ANNUAL MEETING
The annual meeting of shareholders has been scheduled for April 29, 1998 in
Buffalo, New York for shareholders of record on March 16, 1998.
FORM 10-K AVAILABLE
Copies of the Company's Form 10-K Annual Report, which is filed with the
Securities and Exchange Commission, may be obtained without charge upon written
or verbal request to:
Computer Task Group, Incorporated
Investor Relations Department
800 Delaware Avenue
Buffalo, NY 14209-2094
(716) 887-7400
TRANSFER AGENT AND REGISTRAR
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:
BankBoston, N.A.
c/o Boston EquiServe
P.O. Box 8040
Boston, MA 02266-8040
(781) 575-3170 (MA residents)
(800) 730-4001
(781) 828-8813 (fax)
www.equiserve.com
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
12 Fountain Plaza, Suite 601
Buffalo, New York 14202
31
<PAGE> 35
CTG BOARD OF DIRECTORS
GEORGE B. BEITZEL
Retired Senior Vice President and Director,
IBM Corporation
RICHARD L. CRANDALL
Managing Director, Arbor Partners LLC
Retired Chairman and CEO, Comshare, Inc.
GALE S. FITZGERALD
Chairman and Chief Executive Officer,
Computer Task Group, Inc.
PAUL W. JOY
Retired Vice Chairman, American Brass Company
RANDOLPH A. MARKS
Co-Founder, Computer Task Group, Inc.
Retired Chairman, American Brass Company
BARBARA Z. SHATTUCK
Principal, Shattuck Hammond Partners, Inc.
CTG OFFICERS
GALE S. FITZGERALD
Chairman and Chief Executive Officer
JONATHAN R. ASHER
Vice President, Operations, IBM National Team
RICHARD A. BALLOU
Vice President, Operations, Southeast Region
CHARLES A. BARBOUR
Vice President, Operations, North Region
JAMES R. BOLDT
Vice President and Chief Financial Officer
LOUIS J.F. BOYLE
Vice President and Chief Information Officer
BEATRICE C. DE ROCCO
Vice President, Sales and Marketing
MICHAEL E. GRICH
Vice President, Operations, West Region
JOSEPH G. MAKOWSKI
Vice President, General Counsel and Secretary
NICO H. MOLENAAR
Vice President and Managing Director, CTG Europe
32
<PAGE> 36
CTG LOCATIONS
ALBANY, NY
(518) 456-9323
National Healthcare
Group
(800) 549-4559
(518) 464-4147
ANCHORAGE, AK
(907) 261-6500
ATLANTA, GA
(800) 345-6855
(770) 263-3400
AUSTIN, TX
(800) 553-8394
(512) 502-0190
BALTIMORE, MD
(410) 837-3700
BOSTON, MA
(617) 937-5564
BUFFALO, NY
(716) 888-3400
Corporate Headquarters
(716) 882-8000
(800) 992-5350
CENTRAL PA
(717) 691-8999
CHARLOTTE, NC
(800) 361-0252
(704) 527-6730
CHICAGO, IL
(630) 434-0312
CINCINNATI, OH
(513) 793-6611
CLEVELAND, OH
(216) 524-6441
COLUMBUS, OH
(614) 268-8883
DALLAS, TX
(800) 549-1635
(972) 919-1555
DELAWARE VALLEY
(800) 891-7270
(610) 891-7200
DENVER, CO
(303) 770-8833
(800) 728-5073
DES MOINES, IA
(515) 225-8379
DETROIT, MI
(248) 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
(800) 201-5055
(904) 737-9400
KANSAS CITY, KS
(913) 469-4188
MELBOURNE, FL
(407) 725-1300
MEMPHIS, TN
(901) 766-9335
MERRILLVILLE, IN
(800) 508-8841
(219) 738-1908
NORTH REGION HQ
(219) 756-6360
MILWAUKEE, WI
(414) 821-3320
NASHVILLE, TN
(615) 373-0794
OMAHA, NE
(402) 342-0494
PITTSBURGH, PA
(412) 323-8600
CTG METALS CENTER
(412) 963-8288
PORTLAND, OR
(503) 222-2915
POUGHKEEPSIE, NY
(914) 462-5043
RALEIGH, NC
(INCLUDES SOUTHEAST
REGION HQ)
(800) 851-6577
(919) 851-9008
ROCHESTER, NY
(716) 325-4220
SALT LAKE CITY, UT
(801) 363-0800
SAN JOSE, CA
(800) 451-5671
(408) 441-6777
ST. LOUIS, MO
(INCLUDES WEST
REGION HQ)
(314) 469-7100
SYRACUSE, NY
(315) 463-6276
(800) 272-5852
TAMPA, FL
(813) 289-4471
TOPEKA, KS
(913) 469-4188
TORONTO, ONT., CANADA
(800) 226-9625
(416) 360-3756
VANCOUVER, BC, CANADA
(604) 685-6422
WASHINGTON, DC
(703) 790-1557
WINSTON-SALEM, NC
(800) 392-1215
(336) 724-4441
CTG EUROPE
BELGIUM
32-2-720 51 70
ENGLAND - NOTTINGHAM
44-1159-678-078
ENGLAND - READING
44-1189-750-877
LUXEMBOURG
352-298 7271
THE NETHERLANDS
(includes CTG
Europe HQ)
31-23-5684100
INTERNET ADDRESS:
http://www.ctg.com
<PAGE> 1
EXHIBIT 21
COMPUTER TASK GROUP, INCORPORATED
Subsidiaries of Computer Task Group, Incorporated.
<PAGE> 2
SUBSIDIARIES OF COMPUTER TASK GROUP, INCORPORATED
The following is a list of all of the subsidiaries of the Registrant as of
December 31, 1997. 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:
<TABLE>
<CAPTION>
State/Country
or Jurisdiction
of Incorporation
----------------
<S> <C> <C>
- - 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.)
</TABLE>
<PAGE> 1
EXHIBIT 23
COMPUTER TASK GROUP, INCORPORATED
Consent of Independent Accountants.
<PAGE> 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, and No.
333-43263 on Form S-3 of Computer Task Group, Incorporated of our report dated
February 4, 1998 which appears on page 26 of the 1997 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, 1997.
We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page IV-2 of such annual report
on Form 10-K.
KPMG PEAT MARWICK LLP
Buffalo, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,033,000
<SECURITIES> 0
<RECEIVABLES> 61,127,000
<ALLOWANCES> 951,000
<INVENTORY> 0
<CURRENT-ASSETS> 88,873,000
<PP&E> 37,700,000
<DEPRECIATION> 25,255,000
<TOTAL-ASSETS> 107,741,000
<CURRENT-LIABILITIES> 41,771,000
<BONDS> 0
0
0
<COMMON> 270,000
<OTHER-SE> 55,056,000
<TOTAL-LIABILITY-AND-EQUITY> 107,741,000
<SALES> 0
<TOTAL-REVENUES> 407,588,000
<CGS> 0
<TOTAL-COSTS> 288,848,000
<OTHER-EXPENSES> 89,784,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296,000
<INCOME-PRETAX> 30,268,000
<INCOME-TAX> 12,406,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,862,000
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000023111
<NAME> COMPUTER TASK GROUP, INC.
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 41,516,000 16,545,000
<SECURITIES> 0 0
<RECEIVABLES> 56,923,000 59,408,000
<ALLOWANCES> 975,000 862,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 101,182,000 78,769,000
<PP&E> 48,249,000 51,922,000
<DEPRECIATION> 35,869,000 33,941,000
<TOTAL-ASSETS> 121,281,000 104,766,000
<CURRENT-LIABILITIES> 39,651,000 29,260,000
<BONDS> 0 5,929,000
0 0
0 0
<COMMON> 135,000 133,000
<OTHER-SE> 71,369,000 61,343,000
<TOTAL-LIABILITY-AND-EQUITY> 121,281,000 104,766,000
<SALES> 0 0
<TOTAL-REVENUES> 365,076,000 339,407,000
<CGS> 0 0
<TOTAL-COSTS> 261,583,000 249,123,000
<OTHER-EXPENSES> 84,975,000 77,534,000
<LOSS-PROVISION> 113,000 0
<INTEREST-EXPENSE> 902,000 1,328,000
<INCOME-PRETAX> 18,504,000 12,041,000
<INCOME-TAX> 7,424,000 1,265,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,080,000 10,776,000
<EPS-PRIMARY> 0.65 0.65
<EPS-DILUTED> 0.63 0.62
</TABLE>
