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EXHIBIT 13
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COMPUTER TASK GROUP, INCORPORATED
1999 ANNUAL REPORT TO SHAREHOLDERS.
We were IT
We are IT
For more than 30 years, information technology (IT) consulting has been CTG's
core competency. Founded in 1966, CTG today is a $472 million information
technology and e-business solutions firm helping Global 2000 clients achieve
competitive advantage through the use of IT. Our 55 offices in North America and
Europe, 5,000+ IT professionals, and suite of proprietary, ISO 9001-certified
service methodologies enable us to manage knowledge globally and deliver
high-value IT solutions when and where our clients need them. CTG clients
include some of the world's leading companies, in industries such as health
care, retail, manufacturing and distribution, financial services, and
telecommunications. As a strategic partner with our clients, CTG provides IT
services tailored to their needs at every phase of the business life cycle.
TABLE OF CONTENTS
1 Message from the CEO
2 ZeniusTM.
4 ExemplarTM
6 ITCapitalTM
8 CTG HealthCare SolutionsTM
10 Financial Section
11 Consolidated Summary--Five-Year Selected Financial Information
12 Management's Discussion and Analysis
16 Auditors' Report
17 Consolidated Financial Statements
22 Notes to Consolidated Financial Statements
32 Corporate Information
33 Officers & Board of Directors
OFFICERS:
Jonathan R. Asher
Vice President, CTG Exemplar North America
Henri Bersoux
Vice President, CTG Zenius
James R. Boldt
Vice President, Global Support Services and Chief Financial Officer
Janice M. Cole
Vice President, Global Career Development
Gale S. Fitzgerald
Chairman and Chief Executive Officer
Joel I. Ivers
Chief Marketing Officer
Nico Molenaar
Vice President, CTG Exemplar Europe
John F. Moore
Vice President, CTG ITCapital
Thomas Niehaus
Vice President, CTG HealthCare Solutions
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BOARD OF DIRECTORS
George B. Beitzel
Retired Senior Vice President and Director of IBM
Richard L. Crandall
Managing Director of Arbor Partners LLC
Retired Chairman and Chief Executive Officer of Comshare, Inc.
R. Keith Elliott
Chairman and former Chief Executive Officer of
Hercules Incorporated
Gale S. Fitzgerald
Chairman and Chief Executive Officer of CTG
Randolph A. Marks
Co-Founder and former Chairman, President, and Chief Executive Officer of CTG
Retired Chairman of American Brass Company
Barbara Z. Shattuck
Managing Director of Shattuck Hammond, a division of
PriceWaterhouseCoopers Securities
We will be IT
As the second century of information technology begins, the vast opportunity of
the Internet is driving our business and the new economy. In February 2000, CTG
aligned its business to capitalize on that opportunity and to focus on the
markets where we are strongest and where there is the greatest potential to grow
our business. As one of the largest and most responsive IT services and
solutions firms in the industry, CTG now provides its services through three
major businesses: ZeniusTM, ExemplarTM, and ITCapitalTM, along with a focus on
the health care market through CTG HealthCare SolutionsTM. Each of these
businesses provides IT solutions to help our clients compete in their respective
marketplaces:
ZeniusTM develops end-to-end e-business solutions, empowering clients to win in
the Internet economy and enhance their relationships with customers, suppliers,
partners, and employees through the creation of a unique, Web-based
communication system called the Zenius WebTM.
ExemplarTM designs, implements, and manages comprehensive application and IT
solutions--encompassing software applications, technology assessments and
selections, project management, and outsourcing--which are in demand by clients
with critical IT needs.
ITCapitalTM delivers IT talent management and professional services solutions.
With a long record of success in supporting the large and complex IT talent
needs of Global 1000 companies, CTG provides a valuable talent deployment and
management solution for its clients. As a result, clients can focus on their
core businesses.
CTG HealthCareSolutionsTM brings CTG's Zenius, Exemplar, and ITCapital services
and solutions to the health care provider and payor to help its clients achieve
their IT and business goals.
CTG has a strong track record and foundation upon which to build our business.
With a more than 30-year history in IT behind us, we've been where you want to
goTM. We were, we are, and we will be IT.
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FROM THE CEO
Dear Fellow Shareholder,
Nineteen ninety-nine was a challenging year for our business and our industry.
CTG held its own in this environment, generating revenues of $472.0 million
compared to revenues of $467.8 million in 1998. Net income for 1999 was $16.7
million or $1.00 per diluted share compared to $24.0 million or $1.42 per
diluted share in 1998. CTG's 1999 financial performance reflects the dramatic
slowdown in information technology (IT) spending in 1999 and the important
investments we are making to position our business for future growth.
As many of you are aware, the focus of the Y2K issue shifted in 1999 from
companies preparing their systems for Y2K compliance to their widespread
reluctance to undertake any major systems work until after the actual transition
into 2000. The magnitude of the resulting slowdown in IT activity and projects
surprised everyone, although it was difficult to predict given the extraordinary
nature of the Y2K event and the heightened level of Y2K-related anxiety that
took hold as the year 2000 approached. In hindsight, CTG's decision to limit
Y2K-related work to no more than 15% of our business was a sound one, because it
allowed us to focus our energies and talents on the areas of our business where
there are the greatest opportunities for sustained long-term growth.
While the actual event of Y2K passed without major incident, it remains with us
in its impact on IT activity, which is currently expected to remain at reduced
levels through the first half of this year. Beyond 2000, however, we see
enormous long-term opportunity to build our business, given the power of
information technology to increase competitive advantage and the growing impact
of the Internet and e-commerce on the global economy.
The IT services market served by Exemplar and ITCapital is projected to grow at
an approximate annual rate of 15% (Source: Dataquest). Growth projections for
the Internet and e-commerce development market served by CTG's newly formed
Zenius business are significantly higher, with that sector projected to grow at
a compound annual rate of 58.7% by 2003 (Source: International Data
Corporation). We have positioned CTG to capitalize on these opportunities by
concentrating our business focus on the markets where we are strongest and where
there is the greatest potential to add value for our clients and to support them
in their growth.
In our over 30-year history, CTG has evolved and functioned as a provider of IT
solutions on many levels. By forming Zenius in February 2000, we have further
extended CTG's strengths into the Internet arena to capture today's highest
growth opportunity in IT services on a global basis. As we establish Zenius as
an important business for CTG and as a major driver of our future growth, we
also remain focused on generating growth in our ongoing IT solutions and
services business through Exemplar and ITCapital.
We are confident in our ability to win a greater share of the IT solutions and
e-business segments for the following reasons:
- - Intellectual capital: The collective experience and expertise of CTG's
more than 5,000 colleagues in a broad range of IT and business disciplines,
called our Intellectual AdvantageTM, is an important differentiator in our
ability to add value for clients. Our commitment to knowing our clients'
business enables us to focus on and extend our clients' value chain and
consistently produce workable solutions.
- - Industry-specific expertise: CTG has a significant depth of experience
in several high-growth industries, including health care, retail, financial
services, telecommunications, and manufacturing and distribution. Our
industry-specific expertise has been and will continue to be an important
differentiator in winning new business.
- - Strong client relationships: As a consulting organization with a long
history of success, our delivery organization is adept in meeting client
expectations and building client relationships. With thousands of successful
engagements behind us, CTG has many established client relationships to leverage
as we expand our focus on e-business.
- - E-commerce capabilities: CTG has significant expertise in several
e-commerce-related competencies, including supply chain, customer relationship,
and enterprise resource management. The combination of this expertise with CTG's
substantial experience in interfacing with enterprise-wide
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systems will be an important contributor to our success in serving the
e-business needs of large, established organizations--our target market.
- - Global business experience: CTG has a strong European presence and has
significant business experience with multinational clients. Our track record and
ability to work on an international level are important assets as enterprises
continue to seek IT and business solutions that consider an increasingly global
marketplace.
- - Strong training and recruiting organizations: CTG's commitment to
training and colleague professional development is widely known throughout the
industry, giving us an advantage in attracting top-level talent and skills to
our organization. Our world-class training and career development organization,
coupled with our strong recruiting capabilities, provide CTG with an effective
solution to address IT skill needs.
- - Ability to partner: CTG has developed a network of alliances and
partnerships to deliver the best combination of products, tools, and expertise
to support customized solutions. CTG also significantly increased its e-business
resources and capabilities in 1999 by partnering with several software and
e-business service providers.
There were also a number of developments in our business during 1999 that bode
well for CTG in 2000 and beyond. CTG secured a number of significant contracts
in 1999 with a broad range of clients, including a major textile manufacturer,
two large regional health care providers, a leading retail grocery chain, two
large steel industry companies, a global oil and gas enterprise, a large
software developer, an energy services company, a global networking solutions
provider, and a global communications services company. We also expanded our
business in the financial services sector, reaching significant agreements with
KeyCorp, a leading U.S. financial services company, and Liberty Insurance
Services, one of North America's largest third-party life and health insurance
administrators.
CTG also continues to extend our business reach through partnerships and
alliances. One of our most successful strategic partnerships has been with
Longview Solutions, a software solution provider in the intelligent e-business
marketplace, for its KhalixTM product. Khalix is an industry-leading technology
that supports planning, budgeting, consolidation, and analytics for Global 2000
companies. During 1999, the CTG Exemplar team successfully implemented Khalix in
27 companies.
In February 1999, CTG added substantially to our vertical business expertise and
our client base with the acquisition of Elumen Solutions, which we combined with
our own health care practice to form CTG HealthCare Solutions. This acquisition
established CTG as one of the largest health care IT consulting firms in North
America. We are optimistic that the long-term growth prospects for IT investment
in health care are strong based on industry consolidation, the value IT brings
to productivity and cost management, and the opportunity to help clients address
issues related to the Health Information Portability and Accountability Act
(HIPAA).
In the fourth quarter of 1999, CTG created a global marketing organization to
drive revenue growth and increase our visibility and brand equity in all the
markets we serve. Joel Ivers was appointed as Chief Marketing Officer in January
2000. Joel brings over 20 years of marketing and sales management experience to
CTG with a significant focus on technology marketing and new business, product,
and service launches. In February 2000, Henri Bersoux joined CTG as a Vice
President leading our newly launched Zenius business. Henri comes to CTG from
Ernst & Young, LLP, and brings extensive experience in e-commerce, digital
strategy, and Web development, as well as strategic marketing and
communications. Both Joel and Henri are excellent additions to CTG's executive
team with strong track records of executing new growth strategies quickly and
successfully.
Although the after-effect of Y2K continues to have an industry-wide impact on IT
activity, we remain very confident in CTG's strategy and long-term growth
prospects. This year will be one where we will make significant investments in
e-business to ensure that we are well positioned to capitalize on the
significant opportunity it holds for us. CTG has a very solid business and
financial foundation, along with many other strengths, to leverage for the
benefit of our shareholders. Foremost among these strengths are the more than
5,000 colleagues of CTG who continue to make the greatest contribution to our
success, delivering IT solutions in 1999 to nearly 800 clients, including many
of the world's leading companies.
Thank you for your interest and continued support of CTG.
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CTG ZeniusTM leverages CTG's expertise in supply chain management, enterprise
resource planning, and customer relationship management to capitalize on the
growing demand for integrated e-commerce solutions.
Our ability to address the enterprise integration needs behind the Web site sets
Zenius apart in the marketplace. Our experience with legacy systems is a
significant advantage for e-commerce initiatives of established enterprises--the
`clicks and mortar' market. Zenius' approach protects the investments companies
have made in enterprise-wide applications while taking full advantage of the
power of the Internet.
Applying business and industry knowledge, along with our unique strategic
approach using solution architects and Web developers at our Zenius
AcceleratorTM, Zenius enables our clients to win in the Internet economy. We do
this by adapting our clients' business strategy and building a comprehensive Web
solution. Zenius draws on CTG's network of alliances to deliver the best
combination of products, tools, and expertise to support customized e-business
solutions.
BUSINESS TO BUSINESS FOR SEIC:
Delivering a Global Intranet/Extranet Solution
Sakhalin Energy Investment Company (SEIC), a joint venture company operating in
the Russian Far East, called on CTG Zenius to recommend, design, and implement a
global intranet/extranet solution that would meet its aggressive security and
time requirements. The CTG Zenius solution enabled SEIC to safely distribute
highly sensitive information to its shareholders via the Internet, saving
valuable time and money over manual distribution. Additionally, it enabled SEIC
to share information with multiple business units worldwide.
BUSINESS TO EMPLOYEE FOR BP AMOCO:
Building an Online Job Fair
For the last three years, CTG Zenius has been providing intranet-related
services to British Petroleum (BP). When BP and Amoco merged in early 1999, the
$174 billion petroleum giant called on CTG Zenius to create an application that
would help employees affected by the merger find new opportunities. The CTG
Zenius solution, a Web-based `Continuous Job Fair,' provides an exclusive, free
service that enables eligible client employees to post resumes and search job
listings, and enables employers to post job openings. The Web site has received
international media attention. More than 1,900 resumes have been posted on the
site since it was piloted in February 1999, and roughly 1,100 companies have
listed job opportunities.
BUSINESS TO CONSUMER FOR PROCARE:
Maximizing Web Power
PROCARE, a chain of automotive service centers in the eastern U.S., called on
CTG Zenius to help upgrade its image on the Internet. PROCARE wanted a Web site
with consumer and market appeal that would provide accurate, up-to-date
information about its services and locations. CTG Zenius created an information-
and marketing-oriented Web site that is easily searchable and maintainable, and
that incorporates customer feedback mechanisms. The CTG Zenius solution helped
PROCARE maximize the effectiveness of its Web site as a marketing and customer
service tool.
CTG ExemplarTM plans, designs, implements, and maintains start-to-finish
application, application management, and IT solutions for clients in industries
worldwide.
At the planning stage, CTG Exemplar helps clients assess their IT needs. Our IT
and vertical industry experts examine the client organization's current
technology, application portfolio, and data architecture. Then we recommend
solutions ranging from selection and implementation of existing software to the
construction of new systems.
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Once a solution has been defined, CTG Exemplar's state-of-the-art design,
development, and testing services are delivered by skilled technicians supported
by intensive training programs and proprietary best practices.
During a project's implementation phase, new technology is integrated seamlessly
into existing systems. Once implementation is complete, CTG Exemplar supports
the requirements of managing and maintaining enterprise software, from rollout
to subsequent updates, conversions, hosting, and help desk activities.
A SEVEN-YEAR IT PARTNERSHIP WITH LONE STAR STEEL
Lone Star Steel is a $500 million U.S. manufacturer and distributor of tubular
steel products. To improve IT services, Lone Star outsourced all IT functions to
CTG, including application management, operations, network management,
telephony, help desk, and PC repair. According to Byron Dunn, Lone Star Steel's
President and CEO, "The relationship with CTG has been very important to Lone
Star--from everyday hardware maintenance to legacy systems Y2K compliance. But
even more importantly, we look to CTG Exemplar's expertise to help ensure the
success of our current ERP implementation project and other future strategic IT
initiatives."
PROTECTING ALYESKA'S PIPELINE
As a major Alaska-based pipeline system operator, Alyeska spends approximately
$30 million annually on corrosion management and systems integrity. To ensure
safe operation of its pipeline system, Alyeska asked CTG Exemplar to help
develop a corrosion management system with maximal functionality to integrate
corrosion data from several sources.
CTG Exemplar managed a project to design, develop, and implement an application
that monitors corrosion data and acts as a decision support tool. The new system
has improved user productivity and efficiency, has enabled the client to realize
substantial cost savings, and has helped increase the level of pipeline safety,
while enhancing Alyeska's reputation as a leader in the field of pipeline
corrosion management.
MAKING THE TELECOM CONNECTION WITH ONE 2 ONE
One 2 One is a major U.K. digital mobile phone service provider owned by
Deutsche Telekom, one of the world's largest telecommunications companies. In
this competitive, fast-changing industry, One 2 One has encountered critical
speed-to-market challenges and unprecedented growth in its customer base,
placing increasing demands on the smooth interaction between One 2 One's
business operations and its IT systems. Through a range of business consultancy
services--including e-business strategy development, project management, systems
and business analysis, applications management, and data warehousing--CTG
Exemplar and One 2 One have worked together in partnership to succeed in meeting
those challenges.
SUPPORTING THE ARTHRITIS FOUNDATION
In 1997 the Arthritis Foundation, a U.S. nonprofit health organization, called
on CTG Exemplar to assess its business and technology strategies. The assessment
led to a variety of projects for CTG, including standardization of the client's
technical environment across its headquarters and 55 local chapters, 69
branches, and other locations. Currently CTG Exemplar manages and supports the
majority of the Arthritis Foundation's portfolio of IT needs.
CTG ITCapitalTM recruits, retains, and manages IT talent for our clients. While
our Global 1000 customers focus on their core businesses, CTG manages the
acquisition and deployment of the professionals they depend on for IT solutions.
Using an assessment methodology to define each client's staffing needs, we build
a customized supply model to streamline everything from technical requisitions
to invoices. Our strategic staffing Web tool, CTG ITCapital SelectTM, allows our
clients to submit requests for help, review progress on their requisitions, and
access candidate resumes online. ITCapital assets include Internet-based
requisitions, service level agreements, customized reporting, vendor management
programs, and EDI payments.
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Internet recruiting, recruiting to hot skills, hiring to profile, and a
centralized global recruiting center define our approach. Hiring and retaining
qualified IT professionals is closely linked with effectively managing those
professionals. We give our clients the benefit of a sole source provider who is
closely aligned to their strategies and who can deliver resources on a national
basis.
A PREFERRED PROVIDER FOR IBM
In 1995, CTG ITCapital was chosen as one of nine vendors in the U.S. to provide
technical services to IBM. Vendor selection was based on price, quality, and the
ability to respond quickly to IBM's high-volume requirements. CTG remains
committed to IBM's service level agreements and has a dedicated team serving the
corporation's needs. Under a recently extended contract, CTG ITCapital will
continue as one of IBM's key providers of technical services.
PROVIDING IT SERVICES TO LIBERTY INSURANCE SERVICES
Liberty Insurance Services (LIS), one of North America's largest third-party
life and health insurance administrators, expressed interest in reducing
contingent workforce dollars and cutting the number of its IT vendors without
sacrificing quality. Using our PartnerProcess methodology, CTG ITCapital
assessed LIS' current staffing processes through facilitated sessions and
one-on-one interviews. Based on our findings and recommendations, the company
developed a leading-edge strategy to serve its IT consulting needs over the
coming years.
IT SUPPORT FOR ELI LILLY AND COMPANY
Eli Lilly and Company, a global pharmaceutical company, selected CTG ITCapital
as one of only nine preferred IT services vendors in the U.S. CTG's IT services
include project management, application management, and help desk support. In
addition, CTG ITCapital was selected as one of three companies in the U.S. to
provide contracted statistical sciences and consulting services to this
pharmaceutical giant.
As a preferred vendor, CTG ITCapital's services are customized to Eli Lilly and
Company's industry, environment, and work approaches. This level of interaction
requires a strong business understanding and effective communication that
fosters trust and generates results.
AN APPROVED SUPPLIER FOR KPN TELECOM
KPN Telecom is the Netherlands' largest telecommunications firm, with 1998
revenues of $8 billion. CTG has provided flexible staffing services to KPN since
1994. The relationship was recently expanded when CTG ITCapital was named an
approved supplier, partnering with KPN to provide a wide range of services on
strategic, tactical, and operational levels. Currently, CTG ITCapital is
managing multiple LAN migration projects for KPN, which regards us as one of its
primary partners for information technology services.
HEALTHCARE SOLUTIONSTM
CTG HealthCare SolutionsTM is a leading provider of information technology
consulting services to health care providers and payors in North America. Using
its proprietary Intellectual AdvantageTM storehouse of knowledge and experience
and its AssureWareTM Web-enabled engagement-management methodology, CTG
HealthCare Solutions delivers services that include software application
support, systems integration, information technology management, infrastructure
support, and a full suite of e-business solutions. Software supported includes
SMS(R), McKessonHBOC, Lawson Software(R), IDXTM, Cerner(R), MEDITECH, STC, HIE,
and Neon, among others.
In a climate of new legislation such as HIPAA and the Balanced Budget Act of
1997, health care industry clients rely on CTG HealthCare Solutions to help them
attain their financial and clinical objectives by maximizing the return on their
IT hardware and software investments.
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A SEAMLESS SYSTEMS SWITCH FOR OHIO HEALTH NETWORK
Ohio Health Network, an integrated delivery network of six hospitals, decided to
migrate from an SMS Medical Information System to a new McKessonHBOC system for
its registration, business office, and financial accounting needs. The dilemma
was how to continue supporting the SMS system while learning and developing the
new McKessonHBOC system. CTG HealthCare Solutions' comprehensive solution:
outsource all of Ohio Health's SMS needs with 24-hour, on-call support.
IMPLEMENTING HNA MILLENNIUMTM FOR AURORA HEALTHCARE
Aurora Healthcare--a 13-hospital, 200-clinic health system headquartered in
Milwaukee, Wisconsin--asked CTG HealthCare Solutions to meet the challenge of
implementing and seamlessly integrating the latest version of HNA MillenniumTM
services across multiple environments. CTG HealthCare Solutions trained the
project team, developed system management procedures, and converted and tested
the new systems.
UPGRADING BLOOD BANK TECHNOLOGY FOR THE NEW ENGLAND MEDICAL CENTER
New England Medical Center's (NEMC) Blood Bank performs testing to determine
blood product donor/recipient compatibility. CTG HealthCare Solutions performed
critical MEDITECH system upgrades for this client--including a conversion of the
system's blood bank module--while ensuring the highest standards of accuracy and
consistency for the blood bank's performance and maintaining rigorous safety
measures for patient care. The conversions met strict regulatory agency
requirements for blood bank validation and enabled the NEMC Blood Bank to
maintain daily operations throughout the project.
visit us on the web at www.ctg.com
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FINANCIAL SECTION
Table of Contents
11 Consolidated Summary--Five-Year Selected Financial Information
12 Management's Discussion and Analysis
16 Auditors' Report
17 Consolidated Financial Statements
22 Notes to Consolidated Financial Statements
REVENUE IN MILLIONS OPERATING INCOME IN MILLIONS
$ 472.0 '99 $ 30.8* '99
$ 467.8 '98 $ 39.9 '98
$ 407.6 '97 $ 29.0 '97
$ 365.1 '96 $ 18.5 '96
$ 339.4 '95 $ 12.8 '95
DILUTED NET INCOME PER SHARE
$ 1.00* '99
$ 1.42 '98
$ 1.01 '97
$ 0.63 '96
$ 0.62** '95
* Includes the expense of a non-recurring arbitration award, which
lowered operating income by approximately $2.5 million, and diluted net income
per share by $0.09
** Includes a non-recurring tax benefit of $0.18 diluted net income per
share related to losses associated with the Company's European operations
CONSOLIDATED SUMMARY -
Five-Year Selected Financial Information
(amounts in millions, except per share data)
CONSOLIDATED SUMMARY 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
OPERATING DATA
Revenue $ 472.0 $ 467.8 $ 407.6 $ 365.1 $ 339.4
Operating income $ 30.8* $ 39.9 $ 29.0 $ 18.5 $ 12.8
Income before
income taxes $ 29.9* $ 40.8 $ 30.3 $ 18.5 $ 12.0
Net income $ 16.7* $ 24.0 $ 17.9 $ 11.1 $ 10.8**
Basic net income
per share $ 1.02* $ 1.48 $ 1.07 $ 0.65 $ 0.65**
Diluted net income
per share $ 1.00* $ 1.42 $ 1.01 $ 0.63 $ 0.62**
Cash dividend per $ 0.05* $ 0.05 $ 0.05 $ 0.05 $ 0.05
per share
FINANCIAL POSITION
Working capital $ 35.2 $ 74.9 $ 47.1 $ 61.5 $ 49.5
Total assets $ 199.2 $ 156.8 $ 107.7 $ 121.3 $ 104.8
Long-term debt $ 31.4 $ - $ - $ $ 3.6
Shareholders' equity $ 94.9 $ 83.4 $ 55.3 $ 71.5 $ 61.5
* Includes the expense of a non-recurring arbitration award, which
lowered operating income and income before income taxes by approximately $2.5
million, net income by approximately $1.5 million, and basic and diluted net
income per share by $0.09
** 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Results of Operations and Financial Condition
FORWARD-LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of Results of
Operations and Financial Condition and elsewhere in this document that do not
relate to present or historical conditions are "forward-looking statements"
within the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 21F of the Securities Exchange Act of 1934, as amended.
Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents that are
filed with the Securities and Exchange Commission. Such forward-looking
statements involve risks and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements.
Forward-looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations, and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements. Among
the important factors on which such statements are based are assumptions
concerning the anticipated growth of the information technology (IT) industry,
the continued need of current and prospective customers for the Company's
services, the availability of qualified professional staff, and price and wage
inflation.
Results of Operations
To better understand the financial trends of the Company, the following table
sets forth data as contained on the consolidated statements of income, with the
information calculated as a percentage of consolidated revenues.
Year ended December 31, 1999 1998 1997
(percentage of revenue)
Revenue 100.0% 100.0% 100.0%
Direct costs 67.0% 68.6% 70.9%
Selling, general, and
administrative expenses,
less non-recurring
charge 26.0% 22.9% 22.0%
Non-recurring charge 0.5% - -
Operating income 6.5% 8.5% 7.1%
Interest and other
income (expense) (0.2)% 0.2% 0.3%
Income before income
taxes 6.3% 8.7% 7.4%
Provision for income
taxes 2.8% 3.6% 3.0%
Net income 3.5% 5.1% 4.4%
1999 AS COMPARED TO 1998
In 1999, CTG recorded revenue of $472.0 million, an increase of 0.9 percent when
compared to 1998 revenue of $467.8 million. North American revenue decreased by
$3.1 million or (0.8) percent during the year, while revenue from European
operations increased by $7.3 million, or 9.9 percent. In 1999, European revenues
are 17.1 percent of total Company revenues.
While the Company's revenues benefited in 1999 from the acquisition of Elumen
Solutions, Inc. (Elumen) and from providing higher-value services to its
customers, similar to other companies in the IT professional services industry,
CTG's revenues were negatively impacted as companies deferred systems
development and integration work until the actual impact of year 2000 on their
systems could be assessed and resolved. CTG believes that this industry-wide
slowdown is a short-term phenomenon and that the long-term growth prospects for
its business remain strong for 2000 and beyond.
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The 1998 to 1999 year-to-year revenue growth rate was impacted slightly by the
strengthening of the U.S. dollar as compared to the currencies of the
Netherlands, Belgium, the United Kingdom, and Luxembourg. If there had been no
change in these foreign currency exchange rates from 1998 to 1999, total
consolidated revenues would have been $3.2 million higher, resulting in a
year-to-year consolidated revenue growth rate of 1.6 percent. This additional
$3.2 million increase in European revenue would have increased the European
revenue growth rate to 14.3 percent.
In January 1999, the Company renewed a contract with IBM for one year as one of
IBM's national technical service providers for the United States. In December
1999, this contract was extended until March 2000. The contract covered 81.6
percent of the total services provided to IBM by the Company in 1999. In 1999,
IBM continued to be the Company's largest customer, accounting for $128.9
million or 27.3 percent of total revenue as compared to $151.4 million or 32.4
percent of 1998 revenue. Although revenues from IBM have been constrained in
1999, CTG expects to continue to derive a significant portion of its revenue
from IBM in 2000 and future years. While the decline in revenue from IBM has had
an 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 existence
of the national contract, 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 67.0 percent of revenue
in 1999 compared to 68.6 percent of revenue in 1998. The decrease in direct
costs as a percentage of revenue in 1999 as compared to 1998 is primarily due to
the continuing trend of the Company providing higher-value services to its
clients.
Selling, general, and administrative expenses, excluding the non-recurring
charge of $2.5 million taken in the first quarter of 1999, were 26.0 percent of
revenue in 1999 compared to 22.9 percent of revenue in 1998. The increase from
1998 to 1999 is primarily due to investments in 1999 in sales and marketing,
recruiting, and training programs. Additionally, goodwill amortization expense
related to the acquisition of Elumen increased selling, general and
administrative expense year over year.
During the first quarter of 1999, CTG recorded a non-recurring charge of $2.5
million to provide for an arbitration award related to a contract dispute
between the Company and one of its customers. As a percentage of consolidated
revenue, this charge lowered operating income and income before taxes in 1999 by
0.5 percent, net income by 0.3 percent, and basic and diluted earnings per share
by $0.09.
Operating income was 6.5 percent of revenue in 1999 compared to 8.5 percent of
revenue in 1998. Without the non-recurring charge, operating income would have
been 7.0 percent of revenue in 1999. The year-over-year decrease is primarily
due to the non-recurring charge, and the investments discussed above. Operating
income from North American and Corporate operations decreased $10.6 million or
33.6 percent from 1998 to 1999. European operations recorded operating income of
$9.9 million in 1999 as compared to $8.2 million in 1998. The European
improvement in profitability is primarily due to the 9.9 percent increase in
revenue disclosed above and an increase in higher-value services performed in
1999.
Interest and other income (expense) was (0.2) percent of revenue for 1999, and
0.2 percent in 1998. In 1999, interest expense on indebtedness related to the
acquisition of Elumen was partially offset by interest income on available cash
and temporary cash investments.
Income before income taxes was 6.3 percent of revenue in 1999 compared to 8.7
percent of revenue in 1998. Without the non-recurring charge, income before
income taxes would have been 6.8 percent of revenue in 1999. The provision for
income taxes was 44.1 percent in 1999 and 41 percent in 1998. The increase in
the effective income tax rate in 1999 was due to an increase in non-deductible
expenses related to the Elumen acquisition.
Net income for 1999 was 3.5 percent of revenue, or $1.02 basic earnings per
share (EPS) and $1.00 diluted EPS, compared to 5.1 percent of revenue or $1.48
basic EPS and $1.42 diluted EPS in 1998. Earnings per share was calculated using
16.4 million (basic EPS) and 16.7 million (diluted EPS) and 16.2 million (basic
EPS) and 16.9 million (diluted EPS) equivalent shares outstanding in 1999 and
1998,
105
12
respectively. The decrease in equivalent shares outstanding for diluted
earnings per share is primarily due to the stock purchases by the Company's
Stock Trusts in 1999.
Relative to year 2000 computer concerns, the Company had completed all of its
remediation and systems testing with respect to its mission critical computer
systems and mission critical non-IT systems prior to December 31, 1999. The
Company had determined that mission critical systems or vendors were those that
were vital to the operations of the Company. As part of CTG's year 2000
compliance program, the Company has not made any changes to its hardware or
software for its mission critical computer systems since June 30, 1999 and into
the year 2000. The total amount spent and expensed in 1998 and 1999 to address
year 2000 issues totaled less than $500,000. As of the date of the filing of
these consolidated financial statements with the Securities and Exchange
Commission, the Company has had no material disruptions in its mission critical
systems.
CTG operates in one industry segment, providing IT professional services to its
clients. The services provided typically encompass the IT business solution life
cycle, including phases for planning, development, and managing and maintaining
the IT solution. A portion of the IT professional services the Company
previously provided included assessment, planning, remediation, testing, and
contingency planning services for year 2000 compliance. CTG actively managed the
inherent risk in the services it provided to its clients through a thorough
contract review process, and by including contractual provisions in its
contracts that were designed to mitigate risk to the Company. Revenue generated
from year 2000 compliance services was approximately 10 percent of CTG's
consolidated revenues in 1999 and 1998.
1998 AS COMPARED TO 1997
In 1998, CTG recorded revenue of $467.8 million, an increase of 14.8 percent
when compared to 1997 revenue of $407.6 million. North American revenue
increased by $33.8 million or 9.4 percent during the year, while revenue from
European operations increased by $26.5 million, or 56.7 percent. In 1998,
European revenues were 15.7 percent of total Company revenues. Overall, the
consolidated revenue increase in 1998 as compared to 1997 was mainly due to the
Company providing higher-value services to its customers, and additional
billable personnel.
During 1998, and for several years prior to that, the Company implemented its
Key Client strategy. The first phase of the strategy was to identify and focus
on selected Key Clients. To that end, CTG reduced the number of customers that
it served from 1,200 in 1995 to approximately 430 by the end of 1997. The next
phase of the strategy was to increase the percentage of higher-value services in
the company's sales mix. CTG believes that its successful implementation of its
Key Client strategy caused earnings to increase significantly faster than
revenues during 1998 and 1997, and that the strategy continued to add to the
Company's financial performance in 1999 through an improved direct margin.
The 1997 to 1998 year-to-year revenue growth rate was impacted slightly by the
strengthening of the U.S. dollar as compared to the currencies of the
Netherlands, Belgium, the United Kingdom, and Luxembourg. If there had been no
change in these foreign currency exchange rates from 1997 to 1998, total
consolidated revenues would have been $0.4 million higher, resulting in a
year-to-year consolidated revenue growth rate of 14.9 percent. This additional
$0.4 million increase in revenue in Europe would have increased the European
revenue growth rate to 57.6 percent.
In January 1999, CTG renewed a contract with IBM for one year as one of IBM's
national technical service providers for the United States. The contract covered
59 percent of the total services provided to IBM by the Company in 1998. IBM
continued to be the Company's largest customer, accounting for $151.4 million or
32.4 percent of 1998 total revenue as compared to $142.2 million or 34.9 percent
of 1997 revenue. The Company continued to derive a significant portion of its
revenue from IBM in 1999.
Direct costs, defined as costs for billable staff, were 68.6 percent of revenue
in 1998 compared to 70.9 percent of revenue in 1997. The decrease in direct
costs as a percentage of revenue in 1998 as compared to 1997 was primarily due
to a trend toward CTG providing higher-value services to its clients, consistent
with CTG's Key Client focus.
106
13
Selling, general, and administrative expenses were 22.9 percent of revenue in
1998 compared to 22.0 percent of revenue in 1997. The increase from 1997 to 1998
was primarily due to additional investments in 1998 in sales and marketing,
recruiting, and training programs.
Operating income was 8.5 percent of revenue in 1998 compared to 7.1 percent of
revenue in 1997. In dollars, there was a 37.6 percent increase year over year
from $29.0 million in 1997 to $39.9 million in 1998. As mentioned above, CTG
continued its focus on Key Clients, with particular emphasis on those
relationships that were mutually profitable for CTG and its clients. The fourth
quarter of 1998 marked the 17th straight quarter of operating income improvement
for CTG. Operating income from North American and Corporate operations increased
$6.3 million or 25 percent from 1997 to 1998. European operations recorded
operating income of $8.2 million in 1998 as compared to $3.7 million in 1997.
The European improvement in profitability was primarily due to the 56.7 percent
increase in revenue discussed above and an increase in higher-value services
performed in 1998.
Due to its European operations, CTG was moderately affected by the
implementation of the Euro currency in most of the countries in which it
operates. However, this effect was financially immaterial as the Company had
upgraded its internal systems to be Euro-compliant with nominal cost to the
company. Additionally, the Company did not experience pricing or competitive
pressures from other IT professional services providers that materially affected
either revenues or profits for CTG as a whole.
Interest and other income and expense was 0.2 percent of revenue in 1998
compared to 0.3 percent of revenue in 1997. This decrease was a result of having
less cash and temporary cash investments on hand for most of 1998, as the
Company's Stock Employee Compensation Trust (SECT) utilized a significant
portion of the Company's available cash and temporary cash investments in the
fourth quarter of 1997 to purchase CTG's stock on the open market.
Income before income taxes was 8.7 percent of revenue in 1998 compared to 7.4
percent of revenue in 1997. The provision for income taxes for 1998 and 1997 was
41 percent.
Net income for 1998 was 5.1 percent of revenue, or $1.48 basic EPS and $1.42
diluted EPS, compared to 4.4 percent of revenue or $1.07 basic EPS and $1.01
diluted EPS in 1997. Earnings per share was calculated using 16.2 million (basic
EPS) and 16.9 million (diluted EPS) and 16.8 million (basic EPS) and 17.6
million (diluted EPS) equivalent shares outstanding in 1998 and 1997,
respectively. The decrease in equivalent shares outstanding for diluted earnings
per share was primarily due to the stock purchases by the Company's SECT in the
fourth quarter of 1997.
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires all items recognized as components
of comprehensive income, such as foreign currency or minimum pension liability
adjustments, to be reported in a financial statement equal to that of the other
financial statements. The adoption of SFAS No. 130 resulted in additional
disclosures, including a revision of previously disclosed information, but had
no effect on the financial condition or results of operations of the Company.
During 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures
About Segments of the Enterprise and Related Information." SFAS No. 131 requires
disclosure of segments of a company's business based upon how a company is
organized for making operating decisions and assessing performance. As the
Company's disclosure of business segments did not change in 1998 from that
disclosed in previous years, the adoption of SFAS No. 131 resulted in additional
disclosures, but had no effect on the financial condition or results of
operations of the Company.
During 1998, the Company adopted the provisions of SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." The adoption of
SFAS No. 132 resulted in additional disclosures about the Company's
non-qualified defined-benefit plan and postretirement benefit plan, but had no
effect on the financial condition or results of operations of the Company.
107
14
FINANCIAL CONDITION
Cash provided by operating activities was $21.8 million in 1999. Net income
totaled $16.7 million, and non-cash adjustments for depreciation expense,
amortization expense, and deferred compensation expense totaled $9.3 million.
Overall, accounts receivable increased due to a decline in accounts receivable
turnover, and the acquisition of Elumen. Deferred income taxes increased $2.0
million due to the liabilities acquired with the acquisition of Elumen and the
accrual of an arbitration award related to a contract dispute between the
Company and one of its customers. Accounts payable decreased by $4.4 million due
to the timing of payments at year-end 1999 as compared to year-end 1998. Accrued
compensation decreased $3.6 million due to a decrease in the total number of
employees year over year. Advanced billings on contracts increased $0.4 million
due to the mix of the contracts outstanding at December 31, 1999, as compared to
December 31, 1998. Other current liabilities increased $1.7 million primarily
due to the arbitration award discussed above. At December 31, 1999, the
Company's current ratio was 1.6 to 1.
Net property and equipment increased $0.3 million. Additions to property and
equipment were $4.5 million, and assets acquired with the acquisition of Elumen
were $1.1 million, offset by depreciation of $5.0 million and foreign currency
translation adjustments of $0.3 million. The Company had no material commitments
for capital expenditures at December 31, 1999. Net acquired intangibles
increased $81.2 million, caused primarily by the acquisition of Elumen.
Financing activities provided $24.0 million of cash in 1999. Long-term debt
increased to $31.4 million from zero due to the acquisition of Elumen. The
Company borrowed $52.0 million in February 1999 under its lines of credit and
made payments on the debt to reduce it to the $31.4 million mentioned above at
year-end. CTG had no long-term debt prior to the acquisition.
During 1999, the Company entered into a $100 million, five-year revolving credit
agreement with a bank group. At December 31, 1999, including unsecured lines of
credit, the Company had $132.0 million in total credit, of which $31.4 million
was outstanding.
During 1999, a total of 0.7 million shares of the Company's stock were purchased
on the open market by the Company's Stock Trusts for $9.9 million. The Company
received $1.1 million from employees for 64,000 shares of stock purchased under
the Employee Stock Purchase Plan, and the Company also received $1.1 million for
the exercise of 129,000 stock options, inclusive of the related tax benefit. The
Company paid an annual dividend of $0.05 per share, totaling $0.8 million in
1999.
On October 26, 1994, the Company authorized the repurchase of 2.0 million shares
and on July 21, 1995 authorized the repurchase of another 1.4 million shares of
its common stock for treasury and by the Company's Stock Trusts. At December 31,
1999, approximately 3.2 million shares have been repurchased under the
authorizations, leaving 0.2 million shares remaining authorized for future
purchases.
At December 31, 1999, consolidated shareholders' equity totaled $94.9 million,
which is an increase of $11.5 million, or 13.8 percent, from December 31, 1998.
The increase is primarily due to 1999 net income of $16.7 million, offset by the
stock purchases by the Company's Stock Trusts.
The Company believes existing internally available funds, cash generated by
operations, and available borrowings will be sufficient to meet foreseeable
working capital, stock repurchase, and capital expenditure requirements and to
allow for future internal growth and expansion.
108
15
INDEPENDENT
AUDITORS' REPORT
Board of Directors and Shareholders
Computer Task Group, Incorporated
Buffalo, New York
We have audited the accompanying consolidated balance sheets of Computer Task
Group, Incorporated and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements as of December 31, 1997 were audited by other auditors
whose report, dated February 4, 1998, expressed an unqualified opinion of those
statements.
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, such 1999 and 1998 consolidated financial statements present
fairly, in all material respects, the financial position of Computer Task Group,
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Buffalo, New York
February 4, 2000
Consolidated Statements of
Income
(amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue $ 472,008 $ 467,838 $ 407,588
Direct costs 316,304 320,673 288,848
Selling, general, and
administrative expenses 124,871 107,314 89,784
Operating income 30,833 39,851 28,956
Interest and other income 1,369 1,445 2,151
Interest and other expense (2,338) (539) (839)
Income before income taxes 29,864 40,757 30,268
Provision for income taxes 13,163 16,712 12,406
Net income $ 16,701 $ 24,045 $ 17,862
Net income per share:
Basic $ 1.02 $ 1.48 $ 1.07
Diluted $ 1.00 $ 1.42 $ 1.01
The accompanying notes are an integral part of these consolidated financial
statements.
109
16
CONSOLIDATED
BALANCE SHEETS
(amounts in thousands, except share balances)
December 31, 1999 1998
ASSETS
Current Assets:
Cash and temporary cash investments $ 10,684 $ 57,748
Accounts receivable, net of allowances and reserves 80,773 73,932
Prepaids and other 2,821 4,000
Deferred income taxes 3,041 1,654
Total current assets 97,319 137,334
Property and equipment, net of accumulated
depreciation and amortization 13,483 13,146
Acquired intangibles, net of accumulated
amortization of $9,151 and $6,002 respectively 84,008 2,808
Deferred income taxes 3,685 2,801
Other assets 664 720
Total assets $ 199,159 $ 156,809
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,834 $ 14,265
Accrued compensation 27,567 29,258
Income taxes payable 10,423 9,157
Advance billings on contracts 761 384
Other current liabilities 12,532 9,409
Total current liabilities 62,117 62,473
Long-term debt 31,380 -
Deferred compensation benefits 9,953 10,300
Other long-term liabilities 785 587
Total liabilities 104,235 73,360
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share,
150,000,000 shares authorized;
27,017,824 shares issued 270 270
Capital in excess of par value 110,895 106,010
Retained earnings 82,046 66,172
Less: Treasury stock of 6,141,823 and 6,269,668
shares, at cost (31,279) (31,850)
Stock Trusts of 4,823,173 and 4,422,500
shares, at cost (61,306) (52,463)
Unearned portion of restricted stock to
related parties (43) (69)
Other comprehensive income:
Foreign currency adjustment (4,786) (2,374)
Minimum pension liability adjustment (873) (2,247)
Accumulated other comprehensive
income (5,659) (4,621)
Total shareholders' equity 94,924 83,449
Total liabilities and shareholders' equity $ 199,159 $ 156,809
The accompanying notes are an integral part of these consolidated financial
statements.
110
17
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(amounts in thousands)
Year ended December 31, 1999 1998 1997
Cash flows from operating activities:
Net income $ 16,701 $ 24,045 $ 17,862
Adjustments:
Depreciation expense 5,009 4,406 4,532
Amortization expense 3,471 596 896
Loss on sales or disposals of assets 23 10 30
Deferred compensation expense 797 216 542
Changes in assets and liabilities, net of assets
acquired and liabilities assumed:
(Increase) decrease in accounts receivable 837 (12,830) (5,692)
(Increase) decrease in prepaids and other 984 (1,551) 16
Increase in deferred income taxes (1,988) (665) (94)
(Increase) decrease in other assets 319 (123) (19)
Increase (decrease) in accounts payable (4,356) 4,805 267
Increase (decrease) in accrued
compensation (3,647) 7,431 4,493
Increase (decrease) in income
taxes payable 1,638 4,546 (555)
Increase (decrease) in advance
billings on contracts 377 (774) (1,326)
Increase in other current liabilities 1,681 4,179 390
Decrease in other long-term liabilities (39) (304) (345)
Net cash provided by operating activities 21,807 33,987 20,997
Cash flows from investing activities:
Acquisition, net of cash acquired (86,775) -- --
Additions to property and equipment (4,509) (5,057) (4,770)
Proceeds from sales or disposals of property
and equipment 39 22 15
Net cash used in investing activities (91,245) (5,035) (4,755)
Cash flows from financing activities:
Proceeds from long-term revolving debt, net 31,380 -- --
Proceeds from Employee Stock Purchase Plan 1,094 1,448 1,155
Purchase of stock for treasury (13) (77) (118)
Purchase of stock by Stock Trusts (9,940) (2,455) (37,018)
Proceeds from other stock plans, inclusive
of the related tax benefit 2,298 5,474 4,266
Dividends paid (827) (812) (837)
Net cash provided by (used in) financing activities 23,992 3,578 (32,552)
Effect of exchange rate changes on cash and
temporary cash investments (1,618) 185 (173)
Net increase (decrease) in cash and temporary
cash investments (47,064) 32,715 (16,483)
Cash and temporary cash investments at beginning of year 57,748 25,033 41,516
Cash and temporary cash investments at end of year $ 10,684 $ 57,748 $ 25,033
The accompanying notes are an integral part of these consolidated financial
statements.
111
18
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except per data share)
Capital in
Common Stock Excess of Retained Stock Trusts
Shares Amount Par Value Earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
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 share issuance - - - - - -
Stock Option Plan share issuance 82 - 3,228 - - -
Deferred Compensation Plan share issuance - - - - - -
Purchase of stock - - - - 5 (118)
Restricted Stock Plan:
Award 2 - 44 - - -
Amortization - - - - - -
Stock Employee Compensation Trust adjustment to - - 53,379 - - -
fair value
Cash dividends - $.05 per share - - - (837) - -
Comprehensive Income:
Net income - - - 17,862 - -
Foreign currency adjustment - - - - - -
Minimum pension liability adjustment - - - - - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Total Comprehensive Income - - - 17,862 - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Balance as of December 31, 1997 27,018 270 216,028 42,939 6,267 (31,773)
Employee Stock Purchase Plan share issuance - - - - - -
Stock Option Plan share issuance - - 2,359 - - -
Other share issuance - - - - - -
Purchase of stock - - - - 3 (77)
Restricted Stock Plan:
Award - - - - - -
Amortization - - - - - -
Stock Employee Compensation Trust adjustment to cost - - (112,377) - - -
Management Stock Purchase Plan repayments - - - - - -
Cash dividends - $.05 per share - - - (812) - -
Comprehensive Income:
Net income - - - 24,045 - -
Foreign currency adjustment - - - - - -
Minimum pension liability adjustment - - - - - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Total comprehensive income - - - 24,045 - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Balance as of December 31, 1998 27,018 270 106,010 66,172 6,270 (31,850)
Acquisition - - 2,616 - (129) 584
Employee Stock Purchase Plan share issuance - - 824 - - -
Stock Option Plan share issuance - - 564 - - -
Other share issuance - - 881 - - -
Purchase of stock - - - - 1 (13)
Restricted Stock Plan - Amortization - - - - - -
Cash dividends - $.05 per share - - - (827) - -
Comprehensive Income:
Net income - - - 16,701 - -
Foreign currency adjustment - - - - - -
Minimum pension liability adjustment - - - - - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Total comprehensive income - - - 16,701 - -
- ----------------------------------------------------- ------------ ----------- ----------- ----------- ------------ -----------
Balance as of December 31, 1999 27,018 $270 $110,895 $82,046 6,142 $(31,279)
====== ==== ======== ======= ===== =========
- -----------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except per data share)
Unearned Minimum
Portion of Loans to Foreign Pension
Stock Trusts Restricted Related Currency Liability
Shares Amount Stock Parties Adjustment Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1996 1,825 $(78,715) $ - $ (54) $(2,039) $(1,594)
-
Two-for-one stock split 1,825 - - - - -
Employee Stock Purchase Plan share issuance (39) 1,155 - - - -
Stock Option Plan share issuance (207) 955 - - - -
Deferred Compensation Plan share issuance (3) 73 - - - -
Purchase of stock 1,293 (37,018) - - - -
Restricted Stock Plan:
Award - - (44) - - -
Amortization - - 10 - - -
Stock Employee Compensation Trust adjustment to - (53,379) - - - -
fair value
Cash dividends - $.05 per share - - - - - -
Comprehensive Income:
Net income - - - - - -
Foreign currency adjustment - - - - (1,167) -
Minimum pension liability adjustment - - - - - (321)
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Total Comprehensive Income - - - - (1,167) (321)
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Balance as of December 31, 1997 4,694 (166,929) (34) (54) (3,206) (1,915)
Employee Stock Purchase Plan share issuance (45) 1,448 - - - -
Stock Option Plan share issuance (272) 1,985 - - - -
Other share issuance (32) 1,051 - - - -
Purchase of stock 80 (2,455) - - - -
Restricted Stock Plan:
Award (2) 60 (60) - - -
Amortization - - 25 - - -
Stock Employee Compensation Trust adjustment to cost - 112,377 - - - -
Management Stock Purchase Plan repayments - - - 54 - -
Cash dividends - $.05 per share - - - - - -
Comprehensive Income:
Net income - - - - - -
Foreign currency adjustment - - - - 832 -
Minimum pension liability adjustment - - - - - (332)
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Total comprehensive income - - - - 832 (332)
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Balance as of December 31, 1998 4,423 (52,463) (69) - (2,374) (2,247)
Acquisition - - - - - -
Employee Stock Purchase Plan share issuance (64) 270 - - - -
Stock Option Plan share issuance (129) 550 - - - -
Other share issuance (65) 277 - - - -
Purchase of stock 658 (9,940) - - - -
Restricted Stock Plan - Amortization - - 26 - - -
Cash dividends - $.05 per share - - - - - -
Comprehensive Income:
Net income - - - - - -
Foreign currency adjustment - - - - (2,412) -
Minimum pension liability adjustment - - - - - 1,374
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Total comprehensive income - - - - (2,412) 1,374
- ----------------------------------------------------- ----------- ------------ ----------- ----------- ------------ -----------
Balance as of December 31, 1999 4,823 $(61,306) $(43) $- $(4,786) $(873)
===== ========= ===== == ======== ======
- --------------------------------------------------------------------------------
(amounts in thousands, except per data share)
Total
Shareholders'
Equity
- -------------------------------------------------------------------------------
Balance as of December 31, 1996 $71,504
Two-for-one stock split -
Employee Stock Purchase Plan share issuance 1,155
Stock Option Plan share issuance 4,183
Deferred Compensation Plan share issuance 73
Purchase of stock (37,136)
Restricted Stock Plan:
Award -
Amortization 10
Stock Employee Compensation Trust adjustment to -
fair value
Cash dividends - $.05 per share (837)
Comprehensive Income:
Net income 17,862
Foreign currency adjustment (1,167)
Minimum pension liability adjustment (321)
- ----------------------------------------------------- -----------
Total Comprehensive Income 16,374
- ----------------------------------------------------- -----------
Balance as of December 31, 1997 55,326
Employee Stock Purchase Plan share issuance 1,448
Stock Option Plan share issuance 4,344
Other share issuance 1,051
Purchase of stock (2,532)
Restricted Stock Plan:
Award -
Amortization 25
Stock Employee Compensation Trust adjustment to cost -
Management Stock Purchase Plan repayments 54
Cash dividends - $.05 per share (812)
Comprehensive Income:
Net income 24,045
Foreign currency adjustment 832
Minimum pension liability adjustment (332)
- ----------------------------------------------------- -----------
Total comprehensive income 24,545
- ----------------------------------------------------- -----------
Balance as of December 31, 1998 83,449
Acquisition 3,200
Employee Stock Purchase Plan share issuance 1,094
Stock Option Plan share issuance 1,114
Other share issuance 1,158
Purchase of stock (9,953)
Restricted Stock Plan - Amortization 26
Cash dividends - $.05 per share (827)
Comprehensive Income:
Net income 16,701
Foreign currency adjustment (2,412)
Minimum pension liability adjustment 1,374
- ----------------------------------------------------- -----------
Total comprehensive income 15,663
- ----------------------------------------------------- -----------
Balance as of December 31, 1999 $94,924
=======
The accompanying notes are an integral part of these consolidated financial
statements.
113
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), located
primarily in North America and Europe. All intercompany accounts and
transactions have been eliminated. Certain amounts in the prior years'
consolidated financial statements and notes have been reclassified to conform to
the current year presentation. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Such estimates primarily relate to allowances for
doubtful accounts and deferred tax assets, a reserve for projects, and estimates
of progress toward completion and direct profit or loss on fixed-price
contracts. Actual results could differ from those estimates.
CTG operates in one industry segment, providing information technology (IT)
professional services to its clients. The services provided typically encompass
the IT business solution life cycle, including phases for planning, development
and implementation, and managing and maintaining the IT solution.
REVENUE AND COST RECOGNITION
The Company primarily recognizes revenue on monthly fee and time-and-materials
contracts as hours are expended and costs are incurred. Fixed-price contracts
accounted for under the percentage-of-completion method represented 2 percent of
1999, 1 percent of 1998, and 2 percent of 1997 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 $2.3 million and $1.1 million at December 31, 1999 and
1998, respectively, accounts receivable is further reduced by a reserve for
projects of $0.9 million at December 31, 1999 and $1.0 million at December 31,
1998, 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, 1999 and 1998, the carrying amounts of the Company's financial
instruments, which include cash and temporary cash investments, accounts
receivable, and long-term debt approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is 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,
while significant betterments are capitalized.
ACQUIRED INTANGIBLES
Acquired intangibles consist of goodwill and other identifiable intangibles.
Amortization is computed using the straight-line method based on estimated
useful lives of 10 years to 25 years.
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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. The recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future 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, if any, are reported at the lower of the
carrying amount or fair value less costs to sell. There were no adjustments to
long-lived assets or identifiable intangibles in either 1999 or 1998.
INCOME TAXES
The Company provides deferred income taxes for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. Deferred income taxes relate principally to deferred compensation,
non-deductible accrued expenses, and accelerated depreciation and amortization
methods.
Tax credits are accounted for as a reduction of the income tax provision in the
year in which they are realized (flow-through method).
STOCK-BASED COMPENSATION
The Company accounts for its Stock-Based Compensation Plans in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense, over the vesting period, the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
STOCK SPLIT
During 1997, the Board of Directors approved a 2-for-1 split of the Company's
common stock, effective June 2, 1997, to shareholders of record as of May 19,
1997. Shares of common stock, treasury stock, and shares held by the Stock
Employee Compensation Trust (SECT) at December 31, 1996, have been restated to
reflect this split on the Company's consolidated balance sheets. All references
elsewhere throughout this annual report to the number of shares, per share
amounts, stock option data, and market prices of the Company's common stock give
effect to the stock split.
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NET INCOME PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1999,
1998, and 1997 are as follows:
(amounts in thousands, Weighted Earnings
except per share data) Income Average per Share
FOR THE YEAR ENDED DECEMBER 31, 1999
Basic EPS $ 16,701 16,401 $ 1.02
Dilutive effect of outstanding
stock options - 279
Diluted EPS $ 16,701 16,680 $ 1.00
FOR THE YEAR ENDED DECEMBER 31, 1998
Basic EPS $ 24,045 16,216 $ 1.48
Dilutive effect of outstanding
stock options - 697
Diluted EPS $ 24,045 16,913 $ 1.42
FOR THE YEAR ENDED DECEMBER 31, 1997
Basic EPS $ 17,862 16,758 $ 1.07
Dilutive effect of outstanding
stock options - 857
Diluted EPS $ 17,862 17,615 $ 1.01
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 with a maturity of three months or less.
Interest paid during 1999, 1998, and 1997 amounted to $2.0 million, $0.1
million, and $0.3 million, respectively, while net income tax payments totaled
$12.9 million, $10.4 million, and $9.7 million for the respective years.
During 1998, as a non-cash financing activity, the shares of common stock held
by the Company's Stock Employee Compensation Trust were adjusted to original
cost basis, with a decrease to capital in excess of par value of $(112.4)
million. During 1997, as a non-cash financing activity, the shares of common
stock of the SECT were adjusted to fair value, with an increase to capital in
excess of par value of $53.4 million (see Note 9, Stock Trusts).
ACCOUNTING STANDARDS PRONOUNCEMENTS
During the first quarter of 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires all items
recognized as components of comprehensive income, such as foreign currency or
minimum pension liability adjustments, to be reported in a financial statement
equal to that of the other financial statements. The adoption of SFAS No. 130
resulted in additional disclosures, including a revision of previously disclosed
information, but had no effect on the financial condition or results of
operations of the Company.
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For the years ended December 31, 1999, 1998, and 1997, the tax benefit (expense)
associated with the minimum pension liability adjustment was $0.3 million,
$(0.1) million, and $(0.1) million, respectively.
During 1998, the company adopted the provisions of SFAS No. 131, "Disclosures
About Segments of the Enterprise and Related Information." SFAS No. 131 requires
disclosure of segments of a company's business based upon how a company is
organized for making operating decisions and assessing performance. As the
Company's disclosure of business segments did not change in 1998 from that
disclosed in previous years, the adoption of SFAS No. 131 resulted in additional
disclosures, but had no effect on the financial condition or results of
operations of the Company.
During 1998, the Company adopted the provisions of SFAS No. 132, "Employers'
Disclosure About Pensions and Other Postretirement Benefits." The adoption of
SFAS No. 132 resulted in additional disclosures about the Company's
non-qualified defined-benefit plan and postretirement benefit plan, but had no
effect on the financial condition or results of operations of the Company.
2. Acquisition
On February 23, 1999, the Company acquired the stock of Elumen Solutions, Inc.
(Elumen). The transaction was valued at $89 million, of which $86 million was
paid in cash or through the assumption of debt, and the remainder was satisfied
through the issuance of approximately 128,000 shares of CTG common stock. The
fair value of the assets acquired totaled $11.2 million, while liabilities
assumed totaled $7.1 million.
The acquisition was accounted for as a purchase, and the results of Elumen have
been included in the accompanying consolidated financial statements since the
date of acquisition. CTG recorded approximately $84.9 million of goodwill and
other identifiable intangibles from the transaction, which are being amortized
on a straight-line basis over periods ranging from 10 years to 25 years.
The unaudited pro forma consolidated results of operations as though Elumen had
been acquired as of January 1, 1998, are as follows:
(amounts in thousands, 1999 1998
except per share data)
Revenue $ 479,935 $ 504,689
Net income $ 16,523 $ 22,188
Net income per share:
Basic $ 1.01 $ 1.36
Diluted $ 0.99 $ 1.30
These pro forma results are not necessarily indicative of what would have
actually occurred if the acquisition had been completed as of the beginning of
the periods presented, nor do they purport to be indicative of the results that
will be obtained in the future.
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3. Property and Equipment
Property and equipment at December 31, 1999 and 1998 are summarized as follows:
December 31, 1999 1998
(amounts in thousands)
Land $ 886 $ 886
Buildings 6,515 6,515
Equipment 21,879 23,984
Furniture 6,188 5,447
Software 3,442 3,739
Leasehold improvements 1,050 1,031
39,960 41,602
Less accumulated depreciation (26,477) (28,456)
$ 13,483 $ 13,146
At December 31, 1999, the Company owned three buildings, two of which are in use
by the Company. The third building, with a net book value of $1.9 million, is
leased to a third party under a five-year lease, which ends in 2000. Receipts
under this lease are estimated at approximately $0.2 million in 2000.
4. Debt
During 1999, the Company refinanced its short-term debt by entering into a
five-year revolving line of credit with a bank group. Under the agreement, the
Company may borrow up to $100 million through August 24, 2004. At the Company's
discretion, interest may be based upon the LIBOR rate, the prime rate, or other
rates as quoted by the agent bank. In addition, the Company is subject to a
commitment fee varying from 10 to 30 basis points of the unused available
credit. There were no commitment fees paid or due during 1998 or 1997. The
agreement requires the Company to maintain certain financial ratios, all of
which were met by the Company.
At December 31, 1999, there was $20.0 million outstanding under the revolving
credit agreement mentioned above. This outstanding debt is due in full on August
24, 2004. No amounts are due under the agreement until that time. There was no
long-term debt outstanding at December 31, 1998.
The Company also has lines of credit available outside of the revolving credit
agreement mentioned above, totaling $32.0 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. The Company intends to refinance its borrowings under these lines of
credit, totaling $11.4 million at December 31, 1999, under the revolving credit
agreement discussed above. There were no borrowings under these arrangements at
December 31, 1998.
The maximum amounts outstanding under borrowings during 1999, 1998, and 1997
were $59.0 million, $0.1 million, and $2.2 million, respectively. Average bank
borrowings outstanding for the years 1999, 1998, and 1997 were $40.9 million,
$0.1 million, and $0.7 million, and carried weighted average interest rates of
5.75 percent, 5.50 percent, and 5.00 percent, respectively.
The carrying amount of long-term debt, as determined by a comparison to similar
instruments, approximates fair value at December 31, 1999.
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5. Income Taxes
The provision (benefit) for income taxes for 1999, 1998, and 1997 consists of
the following: (amounts in thousands)
Domestic and foreign components of income before income taxes are as follows:
1999 1998 1997
-------------------------------------------------
Domestic $ 21,168 $ 34,027 $ 28,825
Foreign 8,696 6,730 1,443
$ 29,864 $ 40,757 $ 30,268
The provision (benefit) for income taxes consists of:
1999 1998 1997
-------------------------------------------------
Current Tax:
U.S. Federal $ 8,359 $ 11,920 $ 10,176
Foreign 3,631 1,782 90
U.S. State and Local 2,194 3,675 2,234
14,184 17,377 12,500
Deferred Tax:
U.S. Federal (836) (579) (82)
U.S. State and Local (185) (86) (12)
(1,021) (665) (94)
$ 13,163 $ 16,712 $ 12,406
The effective and statutory income tax rate can be reconciled as follows:
1999 1998 1997
-------------------------------------------------
Tax at statutory rate of
34 percent $ 10,153 $ 13,857 $ 10,291
Rate differential 299 408 303
State tax, net of federal
benefits 1,224 2,333 1,445
Expenses for which no tax
benefit is available 1,579 472 658
Change in estimate of
nondeductible expenses - (927) (475)
Other, net (92) 569 184
$ 13,163 $ 16,712 $ 12,406
Effective income tax rate 44.1% 41.0% 41.0%
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The Company's deferred tax assets and liabilities at December 31, 1999 and 1998
consist of the following:
December 31, 1999 1998
(amounts in thousands)
ASSETS
Deferred compensation $3,563 $2,835
Accruals deductible for tax
purposes when paid 2,527 1,561
Allowance for doubtful accounts 650 292
Other 668 444
Gross deferred tax assets 7,408 5,132
LIABILITIES
Amortization 236 204
Depreciation 446 473
Gross deferred tax liabilities 682 677
Deferred tax assets
valuation allowance - -
Net deferred tax assets $6,726 $4,455
Net deferred assets and liabilities are recorded at December 31, 1999 and 1998
as follows:
Net current assets $3,041 $1,654
Net non-current assets 3,685 2,801
$6,726 $4,455
In assessing the realizability of deferred tax assets, management considers,
within each taxing jurisdiction, whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the years in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences at December 31, 1999. Accordingly, no
valuation allowance is required.
Undistributed earnings of the Company's foreign subsidiaries were minimal at
December 31, 1999, and are considered to be indefinitely reinvested.
Accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of these earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. In the event that the other foreign entities'
earnings were distributed, it is estimated that U.S. federal and state income
taxes, net of foreign credits, would be immaterial.
In 1999, 1998, and 1997, 264,900, 193,000, and 233,000 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 $1.4 million, $2.4 million, and $2.9 million in 1999, 1998, and 1997,
respectively. These tax benefits have also been recognized in the consolidated
balance sheets as a reduction of current taxes payable.
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6. Lease Commitments
At December 31, 1999, the Company was obligated under a number of long-term
operating leases. Minimum future obligations under such leases are summarized as
follows:
Year ended December 31,
(amounts in thousands)
2000 $ 8,508
2001 6,493
2002 3,861
2003 1,094
2004 878
Later years 1,019
Minimum future obligations $21,853
The operating lease obligations relate to the rental of office space, office
equipment, and automobiles. Total rental expense under such operating leases for
1999, 1998, and 1997 was approximately $11.0 million, $9.0 million, and $6.8
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 for 1999, 1998, and 1997 is as follows:
Net Periodic Pension Cost 1999 1998 1997
(amounts in thousands)
Interest cost $641 $655 $633
Amortization of unrecognized
net loss 85 66 48
$726 $721 $681
The change in benefit obligation at December 31, 1999 and 1998 is as follows:
Change in Benefit Obligation 1999 1998
(amounts in thousands)
Benefit obligation at beginning of year $ 9,720 $ 9,258
Interest cost 641 655
Amortization of unrecognized net loss 85 66
Benefits paid (435) (591)
Adjustment to minimum liability (791) 332
Benefit obligation at end of year 9,220 9,720
Fair value of plan assets at end of year - -
Funded status 9,220 9,720
Unrecognized net actuarial loss (1,455) (2,247)
Accrued benefit cost $ 7,765 $ 7,473
Weighted average discount rate 7.50% 6.75%
Salary increase rate 0% 0%
Benefits paid to participants are funded by the Company as needed. The plan is
deemed unfunded as the Company has not specifically identified Company assets to
be used to discharge the deferred compensation benefit liabilities. The Company
has purchased insurance on the lives of certain plan
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participants in amounts considered sufficient to reimburse the Company for the
costs associated with the plan for those participants.
The Company maintains a non-qualified defined-contribution deferred compensation
plan for certain key executives. The Company contributions to this plan, which
were $71,000, $107,000, and $241,000 in 1999, 1998, and 1997, respectively, are
based on annually defined financial performance objectives.
8. Employee Benefits
401(K) PROFIT-SHARING RETIREMENT PLAN
The Company maintains a contributory 401(k) profit-sharing retirement plan
covering substantially all U.S. employees. Company contributions of cash and the
Company's stock, which are discretionary, were funded and charged to operations
in the amounts of $3.5 million, $3.8 million, and $2.4 million for 1999, 1998,
and 1997, respectively.
OTHER RETIREMENT PLANS
The Company maintains various retirement plans covering substantially all of its
European employees. Company contributions charged to operations were $0.5
million, $0.5 million, and $0.1 million in 1999, 1998, and 1997, 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 for 1999, 1998, and 1997 is as follows:
Net Periodic Postretirement 1999 1998 1997
Benefit Cost (amounts in thousands)
Interest cost $ 35 $ 33 $ 41
Amortization of transition amount 29 29 29
Amortization of gain (6) (14) (4)
$ 58 $ 48 $ 66
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The change in postretirement benefit obligation at December 31, 1999 and 1998 is
as follows:
Change in Postretirement 1999 1998
Benefit Obligation (amounts in thousands)
Postretirement benefit obligation at beginning
of year $ 552 $ 485
Interest cost 35 33
Amortization of transition amount 29 29
Benefits paid (38) (32)
Amortization of gain (6) (14)
Adjustment to unrecognized transition obligation (29) (29)
Adjustment to unrecognized gain (43) 80
Postretirement benefit obligation at end of year 500 552
Fair value of plan assets at end of year -- --
Funded status 500 552
Unrecognized transition obligation (380) (409)
Unrecognized gain 192 149
Accrued postretirement benefit cost $ 312 $ 292
Weighted average discount rate 7.50% 6.75%
Salary increase rate 0% 0%
Benefits paid to participants are funded by the Company as needed.
The rate of increase in health care costs is assumed to be 6.8 percent and 7.1
percent in 2000 for pre-age 65 and post-age 65 benefits, respectively, gradually
declining to 5 percent by the year 2003 and remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point would
increase the accumulated postretirement benefit obligation by $27,000 at
December 31, 1999 and the net periodic cost by $2,000 for the year, while a one
percentage point decrease in the health care cost trend would decrease the
accumulated postretirement benefit obligation by $24,000 at December 31, 1999,
and the net periodic pension 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 the market price on the business day preceding the date
of purchase. As of December 31, 1999, 178,000 shares remain unissued under the
Plan, of the total of 11 million shares that have been authorized under the
Plan. During 1999, 1998, and 1997, 63,000, 45,000, and 39,000 shares were
purchased under the plan at an average price of $17.30, $32.40, and $29.96 per
share, respectively.
MANAGEMENT STOCK PURCHASE PLAN
Under the Company's Management Stock Purchase Plan approved in 1992, 800,000
common shares have been designated (up to 400,000 shares from treasury) for
purchase by certain key employees using loans from the Company. During 1999 and
1998, no loans were made to employees. In 1998, an employee repaid a loan
representing 3,174 shares with a value of $54,900, reducing the outstanding loan
balance to $0. The loans were classified as a reduction of shareholders' equity
as they were used to purchase and were secured by common stock previously held
in treasury. Interest was charged at 4 percent per annum, and the loan principal
was payable in full no later than three years from the date of the loan.
SHAREHOLDER RIGHTS PLAN
The Board of Directors adopted a Shareholder Rights Plan in January 1989. Under
the plan, one right was distributed for each share of common stock outstanding
on January 27, 1989, and on each additional share of common stock issued after
that date and prior to the date the rights become exercisable. The
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rights become exercisable when 20 percent or more of the Company's outstanding
common stock is acquired by a person or group, other than Company provided
employee benefit plans, and when an offer to acquire is made. Each right
entitles the holder to purchase Series A preferred stock (which is essentially
equivalent to common stock) at a 50 percent discount from the then-market price
of the common stock or, in the event of a merger, consolidation, or sale of a
major part of the Company's assets, to purchase common stock of the acquiring
company at a 50 percent discount from its then-market price. The Shareholder
Rights Plan was amended to provide that the rights expire in November 2008. The
rights may be redeemed by the Company at a price of $.01 per right.
STOCK TRUSTS
The Company maintains a Stock Employee Compensation Trust (SECT) to provide
funding for existing employee stock plans and benefit programs. Shares are
purchased by and released from the SECT by the trustee of the SECT at the
request of the Compensation Committee of the Board of Directors. As of December
31, 1999, all shares remaining in the SECT were unallocated and therefore are
not considered outstanding for purposes of calculating earnings per share.
SECT activity for 1999, 1998, and 1997 is as follows:
(amounts in thousands) 1999 1998 1997
Share balance at beginning of year 4,423 4,694 3,650
Shares purchased 599 80 1,293
Shares released:
Stock option plans (129) (272) (207)
Employee Stock Purchase Plan (64) (45) (39)
Other stock plans (65) (34) (3)
Share balance at end of year 4,764 4,423 4,694
During 1999, 1998, and 1997, shares were purchased by the SECT at an average
price of $14.92, $30.69, and $28.63, respectively.
In 1998, the SECT was adjusted through a decrease to capital in excess of par
value totaling $(112.4) million, from fair value to original cost basis, based
upon new interpretive guidance issued by the Financial Accounting Standards
Board. The cost basis of the shares held by the SECT is reported as a reduction
to shareholders' equity. During 1997, as a non-cash financing activity, the
shares of common stock of the SECT were adjusted to fair value, with an increase
to capital in excess of par value of $53.4 million.
During 1999, the Company created an Omnibus Stock Trust (OST) to provide funding
for various employee benefit programs. Shares are released from the OST by the
trustee at the request of the compensation committee of the Board of Directors.
During 1999, the OST purchased 59,000 shares for $1 million. No shares were
released from the trust.
RESTRICTED STOCK PLAN
Under the Company's Restricted Stock Plan, 800,000 shares of restricted stock
may be granted to certain key employees. During 1998 and 1997, 1,500 and 2,000
shares, respectively, were granted to an employee of the Company. The shares
vest to the employee over 48 months from the date of grant, and are forfeited if
the employee is no longer employed by the Company at the end of the vesting
period.
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
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the grant, beginning one year from the date of grant, and expire six years after
becoming exercisable. Nonqualified stock options generally become exercisable in
either four or five annual installments of 20 or 25 percent of the shares
covered by the grant, beginning one year from the date of grant, and expire up
to 15 years from the date of the grant. All options remain in effect until the
earlier of the expiration, exercise, or surrender date.
The per share weighted-average fair value on the date of grant of stock options
granted in 1999, 1998, and 1997, using the Black-Scholes option pricing model,
was $10.77, $10.64, and $12.95, respectively. The fair value of the options at
the date of grant was estimated with the following weighted-average assumptions:
1999 1998 1997
Expected life (years) 5.4 5.4 5.9
Dividend yield 0.23% 0.23% 0.19%
Risk-free interest rate 4.98% 4.62% 6.15%
Expected volatility 47.75% 46.36% 42.36%
The Company applies APB Opinion No. 25 in accounting for the 1991 and 1981 Plans
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and basic and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below:
(amounts in thousands, 1999 1998 1997
except per share data)
Net income
As reported $ 16,701 $ 24,045 $ 17,862
Pro forma $ 14,525 $ 21,626 $ 15,959
Basic earnings per share
As reported $ 1.02 $ 1.48 $ 1.07
Pro forma $ 0.89 $ 1.33 $ 0.95
Diluted earnings per share
As reported $ 1.00 $ 1.42 $ 1.01
Pro forma $ 0.87 $ 1.28 $ 0.91
1998 and 1997 pro forma net income reflects only options granted subsequent to
December 31, 1994. Accordingly, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above as compensation cost is reflected over the
options' vesting period as discussed above, and compensation cost for options
granted prior to January 1, 1995 is not considered. Pro forma amounts for
compensation cost may not be indicative of the effects on earnings for future
years.
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A summary of stock option activity under these plans is as follows:
Weighted Weighted
1981 Plan Average 1991 Plan Average
Options Exercise Price Options Exercise Price
Outstanding at December 31, 1997 14,372 $ 5.58 1,864,226 $ 14.81
Granted -- $ -- 507,000 $ 22.39
Exercised (11,397) $ 5.63 (261,025) $ 7.36
Canceled, expired, and forfeited -- $ -- (163,875) $ 17.76
Outstanding at December 31, 1998 2,975 $ 5.40 1,946,326 $ 17.54
Granted -- $ -- 132,750 $ 23.13
Exercised (1,750) $ 5.55 (127,025) $ 7.33
Canceled, expired, and forfeited -- $ -- (94,500) $ 22.24
Outstanding at December 31, 1999 1,225 $ 5.17 1,857,551 $ 18.48
At December 31, 1999 and 1998, the number of options exercisable under the 1991
Plan was 1,150,815 and 871,075, respectively, and the weighted average exercise
price of those options was $16.03 and $13.84, respectively. At December 31, 1999
and 1998, the number of options exercisable under the 1981 Plan was 1,225 and
2,975, respectively, and the weighted average exercise price of those options
was $5.17 and $5.40, respectively.
A summary of the range of exercise prices and the weighted average remaining
contractual life of outstanding options at December 31, 1999 for the 1991 and
1981 Plans is as follows:
Options Weighted Weighted Average
Range of Outstanding at Average Remaining Contractual
Exercise Prices December 31, 1999 Exercise Price Life (years)
1991 PLAN
$3.4375 to $4.8125 96,076 $ 3.99 5.0
$6.125 to $9.00 345,950 $ 7.76 4.4
$9.4375 to $9.75 45,200 $ 9.51 3.8
$14.875 to $21.9375 1,006,625 $ 19.75 7.5
$26.00 to $37.1875 363,700 $ 30.09 8.8
1981 PLAN
$4.5625 to $5.3125 1,225 $ 5.17 0.6
At December 31, 1999, there were 541,000 and 0 shares available for grant under
the 1991 Plan and 1981 Plan, respectively.
During 1999 and 1998, the Company acquired stock for treasury valued at $13,000
and $77,000, respectively, from employees through stock option exercise
transactions.
11. Significant Customer
International Business Machines (IBM) is the Company's largest customer. IBM
accounted for $128.9 million or 27.3 percent, $151.4 million or 32.4 percent,
and $142.2 million or 34.9 percent of consolidated 1999, 1998, and 1997 revenue,
respectively. The Company's accounts receivable from IBM at December 31, 1999
and 1998 amounted to $19.7 million and $20.8 million, respectively. No other
customer accounted for more than 10 percent of revenue in 1999, 1998, or 1997.
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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 industry segment, providing IT professional services
to its clients. The services provided typically encompass the IT business
solution life cycle, including phases for planning, development and
implementation, and managing and maintaining the IT solution. All of the
Company's revenues are generated from these services. CTG's two reportable
segments are based on geographical areas, which is consistent with prior years
and prior to the adoption of SFAS No. 131, "Disclosure about Segments of the
Enterprise and Related Information."
The accounting policies of the individual segments are the same as those
described in note one, "Summary of Significant Accounting Policies." CTG
evaluates the performance of its segments at the operating income level.
Corporate and other identifiable assets consist principally of cash and
temporary cash investments and other assets.
(amounts in thousands)
Financial Information Relating to
Domestic and Foreign Operations 1999 1998 1997
REVENUE
North America 391,496 394,609 360,849
Europe 80,512 73,229 46,739
Total Revenue 472,008 467,838 407,588
DEPRECIATION AND AMORTIZATION
North America $ 5,801 $ 2,404 $ 2,872
Europe 1,004 848 630
Corporate and Other 1,675 1,750 1,926
Total Depreciation and Amortization $ 8,480 $ 5,002 $ 5,428
OPERATING INCOME (EXPENSE)
North America $ 36,434 $ 46,427 $ 36,324
Europe 9,860 8,243 3,663
Corporate and Other (15,461) (14,819) (11,031)
Total Operating Income $ 30,833 $ 39,851 $ 28,956
IDENTIFIABLE ASSETS
North America 154,951 $ 67,128 $ 57,519
Europe 22,736 22,999 15,777
Corporate and Other 21,472 66,682 34,445
Total Identifiable Assets 199,159 156,809 107,741
CAPITAL EXPENDITURES
North America $ 2,295 $ 2,591 $ 2,226
Europe 1,038 1,158 648
Corporate and Other 1,176 1,308 1,896
Total Capital Expenditures $ 4,509 $ 5,057 $ 4,770
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14. Quarterly Financial Data (Unaudited)
(amounts in thousands, except per share data)
Quarters First Second Third Fourth Total
1999
Revenue $116,618 125,464 $114,526 $115,400 $472,008
Direct costs 78,197 82,672 75,429 80,006 316,304
Selling, general, and
administrative expenses 30,405 31,052 31,969 31,445 124,871
Operating income 8,016* 11,740 7,128 3,949 30,833
Net interest and other
income (expense) 180 (644) (584) 79 (969)
Income before income taxes 8,196* 11,096 6,544 4,028 29,864
Net income $ 4,699* $ 6,317 $ 3,530 $ 2,155 $ 16,701
Basic net income per share $ 0.29* $ 0.38 $ 0.21 $ 0.13 $ 1.02
Diluted net income per share $ 0.28* $ 0.38 $ 0.21 $ 0.13 $ 1.00
Quarters First Second Third Fourth Total
1998
Revenue $109,683 117,646 $116,174 $124,335 $467,838
Direct costs 76,074 80,472 79,396 84,731 320,673
Selling, general, and
administrative expenses 25,220 27,359 26,491 28,244 107,314
Operating income 8,389 9,815 10,287 11,360 39,851
Net interest and other income 216 73 246 371 906
Income before income taxes 8,605 9,888 10,533 11,731 40,757
Net income $ 5,077 $ 5,834 $ 6,216 $ 6,918 $ 24,045
Basic net income per share $ 0.32 $ 0.36 $ 0.38 $ 0.42 $ 1.48
Diluted net income per share $ 0.30 $ 0.34 $ 0.37 $ 0.41 $ 1.42
* Includes the expense of a non-recurring arbitration award which lowered
operating income and income before income taxes by $2.5 million, net income by
$1.5 million, and basic and diluted net income per share by $0.09
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CORPORATEINFORMATION
Stock Market Information High Low
YEAR ENDED DECEMBER 31, 1999
First Quarter $ 29 1/2 $ 16 1/16
Second Quarter $ 21 7/8 $ 15 3/8
Third Quarter $ 18 1/4 $ 13 1/8
Fourth Quarter $ 15 13/16 $ 12 5/16
YEAR ENDED DECEMBER 31, 1998
First Quarter $ 45 $ 32 9/16
Second Quarter $ 42 1/2 $ 28 3/4
Third Quarter $ 40 7/8 $ 23
Fourth Quarter $ 34 1/2 $ 18 1/2
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 18, 2000, there were 3,409 record holders of the Company's common
shares. The Company paid an annual cash dividend of $.05 per share from 1993 to
1999 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 26, 2000 in
Buffalo, New York for shareholders of record on March 15, 2000.
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
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TRANSFER AGENT AND REGISTRAR
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 EquiServe:
Bank Boston, N.A.
c/o EquiServe - Boston Division
P.O. Box 8040
Boston, Massachusetts 02266-8040
(781) 575-3170 (MA residents)
(800) 730-4001
(781) 828-8813 (fax)
www.equiserve.com
Independent Certified Public Accountants
Deloitte & Touche LLP
Key Bank Tower, Suite 250
50 Fountain Plaza
Buffalo, NY 14202
CTG
800 Delaware Avenue
Buffalo, New York 14209-2094
716.882.8000
800.992.5350
NYSE:TSK
0554-AR-00
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