News Column

COMPUTER TASK GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 26, 2014

Forward-Looking Statements This annual report on Form 10-K contains forward-looking statements made by the management of Computer Task Group, Incorporated (CTG, the Company or the Registrant) that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on information from and after the date of this report. Generally, forward-looking statements include words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "could," "may," "might," "should," "will" and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of, or trends in, revenue, operating expenses, capital expenditures, and financing. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including the following: (i) the availability to CTG of qualified professional staff, (ii) domestic and foreign industry competition for customers and talent, (iii) the Company's ability to protect confidential client data, (iv) the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM), (v) risks associated with operating in foreign jurisdictions, (vi) renegotiations, nullification, or breaches of contracts with customers, vendors, subcontractors or other parties, (vii) the change in valuation of recorded goodwill balances, (viii) the impact of current and future laws and government regulation, as well as repeal or modification of such, affecting the information technology (IT) solutions and staffing industry, taxes and the Company's operations in particular, (ix) industry and economic conditions, including fluctuations in demand for IT services, (x) consolidation among the Company's competitors or customers, (xi) the need to supplement or change our IT services in response to new offerings in the industry, and (xii) the risks described in Item 1A of this annual report on Form 10-K and from time to time in the Company's reports filed with the Securities and Exchange Commission (SEC). Industry Trends The market demand for the Company's services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that we serve. The pace of technology advances and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide. Competition for new engagements and pricing pressure has been strong. In 2011, we experienced an increase in demand for our services, primarily in the healthcare provider solution and general IT staffing businesses. While demand in our healthcare vertical market remained strong in 2012, demand for our IT staffing services was modest which limited revenue growth for these services in 2012 as compared with 2011. During 2013, however, the demand for our services softened from prior years as demand from our healthcare clients was down, as were requirements for personnel received from our largest staffing customer. The Company operates in one industry segment, providing IT services to its clients. These services include IT solutions and IT staffing. With IT solutions services, we generally take responsibility for the deliverables on a project and the services may include high-end consulting services. When providing IT staffing services, we typically supply personnel to our customers who then, in turn, take their direction from the client's managers. IT solutions and IT staffing revenue as a percentage of consolidated revenue for the years ended December 31, 2013, 2012 and 2011 is as follows: 2013 2012 2011 IT solutions 39.4 % 41.0 % 37.9 % IT staffing 60.6 % 59.0 % 62.1 % Total 100.0 % 100.0 % 100.0 % The Company promotes a majority of its services through four vertical market focus areas: Healthcare (which includes services provided to healthcare providers, health insurers, and life sciences companies), Technology Service Providers, Financial Services, and Energy. The remainder of CTG's revenue is derived from general markets. 18



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CTG's revenue by vertical market as a percentage of consolidated revenue for the years ended December 31, 2013, 2012 and 2011 is as follows:

2013 2012 2011 Healthcare 31.4 % 32.7 % 29.6 % Technology service providers 27.9 % 31.2 % 34.3 % Financial services 6.8 % 6.1 % 6.7 % Energy 6.1 % 6.0 % 6.0 % General markets 27.8 % 24.0 % 23.4 % Total 100.0 % 100.0 % 100.0 % The IT services industry is extremely competitive and characterized by continuous changes in customer requirements and improvements in technologies. Our competition varies significantly by geographic region, as well as by the type of service provided. Many of our competitors are larger than CTG, and have greater financial, technical, sales and marketing resources. In addition, the Company frequently competes with a client's own internal IT staff. Our industry is being impacted by the growing use of lower-cost offshore delivery capabilities (primarily India and other parts of Asia). There can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, when the services have been rendered, when the price is determinable, and when collectibility of the amounts due is reasonably assured. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with periodic billing schedules, primarily monthly, revenue is recognized as services are rendered to the customer. Revenue for fixed-price contracts is recognized per the proportional method of accounting using an input-based approach. On a given project, actual salary and indirect labor costs incurred are measured and compared against the total estimated costs of such items at the completion of the project. Revenue is recognized based upon the percentage-of-completion calculation of total incurred costs to total estimated costs. The Company infrequently works on fixed-price projects that include significant amounts of material or other non-labor related costs which could distort the percent complete within a percentage-of-completion calculation. The Company's estimate of the total labor costs it expects to incur over the term of the contract is based on the nature of the project and our past experience on similar projects, and includes management judgments and estimates which affect the amount of revenue recognized on fixed-price contracts in any accounting period. From 2011 to 2013, the Company performed services for a customer under a series of contracts that provided for application customization and integration services, specifically utilizing one of the software tools the Company has developed for internal use. These services were provided under a software-as-a-service model. As the contracts were closely interrelated and dependent on each other, for accounting purposes the contracts were considered to be one arrangement. As the project included significant modification and customization services to transform the previously developed software tool into an expanded tool intended to meet the customer's requirements, the percentage-of-completion method of contract accounting was utilized for the project. The Company's revenue from contracts accounted for under time-and-material, progress billing, and percentage-of-completion methods as a percentage of consolidated revenue for the years ended December 31, 2013, 2012 and 2011 is as follows: 2013 2012 2011 Time-and-material 88.8 % 90.3 % 91.0 % Progress billing 8.8 % 7.9 % 7.3 % Percentage-of-completion 2.4 % 1.8 % 1.7 % Total 100.0 % 100.0 % 100.0 % 19



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Results of Operations The table below sets forth percentage information calculated as a percentage of consolidated revenue as reported on the Company's consolidated statements of income as included in Item 8, "Financial Statements and Supplementary Data" in this report. Year Ended December 31, 2013 2012 2011 (percentage of revenue) Revenue 100.0 % 100.0 % 100.0 % Direct costs 78.8 % 78.4 % 78.7 %



Selling, general and administrative expenses 15.3 % 15.8 % 16.4 % Operating income

5.9 % 5.8 % 4.9 % Interest and other income (expense), net (0.1 )% 0.2 % (0.1 )% Income before income taxes 5.8 % 6.0 % 4.8 % Provision for income taxes 2.1 % 2.2 % 1.8 % Net income 3.7 % 3.8 % 3.0 %



2013 as compared with 2012 The Company recorded revenue in 2013 and 2012 as follows: Year Ended December 31, % of total 2013 % of total

2012 Year-Over-Year Change (dollars in thousands) North America 81.6 % $ 341,924 83.8 % $ 355,805 (3.9 )% Europe 18.4 % 77,112 16.2 % 68,610 12.4 % Total 100.0 % $ 419,036 100.0 % $ 424,415 (1.3 )%



Reimbursable expenses billed to customers and included in revenue totaled $11.8 million and $13.4 million in 2013 and 2012, respectively.

In North America, the revenue decrease in 2013 as compared with 2012 was due to a reduction in demand from our healthcare customers and from our largest IT staffing customer. On a consolidated basis, IT solutions revenue decreased $9.2 million or 5.3% in 2013 as compared with 2012. The decrease was primarily driven by the sequestration that the U.S. federal government imposed during 2013, which, amongst other cuts, reduced Medicare reimbursements to hospitals and healthcare systems by 2% beginning on April 1, 2013. These cuts reduced revenue for many of our healthcare customers, causing them to reduce their expenses for much of 2013, including previously planned spending on IT projects. IT staffing revenue increased $3.8 million or 1.5% during 2013 as soft demand from our largest IT staffing customer was offset by strong demand from our other IT staffing customers. The Company's European operations include Belgium, Luxembourg and the United Kingdom. When considering the year-over-year change in revenue in constant currencies, the revenue from our European operations increased 9.0%. This strong increase in year-over-year revenue was in part due to strength in the Company's European IT solutions services, and in part by the acquisition of etrinity which added approximately $2.8 million in revenue during the year. The revenue increase was supported by the strength relative to the U.S. dollar of the currencies of Belgium and Luxembourg, and slightly offset by the currency of the United Kingdom. In Belgium and Luxembourg, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2013 as compared with 2012, the average value of the Euro increased 3.3%, while the average value of the British Pound decreased 1.3%. A significant portion of the Company's revenue from its European operations is generated in Belgium and Luxembourg. Had there been no change in these exchange rates from 2012 to 2013, total European revenue would have been approximately $2.3 million lower, or $74.8 million as compared with the $77.1 million reported. 20



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IBM is CTG's largest customer. CTG provides services to various IBM divisions in many locations. During 2011, the NTS Agreement with IBM was renewed for three years until December 31, 2014. As part of the NTS Agreement, the Company also provides its services as a predominant supplier to IBM's Integrated Technology Services unit and as the sole provider to the Systems and Technology Group business unit. This agreement accounted for approximately 92.3% of all of the services provided to IBM by the Company in 2013. In 2013, 2012, and 2011, IBM accounted for $101.0 million or 24.1%, $113.5 million or 26.7%, and $116.5 million or 29.4% of the Company's consolidated revenue, respectively. In 2012, IBM spun its retail business off to another large company. While CTG retained the work, this reduced our revenue from IBM in 2012 by $3.2 million. We expect to continue to derive a significant portion of our revenue from IBM in future years. However, a significant decline or the loss of the revenue from IBM would have a significant negative effect on our operating results. In January 2014, IBM announced its intention to spin off its x86 server division to Lenovo. A portion of the Company's 2013 revenue from IBM was related to the x86 server division. The Company expects to retain a significant share of the revenue derived from the x86 server division despite the transition of the division from IBM to Lenovo. The Company's accounts receivable from IBM at December 31, 2013 and 2012 amounted to $11.0 million and $12.6 million, respectively. No other customer accounted for more than 10% of the Company's revenue in 2013, 2012 or 2011. Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 78.8% of consolidated revenue in 2013 and 78.4% of consolidated revenue in 2012. The increase in direct costs as a percentage of revenue in 2013 compared with 2012 was due to a shift in the Company's business mix to a higher percentage of IT staffing services, which has a higher direct cost as a percentage of revenue than our IT solutions services. Selling, general and administrative (SG&A) expenses were 15.3% of revenue in 2013 as compared with 15.8% of revenue in 2012. The SG&A decrease as a percentage of revenue in 2013 as compared with 2012 is primarily due to lower levels of personnel incentives earned in 2013, and continued disciplined cost management. Operating income was 5.9% of revenue in 2013 as compared with 5.8% of revenue in 2012. The increase in operating income year-over-year was primarily due to the lower SG&A costs as a percentage of revenue. Operating income from North American operations was $21.8 million and $21.3 million in 2013 and 2012, respectively, while European operations generated operating income of $2.9 million and $3.2 million in 2013 and 2012, respectively. Operating income in 2013 in the Company's European operations would have been approximately $0.1 million lower if there had been no change in foreign currency exchange rates year-over-year. Interest and other income (expense), net was (0.1)% of revenue in 2013 and 0.2% in 2012. Net other income in 2012 primarily resulted from the receipt of life insurance proceeds totaling approximately $1.3 million for two former executives that passed away during 2012. This income in 2012 was partially offset by bank fees. The Company's effective tax rate (ETR) is calculated based upon the full year's operating results, and various tax related items. The Company's normal ETR ranges from 38% to 40%. The ETR in 2013 was 35.6%, while the 2012 ETR was 36.5%. The 2013 ETR was lower than the normal range primarily due to the recording of approximately $0.7 million of tax credits related to research and development activities, and approximately $0.4 million of tax credits related to the Company's participation in the Work Opportunity Tax Credit (WOTC) program offered by the federal government to companies who have hired individuals who have traditionally faced barriers to employment. The tax benefit for these two items for both 2013 and 2012 was recorded in 2013 as required under current accounting guidelines, as the legislation extending these tax credits, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. The benefit of these tax credits was partially offset by an increase of approximately $0.1 million in the valuation allowance associated with net operating losses incurred by certain foreign subsidiaries. The 2012 ETR was lower than the normal range due to approximately $0.5 million in tax expense related to non-taxable life insurance proceeds received during the year. In addition, in 2012 the Company recorded an additional $0.2 million reduction of state tax expense as a result of the recording of certain favorable provision-to-return adjustments associated with the Company's 2011 income tax returns. Net income for 2013 was 3.7% of revenue or $0.92 per diluted share, compared with net income of 3.8% of revenue or $0.96 per diluted share in 2012. Diluted earnings per share were calculated using 17.0 million weighted-average equivalent shares outstanding in 2013 and 16.8 million in 2012. The increase in shares year-over-year is due to additional actual shares outstanding during 2013 as compared with 2012 due to a high number 21



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of stock option exercises by optionees in 2012 and 2013. This increase in the number of shares outstanding was partially offset by purchases of approximately 0.4 million and 0.3 million shares for treasury by the Company during 2013 and 2012, respectively. 2012 as compared with 2011 The Company recorded revenue in 2012 and 2011 as follows:



Year-over-

Year Ended December 31, % of total 2012 % of total 2011

Year Change (dollars in thousands) North America 83.8 % $ 355,805 83.1 % $ 329,295 8.1 % Europe 16.2 % 68,610 16.9 % 66,980 2.4 % Total 100.0 % $ 424,415 100.0 % $ 396,275 7.1 %



Reimbursable expenses billed to customers and included in revenue totaled $13.4 million and $12.7 million in 2012 and 2011, respectively.

In North America, the significant revenue increase in 2012 as compared with 2011 was due to strong demand for the Company's IT solutions services. On a consolidated basis, IT solutions revenue increased $26.4 million or 17.9%, and was primarily driven by an increase in the Company's EMR work for providers in the healthcare vertical market in North America. IT staffing revenue increased $1.8 million or 0.7% as demand for these services significantly slowed due to challenging economic conditions in the United States. The Company's European operations include Belgium, Luxembourg and the United Kingdom. The increase in year-over-year revenue in the Company's European operations was primarily due to modest strength in the Company's European IT solutions services. When considering the year-over-year change in revenue in constant currencies, the revenue from our European operations increased 10.9%. This revenue increase was offset by the weakness relative to the U.S. dollar of the currencies of Belgium, Luxembourg, and the United Kingdom. In Belgium and Luxembourg, the functional currency is the Euro, while in the United Kingdom the functional currency is the British Pound. In 2012 as compared with 2011, the average value of the Euro decreased 7.7%, while the average value of the British Pound decreased 1.2%. A significant portion of the Company's revenue from its European operations is generated in Belgium and Luxembourg. Had there been no change in these exchange rates from 2011 to 2012, total European revenue would have been approximately $5.4 million higher, or $74.0 million as compared with the $68.6 million reported. As noted above, IBM is CTG's largest customer, and CTG provides services to various IBM divisions in many locations. During the 2011 fourth quarter, the NTS Agreement was renewed for three years until December 31, 2014. As part of the NTS Agreement, the Company also provides its services as a predominant supplier to IBM's Integrated Technology Services unit and as the sole provider to the Systems and Technology Group business unit. These agreements accounted for approximately 91.9% of all of the services provided to IBM by the Company in 2012. In 2012, 2011, and 2010, IBM accounted for $113.5 million or 26.7%, $116.5 million or 29.4%, and $102.3 million or 30.9% of the Company's consolidated revenue, respectively. In 2012, IBM spun its retail business off into another large company. While CTG retained the work, this reduced our revenue from IBM in 2012 by $3.2 million. The Company's accounts receivable from IBM at December 31, 2012 and 2011 amounted to $12.6 million and $12.8 million, respectively. No other customer accounted for more than 10% of the Company's revenue in 2012, 2011 or 2010. Direct costs were 78.4% of consolidated revenue in 2012 and 78.7% of consolidated revenue in 2011. The decrease in direct costs as a percentage of revenue in 2012 compared with 2011 was due to a continued shift in the Company's business mix to a higher percentage of solutions services, which incurs lower direct costs as a percentage of revenue than the Company's staffing services. SG&A expenses were 15.8% of revenue in 2012 as compared with 16.4% of revenue in 2011. The SG&A decrease as a percentage of revenue in 2012 as compared with 2011 is primarily due to disciplined cost management and the effect of operating leverage resulting from revenue growth. 22



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Operating income was 5.8% of revenue in 2012 as compared with 4.9% of revenue in 2011. The increase in operating income year-over-year was primarily due to the favorable change in business mix to more solutions services in 2012, and lower SG&A costs as a percentage of revenue. Operating income from North American operations was $21.3 million and $16.6 million in 2012 and 2011, respectively, while European operations generated operating income of $3.2 million and $2.7 million in 2012 and 2011, respectively. Operating income in 2012 would have been approximately $0.2 million higher if there had been no change in foreign currency exchange rates year-over-year. Interest and other income (expense), net was 0.2% of revenue in 2012 and (0.1)% in 2011. Net other income in 2012 primarily resulted from the receipt of life insurance proceeds totaling approximately $1.3 million for two former executives who passed away during 2012. This income in 2012 was partially offset by bank fees. In 2011, partially offsetting net interest and other expenses which resulted from bank fees and a loss on intercompany balances settled or intended to be settled at year-end, was approximately $0.1 million resulting from a gain on a sale of property. The 2012 ETR was 36.5%, and the 2011 ETR was 37.6%. The ETR in 2012 was lower due to approximately $0.5 million in tax expense related to non-taxable life insurance proceeds received during the year. In addition, the Company recorded an additional $0.2 million reduction of state tax expense as a result of the recording of certain favorable provision-to-return adjustments associated with the Company's 2011 income tax returns. The ETR during 2011 was reduced as the Company recorded $0.3 million of tax credits related to research and development activities, and $0.3 million of federal tax credits related to the retention of certain individuals hired during 2010. The impact of these credits was partially offset by an increase in the valuation allowance of $0.2 million associated with net operating losses incurred by certain foreign subsidiaries. The Company did not record a tax benefit for its research and development activities during 2012 as the legislation extending the tax credit related to these expenses, the American Taxpayer Relief Act of 2012, was not passed by the U.S. federal government until January 2013. As required under current accounting guidelines, the Company recognized a tax benefit of $0.3 million for these 2012 credits in the 2013 first quarter. Net income for 2012 was 3.8% of revenue or $0.96 per diluted share, compared with net income of 3.0% of revenue or $0.71 per diluted share in 2011. Diluted earnings per share were calculated using 16.8 million weighted-average equivalent shares outstanding in 2012 and 16.7 million in 2011. The increase in shares year-over-year was due to the dilutive effect of incremental shares outstanding under the Company's equity-based compensation plans. This increase was partially offset by purchases of approximately 0.3 million shares for treasury by the Company during 2012. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company's significant accounting policies are included in note 1 to the consolidated financial statements contained in this annual report on Form 10-K under Item 8, "Financial Statements and Supplementary Data." These policies, along with the underlying assumptions and judgments made by the Company's management in their application, have a significant impact on the Company's consolidated financial statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company's critical accounting policies are those related to goodwill valuation, and the valuation allowance for deferred income taxes. Goodwill Valuation The Company has a goodwill balance of $37.6 million related to its healthcare vertical market recorded as of December 31, 2013. This balance reflects an increase of approximately $2.0 million in 2013 due to the acquisition of etrinity, a provider of IT services to the healthcare market in Belgium and the Netherlands. The balance is evaluated annually as of the Company's October fiscal month-end (the measurement date), or more frequently if facts and circumstances indicate impairment may exist. This evaluation, as applicable, is based on estimates and assumptions that may be used to analyze the appraised value of similar transactions from which the goodwill arose, the appraised value of similar companies, or estimates of future discounted cash flows. The estimates and assumptions on which the Company's evaluations are based 23



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involve judgments and are based on currently available information, any of which could prove wrong or inaccurate when made, or become wrong or inaccurate as a result of subsequent events. At the respective measurement dates for 2013, 2012, and 2011, the Company completed its annual valuation of the business to which the Company's goodwill relates. During 2013 and 2012, the Company utilized the provisions under Accounting Standards Update No. 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment," which allow public entities to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this process, an entity is no longer required to calculate the fair value of a reporting unit unless the qualitative assessment shows that it is more likely than not that its fair value is less than its carrying amount. During 2011, the company utilized the assistance of an independent third party appraiser to complete its review. The 2011 valuation indicated that the estimated fair value of the business was substantially in excess of its carrying value, with the estimated fair value of the unit exceeding the carrying value by 116%. From its internal reviews completed in 2013 and 2012, the Company believes the fair value of the business continues to be substantially in excess of the carrying value of the business. Additionally, there are no other facts or circumstances which arose during 2013, 2012 or 2011 that led management to believe the goodwill balance was impaired. Income Taxes-Valuation Allowances on Deferred Tax Assets At December 31, 2013, the Company had a total of approximately $7.5 million of current and non-current deferred tax assets, net of deferred tax liabilities, recorded on its consolidated balance sheet. The deferred tax assets, net, primarily consist of deferred compensation, loss carryforwards and state taxes. The changes in deferred tax assets and liabilities from period to period are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes, as measured by the enacted tax rates when these differences are estimated to reverse. The Company has made certain assumptions regarding the timing of the reversal of these assets and liabilities, and whether taxable income in future periods will be sufficient to recognize all or a part of any gross deferred tax asset of the Company. At December 31, 2013, the Company had deferred tax assets recorded resulting from net operating losses in previous years totaling approximately $1.2 million. The Company has analyzed each jurisdiction's tax position, including forecasting potential taxable income in future periods and the expiration of the net operating loss carryforwards as applicable, and determined that it is unclear whether all of these deferred tax assets will be realized at any point in the future. Accordingly, at December 31, 2013, the Company had offset a portion of these assets with a valuation allowance totaling approximately $1.1 million, resulting in a net deferred tax asset from net operating loss carryforwards of approximately $0.1 million. The Company's deferred tax assets and their potential realizability are evaluated each quarter to determine if any changes should be made to the valuation allowance. Any change in the valuation allowance in the future could result in a change in the Company's ETR. A 1% change in the ETR in 2013 would have increased or decreased net income by approximately $243,390, or approximately $0.01 per diluted share. Other Estimates The Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements pursuant to the rules and regulations of the SEC, the FASB, and other regulatory authorities. Such estimates primarily relate to the valuation of stock options for recording equity-based compensation expense, allowances for doubtful accounts receivable, investment valuation, legal matters, and estimates of progress toward completion and direct profit or loss on contracts, as applicable. As future events and their effect on the Company's operating results cannot be determined with precision, actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these estimates and will be reflected in the Company's financial statements in the event they occur. Financial Condition and Liquidity Cash provided by operating activities was $19.0 million, $21.2 million and $8.6 million in 2013, 2012 and 2011, respectively. In 2013, net income was $15.7 million, while other non-cash adjustments, primarily consisting of depreciation expense, equity-based compensation, deferred income taxes, and deferred compensation totaled $5.2 24



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million. In 2012 and 2011, net income was $16.2 million and $11.9 million, respectively, while the corresponding non-cash adjustments netted to $5.9 million and $1.9 million, respectively. The decrease in non-cash adjustments in 2013 as compared with 2012 was primarily due to a decrease in deferred compensation of approximately $0.5 million. The increase in non-cash adjustments in 2012 as compared with 2011 was primarily due to an increase in depreciation and amortization expense of $0.6 million, an increase in equity-based compensation expense of $0.6 million, deferred taxes of $1.0 million and deferred compensation of $1.6 million. The increase in 2012 for depreciation and amortization expense was due to the completion, at that time, of all existing capitalized software projects and the corresponding initiation of depreciation expense on those projects. The change in 2012 from 2011 for deferred compensation primarily relates to a change in the discount rate for the Netherlands defined-benefit plan. Accounts receivable balances decreased $5.2 million in 2013 as compared with 2012, increased $2.2 million in 2012 as compared with 2011, and increased $10.6 million in 2011 as compared with 2010. The decrease in the accounts receivable balance in 2013 resulted from a decrease in revenue in the 2013 fourth quarter of approximately 4.8% when compared with the 2012 fourth quarter. The decrease in revenue was offset by an increase in days sales outstanding (DSO). DSO is calculated by dividing accounts receivable obtained from the consolidated balance sheet by average daily revenue for the fourth quarter of the respective year. DSO was 62 days at December 31, 2013, whereas the DSO at December 31, 2012 was 61 days. The increase in the accounts receivable balance in 2012 as compared with 2011 resulted from an increase in revenue in the 2012 fourth quarter of approximately 6.9% when compared with the 2011 fourth quarter. The increase in revenue was offset by a decrease in DSO of one day from 62 days at December 31, 2011. The increase in the accounts receivable balance in 2011 as compared with 2010 resulted from an increase in revenue in the 2011 fourth quarter of approximately 16% when compared with the 2010 fourth quarter. DSO also increased to 62 days at December 31, 2011 from 60 days at December 31, 2010. Other assets increased $1.6 million in 2013, decreased less than $0.1 million in 2012, and decreased $1.1 million in 2011. The increase in 2013 as compared with 2012 was due to the Company electing to not borrow available funds from its life insurance policies which would have offset the increase in the cash surrender value of the policies. The decrease in 2011 from 2010 was primarily due to a decrease in the actuarially determined asset recorded for the Netherlands defined benefit plan. Accounts payable decreased $2.6 million in 2013, decreased $0.3 million in 2012, and increased $1.3 million in 2011. The decrease in 2013 was primarily due to the timing of certain payments near year-end. The increase in accounts payable in 2011 is primarily due to a general increase in the size of the Company and the timing of payments near year-end. Accrued compensation decreased $1.1 million in 2013 primarily due to lower incentives and headcount in 2013, increased $1.0 million in 2012 primarily due to an increase in employee headcount of about 200 from 2011, and increased $1.5 million in 2011 primarily due to a significant increase in headcount of about 300 employees year-over-year. Income taxes payable decreased $0.2 million in 2013, decreased $1.1 million in 2012 due to the timing of payments made in 2012 and certain provision-to-return adjustments made when filing the Company's 2011 tax returns, and increased $1.2 million in 2011 due to higher taxable income in 2011 as compared with 2010. Investing activities used $6.7 million, $2.0 million, and $1.7 million of cash in 2013, 2012 and 2011, respectively, primarily due to additions to property, equipment and capitalized software of $4.0 million in 2013, $1.9 million in 2012, and $1.9 million in 2011. The Company has no significant commitments for the purchase of property or equipment at December 31, 2013, and does not expect the amount to be spent in 2014 on additions to property, equipment and capitalized software to significantly vary from the amount spent in 2013. Additionally, in 2013, the Company spent approximately $2.5 million acquiring etrinity, an IT services firm providing services in Belgium and the Netherlands. Financing activities used $7.1 million of cash in 2013, used $1.3 million of cash in 2012, and provided $1.0 million of cash in 2011. The Company received $1.7 million, $3.8 million, and $3.8 million during 2013, 2012, and 2011, respectively, from the proceeds from stock option exercises and excess tax benefits from equity-based compensation transactions. These increases in 2011 and 2012 were larger as compared with 2013 due to a significant increase in the Company's stock price during 2011 and 2012 which led to a higher level of stock option exercises. During 2013, 2012 and 2011, the Company used $7.3 million, $4.6 million, and $3.6 million, respectively, to purchase approximately 0.4 million, 0.3 million, and 0.3 million shares of its stock for treasury. During October 2013, the Company's Board of Director's authorized 1.0 million additional shares for future stock repurchases under this program. Approximately 1.1 million, 0.5 million, and 0.9 million shares remained authorized for future purchases under the Company's share repurchase plan at December 31, 2013, 2012 and 2011, respectively. At 25



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December 31, 2013, 2012 and 2011, the Company also experienced changes in its cash account overdrafts, which are primarily due to the timing of payments near year-end, of $0.5 million, $(0.8) million, and $0.5 million, respectively. The Company did not have any borrowings outstanding under its revolving line of credit (LOC) at December 31, 2013, 2012 or 2011. The term of the LOC extends to April 2014. The LOC totals $35.0 million and can be used for borrowings or letter of credit commitments, as needed. Letters of credit at December 31, 2013, 2012 and 2011 totaled $0.6 million, $0.5 million, and $0.4 million, respectively. The Company borrows or repays the LOC as needed based upon its working capital obligations, including the timing of the U.S. bi-weekly payroll. The Company did not borrow any amounts under the line of credit during 2013 or 2012. The average outstanding balance under the Company's LOC for 2011 was approximately $0.4 million. The Company is required to meet certain financial covenants in order to maintain borrowings under its revolving credit line, pay dividends, and make acquisitions. The covenants are measured quarterly, and at December 31, 2013 include a leverage ratio which must be no more than 2.75 to 1.00, a calculation of minimum tangible net worth which must be no less than $58.3 million, and total expenditures for property, equipment and capitalized software cannot exceed $5.0 million annually. The Company was in compliance with these covenants at December 31, 2013 as its leverage ratio was 0.0, its minimum tangible net worth was $75.2 million, and 2013 expenditures for property, equipment and capitalized software were $4.0 million. The Company was also in compliance with its required covenants at December 31, 2012 and 2011. When considering current market conditions and the Company's current operating results, the Company believes it will be able to meet its covenants, as applicable, in 2014. Of the total cash and cash equivalents reported on the consolidated balance sheet at December 31, 2013 of $46.2 million, approximately $13.5 million is held by the Company's foreign operations and is considered to be indefinitely reinvested in those operations. During January 2013, the Company used a portion of its cash held by its foreign operations to purchase etrinity. The Company has not repatriated any of its cash and cash equivalents from its foreign operations in the past five years, and has no intention of doing so in the foreseeable future as the funds are generally required to meet the working capital needs of its foreign operations. The Company believes existing internally available funds and cash potentially generated from operations will be sufficient to meet foreseeable working capital and capital expenditure needs, fund stock repurchases, continue paying a dividiend, and to allow for future internal growth and expansion. Off-Balance Sheet Arrangements The Company did not have off-balance sheet arrangements or transactions in 2013, 2012 or 2011 other than guarantees in our European operations which support office leases and performance under government contracts. These guarantees totaled approximately $2.7 million at December 31, 2013. Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk exposures consist of interest rate risk associated with variable rate borrowings and foreign currency exchange risk associated with the Company's European operations. See Item 7A, "Quantitative and Qualitative Disclosure about Market Risk" in this report. 26



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Contractual Obligations The Company intends to satisfy its contractual obligations from operating cash flows, and, if necessary, from draws on its revolving credit line. A summary of the Company's contractual obligations at December 31, 2013 is as follows: Less More than Years Years than (in millions) Total 1 year 2-3 4-5 5 years Long-term debt A $ - $ - $ - $ - $ - Capital lease obligations B - - - - - Operating lease obligations C 16.3 5.9 7.3 2.8 0.3 Purchase obligations D 2.2 1.6 0.6 - -



Deferred compensation benefits (U.S.) E 7.5 0.7 1.5

1.3 4.0 Deferred compensation benefits Europe F 2.9 0.1 0.3 0.4 2.1 Other long-term liabilities G 0.4 - 0.1 0.1 0.2 Total $ 29.3$ 8.3$ 9.8$ 4.6$ 6.6



A A $35.0 million revolving credit agreement (Agreement) that expires in April

2014. The Company uses this Agreement to fund its working capital obligations

as needed, primarily funding the U.S. bi-weekly payroll. There were no

borrowings outstanding under the Agreement at December 31, 2013. The Company

does currently have one outstanding letter of credit under the Agreement

totaling approximately $0.6 million which collateralizes an employee benefit

program. B The Company does not have any capital lease obligations outstanding at December 31, 2013.



C Operating lease obligations relate to the rental of office space, office

equipment, and automobiles leased in the Company's European operations. Total

rental expense under operating leases in 2013, 2012 and 2011 was

approximately $7.0 million, $6.3 million, and $6.8 million, respectively.

D The Company's purchase obligations in 2014, 2015 and 2016 total approximately

$2.2 million, including $0.9 million for software maintenance, support and

related fees, $0.6 million for telecommunications, $0.5 million for

recruiting services, $0.1 million for computer-based training courses, and

$0.1 million for professional organization memberships.

E The Company is committed for deferred compensation benefits in the U.S. under

two plans. The Executive Supplemental Benefit Plan (ESBP) provides certain

former key executives with deferred compensation benefits. The ESBP was

amended as of November 30, 1994 to freeze benefits for participants at that

time. Currently, 16 individuals are receiving benefits under this plan. The

ESBP is deemed to be unfunded as the Company has not specifically identified

Company assets to be used to discharge the deferred compensation benefit

liabilities.

The Company also has a non-qualified defined-contribution deferred compensation plan for certain key executives. Contributions to this plan in 2013 were $0.3 million. The Company anticipates making contributions totaling approximately $0.2 million in 2014 to this plan for amounts earned in 2013. F The Company retained a contributory defined-benefit plan for its previous



employees located in the Netherlands when the Company disposed of its

subsidiary, CTG Nederland B.V. This plan was curtailed on January 1, 2003 for

additional contributions. The Company does not anticipate making additional

contributions to fund the plan in future years. G The Company has other long-term liabilities including payments for a



postretirement benefit plan for several retired employees and their spouses,

totaling less than 10 participants. 27



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