| CIBER INC caption “Item 1A RISK FACTORS” As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance |
| Additionally, we caution investors not to place undue reliance on any forward-looking statement as these statements speak only as of the date when made |
| We undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise |
| and its subsidiaries (generally referred to herein as “CIBER,” “the Company,” “we,” “our,” or “us”) provide information technology (“IT”) system integration consulting and other IT services |
| Our services are offered on a project or strategic staffing basis, in both custom and enterprise resource planning (“ERP”) package environments, and across all technology platforms, operating systems and infrastructures |
| Our clients consist primarily of governmental agencies, Fortune 500 and middle market companies, across most major industries |
| To a small extent, we also resell certain IT hardware and software products |
| Our consultants serve client businesses from over 60 US offices, over 20 European offices, as well as several offices in Asia/India/Pacific |
| Our foreign operations, across 16 countries, accounted for 23prca of our total revenue in 2005 |
| was originally incorporated in Michigan in 1974 and later reincorporated in Delaware in 1993 |
| We completed our initial public offering in 1994 and our common stock trades on the New York Stock Exchange under the symbol “CBR” Our corporate headquarters is located in Greenwood Village, Colorado, and our main telephone number is 303-220-0100 |
| Financial Information about Segments and Geographic Areas The information required by these items is incorporated herein by reference to “Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 of the Notes to Consolidated Financial Statements included under “Item 8 |
| Financial Statements and Supplementary Data” of this Annual Report |
| 3 ______________________________________________________________________ Narrative Description of Business Services and Operations We organize our operations by the nature of their services, client base and geography |
| At December 31, 2005, we had five reportable segments as follows: 2005 Revenue % Custom Solutions: Commercial Solutions 37prca Federal Government Solutions 17prca State & Local Government Solutions 13prca US Package Solutions 11prca European Operations 22prca Custom Solutions Our Custom Solutions branch office network provides IT project solutions and IT staffing in custom-developed software environments to Commercial, Federal Government and State & Local Government clients |
| Each branch office has local leadership, sales, recruiting and delivery capabilities |
| Through the branch office network, we can (1) offer a broad range of consulting services on a local basis, (2) respond to changing market demands for IT services through a variety of relationships in many industries and geographic areas and (3) maintain a quality professional staff because of our nationwide reputation and strong recruiting capabilities |
| Our sales methodology and solution delivery capabilities continue to enhance our ability to identify, pursue and close project or solutions-based business |
| The primary service offerings of Custom Solutions include: • Application Development; • Enterprise Integration; • Application Management Outsourcing; and • Global Security CIBER’s Application Development services provide analysis, design, development, testing, implementation and maintenance of business applications |
| Our delivery capabilities span service-oriented architectures, including J2EE and |
| NET, as well as traditional client/server and mainframe development |
| We also offer portal development, wireless and mobility applications and managed content services |
| CIBER’s Enterprise Integration services integrate data and applications for companies and organizations to deliver fully functional business solutions |
| We blend our proprietary tools, standardized processes and skilled resources in enterprise architecture, enterprise application integration, business intelligence/data warehousing, business continuity/disaster recovery and network security to help our clients leverage information for optimal business value |
| CIBER offers a comprehensive scope of IT-related outsourcing services |
| Our Application Management Outsourcing service assumes responsibility for a client’s specific IT operation and provides on-going application support, which we categorize as Tier 1-Application Specific Help Desk, Tier 2-Production Support or Tier 3-Routine Maintenance |
| We also provide infrastructure and IT operations outsourcing in the areas of technology solutions (including networks, servers, storage, security and desktops) and service desk solutions (including help desk and call center, data center hosting, monitoring and management, and maintenance and systems support) |
| CIBER’s Global Security services provide assessment and remediation services, as well as managed services that include intrusion monitoring and incident response |
| 4 ______________________________________________________________________ Our Custom Solutions group also has two branch offices that resell certain third party IT hardware and software products, primarily network equipment, including switches and routers, fileservers, application and database servers and related software, data storage systems, security appliances and security software |
| In addition, our Company introduced and expanded its global delivery capability with its CIBERsites^TM offering in 2005 |
| CIBERsites are development centers strategically located both domestically and offshore, to take advantage of lower-cost labor in under utilized technology markets and provide an alternative for low-cost application development, outsourcing and support functions |
| In the US, CIBER launched CIBERsites in Oklahoma City, Oklahoma and Tampa, Florida in the first quarter of 2005 |
| Additionally, to fulfill the needs of those clients seeking an offshore alternative solution, CIBER acquired Bangalore, India-based Knowledge Systems Pvt |
| (“Knowledge Systems”) in July 2005 |
| CIBERsites leverage the communication skills, technical proficiency, education and ingenuity of our employees to offer a solution that is fully secure and compliant with US business laws and practices |
| We have segmented our Custom Solutions branch offices around their designated client focus category (Commercial, Federal Government or State & Local Government) |
| For example, a Commercial office may also provide services to a government client |
| Commercial Solutions With approximately 2cmam750 consultants, our Commercial Solutions segment is our largest operating group and targets large commercial clients across most major industries, including manufacturing, high-technology, services, banking/financial services and retail |
| This segment also includes our India-based operations |
| Federal Government Solutions Our Federal Government Solutions segment, comprised of approximately 1cmam650 consultants, primarily provides custom solutions to defense and civilian agencies of the US Federal Government |
| In the aggregate, the various agencies of the US Federal Government represent our largest client and accounted for approximately 15prca of our total revenue in 2005 |
| Areas of focus include defense and aerospace, energy, accounting and financial, port security, training solutions and homeland security |
| State & Local Government Solutions Our State & Local Government Solutions segment, comprised of approximately 1cmam050 consultants, primarily provides custom solutions to over 600 state and local government agencies, in more than 45 states |
| Areas of focus include health and human services, transportation, homeland security, labor and workforce development and finance and administration |
| CES’s approximately 450 consultants provide consulting services to support software from enterprise solutions vendors including Oracle, SAP and Lawson, as well as several supply chain management products |
| Our services include package software assessment, selection, planning and implementation |
| We have vertical expertise in the public sector, higher education, healthcare, retail, manufacturing and supply chain, among others |
| The division’s Technology Solutions Practice helps clients select, configure and design IT platform-related solutions, and we are an authorized reseller of certain technology products, primarily from IBM We are a Gold-level SAP America Partner, an Oracle Certified Advantage Partner, and a Lawson Consulting Partner |
| Our partner relationships are a key component of our Package Solutions segment |
| These alliance or partner relationships allow us access to various sales and marketing opportunities |
| In some cases, it allows us to jointly propose our services along with the software vendor’s proposal for software |
| We believe that prospective package software implementation customers often have a preference to only consider purchasing services from a software 5 ______________________________________________________________________ vendor partner |
| Also, software vendors with whom we partner typically give us a license to their software applications, as well as access to their most recent research and development findings and training programs |
| European Operations Our CIBER Europe operations provide a broad range of business and technical consulting services that include package implementation, application development, systems integration and support services, as well as our own Customer Relationship Management software products |
| CIBER Europe has approximately 1cmam150 consultants in more than 10 European countries and several Asian countries |
| Our partner relationships in Europe include SAP, Sage, Microsoft and Oracle |
| With our acquisitions of Novasoft and Ascent in 2004, we now provide SAP-related services from 13 countries |
| We have re-branded our SAP business as “CIBER Novasoft” to continue the recognition established in Europe by Novasoft |
| We are an SAP Alliance Partner, as well as a Special Expertise Partner for SAP Industry Solutions in Automotive, Retail and Chemicals |
| Clients Our clients consist primarily of Fortune 500 and middle market companies across most major industries, as well as governmental agencies |
| These organizations typically have significant IT budgets and frequently depend on outside consultants to help achieve their business and IT objectives |
| In 2005, we estimate our approximate percentage of total revenue by client industry was: Government 31 % Manufacturing 17 % Finance, banking, and insurance 13 % Services and other 9 % Healthcare 8 % Telecommunications 7 % Automotive 7 % Retail 5 % Education 3 % Certain clients account for a significant portion of our revenue |
| Our largest client, the various agencies of the US Federal Government, accounted for approximately 10prca, 16prca and 15prca of total revenue in 2003, 2004 and 2005, respectively |
| In addition, our five largest clients accounted for, in the aggregate, approximately 25prca of our total revenue in 2005 |
| Also in 2005, our largest client in each segment, as a percentage of that segment’s total revenue was: Commercial - 9prca; Federal - 90prca; State & Local - 17prca; Package - 7prca and European Operations - 6prca |
| Additionally, only our State & Local segment had a second client that also accounted for more than 10prca of its total segment revenue |
| Client retention and turnover is highly dependent upon whether we are providing a custom solution or a package software solution |
| Many of our client relationships have continued for many years |
| Most of our US Custom Services revenue each year comes from clients for whom we have previously provided services |
| With services related to package software solutions, which includes all of our Package Solutions segment, as well as a large part of our European Operations, client engagements most typically involve a large enterprise software implementation over a period of six to 18 months |
| Typically, once package software implementations are completed, future services revenue from that client is minimal and, as a result, client turnover is high, and we are generally selling services to new customers |
| Typically, both our commercial and government clients may cancel their contracts or reduce their use of our services on short notice |
| If any significant client terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse affect on our financial condition and results of operations |
| 6 ______________________________________________________________________ Acquisitions/Business Combinations We began operations in 1974 as a professional services staffing organization to assist companies in need of computer programming support |
| In the late-1980s, we initiated a growth strategy that included expanding our range of IT-related services, developing a professional sales force and selectively acquiring established complementary companies |
| Since our initial public offering in March of 1994, we have completed over 50 business combinations |
| Our acquisition strategy has been central to our ability to expand our business model |
| Our acquisitions have allowed us to effectively expand our business model in the following areas: • Increased project-based capabilities - We have expanded our project-based delivery capabilities by adding expertise around SAP, PeopleSoft (now part of Oracle), and other enterprise resource planning (“ERP”) packages |
| In addition to acquiring project-based ERP capabilities, we have organically developed project level expertise in delivery of custom software applications, application maintenance and technology outsourcing services |
| This combination of acquired and organically developed project delivery capabilities has resulted in a shift in our mix of business to project-based work from staff supplementation services |
| • Established significant public sector presence - Our acquisitions have enabled us to become an established firm in the public sector, providing services to over 600 state and local government agencies, in more than 45 states, as well as to several agencies of the US Federal government |
| Our public sector clients, including Europe, accounted for approximately 31prca of our total revenue in 2005 |
| • Expanded geographic presence - Acquisitions have also allowed us to expand our geographic footprint to include a significant European presence |
| Beginning with our late 1999 acquisition of Netherlands based Solution Partners BV, and most recently our 2004 acquisition of Novasoft; we have expanded our European operations to include 25 foreign offices located in 14 countries, including Asia/Pacific |
| In 2005, we acquired two small entities, including a single office operation specializing in SAP implementations and an India-based professional services firm specializing in custom application development |
| From January 2003 to December 2005, we completed the following significant business combinations: Acquired Company Date Consultants added Novasoft AG September 2004 425 Ascent Technology Group Limited May 2004 130 SCB Computer Technology, Inc |
| March 2004 1cmam250 ECsoft Group, plc January 2003 440 Novasoft AG (“Novasoft”) – In late 2004, we acquired approximately 94prca of the net outstanding shares of Novasoft, headquartered in Heidelberg, Germany |
| In 2005, we increased our ownership of Novasoft to approximately 95prca and we expect to acquire the remaining shares in 2006 |
| Novasoft is a provider of implementation and other consulting services related to SAP software products |
| Novasoft is an SAP Alliance Partner and implements all of SAP’s ERP products including mySAPcom products and industry specific applications |
| At the time of the acquisition, Novasoft had approximately 425 consultants, located mainly in Germany, the UK and Spain |
| We acquired Novasoft to expand our international presence, as well as our capacity to deliver SAP-related services |
| Ascent Technology Group Limited (“Ascent”) - - Based in Hinckley, Leicestershire, UK, Ascent provides IT services to medium-sized enterprises with a particular focus on software implementation and sales, including both SAP and Sage ERP solutions and Microsoft |
| Ascent has also developed and sells its own proprietary customer relationship management software |
| SCB Computer Technology, Inc |
| (“SCB”) - - Based in Memphis, Tennessee, SCB provided IT services similar to CIBER, including consulting, outsourcing and professional staffing, with a particular focus on federal and state government clients |
| This acquisition expanded our Federal Government Solutions and State & Local Government Solutions segments and added beneficial customer relationships to our Commercial Solutions business |
| We acquired SCB so that a combined CIBER and SCB would be able to compete more effectively for larger public sector contracts |
| We believe the acquisition provided an opportunity to realize operational efficiencies in the form 7 ______________________________________________________________________ of lower combined selling, general and administrative costs, primarily by reducing SCB’s corporate administrative costs |
| ECsoft Group plc |
| (“ECsoft”), now named CIBER Europe Limited, is based in London |
| ECsoft operates in Denmark, the Netherlands, Norway, Sweden and the UK and provides IT consulting services similar to services provided by CIBER We acquired ECsoft to increase the size of our European operations and add depth to our European management team |
| Due to our numerous historical acquisitions, we have recorded a significant amount of goodwill |
| Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired business |
| Many of our acquisitions have involved a relatively small amount of acquired net assets, and thus, a large portion of the purchase price has been assigned to goodwill |
| Not all of our acquisitions have been successful |
| Acquired businesses may perform significantly worse than we had expected for a variety of reasons, including decreased customer demand for a particular service offering or the loss of a significant customer, among others |
| Such factors could lead to a future goodwill impairment charge |
| Our Competitive Strengths We believe that our corporate strengths, identified below, position us to respond to the long-term trends, changing demands and competition within our principal markets |
| • Balanced Business Model - We have developed a business model that allows us to provide superior, leading-edge services that are routinely updated to meet the current needs of our clients |
| We have developed a reputation for thought leadership in industry verticals such as state government and higher education and in technology verticals such as wireless and security applications, including homeland security |
| • Competitive Pricing Model - Our pricing structure is very competitive relative to the level of our service offerings |
| Because of the efficient overhead structure of our branch office operations and the high utilization of our billable consulting staff, we are able to offer our clients a pricing model that is very competitive |
| We believe that, on average, our hourly billing rates are significantly lower than the rates of national competitors for similar services |
| • Scale of Operations - The competitive landscape for the delivery of IT services is highly fragmented |
| In almost every major market we compete with larger national and international publicly-held firms, as well as a host of smaller regional and local privately-held firms |
| For the past several years, large clients have attempted to consolidate the purchasing of IT services and work with fewer firms |
| Because of the relatively large scale of our operations, we have been able to compete effectively to remain a vendor to these large clients |
| Our success has come at the expense of local and regional competitors that currently lack the scale to compete successfully for this work |
| • Breadth of Service Offering - We offer a broad range of services to our clients including staff supplementation services, custom application development services, implementation of ERP packages, application maintenance outsourcing services, resale of certain hardware and software products, managed hosting and call center support |
| We believe that having this broad delivery capacity is often a competitive advantage, particularly when competing against smaller local and regional firms |
| • Long-term Client Relationships - We have been in business since 1974 and a prominent first-year client, Ford Motor Company, remains one of our top five clients today in terms of annual revenue |
| This relationship exemplifies the kind of long-term commitment that we have toward our clients and speaks to the quality and breadth of the services that we provide |
| • Optimized Delivery Methodology - Our proprietary Optimized Delivery Model ™ (“ODM”) is designed to determine the right mix of client and CIBER resources, and the appropriate work site for an engagement, as well as balance the cost of the resources, and the complexity of managing a diverse and distributed team |
| Our approach minimizes resource costs and maximizes delivery effectiveness for the benefit of the client |
| 8 ______________________________________________________________________ The approach consists of a series of steps to profile the customer’s business drivers and capabilities, create alternative resource scenarios, and formalize governance around delivering the work |
| The output of these efforts is a recommended delivery model that is optimized to balance the client’s resource costs with the risks and constraints of distributed delivery teams |
| The overall ODM process has been effective in our pursuit of project engagements, and use of the methodology has become a distinct competitive advantage |
| • Disciplined Pursuit and Efficient Integration of Strategic Acquisitions - We have completed over 50 business combinations since our initial public offering in March of 1994 |
| During this time, through experience and process, we have developed expertise in effectively valuing and successfully integrating firms with which we combine |
| We view this skill and expertise as a distinct advantage, especially in the current economic environment |
| Competition The IT services industry is extremely competitive and characterized by continuous changes in customer requirements and improvements in technologies |
| Our competition varies significantly from city to city, as well as by the type of service provided |
| Our principal competitors include Accenture, Atos Origin, BearingPoint, Cap Gemini, CACI, CGI Group, Deloitte & Touche, EDS, IBM Global Services, Keane, Logica/CMG, Maximus and Xansa |
| Many large consulting firms also offer services that overlap with some of our services |
| Many of our competitors are larger than we are and have greater financial, technical, sales and marketing resources than we do |
| In addition, we must frequently compete with a client’s own internal IT staff |
| We also compete with Internet professional services firms, as well as the service divisions of various software developers |
| Our industry is being impacted by the growing use of lower-cost offshore delivery capabilities (primarily India) |
| There can be no assurance that we will be able to continue to compete successfully with existing or future competitors or that competition will not have a material adverse effect on our results of operations and financial condition |
| Employees As of December 31, 2005, we had approximately 8cmam000 employees and consultants |
| We routinely supplement our employee consulting staff with the use of contractors |
| At December 31, 2005, we had approximately 7cmam050 billable consultants, of which approximately 1cmam200 were contractors |
| None of our employees are subject to a collective bargaining arrangement |
| We have employment agreements with our executive officers and certain other employees |
| We believe our relations with our employees are good |
| Our future success depends in part on our ability to hire and retain adequately trained personnel who can address the changing and increasingly sophisticated IT needs of our clients |
| Our ongoing personnel needs arise from turnover, which is generally high in the industry, and client needs for consultants trained in the newest software and hardware technologies |
| Historically, competition for personnel in the IT services industry has been significant |
| We have had in the past, and expect at some point in the future, to have difficulty attracting and retaining an optimal level of qualified consultants |
| There can be no assurance that we will be successful in attracting and retaining the personnel we require to conduct and expand our operations successfully |
| Because of this, the recruitment of skilled consultants is a critical element to our success |
| We have an internal staff of recruiters devoted to meeting our personnel requirements |
| Seasonality We experience a moderate amount of seasonality |
| Typically, our billable hours, which directly affect our revenue and profitability, are reduced in the second half of the year, especially during the fourth quarter, due to the large number of holidays and vacation time taken by our billable consultants |
| As a result, our operating income as a percentage of revenue is generally the lowest in the fourth quarter of each calendar year |
| Through our website, we make available, free of charge, access to all reports filed with the Securities and Exchange Commission (“SEC”) including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to 9 ______________________________________________________________________ those reports, as soon as reasonably practical after they are electronically filed or furnished to the SEC Copies of any materials we file with, or furnish to, the SEC can also be obtained free of charge through the SEC’s website at http://www |
| gov or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 |
| You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 |
| Item 1A Risk Factors We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties |
| The following section describes some, but not all, of the risks and uncertainties that may have a material adverse affect on our business, financial condition, results of operations and the market price of our common stock and could cause our actual results to differ materially from those expressed or implied in our forward-looking statements |
| Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our share price |
| Our quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter, making them difficult to predict |
| This may lead to volatility in our share price |
| Some of the factors that are likely to cause these variations are: • the business decisions of our clients regarding the use of our services; • the stage of completion of existing projects and/or their termination; • our ability to maintain our profit margins and manage costs, including those for personnel, support services and severance; • acquisition and integration costs related to possible acquisitions of other businesses; • changes in, or the application of changes in, accounting principles or pronouncements under US generally accepted accounting principles; • currency exchange rate fluctuations; • changes in estimates, accruals or payments of variable compensation to our employees; and • global, regional and local economic and political conditions and related risks |
| Our profit margin, and therefore our profitability, is largely a function of the rates we charge for our services and the utilization rate, or chargeability, of our consultants |
| Accordingly, if we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our consultants, we will not be able to sustain our profit margin and our profitability will suffer |
| A number of factors affect the rates we charge for our services, including: • our clients’ perception of our ability to add value through our services; • changes in our pricing policies or those of our competitors; • the introduction of new products or services by us or our competitors; • the use of globally-sourced, lower-cost service delivery capabilities by our competitors and our clients; and • general economic conditions |
| Additionally, a number of factors affect our utilization rates, such as: • seasonality, including number of workdays and holiday and summer vacations; • our ability to transition consultants quickly from completed projects to new engagements; • our ability to forecast demand for our services and thereby maintain an appropriately balanced and sized workforce; and • our ability to manage employee turnover |
| Economic conditions and levels of client spending materially affect our results of operations |
| Our results of operations are affected by the level of business activity of our clients, which in turn is affected by regional and global economic conditions |
| We continue to operate in a challenging economic environment in the United States and abroad, particularly in Europe |
| Due to the current economic environment, some clients have cancelled, reduced or deferred expenditures for IT products and services |
| We have implemented cost management 10 ______________________________________________________________________ programs to manage our expenses as a percentage of revenue |
| Current and future cost management efforts may not be sufficient, however, to maintain our margins if the current economic environment continues |
| In addition, our business tends to lag behind economic cycles and, consequently, the benefits of any economic recovery to our business may take longer to realize |
| If we are not able to anticipate and keep pace with rapid changes in technology, our business will be negatively affected |
| Our market is characterized by rapidly changing technologies, such as the evolution of the Internet, frequent new product and service introductions and evolving industry standards |
| Our success depends, in part, on our ability to develop and implement technology services and solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences |
| We may not be successful in anticipating or responding to these developments on a timely basis and our offerings may not be successful in the marketplace |
| In addition, services, solutions and technologies developed by our competitors may make our service or solution offerings uncompetitive or obsolete |
| Any one of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements |
| We may face damage to our professional reputation and/or legal liability if our clients are not satisfied with our services |
| As a professional services firm, we depend largely on our relationships with our clients and our reputation for high-quality professional services and integrity to attract and retain clients and employees |
| Additionally, many of our engagements involve projects that are critical to the operations of our clients’ businesses |
| If a client is not satisfied with our services and/or we do not meet our contractual obligations to a client, it could subject us to legal liability and may be very damaging to our reputation, business, operating results and financial condition |
| Our contracts typically include provisions to limit our exposure to legal claims relating to our services and the applications we develop; however, these provisions may not protect us, or may not be enforceable under some circumstances or under the laws of some jurisdictions |
| It is possible, due to the nature of our business, that we will be sued in the future |
| Although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities |
| Termination of a contract by a significant client and/or cancellation with short notice could reduce our revenue and profitability and adversely affect our financial condition |
| Our five largest clients accounted for 25prca of our revenue in 2005 |
| The various agencies of the US Federal Government represent our largest client, accounting for 15prca of total revenue in 2005, while no other client accounted for more than 4prca of our total revenue |
| Our clients typically retain us on a non-exclusive, engagement-by-engagement basis |
| Most individual client assignments are from three to twelve months; however, many of our client relationships have continued for many years |
| Although they may be subject to penalty provisions, clients may generally cancel a contract at any time with short notice |
| Under many contracts, clients may reduce or delay their use of our services without penalty |
| These terminations, reductions or delays could result from factors unrelated to our work product or the progress of the project, but could be related to business or financial conditions of the client, changes in client strategies or the economy generally |
| When contracts are terminated, we lose the associated revenues and we may not be able to eliminate associated costs in a timely manner |
| Consequently, our profit margins may be adversely affected |
| We may experience declines in revenue and profitability if we do not accurately estimate the cost of a large engagement conducted on a fixed-price basis |
| We estimate that approximately 10-15prca of our total revenue in 2005 is from engagements performed in accordance with fixed-price contracts |
| Revenue for these types of engagements is recognized based on the estimated percentage of completion determined generally by costs incurred relative to total estimated costs |
| When making a proposal or managing a fixed-price engagement, we rely on our estimates of costs and timing for completing the project |
| These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to apply them to the project |
| The cumulative impact of any adjustments in estimated revenue and cost are recognized as necessary in the period during which the facts causing the adjustment become known |
| Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable and may affect the amount of revenue reported in any period |
| Financial and operational risks of our international operations could result in a decline in revenue and profitability |
| We have continued to expand our international operations and estimate that our foreign operations currently represent approximately 23prca of our total revenue |
| Due to our international operations, we are subject to a number of financial and operational risks that may adversely affect our revenue and profitability, including: • the costs and difficulties relating to managing geographically diverse operations; • foreign currency exchange rate fluctuations (discussed in more detail below); • differences in, and uncertainties arising from changes in, foreign business culture and practices; • restrictions on the movement of cash and the repatriation of earnings; • multiple and possibly overlapping or conflicting tax laws; • the costs of complying with a wide variety of national and local laws; • operating losses incurred in certain countries and the non-deductibility of those losses for tax purposes; and • differences in, and uncertainties arising from changes in legal, labor, political and economic conditions, as well as international trade regulations and restrictions, and tariffs |
| The revenues and expenses of our international operations generally are denominated in local currencies |
| Accordingly, we are subject to exchange rate fluctuations between such local currencies and the US dollar |
| These exchange rate fluctuations subject us to currency translation risk with respect to the reported results of our international operations and the cost of potential acquisitions |
| There can be no assurance that we will not experience fluctuations in financial results from our operations outside of the US, and there can be no assurance that we will be able, contractually or otherwise, to reduce the currency risks associated with our international operations |
| We manage our exposure to changes in foreign currency exchange rates through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments |
| There is no assurance that we will continue to use such financial instruments in the future or that any such use will be successful in managing or controlling foreign currency risks |
| We depend on contracts with various federal, state and local government agencies for a significant portion of our revenue, and if the spending policies or budget priorities of these agencies change, we could lose revenue |
| In 2005, approximately 31prca of our revenue was from public sector clients, including federal, state, local and foreign governments and agencies |
| The market for our services depends largely on federal and state legislative programs and the budgetary capability to support programs, including the continuance of existing programs |
| These programs can be modified or amended at any time by acts of federal and state governments |
| Many government budgets have been adversely impacted by the economic slowdown |
| All but one state must operate under a balanced budget |
| In addition, changes in federal initiatives or in the level of federal spending due to budgetary or deficit considerations may have a significant impact on our future financial performance, as may curtailment of the federal government’s use of consulting and technology services firms, the adoption of new laws or regulations that affect companies providing services to the federal government and potential delays in the government appropriation process |
| Additionally, federal government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts |
| Among other things, governments may terminate contracts with short notice for convenience, as well as for default, and cancel multi-year contracts if funds become unavailable |
| 12 ______________________________________________________________________ Unfavorable government audits could require us to adjust previously reported operating results, to forego anticipated revenue and could subject us to penalties and sanctions |
| The government agencies we contract with generally have the authority to audit and review our contracts with them |
| As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards |
| An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our previously reported operating results |
| For example, any costs that were originally reimbursed could be subsequently disallowed |
| In this case, cash we have already collected may have to be refunded and operating margins may be reduced |
| If a government audit uncovers improper or illegal activities by us, or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or disqualification from doing business with the government |
| Any unfavorable determination could adversely affect our ability to bid for new work with one or more jurisdictions |
| We may have difficulty integrating or managing those businesses we have acquired or may acquire in the future, which may have a material adverse impact on our financial results |
| Since January 1, 2003, we have made four significant acquisitions, only one of which was based in the US The other three were European companies |
| These acquisitions included ECsoft Group, plc, SCB Computer Technology, Inc, Ascent Technology Group Limited, and Novasoft AG Each of these acquisitions involved the integration of separate companies that had previously operated independently and had different corporate cultures |
| We may not succeed at integrating or managing acquired businesses or in managing the larger company that results from these acquisitions |
| The process of combining these companies may be disruptive to their business and our business and could have an adverse impact on our reputation and/or our financial results as a result of the following difficulties, among others: • loss of key clients or management and technical personnel; • additional costs and delays from difficulties in the integration of the acquired business with our existing business activities; • assumption of unanticipated legal or other financial liabilities; • impairment charges for acquired intangible assets, including goodwill, that decline in value; • inconsistencies in standards, controls, procedures and policies among the companies being combined, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems; • coordination of geographically diverse organizations; • diversion of management’s attention from the day-to-day business of our Company; • becoming significantly leveraged as a result of debt incurred to finance acquisitions; and • dilution to our earnings per share as a result of issuing shares of our stock to finance acquisitions |
| Difficulties with integration or management may also affect client satisfaction or create problems with the quality of client service, which could have an adverse impact on the reputation of our Company |
| If we are unable to integrate our acquisitions in a timely manner, or at all, or if we experience difficulty integrating or managing the acquired businesses, we may not achieve the desired level of benefits in connection with the transactions |
| In addition, the costs of achieving those benefits may be greater than we anticipate |
| In the course of acquiring companies, we have recorded a significant amount of goodwill |
| Historically, we have not always achieved the level of benefits that we expected from our acquisitions, nor have the acquired businesses always achieved the revenue and profitability we anticipated |
| Such experiences could lead to a subsequent goodwill impairment charge |
| We will continue to evaluate from time to time, on a selective basis, other strategic acquisitions if we believe they will help us obtain well-trained, high-quality consultants, new service offerings, additional industry expertise, a broader client base or an expanded geographic presence |
| There can be no assurance that we will be successful in 13 ______________________________________________________________________ identifying candidates or consummating acquisitions on terms that are acceptable or favorable to us |
| In addition, there can be no assurance that financing for acquisitions will be available on terms that are acceptable or favorable to us, if at all |
| We may issue shares of our common stock as part of the purchase price for some or all of these acquisitions |
| Future issuances of our common stock in connection with acquisitions also may dilute our earnings per share |
| Our future success depends on our ability to continue to retain and attract qualified employees |
| Our business involves the delivery of professional services and is highly labor intensive |
| Our future success depends upon our ability to continue to attract, train, effectively motivate and retain highly skilled technical, managerial, sales and marketing personnel |
| Although we invest significant resources in recruiting and retaining employees, there is often considerable competition for certain personnel in the IT services industry, as a result, employee turnover is generally high |
| From time to time, we have trouble locating enough highly qualified candidates in desired geographic locations or with required specific expertise |
| The inability to attract and retain qualified employees in sufficient numbers could have a serious negative effect on us, including our ability to obtain and successfully complete important client engagements and thus, maintain or increase our revenues |
| In addition, we believe that there are certain key employees within the organization, primarily in the senior management team, who are important for us to meet our objectives |
| Due to the competitive employment nature of our industry, there is a risk that we will not be able to retain these key employees |
| The loss of one or more key employees could adversely affect our continued growth |
| In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance, which could cause fluctuations in our stock price and result in further turnover of our employees |
| Our current indebtedness, and any future indebtedness, could adversely affect our business, our operating flexibility and our ability to make full payment on the Debentures |
| Our aggregate level of indebtedness increased in December 2003 in connection with our issuance of dlra175 million of Convertible Senior Subordinated Debentures (“Debentures”) due 2023 |
| The terms of the Debentures permit us to incur additional debt, including secured debt, and to repurchase our common stock |
| Additionally, the limited covenants applicable to the Debentures do not require us to achieve or maintain any minimum financial results relating to our financial position or results of operations |
| We also have a dlra60 million bank revolving line of credit that expires on September 30, 2007 |
| We have used borrowings under our line of credit to finance some of our acquisitions |
| This credit facility contains specific limitations on additional indebtedness, liens and merger activity and prohibits the payment of dividends |
| Additionally, it requires CIBER to maintain specified financial covenants, including an asset coverage ratio, a leverage ratio, a senior leverage ratio, and a fixed charges coverage ratio |
| We have experienced, from time to time, instances of covenant non-compliance under our line of credit that have been waived by our lender |
| If we fail to comply with any covenants in the future, however, we may not be able to obtain a waiver and could be in default under our credit agreement |
| In the past, we have been successful in generating cash flow from operations to reduce our indebtedness |
| As of December 31, 2005, we had approximately dlra219dtta6 million of outstanding indebtedness and had the ability to incur approximately dlra9 million of additional debt under our revolving credit facility |
| We may obtain additional long-term debt and working capital lines of credit to meet our future financing needs, which would have the effect of increasing our total leverage |
| An increase in our leverage could have significant negative consequences, including: • limiting our cash flow available for general corporate purposes, such as acquisitions, due to the ongoing cash flow requirements for debt service; • limiting our ability to obtain, or obtain on favorable terms, future additional debt financing for working capital or acquisitions; • limiting our flexibility to react to competitive and other changes in our industry and economic conditions generally; • exposing us to a risk that a substantial decrease in net operating cash flows due to economic or adverse developments in our business could make it difficult to meet debt service requirements; 14 ______________________________________________________________________ • increasing our vulnerability to adverse economic and industry conditions; and • exposing us to risks inherent in interest rate fluctuations due to variable interest rates, which could result in higher interest expense |
| Our ability to repay or to refinance our indebtedness will depend upon our future operating performance and on economic, financial, competitive, regulatory, business and other factors beyond our control |
| If we are unable to service our indebtedness or maintain covenant compliance, whether in the ordinary course of business or upon acceleration of such indebtedness, we may be forced to pursue one or more alternative strategies, such as restructuring or refinancing our indebtedness, selling assets, reducing or delaying capital expenditures or seeking additional equity capital |
| Any additional capital raised through the sale of equity may dilute shareholders’ ownership interest |
| There can be no assurances that any of these strategies could be undertaken on satisfactory terms, if at all |
| We may be unable to repurchase our outstanding Debentures for cash on specific dates or following a designated event |
| Debenture holders may require us to repurchase their Debentures at a repurchase price of 100prca of the principal amount plus accrued interest on December 15, 2008, 2010, 2013 and 2018, or at any time prior to their maturity in the case of certain events as described in the indenture |
| Additionally, the Debentures are convertible at the option of the holder into shares of our common stock under certain circumstances |
| CIBER has made an irrevocable election to settle in cash and not in shares 100prca of the principal amount of the Debentures under these circumstances |
| We may not have sufficient funds to pay the repurchase price for all tendered Debentures in cash at such time or the ability to arrange necessary financing on acceptable terms |
| We may be subject to limitations under our bank line of credit related to the repurchase of our indebtedness |
| We may be prohibited under future indebtedness from repurchasing any Debentures prior to their stated maturity |
| In addition, if we fail to repurchase the Debentures as required by the indenture, it would constitute an event of default under the indenture, which, in turn, would be expected to constitute an event of default under any agreement relating to indebtedness, including our bank line of credit |
| Important corporate events, such as takeovers, recapitalizations, or similar transactions, may not constitute a designated event under the indenture governing the Debentures, and thus may not permit the Debenture holders to require us to repurchase or redeem the Debentures |
| We may be unable to obtain surety bonds or letters of credit in support of client engagements on acceptable terms, if available, which could affect our ability to obtain additional client engagements that require them |
| Some of our government clients, largely in the state and local market, may require us to provide surety bonds or letters of credit as a condition of being awarded a new engagement |
| We cannot be certain that surety bonds or letters of credit will be available to us on acceptable terms, if at all |
| If we cannot obtain surety bonds or letters of credit on acceptable terms, we may be unable to obtain additional client engagements that require them, which could negatively impact our ability to grow our business and adversely affect our business, financial condition and results of operations |
| As of December 31, 2005, we had approximately dlra13dtta6 million of outstanding surety bonds supporting client engagements for which we may be required to make future payment |
| The issuer of our outstanding surety bonds requires that we post a letter of credit as collateral to support these possible obligations |
| We have a dlra6dtta0 million letter of credit outstanding to support our current surety program |
| The surety company, at its discretion, may require us to provide additional collateral as a condition for future surety bond issuances |
| We cannot be certain that such collateral will be available if needed |
| The IT services industry is highly competitive, and we may not be able to compete effectively |
| We operate in a highly competitive industry that includes a large number of participants |
| We believe that we currently compete principally with other IT professional services firms, technology vendors and the internal information systems groups of our clients |
| Many of the companies that provide services in our industry have significantly greater financial, technical and marketing resources than we do |
| Our marketplace is experiencing rapid changes in its competitive landscape |
| Some of our competitors have sought access to public and private capital and others have merged or consolidated with better-capitalized partners |
| Larger and better-capitalized competitors have enhanced abilities to compete for market share generally and our clients specifically, in some cases, through 15 ______________________________________________________________________ significant economic incentives to clients to secure contracts |
| These competitors may also be better able to compete for skilled professionals by offering them large compensation incentives |
| One or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting their profit margins |
| In addition, there are relatively few barriers to entry into our industry |
| As a result, we have faced and expect to continue to face, competition from new entrants into our market |
| We may be unable to compete successfully with current or future competitors and our revenue and profitability may be adversely affected |
| We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of CIBER or limit the price investors might be willing to pay for our stock, thus affecting the market price of our stock |
| Our certificate of incorporation and bylaws each contain provisions that may make the acquisition of our Company more difficult without the approval of our board of directors |
| These provisions include adoption of a Preferred Stock Purchase Rights Agreement, commonly known as a “poison pill” that gives our board of directors the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without stockholder approval |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of CIBER In addition, the staggered terms of our board of directors could have the effect of delaying or deferring a change in control |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and as a result, the price of our common stock could decline |
| The above factors and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of CIBER; this could adversely affect transactions in which our shareholders might otherwise receive a premium over the then-current market price for their shares of CIBER common stock |