| OPINION RESEARCH CORP Item 1A Risk Factors Readers of this report should be aware that the following important factors, among others, in some cases have affected, and in the future could affect, our actual operating results and could cause our actual consolidated results for 2006 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of us |
| Risks Related to Our Business General economic and industry-specific factors beyond our control may adversely affect our business by causing demand for our services to decline |
| A number of factors beyond our control could decrease the demand of our existing clients for our services and impair our ability to attract new clients |
| These include marketing budgets, general economic conditions, business consolidations, government spending, and other industry-specific trends |
| Changes in management or ownership of an existing client are also factors that could affect the client’s demand for our services |
| As a result, we may provide different levels of services to our clients from year to year, and these differences can cause a decline in or contribute to fluctuations in our operating results |
| - 8 - ______________________________________________________________________ [33]Table of Contents Our business could suffer if we were to lose the business of SAMHSA, USAID or one or more of our other large clients |
| SAMHSA and USAID are our largest clients |
| SAMHSA represented 20dtta7prca of our revenues and 19dtta2prca of our backlog at December 31, 2005 |
| USAID, our second largest client, represented 15dtta3prca of our revenues and 29dtta5prca of our backlog at December 31, 2005 |
| Services we provided to various US federal and state governmental departments and agencies, including SAMHSA and USAID, generated approximately 64dtta9prca of our revenues in 2005 |
| Our clients generally may terminate the services we provide to them at any time |
| If we lose one or more of our large clients, such as SAMHSA or USAID , or if one or more of our large clients reduces its business with us, our revenues could decline |
| We have incurred losses in recent years and may not be profitable in the future |
| These losses may adversely affect our business and the market price of our stock |
| We may not be able to attain or increase profitability in the future on a quarterly or annual basis |
| Any future losses may adversely affect our business and the market price of our stock |
| The level of our debt, interest thereon, payment obligations and covenants in our loan agreements could adversely affect our results and business by limiting our operational and financial flexibility |
| Interest expense represents a significant portion of our operating expenses and an increase in interest rates will result in a decrease in operating results |
| If we do not generate sufficient cash from our operations to make scheduled debt payments our operational and financial flexibility will be adversely affected |
| Our present credit agreements contain customary financial and operating covenants |
| These covenants limit or prohibit, among other things, our ability to incur additional debt, prepay specified types of indebtedness, pay dividends, make investments, sell assets, or engage in mergers and acquisitions |
| These covenants could adversely affect our business by limiting our operational and financial flexibility |
| We may enter into acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention |
| We have evaluated, and expect to continue to evaluate, a wide array of possible acquisitions |
| We cannot assure you that any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction |
| Acquisitions are typically accompanied by a number of risks, including: • difficulties in integrating the operations and personnel of the acquired companies; • maintenance of acceptable standards, controls, procedures and policies; • potential disruption of ongoing business and distraction of management; • impairment of relationships with employees and customers as a result of any integration of new management and other personnel; • inability to maintain relationships with customers of the acquired business; • difficulties in incorporating acquired technology and rights into our services; • unexpected expenses resulting from the acquisition; • potential unknown liabilities associated with acquired businesses; and • unanticipated expenses related to acquired technology and its integration into our existing technology |
| - 9 - ______________________________________________________________________ [34]Table of Contents In addition, acquisitions may result in the incurrence of debt, restructuring charges and large one-time write-offs, such as write-offs for acquired in-process research and development costs |
| Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges |
| Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, the holdings of our existing stockholders may be diluted and earnings per share may decline |
| Fluctuations in our quarterly and annual operating results may cause unanticipated decreases in available cash and may cause the value of our stock to decline |
| A number of factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual revenue and operating results |
| These fluctuations may make financial planning and forecasting more difficult |
| In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively impact our operations |
| These fluctuations also could increase the volatility of our stock price |
| A number of factors cause our revenues, cash flow and operating results to vary from quarter to quarter, including: • fluctuations in revenues earned and expenses incurred on fixed-price contracts and contracts with a performance-based fee structure; • commencement, completion or termination of contracts during any particular quarter; • variable purchasing patterns under government and commercial contracts; and • changes in policy or budgetary measures that adversely affect government and commercial contracts in general |
| Changes in the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our revenues and, because a relatively large amount of our expenses are fixed, in our operating results |
| In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of delayed approvals of governmental budgets by legislative, executive or other governmental bodies |
| Our operating results may suffer if there are additional significant goodwill write-offs |
| Goodwill related to acquisitions represents a substantial portion of our total assets |
| At December 31, 2005, the net goodwill amount on our consolidated balance sheet represented 29dtta2prca of our total assets |
| Goodwill is an intangible asset and represents the excess of the purchase price that we paid for acquired businesses over the estimated fair market value of the net assets of those businesses |
| If the fair value of the goodwill, determined in accordance with applicable accounting standards, falls below the recorded value shown on the balance sheet, we will be required to write off the excess goodwill |
| Any future write-off would be treated as an expense and, although non-cash in nature, would adversely affect our operating results by reducing net income |
| In the third quarter of 2005, we wrote off impaired goodwill of dlra5dtta5 million in our former teleservices business |
| This charge is included in our financial results for discontinued operations |
| If we lose key management or are unable to attract and retain the personnel required for our business, our operating results could suffer |
| We are a service business, and as such we are dependent upon the efforts and skills of our senior executives and other key employees |
| The cumulative effect of losing several of these individuals could hurt our business |
| We do not currently maintain key person life insurance policies on any of our executives other than John F Short, our Chief Executive Officer |
| Competition for senior management is intense, and in the future we may not be successful in retaining key personnel or in attracting and retaining other personnel that we may require |
| - 10 - ______________________________________________________________________ [35]Table of Contents Our clients’ spending priorities may change in a manner which could negatively affect our revenues |
| A majority of our revenues result from services we provide to the US federal government; therefore, our business depends upon continued US federal government expenditures |
| A significant decline in government expenditures, or a shift of expenditures away from programs for which we provide services, could adversely affect our business |
| In addition, it has been our experience that our commercial clients generally view their expenditures for our services as discretionary |
| If our commercial clients’ budgets for discretionary spending on programs for which we provide services decrease or if their priorities for spending shift in a manner that results in a significant decline in research expenditures, our business could be adversely affected by the loss of revenues |
| Our contracts with the US federal government grant the government rights that are typically not found in commercial contracts and that could adversely affect our revenues and income |
| We presently have approximately 150 active contracts and task orders with the US federal government which represented approximately 58dtta7prca of our revenues for the year ended December 31, 2005 |
| There are inherent risks in contracting with the US federal government which could have an adverse effect on our business |
| All contracts with the US federal government contain provisions, and/or are subject to laws and regulations, that give the government rights and remedies not typically found in our commercial contracts, including rights that allow the government to: • claim rights in and ownership of products and systems that we produce; • adjust contract costs and fees on the basis of audits completed by its agencies; • suspend or debar us from doing business with the US federal government; and • release information obtained from us in response to a Freedom of Information Act request |
| The US federal government has the right to terminate its contracts with us at any time and such terminations could adversely affect our revenues and income |
| The US federal government has the right to terminate its contracts with us at any time |
| If the US federal government terminates a contract, we may recover only our incurred or committed costs, settlement expenses and profit on work completed before the termination |
| If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source |
| Additionally, most of our backlog could be reduced by any modification or termination of contracts that we have with the US federal government or, in cases where we are a subcontractor, contracts that our prime contractors have with the US federal government |
| As a contractor to the US federal government, we are subject to restrictions and compliance requirements that could divert the attention of our management, drain our resources and/or result in additional costs, fines or other penalties |
| As a contractor to the US federal government, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors |
| We are required to obtain and maintain material governmental authorizations and approvals to conduct our business as it is currently conducted |
| New or more stringent laws or governmental regulations concerning government contracts could hurt our business by limiting our flexibility and by potentially causing us to incur additional expenses |
| We also must comply with and are affected by laws and regulations relating to the formation, administration and performance of US federal government contracts |
| These laws and regulations affect how we do business with our US federal government clients and may result in added costs for our business |
| For example, we are required to comply with the Federal Acquisition Regulations and all supplements, which comprehensively regulate the formation, administration and performance of US federal government contracts, and the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations |
| If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including: • termination of contracts; - 11 - ______________________________________________________________________ [36]Table of Contents • forfeiture of profits; • suspension of payments; • fines; and • suspension or debarment from doing business with US federal government agencies |
| Any of the sanctions could adversely affect our business, prospects, financial condition, or operating results |
| We may not receive the full amount authorized under contracts that we have entered into and our backlog may be lower than we have projected, both of which could reduce our future revenues |
| We define backlog as the total contract value of our engagements that our management believes to be firm, less previously recognized revenues |
| Our backlog includes twelve months of commercial contracts, the funded and unfunded amounts of our government contracts, and options to renew or extend government contracts that we expect our clients to exercise |
| However, the maximum contract value specified under each contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract |
| Because we may not receive the full amount we expect under a contract, our estimates of our backlog may not prove to be accurate since the actual recognition of revenues on programs included in backlog may never occur or may change |
| Estimates of future revenues included in backlog are not necessarily precise and the receipt and timing of any of the revenues are subject to contingencies, many of which are beyond our control |
| For a discussion of these contingencies, see “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K Our competitors could challenge successfully the award of a government contract to us, causing us to lose the contract, which could reduce our future revenues |
| A unique feature of US federal government contracting allows a contractor that loses a prime contract award to protest the contract award to its competitor and obtain an independent review of the agency’s decision-making process |
| A contractor may also protest the terms of a bid solicitation if it believes those terms to be unfair or anticompetitive |
| If one or more of our competitors challenges a contract awarded to us, the government may ultimately determine that it is necessary for the contract to undergo a new round of evaluation and competition, and our contract with the government may be terminated |
| A successful challenge by a competitor could cause us to lose a contract that might otherwise be awarded to us and reduce our future revenues |
| Our government contracts are subject to audits and cost adjustments by the US federal government, which could hurt our operating results |
| The US federal government audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards |
| Responding to governmental audits, inquiries or investigations may involve significant expense and divert the attention of our management |
| 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 revenues because any costs determined by the government to be improperly allocated to a specific contract will not be reimbursed, and revenues we have already recognized may need to be refunded |
| If a US federal government audit results in allegations of improper or illegal activities by us or our employees and if we are unable to successfully defend against those allegations, 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, and / or debarment from doing business with US federal government agencies |
| In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us regardless of the merits of any such allegation |
| In addition, the US federal government may conduct non-audit reviews on a majority of our government contracts, which in turn could lead to full audit reviews by the government |
| - 12 - ______________________________________________________________________ [37]Table of Contents We may not accurately estimate the expenses, time and resources necessary to satisfy our contractual obligations, which could hurt our operating results |
| We enter into three types of contracts with our clients: fixed-price, cost-reimbursement and time-and-materials |
| For the year ended December 31, 2005, we derived approximately 43dtta1prca of our consolidated revenues from fixed-price contracts, 48dtta2prca of our consolidated revenues from cost-reimbursement contracts and 8dtta8prca of our consolidated revenues from time-and-materials contracts |
| Compared to cost-reimbursement contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the impact of cost overruns |
| Our profits could be adversely affected if our costs under any of these contracts exceed the assumptions we used in bidding for or negotiating the contract |
| Under cost-reimbursement contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based |
| To the extent that the actual costs incurred in performing a cost-reimbursement contract are within the contract ceiling and allowable under the terms of the contract and applicable regulations, we are entitled to reimbursement of our costs, plus a profit |
| However, if our costs exceed the ceiling or are not allowable under the terms of the contract or, in the case of government contracts, by applicable regulations, our income may be adversely affected because we may not be able to recover those costs |
| Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly billing rates and for expenses |
| We assume financial risk on time-and-materials contracts because we assume the risk of performing those contracts at negotiated hourly rates |
| If our employees engage in misconduct or other improper activities, we could be subject to various penalties and liabilities |
| We are exposed to the risk that employee fraud or other misconduct could occur and would expose us, as well as the individual employee, to various penalties and liabilities, including those under the Federal False Claims Act |
| Misconduct by employees could include intentional or unintentional failures to comply with US federal government procurement regulations or failure to disclose unauthorized or unsuccessful activities to us |
| It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity — including our policies and procedures — may not be effective in controlling unknown or unmanaged risks or losses |
| Our competitors could obtain, and use to our detriment, confidential information about us obtained through a request under the Freedom of Information Act |
| Our competitors may be able to obtain confidential information about us, such as our cost or pricing policies, in a request under the Freedom of Information Act |
| The competitor could use this information as the basis for a successful challenge to the award of a contract to us or to gain a competitive business advantage that it might use to our detriment in future bid solicitations |
| Our international operations subject us to social, political and economic risks of doing business in foreign countries |
| Approximately 12dtta9prca of our revenues for the year ended December 31, 2005 were generated from contracts performed outside of the US, and a portion of those revenues was denominated in currencies other than the US dollar |
| We are exposed to foreign currency risk to the extent that the results of our foreign operations may decline in value as measured in US dollars |
| It has not been our practice to enter into foreign exchange contracts to protect against adverse foreign currency fluctuations, and we cannot predict whether future exchange rate fluctuations will significantly harm our operations or financial results |
| In addition to adverse fluctuations in foreign currency exchange rates, we are exposed to further risks inherent in doing business abroad, including limitations on asset transfers, changes in foreign regulations and political turmoil, all of which could adversely affect our operating results |
| Several of our purported stockholders have filed a lawsuit against us, which could result in significant legal costs and divert management attention from the operation of our business |
| On December 2, 2004, several of our purported stockholders filed a derivative complaint against us and our directors in the Chancery Court of the State of Delaware alleging, among other things, that our directors breached their fiduciary duties of good faith and loyalty to us and our stockholders |
| We could incur significant costs defending the lawsuit, and - 13 - ______________________________________________________________________ [38]Table of Contents management attention could be diverted from other important business concerns |
| An adverse determination in the lawsuit may harm our business |