ITEM 1. BUSINESS
GENERAL
CIBER, Inc. and its subsidiaries provide information technology ("IT") system integration consulting and other services and to a lesser extent, resell certain hardware and software products. Our clients consist primarily of Fortune 2000 and middle market companies across most major industries and governmental agencies. We operate from branch offices across the United States, plus offices in Canada and the Netherlands. At December 31, 2000, we had approximately 5,000 employees.
We began operations in 1974 to assist companies in need of computer programming support. In the mid-1980s, we initiated a growth strategy that included expanding our range of computer-related services, developing a professional sales force and selectively acquiring established complementary companies. We continue to expand and modify our service offerings to address changes in customer demands and rapidly changing technology. In addition, we look to form strategic alliances with select package software and hardware vendors to stay at the leading edge of technology advances, to develop new business and to generate additional revenue.
We operate our business as follows: CIBER Operations, DigiTerra, Inc., Solution Partners B.V., Waterstone, Inc. and Enspherics, Inc. CIBER Operations provides a wide range of IT services and products including project execution, supplemental IT staffing and consulting in leading-edge practice areas such as IT architecture and strategy, business intelligence/customer loyalty, Internet solutions, network infrastructure and security, wireless integration and IT outsourcing. DigiTerra provides packaged software implementation services ranging from enterprise resource planning (ERP) to supply chain optimization, customer relationship management and e-business components. DigiTerra also provides related hardware sizing and procurement services as an authorized remarketer of certain computer hardware. Solution Partners, located in the Netherlands, provides SAP software implementation consulting and e-business solutions in custom environments. Waterstone (formerly known as Neovation, Inc.) provides strategic, technical and creative services including e-business planning, assessments and solutions, customer relationship management, supply chain management, web content development and design and custom integration services. Enspherics, in which we acquired a 51% interest in November 2000, provides custom designed IT security solutions to clients who operate in high-risk environments. In 2000, approximately 74% of our revenues was from CIBER Operations, 23% from DigiTerra and 3% from our other operations.
SERVICES AND OPERATIONS
CIBER OPERATIONS
The term CIBER Operations refers to the branch offices doing business under the CIBER name (herein referred to as "CIBER" for purposes of this section). CIBER has approximately 4,000 employees operating from over 35 branch offices across the country. CIBER's branch office network is integral to its business strategy. Through its branch office network, CIBER 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 contacts in many industries and geographic areas and (3) maintain a quality professional staff because of its nationwide reputation and its training programs. CIBER's strategy is to expand its business by building long-term relationships with large-sized clients by providing high quality IT services tailored to meet client needs, with an emphasis on services involving newer technologies. Although the majority of CIBER's work involves custom solutions, newer technologies often involve package software and hardware products. As a result, strategic alliances with software and hardware vendors are becoming increasingly important to CIBER's service offerings. Some of CIBER's current alliance partners include: Cisco Systems; Microsoft; Sun Microsystems; CITRIX; Oracle; IBM; and Palm, among others.
CIBER offers expertise in the following main areas:
o IT Architecture & Strategy
o Business strategy and strategy alignment with IT o IT strategy, architecture and planning o Application integration and architecture o Business process analysis/modeling
o Business Intelligence/Customer Loyalty o Strategic requirements, scoping and planning o Knowledge discovery/data mining/data warehousing o Online analytical processing (OLAP) reporting and services o Knowledge management/enterprise business intelligence portals o Middleware technology integration o Customer relationship management integration
o Internet Solutions/ "e-business" o Commerce and content management o Call center integration o Internet integration, site design development and enablement
o Network Infrastructure, Storage and Security o Network design/assessment, product evaluation/procurement and implementation o Security audits and security policies, hacking prevention, virtual private networks and firewalls o Data storage and management
o Wireless Integration o Assessment of readiness o Design, development and application integration
o IT Outsourcing o Application maintenance o Help desk/client call center o Production application hosting and support
CIBER has historically provided most of its services at client locations. In order to address the changing needs of our clients, CIBER currently operates development centers in Denver, Rochester (NY), Atlanta, Kansas City and Harrisburg. These centers deliver web development, web enablement and application development efforts, crossing a variety of platforms and technologies. CIBER's services are provided under both staff supplementation and project engagements. Projects are distinguishable from professional services staff supplementation consulting by the level of responsibility we assume. In a typical project, we assume major responsibilities for the management of the project and/or the design and implementation of specific deliverables based upon client-defined requirements. With professional services staff supplementation engagements, the client generally maintains responsibility for the overall task.
CIBER seeks to be a leader in providing quality services and processes to its clients. Most CIBER branch operations have received ISO 9001 certification. ISO 9001 certification has enhanced CIBER's ability to achieve preferred supplier status from certain larger companies, to satisfy current and prospective clients who insist on a documented quality assurance system and to improve our internal operations by facilitating cost controls and other efficiencies. In addition, branch office support is provided by CIBER's Center for Project Performance, which helps to bid projects, train project managers, implement our proprietary E.ACCELERATION methodology and audit ongoing projects.
DIGITERRA
DigiTerra, Inc. was established as a separate wholly owned subsidiary on April 3, 2000. DigiTerra brought together five acquisitions made by CIBER from 1995 to 1999. These acquired companies had business models that were "package software centric." DigiTerra's services typically involve implementation of package software and integration services. Integration with other IT systems is an important portion of each project that allows the client to obtain an optimized return on the software investment. DigiTerra's customers are typically middle market companies, large divisions of Fortune 2000 companies, governments and higher education institutions. At December 31, 2000, DigiTerra had approximately 750 employees based from 13 offices in the United States and two in Canada.
DigiTerra operates the following service delivery groups:
o Enterprise Solutions o Net Solutions o Emerging Solutions o Technology Solutions
Enterprise Solutions implements and integrates traditional enterprise system or "ERP" software packages. Enterprise Solutions continues to represent DigiTerra's core business and is organized on a national basis by practice. Each practice is associated with a specific software package. DigiTerra has formal business alliances with the following "enterprise software" vendors:
o PeopleSoft o J.D. Edwards o Oracle o SAP o Lawson
Enterprise Solutions places significant emphasis on e-business opportunities that "extend the enterprise" to both customers and suppliers. These customer relationship management and supply chain systems allow organizations to use the Internet and create true collaborative commerce. PeopleSoft, Oracle and SAP have web enabled their product offerings to take advantage of these concepts.
Net Solutions represents a new and emerging business area for DigiTerra. This group uses state of the art package software to link customers, suppliers and other external groups to the client's enterprise system. The Net Solutions group also develops strategies for clients that use package software to conduct large volumes of transactions over the Internet with seamless connectivity to their enterprise system. DigiTerra has formal business alliances with the following "e-business package" vendors:
o Siebel o Commerce One o RightWorks o ArsDigita o WebSphere o Ariba o Frontstep o Provia o Adexa o Onyx
Emerging Solutions is a new group formed in late 2000 to focus on e-Strategy consulting services and the development of services involving new technologies such as broadband and wireless. DigiTerra intends to use this group to evaluate technology advances, develop incubator service groups and ultimately establish new service offerings.
The Technology Solutions group primarily helps to provide mid-range servers and systems hardware. This group complements DigiTerra's consulting services by offering our clients a single source for hardware and services. DigiTerra provides hardware sizing and configurations under formal remarketing agreements with the following equipment manufacturers:
o IBM o Hewlett-Packard o Sun Microsystems
SOLUTION PARTNERS
Solution Partners B.V., based in Eindhoven, the Netherlands, provides SAP software implementation consulting and other e-business solutions. Solution Partners is also a reseller of SAP. Solution Partners provides custom-based solutions on various software platforms. With approximately 75 employees, Solution Partners delivers its services in a number of European countries.
WATERSTONE
Waterstone, Inc. (formerly known as Neovation, Inc.) was formed in 2000 by combining CIBER's Interactive Papyrus, Inc. subsidiary with the business operations acquired from Waterstone Consulting, Inc. Waterstone has approximately 150 employees and divides its business into three distinct practices: Digital Media, eBusiness and Technology.
o Digital Media - The Digital Media practice offers clients services for establishing and/or enhancing their Internet presence. Waterstone's wide range of creative services includes Internet marketing and branding, digital strategy assessment, full-service web site design, and usability testing.
o eBusiness - The eBusiness practice puts technology to work for clients in need of leading-edge business process solutions. Working jointly with the Digital Media and Technology practices, the eBusiness practice provides Internet-centric strategic design and implementation services relating to business-to-consumer, business-to-business, supply chain management, customer relationship management and other applications.
o Technology - the Technology practice provides application development, software engineering, process engineering, application architecture, package implementation and systems integration services.
ENSPHERICS
Enspherics, Inc. provides IT security consulting and managed security services. Enspherics has approximately 30 employees. CIBER, Inc. acquired 51% of Enspherics in November 2000. Enspherics deploys a complete security life cycle that includes initial security risk assessment, policy and requirements development, architecture design, system installation and configuration, proof testing (security test and evaluation), security system monitoring and administration, security risk management and subsequent systems modification analysis.
BUSINESS COMBINATIONS
We have expanded our geographic breadth, increased our client base and added to our technical expertise and service offerings through business combinations. Given the highly fragmented nature of the IT services industry, we intend to pursue business combinations as part of our growth and operation strategy, including possible international opportunities. The success of this strategy depends not only upon our ability to identify and acquire businesses on a cost-effective basis, but also upon our ability to integrate acquired operations into our organization effectively, to retain and motivate personnel and to retain clients of acquired or merged companies. In reviewing potential business combinations, we consider the target company's capabilities in specific technical services, client base, geographic area, expected financial performance, cost, and the abilities of management, sales and recruiting personnel, among other factors. From July 1, 1997 to December 31, 2000, we have completed the following business combinations:
(1) Approximate consideration includes the value of CIBER common stock issued, the value of certain options for CIBER common stock issued and cash paid or payable (including any recorded additional consideration). (2) CIBER acquired 51% of Enspherics, Inc. (3) CIBER acquired 78% of Interactive Papyrus, Inc. (now named Waterstone, Inc. and 99% owned by CIBER at February 28, 2001).
CLIENTS
Our clients consist primarily of Fortune 2000 and middle market companies across most major industries and governmental agencies. These organizations typically have significant IT budgets and/or depend on outside consultants to help achieve their business and IT objectives.
In 2000, our approximate percentage of revenue by client industry was:
Manufacturing 20% Finance, banking & insurance 18% Information technology 16% Government 16% Telecommunications 13% Healthcare 6% Other 11%
Certain customers account for a significant portion of our revenues. Our five largest clients represented approximately 14% of our total revenues in 2000 with our largest client accounting for approximately 6% of our revenues. Some of our significant clients include: American Express; City & County of San Francisco; Commonwealth of Pennsylvania; Fidelity Investments; Ford Motor Company; Federal Deposit Insurance Corporation; IBM; Xerox; MCI WorldCom and the U.S. Federal Government. If any significant client terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse effect on our business, financial condition and results of operations. We seek to develop long-term relationships with our clients. Although a typical individual client assignment ranges from three months to 12 months in duration, some of our client relationships have continued for more than 10 years.
SALES FORCE
We maintain a direct sales force of approximately 225 employees at December 31, 2000 who market our services to senior business executives, chief information officers, information systems managers and others who purchase IT services. New client contacts are generated through a variety of methods, including client referrals, trade shows, personal sales calls and direct mailings to targeted clients.
CONSULTANTS
Our future success depends in part on our ability to hire and retain adequately trained personnel who can address the changing and increasingly sophisticated technology 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. Few of our employees are bound by non-compete agreements. Competition for personnel in the information technology services industry is significant. We have had, and expect to continue to have, difficulty in 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 devote significant resources to meeting our personnel requirements. At January 31, 2001, we had approximately 110 full-time recruiters.
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: Cambridge Technology Partners; Computer Horizons; Computer Task Group; Keane; marchFIRST; Renaissance Worldwide; Sapient and Technology Solutions. Many large accounting and consulting firms (such as Deloitte & Touche, KPMG Consulting, EDS, IBM Global Services) 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 information technology staff. We also compete with Internet professional services firms as well as the service divisions of various software developers. 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, 2000, we had approximately 5,000 employees, including approximately 4,000 billable consultants and approximately 1,000 personnel in administrative positions. Administrative personnel include management, sales representatives, recruiters and other office personnel. None of our employees are subject to a collective bargaining arrangement. We have employment agreements with our executive officers. We believe our relations with our employees are good.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate office is located at 5251 DTC Parkway, Suite 1400, Greenwood Village, Colorado 80111, where we have a lease for approximately 38,500 square feet that expires in December 2003. We lease office space at approximately 60 other locations. We believe our facilities are adequate for our current level of operations and that suitable additional or alternative space will be available as needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time the subject of lawsuits and other claims and regulatory proceedings arising in the ordinary course of our business. We do not expect any of these matters, individually or in the aggregate, will have a material impact on our financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange under the symbol "CBR." The table below sets forth, for the periods indicated, the high and low sales price per share of our common stock.
The closing price of our common stock on March 16, 2001 was $5.76. As of December 31, 2000, there were approximately 28,000 beneficial owners of our common stock.
Our policy is to retain our earnings to support the growth of our business. Accordingly, we have never paid cash dividends on our common stock and have no present plans to do so in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from our consolidated financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and Notes thereto, which are included herein.
Notes:
o Effective December 31, 1999, we changed our year end from June 30 to December 31.
o All fiscal 1996 to 1998 amounts have been restated to reflect pooling of interests business combinations.
o Goodwill impairment and other charges for the years ended June 30, 1996 to June 30, 1999 consist of merger costs related to pooling of interests business combinations. During the year ended December 31, 2000, we recorded a goodwill impairment charge of $80,773,000 as well as certain other one-time charges (see Note 2 to Consolidated Financial Statements).
o Pro forma net income is after a pro forma adjustment to income tax expense resulting from pooling of interests business combinations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. WITH THE EXCEPTION OF HISTORICAL MATTERS AND STATEMENTS OF CURRENT STATUS, CERTAIN MATTERS DISCUSSED BELOW ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM TARGETS OR PROJECTED RESULTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE DISCUSSED HEREIN UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS." MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO PREDICT OR CONTROL. WE DISCLAIM ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY SUCH FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. IN ADDITION, AS A RESULT OF THESE AND OTHER FACTORS, OUR PAST FINANCIAL PERFORMANCE SHOULD NOT BE RELIED ON AS AN INDICATION OF FUTURE PERFORMANCE.
OVERVIEW
CIBER, Inc. and its subsidiaries DigiTerra, Inc., Solution Partners B.V., Waterstone, Inc. and Enspherics, Inc. provide information technology ("IT") system integration consulting and other services and to a lesser extent, resell certain hardware and software products. Our clients consist primarily of Fortune 2000 and middle market companies across most major industries and governmental agencies. We operate from branch offices across the United States, plus offices in Canada and the Netherlands. At December 31, 2000, we had approximately 5,000 employees. We operate our business as follows: CIBER Operations, DigiTerra, Solution Partners, Waterstone and Enspherics. CIBER Operations refers to the branch offices doing business under the CIBER name. CIBER Operations provides a wide range of IT services and products including project execution, supplemental IT staffing and consulting in leading-edge practice areas such as IT architecture and strategy, business intelligence/customer loyalty, Internet solutions, network infrastructure and security, wireless integration and IT outsourcing. DigiTerra provides package software implementation services ranging from enterprise resource planning (ERP) to supply chain optimization, customer relationship management and e-business components. DigiTerra works with software from PeopleSoft, J.D. Edwards, Oracle, SAP, Lawson, Siebel, Ariba, Rightworks and Commerce One, among others. DigiTerra also provides related hardware sizing and procurement services as an authorized remarketer of certain computer hardware. Solution Partners, located in the Netherlands, provides SAP software implementation consulting and e-business solutions in custom environments. Waterstone provides strategic, technical and creative services including e-business planning, assessments and solutions, customer relationship management, supply chain management, web content development and design and custom integration services. Enspherics provides custom designed IT security solutions to clients who operate in high-risk environments.
We have grown through mergers and acquisitions, as well as through internal growth. For purposes of this Report, the term "acquisition" refers to business combinations accounted for as a purchase and the term "merger" refers to business combinations accounted for as a pooling of interests. Acquisitions result in the recording of goodwill, which we amortize over periods of up to 20 years. Our consolidated financial statements include the results of operations of an acquired business since the date of acquisition. Mergers result in a one-time charge for costs associated with completing the business combination. Unless the effects are immaterial, our consolidated financial statements are restated for all periods prior to a merger to include the results of operations, financial position and cash flows of the merged company. CIBER completed one business combination during the year ended December 31, 2000, five business combinations during the six months ended December 31, 1999 and ten business combinations in each of the fiscal years ended June 30, 1999 and 1998. As a result of a sale of stock to new investors by our former subsidiary, Agilera, Inc., effective January 1, 2000, we no longer consolidate the accounts of Agilera. (See Note 5 to Consolidated Financial Statements.)
Other revenues include sales of computer hardware products, commissions on computer hardware and software product sales and software license and maintenance fees. We sold our software business in September 1999.
Effective December 31, 1999, we changed our year end from June 30 to December 31. As used herein, the term fiscal year refers to our fiscal year ended June 30.
The following table sets forth certain items from our consolidated statements of operations, expressed as a percentage of revenues:
(1) Includes the effects of pro forma adjustments to income tax expense as a result of merged companies.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total revenues decreased 16% to $621.5 million for the year ended December 31, 2000 from $741.9 million for the year ended December 31, 1999. This represents a 16% decrease in consulting services revenues and a decrease in other revenues. Other revenues decreased to $35.1 million for the year ended December 31, 2000 from $43.6 million for the year ended December 31, 1999 due to decreased hardware sales and reduced software revenues. CIBER Operations revenues decreased 16% while DigiTerra revenues decreased 23%, when compared to last year. CIBER Operations accounted for approximately 74% of revenues in 2000 and 1999. DigiTerra revenues decreased to approximately 23% of revenues for the year ended December 31, 2000 from 26% in 1999. Our other businesses accounted for approximately 3% of revenues for the year ended December 31, 2000 compared to less than 1% in 1999. The majority of revenues from our other businesses in 2000 came from Waterstone and Solution Partners, which we acquired late in 1999, and therefore 1999 included revenue for fewer than 12 months.
During 2000, there continued to be an industry-wide shift in IT spending, principally resulting from the resolution of the Y2K issue and ERP curtailments. Many companies reduced IT expenditures beginning mid-1999 due to completion of Y2K and ERP specific projects and a general tendency to minimize new IT initiatives during the end of 1999. This adversely impacted us, particularly in our mainframe staffing and ERP related service offerings. There was a significant industry trend towards new IT services driven by the Internet and increased bandwidth availability. These new services include web-designed, e-business technologies, customer relationship management ("CRM") and supply chain software, wireless integration, among others. We have focused more of our efforts to deliver these newer IT services. These efforts include new alliances with independent software vendors, such as Commerce One and Siebel, and the realignment of our professional and sales personnel towards a greater focus on new technology services. In addition, commencing in the Spring of 2000, the IT services industry was negatively impacted by the shift in investor sentiment away from development and early stage dot.com businesses. As a result, industry
demand for IT services by dot.com companies decreased significantly. This has lead to greater competition within the IT services industry.
Gross margin percentage decreased to 32.1% of revenues for the year ended December 31, 2000 from 34.6% of revenues for the year ended December 31, 1999. This decrease is due to declining gross margins on consulting services offset partially by improved gross margins on other revenues. Consulting services gross margins declined primarily due to a decrease in the utilization levels of professional staff. CIBER Operations gross margin on consulting services declined to 29.8% for the year ended December 31, 2000 from 30.9% in 1999, while DigiTerra consulting gross margin declined to 34.7% in 2000 from 44.1% in 1999. Gross margin percentage on other revenues increased due to decreased sales of lower margin computer hardware products.
Selling, general and administrative expenses ("SG&A") decreased to $158.6 million for the year ended December 31, 2000 from $167.6 million in 1999, while as a percentage of sales, SG&A increased to 25.5% for the year ended December 31, 2000 from 22.6% in 1999. This reflects the semi-fixed nature of SG&A. We also incurred additional SG&A in 2000 related to new marketing and branding initiatives as well as costs to prepare DigiTerra to be a stand-alone entity. As our focus continues to shift to more solutions-oriented and project work, SG&A is expected to increase as a percentage of sales and partially offset the expected higher gross margins on such work.
Amortization of intangible assets increased to $14.0 million for the year ended December 31, 2000 from $12.1 million for the year ended December 31, 1999. This increase was due to the additional intangible assets resulting from acquisitions during the past year, partially offset by the effects of the goodwill write-down in the September 2000 quarter.
Goodwill impairment and other charges of $83.8 million were incurred during the year ended December 31, 2000. We recorded a goodwill impairment charge of $80.8 million during the quarter ended September 30, 2000 to write-down the goodwill associated with certain acquisitions. This charge represents the amount required to write-down the goodwill to our best estimate of the future discounted cash flows of these operations. The other charges are comprised of $1.3 million of severance costs resulting from involuntary terminations related to personnel realignment, $975,000 for an asset write-down, and $720,000 of professional fees resulting from our planned spinoff of DigiTerra. Subject to Board approval and a favorable tax ruling from the IRS, as well as favorable market conditions, we expect to complete the spinoff of DigiTerra to our shareholders in 2001. We also expect to incur additional costs in 2001 in connection with our plan to spinoff DigiTerra.
Net other income, including interest income and interest expense, decreased to $1.0 million for the year ended December 31, 2000 from $2.8 million for the year ended December 31, 1999. Other income in 2000 includes gains of $504,000 from sales of investments and other income in 1999 includes a gain of $827,000 on the sale of our LogisticsPRO software business. The fluctuations in interest income and expense are the result of changes in our average cash balance invested or amounts borrowed under our line of credit.
Tax expense of $10.9 million was recorded during the year ended December 31, 2000 even though a pre-tax loss was reported. Tax expense was recorded for the year ended December 31, 2000 because most of the goodwill impairment charge was not deductible for income tax purposes since the majority of the impaired goodwill related to non-taxable acquisitions. Excluding the effects of the goodwill impairment charge, our effective tax rate would have been approximately 50.8% in 2000 as compared to 41.2% for the year ended December 31, 1999. Tax expense for 2000 also reflects the effects of increased non-deductible goodwill amortization, increased other non-deductible expenses and increased state income taxes.
SIX MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
Our total revenues increased 7% to $362.0 million for the six months ended December 31, 1999 from $339.7 million for the six months ended December 31, 1998. This represents a 13% increase in consulting services revenues offset by a decrease in other revenues, primarily sales of computer hardware products. Other revenues decreased to $20.9 million for the six months ended December 31, 1999 from $36.6 million
for the same period of 1998. Of the 13% increase in consulting services revenues, approximately 12% was due to revenues from acquired businesses and approximately 1% was due to organic growth of existing operations. CIBER operations consulting revenues increased 4.6%, while DigiTerra consulting revenues increased 34.0%. DigiTerra consulting revenues increased to approximately 26% of total consulting revenues for the six months ended December 31, 1999 from 22% in the same period of 1998.
Gross margin percentage decreased to 33.1% of revenues for the six months ended December 31, 1999 from 35.3% of revenues for the same period of 1998. This decrease was due to declining gross margins on consulting services offset by improved gross margins on other revenues. Consulting services gross margins declined primarily due to a decrease in the utilization levels of professional staff. CIBER Operations gross margin on consulting services declined to 29.5% for the six months ending December 31, 1999 from 33.0% for the same period of 1998, while DigiTerra consulting gross margin declined to 41.5% from 46.1% for the same period of 1998. Gross margin on other revenues increased due to decreased sales of lower margin computer hardware products.
Selling, general and administrative expenses were 23.2% of revenues for the six months ended December 31, 1999 compared to 21.9% of revenues for the same period of 1998. This increase was due primarily to additional costs incurred for new programs implemented to position us for future growth, including the addition of senior and executive management team members, branding and marketing initiatives, and internal systems development.
Amortization of intangible assets increased to $6.8 million for the six months ended December 31, 1999 from $2.2 million for the same period of 1998. This increase was due to the additional intangible assets resulting from acquisitions.
No other charges were incurred during the six months ended December 31, 1999, while merger costs of $1.5 million, primarily transaction related broker and professional costs related to pooling of interests business combinations, were incurred during the six months ended December 31, 1998.
Interest income decreased to $920,000 for the six months ended December 31, 1999 from $1.3 million for the same period of 1998 due to decreased average cash balances available for investment. Interest expense was $190,000 for the six months ended December 31, 1999, while no interest expense was incurred during the same period of 1998. This increase was due to borrowings under our line of credit during the six months ended December 31, 1999. Included in other income for the six months ended December 31, 1999 is an $827,000 gain on the sale of our LogisticsPRO software business.
Our effective tax rate for the six months ended December 31, 1999 was 42.6% compared to 41.2% for the same period of 1998. Our effective tax rate for the six months ended December 31, 1999 increased due to increased nondeductible amortization resulting from certain acquisitions.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Total revenues increased 24.8% to $719.7 million in fiscal 1999 from $576.5 million in fiscal 1998. This represents a 27.8% increase in consulting revenues offset by a decrease in other revenues, primarily sales of computer hardware products. Other revenues decreased to $59.3 million in fiscal 1999 from $59.8 million in fiscal 1998. The increase in consulting revenues was derived primarily from an increase in hours billed and, to a lesser extent, an increase in average billing rates.
Of the 27.8% increase in consulting revenues for fiscal 1999 in comparison to fiscal 1998, approximately 9% was due to revenues from acquired businesses or immaterial poolings of interests and approximately 19% was due to organic growth of existing operations. Organic growth for fiscal 1999 was driven by a strong demand for ERP implementation services and was lessened, to some extent, due to declining direct Year 2000 service revenues. CIBER Operations consulting revenues increased 20.9%, while DigiTerra consulting revenues increased 59.0%. DigiTerra consulting revenues increased to approximately 24% of total consulting revenues in fiscal 1999 from 19% in 1998.
Gross margin percentage improved to 35.6% of revenues in fiscal 1999 from 34.9% in fiscal 1998. This improvement was due to improved gross margins on both consulting services and other revenues. Gross margins on consulting services increased as a larger percentage of our revenues were derived from higher margin solutions-oriented and project work. DigiTerra consulting margins improved to 46.4% in fiscal 1999 from 44.9% in 1998, which was offset somewhat by a decline in CIBER Operations consulting margin to 32.6% in 1999 from 33.4% in 1998.
Selling, general and administrative expenses were 21.9% of revenues for fiscal 1999 compared to 23.4% of revenues for fiscal 1998. The decrease as a percentage of revenues is primarily due to greater economies of scale, including reduced administrative costs of certain merged companies.
Amortization of intangible assets increased to $7.5 million in fiscal 1999 from $3.9 million in fiscal 1998. This increase was due to the additional amortization of intangible assets resulting from mergers and acquisitions.
Other charges of $1.5 million in fiscal 1999 and $4.5 million in fiscal 1998 represent merger costs, which are primarily transaction-related broker and professional costs resulting from pooling of interests business combinations.
Interest income, net of interest expense, increased to $2.6 million in fiscal 1999 from $1.5 million in fiscal 1998 due to increased average cash balances available for investment and the elimination of borrowings of certain merged companies.
Including the effects of pro forma adjustments to income tax expense, if any, our effective tax rates for fiscal 1999 and 1998 were 40.8% and 42.3%, respectively. The effective tax rate for fiscal 1999 decreased due to reduced nondeductible merger costs in fiscal 1999 compared to fiscal 1998, which was partially offset by increased nondeductible amortization resulting from fiscal 1999 acquisitions. The pro forma adjustment to income tax expense in fiscal 1998 reflects the exclusion of the one-time income tax effects related to changes in the tax status of certain merged companies and imputes income tax expense for S corporation operations that were not subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had $102.9 million of working capital and a current ratio of 2.9:1. We believe that our cash and cash equivalents, our operating cash flow and our available line of credit will be sufficient to finance our working capital needs through at least the next year.
In June 1999, our Board of Directors authorized the repurchase of up to 5,888,000 shares (10%) of our common stock. As of December 31, 2000, we have purchased 4,680,000 shares for $59,560,000 under this program. We may use significant amounts of cash for the repurchase of our stock or to acquire other businesses. As a result, we may borrow to finance such activities. Future borrowings may include bank, private or public debt.
Net cash provided by operating activities was $26.2 million and $63.4 million in fiscal 1998 and 1999, respectively, $28.7 million for the six months ended December 31, 1999, and $62.9 million and $36.5 million for the years ended December 31, 1999 and 2000, respectively. The decrease in 2000 primarily reflects reduced income, excluding the non-cash goodwill impairment charge. Accounts receivable totaled $127.2 million at December 31, 2000 compared to $139.4 million at December 31, 1999. Accounts receivable days sales outstanding ("DSO") was 80 days at December 31, 2000.
Net cash used in investing activities was $11.2 million and $40.5 million in fiscal 1998 and 1999, respectively, $67.3 million for the six months ended December 31, 1999, and $99.3 million and $11.2 million during the years ended December 31, 1999 and 2000, respectively. We used cash for acquisitions of $351,000 and $26.5 million during fiscal 1998 and 1999, respectively, $60.1 million during the six months ended December 31, 1999, and $82.5 million and $16.2 million during the years ended December 31, 1999 and 2000, respectively. In 2000, we received $9.9 million from Agilera as repayment of advances. We
purchased property and equipment of $11.7 million and $14.0 million during fiscal 1998 and 1999, respectively, $7.2 million during the six months ended December 31, 1999, and $16.8 million and $8.5 million during the years ended December 31, 1999 and 2000, respectively. Purchases of property and equipment have decreased in 2000 because we made a number of significant purchases in 1999 related to back office systems, technology infrastructure and facility expansion.
Net cash provided by (used in) financing activities was ($4.9 million) and $1.8 million in fiscal 1998 and 1999, respectively, ($20.5 million) in the six months ended December 31, 1999, and ($22.9 million) and $8.9 million during the years ended December 31, 1999 and 2000, respectively. We obtained net cash proceeds from employee stock purchases and options exercised of $5.8 million and $14.8 million in fiscal 1998 and 1999, respectively, $10.9 million in the six months ended December 31, 1999, and $19.7 million and $10.9 million during the years ended December 31, 1999 and 2000, respectively. We purchased 706,000 shares of treasury stock for $13.0 million during fiscal 1999, 2,255,000 shares for $36.7 million during the six months ended December 31, 1999, 2,860,000 shares for $47.9 million and 1,925,000 shares for $14.1 million during the years ended December 31, 1999 and 2000, respectively. We have reissued some of the treasury shares under our stock plans and in connection with acquisitions.
We have a $35 million unsecured revolving line of credit with a bank. There were no outstanding borrowings under this bank line of credit at December 31, 2000 and June 30, 1999. At December 31, 1999, there was $5,355,000 outstanding under this line of credit. Outstanding borrowings bear interest at the three month London Interbank Offered Rate ("LIBOR") plus 2%. The credit agreement requires a commitment fee of 0.225% per annum on any unused portion of the line of credit up to $20 million. The credit agreement expires on July 1, 2001. We expect, although there can be no assurance, to be able to renew this line of credit on similar terms.
SEASONALITY
We experience a moderate amount of seasonality. Typically, operating income as a percentage of revenues is lowest in the fourth quarter of each calendar year because more holidays and vacations are taken at that time of year resulting in fewer hours billed in that period.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Included in this Report and elsewhere from time to time in other written reports and oral statements, including but not limited to, the Annual Report to Shareholders, quarterly shareholder letters, news releases and investor presentations, are forward-looking statements about our business strategies, market potential, future financial performance and other matters which reflect our current expectations. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. We disclaim any intent or obligation to update publicly such forward-looking statements. Actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including, without limitation, those set forth below.
We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of the risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock.
GROWTH THROUGH BUSINESS COMBINATIONS AND INTERNAL EXPANSION - As an integral part of our business strategy, we intend to continue to expand by acquiring information technology businesses. We regularly evaluate potential business combinations and aggressively pursue attractive transactions. From July 1, 1997 through December 31, 2000, we completed 26 business combinations. The success of this strategy depends not only upon our ability to identify and acquire businesses on a cost-effective basis, but also upon our ability to successfully integrate the acquired business with our organization and culture. Business combinations involve numerous risks, including: the ability to manage geographically remote operations; the diversion of management's attention from other business concerns; risks of losing clients and employees of the acquired business and the risks of entering markets in which we have limited or no direct experience. There can be no assurance we will be able to acquire additional business, or that any business
combination will result in benefits to us. In addition, we may open new offices in attractive markets with our own personnel. Many of our branch offices were originally start-up operations. Not all branch offices, whether start-up or acquired, have been successful. There can be no assurances that we will be able to successfully start up, identify, acquire, or integrate future successful branch office operations.
ABILITY TO ATTRACT AND RETAIN QUALIFIED CONSULTANTS - Our future success depends in part on our ability to attract and retain adequately trained personnel who can address the changing and increasingly sophisticated technology 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. Few of our employees are bound by non-compete agreements. Competition for personnel in the information technology services industry is significant. We have had, and expect to continue to have, difficulty in 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.
DEPENDENCE ON SIGNIFICANT RELATIONSHIPS AND THE ABSENCE OF LONG-TERM CONTRACTS -Our five largest clients accounted for 14% of our revenues in 2000 with our largest client accounting for 6% of revenues. We strive to develop long-term relationships with our clients. Most individual client assignments are from three to 12 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. In addition, under many contracts, clients may reduce their use of our services under such contract without penalty. If any significant client terminates its relationship with us or substantially decreases its use of our services, it could have a material adverse effect on our business, financial condition and results of operations. Additionally, we have a significant relationship with PeopleSoft as an implementation partner. Approximately 8% of our revenues are from services related to PeopleSoft software. In the event PeopleSoft products become obsolete or non-competitive, or if we should lose our "implementation partner" status with PeopleSoft, we could suffer a material adverse effect. We have other similar relationships and strategic alliances with other technology vendors. The sudden loss of any significant relationship or substantial decline in demand for their products could also adversely affect us.
MANAGEMENT OF A RAPIDLY CHANGING BUSINESS - 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. If we cannot keep pace with these changes, our business could suffer. Our success depends, in part, on our ability to develop service offerings that keep pace with continuing changes in technology, evolving industry standards and changing client preferences. Our success will also depend on our ability to develop and implement ideas for the successful application of existing and new technologies. We may not be successful in addressing these developments on a timely basis or our ideas may not be successful in the marketplace. Products and technologies developed by our competitors may also make our services or product offerings less competitive or obsolete.
PROJECT RISKS - We provide and intend to continue to provide project services to our clients. Projects are distinguishable from CIBER's professional services staff supplementation contracts by the level of responsibility we assume. With professional services staff supplementation contracts, our clients generally maintain responsibility for the overall tasks. In a typical project, we assume major responsibilities for the management of the project and/or the design and implementation of specific deliverables based upon client-defined requirements. As our project engagements become larger and more complex and must be completed in shorter time frames, it becomes more difficult to manage the project and the likelihood of any mistake increases. In addition, our projects often involve applications that are critical to our client's business. Our failure to timely and successfully complete a project and meet our client's expectations could have a material adverse effect on our business, results of operations or financial condition. Such adverse effects may include delayed or lost revenues, additional services being provided at no charge and a negative impact to our reputation. In addition, claims for damages may be brought against us, regardless of our responsibility, and our insurance may not be adequate to cover such claims. Our contracts generally limit our liability for damages that may arise in rendering our services. However, we cannot be sure these contractual provisions will successfully protect us from liability if we are sued.
We sometimes undertake projects on a fixed-fee basis or cap the amount of fees we may bill on a time and materials basis. Any increased or unexpected costs or unanticipated delays could make such projects less profitable or unprofitable and could have a material adverse effect on our business, results of operations and financial condition.
COMPETITION - We operate in a highly competitive industry. We believe that we currently compete principally with IT and Internet professional services firms, technology vendors and internal information systems groups. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we do. In addition, there are relatively few barriers to entry into our markets and we have faced, and expect to continue to face, competition from new entrants into our markets. 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 business, results of operations and financial condition.
INTERNET GROWTH AND USAGE - Our business is dependent upon continued growth of the use of the Internet by our clients and prospective clients as well as their customers and suppliers. If Internet usage and commerce conducted over the Internet does not continue to grow, the demand for our services may decrease and, as a result, our revenues would decline. Capacity constraints of the Internet, unless resolved, could impede further growth of Internet usage. In addition, any laws and regulations relating to the Internet that are adopted by governments in the United States or abroad that could reduce growth or usage of the Internet as a commercial medium may impact our business. We cannot predict how any such government regulations may affect our business. However, if such regulations were to result in a decrease in the demand for our services, they could have a material adverse effect on our business, results of operations and financial condition.
INTERNATIONAL EXPANSION - We expect to expand our international operations. We currently have offices in Toronto and Vancouver, Canada and Eindhoven, the Netherlands. We have limited experience in marketing, selling and providing our services internationally. International operations are subject to political and economic uncertainties, fluctuations in foreign currency exchange rates and new tax and legal requirements. Other risks inherent in international operations include managing geographically distant locations and customers, employees speaking different languages and different cultural approaches to the conduct of business. If any of these risks materialize, they could have a material adverse effect on our business, results of operations and financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS - Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly revenues or operating results generally include: costs relating to the expansion of our business; the extent and timing of business acquisitions; our ability to obtain new and follow-up on client engagements; the timing of assignments from customers; our consultant utilization rate (including our ability to transition employees quickly from completed assignments to new engagements); the seasonal nature of our business due to variations in holidays and vacation schedules; the introduction of new services by us or our competitors; price competition or price changes and our ability to manage costs and economic and financial conditions specific to our clients. Quarterly sales and operating results can be difficult to forecast, even in the short term. Due to all of the foregoing factors, it is possible that our revenues or operating results in one or more future quarters will fail to meet or exceed the expectations of security analysts or investors. In such event, the price of our common stock would likely be materially adversely affected.
PRICE VOLATILITY - The market price of our common stock could be subject to significant fluctuations in response to: variations in quarterly operating results; changes in earnings estimates by securities analysts; any differences between our reported results and securities analysts' expectations; general economic, financial and other factors; and market conditions that can affect the capital markets. In addition, reaction to announcements made by us or by our competitors, such as new contracts or service offerings, acquisitions or strategic investments may impact our stock price.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from foreign currency fluctuations and changes in interest rates on any borrowings we may have. We currently do not use derivative financial or commodity instruments.
FOREIGN EXCHANGE. We are exposed to foreign exchange rate fluctuations as the financial results of our foreign operations are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact our financial position or results of operations. During the year ended December 31, 2000, approximately 2% of our total revenues was attributable to foreign operations. CIBER does not enter into forward exchange contracts as a hedge against foreign currency exchange risk on transactions denominated in foreign currencies or for speculative or trading purposes. We believe that our exposure to foreign currency exchange risk at December 31, 2000 is not material.
INTEREST RATES. We have a $35 million revolving line of credit with a bank. There were no outstanding borrowings under this bank line of credit at December 31, 2000. The interest rate on the line of credit is based on LIBOR, plus 2%. Therefore, as LIBOR fluctuates, we would experience changes in interest expense related to any outstanding borrowings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders CIBER, Inc.:
We have audited the accompanying consolidated balance sheets of CIBER, Inc. and subsidiaries as of June 30, 1999, December 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the two-year period ended June 30, 1999, the six-month period ended December 31, 1999 and the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CIBER, Inc. and subsidiaries as of June 30, 1999, December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1999, the six-month period ended December 31, 1999 and the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Denver, Colorado February 8, 2001
CIBER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CIBER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CIBER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
CIBER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
CIBER, Inc. and its subsidiaries DigiTerra, Inc., Solution Partners B.V., Waterstone, Inc. and Enspherics, Inc. provide information technology ("IT") system integration consulting and other services and to a lesser extent, resell certain hardware and software products. Our clients consist primarily of Fortune 2000 and middle market companies across most major industries and governmental agencies. We operate from branch offices across the United States, plus offices in Canada and the Netherlands. At December 31, 2000, we had approximately 5,000 employees. We operate our business as follows: CIBER Operations, DigiTerra, Solution Partners, Waterstone and Enspherics. CIBER Operations refers to the branch offices doing business under the CIBER name. CIBER Operations provides a wide range of IT services and products including project execution, supplemental IT staffing and consulting in leading-edge practice areas such as IT architecture and strategy, business intelligence/customer loyalty, Internet solutions, network infrastructure and security, wireless integration and IT outsourcing. DigiTerra provides package software implementation services ranging from enterprise resource planning (ERP) to supply chain optimization, customer relationship management and e-business components. DigiTerra works with software from PeopleSoft, J.D. Edwards, Oracle, SAP, Lawson, Siebel, Ariba, Rightworks and Commerce One, among others. DigiTerra also provides related hardware sizing and procurement services as an authorized remarketer of certain computer hardware. Solution Partners, located in the Netherlands, provides SAP software implementation consulting and e-business solutions in custom environments. Waterstone (formerly known as Neovation, Inc.) was formed in 2000 by combining our Interactive Papyrus, Inc. subsidiary with the business operations we acquired from Waterstone Consulting, Inc. Waterstone provides strategic, technical and creative services including e-business planning, assessments and solutions, customer relationship management, supply chain management, web content development and design and custom integration services. Enspherics provides custom designed IT security solutions to clients who operate in high-risk environments.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CIBER, Inc. and all wholly owned and majority owned subsidiaries. All material intercompany balances and transactions have been eliminated. Agilera, Inc. was consolidated with us through December 31, 1999 (see Note 5).
(c) CHANGE IN FISCAL YEAR END AND INTERIM FINANCIAL INFORMATION
We changed our year end to December 31 from June 30, effective December 31, 1999.
Unaudited consolidated statements of operations and cash flows for the year ended December 31, 1999 have been included in the accompanying consolidated financial statements for comparative purposes.
(d) CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Cash equivalents consist of money market funds of $19,601,000 and investment grade commercial paper of $33,213,000 at June 30, 1999, and money market funds of $11,752,000 at December 31, 2000. There were no cash equivalents at December 31, 1999.
(e) INVESTMENTS
Investments in marketable equity securities are classified as available-for-sale and are recorded at fair market value, which is determined based on quoted market prices. Investments are included in prepaid expenses and other current assets on the consolidated balance sheet. The net unrealized gain or loss, net of tax, is included in accumulated other comprehensive loss on the consolidated balance sheet. Realized gains and losses on the
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sale of investments are based on average cost and are included in other income in the consolidated statements of operations.
(f) PROPERTY AND EQUIPMENT
Property and equipment, which consists primarily of computer equipment, software and furniture, is stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives, ranging primarily from three to seven years.
(g) COSTS OF DEVELOPING COMPUTER SOFTWARE FOR INTERNAL USE
Direct costs of time and material incurred for the development of software for internal use are capitalized as property and equipment. These costs are depreciated using the straight-line method over the estimated useful life of the software, ranging from three to seven years.
(h) INTANGIBLE ASSETS
Intangible assets consist of goodwill and noncompete agreements. Goodwill is amortized over 6 to 20 years. Noncompete agreements are amortized over the terms of the contracts, which range from one to three years. Amortization is recorded using the straight-line method.
Intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount of intangible assets may not be recoverable. Conditions that may trigger an impairment assessment include a history of operating losses of the related business, a significant reduction in the revenues of the related business, and a loss of a major customer, among others. An impairment would be considered to exist when the estimated undiscounted future cash flows expected to result from the use of the intangible asset are less than the carrying amount of the asset. Future cash flows are estimated at the lowest business unit level which includes all of the operations that directly benefit from the intangible asset. This level may be a practice, branch office, region or subsidiary. If the acquired business has been fully integrated into operations, enterprise-wide goodwill would be evaluated at the consolidated level. Estimated cash flows at the business unit level are net of taxes and do not include any allocation of interest or other corporate level items. Impairment, if any, is measured based on forecasted future discounted operating cash flows. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly.
(i) REVENUE RECOGNITION
We provide consulting services under time-and-material and fixed-priced contracts. The majority of our service revenues are recognized under time-and-material contracts as hours and costs are incurred. Revenues include reimbursable expenses separately billed to clients. For fixed-priced contracts, revenue is recognized on the basis of the estimated percentage of completion based on costs incurred relative to total estimated costs. The cumulative impact of any revisions in estimated revenues and costs are recognized in the period in which they become known. Losses, if any, on fixed-price contracts are recognized when the loss is determined. Under certain national IT services contracts, we are required by our customer to act as a billing agent for other service providers to such client. We recognize the net fee under these arrangements as revenue.
Other revenues include sales of computer hardware products, commissions on computer product sales and software license and maintenance fees. Revenues related to the sale of computer products are recognized when the products are shipped. Where we are the remarketer of certain computer products, commission revenue is recognized when the products are drop-shipped from the vendor to the customer. On September 30, 1999, we sold our software business. Software license fee revenues were recognized over the period of the software implementation and revenues from maintenance agreements were recognized ratably over the maintenance period.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unbilled accounts receivable represent amounts recognized as revenue based on services performed in advance of billings in accordance with contract terms. Deferred revenues consist of amounts received or billed in advance of services to be provided.
(j) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A tax benefit or expense is recognized for the net change in the deferred tax asset or liability during the period. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
(k) PRO FORMA NET INCOME
Pro forma net income has been presented for the year ended June 30, 1998 because certain companies that merged with us in business combinations accounted for as poolings of interests were S corporations and generally not subject to income taxes. Accordingly, no provision for income taxes has been included in the historical consolidated financial statements for the operations of these companies prior to their merger with us. The related net deferred tax asset or liability of these companies at the date of their respective mergers with us was recorded as income tax benefit or expense. The pro forma adjustment to income taxes has been computed as if the merged companies had been taxable entities subject to income taxes for all periods prior to their merger with us at the marginal rates applicable in such periods.
(l) STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS 123"), we account for stock-based employee compensation in accordance with the provisions of Accounting Principles Board Opinion 25, and related interpretations, including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)", issued in March 2000. We measure stock-based compensation cost as the excess, if any, of the quoted market price of CIBER common stock (or the estimated fair value of subsidiary stock) at the grant date over the amount the employee must pay for the stock. We generally grant stock options at fair market value at the date of grant. The pro forma disclosures, as if the fair-value based method defined in SFAS 123 had been applied, are provided in Note 15.
(m) MINORITY INTEREST
At December 31, 1999, we owned 78% of Interactive Papyrus, Inc. In April 2000, we contributed to Interactive Papyrus the business operations and net assets that we acquired from Waterstone Consulting, Inc. and increased our ownership to 88%. We subsequently changed its name to Waterstone, Inc. In January 2001, we purchased most of the shares that represented the minority interest in Waterstone for $1.7 million. As a result, in 2001, we will record goodwill of $792,000, which will be amortized over 10 years. This transaction increased our ownership in Waterstone to 99%. On November 27, 2000, we acquired 51% of Enspherics, Inc. The minority stockholders' proportionate share of the equity of these subsidiaries is reflected as minority interest in the consolidated balance sheet. The minority stockholders' proportionate share of the net income (loss) of these subsidiaries is included in other income, net in the consolidated statement of operations. The minority interest in the net income of subsidiaries was $4,000 for the six months ended December 31, 1999. For the year ended December 31, 2000, the minority interest in the net loss of subsidiaries was $467,000.
(n) COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are reported directly as a separate component of shareholders' equity in the consolidated balance sheet. Comprehensive loss includes net income (loss) plus changes in the net unrealized gain/loss on investments and the cumulative foreign currency translation adjustment.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(o) FOREIGN CURRENCY TRANSLATION
The assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the period. The resulting cumulative translation adjustment is included in accumulated other comprehensive loss on the consolidated balance sheet. Foreign currency transaction gains and losses have not been significant and are included in the results of operations as incurred.
(p) SUBSIDIARY STOCK SALES
Gains and losses on sales of stock by our subsidiaries are recognized directly in shareholders' equity through an increase or decrease to additional paid-in capital in the period in which the transaction occurs.
(q) ESTIMATES
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to estimates of collectibility of accounts receivable, the realizability of goodwill, the costs to complete fixed-priced projects, certain accrued liabilities and other factors.
(r) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of our financial instruments approximates our carrying amounts due to the relatively short periods to maturity of the instruments and/or variable interest rates of the instruments which approximate current market rates.
(s) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) GOODWILL IMPAIRMENT AND OTHER CHARGES
Goodwill impairment and other charges are comprised of the following (in thousands):
During the quarter ended September 30, 2000, we recorded a goodwill impairment charge of $80.8 million to write-down the goodwill associated with certain acquisitions. These acquisitions include: Business Impact Systems, Inc. ("BIS"), Integration Software Consultants, Inc. ("ISC"), York & Associates, Inc., Interactive Papyrus, Inc. and Paragon Solutions, Inc. Of the total goodwill impairment charge, $53.2 million relates to CIBER Operations, $22.2 million relates to DigiTerra and $5.4 million relates to Waterstone. These businesses were acquired at a time when the value of IT services companies was much higher than at the time of the impairment charge. In addition, approximately 88% of the goodwill impairment charge related to businesses acquired for consideration paid 100% in our stock. Stock consideration typically involves a premium over cash consideration. These acquired operations experienced a decrease in the demand for their
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
services as post Year 2000 IT spending of many companies decreased. In addition, in the spring of 2000, the IT services requirements of dot.com companies decreased significantly. This has led to greater competition within the IT services industry for the remaining business, and as a result, revenues, cash flows and expected future growth rates of these operations have decreased.
Due to the significance of the change in conditions, we performed an evaluation of the recoverability of the goodwill related to these operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Because the estimated future undiscounted cash flows of these operations were less than the carrying value of the related goodwill, an impairment charge was required. The impairment charge represents the amount required to write-down this goodwill to our best estimate of these operations' future discounted cash flows.
In addition, we reduced the remaining goodwill amortization periods for BIS and ISC to 10 years and 14 years, respectively. This reduction resulted in additional goodwill amortization of $330,000 during the year ended December 31, 2000, which increased the net loss by the same amount.
In March 2000, we announced our intent to spin-off our DigiTerra subsidiary to our shareholders, subject to receiving Board approval and a favorable tax ruling, as well as favorable market conditions. We expect to complete the spin-off of DigiTerra in 2001, however, there can be no assurance that such transaction will be completed. As a result of our planned separation of DigiTerra, we have incurred certain charges for an asset write-down as well as professional fees.
Merger costs represent professional fees, primarily broker fees, associated with certain pooling of interests business combinations.
(3) ACQUISITIONS
We have acquired certain businesses, as set forth below. Each of these acquisitions has been accounted for under the purchase method of accounting for business combinations and accordingly, the accompanying consolidated financial statements include the results of operations of each acquired business since the date of acquisition.
ACQUISITION FROM JANUARY 1, 2000 THROUGH DECEMBER 31, 2000
ENSPHERICS, INC. ("ENSPHERICS") - On November 27, 2000, we acquired 51% of the outstanding capital stock of Enspherics for $2.5 million. Per the terms of the agreement, additional consideration may be paid based on Enspherics achieving certain performance objectives. We have recorded initial goodwill of $2.5 million related to this acquisition, which will be amortized over 10 years. Any additional consideration paid will be recorded as additional goodwill. Enspherics, located in Greenwood Village, Colorado, provides custom designed IT security solutions to clients who operate in high-risk environments.
ACQUISITIONS FROM JULY 1, 1999 THROUGH DECEMBER 31, 1999
SOLUTION PARTNERS B.V. ("SOLUTION PARTNERS") - On December 2, 1999, we acquired all of the outstanding capital stock of Solution Partners for initial consideration of $14.1 million. As part of the purchase price, we issued 171,580 shares of our common stock with a value of $4.0 million. In 2000, we agreed to pay additional consideration of approximately $1.9 million, of which $1.0 million was paid in 2001 and the remainder is payable in January 2002. The additional consideration has been recorded as goodwill and as a result, we have recorded total goodwill of $15.3 million related to this acquisition, which is being amortized over 20 years. Solution Partners, located in Eindhoven, the Netherlands, provides e-business and supply chain solutions using SAP software to companies throughout Europe.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INTERACTIVE PAPYRUS, INC. ("IPI") - On December 2, 1999, we acquired approximately 78% of the outstanding capital stock of IPI for $6.2 million. As part of the purchase price, we issued 22,500 shares of our common stock with a value of $450,000. We originally recorded goodwill of $5.7 million related to this acquisition, which was being amortized over 6 years. In 2000, we reduced the goodwill associated with IPI to $924,000 (see Note 2). IPI, located in Colorado Springs, Colorado, developed interactive web sites to build online business ventures.
SOFTWARE DESIGN CONCEPTS, INC. ("SDC") - On November 15, 1999, we acquired certain assets, liabilities and all of the business operations of SDC for $9.0 million in cash and the issuance of 160,378 shares of our common stock with a value of $3.0 million. The aggregate purchase price was $12.0 million. We have recorded goodwill of $11.5 million related to this acquisition, which is being amortized over 20 years. SDC, located in Philadelphia, Pennsylvania, provided software development and consulting services similar to us.
WATERSTONE CONSULTING, INC. ("WATERSTONE") - On October 29, 1999, we acquired certain assets, liabilities and all of the business operations of Waterstone for $30.7 million. As part of the purchase price, we issued 243,347 shares of our common stock with a value of $4.0 million. We have recorded goodwill of $29.8 million related to this acquisition, which is being amortized over 20 years. Waterstone, located in Chicago, Illinois, provided consulting services specializing in supply chain and customer relationship management solutions.
THE ISADORE GROUP, INC. ("ISADORE") - On October 15, 1999, we acquired certain assets, liabilities and all of the business operations of Isadore for $18.3 million. Additionally, the terms of the purchase provide for additional consideration of up to $10.4 million based on certain revenue earned during the 3-year period ending December 31, 2002. We have recorded goodwill of $17.5 million related to this acquisition, which is being amortized over 20 years. Any additional consideration paid will be accounted for as additional goodwill. Isadore, located in Phoenix, Arizona, provided PeopleSoft higher education consulting services.
ACQUISITIONS FROM JULY 1, 1998 THROUGH JUNE 30, 1999
DIGITAL SOFTWARE CORPORATION ("DSC") - On April 30, 1999, we acquired certain assets, liabilities and all of the business operations of DSC for $6.9 million in cash. We have recorded goodwill of $7.0 million related to this acquisition, which is being amortized over 15 years. DSC, located in Aurora, Colorado, provided software engineering services similar to us.
COMPAID CONSULTING SERVICES, INC. ("COMPAID") - On March 2, 1999, we acquired all of the outstanding capital stock of Compaid for $10.3 million. We have recorded goodwill of $8.0 million related to this acquisition, which is being amortized over 15 years. Compaid, headquartered in Atlanta, Georgia, provided services similar to us.
BUSINESS IMPACT SYSTEMS, INC. ("BIS") - On February 26, 1999, we issued 2,401,028 shares of our common stock and granted options for 3,634 shares of our common stock (at an aggregate purchase price of $40,000) in exchange for substantially all of the outstanding assets and liabilities of BIS. The aggregate purchase price was $62.2 million, including acquisition costs. We had originally recorded goodwill of $55.6 million related to this acquisition, which was being amortized over 20 years. In 2000, we reduced the goodwill related to BIS to $9.8 million and reduced the remaining goodwill amortization period to 10 years (see Note 2). BIS, headquartered in Herndon, Virginia, provided enterprise integration services.
PARADYME HR TECHNOLOGIES CORPORATION ("PARADYME HRT") - On February 5, 1999, we acquired certain assets, liabilities and all of the business operations of Paradyme HRT for initial consideration of $5.0 million. We paid additional consideration of $2.2 million during 2000 and additional consideration of $816,000 is to be paid in 2001. Paradyme HRT, located in Columbia, South Carolina, provided ERP outsourcing services and HR/Payroll business services. The acquired business initially operated as CIBER Enterprise Outsourcing, Inc. which became Agilera, Inc. (see Note 5).
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INTEGRATION SOFTWARE CONSULTANTS, INC. ("ISC") - On February 2, 1999, we issued 1,280,289 shares of our common stock in exchange for all of the outstanding common stock of ISC. The aggregate purchase price was $34.0 million, including acquisition costs. We had originally recorded goodwill of $31.9 million related to this acquisition, which was being amortized over 20 years. In 2000, we reduced the goodwill related to ISC to $11.7 million and reduced the remaining goodwill amortization period to 14 years (see Note 2). ISC, headquartered in Philadelphia, Pennsylvania, provided SAP software implementation services.
YORK & ASSOCIATES, INC. ("YORK") - On January 29, 1999, we issued 548,857 shares of our common stock and granted options for 30,643 shares of our common stock (at an aggregate exercise price of $159,000) in exchange for substantially all of the outstanding assets and liabilities of York. The aggregate purchase price was $14.5 million, including acquisition costs. We had originally recorded goodwill of $12.2 million related to this acquisition, which was being amortized over 20 years. In 2000, we wrote-off all of the goodwill related to York because we exited the primary business for which York was acquired (see Note 2).
PARAGON SOLUTIONS, INC. ("PARAGON") - On January 8, 1999, we acquired certain assets, liabilities and all of the business operations of Paragon for $4.4 million. The original terms of the purchase provided for additional consideration of up to $3.3 million based on certain performance criteria during the 12-month periods ending December 31, 1999 and 2000. In 2000, we paid $2.5 million in final settlement of the purchase agreement. We had originally recorded total goodwill of $6.8 million related to this acquisition, which was being amortized over 15 years. In 2000, we reduced the goodwill associated with Paragon to $1.9 million (see Note 2). Paragon, located in Pittsburgh, Pennsylvania, provided Oracle software implementation services.
THE DORADUS CORPORATION ("DORADUS") - On November 15, 1998, we acquired all of the outstanding capital stock of Doradus for $4.1 million. Additional consideration of $288,000 was paid in during the year ended December 31, 1999. The additional consideration was accounted for as additional goodwill. We have recorded total goodwill of $4.2 million related to this acquisition, which is being amortized over 15 years. Doradus, located in Minneapolis, Minnesota, provided IT consulting services similar to us.
(4) POOLINGS OF INTERESTS
We completed certain business combinations accounted for as poolings of interests, as set forth below. Our financial statements have been restated for all periods prior to each pooling of interests to include the accounts of the merged company.
YEAR ENDED JUNE 30, 1999
THE CUSHING GROUP, INC. ("CUSHING") - On August 31, 1998, we issued 961,135 shares of our common stock in connection with the merger of Cushing.
EJR COMPUTER ASSOCIATES, INC. ("EJR") - On August 11, 1998, we issued 1,155,516 shares of our common stock in connection with the merger of EJR.
YEAR ENDED JUNE 30, 1998
THE SUMMIT GROUP, INC. ("SUMMIT") - On May 4, 1998, we issued 4,262,860 shares of our common stock in connection with the merger of Summit.
STEP CONSULTING, INC. ("STEP") - On April 30, 1998, we issued 131,242 shares of our common stock in connection with the merger of Step.
COMPUTER RESOURCE ASSOCIATES, INC. ("CRA") - On March 2, 1998, we issued 530,910 shares of our common stock in connection with the merger of CRA.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ADVANCED SYSTEMS ENGINEERING, INC. ("ASE") - On March 2, 1998, we issued 382,602 shares of our common stock in connection with the merger of ASE.
TECHWARE CONSULTING, INC. ("TECHWARE") - On November 26, 1997, we issued 747,836 shares of our common stock in connection with the merger of Techware.
FINANCIAL DYNAMICS, INC. ("FDI") - On November 24, 1997, we issued 1,128,054 shares of our common stock and granted options for 97,220 shares of our common stock (at an aggregate exercise price of $217,000) in connection with the merger of FDI.
THE CONSTELL GROUP, INC. ("CONSTELL") - On October 24, 1997, we issued 500,000 shares of our common stock in connection with the merger of Constell.
BAILEY & QUINN, INC. ("BQI") - On October 22, 1997, we issued approximately 148,000 shares of our common stock in connection with the merger of BQI.
SOFTWAREXPRESS, INC. D/B/A RELIANT INTEGRATION SERVICES, INC. ("RELIANT") - On August 21, 1997, we issued 1,183,276 shares of our common stock in connection with the merger of Reliant.
KCM COMPUTER CONSULTING, INC. ("KCM") - On July 18, 1997, we issued 861,700 shares of our common stock in connection with the merger of KCM.
(5) AGILERA INVESTMENT
In March 2000, our wholly owned subsidiary, Agilera, Inc. (formerly named CIBER Enterprise Outsourcing, Inc.), sold $45 million of convertible preferred stock to new investors. As a result of participating rights obtained by the preferred stockholders in connection with their investment, we retained a 41% voting interest in Agilera. Accordingly, effective January 1, 2000, for financial reporting purposes, we no longer consolidate the results and accounts of Agilera and account for our interest in Agilera using the equity method of accounting. In connection with the preferred stock sale, Agilera paid us $9.9 million in repayment of our advances to Agilera as of December 31, 1999, reducing our historical cost basis in our remaining ownership in Agilera to zero. Since the basis of our investment in Agilera is zero, beginning January 1, 2000 we do not record our proportionate share of Agilera's net losses. Agilera provides enterprise application hosting or application service provider ("ASP") services.
In August 2000, Agilera obtained additional equity financing that reduced our voting interest to 24%. In January 2001, our voting interest in Agilera has been reduced to approximately 19% as a result of an Agilera business combination.
We provide software implementation and other services to Agilera as a subcontractor under certain Agilera customer contracts. We have recorded revenue of $5,986,000 related to these services during the year ended December 31, 2000.
(6) SALE OF LOGISTICSPRO
On September 30, 1999, we sold our LogisticsPRO software business for $2.0 million resulting in a gain of $827,000 that is included in other income. The after-tax gain was $496,000 or $.01 per diluted share. As consideration, we received a $2.0 million, 8% promissory note that was paid in full in September 2000. The software business was sold to an entity owned by the management of the LogisticsPRO business as well as two non-executive officers of DigiTerra.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) EARNINGS (LOSS) PER SHARE
The computation of earnings (loss) per share - basic and diluted is as follows (in thousands, except per share amounts):
Loss per share - diluted for the year ended December 31, 2000 excludes common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. The dilutive common equivalent shares for the year ended December 31, 2000 were 876,000, had we reported net income. In addition, the number of antidilutive stock options (options whose exercise price is greater than the average CIBER stock price during the period) omitted from the computation of weighted average shares - diluted was 1,182,000, 2,316,000 and 4,175,000 for the year ended June 30, 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively.
(8) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
The activity in the allowance for doubtful accounts consist of the following (in thousands):
(1) Represents additions due to business combinations accounted for as purchases and immaterial poolings of interests.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) INVESTMENTS
Investments (which are included in prepaid expenses and other current assets) consist of the following at December 31, 2000 (in thousands):
The following summarizes gains and losses from the sale of investments for the year ended December 31, 2000 (in thousands):
In 2000, we purchased 134,400 shares of Merrill Lynch & Co., Inc. Structured Yield Product Exchangeable for Stock ("STRYPES"), payable with shares of common stock of CIBER, Inc. On February 1, 2001, we received 285,044 shares of our common stock upon the maturity of the STRYPES. We have recorded these shares as treasury stock at December 31, 2000, at a cost of $1,534,000. The CIBER, Inc. common stock delivered by Merrill Lynch & Co. in settlement of the STRYPES was purchased by Merrill Lynch & Co. from a trust controlled by Bobby G. Stevenson, our Chairman, pursuant to a forward purchase contract entered into in January 1998.
(10) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
(11) INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
(1) As discussed in Note 2, during 2000, we reduced the value of certain goodwill by $80,773,000.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) REVOLVING LINE OF CREDIT
We have a $35 million unsecured revolving line of credit with a bank. There were no outstanding borrowings under this bank line of credit at December 31, 2000 and June 30, 1999. At December 31, 1999, we had $5,355,000 outstanding under this line of credit, which was classified as a long-term liability as the maturity date was more than 12 months into the future. Outstanding borrowings bear interest at the three-month London Interbank Offered Rate ("LIBOR") plus 2% (8.40% at December 31, 2000). The credit agreement requires a commitment fee of 0.225% per annum on any unused portion of the line of credit up to $20 million. The credit agreement expires on July 1, 2001. The terms and conditions of the credit agreement include several covenants, including those whereby we agree to the maintenance of certain net worth and debt service coverage ratios, among other things. Amounts advanced under the line of credit can be used to consummate an acquisition and may be required by the bank to be converted into a five-year term note payable in equal amounts of interest and principal. In such event, the line of credit would be reduced by the amount of the term note.
(13) LEASES
We have noncancelable operating leases for office space. Rental expense for operating leases totaled $8,636,000, $10,730,000, $6,218,000 and $12,106,000 for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively.
Future minimum lease payments as of December 31, 2000 are (in thousands):
(14) INCOME TAXES
Income tax expense (benefit) consists of the following (in thousands):
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax expense differs from the amounts computed by applying the statutory U.S. federal income tax rate to income before income taxes as a result of the following (in thousands):
The components of the net deferred tax asset or liability are as follows (in thousands):
Based on our evaluation of current and anticipated future taxable income, we believe sufficient taxable income will be generated to realize the deferred tax assets.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) STOCK-BASED PLANS
Stock-based compensation plans are described below.
EMPLOYEES' STOCK OPTION PLAN - We have a stock option plan for employees and up to 10,500,000 shares of CIBER, Inc. common stock are authorized for issuance under this plan. At December 31, 2000, 1,087,000 options were available for future grants. The plan administrators may grant to officers, employees and consultants, restricted stock, stock options, performance bonuses or any combination thereof. The Compensation Committee of the Board of Directors determines the number and nature of awards. Options become exercisable as determined at the date of grant by the Board of Directors and expire within 10 years from the date of grant.
1989 STOCK OPTION PLAN - We established a stock option plan in 1989 that was discontinued during 1994. The options expire twenty years after the date of grant through 2013. At December 31, 2000, options for 859,000 shares were outstanding and vested at an average exercise price of $0.27.
DIRECTORS' STOCK OPTION PLAN - Up to 200,000 shares of CIBER, Inc. common stock are authorized for issuance to non-employee, non-affiliate directors under this plan. Such stock options are non-discretionary and granted annually at the fair market value of our common stock on the date of grant. The number of options granted annually is fixed by the plan. Options expire 10 years from the date of grant.
At December 31, 2000, there were 9,098,000 shares of CIBER, Inc. common stock reserved for future issuance under our stock option plans.
DIRECTORS' STOCK COMPENSATION PLAN - A total of 50,000 shares of CIBER, Inc. common stock are authorized for issuance to non-employee directors under this plan, of which 10,214 shares have been issued through December 31, 2000. Each non-employee director is issued shares having a fair market value of approximately $2,500 for attendance at each meeting of our Board of Directors. During the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, we issued 1,233, 1,980, 1,445 and 3,892 shares, respectively, of common stock under this plan.
STOCK OPTION EXCHANGE PROGRAM - We offered each employee of our DigiTerra subsidiary the option to cancel their outstanding CIBER, Inc. stock options in exchange for options to be issued under a DigiTerra stock option plan on or about July 5, 2001, with an exercise price equal to the fair market value on the date of grant. DigiTerra's plan is not yet finalized, but is expected to have similar terms as our Employees' Stock Option Plan. Under this exchange program, on January 4, 2001, DigiTerra employees cancelled 1,079,000 options at an average price of $18.55. Of these cancelled options, 409,000 were exercisable at December 31, 2000.
On September 1, 1998, our Board of Directors authorized a repricing program for non-executive employees who were originally granted options under our Employees' Stock Option Plan from March 1, 1998 to August 31, 1998 at exercise prices ranging from $28.88 to $38.00 that repriced all of these outstanding stock options to an exercise price of $27.06 per share. Options to purchase 537,050 shares of common stock were repriced. On October 9, 1998, our Board of Directors authorized another repricing program for non-executive employees who were originally granted options under our Employees' Stock Option Plan on October 1, 1998 at an exercise price of $20.13 that repriced all of these outstanding stock options to an exercise price of $16.00 per share. Options to purchase 71,200 shares of common stock were repriced. All of the repriced options follow the vesting schedule of the original options granted.
On October 9, 1998, our Board of Directors authorized a program which allowed certain directors, who were originally granted options under the Directors' Stock Option Plan from October 1, 1997 to September 30, 1998 at exercise prices ranging from $21.53 to $40.25, to cancel these stock options and replace them with options under the Employees' Stock Option Plan at an exercise price of $16.00 per share. Options to purchase 48,000 shares of common stock were replaced.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the status of the CIBER, Inc. stock option plans as of June 30, 1998 and 1999, and the six months ended December 31, 1999, and changes during the periods ending on those dates is presented below (shares in thousands):
A summary of the status of the CIBER, Inc. stock option plans as of December 31, 2000 and changes during the year ending on that date is presented below (shares in thousands):
The weighted average fair values of CIBER, Inc. options granted during the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000 were $11.45, $16.24, $9.20 and $6.41, respectively.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the range of exercise prices and the weighted-average contractual life of outstanding CIBER, Inc. stock options at December 31, 2000 is as follows (shares in thousands):
WATERSTONE, INC. EQUITY INCENTIVE PLAN - In 1999, our Waterstone subsidiary adopted the Waterstone, Inc. Equity Incentive Plan (formerly the Interactive Papyrus, Inc. Equity Incentive Plan). Under the plan, the plan committee may grant to officers, employees and consultants stock options, restricted stock, performance shares or performance units. A committee of the Board of Directors of Waterstone determines the number and nature of awards. Options become exercisable as determined at the date of grant by the committee and expire within 10 years from the date of grant. Waterstone issued options for 664,000 and 1,514,900 shares of its stock during the six months ended December 31, 1999 and the year ended December 31, 2000, respectively, at exercise prices ranging from $0.90 to $1.75 per share (estimated fair value at the date of grant). These options vest over three to four years. During 2000, there were no options exercised and options for 695,000 shares were canceled. As of December 31, 2000, there were 1,472,900 options outstanding at a weighted average exercise price of $1.37 and 212,375 options exercisable at a weighted average exercise price of $0.90.
EMPLOYEE STOCK PURCHASE PLAN ("ESPP") - We have a stock purchase plan that allows eligible employees to purchase, through payroll deductions, shares of CIBER, Inc. common stock at 85% of the fair market value at specified dates. Up to 2,000,000 shares of common stock are authorized to be issued under the ESPP. An additional 2,750,000 shares may be issued subject to shareholder approval at the 2001 annual meeting. If shareholder approval is not obtained, our Board of Directors has authorized that any shares in excess of the 2,000,000 authorized are to be issued pursuant to our Employees' Stock Option Plan. During the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, employees purchased 197,565, 633,405, 440,290 and 837,850 shares of common stock, respectively. Through December 31, 2000, 2,502,846 shares have been issued under the ESPP, of which 502,846 shares were issued under the Employees' Stock Option Plan registration statement.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We apply APB 25 in accounting for our stock-based compensation plans. The compensation expense that has been recorded for these plans for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000 was $59,000, $395,000, $225,000 and $189,000, respectively. Had we determined compensation cost for our stock-based compensation plans based on the fair value at the grant date, as calculated in accordance with SFAS 123, our net income (loss), pro forma net income, and pro forma income (loss) per share would have been as indicated in the pro forma amounts below (in thousands, except per share data):
The effect of applying SFAS 123 in this disclosure may not be indicative of the effect on reported net income for future years. SFAS 123 does not apply to options granted prior to July 1, 1995.
The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
(16) 401(k) SAVINGS PLAN
We have a savings plan under Section 401(k) of the Internal Revenue Code. Our contributions are determined based on the employee's completed years of service, the employee's contribution and our matching contribution percentage. In addition, certain companies that have merged with us in business combinations accounted for as poolings of interests have had similar defined contribution retirement plans. We recorded expense of approximately $4,519,000, $4,555,000, $2,464,000 and $3,593,000 for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively, related to these plans.
(17) STOCK PURCHASE RIGHTS
On September 21, 1998, CIBER, Inc. paid a dividend of one preferred stock purchase right (a "Right") for each outstanding share of CIBER, Inc. common stock ("Common Stock"). A Right is also attached to all shares of Common Stock issued after the dividend date. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Preferred Stock, par value $0.01, at a purchase price of $250, subject to adjustment. The Rights become exercisable ten business days following a public announcement that a person or group has acquired, or has commenced or intends to commence a tender
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
offer for 15% or more of our outstanding Common Stock. In the event the Rights become exercisable, each Right will entitle its holder, other than the Acquiring Person (as defined in the Rights Agreement), to that number of shares of our Common Stock having a market value of two times the exercise price of the Right. In the event the Rights become exercisable because of a merger or certain other business combination, each Right will entitle its holder to purchase common stock of the acquiring company having a market value of two times the exercise price of the Right. If the Rights are fully exercised, the shares issued would cause substantial dilution to the Acquiring Person or the shareholders of the acquiring company.
We can redeem the Rights in their entirety, prior to their becoming exercisable, at $0.001 per Right. The Rights expire on August 28, 2008, unless extended or earlier redeemed.
(18) SHARE REPURCHASE PROGRAM
On June 21, 1999, our Board of Directors authorized the repurchase of up to 5,888,000 shares (10%) of our common stock. As of December 31, 2000, we have purchased 4,680,000 shares for $59,560,000 under this program.
(19) BUSINESS AND CREDIT CONCENTRATIONS
Our clients are located principally throughout the United States. Our revenue and accounts receivable are concentrated with large companies in several industries. Our largest client accounted for approximately 5%, 6%, 7% and 6% of total revenues for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively. In addition, our five largest clients accounted for, in the aggregate, approximately 14%, 15%, 16% and 14% of our total revenues for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively. We have a policy to regularly monitor the creditworthiness of our clients and generally do not require collateral. We have a concentration of revenues related to clients purchasing software from PeopleSoft, Inc. Approximately 9%, 10%, 8% and 8% of our total revenues for the years ended June 30, 1998 and 1999, the six months ended December 31, 1999 and the year ended December 31, 2000, respectively, were generated from implementing PeopleSoft software.
(20) SEGMENT INFORMATION
We manage our operations based on our legal operating entities that are differentiated by products and services offered. We have two reportable segments, CIBER Operations and DigiTerra. All Other includes our subsidiaries, Waterstone, Solution Partners, Enspherics and, through December 31, 1999, Agilera. A description of each of these operations' products and services is included in Note 1. Beginning in 2000, our corporate department only serves CIBER's branch operations and therefore, the related activity is included in the CIBER Operations segment. Prior year information has been restated to conform to this presentation including an allocation of certain corporate costs to DigiTerra. We evaluate each segment based on operating income before amortization of intangible assets and goodwill impairment and other charges. The accounting policies of the reportable segments are the same as those disclosed in the Summary of Significant Accounting Policies.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following presents information about our segments (in thousands):
* As a result of our incorporation of DigiTerra on April 3, 2000, CIBER Operations' investment in subsidiaries increased by $94,961,000.
Revenues from foreign operations were $11,418,000 for the year ended December 31, 2000, and were not significant during the prior periods presented. Total assets of foreign operations were $17,528,000 and $21,305,000 at December 31, 1999 and 2000, respectively, and were not significant at June 30, 1999.
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(21) SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Supplemental statement of cash flow information is as follows (in thousands):
(22) COMPARATIVE FINANCIAL INFORMATION (UNAUDITED)
The following represents financial information for the six months ended December 31, 1998, which is included for comparative purposes (in thousands):
CIBER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain statement of operations data for each of the quarters indicated below and, in our opinion, contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is omitted from this Report on Form 10-K because the Registrant will file a definitive proxy statement (the "Proxy Statement") within 120 days of December 31, 2000 and certain information included therein is incorporated herein by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to CIBER's 2001 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to CIBER's 2001 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to CIBER's 2001 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to CIBER's 2001 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements are filed as part of this report:
Independent Auditors' Report
Consolidated Statements of Operations - Years Ended June 30, 1998 and 1999, the Six Months Ended December 31, 1999, and the Years Ended December 31, 1999 (unaudited) and 2000.
Consolidated Balance Sheets - June 30, 1999, and December 31, 1999 and 2000.
Consolidated Statements of Shareholders' Equity - Years Ended June 30, 1998 and 1999, the Six Months Ended December 31, 1999 and the Year Ended December 31, 2000.
Consolidated Statements of Cash Flows - Years Ended June 30, 1998 and 1999, the Six Months Ended December 31, 1999, and the Years Ended December 31, 1999 (unaudited) and 2000.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(2) Exhibits
------------
(1) Incorporated by reference to the Registration Statement on Form S-1, as amended (File No. 33-74774), as filed with the Commission on February 2, 1994. (2) Incorporated by reference to the Annual Report on Form 10-K for the year ended June 30, 1999.
* Filed herewith
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 2000
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CIBER, INC. (Registrant)
Date: March 23, 2001 By /s/ Mac J. Slingerlend -------------------------------------- Mac J. Slingerlend CHIEF EXECUTIVE OFFICER, PRESIDENT AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.