SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission file number:
DECEMBER 31, 1998 0-23488
CIBER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-2046833
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5251 DTC PARKWAY
SUITE 1400
ENGLEWOOD, CO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Telephone Number: (303) 220-0100
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of December 31, 1998, there were 53,741,443 shares of the Registrant's
common stock ($0.01 par value) outstanding.
CIBER, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Statements of Operations
Three and six months ended December 31, 1998 and 1997 3
Consolidated Balance Sheets
December 31, 1998 and June 30, 1998 4
Consolidated Statements of Cash Flows
Six months ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
CIBER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 1997(1) 1998 1997(1) 1998
-------- -------- -------- --------
Consulting services $123,937 $155,552 $238,627 $303,153
Other revenues 17,724 18,504 32,368 36,561
-------- -------- -------- --------
Total revenues 141,661 174,056 270,995 339,714
-------- -------- -------- --------
Cost of consulting services 81,043 100,164 156,166 194,660
Cost of other revenues 13,028 12,720 23,992 25,221
Selling, general and administrative expenses 33,058 36,955 64,241 74,239
Amortization of intangible assets 970 1,069 1,908 2,151
Merger costs 1,573 -- 2,187 1,535
-------- -------- -------- --------
Operating income 11,989 23,148 22,501 41,908
Interest and other income 419 718 794 1,330
Interest expense (67) -- (170) -
-------- -------- -------- --------
Income before income taxes 12,341 23,866 23,125 43,238
Income tax expense 6,285 9,546 10,585 17,801
-------- -------- -------- --------
Net income $ 6,056 $ 14,320 $ 12,540 $ 25,437
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma information (Note 1):
Historical net income $ 6,056 $ 14,320 $ 12,540 $ 25,437
Pro forma adjustment to income tax expense 795 -- 519 --
-------- -------- -------- --------
Pro forma net income $ 6,851 $ 14,320 $ 13,059 $ 25,437
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma income per share - basic $ 0.13 $ 0.27 $ 0.26 $ 0.48
Pro forma income per share - diluted $ 0.13 $ 0.26 $ 0.25 $ 0.46
Weighted average shares - basic 51,138 53,708 50,783 53,314
Weighted average shares - diluted 53,636 55,478 53,239 55,324
(1) Restated for poolings of interests through December 31, 1998 - See Note 2.
See accompanying notes to consolidated financial statements.
3
CIBER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 1998(1) 1998
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,238 $ 62,108
Accounts receivable 121,538 136,491
Inventories 618 837
Prepaid expenses and other assets 4,792 3,527
Deferred income taxes 1,458 2,552
-------- --------
Total current assets 166,644 205,515
-------- --------
Property and equipment, at cost 32,561 37,214
Less accumulated depreciation and amortization (15,219) (18,676)
-------- --------
Net property and equipment 17,342 18,538
-------- --------
Intangible assets, net 33,597 35,596
Deferred income taxes 2,068 3,616
Other assets 2,134 2,703
-------- --------
Total assets $221,785 $265,968
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables $ 10,989 $ 18,160
Accrued compensation and payroll taxes 25,720 27,843
Deferred revenues 4,097 3,460
Other accrued expenses and liabilities 11,859 10,614
Income taxes payable 3,276 5,411
-------- --------
Total current liabilities 55,941 65,488
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued -- --
Common stock, $0.01 par value, 80,000,000 shares authorized,
52,248,000 and 53,742,000 shares issued and outstanding 522 537
Additional paid-in capital 93,889 103,915
Retained earnings 71,433 96,028
-------- --------
Total shareholders' equity 165,844 200,480
-------- --------
Total liabilities and shareholders' equity $221,785 $265,968
-------- --------
-------- --------
(1) Restated for poolings of interests through December 31, 1998 - See Note 2.
See accompanying notes to consolidated financial statements.
4
CIBER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------
IN THOUSANDS 1997(1) 1998
-------- --------
OPERATING ACTIVITIES:
Net income $ 12,540 $ 25,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,568 5,375
Deferred income taxes (1,636) (2,642)
Other 29 37
Changes in operating assets and liabilities,
net of the effects of acquisitions:
Accounts receivable (20,379) (13,447)
Inventories -- (219)
Other current and long-term assets (3,208) 521
Trade payables 1,313 7,098
Accrued compensation and payroll taxes 3,533 1,881
Deferred revenues 1,755 (637)
Other accrued expenses and liabilities 1,803 (19)
Income taxes payable 6,704 4,799
-------- --------
Net cash provided by operating activities 7,022 28,184
-------- --------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired -- (4,138)
Purchases of property and equipment (4,505) (4,365)
Purchases of investments (905) --
Sales of investments 815 --
-------- --------
Net cash used in investing activities (4,595) (8,503)
-------- --------
FINANCING ACTIVITIES:
Proceeds from sales of common stock, net 2,924 5,984
Purchases of treasury stock -- (1,795)
Net payments on bank lines of credit (1,985) --
Payments on notes payable (2,600) --
Borrowings on notes payable 247 --
Distributions by merged companies (585) --
-------- --------
Net cash provided by (used in) financing activities (1,999) 4,189
-------- --------
Net increase in cash and cash equivalents 428 23,870
Cash and cash equivalents, beginning of period 27,257 38,238
-------- --------
Cash and cash equivalents, end of period $ 27,685 $ 62,108
-------- --------
-------- --------
(1) Restated for poolings of interests through December 31, 1998 - See Note 2.
See accompanying notes to consolidated financial statements.
5
CIBER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of CIBER, Inc. and
subsidiaries ("CIBER" or the "Company") have been prepared without audit.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in CIBER's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998. In the opinion of
management, these unaudited consolidated financial statements include all
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods presented. Interim results of
operations for the six month period ended December 31, 1998 are not
necessarily indicative of operating results for the full fiscal year.
PRO FORMA NET INCOME. Pro forma net income has been presented because
certain companies, which have merged with CIBER 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 CIBER. 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 CIBER at the marginal rates applicable in such periods. In
addition, the pro forma adjustment to income tax expense eliminates the
one-time tax expense or benefit resulting from changes in the tax status of
these merged companies.
PRO FORMA INCOME PER SHARE. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS includes the effects of the
potential dilution of the Company's stock options, determined using the
treasury stock method. The computation of weighted average shares includes
the shares and options issued in connection with business combinations
accounted for as poolings of interests as if they had been outstanding for
all periods prior to the merger. The number of antidilutive stock options
omitted from the computation of weighted average shares was 1,393,071 and
778,855 for the three months and six months ended December 31, 1998,
respectively. There were no antidilutive stock options for the corresponding
periods last year.
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.
(2) POOLINGS OF INTERESTS
From July 1, 1998 to December 31, 1998, the following companies have merged
with CIBER in business combinations accounted for as poolings of interests:
EJR COMPUTER ASSOCIATES ("EJR") - On August 11, 1998, CIBER issued 1,155,516
shares of its common stock and assumed substantially all of EJR's liabilities
in exchange for all of the assets of EJR. EJR, located in Hoboken, New
Jersey, provided data processing consulting and project management services
similar to the Company's CIS Division. CIBER's consolidated financial
statements have been restated for all periods prior to the merger to include
the results of operations, financial position and cash flows of EJR.
6
CIBER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Selected financial data of CIBER and of EJR, prior to its merger with CIBER,
and on a combined basis, were (in thousands, except per share data):
CIBER EJR COMBINED
-------- ------- --------
YEAR ENDED JUNE 30, 1998
Revenues $550,421 $26,067 $576,488
Net income (loss) 36,510 (33) 36,477
Pro forma net income (loss) 34,303 (33) 34,270
Pro forma income per share - diluted $ .65 $ .64
YEAR ENDED JUNE 30, 1997
Revenues $390,817 $22,563 $413,380
Net income 20,696 530 21,226
Pro forma net income 19,893 530 20,423
Pro forma income per share - diluted $ .40 $ .40
YEAR ENDED JUNE 30, 1996
Revenues $275,576 $20,389 $295,965
Net income 14,380 401 14,781
Pro forma net income 12,068 401 12,469
Pro forma income per share - diluted $ .26 $ .26
THE CUSHING GROUP ("CUSHING") - On August 31, 1998, CIBER issued 961,135
shares of its common stock and assumed substantially all of Cushing's
liabilities in exchange for all of the assets of Cushing. Cushing,
headquartered in Nashua, New Hampshire, provided distributed object
technology consulting services. The merged business operates within CIBER's
Spectrum Technology Group, Inc. subsidiary. The effects of this merger on
CIBER's revenues, pro forma net income and pro forma income per share would
not have been material. As a result, CIBER's historical financial statements
have not been restated for this business combination.
(3) ACQUISITIONS
THE DORADUS CORPORATION ("DORADUS") - On November 15, 1998, CIBER acquired
all of the outstanding capital stock of Doradus for approximately $3.9
million in cash. Additional consideration of up to $400,000 may be payable
in one year. The acquisition has been accounted for as a purchase.
Accordingly, CIBER's consolidated financial statements include the results of
operations of Doradus since the date of acquisition. CIBER has recorded
goodwill of approximately $3.8 million related to this acquisition, which
will be amortized over 15 years. If any additional consideration is paid, it
will be recorded as additional goodwill. Doradus, located in Minneapolis,
Minnesota, provided services similar to the CIS division of CIBER.
In the current fiscal year, CIBER paid additional cash consideration of
$150,000 to the former owners of Oasys, Inc. related to the March 1996
acquisition. This additional consideration was recorded as additional
goodwill.
7
CIBER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CIBER Network Services, Inc. ("CNSI"), which was majority owned by certain
officers of the Company, was acquired in December 1996. The terms of the
agreement provided for additional contingent consideration based on certain
performance objectives of CNSI for the 12-month period ended October 31,
1998. CIBER had recorded additional goodwill and a liability of $1,175,000 at
June 30, 1998 in anticipation of the performance objectives being met. In
October 1998, CIBER offered the sellers the option to receive either 90% of
the additional consideration in the form of CIBER common stock valued at
$16.00 per share or 100% of the additional consideration payable in cash. As
a result, 59,479 shares of CIBER common stock were issued and $118,000 was
paid in cash for total consideration of $1,070,000.
(4) SHAREHOLDERS' EQUITY
Changes in shareholder's equity during the six months ended December 31, 1998
were (in thousands):
Common stock Additional Total
---------------- paid-in Retained Treasury shareholders'
Shares Amount capital earnings stock equity
------- ------ ---------- -------- -------- -------------
BALANCES AT JULY 1, 1998, AS RESTATED (SEE NOTE 2) 52,248 $522 $ 93,889 $71,433 $ -- $165,844
Employee stock purchases and options exercised 483 5 5,979 (746) 746 5,984
Immaterial pooling of interests 961 10 806 -- -- 816
Acquisition consideration 48 -- 100 (96) 1,049 1,053
Tax benefit from exercise of stock options -- -- 3,104 -- -- 3,104
Compensation expense related to stock issuances 2 -- 37 -- -- 37
Purchase of treasury stock -- -- -- -- (1,795) (1,795)
Net income -- -- -- 25,437 -- 25,437
------ ---- -------- ------- ------- --------
BALANCES AT DECEMBER 31, 1998 53,742 $537 $103,915 $96,028 $ -- $200,480
------ ---- -------- ------- ------- --------
------ ---- -------- ------- ------- --------
(5) STOCK OPTION PLANS
On September 1, 1998, the Board of Directors authorized a repricing program
for employees who were originally granted options under the 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. The repriced options follow the vesting schedule
of the original options granted.
On October 9, 1998, the Board of Directors authorized another repricing
program for employees who were originally granted options under the
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. The repriced options follow the vesting schedule of the
original options granted.
8
CIBER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On October 9, 1998, the 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 reissued.
In addition, from July 1, 1998 to December 31, 1998, CIBER granted 1,575,876
stock options to certain employees under the Employees' Stock Option Plan at
exercise prices ranging from $16.00 to $27.06 per share.
(6) REVOLVING LINE OF CREDIT
The Company renewed and increased its line of credit during the three months
ended December 31, 1998. The Company has a $35 million revolving line of
credit with a bank. There were no outstanding borrowings under this bank
line at December 31, 1998 and June 30, 1998. Outstanding borrowings bear
interest at the three month London Interbank Offered Rate ("LIBOR") plus 2%.
Borrowings are unsecured. The credit agreement requires a commitment fee of
.225% per annum on any unused portion of the line of credit up to $15
million. The credit agreement expires in December 1999.
(7) SUBSEQUENT EVENTS
Subsequent to December 31, 1998, CIBER completed the following business
combinations:
PARAGON SOLUTIONS, INC. ("PARAGON") - On January 8, 1999, CIBER acquired
certain assets, liabilities and all of the business operations of Paragon for
approximately $4.2 million in cash. This acquisition will be accounted for
as a purchase. Accordingly, the Company's consolidated financial statements
will include the results of operations of Paragon after the date of
acquisition. CIBER will record goodwill of approximately $4.2 million related
to this acquisition, which will be amortized over 15 years. Paragon, located
in Pittsburgh, Pennsylvania, provided software implementation services and
will be part of CIBER's subsidiary, The Summit Group, Inc.
YORK & ASSOCIATES, INC. ("YORK") - On January 29, 1999, York merged with
CIBER in a business combination to be accounted for as a pooling of
interests. The Company issued approximately 550,000 shares of its common
stock in exchange for substantially all of the outstanding assets and
liabilities of York. York, headquartered in Minneapolis, Minnesota,
provided IT consulting and software implementation services similar to
CIBER's subsidiaries, Spectrum Technology Group, Inc. and The Summit Group,
Inc. The accompanying consolidated financial statements have not been
restated for the York merger. The Company's consolidated financial
statements issued in the future will be restated to include the results of
operations, financial position, and cash flows of York.
INTEGRATION SOFTWARE CONSULTANTS, INC. ("ISC") - On February 2, 1999, ISC
merged with CIBER in a business combination to be accounted for as a pooling
of interests. The Company issued approximately 1,270,000 shares of its
common stock in exchange for all of the outstanding common stock of ISC.
ISC, headquartered in Philadelphia, Pennsylvania, provided software
implementation services similar to CIBER's subsidiary, The Summit Group, Inc.
The accompanying consolidated financial statements have not been restated for
the ISC merger. The Company's consolidated financial statements issued in the
future will be restated to include the results of operations, financial
position, and cash flows of ISC.
9
CIBER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PARADYME HR TECHNOLOGIES CORPORATION ("PARADYME HRT") - On February 5, 1999,
CIBER acquired certain assets, liabilities and all of the business operations
of Paradyme HRT for approximately $5.0 million in cash. Additionally, the
terms of the purchase provide for additional consideration of up to $3.0
million based on contracts signed during the 12-month periods ending January
31, 2000 and 2001. This acquisition will be accounted for as a purchase.
Accordingly, the Company's consolidated financial statements will include the
results of operations of Paradyme HRT after the date of acquisition. CIBER
will record goodwill of approximately $4.5 million related to this
acquisition, which will be amortized over 15 years. Any additional
consideration paid will be accounted for as additional goodwill. Paradyme
HRT, located in Columbia, South Carolina, provided ERP Outsourcing services
and HR/Payroll business services and will become CIBER's Global Outsourcing
Practice.
(7) QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain statements of operations data for each
of the quarters indicated below and, in the opinion of management, contains
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation thereof. All information has been restated for
pooling of interests business combinations through December 31, 1998.
FIRST SECOND THIRD FOURTH
IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
YEAR ENDED JUNE 30, 1999
Revenues $165,658 $174,056 N/A N/A $339,714
Merger costs 1,535 -- N/A N/A 1,535
Operating income 18,760 23,148 N/A N/A 41,908
Net income 11,117 14,320 N/A N/A 25,437
Pro forma net income 11,117 14,320 N/A N/A 25,437
Pro forma income per share - basic $0.21 $0.27 N/A N/A $0.48
Pro forma income per share - diluted $0.20 $0.26 N/A N/A $0.46
YEAR ENDED JUNE 30, 1998
Revenues $129,334 $141,661 $148,093 $157,400 $576,488
Merger costs 614 1,573 504 1,847 4,538
Operating income 10,512 11,989 17,728 17,639 57,868
Net income 6,484 6,056 11,387 12,550 36,477
Pro forma net income 6,208 6,851 10,657 10,554 34,270
Pro forma income per share - basic $0.12 $0.13 $0.21 $0.20 $0.67
Pro forma income per share - diluted $0.12 $0.13 $0.20 $0.19 $0.64
YEAR ENDED JUNE 30, 1997
Revenues $88,990 $ 96,552 $108,480 $119,358 $413,380
Merger costs 622 596 -- -- 1,218
Operating income 6,330 6,164 9,695 11,179 33,368
Net income 3,420 3,960 6,407 7,439 21,226
Pro forma net income 3,786 3,847 5,922 6,868 20,423
Pro forma income per share - basic $0.08 $0.08 $0.12 $0.14 $0.43
Pro forma income per share - diluted $0.08 $0.08 $0.12 $0.13 $0.40
10
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 THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE HEREIN. 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. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY INCLUDE, AMONG OTHERS, GROWTH THROUGH BUSINESS COMBINATIONS
AND INTERNAL EXPANSION, THE ABILITY TO ATTRACT AND RETAIN QUALIFIED
CONSULTANTS, DEPENDENCE ON SIGNIFICANT RELATIONSHIPS AND THE ABSENCE OF
LONG-TERM CONTRACTS, MANAGEMENT OF A LARGE AND RAPIDLY GROWING BUSINESS,
PROJECT RISKS, PRICING AND MARGIN PRESSURES, AND COMPETITION. MANY OF THESE
FACTORS ARE BEYOND THE COMPANY'S ABILITY TO PREDICT OR CONTROL. PLEASE REFER
TO A DISCUSSION OF THESE AND OTHER FACTORS IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K AND OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY
DISCLAIMS 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, THE
COMPANY'S PAST FINANCIAL PERFORMANCE SHOULD NOT BE RELIED ON AS AN INDICATION
OF FUTURE PERFORMANCE.
OVERVIEW
The Company operates the CIBER Information Services ("CIS") Division and the
CIBER Solutions ("Solutions") Division. The CIS Division accounted for
approximately 60% of the Company's total revenues in fiscal 1998, while the
Solutions Division accounted for the remainder. The CIS Division provides
application software development and maintenance services and millenium date
change solutions. The Solutions Division is comprised of the Company's
wholly-owned subsidiaries, Spectrum Technology Group, Inc. ("Spectrum"),
Business Information Technology, Inc. ("BIT"), The Summit Group, Inc.
("Summit") and CIBER Network Services, Inc. ("CNSI"). Spectrum provides
information technology consulting solutions to business problems,
specifically in the areas of data warehousing, data modeling and enterprise
architecture, as well as project management and systems integration services.
BIT specializes in the implementation and integration of PeopleSoft, Inc.
software including Human Resource, Financial Management and Accounting,
Student Administration, Government, Manufacturing and Distribution products.
Summit provides Lawson, J.D. Edwards, Oracle, Baan and other software
implementation services, strategic consulting services, proprietary
warehousing and traffic software, and is an industry remarketer of certain
third party computer products. CNSI provides a wide range of local-area and
wide-area network solutions, from design and procurement to installation and
maintenance with services including Internet and intranet connectivity.
In general, except for CNSI's product sales, the Solutions Division revenues
provide higher gross margins than the CIS Division. However, the Solutions
Division activities also involve higher selling, general and administrative
expenses as a percentage of revenues. Consequently, fluctuations in gross
margin and selling, general and administrative expenses as a percentage of
revenues may be due to changes in the mix of revenues between the CIS
Division and the Solutions Division. Management believes that operating
income before amortization and merger costs, as a percentage of revenues, is
a more meaningful indicator because it reflects the effects of revenue mix.
The Company's largest customer is IBM, which represented approximately 6% of
revenue for the three months and six months ended December 31, 1998. The
Company's contract with IBM was extended through March 31, 1999. This
contract has been renewed three times in the last three years. The Company
and IBM are currently negotiating contract renewal. There is no assurance a
contract renewal can be negotiated or, if negotiated, that contract terms
will be favorable to the Company. If the Company does not renew the IBM
contract or if it is renewed on less favorable terms, the Company's future
operating performance may be adversely impacted.
11
BUSINESS COMBINATIONS
The Company has grown significantly 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. The Company's acquisitions involve the capitalization of
intangible assets, which intangible assets are generally amortized over
periods of up to 15 years for financial reporting purposes. The Company's
consolidated financial statements include the results of operations of an
acquired business since the date of acquisition. Mergers result in a
one-time charge in the period in which the transaction is completed for costs
associated with the business combination. Unless the effects are immaterial,
the Company's 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. In addition, selling, general and
administrative expenses may vary as a percentage of revenues depending on the
fluctuations in the selling, general and administrative expenses of merged
companies, if any, during any given period.
From July 1, 1998 to December 31, 1998, the following companies have merged
with CIBER in business combinations accounted for as poolings of interests.
EJR COMPUTER ASSOCIATES ("EJR") - On August 11, 1998, CIBER issued 1,155,516
shares of its common stock and assumed substantially all of EJR's liabilities
in exchange for all of the assets of EJR. The Company's consolidated
financial statements have been restated for all periods prior to the merger
to include the results of operations, financial position and cash flows of
EJR.
THE CUSHING GROUP ("CUSHING") - On August 31, 1998, CIBER issued 961,135
shares of its common stock and assumed substantially all of Cushing's
liabilities in exchange for all of the assets of Cushing. The effects of
this merger on the Company's revenues, pro forma net income and pro forma
income per share would not have been material. As a result, the Company's
historical financial statements have not been restated for this business
combination.
In addition, on November 15, 1998, CIBER acquired all of the outstanding
capital stock of The Doradus Corporation ("Doradus") for approximately $3.9
million in cash. CIBER's consolidated financial statements include the
results of operations of Doradus since the date of acquisition.
THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997
The Company's revenues for the three months ended December 31, 1998 increased
22.9% to $174.1 million from $141.7 million for the quarter ended December
31, 1997. This represents a 25.5% increase in consulting revenues offset by
planned lesser growth in other revenues. For the three months ended December
31, 1998, CIS Division consulting revenues increased 19.6% to $100.7 million
from $84.2 million for the same quarter of last year and the Solutions
Division consulting revenues increased 38.0% to $54.9 million from $39.8
million for the same quarter of last year. Other revenues increased to $18.5
million for the three months ended December 31, 1998 from $17.7 million for
the same quarter last year. CIS Division consulting revenues accounted for
64.7% and 67.9% of total consulting revenues for the three months ended
December 31, 1998 and 1997, respectively. The increase in the CIS Division
revenues is derived primarily from an increase in hours billed and, to a
lesser extent, an increase in average billing rates. The increase in hours
billed is due primarily to internal growth in branch offices. Solutions
Division revenues increased primarily due to increased software
implementation services, and to a lesser extent, increases in other
consulting services and increases in billing rates.
Of the 25.5% increase in consulting revenues for the three months ended
December 31, 1998 in comparison to the three months ended December 31, 1997,
approximately 2.6% was due to revenues from acquired businesses or from
mergers accounted for as immaterial poolings of interests. The remainder of
the increase was due to increased revenues from existing operations.
Management believes this growth is reflective of increased demand for IT
services, including an increased demand for year 2000 related services and
increased demand for enterprise resource planning ("ERP") software
implementation services.
12
Gross margin percentage improved to 35.1% of revenues for the three months
ended December 31, 1998 from 33.6% of revenues for the same quarter of last
year. This improvement is due to improved gross margins on both consulting
services and other revenues.
Selling, general and administrative expenses were 21.2% of revenues for the
three months ended December 31, 1998 compared to 23.3% of revenues for the
same quarter last year.The decrease as a percentage of revenues is primarily
due to greater economies of scale.
Amortization of intangible assets increased to $1.1 million for the three
months ended December 31, 1998 from $970,000 for the same quarter last year.
This increase was due to the additional intangible assets resulting from
mergers and acquisitions.
Merger costs, primarily transaction related broker and professional costs, of
$1.6 million were incurred during the three months ended December 31, 1997,
while no merger costs were incurred during the three months ended December 31,
1998.
Net interest and other income increased to $718,000 for the three months
ended December 31, 1998 from $352,000 for the same quarter last year due to
increased average cash balances available for investment and the elimination
of borrowings of certain merged companies.
After the pro forma adjustment to income tax expense, if any, the Company's
pro forma effective tax rates for the three months ended December 31, 1998
and 1997 were 40.0% and 44.5%, respectively. The Company's effective tax rate
is higher than its normal effective tax rate for the three months ended
December 31, 1997 due to nondeductible merger costs. The pro forma
adjustment to income tax expense 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 which
were not subject to income taxes.
The Company's pro forma net income increased 109% to $14.3 million for the
three months ended December 31, 1998 from $6.9 million for the quarter ended
December 31, 1997.
SIX MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997
The Company's revenues for the six months ended December 31, 1998 increased
25.4% to $339.7 million from $271.0 million for the six months ended December
31, 1997. This represents a 27.0% increase in consulting revenues offset by a
planned lesser growth in other revenues. For the six months ended December
31, 1998, CIS Division consulting revenues increased 21.5% to $196.3 million
from $161.5 million for the same period of last year and the Solutions
Division consulting revenues increased 38.6% to $106.8 million from $77.1
million for the same period of last year. Other revenues increased 13.0% to
$36.6 million for the six months ended December 31, 1998 from $32.4 million
for the same period last year. CIS Division consulting revenues accounted
for 64.8% and 67.7% of total consulting revenues for the six months ended
December 31, 1998 and 1997, respectively. The increase in the CIS Division
revenues is derived primarily from an increase in hours billed and, to a
lesser extent, an increase in average billing rates. The increase in hours
billed is due primarily to internal growth in branch offices. Solutions
Division revenues increased primarily due to increased software
implementation services, and to a lesser extent, increases in other
consulting services and increases in billing rates.
Of the 27.0% increase in consulting revenues for the six months ended
December 31, 1998 in comparison to the six months ended December 31, 1997,
approximately 2.0% was due to revenues from acquired businesses or from
mergers accounted for as immaterial poolings of interests. The remainder of
the increase was due to increased revenues from existing operations.
Management believes this growth is reflective of increased demand for IT
services, including an increased demand for year 2000 related services and
increased demand for enterprise resource planning ("ERP") software
implementation services.
13
Gross margin percentage improved to 35.3% of revenues for the six months
ended December 31, 1998 from 33.5% of revenues for the same period of last
year. This improvement is due to improved gross margins on both consulting
services and other revenues.
Selling, general and administrative expenses were 21.9% of revenues for the
six months ended December 31, 1998 compared to 23.7% of revenues for the same
period last year. The decrease as a percentage of revenues is primarily due
to greater economies of scale.
Amortization of intangible assets increased to $2.2 million for the six
months ended December 31, 1998 from $1.9 million for the same period last
year. This increase was due to the additional intangible assets resulting
from mergers and acquisitions.
Merger costs, primarily transaction related broker and professional costs, of
$1.5 million were incurred during the six months ended December 31, 1998
compared to $2.2 million for the same period last year.
Net interest and other income increased to $1.3 million for the six months ended
December 31, 1998 from $624,000 for the same period last year due to increased
average cash balances available for investment and the elimination of borrowings
of certain merged companies.
After the pro forma adjustment to income tax expense, if any, the Company's
pro forma effective tax rates for the six months ended December 31, 1998 and
1997 were 41.2% and 43.5%, respectively. The Company's effective tax rate is
higher than its normal effective tax rate for the six months ended December
31, 1998 and 1997 due to nondeductible merger costs. The pro forma
adjustment to income tax expense 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 which
were not subject to income taxes.
The Company's pro forma net income increased 94.8% to $25.4 million for the
six months ended December 31, 1998 from $13.1 million for the six months
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $140.0 million of working capital, of
which $62.1 million was cash and cash equivalents, and had a current ratio of
3.1:1. The Company has primarily used its operating cash flow and the net
proceeds from public offerings to finance working capital needs and
acquisitions. The Company believes that its cash and cash equivalents, its
operating cash flow and the availability of credit under its bank revolving
line of credit will be sufficient to finance working capital needs through at
least fiscal 1999.
Net cash provided by operating activities was $28.2 million and $7.0 million
for the six months ended December 31, 1998 and 1997, respectively.
The Company's accounts receivable totaled $136.5 million at December 31, 1998
compared to $121.5 million at June 30, 1998. This increase is primarily a
result of the Company's increase in revenues and also the mix shift to more
solution oriented engagements. Generally, due to the high quality and large
size of the Company's clients, bad debt expenses have averaged less than 0.1%
of revenue for the last several years. Accounts receivable days sales
outstanding ("DSO") was 72 days at December 31, 1998 as compared to 70 days
at June 30, 1998, which management believes is in line with industry
standards.
Net cash used in investing activities was $8.5 million during the six months
ended December 31, 1998 and 1997. The Company used cash of $3.9 million
during the six months ended December 31, 1998 for the Doradus acquisition and
$268,000 for additional consideration related to previous acquisitions. The
Company also purchased property and equipment of $4.4 million and $4.5
million during the six months ended December 31, 1998 and 1997, respectively.
Net cash provided by (used in) financing activities was $4.2 million and ($2.0
million) during the six months ended December 31, 1998 and 1997, respectively.
The Company obtained net cash proceeds from sales of
14
common stock of $6.0 million and $2.9 million during the six months ended
December 31, 1998 and 1997, respectively. During the six months ended
December 31, 1998, CIBER purchased 101,000 shares of treasury stock for $1.8
million. These treasury shares were reissued as additional consideration
related to the acquisition of CNSI and as sales of common stock under CIBER's
Employee Stock Purchase Plan.
The Company renewed and increased its line of credit during the three months
ended December 31, 1998. The Company has a $35 million revolving line of
credit with a bank. There were no outstanding borrowings under this bank line
at December 31, 1998 and June 30, 1998. Outstanding borrowings bear interest
at the three month London Interbank Offered Rate ("LIBOR") plus 2%.
Borrowings are unsecured. The credit agreement requires a commitment fee of
.225% per annum on any unused portion of the line of credit up to $15
million. The credit agreement expires in December 1999.
The Company's subsidiary, CNSI, has a $7.5 million unsecured inventory
financing line of credit with a financial corporation. The amount outstanding
totaled approximately $2.0 million at December 31, 1998 and is included in
trade payables on the Company's balance sheet.
The Company expects, although there can be no assurance, to be able to renew
these lines of credit on similar terms.
YEAR 2000
THE FOLLOWING STATEMENTS ARE "YEAR 2000 READINESS DISCLOSURES" IN CONFORMANCE
WITH THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT OF 1998.
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Computer software and
hardware and other devices with embedded technology that are date sensitive
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions
of CIBER's operations.
CIBER has instituted various projects to address the Year 2000 issue. CIBER
believes its material internal information technology ("IT") systems,
including payroll, billing and accounting systems, are currently Year 2000
compliant. For third-party software applications, CIBER has obtained
confirmation that the software is Year 2000 compliant. CIBER has completed
testing and remediation, if necessary, of all internally developed software.
CIBER is currently evaluating its non-IT systems, such as building security,
elevators, fire-safety systems, telephones, voice mail and other systems
containing embedded microprocessors as well as evaluating the Year 2000
readiness of its significant suppliers. CIBER expects to complete this by
March 31, 1999. CIBER relies on the services of the landlords of its offices,
telecommunications companies, banks, utilities, commercial airlines, and
insurance companies, among others. If CIBER does not obtain reasonable
assurances from its significant third party vendors and suppliers that there
will be no interruption of service as a result of the Year 2000 issue, CIBER
intends to devise contingency plans to correct the negative effects on CIBER
in the event the Year 2000 issue results in the unavailability of services.
There can be no assurance that any contingency plans developed by CIBER will
prevent such service interruption on the part of one or more of CIBER's
vendors from having a material adverse affect on CIBER.
CIBER's principal business is providing IT services. Some of CIBER's services
are directly or indirectly related to the Year 2000 issue, including Year 2000
remediation services. CIBER provides services to clients that assist the client
in their Year 2000 projects. In addition, CIBER provides services to clients
directly related to client systems that may or may not be Year 2000 compliant.
Due to the potential significance of the Year 2000 issue upon client operations
and upon any failure of critical client systems to which CIBER has provided
services, CIBER may be subject to claims regardless of whether the failure is
related to the services provided by CIBER. If asserted, the resolution of such
claims, including defense costs, could have a material adverse affect on CIBER.
CIBER generally attempts to include provisions in client contracts that, among
other things, disclaim implied warranties, limit the duration of any express
warranties, limit CIBER's maximum liability and disclaim any warranties for
projects managed by the client. There can be no assurance
15
that CIBER will be able to obtain these contractual protections in future
client contracts, or that such provisions will protect CIBER from, or limit
the amount of, any liability arising from claims against CIBER.
As a reseller of certain IT products, CIBER only passes to its customers the
applicable vendor's warranties. CIBER makes no warranties regarding Year
2000 compliance of any of the products it resells. CIBER's subsidiary, The
Summit Group, Inc. ("Summit"), has developed and licensed certain warehousing
and traffic software products that have been modified to be Year 2000
compliant. After testing of the modifications by a third party, Summit will
offer the Year 2000 compliant software version to its existing customers.
This is expected to be complete by June 30, 1999.
Many of CIBER's clients need to repair or replace their legacy systems
because of Year 2000 issues. CIBER believes this will favorably impact the
demand for its services and products. CIBER believes that its direct Year
2000 services, like code renovation, will diminish over time. CIBER also
believes that as companies focus on Year 2000 issues, other less critical
projects are being delayed. Therefore, CIBER does not expect a decrease in
the demand for its services as the Year 2000 draws closer. However, given
the lack of precedent for an issue of this nature and magnitude, CIBER's
ability to forecast the impact of this issue on quarter to quarter operations
is limited. In addition, the business interruption of any of CIBER's
significant clients, resulting from their Year 2000 issues, could have a
material adverse affect on CIBER.
As described above, CIBER has identified various potential issues associated
with the Year 2000 issue. CIBER is devoting internal resources and is working
with its suppliers to help ensure that CIBER's business is not substantially
interrupted as a result of the Year 2000. CIBER believes that the total
amounts spent by it to date and that it expects to spend in 1999 addressing
the Year 2000 issue are not material. CIBER currently does not have a
contingency plan in the event of a particular system not being Year 2000
compliant. Such a plan will be developed if it becomes clear that CIBER is
not going to achieve its scheduled compliance objectives. Although CIBER
expects to identify and resolve all Year 2000 problems that could materially
adversely affect its business operations, management believes that it is not
possible to determine with certainty that all Year 2000 problems affecting
CIBER, its vendors, or its clients have been identified or corrected. If
CIBER is required to implement any contingency plan, it could have a material
adverse effect on CIBER's operations. This discussion of CIBER's Year 2000
efforts, management's expectations relating to Year 2000 compliance and the
possible affects on CIBER are forward-looking statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
standard requires disclosure of financial and descriptive information about
an entity's reportable operating segments. This standard is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
comparative information for prior periods. The Company will provide the
disclosures required by SFAS 131, if any, in its fiscal year 1999 annual
financial statements. In addition, the Company believes the future adoption
of FASB Statements No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" will not have a material affect on its financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no activities in derivative financial or commodity
instruments. The Company's exposure to market risks, (i.e. interest rate
risk, foreign currency exchange rate risk, equity price risk) through other
financial instruments, including, among others, cash equivalents, accounts
receivable, lines of credit, is not material.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of CIBER, Inc. held on
October 29, 1998, the following matters were voted upon with the
results as indicated below.
1) Election of Directors
For Withhold
--- --------
Roy L. Burger 38,702,199 89,781
James G. Brocksmith, Jr. 38,703,439 88,541
The terms of offices as a director of Bobby G. Stevenson, Mac J.
Slingerlend, Richard A. Montoni, James A. Rutherford and Archibald J.
McGill continued after the meeting.
2) The ratification of KPMG Peat Marwick LLP as the Company's independent
auditors for the fiscal year ending June 30, 1999.
For Against Abstain
--- ------- -------
38,760,240 19,745 11,995
ITEM 5. OTHER INFORMATION
On January 29, 1999, York & Associates, Inc. ("York") merged with
CIBER in a business combination to be accounted for as a pooling of
interests. The Company issued approximately 550,000 shares of its
common stock in exchange for substantially all of the outstanding
assets and liabilities of York. A copy of the CIBER News Release
announcing this merger is attached as an exhibit.
On February 2, 1999, Integration Software Consultants, Inc. ("ISC")
merged with CIBER in a business combination to be accounted for as a
pooling of interests. The Company issued approximately 1,270,000
shares of its common stock in exchange for all of the outstanding
common stock of ISC. A copy of the CIBER News Release announcing
this merger is attached as an exhibit.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.1 - Unsecured Credit Agreement with UMB Bank Colorado
dated December 1, 1998
Exhibit 27.1 - Financial Data Schedule
Exhibit 99.1 - News Release dated January 28, 1999 announcing the
merger with York & Associates, Inc.
Exhibit 99.2 - News Release dated January 28, 1999 announcing the
merger with Integration Software Consultants, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
CIBER, INC.
(Registrant)
Date February 10, 1999 By /s/ Mac J. Slingerlend
------------------ -----------------------
Mac J. Slingerlend
President and Chief Executive Officer
Date February 10, 1999 By /s/ Richard A. Montoni
------------------ -----------------------
Richard A. Montoni
Executive Vice President/Chief
Financial Officer
18