Item 1. Legal Proceedings
We are subject to various claims and litigation that arise in the ordinary course of business. The litigation process is inherently uncertain. Therefore, the outcome of such matters is not predictable.
As previously reported, a lawsuit titled
CamSoft Data Systems, Inc. v. Southern Electronics, et al.
, was filed initially in October 2009 in Louisiana state court against numerous defendants, including Ciber. The lawsuit was subsequently removed to federal court in the Middle District of Louisiana and the complaint was amended to include additional defendants and causes of action including antitrust claims, civil RICO claims, unfair trade practices, trade secret, fraud, unjust enrichment, and conspiracy claims. The suit involves many of the same parties involved in related litigation in the state court in New Orleans, which was concluded in 2009 when Ciber settled the New Orleans suit with the plaintiffs, Active Solutions and Southern Electronics, who were CamSoft's former alleged joint venturers and are now co-defendants in the current lawsuit. Proceedings in the federal appellate courts concluded in January 2015 with the matter remanded back to state court. Ciber is vigorously defending the allegations. Based on information known to us, we have established a reserve that we believe represents a probable estimate of the loss. We are unable to predict the outcome of this litigation.
A lawsuit titled
Pennsylvania Turnpike Commission. v. Ciber, Inc., and Dennis Miller
was filed in January 2015 in Pennsylvania state court against Ciber and a former employee. The complaint generally alleges breach of contract, negligent misrepresentation, violation of an anti-bid-rigging statute and procurement code, and conspiracy to commit fraud with and by Ciber’s own employee. These claims arise out of a project in 2004-2008 to implement a new finance and administrative system for the Pennsylvania Turnpike Commission (“PTC”). PTC alleges
$38 million
in damages. We believe the claims are without merit and Ciber is vigorously defending against these allegations. At this time, we are unable to predict the outcome of this litigation.
Item 1A. Risk Factors
We operate in a dynamic and rapidly changing economic and technological environment that involves numerous risks and uncertainties, many of which are driven by factors that we cannot control or predict. The following section describes some, but not all, of the factors that could have a material adverse effect on our business, financial condition, results of operations, and the market price of our common stock.
We may need to raise additional capital to de-lever our balance sheet to allow us to continue as a going concern over the long term, but can provide no assurances of the terms thereof or how it will impact our shareholders.
As a result of our significant use of available borrowings under our ABL Facility, recent underperformance compared to expectations and challenging current market conditions, we may need to raise additional capital to de-lever our balance sheet to allow us to continue as a going concern in the long term. Any new capital investment, or capital raised in the context of an equity cure of a breach of our Fixed Charge Coverage Ratio and/or solvency covenant, as applicable, and may be in the form of equity or equity linked securities, and is likely to be substantially dilutive to existing shareholders. If we raise cash through the incurrence of additional indebtedness, we may be subject to additional contractual restrictions on our business. If our financial performance does not improve or additional third-party financing is not obtained, we anticipate that we will not regain compliance with the Fixed Charge Coverage Ratio and solvency covenant in our ABL Facility, unless such covenant is amended or compliance is waived. In the event of a covenant violation that remains uncured or that is not waived, the lenders have the right to declare all outstanding debt under the ABL Facility immediately due and payable and we may not have sufficient cash to fulfill this obligation.
Our credit facility limits our operational and financial flexibility, and in addition we may require substantial additional capital to support our business, and this capital may not be available to us on acceptable terms, if at all.
We have an asset-based revolving line of credit of up to $54 million, with the amount available for borrowing at any time determined based on a valuation of our eligible accounts receivable. As of June 30, 2016, we had
$40.7 million
of borrowings outstanding under our revolving line of credit. Any borrowings we make under our credit facility are secured by liens on substantially all of our assets.
We are dependent on our asset-based revolving credit facility to meet working capital and operational requirements, and access to our asset-based facility is dependent on, among other things, the borrowing base valuation of our eligible accounts receivable and the absence of a default under the credit agreement. The amount available for borrowing under the credit facility could be significantly reduced if there is a reduction in our eligible accounts receivable due to poor economic conditions, operational performance, the sale of any portion of our business, or other factors. Any loss or material reduction of our ability to access funds under the credit facility could materially and negatively impact our liquidity.
The credit agreement includes, among other provisions, specific limitations on our ability to take certain actions, which include, among others, our ability to incur indebtedness or liens, make investments, issue guarantees, enter into certain mergers, dispositions, acquisitions, liquidations or dissolutions, issue additional securities, pay dividends, make loans and advances, and enter into transactions with affiliates.
We are required to be in compliance with a minimum trailing 12-month fixed charge coverage ratio of consolidated EBITDA (as defined in the ABL Facility) to consolidated fixed charges of 1.1/1.0 (the "Fixed Charge Coverage Ratio") if (i) an event of default has occurred and is continuing, (ii) Ciber fails to maintain excess availability of at least the greater of (i)
$15 million
or (ii) an amount equal to
25%
of the aggregate amount of the commitments at any time. We must then continue to comply with the minimum trailing 12-month fixed charge coverage ratio until (1) no event of default is continuing and (2) excess availability has equaled or exceeded the greater of (a)
$15 million
or (b) an amount equal to
25%
of the aggregate amount of the commitments for 30 consecutive days. Due to the balance available for borrowing falling below
$15 million
during the six months ended June 30, 2016, we became subject to the Fixed Charge Coverage Ratio and we were not in compliance with the Fixed Charge Coverage Ratio during the first quarter of 2016 and subsequently.
A default, such as our current default for non-compliance with the Fixed Charge Coverage ratio, as described above, if not waived or cured by amendment, could cause our debt to become immediately due and payable and terminate our ability to draw upon the funds under the credit agreement. We may not be able to repay our debt or borrow sufficient funds to refinance it, and even if new financing is available, it may not be on terms acceptable to us. This could materially adversely affect our results of operations and financial condition. Additionally, if we needed to obtain a waiver under, or an amendment to, the credit agreement in the future, or if we seek other financing, if available, our cost of borrowing could increase significantly. The ABL Facility also contains certain requirements relating to perfection of security interests of the Loan Parties (as defined in the ABL Facility), as well as an affirmative solvency (as defined in the ABL Facility) representation applicable as of the date of the making of any Revolving Loan (as defined in the ABL Facility) or any other extension of credit. During the six months ended June 30, 2016, Wells Fargo notified us that it had become subject to, and waived an event of default relating to an additional perfection notice requirement that had become applicable to the German borrowers, which we began to comply with in March 2016, and this requirement continues to be applicable to us. In May 2016, Wells Fargo notified us that we were not in compliance with a similar perfection notice requirement applicable to the Dutch borrowers that was applicable to us during the three months ended March 31, 2016 and the six months ended June 30, 2016. We currently are working with Wells Fargo to cure this non-compliance.
In addition, the ABL Facility includes ongoing representations including solvency of the Company. Based on the ABL Facility definition of solvency, which includes the ability to pay amounts due on the prescribed invoice due dates, the Company may have breached the solvency representation during the six months ended June 30, 2016, and may be in breach of that representation at the time of each subsequent borrowing under the ABL Facility. This may limit future borrowings under the ABL Facility.
In addition, our liquidity is affected by many factors including, among others, fluctuations in revenue, gross profits and operating expenses, as well as changes in operating assets and liabilities. In addition, further softening in the demand for our products and services may result in higher than anticipated losses in the future and lower our cash balances at a faster rate, and lower our borrowing base under our credit facility. Management evaluated its existing cash, cash equivalents and marketable securities, together with our cash collections, including the Netherlands Sale, combined with cash management measures we have recently implemented and currently believes, based on this evaluation, the Company can continue to operate through the end of the third quarter 2016, although this cannot be assured. Additionally, as a normal course of business or as a result the debt being called, we may take further actions that include, but are not limited to, obtaining a covenant waiver or modification, restructuring, divesting certain assets and business units, cost reductions, refinancing, and obtaining new debt or equity financing.
Should additional capital resources not become available to us through such measures, or should additional capital resources only be available on unfavorable terms, we would be required to make changes to our operating expense levels and capital expenditures to extend that period and would likely need to significantly reduce our business activities which could adversely affect our ability to compete effectively in the markets in which we participate which could, in turn, adversely affect our results of operations. If we issue equity or equity linked securities in order to raise additional funds, substantial dilution to existing shareholders may occur. If we raise cash through the incurrence of additional indebtedness, we may be subject to additional contractual restrictions on our business.
We may not be able to maintain compliance with the continued listing requirements of the New York Stock Exchange.
Our common stock is listed on the New York Stock Exchange (“NYSE”). In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least $1.00 per share. During both the first and second quarter of 2016, the Company observed a sustained decrease in the stock price and lower than expected earnings during the three and six months ended June 30, 2016. The closing price of our common stock was less than $1.00 on three days during the second quarter of 2016. On August 1, 2016, the closing price of our common stock on the NYSE was $1.45. Under the listing standards of the NYSE, if we fail to maintain a minimum closing bid price of $1.00 for 30 consecutive business days, we may receive a notice from the NYSE that we are not in compliance with this rule, in which case the NYSE could commence suspension and delisting procedures. In the event we are not in, and do not regain compliance with the rule, our common stock will no longer be listed on the NYSE. The delisting of our common stock could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay debt and fund our operations. There can be no assurance that the Company will be able to sustain compliance with this rule or with the NYSE’s other listing requirements.
Our results of operations may be adversely affected if we are unable to continue to evolve our business model, develop and release our new offerings or other new or enhanced products and services within the anticipated time frames, refine our existing offerings, improve efficiency, and execute on these key elements of our strategic plan or our strategic plan proves to be less successful than anticipated.
If we fail to properly analyze and classify the needs of our clients to meet next-generation market opportunities and continue to evolve our business model, develop and release our new offerings or other new or enhanced products and services within the anticipated time frames, or refine our existing offerings, we may not be able to achieve our desired client retention and growth objectives and, as a consequence, our financial performance may be negatively impacted. If we are unable to instill the appropriate operational regimes and delivery methods to increase our overall efficiency and cost effectiveness, we may not be able to increase our profitability, improve our cash flow, and strengthen our balance sheet. If we are unable to successfully execute any or all of the initiatives of our strategic plan to implement our planned strategic shift in our business model, our revenues, operating results, and profitability may be adversely affected. Even if we successfully implement our strategic plan, we cannot guarantee that our plan will be successful and that our revenues, operating results, and profitability will improve to the levels we anticipate, or at all.
Our results of operations could be adversely affected by volatile, uncertain or negative economic conditions and the effects of these conditions on our clients' businesses.
Our clients' businesses and the markets they serve are impacted by global macroeconomic conditions. Developments, such as the instability and recent recessions in the United States and Europe and the inflationary risks associated with higher oil and gas and other commodity prices, along with other developments, may have an adverse effect on our client's businesses and, consequently, on our revenue growth and profitability.
Volatile, uncertain or negative economic conditions in the markets we serve have undermined and could continue to erode business confidence and cause our clients to defer or reduce their spending on new technology initiatives or terminate existing contracts, which has and would negatively affect our business. Growth in markets we serve could be at a slow rate, or could stagnate, in either case, for an extended period of time. Changing economic growth patterns and conditions has affected and may in the future affect demand for our services. Weakening demand could have a material adverse effect on our results of operations. Ongoing economic volatility and uncertainty affects us in a number of other ways, including making it more difficult to effectively build our revenue and resource plans, particularly in consulting, and to accurately forecast client demand beyond the immediate term. This could result in, among other things, us not having the level of appropriate personnel where they are needed or having to use involuntary terminations, as we recently have done, as means to keep our supply of skills and resources in balance.
Economic volatility and uncertainty is particularly challenging because the effects and resulting changes in demand patterns to manifest themselves in our business and results of operations over a period of time and the impacts may not be immediate. Differing demand patterns from economic volatility and uncertainty could have a significant negative impact on our business.
A data security or privacy breach could adversely affect our business.
The protection of client, employee, and company data is critical to our reputation and the success of our business. Our clients have a high expectation that we will adequately protect their confidential information. In addition, the regulatory environment surrounding cybersecurity and privacy is increasingly demanding with new and constantly changing requirements and third-party efforts to breach systems are increasing in frequency and sophistication. Protection of confidential client, employee, and Company data, along with compliance in the constantly changing regulatory environment may add expenses to our business operations. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through a third party system breach, systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems or those we develop for our clients, whether by our employees or third parties, could result in system disruptions, negative publicity, legal liability, monetary damages, and damage to our reputation.
Our results of operations could be adversely affected if the market for IT services and solutions fluctuates or does not continue to grow.
Fluctuations in our customers’ needs, changes in our customers’ industries, lack of client acceptance, uncertainty of global economic conditions or weakening economic conditions, competing technologies and services or reductions in corporate spending could cause the market for IT services and solutions to grow more slowly or could reduce demand for our services and solutions. For example, economic conditions have impacted some of our customers’ operations and technology spending and have caused some of our clients to delay, cancel or scale back their IT projects or IT spending, to seek lower pricing or extended payment terms or otherwise exert pricing pressure on us, to delay payments due to us and, as occurred with several clients, to enter into bankruptcy or liquidation. Our customer's deployment time frames may vary based on the applications being deployed, the complexity and scale of the customers' businesses, the configuration requirements, and other factors, many of which are beyond our control. Delayed and reduced demand for IT services have also resulted in reductions in the growth of new business and led to increased price competition for our offerings and increased the likelihood of entering into contracts that produce lower profit margins, which may materially adversely affect our revenues, results of operations and financial condition.
Our profitability will be adversely impacted if we are unable to maintain our utilization rates and control our costs.
Our profitability depends primarily on the prices for our services, our professionals’ utilization or billable time and our costs. As a services business, our largest expense is salaries and payroll-related expenses. However, it is our skilled employees that generate our revenues. Balancing our workforce levels against the demands for our services is difficult. Delays or cutbacks in projects or delays in finding new projects could increase the non-productive time of our consultants, which would decrease our utilization levels and our profit margins. We generally cannot reduce our labor costs as quickly as negative changes in revenue may occur. In addition, in a number of the countries in which we operate, the local labor laws make it very expensive to involuntarily terminate employees. As a result, some of our operations may retain underutilized employees for longer periods. To achieve our desired level of profitability, we must maintain our utilization at an appropriate rate. If we are unable to achieve and maintain our target utilization rates, our profitability could be adversely impacted. Further, if labor costs increase, this could put upward pressure on our costs and adversely affect our profitability if we are unable to recover these increased costs by increasing the prices for our services.
If we are not able to anticipate and keep pace with rapid changes in technology, our business may be negatively affected.
Our success depends on our ability to develop and implement technology services and solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, and our products, services and solutions may not be successful in the marketplace, or there may be a delay in market acceptance of new, enhanced or acquired products or services. In addition, services, solutions and technologies developed by current or future competitors may make our service or solution offerings uncompetitive or obsolete. Any one of these circumstances could adversely affect our ability to obtain and successfully complete client engagements.
Termination of a contract by a significant client and/or cancellation with short notice could adversely affect our financial condition.
Our clients typically retain us on a non-exclusive, engagement-by-engagement basis through master service agreements (“MSA”). Our MSAs typically do not include any commitment by our clients to give us a specific volume of business or future work. The length of individual projects and engagements can vary greatly. Our objective is to sign multi-year contracts with our clients; however, our contracts generally allow our client to terminate the contract for convenience or to reduce the amount of our services. Clients may generally cancel a contract with short notice, subject in some instances to penalty provisions but in many cases, without significant early termination cost. Termination, reduction, or delay of any given engagement could result from factors unrelated to our work product or the progress of the project, such as factors related to business or financial conditions of the client, changes in client strategies or the domestic or global economy generally. A significant number of terminations, reductions, or delays in engagements in any given period of time could negatively and materially impact our revenues and profitability.
The IT services industry, in the U.S. and internationally, is highly competitive and continually evolving, and we may not be able to compete effectively in this evolving marketplace.
We operate in a highly competitive industry that includes a large number of diverse participants. We currently compete principally with other IT professional services firms and technology vendors, including a variety of large multinational providers and large offshore service providers that offer some or all of the services that we offer, as well as many niche solution or service providers that compete with us in a specific geographic market, industry segment or service area. As we continue to implement our strategic plan, we will also face competition from legacy vendors and custom-built software vendors and from vendors of specific applications. Many of the companies in our industry have significantly greater financial, technical, offshore and marketing resources than we do. In addition, a client may choose to use its own resources rather than to engage an outside firm for the type of products or services that we can provide. We may be unable to compete successfully with current or future competitors, and our revenue and profitability may be adversely affected. Additionally, some of our competitors, particularly those located outside of the U.S. and Western Europe in regions with lower costs of doing business, may be able to provide solutions and services to clients at lower costs or on more attractive terms. Increased competition has, and may continue to, put downward pressure on the prices we can charge for our services or products. In particular, one key element of our ability to improve our profitability in the face of these trends is our ability to implement and leverage a global workforce, deploying lower-cost resources to provide quality work at higher margins. If we are not able to cost-effectively integrate our global workforce in services delivery, we may not be able to compete effectively, or maintain or improve our profitability.
Our revenues, operating results, and profitability may vary from quarter to quarter and may result in increased volatility in the price of our stock.
Our quarterly revenues, operating results, and profitability have varied significantly in the past and may continue to do so, which can create volatility in the price of our common stock. In addition, our relatively low average daily trading volume can greatly impact our stock price on a daily basis. Factors that have caused and may continue to cause variations in our revenues, operating results, and profitability include:
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the business decisions of our clients regarding the use of our services;
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the stage of completion of existing projects and/or their termination;
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our ability to continue to evolve our business model, develop and release our new offerings or other new or enhanced products and services within the anticipated time frames or refine our existing offerings;
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client satisfaction with our services;
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our clients' financial ability to pay for our services;
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our ability to properly manage and execute client projects, especially those under fixed-price arrangements;
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our ability to properly price fixed-price contracts to provide for adequate profits;
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our ability to maintain our profit margins and manage costs, including those for personnel and support services;
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restructuring costs or charges related to changes in our business operations;
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acquisition and integration costs related to possible acquisitions of other businesses;
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costs related to the discontinued operations of our former Federal division, information technology outsourcing practice, and Russian operations, including possible additional future related costs we may incur;
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costs or charges associated with potential asset sales or dispositions;
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changes in, or the application of changes in, accounting principles or pronouncements under U.S. generally accepted accounting principles;
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changes in significant accounting estimates;
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changes in interest rates on our debts;
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currency exchange rate fluctuations;
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changes in estimates, accruals or payments of variable compensation to our employees; and
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global, regional and local economic and political conditions and related risks.
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If we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our consultants, we will not be able to sustain our profit margin and our profitability will suffer. A number of factors affect the rates we charge for our services, including:
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our clients' perception of our ability to add value through our services;
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changes in our pricing policies or those of our competitors;
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the introduction of new products or services by us or by our competitors;
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the use of globally-sourced, lower-cost service delivery capabilities by our competitors and our clients; and
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Additionally, a number of factors affect our utilization rates, such as:
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seasonality, including number of workdays, holidays and vacations;
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our ability to transition consultants quickly from completed projects to new engagements;
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our ability to forecast demand for our services and thereby maintain an appropriately balanced and sized workforce; and
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our ability to manage employee turnover.
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Our business could be adversely affected if our clients are not satisfied with our offerings or services, and we could face damage to our financial results, professional reputation and/or incur legal liability.
Our business has historically been as a professional services firm, and as a result, we have depended largely on our relationships with our clients and our reputation for high quality professional services and integrity to attract and retain clients. In addition, we depend heavily on a limited number of clients. While no specific client accounts for over 10% of our consolidated revenues, our 5 largest clients accounted for approximately 19% of our revenues in 2015. Additionally, many of our engagements involve projects that are critical to the operations of our clients' businesses and many involve the protection of confidential client information. If a client is not satisfied with the quality of work performed by us or a subcontractor, or with the type of services or solutions delivered, or if a data security breach occurs, we could incur additional costs to address the situation, the profitability of that work might be impaired, and the client's dissatisfaction with our services could damage our ability to obtain additional work from that client or other clients. Clients that are not satisfied may also seek to terminate contracts with us prematurely, potentially resulting in additional costs and loss of expected revenues. In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts with current and prospective clients. If we do not meet our contractual obligations to a client, we could be subject to legal liability. Our contracts typically include provisions to limit our exposure to legal claims relating to our services and the applications we develop; however, these provisions may not protect us, or may not be enforceable under some circumstances or under the laws of some jurisdictions. In addition, we may enter into agreements with little or no liability protection because we perceive an important economic opportunity or because our personnel did not adequately adhere to our guidelines. As a result, we may find ourselves committed to providing services that we are unable to deliver or whose delivery will cause us financial loss. If we cannot or do not fulfill our obligations, we could face legal liability. In addition, if we were to fail to properly deliver on a project, we may not be able to collect any related accounts receivable or could even be required to refund amounts paid by the client.
We may experience declines in profitability if we do not accurately estimate the cost of engagements conducted on a fixed-price basis.
When making a proposal for or managing a fixed-price engagement, we rely on our estimates of costs and timing for delivering our services, which are sometimes based on limited data and could be inaccurate. If we do not accurately estimate our costs and the timing for completion of a fixed-price project, the contract for such a project could prove unprofitable or yield a profit margin that is lower than expected. Some fixed-price engagements are subject to long-term contracts that range from three to five years. Estimating future year costs on such long-term engagements is extremely difficult and subject to additional risks. Often our cost estimates and the pricing we offer for outsourcing projects anticipate long-term cost savings resulting from transformational and other initiatives that we expect to implement and benefit from over the term of the outsourcing contract. If we fail to accurately estimate the costs of performing our services or the amount of cost savings that we will experience on long-term contracts, we may underprice our contracts as a result, causing an adverse effect on our profits.
Losses, if any, on fixed-price contracts are recognized when the loss is determined. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable and may affect the amount of revenue, profit, and profit margin reported in any period.
We rely on third-parties to perform some of our services to our customers, which if not performed to our standards, could cause significant disruption to our business and harm our reputation.
We have arrangements with third parties to perform certain services for our customers which, if not performed accurately, to our standards, and in accordance with the terms of our agreements with our customers, could result in significant disruptions or costs to us. Often in these circumstances, we are liable to our clients for the performance of these third parties. Should these third parties fail to perform timely or satisfactorily, our clients may terminate their engagements with us or withhold payment under their agreements with us until the services have been completed successfully. In addition, the timing of our revenue recognition may be affected or we may realize lower profits if we incur additional costs due to delays, if we must assign additional personnel to complete the engagement, if we are unable to otherwise provide those services internally, or if we fail to identify a replacement third party in an orderly, cost-effective and timely manner. Unsatisfactory performance by these third parties could negatively impact our relationships with our clients and harm our reputation.
If we do not continue to improve our operational, financial and other internal controls and systems to manage our growth and size or if we are unable to enter, operate and compete effectively in new geographic markets, our results of operation may suffer and the value of our business may be harmed.
Our current business and anticipated growth will continue to place significant demands on our management and other resources. Our global operations will require us to continue to develop and improve our operational procedures, financial systems, and other internal controls at our operations and facilities around the world. In particular, our continued growth will increase the challenges involved in:
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recruiting, training and retaining technical, finance, marketing and management personnel with the knowledge, skills and experience that our business model requires;
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maintaining high levels of client satisfaction;
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developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems;
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preserving our culture, values and entrepreneurial environment; and
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effectively managing our personnel and operations and effectively communicating to our personnel worldwide our core values, strategies, and goals.
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In addition, the increasing size and scope of our operations increase the possibility that a member of our personnel will engage in unlawful or fraudulent activity, breach our contractual obligations, or otherwise expose us to unacceptable business risks, despite our efforts to train our employees and maintain internal controls to prevent such instances. If we are not successful in developing and implementing the right processes and tools to manage our enterprise, our ability to compete successfully and achieve our business objectives could be impaired.
If we fail to compete effectively in the new markets we enter, or if the cost of entering those markets is substantially greater than we expect, our business, results of operations, and financial condition could be adversely affected.
Our brand and reputation are key assets and competitive advantages of our Company and our business may be affected by how we are perceived in the marketplace.
Our ability to attract and retain customers is affected by external perceptions of our brand and reputation. Reputational damage from negative perceptions or publicity could damage our reputation with customers and employees as well as prospective customers and employees. We may not be successful in detecting, preventing, or negating all changes in or impacts upon our reputation. Negative perceptions or publicity could have a material adverse effect on our business and financial results.
The outcome of litigation in which we are involved is unpredictable and an adverse decision in any such matter could subject us to damage awards and lower the market price of our common stock.
From time to time and in the ordinary course of our business, we are a party to litigation matters such as those described in Part II Item 1, “Legal Proceedings” of this Annual Report on Form 10-K. All such legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business or we may enter into settlements of claims for monetary damages. Litigation is costly, time-consuming and disruptive to normal business operations. These and any other future disputes, litigations, investigations, administrative proceedings or enforcement actions we may be involved in may divert management’s time and attention that would otherwise be used to benefit our operations, result in negative publicity and harm our customer or supplier relationships.
Although we intend to contest such matters vigorously, we cannot assure you that their outcome will be favorable to us. An adverse resolution of any such matter in the future, including the results of any amicable settlement, could subject us to material damage awards or settlement payments or otherwise materially harm our business. For some complaints filed against us, we are currently unable to estimate the amount of possible losses that might be incurred should these legal proceedings be resolved against us.
We rely on a few customers for a large portion of our revenues.
Our five largest customers generated approximately 19% of our revenues for the year ended December 31, 2015. The volume of work performed for specific customers often varies from year to year, and a major customer in one year may not use our services in a subsequent year. The loss of one of our large customers could have a material adverse effect on our business and results of operations.
Our future success depends on our ability to continue to retain and attract qualified employees and any inability to do so, or a loss of key employees, could have a material adverse effect on our business.
Our business involves the delivery of professional services and is highly labor intensive. Our future success depends upon our ability to continue to attract, train, effectively motivate and retain highly-skilled technical, managerial, sales and marketing personnel. Although we invest significant resources in recruiting and retaining employees, there is often considerable competition within the IT services industry for personnel with certain in-demand qualifications, and we may be unable to compete for the most desirable employees.
From time to time, we have trouble locating sufficient numbers of highly-qualified candidates located in our desired geographic locations, with the required specific expertise or at the desired compensation levels. The inability to attract and retain qualified employees in sufficient numbers could have a serious negative effect on us, including our ability to obtain and successfully complete important client engagements and thus, maintain or increase our revenues. Such conditions could also force us to resort to the use of higher-priced subcontractors, which would adversely affect the profitability of the related engagement. In addition, our ability to attract and retain qualified personnel in India will become increasingly important as we implement our plans to expand our Global Solutions Center in India and increase the number of employees working there.
We believe that our future success substantially depends on certain key employees within the company, primarily in the senior management team. Due to the competitive employment nature of our industry, there is a risk that we will not be able to retain these key employees. The loss of one or more key employees could seriously impair our ability to continue to manage and expand our business, which could adversely affect our business and financial results. In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance, which could cause fluctuations in the price of our securities and result in further turnover of our employees.
We rely heavily on relationships with software vendors and the loss of one or more of our significant software vendors could have a material and adverse effect on our business and results of operations.
We have significant relationships with software vendors including SAP, Oracle, Infor, and Microsoft. Our relationships with these companies enable us to acquire customers at reduced costs and to increase win rates by allowing us to leverage our vendors' marketing efforts and benefit from strong vendor endorsements. The loss of one or more of these relationships or endorsements could reduce our revenues, result in increased sales and marketing costs, lead to longer sales cycles, harm our reputation and brand recognition, and adversely affect our results of operations. We cannot predict at this time what the impact of the loss of one or more software vendors would have on our business and results of operations.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws of the various countries in which we provide services or solutions offer only limited protection of our intellectual property rights. These laws are subject to change at any time and could further limit our ability to protect our intellectual property. In addition to intellectual property laws in each jurisdiction where we operate, we rely upon a combination of confidentiality policies, nondisclosure agreements, and other contractual arrangements to protect our intellectual property rights. In some jurisdictions where we operate, there is uncertainty concerning the scope of available intellectual property protection for software and business methods, which are fields in which we rely on intellectual property laws to protect our rights. Our efforts to protect intellectual property rights may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees, or other third parties, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our rights might also require considerable time, money, and oversight, and we may not be successful in enforcing our rights.
Depending on the circumstances, we might need to grant a specific client greater rights in intellectual property developed in connection with a contract than we otherwise generally do. In certain situations, we might forego all rights to the use of intellectual property we create, which would limit our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.
Our services or solutions could infringe upon the intellectual property rights of others, or we might lose our ability to utilize rights we claim in intellectual property or the intellectual property of others.
We cannot be sure that our services and solutions, or the third-party software and solutions of others that we offer to our clients, do not infringe on the intellectual property rights of third parties, and we could have infringement claims asserted against us or against our clients. These claims could harm our reputation, cost us money and prevent us from offering some services or solutions. In a number of our contracts, we agree to indemnify our clients for expenses or liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities could be greater than the revenues we receive from the client. Any claims or litigation in this area, whether we ultimately win or lose, could be costly, injure our reputation, or require us to enter into royalty or licensing arrangements. We might not be able to enter into these royalty or licensing arrangements on acceptable terms. If a claim of infringement were successful against us or our clients, an injunction might be ordered against our clients or our own services or operations, causing further damages. We could lose our ability to utilize the intellectual property of others. Third-party suppliers of software, hardware or other intellectual property assets could be acquired or sued, which could disrupt use of their products or services by us and our clients. If our ability to provide services and solutions to our clients is impaired, our operating results could be adversely affected.
In addition, if we are unable to capture the intellectual capital developed by our employees and convert such intellectual capital into reusable and commercially marketable intellectual property, our costs of delivering our services may increase, our development efforts may be duplicated and we may lose the economic advantage of owning and licensing Ciber intellectual property.
If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients for the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables, but actual losses on client balances could differ from those that we currently anticipate and as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. In addition, timely collection of client balances depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. Recent global economic conditions and other factors resulted in financial difficulties for a number of our clients and, consequently, we experienced a greater amount of bad debt expense and related payments.
If we are unable to meet our contractual requirements, we might experience delays in the collection of, and/or be unable to collect, our client balances and, if this occurs, our results of operations and cash flows could be adversely affected.
Our international operations expose us to additional risks, including fluctuations in foreign currency exchange rates, which could have adverse effects on our business and operating results.
Our operations outside of the U.S. represented just under half of our revenues in 2015. Due to our international operations, we are subject to a number of financial and operational risks that may adversely affect our revenue and profitability, including:
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the costs and difficulties related to managing geographically diverse operations;
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differences in, and uncertainties arising from, unfamiliarity or changes in foreign business culture and practices;
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our ability to obtain the necessary visas and work permits for foreign nationals;
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restrictions on the movement of cash and the repatriation of earnings;
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multiple and possibly overlapping or conflicting laws;
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the costs of complying with a wide variety of local laws;
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operating losses incurred in certain countries and the non-deductibility of those losses for tax purposes; and
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differences in, and uncertainties arising from, changes in legal, labor, political and economic conditions.
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The revenues and expenses of our international operations generally are denominated in local currencies. Accordingly, we are subject to exchange rate fluctuations between such local currencies and the U.S. dollar. These exchange rate fluctuations subject us to currency translation risk with respect to the reported results of our international operations. There can be no assurance that we will be able to reduce the currency risks associated with our international operations. We manage our exposure to changes in foreign currency exchange rates through our normal operating and financing activities and, when deemed appropriate, with derivative financial instruments. There is no assurance that we will continue to use such financial instruments in the future or that any such use will be successful in managing or controlling foreign currency risks.
We have experienced and may continue to experience material impacts to revenues and earnings due to fluctuations in foreign currency rates, and in addition, these impacts may cause material fluctuations in our revenues and earnings from period to period. Significant strengthening or weakening of the U.S. dollar against currencies like the British Pound and the Euro may materially impact our revenue and profits. As we continue to expand our presence in India, we will have increased exposure to fluctuations between the Indian Rupee and the U.S. dollar. In addition, we have transactions with clients, as well as inter-company transactions between our subsidiaries, that cross currencies and expose us to foreign currency gains and losses. These types of events are difficult to predict and may recur.
We are committing resources to new products and offerings and our profitability could be reduced if our business does not grow proportionately.
We have committed resources and invested infrastructure to develop and market our Ciber Momentum application transformation technology. This success of this component of our business strategy depends on many factors. We have experienced long product development cycles in the past and we may experience delays in the future. Although we anticipate developing our modernization business under our strategic plan, if we are unable to grow our business and revenues to sufficiently offset these investments, or on the time frame we anticipate, our profitability could be reduced.
Our operations are vulnerable to disruptions that may impact our results of operations and from which we may not recover.
As a services business, our operations around the world are highly dependent upon our employees, independent contractors, and service providers being able to effectively serve our clients. That ability may be impacted by many types of events that impact the people themselves or limit access to facilities or technology required to perform work. Examples of such events include severe weather, pandemics, natural disasters, infrastructure outages, terrorist attacks, governmental actions, political or economic instability, civil unrest, or the threat or perception that such events might occur. In such circumstances, our business continuity and disaster recovery plans may not be effective. In any such event, our results of operations could be adversely affected. In addition to the risk that we may not be able to serve our clients, we may be unable to protect our employees or facilities from harm. Where we have facilities with concentrations of employees (for instance, in several cities in the US, Europe, and India), our risk of disruption that materially impacts our results of operations may be higher. Insurance, if available for a given disruptive event, may be inadequate to compensate for the losses involved. If a disruption continues for an extended period of time, or if a short-term disruption renders a material portion of our operations ineffective for an extended period of time, our business may suffer material and potentially irreparable harm.
We cannot guarantee that we are in compliance with all applicable laws and regulations.
We are required to comply with numerous and constantly changing laws and regulations in jurisdictions around the world. If our compliance efforts prove insufficient or any of our employees fail to comply with, or intentionally disregard, any of our policies or applicable laws or regulations, a range of liabilities could result for the employee and for the Company, including, but not limited to, significant penalties and fines, sanctions or litigation, and the expenses associated with defending and resolving any of the foregoing, any of which could have a material impact on our business, financial condition, and operating results
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In addition, as a global company, we are subject to U.S. and foreign laws and regulations with respect to corruption, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these laws and regulations could result in prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, fines and penalties, criminal sanctions against us, our officers, or our employees, and have a material negative adverse effect on our reputation and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these U.S. and foreign laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, there can be no assurance that our employees or our business partners will not violate our policies.
Our insurance policies may not fully cover all losses we may incur.
Although we attempt to limit our liability for damages arising from negligent acts, errors or omissions through contractual provisions, the limitations of liability included in our contracts may not fully protect us from liability or damages and may not be enforceable in all instances. In addition, not all of our contracts may limit our exposure for certain liabilities, such as claims of third parties for which we may be required to indemnify our clients. Although we have general liability insurance coverage, this coverage may not continue to be available on terms reasonable to us or in sufficient amounts to cover one or more large claims, and our insurers may disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that are excluded from our insurance coverage or that exceed our available insurance coverage, or changes in our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We might not be successful at identifying, acquiring, or integrating businesses or entering into joint ventures, which could have a material adverse effect on our business and financial results.
In the past, we have made strategic and targeted acquisitions and joint ventures intended to enhance or add to our offerings of services and solutions, or to enable us to expand in certain geographic and other markets. In order to compete in our industry, we anticipate that we may, from time to time, in the future acquire additional businesses or enter into additional joint ventures that we believe would provide a strategic fit with our business. Potential issues associated with acquisitions and joint ventures could include, among other things: our ability to identify suitable acquisitions and joint ventures; our ability to offer potential acquisition targets and joint ventures competitive transaction terms; our ability to complete targeted transactions; our ability to realize the anticipated benefits or cost savings as a result of the acquisition or joint venture; diversion of management's attention; our ability to successfully integrate our businesses with the business of the acquired company; assimilating, motivating, recruiting and retaining key employees; potential significant costs and expenses and charges to earnings; conforming standards, controls, procedures and policies, business cultures and compensation structures among our company and the acquired company; consolidating and streamlining sales, marketing and corporate operations; potential exposure to unknown liabilities of acquired companies; loss of key employees and customers of the acquired business; and managing tax costs or inefficiencies associated with integrating our operations following completion of an acquisition or entry into a joint venture. In addition, by nature, joint ventures involve a lesser degree of control over the operations of the joint venture business, and particularly if we were to enter into such business in a minority position. If an acquisition or joint venture is not successfully completed or integrated into our existing operations, our business and financial results could be materially adversely impacted
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We could incur additional losses due to further impairment in the carrying value of our goodwill.
We have recorded a significant amount of goodwill on our consolidated balance sheet as a result of numerous acquisitions. At December 31, 2015, the carrying value of our goodwill was $256.7 million. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. We are required to test goodwill for impairment annually and do so during the second quarter of each year, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value of any of our reporting units below its book value. Such factors requiring an interim test for goodwill impairment include, but are not limited to, financial performance indicators such as negative or declining cash flows or a decline in actual or planned revenue or earnings and a
sustained decrease in share price. Our cash flow estimates involve projections that are inherently subject to change based on future events. A significant downward revision in the fair value of one or more of our business units that causes the carrying value to exceed the fair value could cause goodwill to be considered impaired, and could result in a non-cash impairment charge in our consolidated statement of operations.
We have recorded several goodwill impairment charges in the past. During the first quarter of 2016, the Company observed a sustained decrease in our stock price and lower than expected earnings during the three months ended March 31, 2016, which provided a potential indicator of goodwill impairment. As a result of an impairment test for the three months ended March 31, 2016 we recorded impairment charges of $85.9 million. During the second quarter of 2016, the Company observed a sustained decrease in our stock price and lower than expected earnings, as well as the Netherlands Sale, which provided potential indicators of goodwill impairment. As a result of an impairment test for the three months ended June 30, 2016, we recorded impairment charges of
$29.6 million
in the three months ended June 30, 2016. We have updated our cash flow forecasts and our other assumptions used to calculate the estimated fair value of our reporting units to account for our beliefs and expectations of the current business environment. While we believe our estimates are appropriate based on our view of current business trends, no assurance can be provided that goodwill impairment will not be required during future periods.
We depend on contracts with various public sector agencies for a significant portion of our revenue and, if the spending policies or budget priorities of these agencies change, we could lose revenue.
In 2015, approximately 13% of our total revenue was from public sector clients, including state, local, and foreign governments and agencies. Such programs can be modified or amended at any time by acts of the governments or agencies involved. Moreover, a number of state and local governments and agencies are suffering from significant budget shortfalls, which may result in curtailment of spending on consulting and technology services. Many contracts with public sector clients contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. Among other things, governments may cancel multi-year contracts if funds become unavailable during the term of the engagement. Cancellation or reduction in price or scope could limit our ability to recover incurred costs, reimbursable expenses and profits on work completed prior to the termination. If insufficient funding is appropriated to the government entity to cover termination costs, we may not be able to fully recover our investments.
Unfavorable government audits could require us to adjust previously reported operating results, to forego anticipated revenue and subject us to penalties and sanctions.
Although we sold our Federal division in 2012, we remain responsible for any audits related to certain engagements for the U.S. federal government performed prior to the sale. The various agencies that our Federal division contracted with generally have the right to audit and review past work. As part of that process, the government agency could review our performance on the contract, our pricing practices, our cost structure, and our compliance with applicable laws, regulations, and standards. Any such audit could result in a substantial adjustment to our previously reported operating results. For example, any costs that were originally reimbursed could be subsequently disallowed, one consequence of which could be refunding cash collected in the past.
If a government audit uncovers improper or illegal activities by us, or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or disqualification from continuing to do business, or bidding on new business, with governments in various jurisdictions.
Provisions in our certificate of incorporation and bylaws and provisions under Delaware law may discourage unsolicited takeover proposals.
Provisions in our certificate of incorporation, as amended, and in our amended and restated bylaws, and Delaware General Corporate Law (the "DGCL"), may have the effect of deterring unsolicited takeover proposals or delaying or preventing changes in our control or management, including transactions in which shareholders might otherwise receive a premium for their shares over then-current market prices. These provisions include:
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authority of the board of directors, without further action by the shareholders, to fix the rights and preferences, and issue shares of preferred stock;
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the classification of our board of directors, which prevents a change of control of our board of directors at a single meeting of shareholders;
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shareholders must comply with advance notice requirements before raising a matter at a meeting of shareholders or nominating a director for election; and
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provisions in the DGCL preventing shareholders from engaging in business combinations with us, subject to certain exceptions.
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These provisions could also discourage bids for our common stock at a premium as well as create a downward pricing pressures on the market price of our common stock.
Institutional shareholders hold a significant amount of our common stock and these shareholders may have conflicts of interests with the interests of our other shareholders and may vote their shares in a way that is adverse to the interests of our other shareholders.
Institutional investors own or control approximately 78% of the voting power of our common stock. The interests of these institutional shareholders may differ from our other shareholders in material respects. As an example, these institutional investors may have an interest in our pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their investments in Ciber, even though such transactions might involve risks to other shareholders. These institutional shareholders, or their affiliates may be in the business of making or advising on investments in companies, and may from time to time in the future, acquire interests in, or provide advice to, businesses that directly or indirectly compete with our business or our customers or suppliers. These investors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us, which could materially differ from the interests of our other shareholders.
This concentration of voting power of our common stock may make it difficult for our other shareholders to approve or defeat matters that may be submitted for action by our shareholders, including the election of directors and amendments to our Certificate of Incorporation or Bylaws. This also may have the effect of deterring, delaying, or preventing a change in control of Ciber, even when such a change in control could benefit our other shareholders. These institutional shareholders may have the power to exert significant influence over our affairs in ways that may be adverse to the interests of our other shareholders.
Issues arising during the implementation of our Enterprise Resource Planning system could adversely affect our business and results of operations.
During the first quarter of 2017, we anticipate implementing an Enterprise Resource Planning ("ERP") system to support our future growth plan and to integrate significant processes. Implementing an ERP system on a widespread basis involves extensive organizational training and significant changes in business processes. In connection with the implementation, we may experience temporary information technology and business disruptions that could adversely affect our business and results of operations.