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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2009

or

For the transition period from                         to                        

Commission file number 001-13103

CIBER, INC.

(Exact name of Registrant as specified in its charter)

(303) 220-0100

(Registrant’s telephone number, including area code)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

There were 68,708,488 shares of the registrant’s Common Stock outstanding as of March 31, 2009.

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CIBER, Inc.

Form 10-Q

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statement of Changes in Equity

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CIBER, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1)  Basis of Presentation

The accompanying unaudited interim consolidated financial statements of CIBER, Inc. and subsidiaries (together, “CIBER,” “the Company,” “we,” “our,” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements.  These consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC.  The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include all adjustments of a normal, recurring nature that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented.  The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.  Certain prior period amounts have been reclassified to conform to the current period presentation.

Retroactive Adjustments — In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“the FSP”).  The FSP requires that the proceeds from the issuance of certain convertible debt instruments be allocated between a liability component (issued at a discount) and the embedded conversion option (i.e., the equity component) in a manner that reflects the entity’s nonconvertible debt borrowing rate.  The difference between the principal amount of the debt and the amount of the proceeds allocated to the liability component must be reported as a debt discount and subsequently amortized to earnings as additional non-cash interest expense over the convertible debt’s expected life using the effective interest method.  We adopted the FSP, which requires retrospective application for all periods presented, on January 1, 2009.  This FSP changed the historical accounting treatment for our Convertible Senior Subordinated Debentures (“Debentures”) even though all of our Debentures were repurchased and retired prior to December 31, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  This Statement requires that the noncontrolling interests in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interests and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interest of the controlling and noncontrolling owners.  We prospectively adopted the requirements of SFAS No. 160 on January 1, 2009, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented.

The required retrospective applications of the FSP and SFAS No. 160 had the following impact on our net income, diluted earnings per share and presentation of the consolidated statement of operations for the 2008 quarterly periods, as well as for the year ended December 31, 2008:

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Other Income (Expense), Net — Other income (expense), net consisted of the following:

(2) Earnings Per Share

Our computation of earnings per share — basic and diluted is as follows:

Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect.  The approximate average number of anti-dilutive stock options (options whose exercise price is greater than the average CIBER stock price during the period) omitted from the computation of diluted weighted average shares outstanding was 7,460,000 and 8,983,000 for the three months ended March 31, 2008 and 2009, respectively.

(3) Acquisitions

In January 2009, we acquired Iteamic Private Ltd. (“Iteamic”) of Bangalore, India.  Iteamic specialized in application development of offshore projects, primarily with companies in North America, and became part of our Custom Solutions division.  The acquisition added leadership and delivery skills depth to our India offshore global solution center.  The purchase price was approximately $4.7 million, and was allocated as follows: $800,000 to net tangible assets acquired and $3.9 million to goodwill.

(4) Financial Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended,” requires companies to recognize all of its derivative instruments as either assets or liabilities on its balance sheet at fair value.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  All hedging instruments must be designated, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.

CIBER is exposed to certain risks related to its ongoing business operations.  From time to time, CIBER may choose to use derivative instruments to manage certain risks related to foreign currency exchange rates and interest rates.

For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the effective hedge portion of the derivative instrument is reported as a component of “accumulated other comprehensive income (loss)” on the balance sheet and is reclassified into earnings in the same period during which the hedged transaction affects earnings. The gain or loss is classified in the same statement of operations line item as the associated item being hedged.

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We have entered into an interest rate swap with a financial institution, for which we have elected hedge accounting under SFAS No. 133 and have designated it as a cash flow hedge.  This interest rate swap helps us manage our interest rate risk under our Revolving Credit Facility by converting a portion of our floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense.  This agreement involves the receipt of floating-rate amounts in exchange for fixed-rate payments over the life of the agreement without any exchange of underlying principal amounts.  Interest is net settled monthly with the financial institution counterparty.  Effective March 12, 2009, this interest rate swap effectively converts $50.0 million of our borrowings under our Revolving Credit Facility from a variable-rate instrument into a fixed-rate instrument at 1.26% plus our current credit margin of 1.50% at March 31, 2009, for a total rate of 2.76%.  The interest rate swap matures on March 12, 2010.  At March 31, 2009, the estimated unrealized loss on our interest rate swap, net of taxes of $106,000, reflected in “accumulated other comprehensive loss” was approximately $173,000.  The liability for the unrealized loss on this swap of $279,000 is presented with “other accrued expenses and liabilities” on the balance sheet and is expected to be recognized in earnings over the next 12 months.

CIBER will also, from time to time, enter into foreign currency forward contracts related to customer agreements or intercompany transactions denominated in a foreign currency or related to certain forecasted foreign operating results.  We have not elected hedge accounting under SFAS No. 133 for these derivatives.  As of and for the three months ended March 31, 2009, we had several of these instruments outstanding, none of which were individually material.  The aggregate gain on these instruments of $658,000 is recorded in “other current assets” and the current period gain of $658,000 is reflected in “other income (expense), net.”

(5) Sale of Common Stock

During the three months ended March 31, 2009, we sold nine million shares of our common stock, for proceeds of $23.2 million, net of issuance costs, which were used to repay a portion of the outstanding borrowings under our senior secured reducing revolving credit facility (“Revolving Credit Facility”).  The net proceeds from the sale also reduced the amount available to us under the Revolving Credit Facility.  In addition, beginning on March 31, 2009, and continuing through December 31, 2010, the aggregate commitments under the Revolving Credit Facility will be reduced by $7.5 million each quarter end.  At March 31, 2009, the maximum available to us under the Revolving Credit Facility was $169.4 million.

(6) Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

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(7) Segment Information

Our reportable segments are our operating divisions, which are organized internally primarily by the nature of their services, client base and geography.  In 2009, we have combined our Commercial and State & Local Government operating divisions into one division called our Custom Solutions division. Therefore, our divisions now include our Europe division, which includes Eastern Asia, Australia and New Zealand, and our three domestic divisions, which consist of Custom Solutions, Federal Government and U.S. ERP.  Our Europe division provides a broad range of information technology (“IT”) consulting services, including package software implementation, application development, systems integration and support services.  Our Custom Solutions and Federal Government divisions provide IT services and products in custom-developed software environments.  Our India-based operations are considered part of our Custom Solutions division.  Our U.S. ERP division primarily provides enterprise software implementation services, including enterprise resource planning (“ERP”) and supply chain management software from software vendors such as Oracle, SAP and Lawson for U.S. customers.  Also in 2009, certain centralized operation support departments have been moved from the Custom Solutions division to become part of our corporate group.  Prior year segment data has been adjusted to conform to the 2009 presentation.

The following presents financial information about our reporting segments:

(8) Subsequent Event

On April 30, 2009, one of our customers, Chrysler LLC, filed for bankruptcy protection and in connection with the Obama Administration Auto Restructuring Initiative announced a new Chrysler-Fiat Alliance and a reorganization plan.  Much about this restructuring is unknown at this time and is subject to change.  At March 31, 2009, CIBER had accounts receivables due from Chrysler of approximately $0.9 million.  Based on published information regarding the bankruptcy, we believe that we will receive full payment on these balances and have not provided any allowance as of March 31, 2009.  We will continue to monitor our situation with Chrysler and will record a bad debt allowance if and when it appears that a loss is probable.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and our Audited Consolidated Financial Statements and related Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008.  References to “we,” “our,” “us” or “CIBER” in this Quarterly Report on Form 10-Q refer to CIBER, Inc. and its subsidiaries.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our operations, results of operations and other matters that are based on our current expectations, estimates, forecasts and projections.  Words, such as “anticipate,” “believe,” “could,” “expect,” “estimate,” “intend,” “may,” “opportunity,” “plan,” “potential,” “project,” “should,” and “will” and similar expressions, are intended to identify forward-looking statements.  For example, we make certain forward-looking statements regarding our current estimates for revenue and profitability for certain of our business units for 2009.  These statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict.  Actual outcomes and results may differ materially from such forward-looking statements due to a number of factors, including without limitation, the factors set forth in our Annual Report on Form 10-K under the caption “Item 1A. Risk Factors.”  Forward-looking statements are not guarantees of performance and speak only as of the date they are made, and we undertake no obligation to publicly update any forward-looking statements in light of new information or future events.  Undue reliance should not be placed on such forward-looking statements.

Business Overview

CIBER provides IT system integration consulting and other IT services primarily to governmental agencies and Fortune 1000 and middle market companies across most major industries.  From offices located throughout the United States and Europe, as well as Eastern Asia, Australia and New Zealand, we provide our clients with a broad range of IT services, including custom and package software development, maintenance, implementation and integration.  To a lesser extent, we also resell certain IT hardware and software products.

Our reportable segments are our operating divisions, which are organized internally primarily by the nature of their services, client base and geography.  In 2009, we have combined our Commercial and State & Local Government operating divisions into one division called our Custom Solutions division. Therefore, our divisions now include our Europe division, which includes Eastern Asia, Australia and New Zealand, and our three domestic divisions, which consist of Custom Solutions, Federal Government and U.S. ERP.  Our Europe division provides a broad range of information technology (“IT”) consulting services, including package software implementation, application development, systems integration and support services.  Our Custom Solutions and Federal Government divisions provide IT services and products in custom-developed software environments.  Our India-based operations are considered part of our Custom Solutions division.  Our U.S. ERP division primarily provides enterprise software implementation services, including enterprise resource planning (“ERP”) and supply chain management software from software vendors such as Oracle, SAP and Lawson for U.S. customers.  Also in 2009, certain centralized operation support departments have been moved from the Custom Solutions division to become part of our corporate group.  Prior year segment data has been adjusted to conform to the 2009 presentation.

Retroactive Adjustments

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“the FSP”).  The FSP requires that the proceeds from the issuance of certain convertible debt instruments be allocated between a liability component (issued at a discount) and the embedded conversion option (i.e., the equity component) in a manner that reflects the entity’s nonconvertible debt borrowing rate.  The difference between the principal amount of the debt and the amount of the proceeds allocated to the liability component must be reported as a debt discount and subsequently amortized to earnings as additional non-cash interest expense over the convertible debt’s expected life using the effective interest method.  We adopted the FSP, which requires retrospective application for all periods presented, on January 1, 2009.  This FSP changed the historical accounting

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treatment for our Convertible Senior Subordinated Debentures (“Debentures”) even though all of our Debentures were repurchased and retired prior to December 31, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  This Statement requires that the noncontrolling interests in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interests and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interest of the controlling and noncontrolling owners.  We prospectively adopted the requirements of SFAS No. 160 on January 1, 2009, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented.

The required retrospective applications of the FSP and SFAS No. 160 had the following impact on our net income, diluted earnings per share and presentation of the consolidated statement of operations for the 2008 quarterly periods, as well as for the year ended December 31, 2008:

Comparison of the Three Months Ended March 31, 2008 and 2009 - Consolidated

The following table sets forth certain Consolidated Statement of Operations data in dollars and expressed as a percentage of revenue:

Revenue.  Total revenue decreased $36.0 million, or 12%, for the three months ended March 31, 2009, compared to the three months ended March 31, 2008.  Global economic conditions and a stronger U.S. dollar between the comparable periods are primarily responsible for the revenue decrease.  As a global company, our revenue is denominated in multiple currencies and may be significantly affected by currency exchange-rate fluctuations.  The U.S. dollar strengthened in early 2008 against many currencies, resulting in unfavorable currency translation and less U.S. dollar reported revenues.  Foreign currency rate changes resulted in approximately $20 million of reduced

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reported revenue in 2009 over 2008.  Excluding the unfavorable currency translation effects, our total revenue decreased 6% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, primarily due to reduced domestic revenue as poor economic conditions have caused clients to cancel, reduce or delay IT spending.

Revenue by segment/division was as follows:

n/m = not meaningful

·                  Custom Solutions revenue decreased primarily due to the successful completion of the Pennsylvania Turnpike Commission project in mid-2008, as well as a number of cancelled or delayed projects and staffing reductions on others resulting from economic conditions.

·                  Unfavorable foreign currency fluctuations, in the form of a stronger U.S. dollar, accounted for an over 20% decline in Europe’s current quarter revenue results.  Excluding the impact of unfavorable foreign currency translation, our Europe division revenue actually improved by approximately 3% resulting from increased work opportunities at several existing clients, and a large, new SAP implementation contract.

·                  The contraction of Federal revenue continued in the current quarter due to expired contracts that are yet to be replaced.  We have continued to experience difficulty in replacing expired contracts due in part, to the current economic environment, which has continued to delay decisions to award and start projects funded by the federal government.  We had several new contract bids that were expected in the first quarter of 2009 that pushed out into the second quarter that we believe will benefit us in 2009.

·                  As with our Custom Solutions division, the primary reason for the decline in revenue in our U.S. ERP division between the comparable quarters was related to the successful completion of the Pennsylvania Turnpike Commission project mentioned above, which is now being supported by this division at considerably less revenue than during the implementation phase of the project.  However, the reduction for this project was partially offset by improved revenues from our Oracle and Lawson practices in the current quarter.

Gross Profit.  In total, our gross profit margin decreased 240 basis points to 25.1% for the three months ended March 31, 2009, compared to 27.5% for the same period in 2008.  Gross profit margin on consulting services revenue accounted for all of the decrease, due to significant consulting services margin decreases in all divisions, other than the Federal division, which had an almost 150 basis point improvement.  The significant declines in gross margins were primarily due to customers cutting back on the size and scope of projects, as well as pricing pressures from a number of existing customers.  Europe also incurred an approximate 2.5% pay increase that went into effect at the beginning of 2009 that we have not yet been able to recover through increased billing rates.  As customers have cancelled, reduced or delayed projects, it has been difficult to maintain our normal levels of consultant utilization, which has also contributed to the reduction in our gross margin.

Selling, general and administrative.  We began a number of cost reduction initiatives in the fall of 2008 in response to the deteriorating economic conditions.  As a result, our SG&A costs during the three months ended March 31, 2009, declined by $8.0 million, or 12%, from the same period of the prior year.  As a percentage of revenue, SG&A expenses improved 10 basis points to 21.8% for the three months ended March 31, 2009, compared to 21.9% for the three months ended March 31, 2008.  The improvement was primarily due to effective cost reductions in most divisions, primarily salaries, as well as reduced recruiting and travel costs.  Although our SG&A expenses showed a modest improvement, we continue to expect further improvements in the second quarter due to further cost cutting

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resulting from the combination of two divisions, our former Commercial and State & Local Government divisions, and other overhead personnel reductions throughout the Company.

Operating income.  Our 240 basis point reduction in gross profit margin drove the equal reduction in our operating income to 2.7% for the three months ended March 31, 2009, compared to 5.1% for the three months ended March 31, 2008.

Operating income by segment/division was as follows:

*Divisions calculated as a % of division revenue, all other calculated as a % of total revenue

·                  Custom Solutions operating income decreased due to a sizable reduction in gross margin resulting primarily from higher-margin projects that were cancelled and the downward pricing pressure from some existing customers.  Additionally, SG&A expenses as a percentage of revenue increased between the comparable periods.  We reduced direct and overhead labor costs by approximately $9 million in the three months ended March 31, 2009 as compared to the same period of 2008, but could not adjust these costs as quickly as our revenue was adjusting downward.  This division represents the combination of our former Commercial and State & Local Government divisions, which was undertaken in 2009 to better align operations and reduce overhead costs.  We expect that much of the benefit to be seen from the overhead reductions will be realized beginning in the second quarter of 2009.

·                  Europe’s operating income declined due to the significant reduction in services gross profit margins stemming from customer-induced pricing pressures, as well as increased consultant wages.  A considerable reduction in SG&A expenses due to lower overhead personnel cost, plus lower recruiting and travel expenses helped to partially offset the gross margin decline.

·                  Federal was the only division with an operating income improvement due to the improvement in their gross margin on services, as well as effective containment of costs within the division.

·                  Similar to our Europe division, the decrease in U.S. ERP’s gross profit margin on services was more than the reduction in their SG&A expenses as a percentage of revenue could offset, resulting in an operating margin decline.

·                  Despite undertaking a number of cost-cutting initiatives, corporate expenses increased primarily due to increased share-based compensation expenses and increased costs related to our new corporate headquarters.

Interest expense.  Interest expense decreased $2.4 million during the three months ended March 31, 2009, compared to 2008, $1.4 million of which related to the 2008 restatement of interest expense due to our January 1, 2009 adoption of FSP APB 14-1.  The remaining decrease was equally a function of lower average borrowings during the 2009 quarter and lower average interest rates on those borrowings as compared to the same period of the prior year.

Other income (expense), net.  Other income, net was $1.1 million for the three months ended March 31, 2009, compared to other expense, net of $1.1 million for the similar period in 2008.  Our foreign exchange transactions accounted for a $3.1 million improvement between the comparable quarters, from a $2.0 million dollar loss in the first

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quarter of 2008 a $1.1 million gain during the three months ended March 31, 2009.  Offsetting the improvement in foreign exchange transactions was a $1.0 million gain on retirement of our Debentures in the first quarter of 2008, with no similar gain in 2009.

Income taxes.  Our effective tax rates were 36.0% and 37.4% for the three months ended March 31, 2009 and 2008, respectively.  The 2008 U.S. Federal Research and Experimentation tax credit wasn’t approved by Congress until the fourth quarter of 2008; therefore, the full-year benefit for the credit in 2008 wasn’t recorded until the fourth quarter, causing the effective tax rates in the earlier quarters of 2008 to be higher.  When the credit was approved for 2008, it was also extended for 2009; therefore we are recording the estimated tax benefit for the 2009 R&E credit over the four quarters of 2009, causing a reduction in our effective tax rate in the current quarter as compared to the same quarter of 2008.

Liquidity and Capital Resources

At March 31, 2009, we had $158.4 million of working capital and a current ratio of 2.17:1, compared to working capital of $165.2 million and a current ratio of 2.15:1 at December 31, 2008.  Historically, we have used our operating cash flow and borrowings, as well as periodic sales of our common stock to finance ongoing operations and business combinations.  We believe that our cash and cash equivalents, our operating cash flow and our available Revolving Credit Facility will be sufficient to finance our working capital needs through the next year.

Our balance of cash and cash equivalents was $36.5 million at March 31, 2009, compared to a balance of $48.8 million at December 31, 2008.  Typically, most of our cash balance is maintained by our European subsidiaries and our domestic cash balances are used daily to reduce our outstanding balance on our Revolving Credit Facility.  From time-to-time, as permitted under tax regulations, we may engage in short-term loans between our U.S. parent company and our foreign subsidiaries.

Operating activities.  Cash provided by operating activities decreased to $5.7 million during the three months ended March 31, 2009, as compared to $25.0 million for the same period of 2008.  Changes in normal short-term working capital items like accounts receivable, accounts payable and accrued compensation and other liabilities accounted for $14.3 million of the decrease.  Our working capital fluctuates based on seasonal factors, as well as the timing of our domestic payroll and accounts payable processing cycles in regards to month end dates.  In the first quarter of 2008 our European operations had an unusual improvement in accounts receivable as compared to December 2007.  A number of client payments that were normally expected late in the fourth quarter of 2007 slipped into the first quarter of 2008.  In contrast, our Europe operations had very good accounts receivable collections during the fourth quarter of 2008, resulting in more normal activity for the three months ended March 31, 2009.  During the first quarter of 2009, our domestic operations generated $14.9 million of cash from operations while our Europe operations used cash of $9.2 million.  During the three months ended March 31, 2008, our domestic and Europe operations generated $21.3 million and $3.7 million of cash, respectively.  Typically, the seasonality of our business in many European countries, including the payment of prior year bonuses in the first quarter, results in negative cash from operations in the early part of the year with improvements in the second half of the year.

Total accounts receivable decreased $4.4 million to $230.7 million at March 31, 2009, from $235.1 million at December 31, 2008, primarily due to decreased revenues.  Total accounts receivable day’s sales outstanding (“DSO”) was 76 days at March 31, 2009, compared to 72 days at December 31, 2008.  Domestic DSO remained consistent with December 2008 while Europe’s DSO increased during the current quarter.  Our European operations typically experience their lowest DSO levels in December.  Changes in accounts receivable have a significant impact on our cash flow.  Items that can affect our accounts receivable DSO include: contractual payment terms, client payment patterns (including approval or processing delays and cash management), client mix (public vs. private), fluctuations in the level

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of IT product sales and the effectiveness of our collection efforts.  Many of the individual reasons are outside of our control and, as a result, it is normal for our DSO to fluctuate from period to period, affecting our liquidity.  Our outstanding accounts receivable from the City of New Orleans (the “City”) was approximately $8.7 million at March 31, 2009, down from $9.2 million at December 31, 2008.  Of our outstanding receivable balance from the City at March 31, 2009, a substantial amount related to work performed following the 2005 hurricane disaster.  The City continues to experience administrative complications and FEMA reimbursement delays, which have delayed payment for our services.  We continue to work with the City and FEMA on the remaining balance.  In addition, we continue to provide a variety of services to the City and based on our communications with them, we believe we will be able to collect the balance in full.

Accrued compensation and related liabilities decreased to $56.9 million at March 31, 2009, from $62.4 million at December 31, 2008, due to the payment of annual bonuses in the first quarter, offset in part by increased domestic payroll accrual days.  These balances are subject to the effects from the timing of our normal bi-weekly U.S. payroll cycle.  At March 31, 2009, there were 12 days of domestic unpaid wages, compared to 8 days at December 31, 2008.  In addition, annual bonuses are typically accrued throughout the year and paid in the first quarter of the following year, causing some fluctuation from quarter to quarter.

Accounts payable and other accrued liabilities typically fluctuate based on when we receive actual vendor invoices and when they are paid.  The largest of such items typically relates to vendor payments for IT hardware and software products that we resell and payments to services-related contractors.

Investing activities.  Investing activities are primarily comprised of cash paid for acquisitions and purchases of property and equipment.  In January 2009, we used $4.3 million (net of $0.4 million of cash acquired) to acquire Iteamic Pvt. Ltd., a Bangalore, India-based IT services company.  Spending on property and equipment increased to approximately $3.2 million during the three months ended March 31, 2009, from $3.0 million in 2008.  In 2009, we incurred spending related to leasehold improvements at our new corporate headquarters location, as well as additional equipment investments for our outsourcing divisions’ data centers.

Financing activities.  Typically, our most significant financing activities consist of the borrowings and payments on our long-term bank debt, which consists primarily of our Revolving Credit Facility.  During the three months ended March 31, 2009, we had net payments on our long-term debt of $31.1 million, compared to net borrowings of $45.7 million in the comparable period of 2008.  The net payment in 2009 resulted primarily from cash received following the sale of our common stock.  The net borrowings in 2008 were primarily used to retire our Debentures.  During the three months ended March 31, 2008, we used $59.0 million of cash to repurchase some of our Debentures; all of which were retired by December 15, 2008.

Revolving Credit Facility. We have a senior secured reducing revolving credit facility, with several financial institutions as lenders and Wells Fargo as administrative agent (the “Revolving Credit Facility”) that matures on February 11, 2011.  The Revolving Credit Facility is secured by substantially all of our assets.  The Revolving Credit Facility is subject to mandatory prepayments, and commitment reductions, in amounts equal to the net cash proceeds resulting from specified events such as asset dispositions, event of loss, issuance or incurrence of indebtedness and issuance of equity, subject in each case to specified thresholds and other exceptions.  As a result of our sale of common stock during the first quarter of 2009, the commitment available under the Revolving Credit Facility was reduced by the net proceeds of $23.2 million.  In addition, beginning on March 31, 2009, and continuing through December 31, 2010, the aggregate commitments under the Revolving Credit Facility will be reduced by $7.5 million each quarter end.  At March 31, 2009, the maximum available to us under the Revolving Credit Facility was $169.4 million.

Our borrowings under the Revolving Credit Facility bear interest at rates calculated in reference to either the Wells Fargo prime lending rate (“prime”) plus a margin that ranges from 0.00% to 0.25%, or a London Interbank Offered Rate (“LIBOR”) for one to six month maturities, plus a margin that ranges from 0.75% to 1.75%.  The lending rate for our borrowings is selected based upon the amount of time we want the borrowing to remain outstanding.  In March 2009, we entered into a one-year interest rate swap that effectively converts $50.0 million of our borrowings under our Revolving Credit Facility from a variable-rate instrument into a 1.26% fixed-rate instrument.  At March 31, 2009, our weighted average interest rate on our outstanding borrowings under the Revolving Credit Facility was 2.54%.

The terms of the Revolving Credit Facility include, among other provisions, specific limitations on the incurrence of additional indebtedness and liens, stock repurchases, investments, guarantees, mergers, dispositions and acquisitions, and a prohibition on the payment of any dividends.  The Revolving Credit Facility also contains certain financial

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covenants, including a maximum consolidated total leverage ratio (Total Debt divided by EBITDA) of 2.25 to 1.00, and a minimum interest coverage ratio (net income plus net interest expense (“EBIT”) divided by interest expense) of 3.50 to 1.00.  Certain elements of these ratios are defined below:

·                  Total Debt includes borrowings under our Revolving Credit Facility, any foreign bank debt and our term loans with Wells Fargo, plus the face amount of any outstanding Letters of Credit.

·                  EBITDA represents net income from continuing operations plus: net interest expense, income tax expense, depreciation expense, amortization expense, share-based compensation expense and minority interest expense, measured over the prior four quarters.

We are required to be in compliance with the financial covenants at the end of each calendar quarter, and we were in compliance with these financial covenants as of March 31, 2009.   At March 31, 2009, our total leverage ratio was 1.98 as compared to a maximum allowed of 2.25.  At June 30, 2009, the maximum allowed leverage ratio decreases to 2.00 and further decreases to 1.75 on December 31, 2009.  Based on management’s current estimates, we do not currently believe a covenant violation to be probable of occurring through at least December 31, 2009.  However, given the current volatile economic conditions, there can be no assurance that we will continue to be in compliance with these bank covenants.  The leverage ratio is impacted by our level of earnings and borrowings.  Starting in the fourth quarter of 2008, we have experienced declines in our profitability as a result of reduced demand of our services, increased competition, as well as the deteriorating financial condition of some of our clients.  Our daily borrowings are primarily driven by the timing for cash receipts from our customers, which are largely outside of our direct control.  Cash receipts are extremely difficult to forecast and may vary widely from one day to another.  Our borrowing balance also fluctuates with the timing of our domestic bi-weekly payroll cycle.  We had 12 days of accrued payroll at March 31, 2009, which will drop to only 7 days at June 30, 2009.  As a result, our payroll will use more cash when calculating covenant compliance at June 30, 2009, than it did in the first quarter.