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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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California 94-3145844
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1350 Treat Boulevard, Suite 250
Walnut Creek, California 94596
(Address of principal executive offices)
(Zip Code)
(925) 937-3950
(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.
(1) Yes [X] No [_] (2) Yes [X] No [_]
As of May 8, 2000, the number of shares outstanding of the Registrant's
Class A Common Stock was 1,556,337 and the number of shares outstanding of the
Registrant's Class B Common Stock was 11,044,593.
This report contains a total of 27 pages of which this page is number 1.
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TIER TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I -- FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000
and September 30, 1999..................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 2000 and 1999......... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended March 31, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 23
Part II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signatures........................................................... 26
Safe Harbor Statement
Certain statements contained in this report, including statements regarding
the development of the Company's services, markets and future demand for the
Company's services, and other statements regarding matters that are not
historical facts, are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995). When used in this report, the words
"believes", "expects", "anticipates", "intends", "estimates", "shows", "will
likely" and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include risks and uncertainties;
consequently, actual results may differ materially from those expressed or
implied thereby. Factors that could cause actual results to differ materially
from those set forth herein include, but are not limited to, those factors
listed in "Factors that May Affect Future Results" section, as set forth
beginning on page 17 of this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
of this report. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements or factors to
reflect events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
March 31, September 30,
2000 1999
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................ $14,107 $10,121
Restricted cash...................................... 386 819
Short-term investments............................... 6,714 8,971
Accounts receivable, net............................. 25,261 26,151
Prepaid expenses and other current assets............ 4,004 2,653
------- -------
Total current assets................................ 50,472 48,715
Equipment and improvements, net....................... 6,302 7,012
Notes and accrued interest receivable from related
parties.............................................. 1,599 1,486
Intangible assets, net................................ 38,458 23,913
Other assets.......................................... 2,392 2,818
------- -------
Total assets........................................ $99,223 $83,944
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,273 $ 2,759
Accrued liabilities.................................. 3,050 2,520
Accrued subcontractor expenses....................... 336 1,113
Accrued compensation and related liabilities......... 4,291 3,476
Purchase price payable............................... 11,742 98
Income taxes payable................................. -- 995
Deferred income...................................... 1,518 1,506
Other current liabilities............................ 308 408
------- -------
Total current liabilities........................... 23,518 12,875
Borrowings and capital lease obligation, less current
portion.............................................. 1,501 443
Other liabilities..................................... 5,091 358
------- -------
Total liabilities................................... 30,110 13,676
------- -------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, no par value........................... 65,762 66,012
Notes receivable from shareholders................... (1,773) (1,773)
Deferred compensation................................ (234) (352)
Accumulated other comprehensive income (loss)........ (1,229) (101)
Retained earnings.................................... 6,587 6,482
------- -------
Total shareholders' equity.......................... 69,113 70,268
------- -------
Total liabilities and shareholders' equity.......... $99,223 $83,944
======= =======
See Notes to Condensed Consolidated Financial Statements
3
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended March 31, Ended March 31,
---------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues..................................... $27,490 $20,243 $52,103 $41,599
Cost of revenues............................. 17,095 12,664 31,942 25,820
------- ------- ------- -------
Gross profit................................. 10,395 7,579 20,161 15,779
Costs and expenses:
Selling and marketing....................... 1,878 1,470 3,366 2,757
General and administrative.................. 6,035 4,593 11,644 8,052
Other nonrecurring charges (gains), net..... (199) -- 1,551 --
Compensation charge related to business
combinations............................... 58 60 118 122
Depreciation and amortization............... 1,427 831 2,685 1,358
------- ------- ------- -------
Income from operations....................... 1,196 625 797 3,490
Interest income (expense), net............... 197 368 434 825
------- ------- ------- -------
Income before income taxes................... 1,393 993 1,231 4,315
Provision for income taxes................... 578 387 1,126 1,683
------- ------- ------- -------
Net income................................... $ 815 $ 606 $ 105 $ 2,632
======= ======= ======= =======
Basic net income per share................... $ 0.07 $ 0.05 $ 0.01 $ 0.22
======= ======= ======= =======
Shares used in computing basic net income per
share....................................... 12,312 12,003 12,271 11,945
======= ======= ======= =======
Diluted net income per share................. $ 0.06 $ 0.05 $ 0.01 $ 0.20
======= ======= ======= =======
Shares used in computing diluted net income
per share................................... 12,961 12,944 12,877 12,855
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
4
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended
March 31,
-----------------
2000 1999
------- --------
Net cash provided by operating activities.................. $ 2,489 $ 1,642
------- --------
Investing activities:
Purchases of equipment and improvements.................... (1,260) (1,845)
Notes and accrued interest receivable from related
parties................................................... (472) (327)
Repayment on notes and accrued interest receivable from
related parties........................................... 199 164
Business combinations, net of cash acquired................ (4,426) (10,408)
Subsidiary disposal, net of cash........................... 3,303 --
Restricted cash............................................ 410 --
Purchases of available-for-sale securities................. (1,845) (22,027)
Sales of available-for-sale securities..................... 2,316 11,272
Maturities of available-for-sale securities................ 1,979 10,884
Other assets............................................... 126 (106)
------- --------
Net cash provided by (used in) investing activities........ 330 (12,393)
------- --------
Financing activities:
Borrowings under bank lines of credit...................... 1,456 909
Payments on borrowings..................................... -- (1,466)
Repurchase of common stock................................. (974) --
Net proceeds from issuance of common stock................. 876 838
Repayment by shareholders on notes receivable.............. -- 386
Payments on capital lease obligations and notes payable to
shareholders.............................................. (176) (81)
------- --------
Net cash provided by financing activities.................. 1,182 586
------- --------
Effect of exchange rate changes on cash.................... (15) (185)
------- --------
Net increase (decrease) in cash and cash equivalents....... 3,986 (10,350)
Cash and cash equivalents at beginning of period........... 10,121 22,466
------- --------
Cash and cash equivalents at end of period................. $14,107 $ 12,116
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid............................................. $ 206 $ 161
======= ========
Income taxes paid (refunded), net......................... $ 3,011 $ 3,246
======= ========
Supplemental disclosures of non-cash transactions:
Equipment acquired under capital lease obligations......... $ 54 $ --
======= ========
Accrued purchase price and assumed liabilities related to
business combinations..................................... $18,226 $ 3,400
======= ========
Class B common stock issued in business combinations....... $ 930 $ 1,328
======= ========
Conversion of Class A common stock to Class B common
stock..................................................... $ 93 $ --
======= ========
Class B common stock returned in disposal of subsidiary.... $ 1,328 $ --
======= ========
See Notes to Condensed Consolidated Financial Statements
5
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Tier
Technologies, Inc. ("Tier" or the "Company") include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the opinion
of management, the condensed consolidated financial statements reflect all
normal and recurring adjustments which are necessary for a fair presentation of
the Company's financial position, results of operations and cash flows as of
the dates and for the periods presented. The condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Consequently, these statements do
not include all the disclosures normally required by generally accepted
accounting principles for annual financial statements nor those normally made
in the Company's Annual Report on Form 10-K. Accordingly, reference should be
made to the Company's Form 10-K filed on December 10, 1999 and other reports
the Company filed with the Securities and Exchange Commission for additional
disclosures, including a summary of the Company's accounting policies, which
have not materially changed. The consolidated results of operations for the
three months and six months ended March 31, 2000 are not necessarily indicative
of results that may be expected for the fiscal year ending September 30, 2000
or any future period, and the Company makes no representations related thereto.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities and the results of operations
during the reporting period. Actual results could differ materially from those
estimates.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
NOTE 2 -- REVENUE RECOGNITION
The majority of the Company's revenues are derived primarily from
professional fees billed to clients on either a time and materials basis, a
fixed price basis or a per-transaction basis. Time and materials revenues are
recognized as services are performed. Revenues from fixed price contracts are
recognized using the percentage-of-completion method of contract accounting
based on the ratio of incurred costs to total estimated costs. Losses on
contracts are recognized when they become known and reasonably estimable.
Actual results of contracts may differ from management's estimates and such
differences could be material to the consolidated financial statements.
Revenues from performance-based contracts are recognized based on fees charged
on a per-transaction basis. Most of the Company's contracts are terminable by
the client following limited notice and without significant penalty to the
client. The completion, cancellation or significant reduction in the scope of a
large project would have a material adverse effect on the Company's business,
financial condition and results of operations. Unbilled receivables represent
revenue recognized in excess of amounts billed in accordance with contractual
billing terms. Unbilled receivables were $7,850,000 and $8,390,000 at March 31,
2000 and September 30, 1999, respectively.
Worldwide revenues derived from sales to governmental agencies were
$30,979,000 and $12,188,000 for the six months ended March 31, 2000 and 1999,
respectively.
NOTE 3 -- ACQUISITIONS
Infact Pty Limited.
In February 2000, the Company paid approximately $580,000 in cash and
released 24,972 shares of Class B common stock from escrow as payment for the
achievement of certain performance targets in accordance with the purchase
agreement for Infact Pty Limited. This contingent payment was accrued in a
previous period.
6
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
ADC Consultants Pty Limited.
In March 2000, the Company paid approximately $250,000 in cash and issued
98,291 shares of Class B common stock as payment for the achievement of certain
performance targets in accordance with the purchase agreement for ADC
Consultants Pty Limited. This contingent payment was accrued in a previous
period.
Sancha Computer Services Pty Limited and Sancha Software Development Pty
Limited ("Sancha Group").
During the quarter ended March 31, 2000, the Company accrued approximately
$651,000 (based on a current exchange rate of AU$1.63 to US $1.00) as a result
of the achievement of certain performance targets in accordance with the
purchase agreement for Sancha Group.
Service Design Associates.
During the quarter ended March 31, 2000, the Company accrued $500,000 as a
result of the achievement of certain performance targets in accordance with the
purchase agreement for certain assets and liabilities of Service Design
Associates. This contingent payment will be offset against the $800,000
guarantee issued in connection with the purchase of certain assets and
liabilities of Service Design Associates, leaving a remaining guarantee of
$300,000.
The SCA Group, Inc. and Harris Chapman.
Effective March 1, 2000, the Company acquired certain assets and assumed
certain liabilities of The SCA Group, Inc., an Illinois corporation, and Harris
Chapman, a Florida corporation (The SCA Group, Inc. and Harris Chapman,
collectively referred to herein as "SCA"), for approximately $16.2 million in
cash, including $200,000 in estimated acquisition costs. Approximately $5.2
million of the initial purchase price was paid in April 2000 and the remainder
will be paid on specified dates in the future. SCA is a business process
consulting firm with expertise in health care, insurance and utilities sectors.
In addition to the initial cost of the acquisition summarized below, contingent
payments of up to approximately $8.0 million in cash may be paid to SCA upon
the achievement of certain revenue and earnings performance targets over a
three-year period.
The SCA acquisition was accounted for using the purchase method of
accounting. Contingent payments will be accrued when earned and recorded as
additional purchase price. The accompanying consolidated financial statements
include the results of operations of SCA for periods beginning on or subsequent
to March 1, 2000.
The allocation of the initial purchase price was as follows:
(in thousands)
--------------
Cash to be paid............................................ $15,996
Estimated acquisition costs................................ 200
-------
$16,196
=======
Tangible assets............................................ $ 747
Intangible assets.......................................... 16,030
Liabilities assumed........................................ (581)
-------
$16,196
=======
Tangible assets acquired are being depreciated over their useful lives of
three to five years. Goodwill is being amortized over useful lives of six to
ten years.
7
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
Pro Forma Disclosure of Significant Acquisition
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if SCA had been purchased
by the Company as of October 1, 1998, after including the impact of certain pro
forma adjustments, such as the unaudited increased amortization expense due to
the recording of intangible assets:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands)
Revenues............................... $30,234 $23,620 $58,889 $50,247
Net income (loss)...................... $ 669 $ (245) $ (566) $ 1,378
Basic net income (loss) per share...... $ 0.05 $ (0.02) $ (0.05) $ 0.12
Diluted net income (loss) per share.... $ 0.05 $ (0.02) $ (0.05) $ 0.11
Shares used in computing basic
net income (loss) per share........... 12,312 12,003 12,271 11,945
Shares used in computing diluted
net income (loss) per share........... 12,961 12,003 12,271 12,855
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and are not intended to be a projection of future results.
NOTE 4 -- BANK LINES OF CREDIT
At March 31, 2000, the Company had an $8 million revolving credit facility
which matures on May 27, 2000. The total commitment amount is limited to the
lesser of 85% of eligible accounts receivable or $8 million and is secured by
first priority liens and security interests in substantially all of the
Company's assets, including a pledge of all stock of its domestic subsidiaries
and a pledge of approximately 65% of the stock of the Company's foreign
subsidiaries. Interest is based on either the adjusted LIBOR rate plus 2.5% or
an alternate base rate plus 0.5%, at the Company's option. The alternate base
rate is the greater of the bank's base rate or the federal funds effective rate
plus 0.5%. Among other provisions, the credit facility requires the Company to
maintain certain minimum financial ratios. As of March 31, 2000, the Company
was in compliance with all financial ratios. As of March 31, 2000 and September
30, 1999, the Company had no outstanding borrowings under this credit facility.
At March 31, 2000, the Company (through one of its Australian subsidiaries)
had a $2,000,000 revolving line of credit with St. George Bank Limited of
Australia (based on a current exchange rate of AU $1.63 to US $1.00). Under the
terms of the agreement, the principal balance of the credit line will reduce by
approximately $145,000 per quarter, beginning February 2000, to a maximum line
of approximately $1,226,000. The line of credit bears interest at fixed rates
that are set at the time of each drawdown on the line. As of March 31, 2000,
the available principal balance of the line of credit was reduced by two
letters of credit totaling approximately $74,000. In December 1999, the balance
of the line of credit was converted to a variable rate loan ("Loan"). The
variable rate is based upon the bank's prime rate less 1.25% (8.5% per annum as
of March 31, 2000) and interest is payable monthly. As of March 31, 2000, the
outstanding balance on the Loan was approximately $1,379,000. Among other
provisions, the Loan requires the Company to maintain certain minimum financial
ratios. As of March 31, 2000, the Company was in compliance with the Loan
covenants.
8
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 5 -- NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
Three Months Six Months
Ended March Ended March
31, 31,
------------- -------------
2000 1999 2000 1999
------ ------ ------ ------
(in thousands, except per
share data)
Numerator:
Net income................................. $ 815 $ 606 $ 105 $2,632
====== ====== ====== ======
Denominator for basic net income per share-
weighted average common shares outstanding.. 12,312 12,003 12,271 11,945
Effects of dilutive securities:
Common stock options....................... 364 797 342 810
Common stock contingently issuable......... 285 144 264 100
------ ------ ------ ------
Denominator for diluted net income per share-
adjusted weighted average common shares and
assumed conversions......................... 12,961 12,944 12,877 12,855
====== ====== ====== ======
Basic net income per share................... $ 0.07 $ 0.05 $ 0.01 $ 0.22
====== ====== ====== ======
Diluted net income per share................. $ 0.06 $ 0.05 $ 0.01 $ 0.20
====== ====== ====== ======
Options to purchase approximately 2,069,000 and 2,005,000 shares of Class B
common stock at exercise prices ranging from $7.78 to $17.81 per share and
$7.06 to $17.81 per share, respectively, were not included in the computation
of diluted net income per share for the three months and six months ended March
31, 2000, respectively, because the options' exercise prices were greater than
the average market price of the shares for these periods.
NOTE 6 -- COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
Three
Months Six Months
Ended Ended March
March 31, 31,
----------- ---------------
2000 1999 2000 1999
----- ---- ------- ------
(in thousands)
Net income................................... $ 815 $606 $ 105 $2,632
Foreign currency translation adjustment...... (931) 79 (1,128) 422
----- ---- ------- ------
Total comprehensive income (loss)............ $(116) $685 $(1,023) $3,054
===== ==== ======= ======
NOTE 7 -- OTHER NONRECURRING CHARGES (GAINS)
In December 1999, the Company's Board of Directors approved a plan to sell
or dispose of its subsidiary, Midas Computer Software Limited. The write-down
of certain assets associated with this subsidiary was included in other
nonrecurring charges for the three months ended December 31, 1999. In March
2000, the Company completed the sale of this subsidiary for approximately $3.7
million (based on an exchange rate of GBP 0.64 to US $1.00), net of estimated
selling expenses. The gross proceeds, including repayment of
9
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
intercompany debt of approximately $1.4 million, amounted to approximately $2.6
million in cash and $1.3 million attributable to a release of 51,074 shares of
the Company's Class B common stock and a share guarantee on the original
acquisition. The Company recorded a nonrecurring gain of approximately $199,000
for the three months ended March 31, 2000 as a result of the completion of this
transaction.
NOTE 8 -- ALLIANCE AGREEMENT
In September 1999, the Company entered into a long-term strategic alliance
("Alliance Agreement"), with Siemens Business Services Limited ("SBS").
Beginning July 1, 2000, under the Alliance Agreement, the Company has committed
to utilizing a minimum amount of resources from the SBS Application Services
Center ("ASC"). The Company will market the ASC's services worldwide in
exchange for fees based on the utilization of resources. To the extent there is
a shortfall in minimum utilization, the Company's obligation under the Alliance
Agreement shall not exceed $17.3 million (based on a current exchange rate of
GBP 0.63 to US $1.00) over the five-year life of the agreement. Through March
31, 2000, there were no minimum utilization requirements under the Alliance
Agreement. The Company will also receive a minimum of approximately $11.2
million for consulting services provided over the life of the Alliance
Agreement.
NOTE 9 -- SEGMENT INFORMATION
The Company operates in four reportable segments: U.S. Commercial Services,
U.S. Government Services, Australian Operations and United Kingdom Operations.
The Company evaluates the performance of its operating segments based on
revenue and gross profit, while other operating costs are evaluated on a
geographical basis. Accordingly, the Company does not include selling and
marketing expenses, general and administrative expenses, depreciation and
amortization expense not attributable to payment processing centers, interest
income (expense), other income (expense) or income tax expense in segment
profitability. The table below presents financial information for the four
reportable segments and for items that cannot be allocated to the operating
segments (in thousands):
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Other Total
---------- ---------- ---------- ---------- ----- -------
Three Months Ended March
31, 2000:
Revenues.............. $ 3,871 $12,615 $ 6,986 $4,018 $ -- $27,490
Gross profit (loss)... 1,172 5,349 2,567 1,343 (36) 10,395
Three Months Ended March
31, 1999:
Revenues.............. $ 7,217 $ 5,061 $ 4,308 $3,657 $ -- $20,243
Gross profit (loss)... 3,487 1,413 1,619 1,063 (3) 7,579
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Other Total
---------- ---------- ---------- ---------- ----- -------
Six Months Ended March
31, 2000:
Revenues.............. $ 7,373 $24,741 $13,644 $6,345 $ -- $52,103
Gross profit (loss)... 2,331 10,596 5,090 2,251 (107) 20,161
Six Months Ended March
31, 1999:
Revenues.............. $18,605 $ 9,678 $ 8,269 $5,047 $ -- $41,599
Gross profit (loss)... 8,312 2,877 3,131 1,469 (10) 15,779
10
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 10 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The new standard requires companies to record derivatives on the balance
sheet as assets or liabilities measured at fair value. Gains or losses
resulting from changes in the values of those derivatives will be reported in
the statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The key criterion
for hedge accounting is that the derivative must be highly effective in
achieving offsetting changes in fair value or cash flows of the hedged items
during the term of the hedge. The Company is required to adopt FAS 133 in the
fourth quarter of fiscal 2001 and has not yet determined the impact, if any,
that the adoption of FAS 133 will have on the consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 is effective no later than the quarter ending December 31,
2000. The Company has not yet determined the impact, if any, that the adoption
of SAB 101 will have on the consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" (the "Interpretation."). The Intepretation is intended to
provide guidance for certain issues that have arisen in practice since the
issuance of APB 25. The Company will adopt the Interpretation for all
transactions entered into after July 1, 2000 and has not yet determined the
impact, if any, that the adoption of the Interpretation will have on the
consolidated financial statements.
NOTE 11 -- CONTRACT DISPUTE
The Company received a notice dated December 17, 1998 that a prime
contractor was exercising its right to terminate one of the Company's
Australian projects alleging a breach of the sub-contract. The Company believes
that the termination was not proper under the terms of the sub-contract and
that it has not breached the agreement. On June 28, 1999, after a series of
discussions with the prime contractor, the Company filed a federal civil action
against the prime contractor seeking monetary damages in excess of $2 million
and a declaration that the Company had performed its duties under the
agreement, and that the prime contractor is obligated to pay the Company all
amounts outstanding under the agreement. At that time, the Company established
a reserve for the net receivable balance of $1,856,000. On August 11, 1999, the
Company received the prime contractor's answer and counterclaim in response to
the Company's complaint. The prime contractor denied the Company's claim and
counterclaimed alleging breach of contract and seeking declaratory relief and
damages in excess of $8 million and indemnification for damages, claims,
penalties, fines and/or other sanctions which may be levied in the future by
the client of the prime contractor. The Company denies the allegations and
intends to pursue its own claim against the prime contractor. The parties to
the action have commenced voluntary discovery. The court has set a case
management hearing date for August 29, 2000. The parties have agreed to mediate
this dispute with JAMS prior to the continued case management conference. The
court will set the case for trial and order completion of all discovery at the
continued case management hearing on August 29, 2000. In the event the prime
contractor prevails in its action, the Company's financial condition, results
of operations and cash flows would be materially and adversely affected.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Tier provides comprehensive business solutions where information technology
("IT") implementations are a significant component of an overall business
solution. Through offices located in the United States, Australia and the
United Kingdom, the Company works closely with Fortune 1000, government and
other clients to determine, evaluate and implement an IT strategy that allows
it to rapidly adopt, deploy and transfer emerging technologies while preserving
viable elements of the client's legacy systems. The Company's revenues
increased to $52.1 million in the six months ended March 31, 2000 from $41.6
million in the six months ended March 31, 1999. A significant portion of the
Company's revenues are derived from sales to government agencies. For the six
months ended March 31, 2000, approximately 59.5% of the Company's revenues were
derived from sales to government agencies, as compared to 29.3% for the six
months ended March 31, 1999. The Company's workforce, composed of employees,
independent contractors and subcontractors, has grown to 900 on March 31, 2000
from 674 on March 31, 1999.
The Company's revenues are derived primarily from professional fees billed
to clients on either a time and materials basis, a fixed price basis, or a per-
transaction basis. Time and materials revenues are recognized as services are
performed and expenses are incurred. Fixed price revenues are recognized using
the percentage-of-completion method, based upon the ratio of costs incurred to
total estimated project costs. Revenues from performance-based contracts are
recognized based on fees charged on a per-transaction basis. The percentage of
the Company's revenues generated on a fixed price basis was 31.4% and 8.9% for
the six months ended March 31, 2000 and 1999, respectively. The percentage of
revenues generated on a per-transaction basis was 14.5% for the six months
ended March 31, 2000. Substantially all of Tier's contracts are terminable by
the client following limited notice and without significant penalty to the
client. From time to time, in the regular course of its business, the Company
negotiates the modification, termination, renewal or transition of time and
materials and fixed price contracts that may involve an adjustment to the scope
or nature of the project, billing rates or outstanding receivables. To date,
the Company has generally been able to obtain an adjustment in its fees
following a significant change in the assumptions upon which the original
estimate was made, but there can be no assurance that the Company will be
successful in obtaining adjustments in the future. If the Company significantly
overestimates the volume for transaction-based contracts or underestimates the
resources or time required for fixed price contracts, its financial condition
and results of operations would be materially and adversely affected.
The Company has derived a significant portion of its revenues from a small
number of large clients. For some of these clients, the Company performs a
number of different projects pursuant to multiple contracts or purchase orders.
For the six months ended March 31, 2000, the District of Columbia accounted for
10.0% of the Company's revenues. The Company anticipates that a substantial
portion of its revenues will continue to be derived from a small number of
large clients. The completion, cancellation or significant reduction in the
scope of a large project would have a material adverse effect on the Company's
business, financial condition and results of operations.
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. The Company manages its personnel utilization rates by
carefully monitoring its needs and anticipating personnel increases based on
specific project requirements. To the extent revenues do not increase at a rate
commensurate with these additional expenses, the Company's results of
operations would be materially and adversely affected. In addition, to the
extent that the Company is unable to hire and retain salaried employees to
staff new or existing client engagements or retain hourly employees or
contractors, the Company's business, financial condition and results of
operations would be materially and adversely affected.
From December 1996 through March 31, 2000, the Company made fifteen
acquisitions for a total cost of approximately $47.7 million in cash and shares
of Class B common stock, excluding future contingent payments. The Company also
incurred $1.9 million in compensation charges related to business combinations
12
resulting from these acquisitions. Generally, contingent payments are recorded
as additional purchase price at the time the payment can be determined beyond a
reasonable doubt. If a contingent payment is based, in part, on a seller's
continuing employment with the Company, the payments are recorded as
compensation expense over the vesting period when the amount is deemed
probable. These acquisitions helped the Company to expand its operations in the
United States, to establish its operations in Australia and the United Kingdom,
to broaden the Company's client base, service offerings and technical expertise
and to supplement its human resources. In March 2000, the Company sold its
United Kingdom subsidiary, Midas Computer Software Limited, for approximately
$3.7 million (based on an exchange rate of GBP 0.64 to US $1.00), net of
estimated selling expenses. International operations accounted for 38.4% and
32.0% of revenues for the six months ended March 31, 2000 and March 31, 1999,
respectively. The Company believes that the percentage of total revenues
attributable to international operations will continue to be significant.
International operations may subject the Company to foreign currency
translation adjustments and transaction gains and losses for amounts
denominated in foreign currencies.
Results of Operations
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenues:
Three
Months Six Months
Ended Ended
March 31, March 31,
------------- ------------
2000 1999 2000 1999
----- ----- ----- -----
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 62.2% 62.6% 61.3% 62.1%
----- ----- ----- -----
Gross profit...................................... 37.8% 37.4% 38.7% 37.9%
Costs and expenses:
Selling and marketing............................ 6.8% 7.2% 6.5% 6.6%
General and administrative....................... 21.9% 22.7% 22.3% 19.4%
Other nonrecurring charges (gains), net.......... (0.7%) -- 3.0% --
Compensation charge related to business
combinations.................................... 0.2% 0.3% 0.2% 0.3%
Depreciation and amortization.................... 5.2% 4.1% 5.2% 3.3%
----- ----- ----- -----
Income from operations............................ 4.4% 3.1% 1.5% 8.3%
Interest income (expense), net.................... 0.7% 1.8% 0.8% 2.0%
----- ----- ----- -----
Income before income taxes........................ 5.1% 4.9% 2.3% 10.3%
Provisions for income taxes....................... 2.1% 1.9% 2.1% 4.0%
----- ----- ----- -----
Net income........................................ 3.0% 3.0% 0.2% 6.3%
===== ===== ===== =====
Three Months Ended March 31, 2000 and March 31, 1999
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 35.8% to $27.5
million for the three months ended March 31, 2000 from $20.2 million in the
three months ended March 31, 1999. This increase resulted primarily from
multiple acquisitions and internal growth, partially offset by a decrease in
revenues from commercial operations.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries and
incentive compensation, independent contractor and subcontractor costs,
employee benefits, payroll taxes, travel expenses, and any equipment or
software costs. For payment processing center operations, cost of revenues also
include facility, equipment and overhead costs. Gross profit increased 37.2% to
$10.4 million for the three months ended March 31, 2000 from $7.6 million in
the three months ended March 31, 1999. Gross profit as a percentage of revenues
increased to 37.8% for the three months ended March 31, 2000 as compared to
37.4% in the three months ended March 31, 1999. This increase
13
resulted primarily from the increased focus in business process consulting;
larger, long-term contracts; and the increased payment processing center
portion of our business, all of which generally have had higher gross margin
than our other consulting services.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, advertising and marketing expenditures,
travel costs and product literature. Selling and marketing expenses increased
27.8% to $1.9 million for the three months ended March 31, 2000 from $1.5
million in the three months ended March 31, 1999. As a percentage of revenues,
selling and marketing expenses decreased to 6.8% for the three months ended
March 31, 2000 from 7.2% in the three months ended March 31, 1999. The increase
in selling and marketing expenses in total dollars was primarily attributable
to the addition of sales and marketing personnel through acquisitions. The
Company expects selling and marketing expenses to increase in future quarters
as the Company continues to make investments in its marketing and branding
initiatives and through its business development efforts.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management and administrative
functions, human resources, recruiting, finance, legal, accounting and
information systems, as well as professional fees related to legal, audit, tax,
external financial reporting and investor relations matters. General and
administrative expenses increased 31.4% to $6.0 million for the three months
ended March 31, 2000 from $4.6 million in the three months ended March 31,
1999. As a percentage of revenues, general and administrative expenses
decreased to 21.9% for the three months ended March 31, 2000 from 22.7% in the
three months ended March 31, 1999. The increase in general and administrative
expenses, in total dollars, was primarily attributable to building the
infrastructure to support, manage and control the Company's growth, as well as
the costs of integrating and operating acquired businesses. Over the longer
term, the Company expects general and administrative expenses to decline as a
percentage of revenues.
Other Nonrecurring Charges (Gains), Net. The other nonrecurring gain of
$199,000 for the three months ended March 31, 2000, resulted primarily from the
completion of the sale of the Company's United Kingdom ERP business.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations consists primarily of certain contingent
performance payments made in connection with prior acquisitions. Compensation
charge related to business combinations was $58,000 for the three months ended
March 31, 2000 and $60,000 for the three months ended March 31, 1999. As a
percentage of revenues, compensation charge related to business combinations
was 0.2% for the three months ended March 31, 2000 and 0.3% for the three
months ended March 31, 1999. For the three months ended March 31, 2000 and
1999, the compensation charge related to business combinations resulted from
the amortization of the value of shares to be released over a three year period
in connection with the acquisition of Simpson Fewster & Co. Pty Limited.
Compensation charges related to business combinations may fluctuate in future
quarters due to the varying timing of future contingent payments. The Company
currently anticipates that the amount it will accrue for compensation charges
related to prior acquisitions in the quarter ending June 30, 2000 will be
significantly higher than the quarter ended March 31, 2000. However, the
Company bases this expectation on the current operating forecast. The amount
and timing of this accrual are contingent on these prior acquisitions attaining
certain performance targets.
Depreciation and Amortization. Depreciation and amortization consist
primarily of expenses associated with the depreciation of equipment and
improvements and amortization of intangible assets resulting from acquisitions
and purchases of certain intellectual property. Depreciation and amortization
increased 71.7% to $1.4 million for the three months ended March 31, 2000 from
$831,000 in the three months ended March 31, 1999. As a percentage of revenues,
depreciation and amortization increased to 5.2% for the three months ended
March 31, 2000 from 4.1% in the three months ended March 31, 1999. The increase
in depreciation and amortization expense in total dollars was primarily
attributable to the amortization of increased intangible assets from business
combinations, the amortization of the costs associated with the purchase of a
project
14
management system, and the depreciation associated with increased capital
expenditures. The Company expects that depreciation and amortization will
continue to increase in absolute dollars.
Interest Income (Expense), Net. Net interest income decreased 46.5% to
$197,000 for the three months ended March 31, 2000 compared to net interest
income of $368,000 in the three months ended March 31, 1999. This decrease was
primarily attributable to lower interest income generated on a smaller
investment balance.
Provision for Income Taxes. The provision for income taxes was $578,000 for
the three months ended March 31, 2000 and $387,000 for the three months ended
March 31, 1999. For the three months ended March 31, 2000 and 1999, the
Company's effective tax rate was 41.5% and 39%, respectively. The future tax
rate may vary due to a variety of factors, including, but not limited to, the
relative income contribution by domestic and foreign operations, changes in
statutory tax rates, the amount of tax exempt interest income generated during
the year, the inability to utilize foreign tax credits and any non-deductible
items related to acquisitions or other nonrecurring charges. The Company will
continue to monitor the effective tax rate on a quarterly basis.
Six Months Ended March 31, 2000 and March 31, 1999
Revenues. Revenues increased 25.3% to $52.1 million for the six months ended
March 31, 2000 from $41.6 million in the six months ended March 31, 1999. This
increase resulted primarily from multiple acquisitions and internal growth,
partially offset by a decrease in revenues from commercial operations.
Gross Profit. Gross profit increased 27.8% to $20.2 million for the six
months ended March 31, 2000 from $15.8 million in the six months ended March
31, 1999. Gross margin increased to 38.7% for the six months ended March 31,
2000 from 37.9% in the six months ended March 31, 1999. The increase in gross
margin was primarily attributable to the increased focus in business process
consulting; larger, long-term contracts; and the increased payment processing
center portion of our business, all of which generally have had higher gross
margin than our other consulting services.
Selling and Marketing. Selling and marketing expenses increased 22.1% to
$3.4 million for the six months ended March 31, 2000 from $2.8 million in the
six months ended March 31, 1999. As a percentage of revenues, selling and
marketing expenses decreased to 6.5% for the six months ended March 31, 2000
from 6.6% in the six months ended March 31, 1999. The increase in selling and
marketing expenses in total dollars was primarily attributable to the addition
of sales and marketing personnel, both internally and through acquisition, to
support the higher revenue base and increased selling and marketing efforts.
General and Administrative. General and administrative expenses increased
44.6% to $11.6 million for the six months ended March 31, 2000 from $8.1
million in the six months ended March 31, 1999. As a percentage of revenues,
general and administrative expenses increased to 22.3% for the six months ended
March 31, 2000 from 19.4% in the six months ended March 31, 1999. The increase
in general and administrative expenses, both in total dollars and as a
percentage of revenues, was primarily attributable to building the
infrastructure to support, manage and control the Company's growth, as well as
the costs of integrating and operating acquired businesses.
Other Nonrecurring Charges (Gains), Net . The other nonrecurring charges of
$1.6 million for the six months ended March 31, 2000, resulted primarily from
the write-down and subsequent sale of the United Kingdom ERP business and
severance costs for a former officer.
Compensation Charge Related to Business Combinations. Business combination
compensation expenses were $118,000, or 0.2% of revenues, for the six months
ended March 31, 2000 as compared to $122,000, or 0.3% of revenues, for the six
months ended March 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased 97.7%
to $2.7 million for the six months ended March 31, 2000 from $1.4 million in
the six months ended March 31, 1999. As a percentage of revenues, depreciation
and amortization increased to 5.2% for the six months ended March 31, 2000 from
3.3% in the six months ended March 31, 1999. The increase in depreciation and
amortization expenses was
15
primarily attributable to the amortization of increased intangible assets from
business combinations, the amortization of the costs associated with the
purchase of a project management system, and the depreciation associated with
increased capital expenditures.
Interest Income (Expense), Net. The Company had net interest income of
$434,000 for the six months ended March 31, 2000 compared to net interest
income of $825,000 for the six months ended March 31, 1999. This decrease was
primarily attributable to lower interest income generated on a smaller
investment balance.
Provision for Income Taxes. Provision for income taxes decreased 33.1% to
$1.1 million for the six months ended March 31, 2000 from $1.7 million in the
six months ended March 31, 1999. The provision for income taxes for the six
months ended March 31, 2000 of 91.5% was impacted by other nonrecurring charges
for which no tax benefit can be recorded. Excluding these nonrecurring charges,
the Company's effective tax rate for the six months ended March 31, 2000 would
have been 41.5%. For the six months ended March 31, 1999, the Company's
effective tax rate was 39.0%. The future tax rate may vary due to a variety of
factors, including, but not limited to, the relative income contribution by
domestic and foreign operations, changes in statutory tax rates, the amount of
tax exempt interest income generated during the year, the inability to utilize
foreign tax credits and any non-deductible items related to acquisitions or
other nonrecurring charges. The Company will continue to monitor the effective
tax rate on a quarterly basis.
Liquidity and Capital Resources
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions and potential
contingent payments related to prior acquisitions. The Company maintains an $8
million revolving credit facility (the "Credit Facility") which matures May 27,
2000. The Credit Facility allows the Company to borrow the lesser of an amount
equal to 85% of eligible accounts receivable or $8 million. The Credit Facility
bears interest, at the Company's option, either at the adjusted LIBOR rate plus
2.5% per annum or an alternate base rate plus 0.5%. The alternate base rate is
the greater of the bank's prime rate or the federal funds effective rate plus
0.5%. The Credit Facility is secured by first priority liens and security
interests in substantially all of the Company's assets, including a pledge of
all stock of its domestic subsidiaries and a pledge of approximately 65% of the
stock of the Company's foreign subsidiaries. The Credit Facility contains
certain restrictive covenants, including limitations on the amount of loans the
Company may extend to officers and employees, the incurrence of additional debt
and a prohibition against the payment of dividends (other than dividends
payable in its stock). The Credit Facility requires the maintenance of certain
financial ratios, including a minimum quarterly net income requirement and a
minimum ratio of total liabilities to earnings before interest, taxes,
depreciation and amortization. As of March 31, 2000, the Company was in
compliance with all financial ratios and there were no borrowings outstanding
under the Credit Facility.
The Company (through one of its Australian subsidiaries) also maintains a
$2,000,000 revolving line of credit with St. George Bank Limited of Australia
(based on a current exchange rate of AU $1.63 to US $1.00). Under the terms of
the agreement, the principal balance of the credit line will reduce by
approximately $145,000 per quarter, beginning February 2000, to a maximum line
of approximately $1,226,000. The line of credit bears interest at fixed rates
that are set at the time of each drawdown on the line. As of March 31, 2000,
the available principal balance of the line of credit was reduced by two
letters of credit totaling approximately $74,000. In December 1999, the balance
of the line of credit was converted to a variable rate loan ("Loan"). The
variable rate is based upon the bank's prime rate less 1.25% (8.5% per annum as
of March 31, 2000) and interest is payable monthly. As of March 31, 2000, the
outstanding balance on the Loan was approximately $1,379,000. Among other
provisions, the Loan requires the Company to maintain certain minimum financial
ratios. As of March 31, 2000, the Company was in compliance with the Loan
covenants.
Net cash provided by operating activities was $2.5 million in the six months
ended March 31, 2000 and $1.6 million in the six months ended March 31, 1999.
The change is primarily attributable to a decrease in accounts receivable, net
of acquisitions, partially offset by payments of Australian and U.S. tax
liabilities and a net reduction in accounts payable and accrued liabilities,
excluding the impact of the SCA purchase price payable.
16
Net cash provided by in investing activities was $330,000 in the six months
ended March 31, 2000 as compared to net cash used in investing activities of
$12.4 million in the six months ended March 31, 1999. The change
is primarily attributable to the timing of the payment of the purchase price for
the recent acquisition of SCA. Capital expenditures, including equipment
acquired under capital lease, but excluding assets acquired or leased through
business combinations, were approximately $1.3 million in the six months ended
March 31, 2000 and $1.8 million in the six months ended March 31, 1999. The
Company anticipates that it may have increased capital expenditures depending
upon the number of future payment processing center operations.
Net cash provided by financing activities totaled $1.2 million in the six
months ended March 31, 2000 and $586,000 in the six months ended March 31,
1999. The increase in net cash provided by financing activities resulted
primarily from the borrowings under the Australian bank line of credit and
proceeds from the issuance of common stock, partially offset by the repurchase
of common stock.
The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, will be
adequate to fund the Company's operations for at least the next 12 months.
There can be no assurance that changes will not occur that would consume
available capital resources before such time. The Company's capital
requirements depend on numerous factors, including potential acquisitions,
contingent payments earned, new contracts, the timing of the receipt of
accounts receivable and employee growth. The Company's ability to obtain
replacement or additional credit facilities will depend upon prevailing market
conditions, the Company's financial condition and the terms and conditions of
such additional facilities. The Company is also involved in a contract dispute
with a prime contractor. On June 28, 1999, the Company filed a federal civil
action against the prime contractor for the amounts the Company is due under
the contract. On August 11, 1999, the Company received the prime contractor's
answer and counterclaim, in which the prime contractor denies the Company's
claim, alleges breach of contract by the Company and seeks declaratory relief
and damages in excess of $8 million. The Company denies the allegations and
intends to pursue its own claim against the prime contractor. At this time,
there can be no assurance as to the course of this dispute or its possible
resolution. In the event the prime contractor prevails in its action, the
Company's financial condition and results of operations would be materially and
adversely affected. To the extent that the Company's existing capital resources
are insufficient to meet its capital requirements, the Company will have to
raise additional funds. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all.
Factors That May Affect Future Results
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Form 10-
Q. Tier is referred to in this section as "we" or "us".
Variability of Quarterly Operating Results. Our revenues and operating
results are subject to significant variation from quarter to quarter due to a
number of factors, including:
. the accuracy of estimates of resources required to complete ongoing
projects,
. the number, size and scope of projects in which we are engaged,
. the contractual terms and degree of completion of such projects,
. start-up costs including software sublicense fees incurred in connection
with the initiation of large projects,
. our ability to staff projects with salaried employees versus hourly
independent contractors and sub-contractors,
. competitive pressures on the pricing of our services,
. any delays incurred in connection with, or early termination of, a
project,
. employee utilization rates,
. the number of billable days in a particular quarter,
17
. the adequacy of provisions for losses,
. the accuracy of estimated transaction volume in computing transaction
rates for payment processing center operations,
. demand for our services generated by strategic partnerships and certain
prime contractors,
. our ability to increase both the number and size of engagements from
existing clients, and
. economic conditions in the vertical and geographic markets we serve.
Due to the relatively long sales cycles for our services in the government
services market, the timing of revenue is difficult to forecast. In addition,
the achievement of anticipated revenues is substantially dependent on our
ability to attract, on a timely basis, and retain skilled personnel. A high
percentage of our operating expenses, particularly personnel and rent, are
fixed in advance. In addition, we typically reach the annual limitation on FICA
contributions for many of our consultants before the end of the calendar year.
As a result, payroll taxes as a component of cost of sales will vary from
quarter to quarter during the fiscal year and will generally be higher at the
beginning of the calendar year. Revenues are impacted by the amount of holidays
and vacations taken both within our consultant base and by our clients. As a
result, revenues will vary from quarter to quarter during the fiscal year.
Because of the variability of our quarterly operating results, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful, should not be relied upon as indications of future performance and
may result in volatility in the price of our Class B common stock. In addition,
our operating results will from time to time be below the expectations of
analysts and investors.
Potential Adverse Effect on Operating Results from Dependence on Large
Projects, Limited Clients or Certain Market Sectors. The completion,
cancellation or significant reduction in the scope of a large project or a
project with certain clients would have a material adverse effect on our
business, financial condition and results of operations. Most of our contracts
are terminable by the client following limited notice and without significant
penalty to the client. We have derived, and believe that we will continue to
derive, a significant portion of our revenues from a limited number of clients.
For the six months ended March 31, 2000, the District of Columbia accounted for
10.0% of the Company's revenues. The volume of work performed for specific
clients is likely to vary from period to period, and a major client in one
period may not use our services in a subsequent period. In addition, as a
result of our focus in specific vertical markets, economic and other conditions
that affect the companies in these markets could have a material adverse effect
on our business, financial condition and results of operations.
Dependence on Contracts with Government Agencies. For the six months ended
March 31, 2000, approximately 59.5% of our revenues were derived from sales to
government agencies. Such government agencies may be subject to budget cuts or
budgetary constraints or a reduction or discontinuation of funding. A
significant reduction in funds available for government agencies to purchase IT
services would have a material adverse effect on our business, financial
condition and results of operations. In addition, the loss of a major
government client, or any significant reduction or delay in orders by such
client, would have a material adverse effect on our business, financial
condition and results of operations.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. An
important component of our business strategy is to expand our presence in new
or existing markets by acquiring additional businesses. From December 1996
through March 31, 2000, we acquired fifteen businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or to integrate successfully any acquired businesses
without substantial expense, delay or other operational or financial problems.
Acquisitions involve a number of special risks, including:
. diversion of management's attention,
. failure to retain key personnel,
. increased general and administrative expenses,
. client dissatisfaction or performance problems with an acquired firm,
18
. assumption of unknown liabilities, and
. other unanticipated events or circumstances.
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations.
Inability to Manage Growth. If we are unable to manage our growth
effectively, such inability would have a material adverse effect on the quality
of our services, our ability to retain key personnel, and our business,
financial condition and results of operations. Our growth has placed, and is
expected to continue to place, significant demands on our management,
financial, staffing and other resources. We have expanded geographically by
opening new offices domestically and abroad, and intend to open additional
offices. Our ability to manage growth effectively will require us to continue
to develop and improve our operational, financial and other internal systems,
as well as our business development capabilities, and to train, motivate and
manage our employees. In addition, as the average size and number of our
projects continues to increase, we must be able to manage such projects
effectively. There can be no assurance that our rate of growth will continue or
that we will be successful in managing any such growth.
Failure to Estimate Accurately Fixed Price and Performance-Based
Contracts. Our failure to estimate accurately the resources or time required
for a fixed price project or the expected volume of transactions under a
performance-based contract could have a material adverse effect on our
business, financial condition and results of operations. Under fixed price
contracts, we receive our fee if we meet specified objectives such as
completing certain components of a system installation. For performance-based
contracts, we receive our fee on a per-transaction basis, such as the number of
child support payments processed. To earn a profit on these contracts, we rely
upon accurately estimating costs involved and assessing the probability of
meeting the specified objectives or realizing the expected number of
transactions within the contracted time period. If we fail to estimate
accurately the factors upon which we base our contract pricing, we may incur
losses on these contracts. During the six months ended March 31, 2000, 31.4% of
our revenues were generated on a fixed price basis and 10.5% of our revenues
were generated from performance-based contracts. We believe that the percentage
of revenues attributable to fixed price and performance-based contracts will
continue to be significant.
Substantial Competition in the IT Services Market. The IT services market is
highly competitive and is served by numerous international, national and local
firms. There can be no assurance that we will be able to compete effectively in
the market. Market participants include systems consulting and integration
firms, including national accounting firms and related entities, the internal
information systems groups of our prospective clients, professional services
companies, hardware and application software vendors, and divisions of large
integrated technology companies and outsourcing companies. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. In addition, there are relatively low barriers to entry into the IT
services market, and we have faced, and expect to continue to face, additional
competition from new entrants into the IT services market.
We believe that the principal competitive factors in the IT services market
include:
. reputation,
. project management expertise,
. industry expertise,
. speed of development and implementations,
. technical expertise,
. competitive pricing, and
. the ability to deliver results on a fixed price and transaction basis as
well as a time and materials basis.
19
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
. the ability of our clients or competitors to hire, retain and motivate
project managers and other senior technical staff,
. the ownership by competitors of software used by potential clients,
. the price at which others offer comparable services,
. the ability of our clients to perform the services themselves, and
. the extent of our competitors' responsiveness to client needs.
Our inability to compete effectively on these competitive factors would have
a material adverse effect on our business, financial condition and results of
operations.
Inability to Attract and Retain Professional Staff Necessary to Existing and
Future Projects. If we are unable to attract, retain and train skilled
employees, such inability could impair our ability to adequately manage and
staff our existing projects and to bid for or obtain new projects, which would
have a material adverse effect on our business, financial condition and results
of operation. In addition, the failure of our employees to achieve expected
levels of performance could adversely affect our business. Our success depends
in large part upon our ability to attract, retain, train, manage and motivate
skilled employees, particularly project managers and other senior technical
personnel. There is significant competition for employees with the skills
required to perform the services we offer. In particular, qualified project
managers and senior technical and professional staff are in great demand
worldwide and competition for such persons is likely to increase. In addition,
we require that many of our employees travel to client sites to perform
services on our behalf, which may make a position with us less attractive to
potential employees. There can be no assurance that a sufficient number of
skilled employees will continue to be available, or that we will be successful
in training, retaining and motivating current or future employees.
Dependence on Key Personnel. Our success depends in large part upon the
continued services of a number of key employees. Although we have entered into
employment agreements with certain key employees, these employees may terminate
their employment agreements at any time. The loss of the services of any key
employee could have a material adverse effect on our business. In addition, if
one or more of our key employees resigns to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of
existing or potential clients to any such competitor could have a material
adverse effect on our business, financial condition and results of operations.
Control of Company and Corporate Actions by Principal
Shareholders. Concentration of voting control could have the effect of delaying
or preventing a change in control of us and may affect the market price of our
stock. All of the holders of Class A common stock have entered into a Voting
Trust with respect to their shares of Class A common stock, which represents
58.7% of the total common stock voting power at March 31, 2000. All power to
vote shares held in the Voting Trust has been vested in the Voting Trust's sole
remaining trustee, James L. Bildner, following William G. Barton's resignation
as a trustee in April 2000. As a result, Mr. Bildner will be able to control
the outcome of all corporate actions requiring shareholder approval, including
changes in our equity incentive plan, the election of a majority of our
directors, proxy contests, mergers, tender offers, open-market purchase
programs or other purchases of common stock that could give holders of our
Class B common stock the opportunity to realize a premium over the then-
prevailing market price for their shares of Class B common stock.
Potential Costs or Claims Resulting from Project Performance. Many of our
engagements involve projects that are critical to the operations of our
clients' businesses and provide benefits that may be difficult to quantify. The
failure by us, or of the prime contractor on an engagement in which we are a
subcontractor, to meet a client's expectations in the performance of the
engagement could damage our reputation and adversely affect our ability to
attract new business, and could have a material adverse effect upon our
business, financial condition and results of operations. We have undertaken,
and may in the future undertake, projects in which we guarantee performance
based upon defined operating specifications or guaranteed delivery dates.
Unsatisfactory
20
performance or unanticipated difficulties or delays in completing such projects
may result in client dissatisfaction and a reduction in payment to, or payment
of damages (as a result of litigation or otherwise) by us, which could have a
material adverse effect upon our business, financial condition and results of
operations. In addition, unanticipated delays could necessitate the use of more
resources than we initially budgeted for a particular project, which also could
have a material adverse effect upon our business, financial condition and
results of operations.
Delay or Failure to Develop New IT Solutions. Our success will depend in
part on our ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. There can be no assurance that we will be successful in developing
such IT solutions in a timely manner or that if developed we will be successful
in the marketplace. Delay in developing or failure to develop new IT solutions
would have a material adverse effect on our business, financial condition and
results of operations.
Failure to Manage and Expand International Operations. For the six months
ended March 31, 2000, international operations accounted for 38.4% of our total
revenues. We believe that the percentage of total revenues attributable to
international operations will continue to be significant. In addition, a
significant portion of our sales are to large multinational companies. To meet
the needs of such companies, both domestically and internationally, we must be
able to provide worldwide services, either directly or indirectly. As a result,
we intend to expand our existing international operations and may enter
additional international markets, which will require significant management
attention and financial resources and could adversely effect our operating
margins and earnings. In order to expand international operations, we will need
to hire additional personnel and develop relationships with potential
international clients through acquisition or otherwise. To the extent that we
are unable to do so on a timely basis, our growth in international markets
would be limited, and our business, financial condition and results of
operations would be materially and adversely affected.
Our international business operations are subject to a number of risks,
including, but not limited to, difficulties in building and managing foreign
operations, enforcing agreements and collecting receivables through foreign
legal systems, longer payment cycles, fluctuations in the value of foreign
currencies and unexpected regulatory, economic or political changes in foreign
markets. There can be no assurance that these factors will not have a material
adverse effect on our business, financial condition and results of operations.
Liquidity and Capital Resources. The Company anticipates that its existing
capital resources, including cash provided by operating activities and
available bank borrowings, will be adequate to fund the Company's operations
for at least the next 12 months. There can be no assurance that changes will
not occur that would consume available capital resources before such time. The
Company's capital requirements depend on numerous factors, including potential
acquisitions, contingent payments earned, new contracts, the timing of the
receipt of accounts receivalbe and employee growth. The Company's current bank
facility expires May 27, 2000. The Company is currently negotiating an
extension and/or renewal of this facility. The Company's ability to obtain
renewed or replacement credit facilities will depend upon prevailing market
conditions, the Company's financial condition and the terms and conditions of
such renewed or replacement facilities.
Potential Volatility of Stock Price. A public market for our Class B common
stock has existed only since the initial public offering of the Class B common
stock in December 1997. There can be no assurance that an active public market
will be sustained. The market for securities of early stage companies has been
highly volatile in recent years as a result of factors often unrelated to a
company's operations, including:
. quarterly variations in operating results,
. announcements of technological innovations or new products or services
by us or our competitors,
. general conditions in the IT industry or the industries in which our
clients compete,
. changes in earnings estimates by securities analysts, and
. general economic conditions such as recessions or high interest rates.
21
Further, in the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against the issuing company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on our business, financial condition
and results of operations. Any adverse determination in such litigation could
also subject us to significant liabilities. There can be no assurance that such
litigation will not be instituted in the future against us.
Insufficient Insurance Coverage for Potential Claims. Any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. There can be no assurance
that the limitations of liability set forth in our service contracts will be
enforceable or will otherwise protect us from liability for damages. Although
we maintain general liability insurance coverage, including coverage for errors
or omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms, will be available in sufficient amounts to cover
one or more claims or that the insurer will not disclaim coverage as to any
future claim. The successful assertion for one or more claims against us that
exceed available insurance coverage or changes in our insurance policies,
including premium increases or the imposition of large deductible or co-
insurance requirements, would adversely affect our business, financial
condition and results of operations.
Dependence on Third Parties in Performing Certain Client Engagements. We
sometimes perform client engagements using third parties. We often join with
other organizations to bid and perform an engagement. In these engagements, we
may engage subcontractors or we may act as a subcontractor to the prime
contractor of the engagement. We also use third party software or technology
providers to jointly bid and perform engagements. In these situations, we
depend on the software, resources and technology of these third parties in
order to perform the engagement. There can be no assurance that actions or
failures attributable to these third parties or to the prime contractor or
subcontractor will not also negatively affect our business, financial condition
or results of operations. In addition, the refusal or inability of these third
parties to permit continued use of their software, resources or technology by
us, or the discontinuance or termination by the prime contractor of our
services or the services of a key subcontractor, would have a material adverse
effect on our business, financial condition and results of operations.
Inability to Protect Proprietary Intellectual Property. The steps we take to
protect our intellectual property rights may be inadequate to avoid the loss or
misappropriation of such information, or to detect unauthorized use of such
information. We rely on a combination of nondisclosure and other contractual
arrangements, and copyright, trade secret and trademark laws to protect our
intellectual property rights. We also enter into confidentiality agreements
with our employees, generally require that our consultants and clients enter
into such agreements and limit access to our proprietary information.
Issues relating to the ownership of, and rights to use, software and
application frameworks can be complicated, and there can be no assurance that
disputes will not arise that affect our ability to resell or reuse such
software and application frameworks. A portion of our business involves the
development of software applications for specific client engagements. Ownership
of such software is the subject of negotiation with each particular client and
is typically assigned to the client. We also develop software application
frameworks, and may retain ownership or marketing rights to these application
frameworks, which may be adapted through further customization for future
client projects. Certain clients have prohibited us from marketing the software
and application frameworks developed for them entirely or for specified periods
of time or to specified third parties, and there can be no assurance that
clients will not demand similar or other restrictions in the future.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against us in the future, or that if asserted, any
such claim will be successfully defended.
22
Issuance of Preferred Stock May Prevent Change in Control and Adversely
Affect Market Price for Class B Common Stock. The Board of Directors has the
authority to issue preferred stock and to determine the preferences,
limitations and relative rights of shares of preferred stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by our shareholders. The preferred stock
could be issued with voting, liquidation, dividend and other rights superior to
the rights of our Class B common stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discourage bids for the
Class B common stock at a premium over the market price and adversely affect
the market price and the voting and other rights of the holders of our Class B
common stock.
No Current Intention to Declare or Pay Dividends. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against the
U.S. dollar and currencies of the Company's subsidiaries and operations in
Australia and the United Kingdom.
Foreign Currency Exchange Rate Risk. The Company has wholly owned
subsidiaries in Australia and conducts operations in the United Kingdom through
a U.S.-incorporated subsidiary. Revenues from these operations are typically
denominated in Australian Dollars or British Pounds, respectively, thereby
potentially affecting the Company's financial position, results of operations
and cash flows due to fluctuations in exchange rates. The Company does not
anticipate that near-term changes in exchange rates will have a material impact
on future earnings, fair values or cash flows of the Company and has not
engaged in foreign currency hedging transactions for the six months ended March
31, 2000. There can be no assurance that a sudden and significant decline in
the value of the Australian Dollar or British Pound would not have a material
adverse effect on the Company's financial condition and results of operations.
23
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, the Company released 24,972 shares of Class B Common Stock
from escrow as partial payment for the achievement of certain performance
targets in accordance with the purchase agreement for Infact Pty Limited.
In March 2000, the Company issued 98,291 shares of Class B Common Stock as
partial payment for the achievement of certain performance targets in
accordance with the purchase agreement for ADC Consultants Pty Limited.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were adopted or rejected by the margins indicated at
Tier's Annual Meeting of Shareholders held on January 11, 2000.
Votes
Proposal Voted For Withheld Abstentions
-------- ---------- -------- -----------
1. To elect a Board of Directors to hold
office until the next Annual Meeting of
Shareholders or until their respective
successors have been elected or approved:
- James L. Bildner........................ 25,595,901 105,837 --
- William G. Barton....................... 25,594,401 107,337 --
- Samuel Cabot III (a).................... 9,198,432 105,686 --
- Ronald L. Rossetti (a).................. 9,214,782 89,336 --
- Morgan P. Guenther...................... 25,611,002 90,736 --
- William C. VanFaasen.................... 25,612,452 89,286 --
2. To approve an amendment to the Company's
Employee Stock Purchase Plan, to increase
the number of shares of Class B Common
Stock authorized and reserved for issuance
under the plan from 100,000 to 300,000
shares..................................... 25,544,875 138,607 18,256
3. To ratify the selection of
PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year
ending September 30, 2000.................. 25,511,362 112,339 78,037
- --------
(a) Class B Director
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.64 Separation Agreement by and between the Registrant and George K. Ross,
dated as of January 21, 2000.
10.65 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of January 24, 2000.
10.66 Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of March 27, 2000. (Assignment of the Note by and
between the Registrant and William G. Barton, previously filed as
Exhibit 10.17 to Form S-1.)
10.67 Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of March 27, 2000. (Assignment of the Note by and
between the Registrant and William G. Barton, previously filed as
Exhibit 10.18 to Form S-1.)
10.68 Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of March 27, 2000. (Assignment of the Note by and
between the Registrant and William G. Barton, previously filed as
Exhibit 10.19 to Form S-1.)
10.69 Pledge Agreement by and between the Registrant and James L. Bildner,
dated as of March 27, 2000.
10.70 Third Amendment to Amended and Restated Revolving Credit Agreement,
dated as of March 31, 2000, by and between the Registrant, Tier
Technologies (United Kingdom) Inc. and BankBoston, NA.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended March 31, 2000.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tier Technologies, Inc.
Dated: May 15, 2000
/s/ Laura B. DePole
By: _________________________________
Laura B. DePole
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
26
EXHIBIT INDEX
Exhibit
Number Description Page
------- ----------- ----
10.64 Separation Agreement by and between the Registrant and George K.
Ross, dated as of January 21, 2000..............................
10.65 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of January 24, 2000.................
10.66 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.17 to Form S-1.).................
10.67 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.18 to Form S-1.).................
10.68 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.19 to Form S-1.).................
10.69 Pledge Agreement by and between the Registrant and James L.
Bildner, dated as of March 27, 2000.............................
10.70 Third Amendment to Amended and Restated Revolving Credit
Agreement, dated as of March 31, 2000, by and between the
Registrant, Tier Technologies (United Kingdom) Inc. and
BankBoston, NA..................................................
27.1 Financial Data Schedule.........................................
27