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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
_________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
_________
Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
_________
California 94-3145844
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 January 31, 2001, the number of shares outstanding of the Registrant's
Class A Common Stock was 1,082,824 and the number of shares outstanding of the
Registrant's Class B Common Stock was 11,607,077.
This report contains a total of 24 pages of which this page is number 1.
1
TIER TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I--FINANCIAL INFORMATION
Page
-----
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2000 and September 30, 2000 ........... 3
Condensed Consolidated Statements of Operations for the three months ended
December 31, 2000 and 1999 ..................................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
December 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 .......... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 21
Part II--OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................. 23
Item 6. Exhibits and Reports on Form 8-K ............................................................... 23
Signatures ............................................................................................. 24
Private Securities Litigation Reform Act 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" within the meaning of federal
securities laws. 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 the "Factors that May
Affect Future Results" section, as set forth beginning on page 15 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)
December 31, September 30,
2000 2000
------------ -------------
ASSETS
------
Current assets:
Cash and cash equivalents .............................................. $ 11,494 $ 10,256
Short-term investments.................................................. 6,583 9,657
Accounts receivable, net................................................ 28,200 24,718
Prepaid expenses and other current assets............................... 3,198 3,322
-------- --------
Total current assets............................................... 49,475 47,953
Equipment and software, net.................................................. 5,477 5,914
Notes and accrued interest receivable from related parties................... 1,938 1,924
Intangible assets, net....................................................... 39,048 40,126
Other assets................................................................. 5,267 5,245
-------- --------
Total assets....................................................... $101,205 $101,162
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................................ $ 3,530 $ 4,314
Accrued liabilities..................................................... 1,808 2,389
Accrued subcontractor expenses.......................................... 2,291 1,597
Accrued compensation and related liabilities............................ 3,830 4,321
Purchase price payable.................................................. 6,020 12,345
Other current liabilities............................................... 2,004 1,642
-------- --------
Total current liabilities.......................................... 19,483 26,608
Borrowings and capital lease obligations, less current portion............... 6,373 1,385
Purchase price payable....................................................... 4,225 3,892
-------- --------
Total liabilities.................................................. 30,081 31,885
-------- --------
Shareholders' equity:
Common stock, no par value.............................................. 66,026 65,937
Notes receivable from shareholders...................................... (1,773) (1,773)
Deferred compensation................................................... (58) (117)
Accumulated other comprehensive loss.................................... (3,208) (3,571)
Retained earnings....................................................... 10,137 8,801
-------- --------
Total shareholders' equity......................................... 71,124 69,277
-------- --------
Total liabilities and shareholders' equity......................... $101,205 $101,162
======== ========
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 Ended
December 31,
---------------------
2000 1999
------- -------
Revenues ......................................................... $30,321 $24,613
Cost of revenues.................................................. 19,548 14,847
------- -------
Gross profit...................................................... 10,773 9,766
Costs and expenses:
Selling and marketing........................................... 1,659 1,488
General and administrative...................................... 5,262 5,669
Other nonrecurring charges...................................... -- 1,750
Depreciation and amortization................................... 1,788 1,258
------- -------
Income (loss) from operations..................................... 2,064 (399)
Interest income (expense), net.................................... 220 237
------- -------
Income (loss) before income taxes................................. 2,284 (162)
Provision for income taxes........................................ 948 548
------- -------
Net income (loss)................................................. $ 1,336 $ (710)
======= =======
Basic net income (loss) per share................................. $ 0.11 $ (0.06)
======= =======
Shares used in computing basic net income (loss) per share........ 12,488 12,230
======= =======
Diluted net income (loss) per share............................... $ 0.11 $ (0.06)
======= =======
Shares used in computing diluted net income (loss) per share...... 12,664 12,230
======= =======
See Notes to Condensed Consolidated Financial Statements
4
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
December 31,
------------------
2000 1999
------- -------
Net cash provided by (used in) operating activities ........................................ $ (250) $ 3,711
------- -------
Investing activities:
Purchases of equipment and software......................................................... (644) (717)
Notes and accrued interest receivable from related parties.................................. (166) (163)
Repayment on notes and accrued interest receivable from related parties..................... 114 100
Business combinations, net of cash acquired................................................. (5,932) (3,862)
Restricted cash............................................................................. -- (131)
Purchases of available-for-sale securities.................................................. (4,589) (824)
Sales and maturities of available-for-sale securities....................................... 7,664 1,032
Other assets................................................................................ -- 169
------- -------
Net cash used in investing activities....................................................... (3,553) (4,396)
------- -------
Financing activities:
Borrowings under bank lines of credit....................................................... 5,000 1,302
Repurchases of common stock................................................................. -- (281)
Issuance of Class B common stock............................................................ 88 180
Payments on capital lease obligations and notes payable to shareholders..................... (82) (90)
------- -------
Net cash provided by financing activities................................................... 5,006 1,111
------- -------
Effect of exchange rate changes on cash..................................................... 35 (101)
------- -------
Net increase in cash and cash equivalents................................................... 1,238 325
Cash and cash equivalents at beginning of period............................................ 10,256 10,121
------- -------
Cash and cash equivalents at end of period.................................................. $11,494 $10,446
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................................. $ 121 $ 100
======= =======
Income taxes paid (refunded), net......................................................... $ 247 $ 1,288
======= =======
Equipment acquired under capital lease obligations.......................................... $ -- $ 54
======= =======
Assumed liabilities related to business combinations........................................ $ -- $ 812
======= =======
Conversion of Class A common stock to Class B common stock.................................. $ 171 $ 93
======= =======
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 7, 2000 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 ended December 31,
2000 are not necessarily indicative of results that may be expected for the
fiscal year ending September 30, 2001 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 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. For the three months ended December 31,2000, revenues from one
client totaled approximately $6,077,000 which represented 20.0% of total
revenues.
Unbilled receivables represent revenue recognized in excess of amounts
billed in accordance with contractual billing terms. Unbilled receivables were
$12,041,000 and $9,567,000 at December 31, 2000 and September 30, 2000,
respectively. Unbilled receivables at December 31, 2000 and September 30, 2000
include $1,945,000 and $2,145,000, respectively, that is not billable for more
than one year under the terms of the contract. Unbilled receivables for two
clients accounted for 12.1% and 10.9% of total net accounts receivable at
December 31, 2000.
Worldwide revenues derived from sales to governmental agencies were
$18,759,000 and $15,019,000 for the three months ended December 31, 2000 and
1999, respectively.
6
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3--ACQUISITIONS
Simsion Bowles & Associates
In December 2000, the Company amended the purchase agreement with Simsion
Bowles & Associates establishing the first year contingent payment at
approximately $602,000 in cash due July 2001 (based on a December 31, 2000
exchange rate of AU $1.80 to US $1.00). Interest will accrue on approximately
$338,000 of this contingent payment beginning December 30, 2000 at the same rate
as the St. George Bank Limited of Australia loan (9% at December 31, 2000).
The SCA Group, Inc. and Harris Chapman
In November 2000, the Company paid approximately $5.4 million of the
initial purchase price for the March 1, 2000 acquisition of The SCA Group, Inc.
and Harris Chapman, of which $5 million was borrowed on the credit facility (See
Note 4).
NOTE 4--BANK LINES OF CREDIT
At December 31, 2000, the Company had a $10 million revolving credit
facility which has a maturity date of August 26, 2002. The total commitment
amount is limited to 85% of eligible accounts receivable plus 50% of up to $6
million of eligible unbilled receivables. The credit facility is secured by
first priority liens and security interests in the Company's assets (excluding
assets owned by Tier Technologies (Australia) Pty Ltd., Simsion Bowles &
Associates ("SBA") and ADC Consultants Pty Ltd.), including a pledge of 65% of
the stock of the Company's subsidiaries excluding SBA. Interest is based on
either the adjusted LIBOR rate plus 2.5% or the lender's announced prime rate
plus 0.25%, at the Company's option and is payable monthly. As of December 31,
2000, the interest rate was 9.75% per annum and the outstanding borrowings were
$5 million. Among other provisions, the credit facility requires the Company to
maintain certain minimum financial ratios. As of December 31, 2000, the Company
was in compliance with all financial ratios.
At December 31, 2000, the Company (through one of its Australian
subsidiaries) had a credit facility that included a $1.4 million revolving line
of credit with St. George Bank Limited of Australia (based on a December 31,
2000 exchange rate of AU $1.80 to US $1.00). Under the terms of the credit
facility, the principal balance of the credit line will be reduced by
approximately $131,000 per quarter to a maximum line of approximately $1.1
million. The line of credit bears interest at fixed rates that are set at the
time of each drawdown on the line. 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% (9% per annum as of December 31,
2000) and interest is payable monthly. As of December 31, 2000, the outstanding
balance of the Loan was approximately $1.4 million. The credit facility also
provides for the issuance of letters of credit up to $155,000. Letters of credit
totaling $152,000 were outstanding as of December 31, 2000. Among other
provisions, the credit facility requires the Company's subsidiary to maintain
certain minimum financial ratios. As of December 31, 2000, the Company was in
compliance with the provisions of this credit facility.
7
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 5 -- NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
Three Months Ended
December 31,
------------------------------
2000 1999
------- -------
(in thousands, except per share data)
Numerator:
Net income (loss).................................. $ 1,336 $ (710)
======= =======
Denominator for basic net income (loss) per share-
weighted average common shares outstanding............. 12,488 12,230
Effects of dilutive securities:
Common stock options............................... 160 --
Common stock contingently issuable ................ 16 --
------- -------
Denominator for diluted net income (loss) per share-
adjusted weighted average common shares and
assumed conversions.................................... 12,664 12,230
======= =======
Basic net income (loss) per share........................ $ 0.11 $ (0.06)
======= =======
Diluted net income (loss) per share...................... $ 0.11 $ (0.06)
======= =======
Options to purchase approximately 2,662,000 shares of Class B common stock
at prices ranging from $6.31 to $17.81 per share were not included in the
computation of diluted net income per share for the three months ended December
31, 2000 because the options exercise prices were greater than the average
market price of the shares for this period. For the three months ended December
31, 1999, options to purchase approximately 4,055,000 shares of Class B common
stock and common stock equivalents of 250,000 shares were excluded from the
calculation of diluted net loss per share since their effect would have been
anti-dilutive.
NOTE 6--COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
Three Months Ended
December 31,
--------------------
2000 1999
------ ------
(in thousands)
Net income (loss) ................................ $1,336 $(710)
Foreign currency translation adjustment .......... 363 (197)
------ -----
Comprehensive income (loss) ...................... $1,699 $(907)
====== =====
8
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 7--OTHER NONRECURRING CHARGES
In December 1999, the Company's Board of Directors approved a plan to sell
or dispose of its United Kingdom ERP business. The write-down of certain assets
associated with this business is included in other nonrecurring charges after
reflecting projected proceeds from a potential sale. Also included in other
nonrecurring charges are severance costs for a former officer.
NOTE 8--ALLIANCE AGREEMENT
In September 1999, the Company entered into a long-term strategic alliance
("Alliance Agreement"), with Siemens Business Services Limited ("SBS"). Under
this Alliance Agreement, the Company has two existing contracts--the Application
Service Center ("ASC") contract and the Consulting contract. Beginning January
1, 2001, under the amended ASC contract, the Company has committed to utilizing
a minimum amount of resources from the 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 ASC contract shall not exceed $16.1 million (based on the
December 31, 2000 exchange rate of GBP 0.67 to US $1.00) over the life of the
contract. Through December 31, 2000, there were no minimum utilization
requirements under the ASC contract. Under the Consulting contract, the Company
bills for its professional services on a time and materials basis. Pursuant to
the Consulting contract, SBS guaranteed that it would engage the Company to
provide a minimum of $10.5 million (based on the December 31, 2000 exchange rate
of GBP 0.67 to US $1.00) for consultancy services over the life of the
Consulting contract. Through December 31, 2000, the company has recognized a
total of $12.6 million under the Consulting contract (based on the December 31,
2000 exchange rate of GBP 0.67 to US $1.00).
NOTE 9--SEGMENT INFORMATION
The Company is managed through 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 (net revenue less direct costs), while other
operating costs are evaluated on a geographic 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) and income
tax expense in segment profitability. The table below presents financial
information for the four reportable segments:
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Total
----------- ----------- ---------- ---------- ---------
(in thousands)
Three Months Ended December 31, 2000:
Revenues.................................... $7,133 $11,918 $5,182 $6,088 $30,321
Gross profit................................ 3,159 4,608 1,696 1,310 10,773
Three Months Ended December 31, 1999:
Revenues.................................... $3,502 $12,126 $6,658 $2,327 $24,613
Gross profit................................ 1,140 5,195 2,523 908 9,766
9
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 10--ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective October 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. The adoption of FAS 133
did not impact the Company's consolidated financial statements as the Company
does not currently hold any derivative instruments, including derivative
instruments embedded in other contracts.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS
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 fourth quarter of fiscal year
2001. The Company does not expect that the adoption of SAB 101 will have a
significant impact on the consolidated financial statements.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. The accounting standards of FAS 140 are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has not yet determined the impact,
if any, that the adoption of FAS 140 will have on the consolidated financial
statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Tier is a vertically focused global consulting firm that delivers end-to-
end business solutions to its national and multinational clients. The Company
provides business solutions utilizing a variety of delivery offerings that are
tailored to specific client industries and governmental agencies, and include
solutions that link systems and technology improvements to increased operating
efficiencies. Through offices located in the United States, Australia and the
United Kingdom, the Company works closely with its Fortune 1000, government and
other clients to determine, evaluate and implement strategies that allow it to
rapidly channel emerging technologies into business operations. The Company's
revenues increased to $30.3 million in the three months ended December 31, 2000
from $24.6 million in the three months ended December 31, 1999. A significant
portion of the Company's revenues are derived from sales to government agencies.
For the three months ended December 31, 2000, approximately 61.9% of the
Company's revenues were derived from sales to government agencies, as compared
to 61.0% for the three months ended December 31, 1999. The Company's workforce,
composed of employees, independent contractors and subcontractors, has grown to
976 on December 31, 2000 from 877 on December 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 16.7% and 35.2% for
the three months ended December 31, 2000 and 1999, respectively. The percentage
of revenues generated on a per-transaction basis was 25.0% and 11.0% for the
three months ended December 31, 2000 and 1999, respectively. The Company
believes that the percentage of total revenues attributable to fixed price and
per-transaction based contracts will continue to be significant. 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,
percent complete or gross profit margins. If the Company significantly
overestimates the volume for transaction-based contracts or underestimates the
resources or time required for fixed price and per-transaction based contracts,
its financial condition and results of operations would be materially and
adversely affected. Unsatisfactory performance or unanticipated difficulties or
delays in completing 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.
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 three months ended December 31, 2000, Siemens Business Services
accounted for 20.0% 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
could 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.
11
From December 1996 through December 31, 2000, the Company made fifteen
acquisitions for a total cost of approximately $53.4 million in cash and shares
of Class B common stock, excluding future contingent payments relating to such
acquisitions. The Company also incurred $2.5 million in compensation charges
related to business combinations 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, delivery offerings and
technical expertise and to supplement its human resources.
International operations accounted for 37.2% and 36.5% of revenues for the
three months ended December 31, 2000 and 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 summarizes the Company's operating results as a
percentage of revenues for each of the periods indicated:
Three Months
Ended December 31,
--------------------
2000 1999
------ ------
Revenues............................................................................ 100.0% 100.0%
Cost of revenues.................................................................... 64.5 60.3
------ ------
Gross profit........................................................................ 35.5 39.7
Costs and expenses:
Selling and marketing............................................................. 5.5 6.0
General and administrative........................................................ 17.3 23.1
Other nonrecurring charges........................................................ -- 7.1
Depreciation and amortization..................................................... 5.9 5.1
------ ------
Income (loss) from operations....................................................... 6.8 (1.6)
Interest income (expense), net...................................................... 0.7 0.9
------ ------
Income (loss) before income taxes................................................... 7.5 (0.7)
Provision for income taxes.......................................................... 3.1 2.2
------ ------
Net income (loss)................................................................... 4.4% (2.9)%
====== ======
Three Months Ended December 31, 2000 and December 31, 1999
Revenues. Revenues are generated primarily by providing professional
consulting and processing services on client engagements. Revenues increased
23.2% to $30.3 million for the three months ended December 31, 2000 from $24.6
million in the three months ended December 31, 1999. This increase resulted
primarily from multiple acquisitions and growth in United Kingdom operations
resulting from increased revenues under the Alliance Agreement with Siemens
Business Services.
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-related expenditures, and any project-related
equipment, hardware or software purchases. For payment processing center
operations, cost of revenues also include facility, equipment and direct
overhead costs. Gross profit increased 10.3% to $10.8 million for the three
months ended December 31, 2000 from $9.8 million for the three months ended
December 31, 1999. Gross profit margin decreased to 35.5% for the
12
three months ended December 31, 2000 as compared to 39.7% for the three months
ended December 31, 1999. This decrease resulted primarily from increased revenue
from United Kingdom operations which have a higher use of subcontractors
resulting in lower gross profit margins.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, advertising and marketing expenditures, and
travel-related expenditures. Selling and marketing expenses increased 11.5% to
$1.7 million for the three months ended December 31, 2000 from $1.5 million for
the three months ended December 31, 1999. As a percentage of revenues, selling
and marketing expenses decreased to 5.5% for the three months ended December 31,
2000 from 6.0% for the three months ended December 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 and
investments in its marketing and branding initiatives. 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 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, resource management, staffing, accounting and
finance, legal, and information systems, as well as professional fees related to
legal, audit, tax, external financial reporting and investor relations matters.
General and administrative expenses decreased 7.2% to $5.3 million for the three
months ended December 31, 2000 from $5.7 million for the three months ended
December 31, 1999. As a percentage of revenues, general and administrative
expenses decreased to 17.3% for the three months ended December 31, 2000 from
23.1% in the three months ended December 31, 1999. The decrease in general and
administrative expenses, both in total dollars and as a percentage of revenues,
was attributable primarily to a higher percentage of labor dollars charged to
project-related activities, the cost of which is included in the cost of
revenues. Included in general and administrative expenses is compensation charge
related to business combinations of $58,000 and $60,000 for the three months
ended December 31, 2000 and 1999, respectively. These charges 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.
Other Nonrecurring Charges. The other nonrecurring charges of $1.8 million
for the three months ended December 31, 1999, resulted primarily from the write-
down of the United Kingdom ERP business which the Company sold in the second
quarter of fiscal year 2000 and severance costs for a former officer. The United
Kingdom ERP business write-down was adjusted for projected sales proceeds.
Depreciation and Amortization. Depreciation and amortization consists
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 42.1% to $1.8 million for the three months ended December 31, 2000
from $1.3 million for the three months ended December 31, 1999. As a percentage
of revenues, depreciation and amortization increased to 5.9% for the three
months ended December 31, 2000 from 5.1% for the three months ended December 31,
1999. The increase in total depreciation and amortization expense was primarily
attributable to the amortization of increased intangible assets from business
combinations. The Company expects that depreciation and amortization will
continue to increase in absolute dollars, although it may vary as a percentage
of revenues.
Interest Income (Expense), Net. Net interest income decreased 7.2% to
$220,000 for the three months ended December 31, 2000 compared to net interest
income of $237,000 for the three months ended December 31, 1999. This decrease
was primarily attributable to interest expense incurred on bank borrowings.
Provision for Income Taxes. The provision for income taxes was $948,000 for
the three months ended December 31, 2000 and $548,000 for the three months ended
December 31, 1999. For the three months ended December 31, 2000, the Company's
effective tax rate was 41.5%. The provision for income taxes for the three
months ended December 31, 1999 was impacted by other nonrecurring charges for
which no tax benefit could be recorded. The effective tax rate in the upcoming
quarters and for the year ending September 30, 2001 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 ability to utilize
foreign tax
13
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 a $10
million revolving credit facility (the "Credit Facility") that expires on August
26, 2002. The Credit Facility allows the Company to borrow the lesser of $10
million or an amount equal to 85% of eligible accounts receivable plus 50% of up
to $6 million of eligible unbilled receivables. The Credit Facility bears
interest at the adjusted LIBOR rate plus 2.5% or the lender's announced prime
rate plus 0.25%, at the Company's option. The Credit Facility is secured by
first priority liens and security interests in the Company's assets (excluding
assets owned by Tier Technologies (Australia) Pty Ltd., Simsion Bowles &
Associates ("SBA") and ADC Consultants Pty Ltd.), including a pledge of 65% of
the stock of the Company's subsidiaries excluding SBA. The Credit Facility
contains certain restrictive covenants, including, but not limited to,
limitations on the amount of loans the Company may extend to officers and
employees and the incurrence of additional debt. The Credit Facility requires
the maintenance of certain financial covenants, including a minimum quarterly
net income requirement, minimum tangible net worth, a minimum ratio of debt to
tangible net worth and a minimum quick ratio. As of December 31, 2000, the
Company was in compliance with the covenants of the Credit Facility. As of
December 31, 2000, the interest rate was 9.75% and outstanding borrowings
totaled $5 million.
The Company (through one of its Australian subsidiaries) also maintains a
credit facility that includes a $1.4 million revolving line of credit with St.
George Bank Limited of Australia (based on a December 31, 2000 exchange rate of
AU $1.80 to US $1.00). Under the terms of the credit facility, the principal
balance of the credit line will be reduced by approximately $131,000 per quarter
to a maximum line of approximately $1.1 million. The line of credit bears
interest at fixed rates that are set at the time of each drawdown on the line.
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% (9% per annum as of December 31, 2000) and interest is payable monthly. As
of December 31, 2000, the outstanding balance of the Loan was approximately $1.4
million. The credit facility also provides for the issuance of letters of credit
up to $155,000. Letters of credit totaling $152,000 were outstanding as of
December 31, 2000. Among other provisions, the credit facility requires the
Company to maintain certain minimum financial ratios. As of December 31, 2000,
the Company was in compliance with the provisions of this credit facility.
Net cash used in operating activities was $250,000 in the three months
ended December 31, 2000 as compared to net cash provided by operating activities
of $3.7 million in the three months ended December 31, 1999. The decrease in net
cash provided by operating activities is largely attributable to the increase in
unbilled receivables and decreases in payables.
Net cash used in investing activities was $3.5 million and $4.4 million in
the three months ended December 31, 2000 and December 31, 1999, respectively.
The decrease in cash used in investing activities is primarily attributable to a
decrease in investment balances, partially offset by increased purchase price
payments related to business combinations. Capital expenditures, including
equipment acquired under capital leases but excluding assets acquired or leased
through business combinations, were approximately $644,000 in the three months
ended December 31, 2000 and $771,000 in the three months ended December 31,
1999. The Company anticipates that it will continue to have significant capital
expenditures in the near-term related to, among other things, purchases of
computer equipment to enhance the Company's global operations and support its
growth, as well as potential expenditures related to new office leases and the
establishment of child support payment processing and other Vertical Application
Service Provider centers.
Net cash provided by financing activities totaled $5.0 million in the three
months ended December 31, 2000 and $1.1 million in the three months ended
December 31, 1999. The net cash provided by financing activities for the three
months ended December 31, 2000 results primarily from bank borrowings.
14
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 and capital
resources depend on numerous factors, including potential acquisitions,
contingent payments earned, new and existing contract requirements, the timing
of the receipt of accounts receivable, the Company's ability to draw on its bank
facility and employee growth. 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.
Recent Accounting Standards
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 fourth quarter of fiscal year
2001. The Company does not expect that the adoption of SAB 101 will have
significant impact on the consolidated financial statements.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the
standards for accounting and securitizations and other transfers of financial
assets and collateral. The accounting standards of FAS 140 are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has not yet determined the impact,
if any, that the adoption FAS 140 will have on the consolidated financial
statements.
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,
15
. 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.
The timing and realization of opportunities in our sales pipeline make the
timing and variability of revenue 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 each calendar year. As a result,
payroll taxes will vary significantly 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 may 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 or imposition of significant
penalties for the Company's failure to meet scheduled requirements 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 three months ended December 31, 2000, Siemens Business
Services accounted for 20.0% of our 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.
In addition, under a contract with Siemens Business Services Limited
("SBS"), the Company is marketing the services of SBS's Application Services
Center ("ASC") in exchange for success fees based on the utilization of ASC
resources. The Company has committed to utilizing a minimum number of full-time
resources from the ASC. The Company's payment obligations to SBS, to the extent
there is a shortfall in the utilization of these resources, shall not exceed
$16.1 million (based on the December 31, 2000 exchange rate of GBP 0.67 to US
$1.00) over the life of the five-year contract.
Dependence on Contracts with Government Agencies. For the three months
ended December 31, 2000, approximately 61.9% 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
professional 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.
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
16
business, financial condition and results of operations. 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.
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 or performance-based 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
three months ended December 31, 2000, 16.7% of our revenues were generated on a
fixed price basis and 25.0% of our revenues were generated from performance-
based contracts. We believe that the percentage of revenues attributable to
fixed price and transaction-based contracts will continue to be significant.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. A
component of our business strategy is to expand our presence in new or existing
markets by acquiring additional businesses. From December 1996 through December
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,
. 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.
17
Substantial Competition in the IT and Consulting Services Market. The IT
and consulting services markets are highly competitive and are served by
numerous international, national and local firms. There can be no assurance that
we will be able to compete effectively in these markets. 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 and consulting services markets, and we have
faced, and expect to continue to face, additional competition from new entrants
into the IT and consulting services markets.
We believe that the principal competitive factors in the IT and consulting
services markets 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.
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.
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 and other key
employees who have not entered into employment agreements 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.
18
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 48.3% of the
total common stock voting power at December 31, 2000. All power to vote shares
held in the Voting Trust has been vested in the Voting Trust's trustee, James L.
Bildner. The voting power held in the Voting Trust combined with the Class B
Common Stock owned by Mr. Bildner and vested options to acquire both Class A and
Class B Common Stock held by Mr. Bildner represents 50.5% of the total common
stock voting power outstanding at December 31, 2000. As a result, Mr. Bildner
may be able to control the outcome of all corporate actions requiring
shareholder approval, including, without limitation, 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 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 Solutions. Our success will depend in part
on our ability to develop 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 solutions in a
timely manner or that if developed we will be successful in the marketplace.
Delay in developing or failure to develop new 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 three months
ended December 31, 2000, international operations accounted for 37.2% 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:
. fluctuations in the value of foreign currencies,
. difficulties in building and managing foreign operations,
. difficulties in enforcing agreements and collecting receivables through
foreign legal systems,
. longer payment cycles, and
19
. 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.
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 or the Company, and
. general economic conditions such as recessions or high interest rates.
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 trade secrets, nondisclosure and other
contractual arrangements, and copyright and trademark laws to protect our
intellectual property rights. We also enter into confidentiality
20
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. The loss or misappropriation of our
intellectual property or the unsuccessful defense of any claim of infringement
could have a material adverse effect on our business, financial condition and
results of operations.
Facilities, Systems and Operations Interruption or Failure. Any system
failure, including network, software or hardware failure, whether caused by us,
a third party service provider, unauthorized intruders and hackers, computer
viruses or natural disasters, could cause interruptions or delays in our
business or loss of data. Although we maintain property insurance and business
interruption insurance, we cannot guarantee that our insurance will be adequate
to compensate us for all losses that may occur as a result of any system
failure.
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. Near-term changes in
exchange rates may have a material impact on future revenues, earnings, fair
values or cash flows of the Company. The Company did not engage in foreign
currency hedging transactions during the quarter ended December 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.
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Interest Rate Sensitivity. The Company maintains a portfolio of cash
equivalents and investments in a variety of securities including: certificates
of deposit, money market funds and government and non-government debt
securities. These available-for-sale securities are subject to interest rate
risk and may fall in value if market interest rates increase. If market interest
rates increase immediately and uniformly by 10 percentage points from levels at
December 31, 2000, the fair value of the portfolio would decline by $425,000. We
anticipate having the ability to hold our fixed income investments until
maturity, and therefore do not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation and legal matters that have
arisen in the ordinary course of business. Management believes that the ultimate
resolution of any existing matters will not have a material adverse effect on
the Company's consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
- -------
Number Description
------ ------------------------------------------------
NONE
- ----------
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended December 31, 2000.
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SIGNATURES
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: February 9, 2001
By: /s/ LAURA B. DEPOLE
------------------------------------------
Laura B. DePole
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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