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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 1999
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)
----------------
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 May 4, 1999, the number of shares outstanding of the Registrant's Class
A Common Stock was 1,639,762 and the number of shares outstanding of the
Registrant's Class B Common Stock was 10,702,416.
This report contains a total of 28 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. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and
September 30, 1998............................................ 3
Condensed Consolidated Statements of Income for the three and
six months ended March 31, 1999 and 1998...................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended March 31, 1999 and 1998.......................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 24
Part II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 26
Item 6. Exhibits and Reports on Form 8-K............................... 27
Signatures.............................................................. 28
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 Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Certain such forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates" or "anticipates" or the negative
thereof, other variations thereof or comparable terminology, or by discussions
of strategy, plans or intentions. 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 include, but are not limited to, those factors
listed in "Factors that May Affect Future Results" section, as set forth
beginning on page 18 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,
1999 1998
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................... $12,116 $22,466
Restricted cash..................................... 761 712
Short-term investments.............................. 16,705 16,834
Accounts receivable, net............................ 18,691 18,335
Prepaid expenses and other current assets........... 2,947 1,399
------- -------
Total current assets.............................. 51,220 59,746
Equipment and improvements, net....................... 4,296 2,371
Notes and accrued interest receivable from related
parties.............................................. 1,628 1,871
Acquired intangibles, net............................. 22,301 9,794
Other assets.......................................... 724 721
------- -------
Total assets...................................... $80,169 $74,503
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 1,754 $ 3,263
Accrued liabilities................................. 1,558 934
Accrued subcontractor expenses...................... 1,505 2,503
Accrued compensation and related liabilities........ 3,083 2,310
Other current liabilities........................... 725 1,041
------- -------
Total current liabilities......................... 8,625 10,051
Other liabilities..................................... 1,061 280
------- -------
Total liabilities................................. 9,686 10,331
------- -------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, no par value.......................... 65,417 62,656
Notes receivable from shareholders.................. (1,773) (2,159)
Deferred compensation............................... (483) (591)
Foreign currency translation adjustment............. (788) (1,210)
Retained earnings................................... 8,110 5,476
------- -------
Total shareholders' equity........................ 70,483 64,172
------- -------
Total liabilities and shareholders' equity........ $80,169 $74,503
======= =======
See Notes to Condensed Consolidated Financial Statements
3
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues....................................... $20,243 $12,672 $41,599 $21,823
Cost of revenues............................... 12,664 8,756 25,820 14,437
------- ------- ------- -------
Gross profit................................... 7,579 3,916 15,779 7,386
Costs and expenses:
Selling and marketing........................ 1,470 601 2,757 1,416
General and administrative................... 4,593 1,903 8,052 3,703
Compensation charge related to business
combinations................................ 60 354 122 552
Depreciation and amortization................ 831 219 1,358 369
------- ------- ------- -------
Income from operations......................... 625 839 3,490 1,346
Interest income (expense), net................. 368 269 825 324
------- ------- ------- -------
Income before income taxes..................... 993 1,108 4,315 1,670
Provision for income taxes..................... 387 449 1,683 676
------- ------- ------- -------
Net income..................................... $ 606 $ 659 $ 2,632 $ 994
======= ======= ======= =======
Basic net income per share..................... $ 0.05 $ 0.07 $ 0.22 $ 0.13
======= ======= ======= =======
Shares used in computing basic net income per
share......................................... 12,003 9,214 11,945 7,643
======= ======= ======= =======
Diluted net income per share................... $ 0.05 $ 0.06 $ 0.20 $ 0.11
======= ======= ======= =======
Shares used in computing diluted net income per
share......................................... 12,944 10,493 12,855 8,953
======= ======= ======= =======
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,
------------------
1999 1998
-------- --------
Operating activities:
Net income................................................. $ 2,632 $ 994
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,358 355
Amortization of deferred compensation..................... 108 --
Provision for doubtful accounts........................... 129 50
Deferred income taxes..................................... -- (288)
Tax benefit of stock options exercised.................... 393 --
Forgiveness of notes receivable from employees............ 389 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable...................................... 934 (3,369)
Prepaid expenses and other current assets................ 73 (83)
Other assets............................................. 103 (534)
Accounts payable and accrued liabilities................. (2,364) 1,389
Income taxes payable..................................... (1,948) 1,092
Deferred income.......................................... (165) 47
-------- --------
Net cash provided by (used in) operating activities........ 1,642 (347)
-------- --------
Investing activities:
Purchases of equipment and improvements.................... (1,845) (600)
Notes and accrued interest receivable from related
parties................................................... (327) (167)
Repayment on notes and accrued interest receivable from
related parties........................................... 164 --
Business combinations, net of cash acquired................ (10,408) (5,015)
Purchases of available-for-sale securities................. (22,027) (9,283)
Sales of available-for-sale securities..................... 11,272 1,060
Maturities of available-for-sale securities................ 10,884 --
Other assets............................................... (106) (180)
-------- --------
Net cash used in investing activities...................... (12,393) (14,185)
-------- --------
Financing activities:
Borrowings under bank lines of credit...................... 909 6,912
Payments on borrowings..................................... (1,466) (9,670)
Net proceeds from issuance of common stock................. -- 23,892
Repayment by shareholders on notes receivable.............. 386 95
Exercise of stock options.................................. 603 145
Employee stock purchase plan............................... 235 --
Payments on capital lease obligations...................... (69) (18)
Deferred financing costs................................... -- 224
Payments on notes payable to shareholders.................. (12) (26)
-------- --------
Net cash provided by financing activities.................. 586 21,554
-------- --------
Effect of exchange rate changes on cash.................... (185) (56)
-------- --------
Net (decrease) increase in cash and cash equivalents....... (10,350) 6,966
Cash and cash equivalents at beginning of period........... 22,466 106
-------- --------
Cash and cash equivalents at end of period................. $ 12,116 $ 7,072
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid............................................. $ 161 $ 83
======== ========
Income taxes paid (refunded), net......................... $ 3,246 $ (127)
======== ========
Equipment acquired under capital lease obligations......... $ -- $ 71
======== ========
Accrued purchase price and assumed liabilities related to
business combinations..................................... $ 3,400 $ --
======== ========
Conversion of preferred stock into common stock............ $ -- $ 1,892
======== ========
Common stock issued in business combinations............... $ 1,328 $ 666
======== ========
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 21, 1998 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, 1999 are not necessarily indicative of results that may be expected
for the fiscal year ending September 30, 1999 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's financial
statements to conform to the current year's presentation.
NOTE 2--REVENUE RECOGNITION
The majority of the Company's revenues are derived from time and material
contracts and 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. Revenues from performance-based contracts are recognized based on fees
charged on a per-transaction basis. 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. 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 were $3,123,000 and $3,444,000 at March 31, 1999 and September 30,
1998, respectively.
Revenues derived from governmental agencies were $12,188,000 and $9,783,000
for the six months ended March 31, 1999 and 1998, respectively. The Company
recorded software sublicense revenue of $1,961,000 from one customer and
$1,888,000 from another customer for the six months ended March 31, 1999 and
1998, respectively.
6
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3--ACQUISITIONS
Service Design Associates, Inc.
Effective March 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Service Design Associates, Inc. ("SDA"), an Indiana
corporation that provided payment processing, policy and IT systems services
for state and local government child support agencies, for approximately $4.4
million including $610,000 in estimated acquisition costs. In addition to the
initial cost of the acquisition summarized below, contingent payments of up to
approximately $900,000 in cash and $3.2 million in shares of the Company's
Class B common stock or cash, at the Company's election, will be paid to SDA
upon the achievement of certain performance targets over a three-year period.
Of the total contingent payments, SDA will be entitled to $500,000 cash upon
the award of a certain client contract with a specified revenue and gross
profit level and will be entitled to the remaining contingent payments on the
second and third anniversaries of the acquisition based upon the acquired
business achieving certain levels of profits before taxes and revenues over
that three-year period. In connection with the acquisition, Tier caused a
letter of credit of up to $800,000 to be issued as additional security for an
obligation of the surviving company.
The SDA 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 SDA for periods beginning on or
subsequent to March 1, 1999.
The allocation of the initial purchase price was as follows:
(in thousands)
Cash paid..................................................... $ 3,800
Estimated acquisition costs................................... 610
-------
$ 4,410
=======
Tangible assets............................................... $ 415
Goodwill...................................................... 5,080
Liabilities assumed........................................... (1,085)
-------
$ 4,410
=======
Tangible assets acquired are being depreciated over their useful lives of
three to five years. Goodwill is being amortized over an eight-year useful
life.
In connection with the SDA acquisition, the Company entered into an
agreement with a third party related to the purchase of certain proprietary
software programs previously used by SDA. Under the agreement, the Company
paid $500,000 upon closing the SDA acquisition and will make two additional
payments of $250,000 on the first and second anniversaries of the closing. The
acquired software is being amortized over a useful life of three years.
Prior to the closing of the SDA acquisition, the Company provided
management consulting services for a period of time to SDA. These consulting
services were provided in the areas of project management, sales and marketing
support, staffing and recruiting, proposal development and other functions for
revenues totaling $400,000.
ADC Consultants Pty Limited
Effective January 1, 1999, the Company acquired all the issued and
outstanding capital stock of ADC Consultants Pty Limited ("ADC"), an
Australian entity that provided data management services. The initial cost
7
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3--ACQUISITIONS (continued)
of the acquisition totaled approximately $2.6 million in cash including
$234,000 in estimated acquisition costs. Ten percent of the initial cash
purchase price was deposited into an escrow account and will be released on
the third anniversary of settlement if Tier has not made a claim against the
escrowed funds. Additional contingent payments of up to approximately $2.0
million (based on the foreign currency exchange rates in effect at the time of
the agreement of AUD $1.63 to US $1.00) may be paid in cash and shares of the
Company's Class B common stock over a three-year period based on the acquired
business achieving certain levels of profits before taxes and revenues
measured annually over the three-year period. The ADC 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 ADC for periods beginning on or subsequent to January 1, 1999.
The allocation of the initial purchase price was as follows:
(in thousands)
Cash paid..................................................... $2,329
Estimated acquisition costs................................... 234
------
$2,563
======
Tangible assets............................................... $ 364
Goodwill...................................................... 2,509
Liabilities assumed........................................... (310)
------
$2,563
======
Tangible assets acquired are being depreciated over their useful lives of
three to five years. Goodwill is being amortized over an eight-year useful
life.
Pro Forma Disclosure of Significant Acquisitions
The initial purchase price for significant acquisitions since September 30,
1997, was allocated to the assets acquired and liabilities assumed based on
their estimated fair values on the respective acquisition dates as follows:
Sancha
Group Infact Midas
------ ------ -------
(in thousands)
Tangible assets................................. $ 17 $ 23 $ 1,812
Acquired workforce.............................. 302 304 --
Goodwill........................................ 4,901 2,813 3,787
------ ------ -------
5,220 3,140 5,599
Liabilities assumed............................. (66) (118) (1,692)
------ ------ -------
Net assets acquired............................. $5,154 $3,022 $ 3,907
====== ====== =======
8
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3--ACQUISITIONS (continued)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if three prior
significant acquisitions, Sancha Computer Group Pty Limited, Infact Pty
Limited as Trustee of the Infact Unit Trust and Midas Computer Software
Limited, had been purchased by the Company as of October 1, 1997, after
including the impact of certain pro forma adjustments, such as the increased
amortization expense due to the recording of intangible assets:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except per share
data)
Revenues.................................... $20,243 $17,003 $42,315 $30,482
Net income.................................. 606 987 2,456 1,575
Basic net income per share.................. 0.05 0.11 0.21 0.20
Diluted net income per share................ 0.05 0.09 0.19 0.17
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 LINE OF CREDIT
At March 31, 1999, the Company had a $10 million revolving credit facility
which matures on March 31, 2001. Total borrowings are limited to the lesser of
85% of eligible accounts receivable or $10 million and are secured by all of
the Company's assets. Interest is charged monthly and is based on either the
adjusted LIBOR rate plus 2.5% or an alternate base rate, at the Company's
option. The alternate base rate is the greater of the bank's base rate plus
0.5% or the federal funds effective rate plus 1.0%. Among other provisions,
the credit facility requires the Company to maintain certain minimum financial
ratios. As of March 31, 1999, the Company was not in compliance with certain
covenants; however, the bank has waived such noncompliance. As of March 31,
1999 and September 30, 1998, the Company had no outstanding borrowings under
its credit facility; however, the Company's borrowing base has been reduced by
the $800,000 letter of credit issued in connection with the SDA acquisition.
9
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 31, Ended March 31,
--------------- ----------------
1999 1998 1999 1998
------- ------- -------- -------
(in thousands, except per share
data)
Numerator:
Net income.............................. $ 606 $ 659 $ 2,632 $ 994
======= ======= ======== =======
Denominator for basic net income per
share-weighted average common shares
outstanding.............................. 12,003 9,214 11,945 7,643
Effects of dilutive securities:
Common stock options.................... 797 1,279 810 1,130
Convertible preferred stock............. -- -- -- 180
Common stock contingently issuable...... 144 -- 100 --
------- ------- -------- -------
Denominator for diluted net income per
share-adjusted weighted average common
shares and assumed conversions........... 12,944 10,493 12,855 8,953
======= ======= ======== =======
Basic net income per share................ $ 0.05 $ 0.07 $ 0.22 $ 0.13
======= ======= ======== =======
Diluted net income per share.............. $ 0.05 $ 0.06 $ 0.20 $ 0.11
======= ======= ======== =======
Options to purchase approximately 1,241,000 and 1,160,000 shares of Class B
common stock at a price ranging from $14.63 to $17.75 per share and $13.88 to
$17.75 per share were not included in the computation of diluted net income
per share for the three months and six months ended March 31, 1999,
respectively, because the options' exercise prices were greater than the
average market price of the shares.
NOTE 6--COMPREHENSIVE INCOME
The Company's comprehensive income was as follows:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
1999 1998 1999 1998
------- ------- -------- -------
(in thousands)
Net income................................. $ 606 $ 659 $ 2,632 $ 994
Currency translation adjustment............ 79 (30) 422 (56)
------- ------- -------- ------
Comprehensive income....................... $ 685 $ 629 $ 3,054 $ 938
======= ======= ======== ======
NOTE 7--CONTINGENCIES
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 valid under the terms of the sub-
contract and that it had not breached the agreement. In early January, 1999,
the Company and the prime contractor reached an understanding to continue the
engagement on a time and materials basis with both parties retaining their
rights under the original agreement. In accordance with the January agreement,
the Company has continued to provide resources on a time and materials
10
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 7--CONTINGENCIES (continued)
basis on the engagement. As of March 31, 1999, accounts receivable under the
sub-contract approximated $1.8 million, which amount currently remains unpaid.
The Company and the prime contractor are continuing to discuss resolution of
the outstanding receivable due to the Company. Although the Company's
investigation and negotiations with the prime contractor are ongoing, the
Company believes, based on currently available information, the resolution of
this matter will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
Guaranty of Obligation
On December 22, 1998, the Company guaranteed a portion of an obligation of
James L. Bildner, the Company's Chief Executive Officer, with respect to his
California residence (the "Guaranty"). The Company's liability under the
Guaranty is capped at $1,000,000. In connection with the Guaranty, Mr. Bildner
pledged to the Company shares of Tier Technologies, Inc. common stock owned by
him with a fair market value in excess of 110% of the Guaranty amount and
agreed to indemnify the Company for any loss, liability or expense incurred in
connection with the Guaranty.
Letter of Credit
In connection with the SDA acquisition the Company caused a letter of
credit of up to $800,000 to be issued as additional security for an obligation
of the surviving company. The surviving company, its shareholder and the
former shareholders of SDA have agreed to indemnify the Company in the event a
draw is made against the letter of credit.
NOTE 8--AMENDED AND RESTATED 1996 EQUITY INCENTIVE PLAN
On January 28, 1999, a majority of the Company's shareholders entitled to
vote thereon approved three amendments to the Company's Amended and Restated
1996 Equity Incentive Plan (the "Plan"). The first amendment increased the
number of shares of Class B common stock authorized and reserved for issuance
under the Plan from 3,989,333 to 5,989,333 shares. The second amendment
increased the maximum number of shares of Class B common stock that may be
granted under the Plan to any one person in any single fiscal year from
100,000 to 300,000 shares. The third amendment increased the number of shares
of Class B common stock to be granted automatically to outside directors upon
their initial appointment to the Board of Directors and upon their re-election
thereafter from 5,000 to 10,000 shares.
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt FAS 131 in the fiscal year 1999 annual
financial statements. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of FAS 131 is expected to have no
material impact on the Company's consolidated financial position, results of
operations or cash flows.
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 will adopt FAS 133 in
fiscal year
11
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS (continued)
2000 and has not yet determined the impact, if any, that the adoption of FAS
133 will have on the consolidated financial statements.
NOTE 10--SUBSEQUENT EVENTS
Acquisition
Effective May 1, 1999, the Company acquired certain assets and assumed
certain liabilities of the Technology Training Services Division of Automated
Concepts, Inc. ("TTS"), a leading provider of training services to the IT
professionals of Fortune 500 companies and other major corporations. The
initial cost of the acquisition totaled approximately $1.5 million in cash.
Additional contingent payments of up to $1.5 million may be paid in shares of
the Company's Class B common stock over a two-year period based on the
acquired business achieving certain levels of gross profit and revenues
measured annually over the two-year period. The TTS acquisition was accounted
for using the purchase method of accounting. Contingent payments will be
accrued when earned and recorded as additional purchase price. The Company's
consolidated financial statements will include the results of operations of
TTS for periods beginning on or subsequent to May 1, 1999.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Tier provides IT consulting, application development and software
engineering services that facilitate the migration of clients' enterprise-wide
systems and applications to leading edge technologies. 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 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 $41.6 million in
the six months ended March 31, 1999 from $21.8 million in the six months ended
March 31, 1998. The Company's workforce, composed of employees, independent
contractors and subcontractors, has grown to 674 on March 31, 1999 from 338 on
March 31, 1998.
The Company's revenues are derived primarily from professional fees billed
to clients on either a time and materials or a fixed price basis. Time and
materials revenues are recognized as services are performed. 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 revenue generated on a
fixed price basis was 8.9% and 20.1% for the six months ended March 31, 1999
and March 31, 1998, respectively. Revenues from the resale of products and
software licenses were $3.1 million and $2.1 million for the six months ended
March 31, 1999 and March 31, 1998, respectively. 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.
The Company has derived a significant portion of its revenues from a small
number of large clients. For many 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, 1999, Humana Inc. and the State of
Missouri accounted for 39.3% and 14.8% of the Company's revenues,
respectively. 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. A significant portion of the
Company's revenues are derived from sales to government agencies. For the six
months ended March 31, 1999, approximately 29.3% of the Company's revenues
were derived from sales to government agencies, as compared to 44.8% for the
six months ended March 31, 1998.
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. Senior executives manage the Company's personnel
utilization rates by carefully monitoring its needs and basing most personnel
increases 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 and retains hourly employees or
independent contractors in their place, the Company's business, financial
condition and results of operations would be materially and adversely
affected.
From December 1996 through March 31, 1999, the Company made eleven
acquisitions for a total cost of approximately $22.0 million, including the
issuance of shares of Class B common stock but excluding future contingent
payments, all of which were accounted for under the purchase method of
accounting. Generally,
13
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, when
the amount is deemed probable to be made the payments are recorded as
compensation expense over the vesting period. 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. International operations accounted for 32.0% and 19.1% of
revenues for the six months ended March 31, 1999 and March 31, 1998,
respectively. The Company believes that the percentage of total revenues
attributable to international operations will continue to be significant and
may continue to grow. 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,
------------ ------------
1999 1998 1999 1998
----- ----- ----- -----
Revenues....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 62.6 69.1 62.1 66.2
----- ----- ----- -----
Gross profit................................... 37.4 30.9 37.9 33.8
Costs and expenses:
Selling and marketing........................ 7.2 4.7 6.6 6.5
General and administrative................... 22.7 15.0 19.4 17.0
Compensation charge related to business
combinations................................ 0.3 2.8 0.3 2.5
Depreciation and amortization................ 4.1 1.8 3.3 1.6
----- ----- ----- -----
Income from operations......................... 3.1 6.6 8.3 6.2
Interest income (expense), net................. 1.8 2.1 2.0 1.5
----- ----- ----- -----
Income before income taxes..................... 4.9 8.7 10.3 7.7
Provision for income taxes..................... 1.9 3.5 4.0 3.1
----- ----- ----- -----
Net income..................................... 3.0% 5.2% 6.3% 4.6%
===== ===== ===== =====
Three Months Ended March 31, 1999 and March 31, 1998
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 59.7% to $20.2
million for the three months ended March 31, 1999 from $12.7 million in the
three months ended March 31, 1998. This increase resulted primarily from
internal growth, including an expanded client base and several significant new
contracts, and from acquisitions. The period ended March 31, 1999 included
three months of revenues from the ADC acquisition and one month of revenues
from the SDA acquisition completed during the quarter.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries,
independent contractor and subcontractor costs, employee benefits and travel
expenses. Gross profit increased 93.5% to $7.6 million for the three months
ended March 31, 1999 from $3.9 million in the three months ended March 31,
1998. Gross margin increased to 37.4% for the three months ended March 31,
1999 as compared to 30.9% in the three months ended March 31, 1998. This
increase resulted primarily from higher margins on certain large contracts.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, travel costs and product literature.
Selling and marketing expenses increased 144.6% to $1.5 million for the three
months ended March 31, 1999 from $601,000 in the three months ended March 31,
14
1998. As a percentage of revenues, selling and marketing expenses increased to
7.2% for the three months ended March 31, 1999 from 4.7% in the three months
ended March 31, 1998. The increase in selling and marketing expenses was
primarily attributable to the addition of sales and marketing personnel, both
internally and through acquisitions, to support the higher revenue base and
increased selling and marketing efforts.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management 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 141.4% to $4.6 million for the three months ended March 31, 1999
from $1.9 million in the three months ended March 31, 1998. As a percentage of
revenues, general and administrative expenses increased to 22.7% for the three
months ended March 31, 1999 from 15.0% in the three months ended March 31,
1998. 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.
In the near term, the Company expects general and administrative expenses as a
percentage of revenues to stabilize within the range of current levels as the
Company continues to develop appropriate internal resources to manage its
rapid growth and to ensure the quality delivery of services. Over the longer
term, the Company expects general and administrative expenses to decline as a
percentage of revenues.
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 decreased 83.1% to $60,000 for the
three months ended March 31, 1999 from $354,000 in the three months ended
March 31, 1998. As a percentage of revenues, compensation charges related to
business combinations decreased to 0.3% for the three months ended March 31,
1999 from 2.8% in the three months ended March 31, 1998. The decrease in total
compensation charge related to business combinations was attributable to a
decrease in contingent payments earned during the current period by prior
owners of the acquired businesses. The Company expects compensation charges
related to business combinations to fluctuate significantly from quarter to
quarter depending upon whether performance payments are earned or missed by
acquired businesses and the timing of those determinations.
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. Depreciation and amortization increased 279.5% to $831,000 for
the three months ended March 31, 1999 from $219,000 in the three months ended
March 31, 1998. As a percentage of revenues, depreciation and amortization
increased to 4.1% for the three months ended March 31, 1999 from 1.8% in the
three months ended March 31, 1998. The increase in total depreciation and
amortization expense was primarily attributable to the amortization of
increased intangible assets from business combinations and the depreciation
associated with increased capital expenditures.
Interest Income and Interest Expense, Net. Net interest income increased
36.8% to $368,000 for the three months ended March 31, 1999 compared to net
interest income of $269,000 in the three months ended March 31, 1998. This
increase was primarily attributable to interest income generated from the
Company's investments.
Provision for Income Taxes. The provision for income taxes decreased 13.8%
to $387,000 for the three months ended March 31, 1999 from $449,000 in the
three months ended March 31, 1998. The effective tax rate for the three months
ended March 31, 1999 was 39.0%, compared to 40.5% for the three months ended
March 31, 1998. The reduction in the effective tax rate was due to the tax
benefit from tax-advantaged investments. The Company anticipates that its
effective tax rate for the fiscal year ending September 30, 1999 will be
39.0%; however, the actual rate may vary due to a change in the estimated
amount or geographic mix of the Company's earnings, changes in tax law, the
effect of future acquisitions or a change in the Company's investment in tax-
advantaged securities.
15
Six Months Ended March 31, 1999 and March 31, 1998
Revenues. Revenues increased 90.6% to $41.6 million for the six months
ended March 31, 1999 from $21.8 million in the six months ended March 31,
1998. This increase resulted primarily from internal growth, including an
expanded client base and several significant new contracts, and from
acquisitions.
Gross Profit. Gross profit increased 113.6% to $15.8 million for the six
months ended March 31, 1999 from $7.4 million in the six months ended March
31, 1998. Gross margin increased to 37.9% for the six months ended March 31,
1999 from 33.8% in the six months ended March 31, 1998. The increase in gross
margin was primarily attributable to higher margins on certain large
contracts.
Selling and Marketing. Selling and marketing expenses increased 94.7% to
$2.8 million for the six months ended March 31, 1999 from $1.4 million in the
six months ended March 31, 1998. As a percentage of revenues, selling and
marketing expenses increased to 6.6% for the six months ended March 31, 1999
from 6.5% in the six months ended March 31, 1998. The increase in total
selling and marketing expenses was primarily attributable to the addition of
sales and marketing personnel, both internally and through acquisitions, to
support the higher revenue base and increased selling and marketing efforts.
General and Administrative. General and administrative expenses increased
117.4% to $8.1 million for the six months ended March 31, 1999 from $3.7
million in the six months ended March 31, 1998. As a percentage of revenues,
general and administrative expenses increased to 19.4% for the six months
ended March 31, 1999 from 17.0% in the six months ended March 31, 1998. 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.
Compensation Charge Related to Business Combinations. Business combination
compensation expenses were $122,000, or 0.3% of revenues, for the six months
ended March 31, 1999 as compared to $552,000, or 2.5% of revenues, for the six
months ended March 31, 1998. The decrease in total compensation charge related
to business combinations was attributable to a decrease in contingent payments
earned during the current period by prior owners of the acquired businesses.
Depreciation and Amortization. Depreciation and amortization increased
268.0% to $1.4 million for the six months ended March 31, 1999 from $369,000
in the six months ended March 31, 1998. As a percentage of revenues,
depreciation and amortization increased to 3.3% for the six months ended March
31, 1999 from 1.6% in the six months ended March 31, 1998. The increase in
total depreciation and amortization expenses was primarily attributable to the
amortization of increased intangible assets from business combinations and the
depreciation associated with increased capital expenditures.
Interest Income and Interest Expense, Net. The Company had net interest
income of $825,000 for the six months ended March 31, 1999 compared to net
interest income of $324,000 for the six months ended March 31, 1998. This
change was primarily attributable to the interest income generated from its
investment of proceeds from the initial and secondary public offerings.
Provision for Income Taxes. Provision for income taxes increased 149.0% to
$1.7 million for the six months ended March 31, 1999 from $676,000 in the six
months ended March 31, 1998. The effective tax rate for the six months ended
March 31, 1999 was 39.0%, compared to 40.5% for the six months ended March 31,
1998. The reduction in the effective tax rate was due to the tax benefit from
tax-advantaged investments.
Liquidity and Capital Resources
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions. The Company
maintains a $10 million revolving credit facility (the "Credit
16
Facility") that allows the Company to borrow the lesser of the sum of 85% of
eligible accounts receivable or $10 million. The Credit Facility bears
interest, at the Company's option, either at the adjusted LIBOR rate plus 2.5%
or an alternate base rate. The alternate base rate is the greater of the
bank's prime rate plus 0.5% or the federal funds effective rate plus 1.0%. The
Credit Facility is secured by all of the Company's assets and contains certain
restrictive covenants, including limitations on amounts of loans the Company
may extend to officers and employees, the incurrence of additional debt and a
prohibition against the payment of dividends. The Credit Facility requires the
maintenance of certain financial ratios, including a minimum quarterly net
income requirement and a limit on total liabilities to earnings before
interest, taxes, depreciation and amortization. As of March 31, 1999, the
Company was not in compliance with certain covenants; however, the bank has
waived such noncompliance. As of March 31, 1999, there were no borrowings
outstanding under the Credit Facility; however, the Company's borrowing base
has been reduced by the $800,000 letter of credit issued in connection with
the SDA acquisition.
Net cash provided by operating activities was $1.6 million in the six
months ended March 31, 1999 as compared to net cash used in operating
activities of $347,000 in the six months ended March 31, 1998. The change is
primarily attributable to increased net income and decreased accounts
receivable, as partially offset by decreased accounts payable and accrued
liabilities and decreased income taxes payable.
Net cash used in investing activities was $12.4 million and $14.2 million
in the six months ended March 31, 1999 and March 31, 1998, respectively. The
decrease in cash used in investing activities is primarily attributable to a
reduction in the net purchases of available-for-sale securities, as partially
offset by increased investments in the acquisition of Midas Computer Software
Limited, ADC Consultants Pty Limited and Service Design Associates, Inc.
Capital expenditures, including equipment acquired under capital lease but
excluding assets acquired or leased through business combinations, were
approximately $1.8 million in the six months ended March 31, 1999 and $671,000
in the six months ended March 31, 1998. The increase in capital expenditures
was primarily attributable to an increased workforce, geographic expansion and
development of the Company's technology infrastructure. 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
the Company's application development centers and global project management
office. The Company anticipates that in the near-term it may purchase certain
proprietary technology from a major client. The Company believes that the
technology will enhance Tier's operating and delivery capacity and enable the
Company to efficiently transfer similar business solutions to potential new
clients. Although there can be no assurance that the parties will reach
agreement on the terms of the purchase or that the purchase will be completed
on the terms currently being negotiated, the Company believes that the
purchase would represent a significant investment by the Company and could
result in significant charges against income.
Net cash provided by financing activities totaled $586,000 in the six
months ended March 31, 1999 and $21.6 million in the six months ended March
31, 1998. In the six months ended March 31, 1998, the Company completed its
initial public offering, which raised net proceeds of $23.9 million, and
repaid $2.8 million under its line of credit.
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, the
timing of the receipt of accounts receivable 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.
17
Year 2000
The "Year 2000 Issue" is typically the result of software being written
using two digits rather than four to define the applicable year. The Company
uses a significant number of computer software programs and operating systems
in its service offerings, financial business systems and administrative
functions. To the extent these software applications are unable to
appropriately interpret the upcoming calendar year "2000", remediation of such
applications will be necessary.
The Company has completed an initial assessment of the preparedness of its
internal IT and non-IT systems and has developed a plan for the remediation,
testing and certification of its internal systems. The Company's internal
systems are largely PC-based and a majority were recently acquired or
installed. As a result, the Company believes that a high percentage of its
hardware and non-IT systems already address the Year 2000 Issue, as does a
majority of its software. Tier anticipates that the remediation, testing and
certification process will be substantially completed during the summer of
1999. The Company has not incurred material remediation costs to date and does
not anticipate that the cost of such process will have a material adverse
effect on the Company's business, result of operations or financial condition.
In addition, the Company has made an initial evaluation of the Year 2000
readiness of its key suppliers and other key third parties. The Company is
working with these parties to address the Year 2000 Issue and to obtain
appropriate assurances. The Company's operations could be materially adversely
affected if these third parties or the products or services they supply to
Tier are disrupted or impaired by the Year 2000 Issue.
There can be no assurance that the remediation, testing and certification
of the Company's systems will be successful or that the Company's key
contractors will have successful conversion programs, and that such Year 2000
Issue compliance failures will not have a material adverse effect on the
Company's business, results of operations or financial condition.
As a result of the Company's assessment to date, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
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".
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, 1999, Humana Inc. and the State of
Missouri accounted for 39.3% and 14.8% of our revenues, respectively. 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.
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 number, size and scope of projects in which we are engaged,
. the contractual terms and degree of completion of such projects,
18
. 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 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,
. the adequacy of provisions for losses,
. the accuracy of estimates of resources required to complete ongoing
projects,
. 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. 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 common stock. In addition, our operating results will from time
to time be below the expectations of analysts and investors.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. A
principal 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, 1999, we acquired eleven 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,
. amortization of acquired intangible assets,
. 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.
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
19
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.
Inability to Attract and Retain Professional Staff Necessary to Existing
and Future Projects. Our inability to attract, retain and train skilled
employees 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, including our Chief Executive
Officer and Chairman of the Board of Directors, James L. Bildner, and our
President and Chief Technology Officer, William G. Barton. Although we have
entered into employment agreements with each of Messrs. Bildner and Barton,
either of them may terminate their employment agreements at any time. The loss
of the services of either of Messrs. Bildner or Barton 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 60.9% of the total common stock voting power at March 31,
1999. All power to vote shares held in the Voting Trust has been vested
in the Voting Trust's trustees, Messrs. Bildner and Barton. As a result,
Messrs. Bildner and Barton 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.
. The California Corporations Code and our Bylaws currently permit
shareholders to require cumulative voting in connection with the
election of directors, subject to certain requirements. However, the
Articles and Bylaws also provide that cumulative voting will be
eliminated effective as of the first record date for an annual meeting
on which we have equity securities listed on Nasdaq and 800 or more
holders of our equity securities.
. Holders of an aggregate of 779,762 shares of Class A Common Stock have
entered into agreements with us that may restrict their ability to
transfer shares of Class A Common Stock following termination of their
employment with the Company. Such agreements would effectively delay the
conversion of such shares of Class A Common Stock and may perpetuate
control of the Company by the Voting Trust's trustees.
20
Dependence on Partnerships with Third Parties in Performing Certain Client
Engagements. We sometimes perform client engagements in partnership with third
parties. In the government services market, 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. In the commercial services market, we sometimes partner
with software or technology providers to jointly bid and perform engagements.
In both markets, we often depend on the software, resources and technology of
our partners in order to perform the engagement. There can be no assurance
that actions or failures attributable to our partners 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 a partner to permit continued use of its 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.
Dependence on Contracts with Government Agencies. For the six months ended
March 31, 1999, approximately 29.3% 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.
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, 1999, 8.9% of
our revenues were generated on a fixed price basis, rather than on a time and
materials basis. During the six months ended March 31, 1999, performance-based
contracts did not constitute a material component of the Company's operations;
however, such contracts are expected to become a more significant portion of
operations in the future.
Significant Start-Up Costs. When we are awarded a contract to manage a
government program, we can incur significant start-up costs before the
facility is fully operational and transactions are being processed. These
expenses include leasing office space, purchasing equipment and hiring
personnel. As a result, we may incur operating losses in the early stage of a
contract.
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.
21
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.
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.
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 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.
22
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 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 (1) enter into
confidentiality agreements with our employees, (2) generally require that our
consultants and clients enter into such agreements and (3) 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.
Failure to Manage and Expand International Operations. For the six months
ended March 31, 1999, international operations accounted for 32.0% 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
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.
Potential Year 2000 Non-Compliance. The "Year 2000 Issue" is typically the
result of software being written using two digits rather than four to define
the applicable year. The Company uses a significant number of computer
software programs and operating systems in its service offerings, financial
business systems and administrative functions. To the extent these software
applications are unable to appropriately interpret the upcoming calendar year
"2000", remediation of such applications will be necessary.
The Company has completed an initial assessment of the preparedness of its
internal IT and non-IT systems and has developed a plan for the remediation,
testing and certification of its internal systems. The Company's internal
systems are largely PC-based and a majority were recently acquired or
installed. As a result, the Company believes that a high percentage of its
hardware and non-IT systems already address the Year 2000 Issue, as does a
majority of its software. Tier anticipates that the remediation, testing and
certification process
23
will be substantially completed during the summer of 1999. The Company has not
incurred material remediation costs to date and does not anticipate that the
cost of such process will have a material adverse effect on the Company's
business, result of operations or financial condition.
In addition, the Company has made an initial evaluation of the Year 2000
readiness of its key suppliers and other key third parties. The Company is
working with these parties to address the Year 2000 Issue and to obtain
appropriate assurances. The Company's operations could be materially adversely
affected if these third parties or the products or services they supply to
Tier are disrupted or impaired by the Year 2000 Issue.
There can be no assurance that the remediation, testing and certification
of the Company's systems will be successful or that the Company's key
contractors will have successful conversion programs, and that such Year 2000
Issue compliance failures will not have a material adverse effect on the
Company's business, results of operations or financial condition.
As a result of the Company's assessment to date, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
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. Factors such as 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 could contribute to the volatility of the price of the Class B
Common Stock and could cause significant fluctuations. 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.
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 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 and a United Kingdom
24
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, 1999.
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.
25
PART II. OTHER INFORMATION
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 28, 1999.
Voted Vote Broker
Proposal For Withheld Non-Votes
-------- ---------- -------- ---------
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...................... 25,076,357 37,837 --
--William G. Barton..................... 25,078,057 36,137 --
--George K. Ross........................ 25,077,057 37,137 --
--Samuel Cabott III(a).................. 8,689,237 27,337 --
--Ronald L. Rossetti(a)................. 8,689,237 27,337 --
Voted Voted Broker
Proposal For Against Abstentions Non-Votes
-------- ---------- --------- ----------- ---------
2. To approve an amendment to the
Company's Amended and Restated
1996 Equity Incentive Plan
(the "Plan") to increase the
number of Class B Common Stock
authorized and reserved for
issuance under the Plan from
3,989,333 to 5,989,333
shares........................ 22,146,270 2,080,915 11,107 875,902
3. To approve an amendment to the
Plan to increase the maximum
number of shares of Class B
Common Stock authorized to be
granted under the Plan to any
one person in any single
fiscal year from 100,000 to
300,000 shares................ 23,475,275 1,626,962 11,957 --
4. To approve an amendment to the
Plan to increase the number of
shares of Class B Common Stock
authorized to be granted
automatically to Outside
Directors upon their initial
appointment to the Board of
Directors and upon their re-
election thereafter from 5,000
to 10,000 shares.............. 23,475,721 1,608,991 12,057 17,425
5. To ratify the appointment of
PricewaterhouseCoopers LLP as
the Company's independent
public accountants for the
fiscal year ended September
30, 1998 and fiscal year
ending September 30, 1999..... 25,103,399 9,161 1,634 --
- --------
(a) Class B Director
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.47 Amended and Restated 1996 Equity Incentive Plan, dated January 28,
1999.
10.48 Agreement for provision of consulting services by and between the
Registrant and the State of New Jersey, division of Family
Development.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K, filed on January 27, 1999, pursuant to Item 5
regarding the acquisition of the entire issued and outstanding outstanding
capital stock of ADC Consultants Pty Limited.
Current Report on Form 8-K/A, filed on February 12, 1999, pursuant to Item
7 attaching financial statements and pro forma financial information related
to the acquisition of the entire issued and outstanding capital stock of Midas
Computer Software Limited.
27
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: May 13, 1999
/s/ James L. Bildner
By: _________________________________
James L. Bildner
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Officer)
/s/ George K. Ross
By: _________________________________
George K. Ross
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
EXHIBIT INDEX
Exhibit
Number Description Page
------- ----------- ----
10.47 Amended and Restated 1996 Equity Incentive Plan, dated January
28, 1999. ......................................................
10.48 Agreement for provision of consulting services by and between the
Registrant and the State of New Jersey, division of Family
Development.....................................................
27.1 Financial Data Schedule..........................................