<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
94-3145844
(I.R.S. EMPLOYER 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 July 21, 1998, 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 10,140,110.
This report contains a total of 21 pages of which this page is number 1.
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<PAGE>
TIER TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited and
restated)
Condensed Consolidated Balance Sheets as of June 30, 1998 and
September 30, 1997........................................... 3
Condensed Consolidated Statements of Income for the three and
nine months ended June 30, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997.......................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (restated)......................... 9
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................... 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
Signatures............................................................. 21
</TABLE>
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
On October 13, 1998, the Company announced that it would restate its
financial statements for the nine-month fiscal year ended September 30, 1997
and for the two subsequent quarters ended December 31, 1997 and March 31, 1998
to reflect changes in accounting for certain payments made in connection with
two business combinations. This amended filing contains restated financial
information and related disclosures for the year ended September 30, 1997 and
the nine-month period ended June 30, 1998 (See Note 1 to Condensed
Consolidated Financial Statements).
Quarterly financial statement information and related disclosures included
in this amended filing reflect, where appropriate, changes as a result of the
restatements.
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 (as defined in the Private
Securities Litigation Reform Act of 1995). When used in this report, the words
"believes," "expects," "anticipates," "intends," "estimates," "should," "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
include, but are not limited to, those factors listed in "Factors that May
Affect Future Results" section, as set forth beginning on page 14 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
---------- -------------
(RESTATED) (RESTATED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $33,136 $ 106
Short-term investments.............................. 10,220 --
Accounts receivable, net............................ 12,530 5,906
Income taxes receivable............................. 27 820
Prepaid expenses and other current assets........... 902 286
------- -------
Total current assets.............................. 56,815 7,118
Equipment and improvements, net....................... 1,708 774
Notes receivable from related parties................. 1,203 942
Deferred financing costs.............................. -- 224
Acquired intangibles, net............................. 7,058 1,300
Other assets.......................................... 1,005 138
------- -------
Total assets...................................... $67,789 $10,496
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Borrowings under bank lines of credit............... $ -- $ 1,232
Accounts payable.................................... 1,233 1,374
Accrued liabilities................................. 2,393 652
Accrued compensation and related liabilities........ 1,531 1,228
Deferred income..................................... 335 34
Notes payable to current and former shareholders.... 26 53
Capital lease obligations due within one year....... 72 31
Deferred income taxes............................... -- 153
------- -------
Total current liabilities......................... 5,590 4,757
Borrowings under bank lines of credit, less current
portion.............................................. -- 1,527
Accrued royalties..................................... 59 59
Notes payable to current and former shareholders, less
current portion...................................... 45 57
Capital lease obligations, less current portion....... 163 25
Deferred income taxes................................. -- 179
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value........... -- 1,892
Common stock, no par value.......................... 61,904 2,949
Deferred compensation............................... (701) --
Notes receivable from shareholders.................. (2,159) (2,253)
Foreign currency translation adjustment............. (649) (40)
Retained earnings................................... 3,537 1,344
------- -------
Total shareholders' equity........................ 61,932 3,892
------- -------
Total liabilities and shareholders' equity........ $67,789 $10,496
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1998 1997 1998 1997
------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues.............................. $14,890 $7,342 $36,713 $18,548
Cost of revenues...................... 9,241 4,814 23,678 12,492
------- ------ ------- -------
Gross profit.......................... 5,649 2,528 13,035 6,056
Costs and expenses:
Selling and marketing............... 800 641 2,217 1,512
General and administrative.......... 2,725 1,531 6,428 3,536
Compensation charge related to
business combinations.............. 94 50 646 100
Depreciation and amortization....... 337 79 706 162
------- ------ ------- -------
Income from operations................ 1,693 227 3,038 746
Interest income (interest expense),
net.................................. 219 (33) 544 (85)
------- ------ ------- -------
Income before income taxes............ 1,912 194 3,582 661
Provision for income taxes............ 713 77 1,390 263
------- ------ ------- -------
Net income............................ $ 1,199 $ 117 $ 2,192 $ 398
======= ====== ======= =======
Basic net income per share............ $ .12 $ .02 $ .26 $ .08
======= ====== ======= =======
Shares used in computing basic net
income per share..................... 9,848 5,620 8,378 4,953
======= ====== ======= =======
Diluted net income per share.......... $ .11 $ .02 $ .22 $ .08
======= ====== ======= =======
Shares used in computing diluted net
income per share..................... 11,373 5,912 9,760 4,963
======= ====== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 2,192 $ 398
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 653 161
Provision for doubtful accounts........................ 50 --
Deferred income taxes.................................. (399) (232)
Changes in operating assets and liabilities:
Accounts receivable.................................. (6,558) (1,318)
Income taxes receivable.............................. -- (844)
Prepaid expenses and other current assets............ (636) (71)
Other assets......................................... (850) (273)
Accounts payable and accrued liabilities............. 1,728 1,753
Income taxes payable................................. 793 --
Deferred income...................................... 301 119
-------- -------
Net cash used in operating activities................... (2,726) (307)
INVESTING ACTIVITIES:
Purchase of equipment and improvements.................. (948) (352)
Notes and accrued interest receivable from related
parties................................................ (192) (849)
Business combinations, net of cash acquired............. (5,465) (1,470)
Purchases of available-for-sale securities.............. (13,283) --
Sales of available-for-sale securities.................. 1,063 --
Maturities of available-for-sale securities............. 2,000 --
-------- -------
Net cash used in investing activities................... (16,825) (2,671)
FINANCING ACTIVITIES:
Borrowings under bank lines of credit................... 6,912 4,626
Payments of borrowings on bank lines of credit.......... (9,671) (1,965)
Net proceeds from issuance of common stock.............. 54,772 --
Repayment by shareholder on note receivable............. 95 --
Exercise of stock options............................... 495 --
Tax benefit of exercise of stock options................ 314 674
Employee stock purchase plan............................ 116 --
Payments on capital lease obligations................... (28) (28)
Deferred financing costs................................ 224 --
Payments on notes payable to shareholders............... (39) (33)
-------- -------
Net cash provided by financing activities............... 53,190 3,274
Effect of exchange rate changes on cash................. (609) (37)
-------- -------
Net increase in cash and cash equivalents............... 33,030 259
Cash and cash equivalents at beginning of period........ 106 --
-------- -------
Cash and cash equivalents at end of period.............. $ 33,136 $ 259
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest paid.......................................... $ 88 $ 136
======== =======
Income taxes paid (refunded), net...................... $ 683 $ 615
======== =======
Equipment acquired under capital lease obligations..... $ 207 $ --
======== =======
Common stock issued in exchange for notes receivable.... $ -- $ 2,196
======== =======
Accrued purchase price and assumed liabilities related
to business combinations............................... $ 175 $ 177
======== =======
Conversion of preferred stock into common stock......... $ 1,892 $ --
======== =======
Common stock issued in business combinations............ $ 666 $ --
======== =======
Restricted stock held in escrow for employees........... $ 701 $ --
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- RESTATEMENT AND BASIS OF PRESENTATION
The accompanying restated condensed consolidated balance sheets as of June
30, 1998 and September 30, 1997, and the accompanying restated condensed
consolidated statements of income for the nine months ended June 30, 1998,
have been restated to treat as compensation expense certain payments made in
connection with two business combinations that were previously treated as
purchase price. The effect of these restatements is to reduce previously
reported net income for the nine months ended June 30, 1998 by $297,000 (or
$0.04 per diluted net income per share) and to decrease previously reported
shareholders' equity at June 30, 1998 and September 30, 1997 by $1,269,000 and
$271,000, respectively. These restatements do not affect previously reported
net cash flows and future amortization expenses related to these acquistions
will be based on the reduced and restated purchase price.
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 S-1
Registration Statement (No. 333-52065) filed on May 7, 1998, as amended, 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 changed except as noted herein. The consolidated
results of operations for the three months and nine months ended June 30, 1998
are not necessarily indicative of results that may be expected for the fiscal
year ending September 30, 1998 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 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. Losses on contracts are recognized when they become known and
reasonably estimable. Actual results of contracts may differ materially from
management's estimates. 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
$3,025,097 and $219,579 at June 30, 1998 and June 30, 1997, respectively.
Unbilled receivable for one client accounted for 14.1% of total accounts
receivables at June 30, 1998.
Revenues derived from governmental agencies were $15,781,279 for the nine
months ended June 30, 1998.
6
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 3 -- ACQUISITION
Effective April 1, 1998, the Company acquired certain assets and liabilities
of Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which
provided IT consulting services to develop and implement call center
applications. The cost of the acquisition totaled approximately $788,000 which
was paid in cash. The SFC acquisition was accounted for as a purchase.
Additional contingent payments may be paid based on the achievement of future
performance targets and the continued employment of certain key
employee/sellers with the Company. These payments will be charged as
compensation expense at the time the payments are deemed probable to be made.
In addition, 48,768 shares of the Company's Class B common stock, valued as of
the date of the acquisition at approximately $701,000, were issued and are
held in escrow and will be released over three years provided that the key
employee/sellers are employed by the Company on the release dates. The value
of these shares has been reflected as deferred compensation on the balance
sheet and will be amortized over the three year vesting period. The
accompanying condensed consolidated financial statements include the results
of operations of this acquisition for the period subsequent to the acquisition
date.
NOTE 4 -- SECONDARY PUBLIC OFFERING
In June 1998, the Company completed a public offering of 3,000,000 shares of
its Class B Common Stock at $15.00 per share. Of those shares, 1,775,000
shares were sold by the Company and 1,225,000 shares were sold by certain
selling shareholders. In June 1998, the underwriters from the Company's public
offering exercised their over-allotment option to purchase an additional
450,000 shares of Class B Common Stock from the Company at the public offering
price. Net proceeds to the Company, including the over-allotment option, were
approximately $31.0 million after deducting the underwriters' discounts,
commissions and related issuance costs.
NOTE 5 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income................... $ 1,199 $ 117 $2,192 $ 398
======= ====== ====== ======
DENOMINATOR:
Weighted-average common
shares outstanding.......... 9,848 5,620 8,378 4,953
------- ------ ------ ------
Denominator for basic net
income per share............ 9,848 5,620 8,378 4,953
Effect of dilutive
securities:
Common stock options....... 1,492 292 1,251 10
Restricted stock........... 33 -- 11 --
Convertible preferred
stock..................... -- -- 120 --
------- ------ ------ ------
Dilutive common stock
equivalents................... 1,525 292 1,382 10
------- ------ ------ ------
Denominator for diluted net
income per share-weighted-
average shares and common
stock equivalents............. 11,373 5,912 9,760 4,963
======= ====== ====== ======
BASIC NET INCOME PER SHARE..... $ .12 $ .02 $ .26 $ .08
======= ====== ====== ======
DILUTED NET INCOME PER SHARE... $ .11 $ .02 $ .22 $ .08
======= ====== ====== ======
</TABLE>
7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 "Reporting Comprehensive Income," ("FAS 130"), and Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these Statements in fiscal year 1999.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements 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," which is required to be adopted in the
Company's fiscal year 2000. Adoption of this Statement is expected to have no
material impact on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 7 -- SUBSEQUENT EVENT
Effective August 1, 1998, the Company acquired certain assets and assumed
certain liabilities of Infact Pty Limited as trustee of the Infact Unit Trust
("Infact"), an information technology consulting firm that specialized in
providing strategic project management services, through Tier Technologies
(Australia) Pty Limited, a wholly owned subsidiary of the Company. The Company
purchased certain assets of Infact for approximately $5.25 million (AUD) in
cash which payments were accounted for as purchase price. Up to an additional
$2.2 million (AUD) and approximately 50,000 shares of Tier's Class B Common
Stock may be paid to Infact based on the achievement of performance targets
over the next two years. Approximately 71% of such payments will be accounted
for as additional purchase price and the remaining payments will be treated as
compensation expense at the time the payments are deemed probable to be made
because such payments are contingent, in part, on the continuing employment of
a key employee/seller.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (RESTATED)
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 eleven offices
located in three countries, 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 installed IT
base. The Company's revenues increased from $18.5 million in the nine months
ended June 30, 1997 to $36.7 million in the nine months ended June 30, 1998.
The Company's workforce has grown from 54 on January 1, 1995, to 231 on
September 30, 1997 and to 436 on June 30, 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. During the nine
months ended June 30, 1998, 23.3% of the Company's revenues were generated on
a fixed price basis. The Company believes that the percentage of total
revenues attributable to fixed price contracts will continue to be significant
and may continue to grow. The Company's risk management committee monitors all
material projects, focusing primarily on factors such as size, revenue and
credit exposure to the Company, number of resources employed, progress against
defined project milestones, clarity of user expectations and definition of
project scope. Substantially all of Tier's contracts are terminable by the
client following limited notice and without significant penalty to the client.
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's failure to
estimate accurately the resources required for a fixed price project or its
failure to complete its contractual obligations in a timely manner consistent
with the project plan upon which its fixed price contract is based could have
a material adverse effect on the Company's business, financial condition and
results of operations. Currently, the Company has no specific concerns with
respect to potential losses or overruns under existing contracts.
The Company has derived, and believes that it will continue to derive, 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 nine months ended
June 30, 1998, the State of Missouri, Unisys Corporation ("Unisys"), Humana,
Inc. ("Humana") and Equifax Europe (UK) Ltd. ("Equifax") accounted for 22.0%,
16.1%, 14.2% and 10.1% of the Company's revenues, respectively. The
completion, cancellation or significant reduction in the scope of a large
project could 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 nine
months ended June 30, 1998, approximately 43% of the Company's revenues were
derived from sales to government agencies.
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 June 30, 1998, the Company made seven
acquisitions for a total purchase price of approximately $8.4 million in cash
and shares of Class B Common Stock, excluding future contingent payments.
9
<PAGE>
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 when the amount
is deemed probable to be made. 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 and technical
expertise and to supplement its human resources. International operations
accounted for 22.0% of revenues for the nine months ended June 30, 1998. 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. The Company does not generally engage in
hedging transactions, but may do so in the future.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 62.1% 65.6% 64.5% 67.3%
----- ----- ----- -----
Gross profit.................... 37.9% 34.4% 35.5% 32.7%
Costs and expenses:
Selling and marketing......... 5.4% 8.7% 6.0% 8.1%
General and administrative.... 18.3% 20.8% 17.5% 19.1%
Compensation charge related to
business combinations........ 0.6% 0.7% 1.8% 0.5%
Depreciation and amortization. 2.3% 1.1% 1.9% 0.9%
----- ----- ----- -----
Income from operations.......... 11.3% 3.1% 8.3% 4.1%
Interest income (expense), net.. 1.5% (0.5)% 1.5% (0.5)%
----- ----- ----- -----
Income before income taxes...... 12.8% 2.6% 9.8% 3.6%
Provision for income taxes...... 4.8% 1.0% 3.8% 1.4%
----- ----- ----- -----
Net income...................... 8.0% 1.6% 6.0% 2.2%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Revenues. Revenues increased 102.8% to $14.9 million for the three months
ended June 30, 1998 from $7.3 million in the three months ended June 30, 1997.
This increase resulted primarily from internal growth, including an expanded
client base and several significant new contracts, and from the inclusion of
revenue from acquisitions.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employees' salaries,
independent contractor costs, employee benefits and travel expenses. Gross
profit increased 123.6% to $5.6 million for the three months ended June 30,
1998 from $2.5 million in the three months ended June 30, 1997. Gross margin
increased to 37.9% for the three months ended June 30, 1998 as compared to
34.4% in the three months ended June 30, 1997. The gross margin for the most
recent quarter increased primarily due to higher margins on certain large
contracts.
10
<PAGE>
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions and advertising and marketing expenditures.
Selling and marketing expenses increased 24.9% to $800,000 for the three
months ended June 30, 1998 from $641,000 in the three months ended June 30,
1997. As a percentage of revenues, selling and marketing expenses decreased to
5.4% for the three months ended June 30, 1998 from 8.7% in the three months
ended June 30, 1997. The increase in total expenses was primarily attributable
to the addition of sales and marketing personnel and increased advertising 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 78.1% to $2.7 million for the three months ended June 30, 1998 from
$1.5 million in the three months ended June 30, 1997. As a percentage of
revenues, general and administrative expenses decreased to 18.3% for the three
months ended June 30, 1998 from 20.8% in the three months ended June 30, 1997.
The increase in total expenses was primarily attributable to building the
infrastructure to support, manage and control the Company's growth and the
increased costs of being a public company.
Compensation Charge Related to Business Combinations (as restated). Business
combination compensation expenses were $94,000, or 0.6% of revenues, for the
quarter ended June 30, 1998, as compared to $50,000, or 0.7% of revenues, for
the quarter ended June 30, 1997. These expenses represent payments made in
connection with business combinations based upon the achievement of certain
performance criteria and the continued employment of key employee/sellers (See
Note 1 to Condensed Consolidated Financial Statements). The increase was
primarily attributable to payments made in connection with the Company's
acquisition of certain assets of Albanycrest Limited and Encore Consulting,
Inc.
Depreciation and Amortization (as restated). 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 326.6% to $337,000 for
the three months ended June 30, 1998 from $79,000 in the three months ended
June 30, 1997. As a percentage of revenues, depreciation and amortization
increased to 2.3% for the three months ended June 30, 1998 from 1.1% in the
three months ended June 30, 1997. The increase in total depreciation and
amortization expense was primarily attributable to the depreciation associated
with increased capital expenditures and the amortization of increased
intangible assets.
Interest Income and Interest Expense, Net. The Company had net interest
income of $219,000 for the three months ended June 30, 1998 compared to a net
interest expense of $33,000 in the three months ended June 30, 1997. This
change was primarily attributable to the Company's repayment of all bank
borrowings under its bank lines of credit and the interest income generated
from its investment of proceeds from the initial and secondary public
offerings.
Provision for Income Taxes (as restated). The provision for income taxes
increased 826.0% to $713,000 for the three months ended June 30, 1998 from
$77,000 in the three months ended June 30, 1997. The effective tax rate for
the three months ended June 30, 1998 was 37.3%, compared to 39.8% for the
three months ended June 30, 1997. The reduction in the effective tax rate was
due to the tax benefit from tax-advantaged investments. The Company
anticipates its effective tax rate for the fiscal year ending September 30,
1998 will be 39.0%. The actual rate may vary due to a change in the estimated
amount or geographic mix of the Company's earnings, changes in U.S. tax law,
the effect of future acquisitions or a change in the Company's investment in
tax-advantaged securities.
NINE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Revenues. Revenues increased 97.9% to $36.7 million for the nine months
ended June 30, 1998 from $18.5 million in the nine months ended June 30, 1997.
This increase resulted primarily from internal growth, including an expanded
client base and several significant new contracts, and from the inclusion of
revenues from acquisitions.
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Gross Profit. Gross profit increased 115.2% to $13.0 million for the nine
months ended June 30, 1998 from $6.1 million in the nine months ended June 30,
1997. Gross margin increased to 35.5% for the nine months ended June 30, 1998
from 32.7% in the nine months ended June 30, 1997. The increase in gross
margin was primarily attributable to higher margins on certain large contracts
and an increased use of salaried as opposed to hourly employees, offset in
part by software sublicense fees and other startup costs incurred in
implementing a significant new contract.
Selling and Marketing. Selling and marketing expenses increased 46.6% to
$2.2 million for the nine months ended June 30, 1998 from $1.5 million in the
nine months ended June 30, 1997. As a percentage of revenues, selling and
marketing expenses decreased to 6.0% for the nine months ended June 30, 1998
from 8.1% in the nine months ended June 30, 1997. The increase in total
selling and marketing expenses was primarily attributable to the addition of
sales and marketing personnel and the Company's increased advertising and
marketing efforts and was partially offset by the use of sales and marketing
personnel in direct project startup expenditures included in cost of revenues.
General and Administrative. General and administrative expenses increased
81.8% to $6.4 million for the nine months ended June 30, 1998 from $3.5
million in the nine months ended June 30, 1997. As a percentage of revenues,
general and administrative expenses decreased to 17.5% for the nine months
ended June 30, 1998 from 19.1% in the nine months ended June 30, 1997. The
increase in total general and administrative expenses was primarily
attributable to building the infrastructure to support, manage and control the
Company's growth and the increased costs of being a public company.
Compensation Charge Related to Business Combinations (as restated). Business
combination compensation expenses were $646,000, or 1.8% of revenues, for the
nine months ended June 30, 1998 as compared to $100,000, or 0.5% of revenues,
for the nine months ended June 30, 1997. The increase was primarily
attributable to payments made in connection with the Company's acquisition of
certain assets of Albanycrest Limited and Encore Consulting, Inc.
Depreciation and Amortization (as restated). Depreciation and amortization
increased 335.8% to $706,000 for the nine months ended June 30, 1998 from
$162,000 in the nine months ended June 30, 1997. As a percentage of revenues,
depreciation and amortization increased to 1.9% for the nine months ended June
30, 1998 from 0.9% in the nine months ended June 30, 1997. The increase in
total depreciation and amortization expenses was primarily attributable to the
depreciation associated with increased capital expenditures and the
amortization of increased intangible assets.
Interest Income and Interest Expense, Net. The Company had net interest
income of $544,000 for the nine months ended June 30, 1998 compared to net
interest expense of $85,000 for the nine months ended June 30, 1997. This
change was primarily attributable to the Company's repayment of all bank
borrowings under its bank lines of credit and the interest income generated
from its investment of proceeds from the initial public offering.
Provision for Income Taxes (as restated). Provision for income taxes
increased 428.5% to $1.4 million for the nine months ended June 30, 1998 from
$263,000 in the nine months ended June 30, 1997. The effective tax rate for
the nine months ended June 30, 1998 was approximately 39.0%, compared to 39.8%
for the nine months ended June 30, 1997. The reduction in the effective tax
rate is due to the tax benefit from tax-advantaged investments. The Company
anticipates its effective tax rate for the fiscal year ending September 30,
1998 will be 39.0%. The actual rate may vary due to a change in the estimated
amount or geographic mix of the Company's earnings, changes in U.S. tax law,
the effect of future acquisitions or a change in the Company's investment in
tax-advantaged securities.
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LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company financed its operations
principally through cash flows from operating activities, the private
placement of equity securities and proceeds from borrowings under asset-based
lines of credit. The Company closed its initial and secondary public offerings
of Class B Common Stock in December 1997 and June 1998, respectively. The
Company received net proceeds totaling approximately $55 million, including
proceeds from the exercise of the over-allotment options in January 1998 and
June 1998. Through June 30, 1998, the Company has used $3.1 million of the
proceeds from the public offerings to repay outstanding indebtedness, $6.0
million for business combinations and $948,000 for capital equipment and
leasehold improvements, with the remainder held as working capital.
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions. In March 1998,
the Company entered into a $10 million revolving credit facility (the "Credit
Facility"). The Credit Facility 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, at the adjusted LIBOR rate plus 2.5%
or an alternate base rate plus 0.5%. The alternate base rate is the greater of
the bank's base rate or the federal funds effective rate plus 0.5%. 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 and 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 June 30, 1998, there
were no borrowings outstanding under the Credit Facility.
Net cash used in operating activities (as restated) was $2.7 million and
$307,000 for the nine months ended June 30, 1998 and June 30, 1997,
respectively. Receivables increased as a result of increases in sales volume,
which was partially offset by increased accounts payable and accrued expenses
during the periods.
Net cash used in investing activities (as restated) totaled $16.8 million
and $2.7 million for the nine months ended June 30, 1998 and June 30, 1997,
respectively. In the nine months ended June 30, 1998, the Company made
significant purchases of marketable securities, made two acquisitions and
purchased equipment and leasehold improvements. For the nine months ended June
30, 1997, the Company's investing activities consisted primarily of completing
several acquisitions in addition to the purchase of equipment and leasehold
improvements.
Net cash provided by financing activities totaled $53.2 million and $3.3
million for the nine months ended June 30, 1998 and June 30, 1997,
respectively. In the nine months ended June 30, 1998, the Company completed
its initial and secondary public offerings of Class B Common Stock raising
aggregate net proceeds of $54.8 million and made net payments of $2.8 million
under its line of credit. In the nine months ended June 30, 1997, the
Company's financing activities consisted primarily of increasing borrowings of
$2.7 million under its former credit facility.
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.
YEAR 2000
The Company has evaluated the software used in connection with the Company's
services and internal operations to determine whether it will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. The Company currently believes that its significant systems are Year
2000 compliant and anticipates that it will not incur
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material costs in connection with achieving Year 2000 compliance. While the
Company has received assurances thus far from its technology and service
providers that they will be Year 2000 compliant, no assurance can be given
that such compliance will in fact exist by the Year 2000. To the extent such
providers to the Company are not Year 2000 compliant or the Company discovers
issues within its internal systems, such failures could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Variability of Quarterly Operating Results. The Company's 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 the Company is 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; competitive
pressures on pricing of the Company's 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 the Company's services generated by
strategic partnerships and certain prime contractors; the Company's ability to
increase both the number and size of engagements from existing clients; and
economic conditions in the vertical and geographic markets served by the
Company. Due to the relatively long sales cycles for the Company's 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 the Company's ability to attract, on a timely
basis, and retain skilled personnel. A high percentage of the Company's
operating expenses, particularly personnel and rent, are fixed in advance.
Changes in the number, scope, duration or progress toward completion, of the
Company's projects or in employee utilization rates would cause significant
variations in operating results in any particular quarter. In addition, the
Company typically reaches the annual limitation on its FICA contributions for
many of its 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. Therefore, the Company believes that period-to-period
comparisons of its 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 the Company's Class B Common Stock. Due to the
foregoing factors, among others, the Company's operating results will from
time to time be below the expectations of the analysts and investors.
Concentration of Revenues; Dependence on Large Projects; Risk of
Termination. The Company has derived, and believes that it will continue to
derive, a significant portion of its revenues from a limited number of
clients. For the nine months ended June 30, 1998, the State of Missouri,
Unisys, Humana and Equifax accounted for 22.0%, 16.1%, 14.2% and 10.1% of the
Company's revenues, respectively. The volume of work performed for specific
clients is likely to vary from year to year, and a major client in one year
may not use the Company's services in a subsequent year. For example, Kaiser
Foundation Health Plan, Inc. ("Kaiser") accounted for 68.1% of the Company's
revenues in 1995 but only 7.4% of the Company's revenues in the nine months
ended June 30, 1998 as significant portions of the Company's engagement have
been completed. 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 could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the amount of the
Company's services required by any of its clients can be adversely affected by
a number of factors, including technological developments and the internal
budget cycles of such clients. As a result of the Company's focus in specific
vertical markets, economic and other conditions that affect these industries
could lead to a reduction in capital spending on IT projects, government
spending cuts or general budgetary constraints, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need to Attract and Retain Professional Staff. The Company's success will
depend in large part upon its 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 the Company offers. In particular,
qualified project managers and senior technical and professional staff
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are in great demand worldwide and competition for such persons is likely to
increase. In addition, the Company requires that a significant number of its
employees travel to client sites to perform services on its behalf, which may
make a position with the Company less attractive to potential employees. There
can be no assurance that a sufficient number of skilled employees will
continue to be available to the Company, or that the Company will be
successful in training, retaining and motivating current or future employees.
The Company's inability to attract, retain and train skilled employees or
failure of its employees to achieve expected levels of performance could
impair the Company's ability to adequately manage and staff its existing
projects and to bid for or obtain new projects, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel. The Company's success will depend in large part
upon the continued services of a number of key employees, including its Chief
Executive Officer and Chairman of the Board of Directors, James L. Bildner,
and its President and Chief Technology Officer, William G. Barton. The loss of
the services of either of Messrs. Bildner or Barton or of one or more of the
Company's other key personnel could have a material adverse effect on the
Company's business. Although the Company has entered into employment
agreements with each of Messrs. Bildner and Barton, either of them may
terminate their employment agreement at any time. If one or more of the
Company's key employees resigns from the Company 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 the Company's business, financial condition and results of
operations. In the event of the loss of any such personnel, there can be no
assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices or procedures by such
personnel.
Control by Principal Shareholders; Voting Trust. All of the holders of Class
A Common Stock have entered into a voting trust (the "Voting Trust") with
respect to their shares of Class A Common Stock, which represents 61.9% of the
Common Stock voting power at June 30, 1998. 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 the Company's equity incentive plans for its employees,
the election of a majority of the Company's directors, proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give holders of the Company's 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 concentration of
voting control could have the effect of delaying or preventing a change in
control of the Company and may affect the market price of the Class B Common
Stock. The holders of the Class A Common Stock also hold a number of shares of
Class B Common Stock that represents 20.8% of the shares of Class B Common
Stock outstanding at June 30, 1998. If such holders vote their shares of Class
B Common Stock as a block, they may be able to elect all of the directors to
be elected solely by the holders of the Class B Common Stock. In addition, as
authorized by the California Corporations Code and based upon provisions in
the Company's Amended and Restated Bylaws (the "Bylaws") and the concentration
of voting control, Messrs. Bildner and Barton may take any action which may be
taken at any meeting of shareholders, subject to certain exceptions related to
the election of directors, by written consent without formally convening a
meeting of shareholders. The Company believes that it may be necessary to
increase the authorized number of shares under the Company's Amended and
Restated 1996 Equity Incentive Plan prior to its next annual meeting and may
circulate a resolution to that effect to its control shareholders for approval
during the last quarter of fiscal 1998 or the first quarter of fiscal 1999. In
addition, the Articles and 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 that the Company has equity securities listed on Nasdaq and
has 800 or more holders of its equity securities. In addition, holders of an
aggregate of 779,762 shares of the Company's Class A Common Stock have entered
into agreements with the Company 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 trustees.
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Risks Associated with Rapid Technological Advances. The Company's success
will depend in part on its 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 the Company will be
successful in developing such IT solutions in a timely manner or that if
developed the Company will be successful in the marketplace. Delay in
developing or failure to develop new IT solutions would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Associated with Possible Acquisitions. A principal component of the
Company's business strategy is to grow by acquiring additional businesses to
expand its presence in new or existing markets. From December 1996 through
June 30, 1998, the Company acquired seven businesses. There can be no
assurance that the Company will be able to identify, acquire or profitably
manage additional businesses or to integrate successfully any acquired
businesses into the Company without substantial expense, delay or other
operational or financial problems. Acquisitions may also 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, or other unanticipated events or circumstances, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
any acquired business will achieve anticipated revenues and operating results.
The failure of the Company to manage its acquisition strategy successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Management of Growth. The Company's growth has placed, and is expected to
continue to place, significant demands on its management, financial, staffing
and other resources. The Company has expanded geographically by opening new
offices domestically and abroad, and intends to open additional offices. The
Company's ability to manage its growth effectively will require it to continue
to develop and improve its operational, financial and other internal systems,
as well as its business development capabilities, and to train, motivate and
manage its employees. In addition, the Company's future success will depend in
large part upon its ability to continue to estimate project parameters
accurately, to maintain employee utilization rates and project quality and to
meet delivery dates, particularly if the average size and number of the
Company's projects continues to increase. If the Company is unable to manage
its growth and projects effectively, such inability would have a material
adverse effect on the quality of the Company's services, its ability to retain
key personnel, and its business, financial condition and results of
operations. There can be no assurance that the Company's rate of growth will
continue or that the Company will be successful in managing any such growth.
Risks Associated with Partnerships; Risk of Termination or
Nonperformance. The Company sometimes performs client engagements in
partnership with third parties. In the government services market, the Company
often joins with other organizations, such as Unisys or BDM International,
Inc., to bid and perform an engagement. In these engagements, the Company is a
subcontractor to the prime contractor of the engagement. In the commercial
services market, the Company sometimes partners with software or technology
providers to jointly bid and perform engagements. In both markets, the Company
often depends on the software, resources and technology of its partners in
order to perform the engagement. There can be no assurance that actions or
failures attributable to the Company's partners or to the prime contractor
will not also negatively affect the Company's 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 would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Project Risks; Liability to Clients; Client Dissatisfaction. Many of the
Company's engagements involve projects which are critical to the operations of
its clients' businesses and provide benefits that may be difficult to
quantify. The failure of the Company, or of the prime contractor on an
engagement in which the Company is a subcontractor, to meet a client's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business, and could
have a material adverse effect upon its business, financial condition and
results of operations. The Company has undertaken, and may in the future
undertake, projects in which the Company guarantees performance based upon
defined operating specifications or guaranteed delivery dates. Unsatisfactory
performance or unanticipated difficulties or delays in completing such
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projects may result in client dissatisfaction and a reduction in payment to,
or payment of damages (as a result of litigation or otherwise) by, the
Company, which could have a material adverse effect upon its business,
financial condition and results of operations. In addition, unanticipated
delays could necessitate the use of more resources than initially budgeted by
the Company for a particular project, which also could have a material adverse
effect upon its business, financial condition and results of operations. Any
failure in a client's system could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. There can be no assurance that the limitations of liability set forth
in the Company's service contracts will be enforceable or will otherwise
protect the Company from liability for damages. Although the Company maintains
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 of one or more claims against the
Company that exceed available insurance coverage or changes in the Company's
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, would adversely affect the Company's
business, financial condition and results of operations.
Reliance on Government Contracts; Risk of Termination. For the nine months
ended June 30, 1998, approximately 43% of the Company's revenues were derived
from sales to government agencies. A significant reduction in government funds
available for agencies or departments to which Tier supplies IT services,
either due to budget cuts or the imposition of budgetary constraints, or a
determination by the particular federal, state or foreign government that
funding of such agencies or departments should be reduced or discontinued,
would have a material adverse effect on the Company's 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 the Company's business,
financial condition and results of operations.
Fixed Price Contracts; Budget Overruns. During the nine months ended June
30, 1998, 23.3% of the Company's revenues were generated on a fixed price
basis, rather than on a time and materials basis. The Company believes that
the percentage of total revenues attributable to fixed price contracts will
continue to be significant and may continue to grow. The Company's failure to
estimate accurately the resources required for a fixed price project or its
failure to complete its contractual obligations in a timely manner consistent
with the project plan upon which its fixed price contract is based could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may establish prices before
project design specifications are finalized, which could result in a fixed
price that proves to be too low and therefore adversely affects the Company's
business, financial condition and results of operations.
Substantial Competition. The IT services market is highly competitive and is
served by numerous international, national and local firms. Market
participants include systems consulting and integration firms, including
national accounting firms and related entities, the internal information
systems groups of its 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 the Company. In
addition, there are relatively low barriers to entry into the IT services
market, and the Company has faced, and expects to continue to face, additional
competition from new entrants into the IT services market.
The Company believes that the principal competitive factors in the IT
services market include reputation, project management expertise, industry
expertise, speed of development and implementation, technical expertise,
competitive pricing, and the ability to deliver results on a fixed price as
well as a time and materials basis. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability of its 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 its clients to perform the
services themselves; and the extent of its competitors' responsiveness to
client needs. There can be no assurance that the Company will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not cause the Company's
revenues or income to decline or otherwise materially adversely affect its
business, financial condition and results of operations.
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Intellectual Property Rights; Limited Protection; Inability to Resell or
Reuse Rights. The Company relies on a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect its intellectual property rights. The Company enters into
confidentiality agreements with its employees, generally requires that its
consultants and clients enter into such agreements and limits access to its
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to avoid the loss or misappropriation
of its proprietary information, or that the Company will be able to detect
unauthorized use of such information and take appropriate steps to enforce its
intellectual property rights.
A portion of the Company's 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. The Company also develops 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 the Company 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. 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 the Company's ability to resell or reuse
such software and application frameworks.
Although the Company believes that its 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 the Company in the future, or that
if asserted, any such claim will be successfully defended.
Risks of Conducting International Operations. For the nine months ended June
30, 1998, international operations accounted for 22.0% of the Company's total
revenues. The Company believes that the percentage of total revenues
attributable to international operations will continue to be significant and
may continue to grow. In addition, a significant portion of the Company's
sales are to large multinational companies. To meet the needs of such
companies, both domestically and internationally, the Company must provide
worldwide services, either directly or indirectly. As a result, the Company
intends to expand its existing international operations and enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect the Company's operating margins
and earnings. In order to expand international operations, the Company will
need to hire additional personnel and develop relationships with potential
international clients through acquisition or otherwise. To the extent that the
Company is unable to do so on a timely basis, any growth of the Company in
international markets would be limited, and the Company's business, financial
condition and results of operations would be materially and adversely
affected.
The Company's 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. The Company does not generally engage in hedging
transactions, but may do so in the future. There can be no assurance that
these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Year 2000. Many existing computer programs were designed and developed
without considering the impact of the upcoming change in the century and
consequently used only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000 (the "Year 2000 Issue"). In connection with providing
IT services to clients, the Company will evaluate existing systems and, to the
extent such systems will become a part of the client's upgraded system, will
correct any Year 2000 Issues, but does not specifically seek Year 2000
projects. Purchasing patterns of clients and potential clients may be affected
by Year 2000 Issues as companies expend significant resources to make existing
systems Year 2000 compliant. These expenditures may result in reduced funds
available to fund migration projects, which could have a material adverse
effect on the Company's business financial condition and results of
operations.
18
<PAGE>
The Company has evaluated the software used in connection with the Company's
services and internal operations to determine whether it will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. The Company currently believes that its significant systems are Year
2000 compliant and anticipates that it will not incur material costs in
connection with achieving Year 2000 compliance. While the Company has received
assurances thus far from its technology and service providers that they will
be Year 2000 compliant, no assurance can be given that such compliance will in
fact exist by the Year 2000. To the extent such providers to the Company are
not Year 2000 compliant or the Company discovers issues within its internal
systems, such failures could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Volatility of Stock Price. A public market for the Company's 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 the Company or its competitors, general conditions
in the IT industry or the industries in which Tier's 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 the Company's
business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. There can be no assurance that such litigation will not be
instituted in the future with respect to the Company.
Issuance of Preferred Stock; Potential Adverse Effects to Holders of 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 the
Company's shareholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Class B
Common Stock. The potential issuance of Preferred Stock may delay or prevent a
change in control of the Company, 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 the Common Stock.
No Dividends. The Company has never declared or paid cash dividends on its
capital stock and does not anticipate paying any cash dividends in the
foreseeable future.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
C. Effective April 1, 1998, in partial consideration for the acquisition of
certain assets of Simpson Fewster & Co. Pty Limited ("SFC"), the Company
issued 48,768 shares of its Class B Common Stock, valued at $712,000, in
an unregistered private placement of securities to SFC as trustee for
the SFC Unit Trust. The offer and sale of these securities were made in
reliance on the exemptions from registration under Section 4(2) and
Regulation D of the Securities Act of 1933.
D.USE OF PROCEEDS:
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING
-----------------
<S> <C>
Effective Date of the Company's Registration Statement: December 16, 1997
Commission File Number: 333-37661
Allocation of net offering proceeds:
Paydown of Bank Lines of Credit (1).................... $ 3,080
Working capital (2).................................... 13,828
Capital equipment and leasehold improvements........... 948
Business acquisitions.................................. 6,036
-----------------
$23,892
=================
</TABLE>
- --------
(1) This amount was paid to persons other than those described in Item
701(f)(4)(vii)(A).
(2) This amount represents a reasonable estimate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1* Full Recourse Promissory Note by and between the Registrant and James
Weaver, dated as of May 22, 1998.
10.2* Full Recourse Promissory Note by and between the Registrant and James
Weaver, dated as of May 22, 1998.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an exhibit to the Registrant's Form 10-Q filed on
August 13, 1998
(b) Reports on Form 8-K.
Form 8-K/A, filed on May 7, 1998, pursuant to Item 7 attaching financial
statements, pro forma financial information and exhibits related to the
acquisition of Sancha Computer Services Pty Limited and Sancha Software
Development Pty Limited.
20
<PAGE>
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.
Date: October 21, 1998
/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)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.1* Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998..........................
10.2* Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998..........................
27.1 Financial Data Schedule.........................................
</TABLE>
- --------
* Previously filed as an exhibit to the Registrant's Form 10-Q filed on August
13, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 33,136
<SECURITIES> 10,220
<RECEIVABLES> 12,630
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 56,815
<PP&E> 2,336
<DEPRECIATION> 628
<TOTAL-ASSETS> 67,789
<CURRENT-LIABILITIES> 5,590
<BONDS> 0
0
0
<COMMON> 61,904
<OTHER-SE> 28
<TOTAL-LIABILITY-AND-EQUITY> 67,789
<SALES> 36,713
<TOTAL-REVENUES> 36,713
<CGS> 0
<TOTAL-COSTS> 23,678
<OTHER-EXPENSES> 9,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 3,582
<INCOME-TAX> 1,390
<INCOME-CONTINUING> 2,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,192
<EPS-PRIMARY> .26
<EPS-DILUTED> .22
</TABLE>
