<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
------------------
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 August 7, 2000, the number of shares outstanding of the Registrant's Class
A Common Stock was 1,556,337 and the number of shares outstanding of the
Registrant's Class B Common Stock was 11,094,931.
This report contains a total of 26 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
----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and September 30,
1999................................................................................ 3
Condensed Consolidated Statements of Operations for the three and nine months ended
June 30, 2000 and 1999.............................................................. 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2000 and 1999.............................................................. 5
Notes to Condensed Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 23
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 24
Item 6. Exhibits and Reports on Form 8-K.................................................... 24
Signatures................................................................................... 25
</TABLE>
Safe Harbor Statement
Certain statements contained in this report, including statements regarding
the development of the Company's services, markets and future demand for the
Company's services, and other statements regarding matters that are not
historical facts, are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995). When used in this report, the words
"believes", "expects", "anticipates", "intends", "estimates", "shows", "will
likely" and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include risks and uncertainties;
consequently, actual results may differ materially from those expressed or
implied thereby. Factors that could cause actual results to differ materially
from those set forth herein include, but are not limited to, those factors
listed in "Factors that May Affect Future Results" section, as set forth
beginning on page 17 of this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements or factors to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
2
<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,
2000 1999
-------- -------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents...................................... $11,215 $10,121
Restricted cash................................................ 385 819
Short-term investments......................................... 7,110 8,971
Accounts receivable, net....................................... 24,845 26,151
Prepaid expenses and other current assets...................... 4,033 2,653
------- -------
Total current assets........................................ 47,588 48,715
Equipment and improvements, net.................................. 5,875 7,012
Notes and accrued interest receivable from related parties....... 1,508 1,486
Intangible assets, net........................................... 37,726 23,913
Other assets..................................................... 3,197 2,818
------- -------
Total assets................................................ $95,894 $83,944
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.............................................. $ 3,056 $ 2,759
Accrued liabilities........................................... 2,025 2,520
Accrued subcontractor expenses................................ 1,376 1,113
Accrued compensation and related liabilities.................. 4,488 3,476
Purchase price payable........................................ 8,727 98
Income taxes payable.......................................... -- 995
Deferred income............................................... 1,740 1,506
Other current liabilities..................................... 413 408
------- -------
Total current liabilities.................................. 21,825 12,875
Borrowings and capital lease obligation, less current portion... 1,308 443
Other liabilities............................................... 3,634 358
------- -------
Total liabilities.......................................... 26,767 13,676
------- -------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, no par value.................................... 65,555 66,012
Notes receivable from shareholders............................ (1,773) (1,773)
Deferred compensation......................................... (175) (352)
Accumulated other comprehensive income (loss)................. (1,637) (101)
Retained earnings............................................. 7,157 6,482
------- -------
Total shareholders' equity................................. 69,127 70,268
------- -------
Total liabilities and shareholders' equity................. $95,894 $83,944
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- ------- -------
Revenues................................ $27,657 $23,798 $79,760 $65,397
Cost of revenues........................ 16,976 13,913 48,918 39,733
------- ------- ------- -------
Gross profit............................ 10,681 9,885 30,842 25,664
Costs and expenses:
Selling and marketing................. 2,003 1,716 5,369 4,473
General and administrative............ 5,192 5,598 16,836 13,650
Other nonrecurring charges............ 644 -- 2,195 --
Compensation charge related to
business combinations................ 407 355 526 477
Purchased in-process technology....... -- 4,000 -- 4,000
Reserve for contract dispute.......... -- 1,856 -- 1,856
Depreciation and amortization......... 1,665 1,219 4,350 2,577
------- ------- ------- -------
Income (loss) from operations........... 770 (4,859) 1,566 (1,369)
Interest income (expense), net.......... 206 266 640 1,091
------- ------- ------- -------
Income (loss) before income taxes....... 976 (4,593) 2,206 (278)
Provision (benefit) for income taxes.... 405 (1,791) 1,531 (108)
------- ------- ------- -------
Net income (loss)....................... $ 571 $(2,802) $ 675 $ (170)
======= ======= ======= =======
Basic net income (loss) per share....... $ 0.05 $ (0.23) $ 0.05 $ (0.01)
======= ======= ======= =======
Shares used in computing basic net
income (loss) per share................ 12,374 12,262 12,306 12,006
======= ======= ======= =======
Diluted net income (loss) per share..... $ 0.05 $ (0.23) $ 0.05 $ (0.01)
======= ======= ======= =======
Shares used in computing diluted net
income (loss) per share................ 12,527 12,262 12,755 12,006
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
-------------------
2000 1999
------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities........ $ 6,107 $ (695)
------- --------
Investing activities:
Purchases of equipment and improvements.................... (1,702) (4,758)
Notes and accrued interest receivable from related parties. (597) (520)
Repayment on notes and accrued interest receivable from
related parties........................................... 408 212
Business combinations, net of cash acquired................ (9,747) (12,773)
Subsidiary disposal, net of cash........................... 3,497 --
Restricted cash............................................ 410 --
Purchases of available-for-sale securities................. (3,646) (26,642)
Sales of available-for-sale securities..................... 2,619 17,478
Maturities of available-for-sale securities................ 2,888 13,737
Other assets............................................... 122 20
------- --------
Net cash used in investing activities...................... (5,748) (13,246)
------- --------
Financing activities:
Borrowings under bank lines of credit...................... 1,727 909
Payments on borrowings..................................... (271) (1,466)
Repurchase of common stock................................. (1,606) (414)
Net proceeds from issuance of common stock................. 1,265 1,497
Repayment by shareholders on notes receivable.............. -- 386
Increase in capital lease obligations...................... -- 46
Payments on capital lease obligations and notes
payable to shareholders................................... (238) (159)
------- --------
Net cash provided by financing activities.................. 877 799
------- --------
Effect of exchange rate changes on cash.................... (142) (72)
------- --------
Net increase (decrease) in cash and cash equivalents....... 1,094 (13,214)
Cash and cash equivalents at beginning of period........... 10,121 22,466
------- --------
Cash and cash equivalents at end of period................. $11,215 $ 9,252
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid............................................ $ 306 $ 243
======= ========
Income taxes paid (refunded), net........................ $ 3,254 $ 3,345
======= ========
Supplemental disclosures of non-cash transactions:
Equipment acquired under capital lease obligations......... $ 54 $ 46
======= ========
Accrued purchase price and assumed liabilities
related to business combinations.......................... $13,752 $ 3,670
======= ========
Class B common stock issued in business combinations....... $ 930 $ 1,328
======= ========
Conversion of Class A common stock to Class B common stock. $ 93 $ --
======= ========
Class B common stock returned in disposal of business...... $ 1,328 $ --
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Tier
Technologies, Inc. ("Tier" or the "Company") include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. In the opinion of management,
the condensed consolidated financial statements reflect all normal and recurring
adjustments which are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows as of the dates and for
the periods presented. The condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Consequently, these statements do not include all the
disclosures normally required by generally accepted accounting principles for
annual financial statements nor those normally made in the Company's Annual
Report on Form 10-K. Accordingly, reference should be made to the Company's Form
10-K filed on December 10, 1999 and other reports the Company filed with the
Securities and Exchange Commission for additional disclosures, including a
summary of the Company's accounting policies, which have not materially changed.
The consolidated results of operations for the three months and nine months
ended June 30, 2000 are not necessarily indicative of results that may be
expected for the fiscal year ending September 30, 2000 or any future period, and
the Company makes no representations related thereto.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities and the results of operations
during the reporting period. Actual results could differ materially from those
estimates.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
NOTE 2 -- REVENUE RECOGNITION
The majority of the Company's revenues are derived primarily from professional
fees billed to clients on either a time and materials basis, a fixed price basis
or a per-transaction basis. Time and materials revenues are recognized as
services are performed. Revenues from fixed price contracts are recognized using
the percentage-of-completion method of contract accounting based on the ratio of
incurred costs to total estimated costs. Losses on contracts are recognized when
they become known and reasonably estimable. Actual results of contracts may
differ from management's estimates and such differences could be material to the
consolidated financial statements. Revenues from performance-based contracts are
recognized based on fees charged on a per-transaction basis. Most of the
Company's contracts are terminable by the client following limited notice and
without significant penalty to the client. The completion, cancellation or
significant reduction in the scope of a large project would have a material
adverse effect on the Company's business, financial condition and results of
operations. Unbilled receivables represent revenue recognized in excess of
amounts billed in accordance with contractual billing terms. Unbilled
receivables were $7,529,000 and $8,390,000 at June 30, 2000 and September 30,
1999, respectively. Unbilled receivables for two clients accounted for 11.5%
and 10.4% of total accounts receivable at June 30, 2000.
Worldwide revenues derived from sales to governmental agencies were
$16,415,000 and $9,054,000 for the three months ended June 30, 2000 and 1999,
respectively and $47,394,000 and $20,699,000 for the nine months ended June 30,
2000 and 1999, respectively.
6
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3 -- ACQUISITIONS
Simpson Fewster & Co. Pty Limited ("SFC").
During the quarter ended June 30, 2000, the Company accrued approximately
$120,000 (based on a current exchange rate of AU$1.66 to US $1.00) as a result
of the achievement of certain performance targets in accordance with the
purchase agreement for SFC. This charge was recorded as compensation charge
related to business combinations since it was contingent upon the continued
employment of a key employee/seller. The Company recorded an additional $54,000
of compensation charge related to business combinations resulting from the
amortization of the value of shares to be released over a three-year period in
connection with the acquisition of SFC.
Infact Pty Limited ("Infact").
During the quarter ended June 30, 2000, the Company accrued approximately
$794,000 (based on a current exchange rate of AU$1.66 to US $1.00) as a result
of the achievement of certain performance targets in accordance with the
purchase agreement for Infact. Approximately $233,000 of this charge was
recorded as compensation charge related to business combinations since it was
contingent upon the continued employment of a key employee/seller, and
approximately $561,000 was recorded as additional purchase price.
Pro Forma Disclosure of Significant Acquisition
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if The SCA Group, Inc. and
Harris Chapman (The SCA Group, Inc. and Harris Chapman, collectively referred to
herein as "SCA") had been purchased by the Company as of October 1, 1998, after
including the impact of certain pro forma adjustments, such as the unaudited
increased amortization expense due to the recording of intangible assets:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
(in thousands)
Revenues...................................................... $27,657 $28,793 $86,546 $79,040
Net income (loss)............................................. $ 571 $(2,990) $ 5 $(1,612)
Basic net income (loss) per share............................. $ 0.05 $ (0.24) $ 0.00 $ (0.13)
Diluted net income (loss) per share........................... $ 0.05 $ (0.24) $ 0.00 $ (0.13)
Shares used in computing basic net income (loss) per share.... 12,374 12,262 12,306 12,006
Shares used in computing diluted net income (loss) per share.. 12,527 12,262 12,755 12,006
</TABLE>
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.
7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 4 -- BANK LINES OF CREDIT
At June 30, 2000, the Company had an $8 million revolving credit facility
which matures on August 27, 2000. The total commitment amount is limited to the
lesser of 85% of eligible accounts receivable or $8 million and is secured by
first priority liens and security interests in substantially all of the
Company's assets, including a pledge of all stock of its domestic subsidiaries
and a pledge of approximately 65% of the stock of the Company's foreign
subsidiaries. Interest is based on either the adjusted LIBOR rate plus 2.5% or
an alternate base rate plus 0.5%, at the Company's option. The alternate base
rate is the greater of the bank's base rate or the federal funds effective rate
plus 0.5%. Among other provisions, the credit facility requires the Company to
maintain certain minimum financial ratios. As of June 30, 2000, the Company was
in compliance with all financial ratios. As of June 30, 2000 and September 30,
1999, the Company had no outstanding borrowings under this credit facility.
At June 30, 2000, the Company (through one of its Australian subsidiaries) had
a $1.6 million revolving line of credit with St. George Bank Limited of
Australia (based on a current exchange rate of AU $1.66 to US $1.00). Under the
terms of the agreement, the principal balance of the credit line will reduce by
approximately $142,000 per quarter to a maximum line of approximately
$1,205,000. The line of credit bears interest at fixed rates that are set at
the time of each drawdown on the line. As of June 30, 2000, the available
principal balance of the line of credit was reduced by two letters of credit
totaling approximately $72,000. In December 1999, the balance of the line of
credit was converted to a variable rate loan ("Loan"). The variable rate is
based upon the bank's prime rate less 1.25% (8.75% per annum as of June 30,
2000) and interest is payable monthly. As of June 30, 2000, the outstanding
balance on the Loan was approximately $1,356,000. Among other provisions, the
Loan requires the Company to maintain certain minimum financial ratios. As of
June 30, 2000, the Company was in compliance with the Loan covenants.
NOTE 5 -- NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Numerator:
Net income (loss)................................................... $ 571 $(2,802) $ 675 $ (170)
======= ======= ======= =======
Denominator for basic net income (loss) per share-weighted average
common shares outstanding............................................ 12,374 12,262 12,306 12,006
Effects of dilutive securities:
Common stock options................................................ 137 -- 269 --
Common stock contingently issuable.................................. 16 -- 180 --
------- ------- ------- -------
Denominator for diluted net income (loss) per share-adjusted weighted
average common shares and assumed conversions ....................... 12,527 12,262 12,755 12,006
======= ======= ======= =======
Basic net income (loss) per share...................................... $ 0.05 $ (0.23) $ 0.05 $ (0.01)
======= ======= ======= =======
Diluted net income (loss) per share.................................... $ 0.05 $ (0.23) $ 0.05 $ (0.01)
======= ======= ======= =======
</TABLE>
Options to purchase approximately 3,371,000 and 2,313,000 shares of Class B
common stock at exercise prices ranging from $5.78 to $17.81 per share and $6.81
to $17.81 per share, respectively, were not included in the computation of
diluted net income (loss) per share for the three months and nine months ended
June 30, 2000, respectively, because the options' exercise prices were greater
than the average market price of the shares for these periods.
8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 6 -- COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
---------------- ------------------
2000 1999 2000 1999
----- ------- ------- ------
<S> <C> <C> <C> <C>
(in thousands)
Net income (loss)............................. $ 571 $(2,802) $ 675 $ (170)
Foreign currency translation adjustment....... (407) 647 (1,536) 1,069
----- ------- ------- ------
Total comprehensive income (loss)............. $ 164 $(2,155) $ (861) $ 899
===== ======= ======= ======
</TABLE>
NOTE 7 -- OTHER NONRECURRING CHARGES
In April 2000, the Company recorded $644,000 of expense for the severance
costs related to a former officer.
In March 2000, the Company completed the sale of its subsidiary, Midas
Computer Software Limited ("Midas"), for approximately $3.7 million (based on
an exchange rate of GBP 0.64 to US $1.00), net of estimated selling expenses.
The gross proceeds, including repayment of intercompany debt of approximately
$1.4 million, amounted to approximately $2.6 million in cash and $1.3 million
attributable to a release of 51,074 shares of the Company's Class B common stock
and a share guarantee on the original acquisition. The Company recorded a
nonrecurring loss of approximately $1.3 million as a result of the sale of
Midas.
In December 1999, the Company recorded $263,000 for severance costs related to a
farmer officer.
NOTE 8 -- ALLIANCE AGREEMENT
In September 1999, the Company entered into a long-term strategic alliance
("Alliance Agreement"), with Siemens Business Services Limited ("SBS").
Beginning October 1, 2000, under the amended Alliance Agreement, the Company has
committed to utilizing a minimum amount of resources from the SBS Application
Services Center ("ASC"). The Company will market the ASC's services worldwide in
exchange for fees based on the utilization of resources. To the extent there is
a shortfall in minimum utilization, the Company's obligation under the Alliance
Agreement shall not exceed $16.4 million (based on a current exchange rate of
GBP 0.66 to US $1.00) over the five-year life of the agreement. Through June
30, 2000, there were no minimum utilization requirements under the Alliance
Agreement. The Company will also receive a minimum of approximately $10.6
million (based on a current exchange rate of GBP 0.66 to US $1.00) for
consulting services provided over the life of the Alliance Agreement, of which
approximately $5.7 million has not been recognized as of June 30, 2000.
9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 9 -- SEGMENT INFORMATION
The Company operates in four reportable segments: U.S. Commercial Services,
U.S. Government Services, Australian Operations and United Kingdom Operations.
The Company evaluates the performance of its operating segments based on revenue
and gross profit, while other operating costs are evaluated on a geographical
basis. Accordingly, the Company does not include selling and marketing
expenses, general and administrative expenses, depreciation and amortization
expense not attributable to payment processing centers, interest income
(expense), other income (expense) or income tax expense in segment
profitability. The table below presents financial information for the four
reportable segments (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Total
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 2000:
Revenues...................................... $5,676 $12,629 $6,669 $2,683 $27,657
Gross profit.................................. 2,435 4,985 2,390 871 10,681
Three Months Ended June 30, 1999:
Revenues...................................... $7,325 $ 7,630 $5,521 $3,322 $23,798
Gross profit.................................. 3,970 2,488 2,247 1,180 9,885
<CAPTION>
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Total
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Nine Months Ended June 30, 2000:
Revenues...................................... $13,049 $37,370 $20,313 $9,028 $79,760
Gross profit.................................. 4,740 15,500 7,480 3,122 30,842
Nine Months Ended June 30, 1999:
Revenues...................................... $25,930 $17,308 $13,790 $8,369 $65,397
Gross profit.................................. 12,277 5,359 5,378 2,650 25,664
</TABLE>
NOTE 10 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The new standard requires companies to record derivatives on the balance
sheet as assets or liabilities measured at fair value. Gains or losses resulting
from changes in the values of those derivatives will be reported in the
statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The key criterion for
hedge accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The Company is required to adopt FAS 133 in the fourth
quarter of fiscal 2001 and has not yet determined the impact, if any, that the
adoption of FAS 133 will have on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 is effective no later than the quarter ending December 31, 2000.
The Company has not yet determined the impact, if any, that the adoption of SAB
101 will have on the consolidated financial statements.
10
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 10 -- NEW ACCOUNTING PRONOUNCEMENTS (continued)
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" (the "Interpretation."). The Intepretation is intended to
provide guidance for certain issues that have arisen in practice since the
issuance of APB 25. The Company will adopt the Interpretation for all
transactions entered into after July 1, 2000. The adoption of this
Interpretation will not have an impact on the consolidated financial statements.
NOTE 11 -- CONTRACT DISPUTE
The Company received a notice dated December 17, 1998 that a prime contractor
was exercising its right to terminate one of the Company's Australian projects
alleging a breach of the sub-contract. The Company believes that the termination
was not proper under the terms of the sub-contract and that it has not breached
the agreement. On June 28, 1999, after a series of discussions with the prime
contractor, the Company filed a federal civil action against the prime
contractor seeking monetary damages in excess of $2 million and a declaration
that the Company had performed its duties under the agreement, and that the
prime contractor is obligated to pay the Company all amounts outstanding under
the agreement. At that time, the Company established a reserve for the net
receivable balance of $1,856,000. On August 11, 1999, the Company received the
prime contractor's answer and counterclaim in response to the Company's
complaint. The prime contractor denied the Company's claim and counterclaimed
alleging breach of contract and seeking declaratory relief and damages in excess
of $8 million and indemnification for damages, claims, penalties, fines and/or
other sanctions which may be levied in the future by the client of the prime
contractor. The Company and the prime contractor have agreed in principle to the
terms to settle this dispute. The agreed upon terms of this settlement will not
have a material adverse effect on the Company's financial condition, results of
operations and cash flows.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Tier provides comprehensive business solutions where information technology
("IT") implementations are a significant component of an overall business
solution. Through offices located in the United States, Australia and the United
Kingdom, the Company works closely with Fortune 1000, government and other
clients to determine, evaluate and implement both a business and 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 $79.8 million in the nine months ended June 30, 2000 from
$65.4 million in the nine months ended June 30, 1999. A significant portion of
the Company's revenues are derived from sales to government agencies. For the
nine months ended June 30, 2000, approximately 59.4% of the Company's revenues
were derived from sales to government agencies, as compared to 31.7% for the
nine months ended June 30, 1999. The Company's workforce, composed of employees,
independent contractors and subcontractors, has grown to 916 on June 30, 2000
from 706 on June 30, 1999.
The Company's revenues are derived primarily from professional fees billed to
clients on either a time and materials basis, a fixed price basis, or a per-
transaction basis. Time and materials revenues are recognized as services are
performed and expenses are incurred. Fixed price revenues are recognized using
the percentage-of-completion method, based upon the ratio of costs incurred to
total estimated project costs. Revenues from performance-based contracts are
recognized based on fees charged on a per-transaction basis. The percentage of
the Company's revenues generated on a fixed price basis was 27.2% and 21.0% for
the three months ended June 30, 2000 and 1999, respectively, and 30.0% and 13.2%
for the nine months ended June 30, 2000 and 1999, respectively. The percentage
of revenues generated on a per-transaction basis was 19.1% and 16.1% for the
three and nine months ended June 30, 2000. Substantially all of Tier's
contracts are terminable by the client following limited notice and without
significant penalty to the client. From time to time, in the regular course of
its business, the Company negotiates the modification, termination, renewal or
transition of time and materials and fixed price contracts that may involve an
adjustment to the scope or nature of the project, billing rates or outstanding
receivables. To date, the Company has generally been able to obtain an
adjustment in its fees following a significant change in the assumptions upon
which the original estimate was made, but there can be no assurance that the
Company will be successful in obtaining adjustments in the future. If the
Company significantly overestimates the volume for transaction-based contracts
or underestimates the resources or time required for fixed price contracts, its
financial condition and results of operations would be materially and adversely
affected.
The Company has derived a significant portion of its revenues from a small
number of large clients. For some of these clients, the Company performs a
number of different projects pursuant to multiple contracts or purchase orders.
For the three and nine months ended June 30, 2000, no client accounted for more
than 10% of the Company's revenues. The Company anticipates that a substantial
portion of its revenues will continue to be derived from a small number of large
clients. The completion, cancellation or significant reduction in the scope of a
large project would have a material adverse effect on the Company's business,
financial condition and results of operations.
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. The Company manages its personnel utilization rates by
carefully monitoring its needs and anticipating personnel increases based on
specific project requirements. To the extent revenues do not increase at a rate
commensurate with these additional expenses, the Company's results of operations
would be materially and adversely affected. In addition, to the extent that the
Company is unable to hire and retain salaried employees to staff new or existing
client engagements or retain hourly employees or contractors, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
From December 1996 through June 30, 2000, the Company completed fifteen
acquisitions for a total cost of approximately $48.4 million in cash and shares
of Class B common stock, excluding future contingent payments. The Company also
incurred $2.3 million in compensation charges related to business combinations
resulting from these acquisitions. Generally, contingent payments are recorded
as additional purchase price at the time the payment can be determined beyond a
reasonable doubt. If a contingent payment is based, in part, on a seller's
continuing employment with
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the Company, the payments are recorded as compensation expense over the vesting
period when the amount is deemed probable. These acquisitions helped the Company
to expand its operations in the United States, to establish its operations in
Australia and the United Kingdom, to broaden the Company's client base, service
offerings and technical expertise and to supplement its human resources. In
March 2000, the Company sold its United Kingdom subsidiary, Midas Computer
Software Limited ("Midas"), for approximately $3.7 million (based on an exchange
rate of GBP 0.64 to US $1.00), net of estimated selling expenses. International
operations accounted for 36.8% and 33.9% of revenues for the nine months ended
June 30, 2000 and June 30, 1999, respectively. The Company believes that the
percentage of total revenues attributable to international operations will
continue to be significant. International operations may subject the Company to
foreign currency translation adjustments and transaction gains and losses for
amounts denominated in foreign currencies.
Results of Operations
The following table sets forth, for the periods indicated, selected statements
of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
---------------- ----------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues .................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .......................................... 61.4 58.5 61.3 60.8
----- ----- ----- -----
Gross profit .............................................. 38.6 41.5 38.7 39.2
Costs and expenses:
Selling and marketing ................................... 7.2 7.2 6.7 6.8
General and administrative .............................. 18.8 23.5 21.1 20.9
Other nonrecurring charges ............................. 2.3 -- 2.8 --
Compensation charge related to business combinations .... 1.5 1.5 0.7 0.7
Purchased in-process technology ......................... -- 16.8 -- 6.1
Reserve for contract dispute ............................ -- 7.8 -- 2.9
Depreciation and amortization ........................... 6.0 5.1 5.4 3.9
----- ----- ----- -----
Income (loss) from operations ............................. 2.8 (20.4) 2.0 (2.1)
Interest income (expense), net ............................ 0.7 1.1 0.8 1.7
----- ----- ----- -----
Income (loss) before income taxes ......................... 3.5 (19.3) 2.8 (0.4)
Provision (benefit) for income taxes ..................... 1.4 (7.5) 1.9 (0.1)
----- ----- ----- -----
Net income (loss) ......................................... 2.1% (11.8)% 0.9% (0.3)%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 2000 and June 30, 1999
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 16.2% to $27.7
million for the three months ended June 30, 2000 from $23.8 million for the
three months ended June 30, 1999. This increase resulted primarily from multiple
acquisitions and internal growth in revenues from government operations,
partially offset by a decrease in revenues from commercial operations.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries and
incentive compensation, independent contractor and subcontractor costs, employee
benefits, payroll taxes, travel expenses, and any equipment or software costs.
For payment processing center operations, cost of revenues also include
facility, equipment and overhead costs. Gross profit increased 8.1% to $10.7
million for the three months ended June 30, 2000 from $9.9 million in the three
months ended June 30, 1999. Gross profit as a percentage of revenues decreased
to 38.6% for the three months ended June 30, 2000 as compared to 41.5% in the
three months ended June 30, 1999. This decrease resulted primarily from
declining margin on the final maintenance phase of a large systems project.
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<PAGE>
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, advertising and marketing expenditures,
travel costs and product literature. Selling and marketing expenses increased
16.7% to $2.0 million for the three months ended June 30, 2000 from $1.7 million
for the three months ended June 30, 1999. As a percentage of revenues, selling
and marketing expenses remained constant at 7.2% for the three months ended June
30, 2000 and June 30, 1999. The increase in selling and marketing expenses in
total dollars was primarily attributable to the addition of sales and marketing
personnel through acquisitions. The Company expects selling and marketing
expenses to increase in future quarters as the Company continues to make
investments in its marketing and branding initiatives and its business
development efforts.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management and administrative
functions, human resources, recruiting, finance, legal, accounting and
information systems, as well as professional fees related to legal, audit, tax,
external financial reporting and investor relations matters. General and
administrative expenses decreased 7.3% to $5.2 million for the three months
ended June 30, 2000 from $5.6 million for the three months ended June 30, 1999.
As a percentage of revenues, general and administrative expenses decreased to
18.8% for the three months ended June 30, 2000 from 23.5% for the three months
ended June 30, 1999. The decrease in general and administrative expenses was
primarily attributable to the disposition of Midas in March 2000. Over the
longer term, the Company expects general and administrative expenses as a
percentage of revenues to remain in a range comparable to the current quarter.
Other Nonrecurring Charges. The other nonrecurring charge of $644,000 for the
three months ended June 30, 2000, resulted primarily from severance costs paid
to a former officer.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations consists primarily of certain contingent
performance payments made in connection with prior acquisitions. Compensation
charge related to business combinations was $407,000 for the three months ended
June 30, 2000 and $355,000 for the three months ended June 30, 1999. As a
percentage of revenues, compensation charge related to business combinations was
1.5% for the three months ended June 30, 2000 and June 30, 1999. For the three
months ended June 30, 2000 and 1999, the compensation charge related to business
combinations resulted from the amortization of the value of shares to be
released over a three year period in connection with the acquisition of Simpson
Fewster & Co. Pty Limited ("SFC") and contingent payments earned in accordance
with the acquisition agreements for SFC and Infact Pty Limited as trustee of the
Infact Unit Trust. 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 and purchases of
certain intellectual property. Depreciation and amortization increased 36.6% to
$1.7 million for the three months ended June 30, 2000 from $1.2 million for the
three months ended June 30, 1999. As a percentage of revenues, depreciation and
amortization increased to 6.0% for the three months ended June 30, 2000 from
5.1% for the three months ended June 30, 1999. The increase in depreciation and
amortization expense in total dollars was primarily attributable to the
amortization of increased intangible assets from business combinations, the
amortization of the costs associated with the purchase of a project management
system, and the depreciation associated with increased capital expenditures. The
Company expects that depreciation and amortization will continue to increase in
absolute dollars.
Interest Income (Expense), Net. Net interest income decreased 22.6% to
$206,000 for the three months ended June 30, 2000 compared to net interest
income of $266,000 for the three months ended June 30, 1999. This decrease was
primarily attributable to lower interest income generated on a smaller
investment balance.
Provision (benefit) for Income Taxes. The provision for income taxes was
$405,000 for the three months ended June 30, 2000 compared to a benefit for
income taxes of $1.8 million for the three months ended June 30, 1999. For the
three months ended June 30, 2000 and 1999, the Company's effective tax rate was
41.5% and 39%, respectively. The future tax rate may vary due to a variety of
factors, including, but not limited to, the relative income contribution by
domestic and
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<PAGE>
foreign operations, changes in statutory tax rates, the amount of tax exempt
interest income generated during the year, the inability to utilize foreign tax
credits and any non-deductible items related to acquisitions or other
nonrecurring charges. The Company will continue to monitor the effective tax
rate on a quarterly basis.
Nine Months Ended June 30, 2000 and June 30, 1999
Revenues. Revenues increased 22.0% to $79.8 million for the nine months
ended June 30, 2000 from $65.4 million for the nine months ended June 30, 1999.
This increase resulted primarily from multiple acquisitions and internal growth,
partially offset by a decrease in revenues from commercial operations.
Gross Profit. Gross profit increased 20.2% to $30.8 million for the nine
months ended June 30, 2000 from $25.7 million for the nine months ended June 30,
1999. Gross margin decreased to 38.7% for the nine months ended June 30, 2000
from 39.2% for the nine months ended June 30, 1999.
Selling and Marketing. Selling and marketing expenses increased 20.0% to
$5.4 million for the nine months ended June 30, 2000 from $4.5 million for the
nine months ended June 30, 1999. As a percentage of revenues, selling and
marketing expenses decreased to 6.7% for the nine months ended June 30, 2000
from 6.8% for the nine months ended June 30, 1999. The increase in selling and
marketing expenses in total dollars was primarily attributable to the addition
of sales and marketing personnel, both internally and through acquisition, to
support the higher revenue base and increased selling and marketing efforts.
General and Administrative. General and administrative expenses increased
23.3% to $16.8 million for the nine months ended June 30, 2000 from $13.7
million for the nine months ended June 30, 1999. As a percentage of revenues,
general and administrative expenses increased to 21.1% for the nine months ended
June 30, 2000 from 20.9% for the nine months ended June 30, 1999. The increase
in general and administrative expenses, both in total dollars and as a
percentage of revenues, was primarily attributable to building the
infrastructure to support, manage and control the Company's growth, as well as
the costs of integrating and operating acquired businesses.
Other Nonrecurring Charges. The other nonrecurring charges of $2.2 million
for the nine months ended June 30, 2000, resulted primarily from the write-down
and subsequent sale of Midas and severance costs for two former officers.
Compensation Charge Related to Business Combinations. Business combination
compensation expenses were $526,000, or 0.7% of revenues, for the nine months
ended June 30, 2000 as compared to $477,000, or 0.7% of revenues, for the nine
months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization increased 68.8%
to $4.4 million for the nine months ended June 30, 2000 from $2.6 million for
the nine months ended June 30, 1999. As a percentage of revenues, depreciation
and amortization increased to 5.4% for the nine months ended June 30, 2000 from
3.9% for the nine months ended June 30, 1999. The increase in depreciation and
amortization expenses was primarily attributable to the amortization of
increased intangible assets from business combinations, the amortization of the
costs associated with the purchase of a project management system, and the
depreciation associated with increased capital expenditures.
Interest Income (Expense), Net. The Company had net interest income of
$640,000 for the nine months ended June 30, 2000 compared to net interest income
of $1.1 million for the nine months ended June 30, 1999. This decrease was
primarily attributable to lower interest income generated on a smaller
investment balance.
Provision (benefit) for Income Taxes. Provision for income taxes was $1.5
million for the nine months ended June 30, 2000 compared to a benefit for income
taxes of $108,000 for the nine months ended June 30, 1999. The provision for
income taxes for the nine months ended June 30, 2000 of 69.4% was impacted by
other nonrecurring charges for which no tax benefit can be recorded. Excluding
these nonrecurring charges, the Company's effective tax rate for the nine months
ended June 30, 2000 would have been 41.5%. For the nine months ended June 30,
1999, the Company's effective tax rate
15
<PAGE>
was 39.0%. The future tax rate may vary due to a variety of factors, including,
but not limited to, the relative income contribution by domestic and foreign
operations, changes in statutory tax rates, the amount of tax exempt interest
income generated during the year, the inability to utilize foreign tax credits
and any non-deductible items related to acquisitions or other nonrecurring
charges. The Company will continue to monitor the effective tax rate on a
quarterly basis.
Liquidity and Capital Resources
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions and potential
contingent payments related to prior acquisitions. The Company maintains an $8
million revolving credit facility (the "Credit Facility") which matures August
27, 2000. The Credit Facility allows the Company to borrow the lesser of an
amount equal to 85% of eligible accounts receivable or $8 million. The Credit
Facility bears interest, at the Company's option, either at the adjusted LIBOR
rate plus 2.5% per annum or an alternate base rate plus 0.5%. The alternate base
rate is the greater of the bank's prime rate or the federal funds effective rate
plus 0.5%. The Credit Facility is secured by first priority liens and security
interests in substantially all of the Company's assets, including a pledge of
all stock of its domestic subsidiaries and a pledge of approximately 65% of the
stock of the Company's foreign subsidiaries. The Credit Facility contains
certain restrictive covenants, including limitations on the amount of loans the
Company may extend to officers and employees, the incurrence of additional debt
and a prohibition against the payment of dividends (other than dividends payable
in its stock). The Credit Facility requires the maintenance of certain financial
ratios, including a minimum quarterly net income requirement and a minimum ratio
of total liabilities to earnings before interest, taxes, depreciation and
amortization. As of June 30, 2000, the Company was in compliance with all
financial ratios and there were no borrowings outstanding under the Credit
Facility.
The Company (through one of its Australian subsidiaries) also maintains a $1.6
million revolving line of credit with St. George Bank Limited of Australia
(based on a current exchange rate of AU $1.66 to US $1.00). Under the terms of
the agreement, the principal balance of the credit line will reduce by
approximately $142,000 per quarter to a maximum line of approximately
$1,205,000. The line of credit bears interest at fixed rates that are set at
the time of each drawdown on the line. As of June 30, 2000, the available
principal balance of the line of credit was reduced by two letters of credit
totaling approximately $72,000. In December 1999, the balance of the line of
credit was converted to a variable rate loan ("Loan"). The variable rate is
based upon the bank's prime rate less 1.25% (8.75% per annum as of June 30,
2000) and interest is payable monthly. As of June 30, 2000, the outstanding
balance on the Loan was approximately $1,356,000. Among other provisions, the
Loan requires the Company to maintain certain minimum financial ratios. As of
June 30, 2000, the Company was in compliance with the Loan covenants.
Net cash provided by operating activities was $6.1 million in the nine months
ended June 30, 2000 as compared to net cash used in operating activities of
$695,000 in the nine months ended June 30, 1999. The change is primarily
attributable to a net increase in accounts payable and accrued liabilities,
partially offset by payments of Australian and U.S. tax liabilities and a net
decrease in outstanding accounts receivable.
Net cash used in investing activities was $5.7 million in the nine months
ended June 30, 2000 and $13.2 million in the nine months June 30, 1999. The
change is primarily attributable to a lower rate of business combinations and
fixed asset purchases in the current year compared to the prior year. Capital
expenditures, including equipment acquired under capital lease, but excluding
assets acquired or leased through business combinations, were approximately $1.7
million in the nine months ended June 30, 2000 and $4.8 million in the nine
months ended June 30, 1999. The Company anticipates that it may have increased
capital expenditures depending on the number of future payment processing center
operations.
Net cash provided by financing activities totaled $877,000 in the nine months
ended June 30, 2000 and $799,000 in the nine months ended June 30, 1999. The
increase in net cash provided by financing activities resulted primarily from
the borrowings under the Australian bank line of credit and proceeds from the
issuance of common stock, partially offset by the repurchase of common stock.
The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, will be adequate
to fund the Company's operations for at least the next 12 months. There can
16
<PAGE>
be no assurance that changes will not occur that would consume available capital
resources before such time. The Company's capital requirements depend on
numerous factors, including potential acquisitions, contingent payments earned,
new contracts, the timing of the receipt of accounts receivable and employee
growth. The Company's ability to obtain replacement or additional credit
facilities will depend upon prevailing market conditions, the Company's
financial condition and the terms and conditions of such additional facilities.
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. The Company is also involved in a
contract dispute with a prime contractor. The Company and the prime contractor
have agreed in principle to the terms to settle this dispute. The Company's
financial condition and results of operations will not be materially and
adversely affected by the agreed upon terms of this settlement.
Factors That May Affect Future Results
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Form 10-Q.
Tier is referred to in this section as "we" or "us".
Variability of Quarterly Operating Results. Our revenues and operating
results are subject to significant variation from quarter to quarter due to a
number of factors, including:
. the accuracy of estimates of resources required to complete ongoing
projects,
. the number, size and scope of projects in which we are engaged,
. the contractual terms and degree of completion of such projects,
. start-up costs including software sublicense fees incurred in connection
with the initiation of large projects,
. our ability to staff projects with salaried employees versus hourly
independent contractors and sub-contractors,
. competitive pressures on the pricing of our services,
. any delays incurred in connection with, or early termination of, a project,
. employee utilization rates,
. the number of billable days in a particular quarter,
. the adequacy of provisions for losses,
. the accuracy of estimated transaction volume in computing transaction rates
for payment processing center operations,
. demand for our services generated by strategic partnerships and certain
prime contractors,
. our ability to increase both the number and size of engagements from
existing clients, and
. economic conditions in the vertical and geographic markets we serve.
Due to the relatively long sales cycles for our services in the government
services market, the timing of revenue is difficult to forecast. In addition,
the achievement of anticipated revenues is substantially dependent on our
ability to attract, on a timely basis, and retain skilled personnel. A high
percentage of our operating expenses, particularly personnel and rent, are fixed
in advance. In addition, we typically reach the annual limitation on FICA
contributions for many of our consultants before the end of the calendar year.
As a result, payroll taxes as a component of cost of sales will vary from
17
<PAGE>
quarter to quarter during the fiscal year and will generally be higher at the
beginning of the calendar year. Revenues are impacted by the amount of holidays
and vacations taken both within our consultant base and by our clients. As a
result, revenues will vary from quarter to quarter during the fiscal year.
Because of the variability of our quarterly operating results, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful, should not be relied upon as indications of future performance and
may result in volatility in the price of our Class B common stock. In addition,
our operating results will from time to time be below the expectations of
analysts and investors.
Potential Adverse Effect on Operating Results from Dependence on Large
Projects, Limited Clients or Certain Market Sectors. The completion,
cancellation, significant reduction in the scope or imposition of significant
penalties for the Company's failure to meet scheduled delivery requirements of
a large project or a project with certain clients would have a material adverse
effect on our business, financial condition and results of operations. Most of
our contracts are terminable by the client following limited notice and without
significant penalty to the client. We have derived, and believe that we will
continue to derive, a significant portion of our revenues from a limited number
of clients. For the nine months ended June 30, 2000, no clients accounted for
more than 10% of the Company's revenues. The volume of work performed for
specific clients is likely to vary from period to period, and a major client in
one period may not use our services in a subsequent period. In addition, as a
result of our focus in specific vertical markets, economic and other conditions
that affect the companies in these markets could have a material adverse effect
on our business, financial condition and results of operations.
In addition, under a contract with Siemens Business Services Limited ("SBS") the
Company is marketing the services of SBS' Application Services Center, in
exchange for success fees based on the utilization of SBS' resources. The
Company has committed to utilizing a minimum number of full-time resources from
SBS. The Company's payment obligations to SBS, to the extent there is a
shortfall in the utilization of these resources, shall not under any
circumstances exceed $16.4 million (based on a current exchange rate of GBP 0.66
to US $1.00) over the life of the five-year contract.
Dependence on Contracts with Government Agencies. For the nine months ended
June 30, 2000, approximately 59.4% of our revenues were derived from sales to
government agencies. Such government agencies may be subject to budget cuts or
budgetary constraints or a reduction or discontinuation of funding. A
significant reduction in funds available for government agencies to purchase IT
services would have a material adverse effect on our business, financial
condition and results of operations. In addition, the loss of a major government
client, or any significant reduction or delay in orders by such client, would
have a material adverse effect on our business, financial condition and results
of operations.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. An
important component of our business strategy is to expand our presence in new or
existing markets by acquiring additional businesses. From December 1996 through
June 30, 2000, we acquired fifteen businesses. There can be no assurance that we
will be able to identify, acquire or profitably manage additional businesses or
to integrate successfully any acquired businesses without substantial expense,
delay or other operational or financial problems. Acquisitions involve a number
of special risks, including:
. diversion of management's attention,
. failure to retain key personnel,
. increased general and administrative expenses,
. client dissatisfaction or performance problems with an acquired firm,
. assumption of unknown liabilities, and
. other unanticipated events or circumstances.
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations.
Inability to Manage Growth. If we are unable to manage our growth
effectively, such inability would have a material adverse effect on the quality
of our services, our ability to retain key personnel, and our business,
financial condition and results of operations. Our growth has placed, and is
expected to continue to place, significant demands on our management, financial,
staffing and other resources. We have expanded geographically by opening new
offices domestically and abroad, and intend to open additional offices. Our
ability to manage growth effectively will require us to continue to develop and
improve our operational, financial and other internal systems, as well as our
business development capabilities, and to train, motivate and manage our
employees. In addition, as the average size and number
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<PAGE>
of our projects continues to increase, we must be able to manage such projects
effectively. There can be no assurance that our rate of growth will continue or
that we will be successful in managing any such growth.
Failure to Estimate Accurately Fixed Price and Performance-Based Contracts.
Our failure to estimate accurately the resources or time required for a fixed
price project or the expected volume of transactions under a performance-based
contract could have a material adverse effect on our business, financial
condition and results of operations. Under fixed price contracts, we receive our
fee if we meet specified objectives such as completing certain components of a
system installation. For performance-based contracts, we receive our fee on a
per-transaction basis, such as the number of child support payments processed.
To earn a profit on these contracts, we rely upon accurately estimating costs
involved and assessing the probability of meeting the specified objectives or
realizing the expected number of transactions within the contracted time period.
If we fail to estimate accurately the factors upon which we base our contract
pricing, we may incur losses on these contracts. During the nine months ended
June 30, 2000, 30.0% of our revenues were generated on a fixed price basis and
16.1% of our revenues were generated from performance-based contracts. We
believe that the percentage of revenues attributable to fixed price and
performance-based contracts will continue to be significant.
Substantial Competition in the IT Services Market. The IT services market is
highly competitive and is served by numerous international, national and local
firms. There can be no assurance that we will be able to compete effectively in
the market. Market participants include systems consulting and integration
firms, including national accounting firms and related entities, the internal
information systems groups of our prospective clients, professional services
companies, hardware and application software vendors, and divisions of large
integrated technology companies and outsourcing companies. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. In addition, there are relatively low barriers to entry into the IT services
market, and we have faced, and expect to continue to face, additional
competition from new entrants into the IT services market.
We believe that the principal competitive factors in the IT services market
include:
. reputation,
. project management expertise,
. industry expertise,
. speed of development and implementations,
. technical expertise,
. competitive pricing, and
. the ability to deliver results on a fixed price and transaction basis as
well as a time and materials basis.
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
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<PAGE>
. the extent of our competitors' responsiveness to client needs.
Our inability to compete effectively on these competitive factors would have a
material adverse effect on our business, financial condition and results of
operations.
Inability to Attract and Retain Professional Staff Necessary to Existing and
Future Projects. If we are unable to attract, retain and train skilled
employees, such inability could impair our ability to adequately manage and
staff our existing projects and to bid for or obtain new projects, which would
have a material adverse effect on our business, financial condition and results
of operation. In addition, the failure of our employees to achieve expected
levels of performance could adversely affect our business. Our success depends
in large part upon our ability to attract, retain, train, manage and motivate
skilled employees, particularly project managers and other senior technical
personnel. There is significant competition for employees with the skills
required to perform the services we offer. In particular, qualified project
managers and senior technical and professional staff are in great demand
worldwide and competition for such persons is likely to increase. In addition,
we require that many of our employees travel to client sites to perform services
on our behalf, which may make a position with us less attractive to potential
employees. There can be no assurance that a sufficient number of skilled
employees will continue to be available, or that we will be successful in
training, retaining and motivating current or future employees.
Dependence on Key Personnel. Our success depends in large part upon the
continued services of a number of key employees. Although we have entered into
employment agreements with certain key employees, these employees may terminate
their employment agreements at any time. The loss of the services of any key
employee could have a material adverse effect on our business. In addition, if
one or more of our key employees resigns to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of existing
or potential clients to any such competitor could have a material adverse effect
on our business, financial condition and results of operations.
Control of Company and Corporate Actions by Principal Shareholders.
Concentration of voting control could have the effect of delaying or preventing
a change in control of us and may affect the market price of our stock. All of
the holders of Class A common stock have entered into a Voting Trust with
respect to their shares of Class A common stock, which represents 58.6% of the
total common stock voting power at June 30, 2000. All power to vote shares held
in the Voting Trust has been vested in the Voting Trust's sole remaining
trustee, James L. Bildner, following William G. Barton's resignation as a
trustee in April 2000. As a result, Mr. Bildner will be able to control the
outcome of all corporate actions requiring shareholder approval, including
changes in our equity incentive plan, the election of a majority of our
directors, proxy contests, mergers, tender offers, open-market purchase programs
or other purchases of common stock that could give holders of our Class B common
stock the opportunity to realize a premium over the then-prevailing market price
for their shares of Class B common stock.
Potential Costs or Claims Resulting from Project Performance. Many of our
engagements involve projects that are critical to the operations of our clients'
businesses and provide benefits that may be difficult to quantify. The failure
by us, or of the prime contractor on an engagement in which we are a
subcontractor, to meet a client's expectations in the performance of the
engagement could damage our reputation and adversely affect our ability to
attract new business, and could have a material adverse effect upon our
business, financial condition and results of operations. We have undertaken, and
may in the future undertake, projects in which we guarantee performance based
upon defined operating specifications or guaranteed delivery dates.
Unsatisfactory performance or unanticipated difficulties or delays in completing
such projects may result in client dissatisfaction and a reduction in payment
to, or payment of damages (as a result of litigation or otherwise) by us, which
could have a material adverse effect upon our business, financial condition and
results of operations. In addition, unanticipated delays could necessitate the
use of more resources than we initially budgeted for a particular project, which
also could have a material adverse effect upon our business, financial condition
and results of operations.
Delay or Failure to Develop New IT Solutions. Our success will depend in
part on our ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. There can be no assurance that we will be successful in developing
such IT solutions in a timely manner or
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that if developed we will be successful in the marketplace. Delay in developing
or failure to develop new IT solutions would have a material adverse effect on
our business, financial condition and results of operations.
Failure to Manage and Expand International Operations. For the nine months
ended June 30, 2000, international operations accounted for 36.8% of our total
revenues. We believe that the percentage of total revenues attributable to
international operations will continue to be significant. In addition, a
significant portion of our sales are to large multinational companies. To meet
the needs of such companies, both domestically and internationally, we must be
able to provide worldwide services, either directly or indirectly. As a result,
we intend to expand our existing international operations and may enter
additional international markets, which will require significant management
attention and financial resources and could adversely effect our operating
margins and earnings. In order to expand international operations, we will need
to hire additional personnel and develop relationships with potential
international clients through acquisition or otherwise. To the extent that we
are unable to do so on a timely basis, our growth in international markets would
be limited, and our business, financial condition and results of operations
would be materially and adversely affected.
Our international business operations are subject to a number of risks,
including, but not limited to, difficulties in building and managing foreign
operations, enforcing agreements and collecting receivables through foreign
legal systems, longer payment cycles, fluctuations in the value of foreign
currencies and unexpected regulatory, economic or political changes in foreign
markets. There can be no assurance that these factors will not have a material
adverse effect on our business, financial condition and results of operations.
Liquidity and Capital Resources. The Company anticipates that its existing
capital resources, including cash provided by operating activities and available
bank borrowings, will be adequate to fund the Company's operations for at least
the next 12 months. There can be no assurance that changes will not occur that
would consume available capital resources before such time. The Company's
capital requirements depend on numerous factors, including potential
acquisitions, contingent payments earned, new contracts, the timing of the
receipt of accounts receivable and employee growth. The Company's current bank
facility expires August 27, 2000. The Company is currently negotiating an
extension of this bank facility and/or a new bank facility. The Company's
ability to renew or replace existing credit facilities will depend upon
prevailing market conditions, the Company's financial condition and the terms
and conditions of such renewed or replacement facilities.
Potential Volatility of Stock Price. A public market for our Class B common
stock has existed only since the initial public offering of the Class B common
stock in December 1997. There can be no assurance that an active public market
will be sustained. The market for securities of early stage companies has been
highly volatile in recent years as a result of factors often unrelated to a
company's operations, including:
. quarterly variations in operating results,
. announcements of technological innovations or new products or services by us
or our competitors,
. general conditions in the IT industry or the industries in which our clients
compete,
. changes in earnings estimates by securities analysts, and
. general economic conditions such as recessions or high interest rates.
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.
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Insufficient Insurance Coverage for Potential Claims. Any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. There can be no assurance
that the limitations of liability set forth in our service contracts will be
enforceable or will otherwise protect us from liability for damages. Although we
maintain general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms, will be available in sufficient amounts to cover
one or more claims or that the insurer will not disclaim coverage as to any
future claim. The successful assertion for one or more claims against us that
exceed available insurance coverage or changes in our insurance policies,
including premium increases or the imposition of large deductible or co-
insurance requirements, would adversely affect our business, financial condition
and results of operations.
Dependence on Third Parties in Performing Certain Client Engagements. We
sometimes perform client engagements using third parties. We often join with
other organizations to bid and perform an engagement. In these engagements, we
may engage subcontractors or we may act as a subcontractor to the prime
contractor of the engagement. We also use third party software or technology
providers to jointly bid and perform engagements. In these situations, we
depend on the software, resources and technology of these third parties in order
to perform the engagement. There can be no assurance that actions or failures
attributable to these third parties or to the prime contractor or subcontractor
will not also negatively affect our business, financial condition or results of
operations. In addition, the refusal or inability of these third parties to
permit continued use of their software, resources or technology by us, or the
discontinuance or termination by the prime contractor of our services or the
services of a key subcontractor, would have a material adverse effect on our
business, financial condition and results of operations.
Inability to Protect Proprietary Intellectual Property. The steps we take to
protect our intellectual property rights may be inadequate to avoid the loss or
misappropriation of such information, or to detect unauthorized use of such
information. We rely on a combination of nondisclosure and other contractual
arrangements, and copyright, trade secret and trademark laws to protect our
intellectual property rights. We also enter into confidentiality agreements with
our employees, generally require that our consultants and clients enter into
such agreements and limit access to our proprietary information.
Issues relating to the ownership of, and rights to use, software and
application frameworks can be complicated, and there can be no assurance that
disputes will not arise that affect our ability to resell or reuse such software
and application frameworks. A portion of our business involves the development
of software applications for specific client engagements. Ownership of such
software is the subject of negotiation with each particular client and is
typically assigned to the client. We also develop software application
frameworks, and may retain ownership or marketing rights to these application
frameworks, which may be adapted through further customization for future client
projects. Certain clients have prohibited us from marketing the software and
application frameworks developed for them entirely or for specified periods of
time or to specified third parties, and there can be no assurance that clients
will not demand similar or other restrictions in the future.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against us in the future, or that if asserted, any
such claim will be successfully defended.
Issuance of Preferred Stock May Prevent Change in Control and Adversely Affect
Market Price for Class B Common Stock. The Board of Directors has the
authority to issue preferred stock and to determine the preferences, limitations
and relative rights of shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by our shareholders. The preferred stock could be issued with
voting, liquidation, dividend and other rights superior to the rights of our
Class B common stock. The potential issuance of preferred stock may delay or
prevent a change in control of us, discourage bids for the Class B common stock
at a premium over the market price and adversely affect the market price and the
voting and other rights of the holders of our Class B common stock.
No Current Intention to Declare or Pay Dividends. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against the
U.S. dollar and currencies of the Company's subsidiaries and operations in
Australia and the United Kingdom.
Foreign Currency Exchange Rate Risk. The Company has wholly owned
subsidiaries in Australia and conducts operations in the United Kingdom through
a U.S.-incorporated subsidiary. Revenues from these operations are typically
denominated in Australian Dollars or British Pounds, respectively, thereby
potentially affecting the Company's financial position, results of operations
and cash flows due to fluctuations in exchange rates. The Company does not
anticipate that near-term changes in exchange rates will have a material impact
on future earnings, fair values or cash flows of the Company and has not engaged
in foreign currency hedging transactions for the nine months ended June 30,
2000. There can be no assurance that a sudden and significant decline in the
value of the Australian Dollar or British Pound would not have a material
adverse effect on the Company's financial condition and results of operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has agreed in principle to the terms to settle the dispute with a
prime contractor regarding one of the Company's Australian projects. The agreed
upon the terms of this settlement will not have a material adverse effect on the
Company's financial condition, results of operations and cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.71 Separation Agreement by and between the Registrant and William G.
Barton, dated as of April 14, 2000.
10.72 Fourth Amendment to Amended and Restated Revolving Credit Agreement,
dated as of May 15, 2000, by and between the Registant, Tier
Technologies (United Kingdom) Inc. and BankBoston, N.A.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K, filed on April 14, 2000, pursuant to Item 2
regarding the disposition of the entire issued and outstanding capital stock of
Midas Computer Software Limited.
Current Report on Form 8-K, filed on April 17, 2000, pursuant to Item 2
regarding the acquisition of certain assets and liabilities of The SCA Group,
Inc. and Harris Chapman.
Current Report on Form 8-K/A, filed April 18, 2000, pursuant to Item 7
regarding the acquisition of certain assets and liabilities of The SCA Group,
Inc. and Harris Chapman.
Current Report on Form 8-K/A, filed June 14, 2000, pursuant to Item 7
attaching financial statements and pro forma information related to the
acquisition of certain assets and liabilities of the SCA Group, Inc. and Harris
Chapman.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tier Technologies, Inc.
Dated: August 11, 2000
By: /s/ LAURA B. DEPOLE
--------------------------------------
Laura B. DePole
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description Page
------- ----------- ----
10.71 Separation Agreement by and between the Registrant and William
G. Barton, dated as of April 14, 2000............................
10.72 Fourth Amendment to Amended and Restated Revolving Credit
Agreement, dated as of May 15, 2000, by and between the
Registant, Tier Technologies (United Kingdom) Inc. and
BankBoston, N.A..................................................
27.1 Financial Data Schedule..........................................
1
