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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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California 94-3145844
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1350 Treat Boulevard, Suite 250
Walnut Creek, California 94596
(925) 937-3950
(Address of principal executive offices and registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Common
Stock, no par value
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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $78,036,091 on December 3, 1999 based on the last
reported sale price of the registrant's Class B Common Stock on the Nasdaq
National Market on such date. As of December 3, 1999, the number of shares
outstanding of the registrant's Class A Common Stock was 1,639,762 and the
number of shares outstanding of the registrant's Class B Common Stock was
10,845,173.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended September
30, 1999. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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TIER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
------ ----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 11
Item 3. Legal Proceedings............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........... 11
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 28
Item 8. Financial Statements and Supplementary Data................... 29
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 29
PART III
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Item 10. Directors and Executive Officers of the Registrant............ 30
Item 11. Executive Compensation........................................ 30
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 30
Item 13. Certain Relationships and Related Transactions................ 30
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 30
SIGNATURES
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", "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
include, but are not limited to, those factors listed in the "Factors That May
Affect Future Results" section, as set forth beginning on page 22 of this
report. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. 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.
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PART I
Item 1. Business
General
Tier Technologies, Inc. ("Tier" or the "Company") provides information
technology ("IT") consulting, application development, software engineering,
training and business process outsourcing services that facilitate the
transformation of clients' enterprise-wide legacy systems and applications to
leading edge technologies. Tier provides IT migration solutions by applying
the Tier Migration SolutionSM, a methodology by which the Company evaluates or
"scores" the efficacy of a client's existing imbedded IT capital against its
business goals. Tier has branded its Migration Solution around such themes as:
"How do you fix the machine without turning it off?"SM and "Taking the risk
out of change."SM Through offices located in the United States, Australia and
the United Kingdom, the Company works closely with its Fortune 1000,
government and other clients to determine, evaluate and implement an IT
strategy that allows it to rapidly adopt, deploy and transfer emerging
technologies while preserving viable elements of the client's legacy systems.
Tier combines significant understanding of enterprise-wide IT systems with
expertise in vertical industries such as healthcare, financial services and
government services to provide clients with rapid and flexible migration
solutions. By helping clients maintain their core IT systems, Tier believes
that it provides high value, cost-effective, flexible solutions that minimize
the risks associated with migration to new technologies.
Tier was incorporated in the State of California in 1991. From December 1996
through September 30, 1999, the Company made twelve acquisitions for a total
purchase price of approximately $26.7 million in cash and shares of Class B
Common Stock, excluding future contingent payments. The Company also incurred
$1.8 million in compensation charges related to business combinations
resulting from these acquisitions. 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. See Note 8 to Notes to Consolidated Financial Statements.
Background
Today, large corporations and government agencies often face a number of
challenges, including a rapidly changing operating environment, intense
competitive pressures and accelerating technological change. To adapt to
change and remain competitive, these organizations have sought to harness
their intellectual and informational capital by investing in advanced IT
systems. As these organizations have become increasingly dependent on more
complex IT systems, their ability to integrate advanced technologies in a
rapid, reliable and cost-effective manner has become critical to their
success.
The migration of enterprise-wide IT systems, which is the process of
incrementally supplementing and replacing legacy IT system components to
integrate advanced technologies, has become a key competitive strategy. This
process enables an organization to preserve the imbedded capital in its
installed base of IT systems, to obtain the benefits of technological
innovations and to mitigate some of the risks, costs and delays inherent in
full system replacements. Migration provides organizations with an important
alternative to the traditional limits of a "buy versus build" analysis.
Several forces are driving the increased use of rapid migration strategies. As
a result of the increasing pace of technological change along with rapid
changes in competitive and business environments, the useful lives of new
technologies have tended to shorten dramatically. To capture more of the
benefits of these technologies, IT projects must be designed and completed
relatively quickly or they risk being out of date upon completion.
Organizations are re-using existing IT components both to preserve the
significant imbedded capital represented by those systems and to achieve new
functionality. For example, mainframe computers are now being used as high
volume servers in distributed computing environments because of their data
storage capacity and transaction processing speeds. As the length and scope of
an IT project expands, so too does the likelihood that the project will fail
to satisfy time, cost or functionality expectations. Consequently,
organizations seek high-impact IT solutions that can be implemented quickly.
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Given the complex and mission-critical nature of IT systems, many
organizations choose to outsource the development and eventual migration of
these systems to new technologies. The Company believes that successful IT
service providers will be characterized by:
. significant experience in the migration of enterprise-wide IT systems;
. an ability to adopt, deploy and transfer relevant, emerging technologies
rapidly and reliably;
. an understanding of the client's industry, business and existing IT
environments;
. successful management of the risks inherent in large system projects; and
. the ability to deliver services on a global basis.
The Tier Migration Solution
The Tier Migration Solution is generally applied to all of the Company's
projects. Initially, the Company assesses a client's existing business
processes and clearly defines the scope of the project, including a
determination of the client's expectations for quantifiable business
improvement. The Company then analyzes the client's existing IT system to
determine which areas would benefit the most from the application of new
technologies. When this assessment is completed, Tier develops a specific IT
strategy that uses a system architecture consistent with the client's existing
environment and takes advantage of new technologies. Tier then implements the
recommended IT strategy. Throughout all phases, the Company evaluates the
risks inherent in the project. If the Company detects areas of concern, it
investigates the matter at an early stage and takes appropriate corrective
action to mitigate potential costs and delays. The Tier Migration Solution
seeks to "take the risk out of change."SM
Strategy
The Company seeks to become the leading provider of comprehensive IT
migration solutions to Fortune 1000 companies and large government entities.
The Company's strategy includes the following elements:
Expertise in Key Vertical Markets. The Company intends to increase its
client base and leverage its expertise by focusing its sales, marketing and
development efforts on high-value opportunities in certain vertical markets,
such as government services, healthcare, financial services and insurance
services. Within those markets, Tier has developed expertise in areas such as
child welfare services, child support services and procurement processes. The
Company believes that large organizations with intensive information
processing needs provide the best near-term market opportunities for the
Company's services.
Concentrate on Migration Opportunities. The Company focuses on the migration
of enterprise-wide IT systems to leading edge technologies for Fortune 1000
companies and large government entities. The Company maintains proficiency in
relevant mainstream and legacy technologies, while also developing expertise
in high demand, emerging technologies that are expected to facilitate the
Company's development and deployment of IT solutions. This strategy allows
Tier to function effectively in open architecture IT environments and to
rapidly adopt, deploy and transfer emerging technologies within existing IT
systems.
Pursue Strategic Acquisitions. Tier considers potential acquisitions which
may expand the Company's presence in key geographic or vertical marketplaces,
supplement the Company's technical scope or industry expertise or allow it to
acquire additional human resources or strategic client relationships. Given
the highly fragmented nature of the IT services marketplace, the Company
believes significant acquisition opportunities exist. From December 1996
through September 30, 1999, Tier has acquired twelve IT service providers in
order to add domestic and international locations, broaden the Company's
technical expertise and expand its professional resources.
Expand Geographic Presence. The Company intends to expand its operations by
opening additional offices in targeted domestic and international locations to
augment its current operations in the United States,
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Australia and the United Kingdom. Tier integrates domestic and multi-national
resources to deliver timely, cost-effective IT solutions on a local level. By
expanding its geographic presence, the Company has increased its access to
international labor markets and is able to compete more effectively for highly
skilled employees who have particular geographic preferences. The Company
believes that the local delivery of services is a significant differentiating
factor among IT service providers.
Actively Brand the Tier Migration Solution. The Company intends to continue
to develop market recognition and acceptance of the Company's services by
branding the Tier Migration Solution. Tier believes it has differentiated and
sold the Company's Migration Solution with the Tier logo and themes such as
"How do you fix the machine without turning it off?"SM and "Taking the risk
out of change."SM Company believes that significant opportunity exists to
develop brand recognition and loyalty.
Attract and Retain Highly Skilled Employees. The Company maintains programs
and personnel to identify, hire, train and retain highly skilled IT
professionals because it believes these professionals are a critical element
in its ability to deliver high quality services to clients. The Company (1)
offers competitive compensation and benefits including stock option and other
stock-based awards; (2) has developed a career advancement program that offers
employees career enrichment opportunities, technical training opportunities,
and on-the-job learning opportunities; and (3) has developed centralized work
sites or "application development centers" where consultants work on projects
for clients located throughout the country, thus reducing the need for travel
by consultants.
Develop Strategic Partnerships. The Company develops strategic partnerships
with service and technology providers pursuant to which Tier jointly bids and
performs certain engagements. The Company believes these relationships provide
a number of competitive advantages, including (i) enabling the Company to
broaden its client base; (ii) allowing the Company to project its staffing
needs and more fully maximize employee utilization; and (iii) maintaining the
Company's technological leadership through the deployment of leading edge
applications.
Services and Methodology
The Company provides IT consulting, application development and software
engineering services that facilitate the migration of its clients' existing IT
systems to leading edge technologies. These services are typically provided on
an enterprise-wide basis. Tier's methodology for providing migration services
combines the ability to evaluate or "score" the efficacy of the client's
imbedded IT capital in comparison to its stated business goals, with a risk
assessment process to manage and benchmark projects on an on-going basis. Tier
maintains a high level of vertical market and industry expertise. As a result,
the Company is able to understand the environment and business rules in which
its clients operate. This approach allows Tier to retain, reuse, repeat and
distribute its experiential knowledge throughout the Company and to achieve
significant improvements in cost, quality and time to deployment on client
projects.
Services
The Company seeks to rapidly implement cost-effective IT solutions through a
flexible combination of one or more of the following services:
Repeatable Transfer Solution. In some situations, the Company identifies
existing, transferable IT applications or components that satisfy a portion of
the client's needs. Tier addresses the client's remaining functional elements
through either custom built applications or packaged software. Transfer
solutions greatly shorten the development cycle by providing a working system
as the starting point for the IT solution. For example, between government
agencies, the Company has successfully transferred components of IT systems
that it has built to solve complex child support and welfare requirements.
Custom Build. The Company often custom builds an IT solution or component
for the client. Even in a custom build solution, the Company's consultants
strive to re-use components of a client's legacy environment
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and to extract, update, and forward engineer business rules from legacy
programs. The Company has developed custom applications in several vertical
markets, including healthcare, financial services, government services and
telecommunications, using advanced languages such as Java, Forte, PowerBuilder
and COOL:Gen. The Company's technical professionals have implemented custom
applications on a variety of platforms and working environments, such as
mainframe, Windows NT, UNIX and other distributed platforms, using a number of
databases, including Oracle, Sybase, DB2, SQL Server and Informix. Tier has
also developed Internet/intranet, data warehouse, web-enabled legacy and e-
commerce applications, as well as applications in the more established
mainframe and client/server environments.
Packaged Software. When the most appropriate solution for a client includes
a commercially available application package, the Company evaluates,
recommends, implements and integrates applications software. The Company has
developed expertise with commercial applications in areas such as operations
resource management, e-commerce and procurement.
Methodology
The Company has developed the Tier Migration Solution over numerous client
engagements and relies on this methodology to provide services in various
industries and technical environments. The four-phase scaleable, repeatable
and leverageable methodology is modular in design and the various phases can
be tailored depending on the scope of a client's needs.
Phase I--Business Assessment and Scoping. The Company establishes the scope
of each project and determines expectations for quantifiable business
improvement. The Company assesses the client's current business processes,
identifies improvement opportunities and inventories the existing IT
applications and systems. Tier consultants bring industry and technical
expertise to each engagement and employ current business engineering
techniques, such as workflow analysis, process mapping, use-case analysis and
business rules definition. Typically, Tier consultants interview key
management personnel, lead group discussions, conduct workshops, review
existing business process documentation and inventory the existing application
portfolio. The work product is usually a business requirements and scope
document that provides a clear charter for the project and a risk management
assessment map to measure project performance throughout the project's life
cycle.
Phase II--Application Effectiveness Scoring. The Company develops a
technology portfolio analysis to determine how best to leverage the client's
capital investment in its existing IT system. Generally, Tier conducts an in-
depth analysis of the existing IT application portfolio using a qualitative
method of "scoring" to determine which areas would benefit most from the
application of new technologies. The resulting matrix correlates the client's
business functions with the most suitable IT solution. Once agreed to by the
client, the application scoring matrix becomes a roadmap to assist in
determining whether to replace or re-use components of the client's existing
IT system.
Phase III--IT Strategy, Architecture and Prototyping. The Company develops a
specific IT migration strategy to address the development, transfer or
acquisition of new IT solutions and their integration into the client's
existing business environment. Tier may model critical business rules to test
the underlying assumptions of the IT migration solution and often prepares an
early look-and-feel prototype to allow the user to visualize the resulting
integrated IT environment. Ultimately, Tier provides clients with a defined IT
architecture designed to meet the client's expectations specified at the
beginning of the engagement.
Phase IV--Information Technology Implementation. Tier implements the IT
solution. The Company employs rapid IT processes and incorporates the
Company's collective experience in managing enterprise-wide IT projects in
areas such as packaged software implementation, custom software development,
quality assurance and testing, systems integration, client testing and
acceptance, implementation and help desk support. The output of this final
phase is an implemented IT solution set. Following installation, the Company
and the client may conduct a post-project assessment to evaluate the
effectiveness of the new IT solution against the business improvement goals
established in Phase I. In addition, the Company often provides post-
implementation services,
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such as on-going software maintenance and enhancements, help desk support and
training of end users and in-house IT staff.
Across all four phases of its methodology, Tier employs a comprehensive risk
management process. The Company believes that its emphasis on risk management
is a critical component of its methodology, particularly in a market that
increasingly demands service providers to undertake large scale projects while
maintaining a high success rate. Using the risk management assessment map
developed in Phase I of Tier's Migration Solution, the Company evaluates
projects on a periodic basis against a checklist of risk factors which
determines the frequency of intervention and review required. The Company
typically focuses on the following risk factors: size of revenue and credit
exposure to the Company, number of resources employed, progress against
defined project milestones, clarity of user expectations, definition of
project scope, use of new technology, effectiveness of project management
personnel and other quantitative and qualitative measures as may be
appropriate to a particular project. If the Company detects areas of concern,
it investigates the matter at an early stage and takes appropriate corrective
action to mitigate potential costs and delays.
Sales and Marketing
The Company markets and sells its services through a direct sales force. As
of September 30, 1999, Tier had a sales and marketing staff of 49. In
addition, the Company's senior management is closely involved in a significant
portion of the Company's sales and marketing activities. Most of the Company's
sales professionals have extensive work experience in the IT industry, often
as strategic IT consultants or managers. In order to more clearly define the
delivery of its services and to reflect the needs of its clients, the Company
has organized its sales and marketing effort into three strategic business
units ("SBUs"): Commercial Services, which targets healthcare, financial
services, insurance services, telecommunications and other commercial markets;
Government Services, which targets the fast-growing health and human services
and state strategic IT markets; and International Services, which targets the
country specific needs of Australia and the United Kingdom.
The Company's focus on the vertical markets defined by these SBUs broadens
its knowledge and expertise in these selected industries and generates
additional client engagements. As a result of its focused sales channel
approach, the Company believes that it is able to penetrate markets quickly
and with lower sales acquisition costs.
The sales team derives leads through (i) industry networking and referrals
from existing clients; (ii) government requests for proposals; (iii) strategic
partnerships with third parties under which the Company jointly bids and
performs certain engagements; (iv) directed sales activities identified by
other strategic business units within the Company; and (v) a national
marketing program. The Company believes that its use of these multiple sales
and marketing activities results in a shorter sales cycle than generally
experienced by other providers.
The Company's marketing program includes targeted software industry trade
shows; joint marketing through strategic partnership arrangements;
participation in user groups; provision of speakers to technology conferences;
publication of white papers, articles and direct client newsletters; and
distribution of marketing materials and public relations announcements.
Clients
The Company's clients consist primarily of Fortune 1000 companies with
information-intensive businesses and government entities with large volume
information and technology needs. Tier's sales and marketing objective is to
develop relationships with clients that result in both repeat and long-term
engagements.
Tier has derived, and believes that it will continue to derive, a
significant portion of its revenues from a small number of large clients, many
of which engage the Company on a number of projects. For the twelve months
ended September 30, 1999, Humana Inc. and the State of Missouri accounted for
27.4% and 13.0% of the Company's revenues, respectively. Most of our contracts
can be terminated by the client with little or no
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notice and 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 its Government Services SBU, the Company sometimes obtains project
engagements through prime contractors. The Company believes that it has been
able to secure large, complex government projects with low acquisition costs
by capitalizing on the reputation, marketing infrastructure and government
relationships of these prime contractors, while at the same time allowing the
prime contractors to leverage Tier's IT competency in their bid proposals. For
the fiscal year ended September 30, 1999, approximately 37.9% of Tier's
worldwide 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 government funding. A significant reduction
in funds available for government agencies to purchase IT services could have
a material adverse effect on Tier's business, financial condition and results
of operations.
Until fiscal 1997, Company revenues were generated primarily through Tier's
domestic operations. For the fiscal year ended September 30, 1999,
international operations accounted for 33.7% of the Company's total revenues.
See Note 10 to Notes to Consolidated Financial Statements. The Company
believes that the percentage of total revenues attributable to international
operations will continue to be significant and may continue to grow.
Human Resources
Tier's approach to managing human resources has allowed the Company to meet
its staffing needs while also achieving what the Company believes to be a low
level of employee turnover. As of September 30, 1999, the Company had a
workforce of 780, including 509 IT consultants of which 316 were salaried
employees, 37 were hourly employees and 156 were independent or sub-
contractors. The workforce also includes 116 payment processors, 49 sales and
marketing employees and 106 general and administrative employees. Of the
Company's total workforce as of September 30, 1999, 65.0%, 27.6% and 7.4% were
located in the United States, Australia and the United Kingdom, respectively.
The Company employs a Senior Vice President of Human Resources Management
and several recruiters who pursue a three level employee-sourcing strategy.
The primary sources include employee referrals, job fairs, Internet job
postings and direct recruiting. Tier also has established national and
international sources through preferred-rate partnerships with recruiting
suppliers. If peak staffing demand exceeds these resources, the Company
engages recruiting agencies on a contingent basis at market rates. Given the
rapid pace of technological evolution, Tier recognizes that skill obsolescence
is a fundamental concern for IT professionals. Tier attracts and retains
employees by offering technical training opportunities including an intensive
training program for new entry-level employees, a stock option award program
and a competitive benefits and compensation package. As a key component of the
Company's employee retention program, Tier has developed and implemented a
performance based compensation structure supported by a performance planning
and review ("PPAR") process that allows each employee and his or her manager
to develop performance plans with specific measurable objectives. The result
of implementing the PPAR program is a focus by each employee on what he or she
needs to achieve to perform at the highest level, which directly influences
his or her compensation. In addition, the Company has developed centralized
work sites or "application development centers" where consultants work on
projects for clients located throughout the country, thus reducing the need
for travel by consultants. The Company believes that there is a shortage of,
and significant competition for, IT professionals and that its future success
is highly dependent upon its ability to attract, train, motivate and retain
skilled IT consultants with the advanced technical skills necessary to perform
the services offered by the Company.
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
8
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.
Intellectual Property Rights
Tier's success has resulted, in part, from its methodologies and other
intellectual property rights. The Company relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary
rights of third parties from whom the Company licenses intellectual property.
The Company enters into confidentiality agreements with its employees and with
many of its consultants and clients, and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter the misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of
this 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. In limited situations, the Company may retain
ownership, or obtain a license from its client, which permits Tier or a third
party to market the software for the joint benefit of the client and Tier or
for the sole benefit of Tier.
Executive Officers of the Registrant
The following persons were executive officers of the Company as of December
3, 1999:
Name Age Position with the Company
---- --- -----------------------------------------
James L. Bildner............... 45 Chairman of the Board and Chief Executive
Officer
William G. Barton.............. 43 President, Chief Technology Officer and
Director
George K. Ross................. 58 Executive Vice President, Chief Financial
Officer, Secretary, Treasurer and
Director
James Weaver................... 42 President, Government Services Division
Stephen McCarty................ 46 Senior Vice President, Human Resources
Management
Laura B. DePole................ 35 Senior Vice President, Finance and Chief
Accounting Officer
David Laidlaw.................. 58 President, International Operations
Mr. Bildner joined Tier as Chairman of the Board in November 1995 and became
Chief Executive Officer in December 1996. From December 1994 to December 1996,
Mr. Bildner was employed as a principal of Argus Management Corporation, a
management consulting firm. Mr. Bildner received an A.B. from Dartmouth
College and a J.D. from Case Western Reserve School of Law.
9
Mr. Barton, one of the initial founders of the Company, has served as Chief
Technology Officer since February 1998 and as President and a Director since
1991. From 1991 until February 1998, he also served as Chief Operating Officer
of the Company. He received a B.S. in Business Administration and Management
from the University of Phoenix and a Presidential/Key Executive MBA from
Pepperdine University.
Mr. Ross has been a Director of the Company since January 1996, has served
as Executive Vice President since 1998, has served as Chief Financial Officer
since February 1997 and has served as Secretary and Treasurer since July 1998.
From February 1997 until April 1998, Mr. Ross also served as Senior Vice
President. From September 1992 to January 1997, Mr. Ross was a partner at
Capital Partners, a private equity investment firm. Mr. Ross received a B.A.
from Ohio Wesleyan University and an MBA from Ohio State University. Mr. Ross
is a Certified Public Accountant. Mr. Ross is not seeking re-election to the
Company's Board of Directors at the Annual Meeting of Shareholders on January
11, 2000. In addition, effective as of the date of the Annual Meeting, Mr.
Ross will resign as Chief Financial Officer, Secretary and Treasurer of the
Company. Mr. Ross will retain the position of Executive Vice President of
Business Affairs.
Mr. Weaver joined Tier as President, Government Services Division in May
1998. From June 1997 until May 1998, Mr. Weaver served as Vice President,
Government Solutions of BDM International, Inc., an information technology
company, where he was responsible for SBU strategic planning, policy and
procedure development, client base expansion and overall business planning and
development. From March 1995 until June 1997, he served as National Program
Director, Public Sector for Unisys Corporation, an information technology
company. Prior to that time, he served as Director, Public Sector Services
with Lockheed Information Management Services and District Manager with the
Commonwealth of Virginia, Division of Child Support Enforcement. Mr. Weaver
received a B.A. in Psychology from California University of Pennsylvania.
Mr. McCarty joined the Company as Senior Vice President, Human Resources
Management in October 1998. From January 1998 to October 1998, he served as a
Vice President of Renaissance Worldwide, Inc., a consulting firm. From
February 1993 to January 1998, he served as a Vice President of Arthur D.
Little, a consulting firm. Mr. McCarty received a B.A. in Psychology from
State University of New York (SUNY) at Plattsburgh and a M.S. in Industrial/
Organizational Psychology from Rensselaer Polytechnic Institute.
Ms. DePole has served as Senior Vice President, Finance since April 1999 and
Chief Accounting Officer since August 1997. From October 1998 to April 1999,
Ms. DePole was Vice President, Finance and from August 1997 to October 1998,
Ms. DePole was also the Corporate Controller of the Company. Prior to that
time Ms. DePole was a Senior Manager at Ernst & Young LLP, an international
public accounting firm. Ms. DePole received a B.S. in Accounting from San
Francisco State University and is a Certified Public Accountant. Effective as
of the Company's Annual Meeting of Shareholders to be held on January 11,
2000, the Board of Directors has elected Ms. DePole to serve as Chief
Financial Officer, Secretary and Treasurer of the Company.
Mr. Laidlaw joined the Company as President, International Operations in
March 1999. From January 1996 through February 1999, Mr. Laidlaw served as
General Manager for the IBM Global Services Australia Consulting and Systems
Integration Unit. From 1966 through December 1995 Mr. Laidlaw held various
other positions within IBM information technology services units in Australia,
the United Kingdom and the Asia Pacific region. Mr. Laidlaw received a B.S.
and M.S. in Engineering from Melbourne University.
10
Item 2. Properties
The Company's headquarters and principal administrative functions are
located in approximately 11,150 square feet of leased space in Walnut Creek,
California. The lease for this space expires November 30, 2002.
The Company also operates through leased facilities in
. Arizona; . Missouri;
. Georgia; . New Jersey;
. Idaho; . New York;
. Illinois; . Tennessee;
. Indiana; . Australia; and
. Kentucky; . United Kingdom
Tier anticipates that additional space will be required during fiscal 2000
as its business expands and believes that it will be able to obtain suitable
space as needed.
Item 3. Legal Proceedings
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, the
Company filed a civil action (Tier Technologies, Inc. v. Unisys Corporation)
in the United States District Court for the Northern District of California
seeking money damages in excess of $2 million and a declaration that the
Company has performed its duties and obligations under the agreement, that it
has no further obligations 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 entire 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. The prime contractor is
also seeking damages in excess of $8 million and indemnification for damages,
claims, penalties, fines and/or other sanctions which may be levied in the
future by the client of the prime contractor. The Company denies the prime
contractor's allegations and intends to vigorously pursue its own claim
against the prime contractor. The parties to the action have commenced
voluntary discovery.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended September 30, 1999.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class B Common Stock is traded on the Nasdaq National Market
under the symbol "TIER." The following table sets forth for the quarterly
periods indicated the range of high and low sales prices for the Company's
Class B Common Stock since its initial public offering effective as of
December 17, 1997:
Fiscal 1999 Fiscal 1998
------------ ------------
High Low High Low
------ ----- ------ -----
First Quarter................................... $17.50 $5.56 $10.75 $8.50*
Second Quarter.................................. 20.00 7.88 18.13 8.88
Third Quarter................................... 9.56 5.06 23.25 14.25
Fourth Quarter.................................. 8.59 6.41 20.50 12.13
--------
* Initial public offering price per share.
The Company has never declared or paid cash dividends on its Common Stock.
The Company's credit facility contains restrictions on the Company's ability
to pay cash dividends. The Company currently intends to retain future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends in the foreseeable future.
As of December 3, 1999, there were approximately 334 holders of record of
the Company's Class B Common Stock and one holder of record of the Company's
Class A Common Stock.
12
Item 6. Selected Financial Data
The following table summarizes selected consolidated financial data of the
Company:
Year Ended Twelve-Month Nine-Month Nine-Month Year Ended
September 30, Period Ended Period Ended Period Ended December 31,
---------------- September 30, September 30, September 30, ---------------
1999 1998 1997 1997(1) 1996 1996 1995
------- ------- ------------- ------------- ------------- ------- -------
(unaudited) (unaudited)
(in thousands, except per share data)
Consolidated Statement
of Income Data:
Revenues................ $91,976 $57,725 $26,885 $22,479 $11,790 $16,197 $12,373
Cost of revenues........ 56,236 37,273 17,864 14,917 8,669 11,616 9,066
------- ------- ------- ------- ------- ------- -------
Gross profit............ 35,740 20,452 9,021 7,562 3,121 4,581 3,307
Costs and expenses:
Selling and marketing.. 6,095 3,009 2,234 1,836 577 975 627
General and
administrative........ 18,988 9,743 5,197 4,397 1,774 2,574 1,560
Compensation charge
related to business
combinations.......... 608 737 469 470 -- -- --
Purchased in-process
technology............ 4,000 -- -- -- -- -- --
Reserve for contract
dispute............... 1,856 -- -- -- -- -- --
Depreciation and
amortization.......... 3,864 1,169 283 259 56 80 45
------- ------- ------- ------- ------- ------- -------
Income from operations.. 329 5,794 838 600 714 952 1,075
Interest (income) and
expense, net........... (1,321) (980) 123 99 50 74 61
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 1,650 6,774 715 501 664 878 1,014
Provision for income
taxes.................. 644 2,642 287 201 266 351 570
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,006 $ 4,132 $ 428 $ 300 $ 398 $ 527 $ 444
======= ======= ======= ======= ======= ======= =======
Basic net income per
share(2)............... $ 0.08 $ 0.45 $ 0.11 $ 0.06 $ 0.08 $ 0.11 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares used in computing
basic
net income per
share(2)............... 12,056 9,231 4,037 5,400 5,220 4,988 10,062
======= ======= ======= ======= ======= ======= =======
Diluted net income per
share(2)............... $ 0.08 $ 0.39 $ 0.10 $ 0.05 $ 0.07 $ 0.10 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares used in computing
diluted
net income per
share(2)............... 12,869 10,624 4,265 5,794 5,478 5,246 10,062
======= ======= ======= ======= ======= ======= =======
September 30, December 31,
----------------------- -------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................ $19,092 $39,301 $ 106 $ 306 $ --
Working capital......................... 35,840 49,695 2,361 1,191 920
Total assets............................ 83,944 74,503 10,496 4,133 2,316
Long-term debt, net of current
obligations............................ 454 202 1,608 576 156
Total shareholders' equity.............. 70,268 64,172 3,892 1,028 686
- --------
(1) In September 1997, the Company changed its fiscal year end to September 30.
(2) See Notes 1 and 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income per
share.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Tier provides IT consulting, application development, software engineering,
training and business process outsourcing services that facilitate the
migration of clients' enterprise-wide systems and applications to leading edge
technologies. Through offices located in the United States, Australia and the
United Kingdom, the Company works closely with its Fortune 1000, government
and other clients to determine, evaluate and implement an IT strategy that
allows it to rapidly adopt, deploy and transfer emerging technologies while
preserving viable elements of the client's legacy systems. The Company's
revenues increased to $92.0 million in the fiscal year ended September 30,
1999 from $57.7 million in the fiscal year ended September 30, 1998. The
Company's workforce has grown from 569 on September 30, 1998 to 780 on
September 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. 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. During the fiscal year ended
September 30, 1999, 20.9% 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. Substantially all of Tier's contracts are terminable by the
client following limited notice and without significant penalty to the client.
From time to time, in the regular course of its business, the Company
negotiates the modification, termination, renewal or transition of time and
materials and fixed price contracts that may involve an adjustment to the
scope or nature of the project, billing rates or outstanding receivables. To
date, the Company has generally been able to obtain an adjustment in its fees
following a significant change in the assumptions upon which the original
estimate was made, but there can be no assurance that the Company will be
successful in obtaining adjustments in the future.
The Company has derived a significant portion of its revenues from a small
number of large clients. For many of these clients, the Company performs a
number of different projects pursuant to multiple contracts or purchase
orders. For the fiscal year ended September 30, 1999, Humana Inc. and the
State of Missouri accounted for 27.4% and 13.0% of the Company's revenues,
respectively. The Company anticipates that a substantial portion of its
revenues will continue to be derived from a small number of large clients. The
completion, cancellation or significant reduction in the scope of a large
project would have a material adverse effect on the Company's business,
financial condition and results of operations. A significant portion of the
Company's revenues are derived from sales to government agencies. For the
fiscal year ended September 30, 1999, approximately 37.9% 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 could be materially and adversely affected. In addition,
to the extent that the Company is unable to hire and retain salaried employees
to staff new or existing client engagements 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 September 30, 1999, the Company made twelve
acquisitions for a total cost of approximately $26.7 million in cash and
shares of Class B Common Stock, excluding future contingent payments. The
Company also incurred $1.8 million in compensation charges related to business
combinations resulting from these acquisitions. Generally, contingent payments
are recorded as additional purchase price at the time the payment can be
determined beyond a reasonable doubt. If a contingent payment is based, in
part, on a seller's continuing employment with the Company, the payments are
recorded as compensation expense over the vesting period when the amount is
deemed probable to be made. These acquisitions helped the Company to
14
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 fiscal year 1999, the Company acquired all the issued and
outstanding capital stock of Midas Computer Software Limited, which added to
the Company's software integration services; all the issued and outstanding
capital stock of ADC Consultants Pty Limited, which added to the Company's
data management services; certain assets and liabilities of Service Design
Associates, Inc. which added to the Company's government services practice;
and certain assets and liabilities of the Technology Training Services
division of Automated Concepts, Inc. which added to the Company's training
services. For the fiscal year ended September 30, 1999, international
operations accounted for 33.7% 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.
International operations subject the Company to foreign currency translation
adjustments and transaction gains and losses for amounts denominated in
foreign currencies.
In September 1997, the Company changed its fiscal year end to September 30.
Fiscal year 1997 comprises the nine months ended September 30, 1997.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of revenues for each of the periods indicated:
Twelve Months Ended Nine Months
September 30, Ended
------------------------- September 30,
1999 1998 1997 1997
----- ----- ----------- -------------
(unaudited)
Revenue............................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 61.1 64.6 66.5 66.4
----- ----- ----- -----
Gross profit....................... 38.9 35.4 33.5 33.6
Costs and expenses:
Selling and marketing............ 6.6 5.2 8.3 8.1
General and administrative....... 20.6 16.9 19.3 19.6
Compensation charge related to
business combinations........... 0.7 1.3 1.7 2.1
Purchased in-process technology.. 4.4 -- -- --
Reserve for contract dispute..... 2.0 -- -- --
Depreciation and amortization.... 4.2 2.0 1.1 1.2
----- ----- ----- -----
Income from operations............. 0.4 10.0 3.1 2.6
Interest (income) and expense,
net............................... (1.4) (1.7) 0.4 0.4
----- ----- ----- -----
Income before income taxes......... 1.8 11.7 2.7 2.2
Provision for income taxes......... 0.7 4.5 1.1 0.9
----- ----- ----- -----
Net income......................... 1.1% 7.2% 1.6% 1.3%
===== ===== ===== =====
Fiscal Years Ended September 30, 1999 and 1998
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 59.3% to $92.0
million for the fiscal year ended September 30, 1999 from $57.7 million for
the fiscal year ended September 30, 1998. This increase resulted from internal
growth, including an expanded client base and several significant new
contracts, and from multiple acquisitions.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries,
independent contractor and subcontractor costs, employee benefits,
15
payroll taxes, travel expenses and any equipment or software costs. For
business process outsourcing projects, cost of revenues also include facility
and overhead costs. Gross margin increased to 38.9% for the fiscal year ended
September 30, 1999 from 35.4% in 1998. 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.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, travel costs and product literature.
Selling and marketing expenses increased 102.6% to $6.1 million for the fiscal
year ended September 30, 1999 from $3.0 million for the fiscal year ended
September 30, 1998. As a percentage of revenues, selling and marketing
expenses increased to 6.6% for the fiscal year ended September 30, 1999 from
5.2% in 1998. The increase in selling and marketing expenses was primarily
attributable to the addition of sales and marketing personnel, both internally
and through acquisitions, to support the higher revenue base and increased
selling and marketing efforts. The Company expects that selling and marketing
expenses will continue to increase in future periods in absolute dollars,
although such expenses may vary as a percentage of revenues.
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 94.9% to $19.0 million for the fiscal year ended September 30, 1999
from $9.7 million for the fiscal year ended September 30, 1998. As a
percentage of revenues, general and administrative expenses increased to 20.6%
for the fiscal year ended September 30, 1999 from 16.9% in 1998. The increase
in total general and administrative expenses 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.
The Company expects that general and administrative expenses will continue to
increase in future periods in absolute dollars, although such expenses may
vary as a percentage of revenues.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations consists primarily of certain contingent
performance payments made in connection with prior acquisitions. Compensation
charge related to business combinations decreased 17.5% to $608,000 for the
fiscal year ended September 30, 1999 from $737,000 for the fiscal year ended
September 30, 1998. As a percentage of revenues, compensation charge related
to business combinations decreased to 0.7% for the fiscal year ended September
30, 1999 from 1.3% for the fiscal year ended September 30, 1998. The decrease
in total compensation charge related to business combinations was attributable
to the timing of the contingent performance payment periods. See Note 8 to the
Consolidated Financial Statements for the compensation charges related to each
business combination.
Purchased In-Process Technology. Purchased in-process technology charge of
$4 million resulted from the purchase of exclusive worldwide licensing rights
to components of a large scale, enterprise-wide commercial billing system
currently under development by the Company for a client which had not yet
reached technological feasibility and had no alternative future use. The
completion of the software is expected to occur in the second quarter of
fiscal year 2000. Once developed, this software would require significant
customization prior to a sale to a customer.
Reserve for Contract Dispute. Reserve for contract dispute charge of $1.9
million for the fiscal year ended September 30, 1999 relates to an ongoing
contract dispute with a prime contractor to which the Company is a
subcontractor. After a series of discussions with the prime contractor, the
Company determined that collection of the outstanding accounts receivable
balance was unlikely. This matter is currently in litigation. See Item 3.--
"Legal Proceedings."
Depreciation and Amortization. Depreciation and amortization consists
primarily of expenses associated with depreciation of equipment and
improvements and amortization of certain other intangible assets resulting
from acquisitions and purchases of certain intellectual property. Depreciation
and amortization increased 230.5% to $3.9 million for the fiscal year ended
September 30, 1999 from $1.2 million for the fiscal year ended
16
September 30, 1998. As a percentage of revenues, depreciation and amortization
increased to 4.2% for the fiscal year ended September 30, 1999 from 2.0% in
1998. The increase in total depreciation and amortization expense 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 depreciation associated with
increased capital expenditures. The Company expects that depreciation and
amortization will continue to increase in future periods in absolute dollars,
although they may vary as a percentage of revenues.
Interest Income and Interest Expense, Net. The Company had net interest
income of $1.3 million for the fiscal year ended September 30, 1999 compared
to net interest income of $980,000 for the fiscal year ended September 30,
1998. This increase was primarily attributable to the interest income
generated from the investment of proceeds from the Company's initial and
secondary public offerings.
Provision for Income Taxes. The provision for income taxes was $644,000 for
the fiscal year ended September 30, 1999 as compared to $2.6 million for the
fiscal year ended September 30, 1998. The effective tax rate for the fiscal
years ended September 30, 1999 and 1998 was 39.0%. This rate differs from the
federal statutory rate due to state and foreign income taxes and tax-exempt
interest income. The Company expects that its effective tax rate for the
fiscal year ending September 30, 2000 will not be materially different from
the effective tax rate for the fiscal year ending September 30, 1999. 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, and any non-deductible items related to
acquisitions.
Twelve-Month Fiscal Year Ended September 30, 1998 and the Twelve Months Ended
September 30, 1997
Revenues. Revenues increased 114.7% to $57.7 million for the fiscal year
ended September 30, 1998 from $26.9 million in the twelve months ended
September 30, 1997. This increase resulted from internal growth, including an
expanded client base and several significant new contracts, and from
acquisitions.
Gross Profit. Gross profit increased 126.7% to $20.5 million for the fiscal
year ended September 30, 1998 from $9.0 million in the twelve months ended
September 30, 1997. Gross margin increased to 35.4% for the fiscal year ended
September 30, 1998 from 33.5% in the twelve months ended September 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 start-up costs
incurred in implementing a significant new contract in the first quarter of
1998.
Selling and Marketing. Selling and marketing expenses increased 34.7% to
$3.0 million for the fiscal year ended September 30, 1998 from $2.2 million in
the twelve months ended September 30, 1997. As a percentage of revenues,
selling and marketing expenses decreased to 5.2% for the fiscal year ended
September 30, 1998 from 8.3% in the twelve months ended September 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 selling and marketing efforts and was partially offset by
the use of sales and marketing personnel on client projects, which costs were
included in cost of revenues.
General and Administrative. General and administrative expenses increased
87.5% to $9.7 million for the fiscal year ended September 30, 1998 from $5.2
million in the twelve months ended September 30, 1997. As a percentage of
revenues, general and administrative expenses decreased to 16.9% for the
fiscal year ended September 30, 1998 from 19.3% in the twelve months ended
September 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. Compensation charge
related to business combinations increased 57.0% to $737,000 for the fiscal
year ended September 30, 1998 from $469,000 in the
17
twelve months ended September 30, 1997. The increase in total compensation
charge related to business combinations was primarily attributable to
contingent payments earned during the current period by previous owners of the
acquired businesses.
Depreciation and Amortization. Depreciation and amortization increased
313.2% to $1.2 million for the fiscal year ended September 30, 1998 from
$283,000 in the twelve months ended September 30, 1997. As a percentage of
revenues, depreciation and amortization increased to 2.0% for the fiscal year
ended September 30, 1998 from 1.1% in the twelve months ended September 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 resulting
from acquisitions.
Interest Income and Interest Expense, Net. The Company had net interest
income of $980,000 for the fiscal year ended September 30, 1998 compared to
net interest expense of $123,000 for the twelve months ended September 30,
1997. This change was primarily attributable to the Company's repayment of all
borrowings under its bank lines of credit and interest income generated from
its investment of proceeds from its initial and secondary public offerings.
Provision for Income Taxes. The effective tax rate for the fiscal year ended
September 30, 1998 was 39.0%, compared to 40.1% for the twelve months ended
September 30, 1997. The decrease in the effective tax rate was primarily
attributable to the investment income earned on tax-exempt securities.
18
Selected Quarterly Statements of Income
The following tables set forth certain unaudited consolidated quarterly
statement of income data for each of the eight quarters ending September 30,
1999. In the opinion of management, this information has been prepared on the
same basis as the audited Consolidated Financial Statements contained herein
and includes all necessary adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary to present fairly this
information in accordance with generally accepted accounting principles. This
information should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto appearing elsewhere in this Form
10-K. The Company's operating results for any one quarter are not necessarily
indicative of results for any future period.
Three Months Ended
------------------------------------------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
(in thousands, except per share data)
Consolidated Statement
of Income Data:
Revenues................ $9,150 $12,672 $14,890 $21,012 $21,356 $20,243 $23,798 $26,579
Cost of revenues........ 5,680 8,756 9,241 13,595 13,156 12,664 13,913 16,503
------ ------- ------- ------- ------- ------- ------- -------
Gross profit............ 3,470 3,916 5,649 7,417 8,200 7,579 9,885 10,076
Costs and expenses:
Selling and marketing.. 815 601 800 792 1,287 1,470 1,716 1,622
General and
administrative........ 1,800 1,903 2,725 3,316 3,459 4,593 5,598 5,338
Compensation charge
related to business
combinations.......... 198 354 94 90 61 60 355 131
Purchased in-process
technology............ -- -- -- -- -- -- 4,000 --
Reserve for contract
dispute............... -- -- -- -- -- -- 1,856 --
Depreciation and
amortization.......... 150 219 337 463 527 831 1,219 1,287
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 507 839 1,693 2,756 2,866 625 (4,859) 1,698
Interest (income) and
expense, net........... (56) (269) (219) (436) (456) (368) (266) (230)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 563 1,108 1,912 3,192 3,322 993 (4,593) 1,928
Provision (benefit) for
income taxes........... 228 449 713 1,252 1,296 387 (1,791) 752
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 335 $ 659 $ 1,199 $ 1,940 $ 2,026 $ 606 $(2,802) $ 1,176
====== ======= ======= ======= ======= ======= ======= =======
Basic net income (loss)
per share.............. $ 0.05 $ 0.07 $ 0.12 $ 0.16 $ 0.17 $ 0.05 $ (0.23) $ 0.10
====== ======= ======= ======= ======= ======= ======= =======
Diluted net income
(loss) per share....... $ 0.04 $ 0.06 $ 0.11 $ 0.15 $ 0.16 $ 0.05 $ (0.23) $ 0.09
====== ======= ======= ======= ======= ======= ======= =======
Three Months Ended
--------------------------------------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
As a Percentage of
Revenues:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 62.1 69.1 62.1 64.7 61.6 62.6 58.5 62.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 37.9 30.9 37.9 35.3 38.4 37.4 41.5 37.9
Costs and expenses:
Selling and marketing.. 8.9 4.7 5.4 3.8 6.0 7.2 7.2 6.1
General and
administrative........ 19.7 15.0 18.3 15.8 16.2 22.7 23.5 20.1
Compensation charge
related to business
combinations.......... 2.1 2.8 0.6 0.4 0.3 0.3 1.5 0.5
Purchased in-process
technology............ -- -- -- -- -- -- 16.8 --
Reserve for contract
dispute............... -- -- -- -- -- -- 7.8 --
Depreciation and
amortization.......... 1.6 1.8 2.3 2.2 2.5 4.1 5.1 4.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 5.6 6.6 11.3 13.1 13.4 3.1 (20.4) 6.4
Interest (income) and
expense, net........... (0.6) (2.1) (1.5) (2.1) (2.1) (1.8) (1.1) (0.9)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 6.2 8.7 12.8 15.2 15.5 4.9 (19.3) 7.3
Provision (benefit) for
income taxes........... 2.5 3.5 4.8 6.0 6.0 1.9 (7.5) 2.9
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 3.7% 5.2% 8.0% 9.2% 9.5% 3.0% (11.8)% 4.4%
===== ===== ===== ===== ===== ===== ===== =====
19
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.
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions. The Company
maintains an $8 million revolving credit facility (the "Credit Facility"). 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%
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
its foreign subsidiaries. The Credit Facility contains certain restrictive
covenants, including limitations on the total 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 September 30, 1999, there were no borrowings
outstanding under the Credit Facility; however the availability of the total
commitment amount to the Company has been reduced by an $800,000 letter of
credit issued in connection with the acquisition of Service Design Associates,
Inc. ("SDA") in March 1999.
Net cash used in operating activities was $1.6 million in fiscal 1999, $1.6
million in fiscal 1998, and $1.4 million in the nine-month fiscal year ended
September 30, 1997. Throughout these periods, in addition to the net income
for the period, the Company experienced increases in receivables as a result
of increases in the Company's sales volume. During the year ended September
30, 1999, the Company acquired the exclusive worldwide licensing rights to
components of a large scale, enterprise-wide commercial billing system
currently under development.
Net cash used in investing activities was $11.5 million in fiscal 1999,
$28.9 million in fiscal 1998 and $2.5 million in the nine-month fiscal year
ended September 30, 1997. The decrease in cash used in investing activities in
fiscal 1999 as compared to fiscal 1998 is largely attributable to a decreased
investment balance, offset by investments in the acquisition of Midas Computer
Software Limited, ADC Consultants Pty Limited, the acquisition of certain
assets and liabilities of Service Design Associates, Inc. and Technology
Training Services, a division of Automated Concepts, Inc. Capital
expenditures, including equipment acquired under capital lease but excluding
assets acquired or leased through business combinations, were approximately
$5.8 million in fiscal 1999, $2.0 million in fiscal 1998 and $554,000 in the
nine-month fiscal year ended September 30, 1997. The increase in capital
expenditures was primarily attributable to an increased workforce, geographic
expansion, establishment of business process outsourcing centers and
development of the Company's technology infrastructure. The Company
anticipates that it will continue to have significant capital expenditures in
the near-term related to, among other things, purchases of computer equipment
to enhance the Company's global operations and support its growth, as well as
potential expenditures related to new office leases and the establishment of
business process outsourcing centers.
Net cash provided by financing activities totaled $769,000 in fiscal 1999,
$53.4 million in fiscal 1998, and $3.7 million in the nine-month fiscal year
ended September 30, 1997. In fiscal 1999, the cash provided by financing
activities was primarily the result of stock option exercises. In fiscal 1998,
the Company raised approximately $55 million in its public offerings of Class
B Common Stock and made net payments of $2.8 million under its line of credit.
In the nine-month fiscal year ended September 30, 1997, the Company raised
gross proceeds of $1.9 million through the issuance of 420,953 shares of
Series A Preferred Stock and increased its net borrowing by $2.1 million under
its former credit facility.
20
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, new
contracts, the timing of the receipt of accounts receivable and employee
growth. The Company is involved in a contract dispute with a prime contractor.
See Item 3. "Legal Proceedings." On June 28, 1999, the Company filed a federal
civil action against the prime contractor for the amounts the Company is due
under the contract. On August 11, 1999, the Company received the prime
contractor's answer and counterclaim, in which the prime contractor denies the
Company's claim, alleges breach of contract by the Company and seeks
declaratory relief and damages in excess of $8 million. The Company denies the
allegations and intends to vigorously pursue its own claim against the prime
contractor. At this time, there can be no assurance as to the course of this
dispute or its possible resolution. In the event the prime contractor prevails
in its action, the Company's financial condition and results of operations
would be materially and adversely affected. To the extent that the Company's
existing capital resources are insufficient to meet its capital requirements,
the Company will have to raise additional funds. There can be no assurance
that additional funding, if necessary, will be available on favorable terms,
if at all.
Recent Accounting Standards
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
computer software costs related to internal software that are incurred in the
preliminary project stage be expensed as incurred. Once the capitalization
criteria of SOP 98-1 have been met, external direct costs of materials and
services consumed in developing or obtaining internal-use computer software;
payroll and payroll-related costs for employees who are directly associated
with and who devote time to the internal-use computer software project (to the
extent of the time spent directly on the project); and interest costs incurred
when developing computer software for internal use should be capitalized. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its
consolidated financial statements for the year ending September 30, 2000. The
adoption of SOP 98-1 is not expected to have a material impact on the
consolidated financial statements of the Company.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. The adoption of SOP 98-5 is not expected to have a material impact
on the consolidated financial statements of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133") which will be effective in fiscal 2001. 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 has not yet determined the impact, if any, that the adoption of FAS
133 will have on the consolidated financial statements.
Year 2000
The "Year 2000 Issue" is typically the result of software being written
using two digits rather than four to define the applicable year. The Company
uses a significant number of computer software programs and operating
21
systems in its service offerings, financial business systems and
administrative functions. To the extent these software applications are unable
to appropriately interpret the upcoming calendar year "2000", remediation of
such applications will be necessary.
The Company is continuing to assess the preparedness of its internal IT and
non-IT systems and has substantially completed the remediation, testing and
certification of its critical internal systems. To date, no significant Year
2000 related problems have been identified. The Company's internal systems are
largely PC-based and a majority were recently acquired or installed. As a
result, the Company believes that a high percentage of its hardware and non-IT
systems already address the Year 2000 Issue, as does a majority of its
software. The remediation, testing and certification process of its remaining
systems and software was substantially completed during the summer of 1999.
The Company has not incurred material remediation costs to date and does not
anticipate that the cost of such process will have a material adverse effect
on the Company's business, result of operations or financial condition.
In addition, the Company made an evaluation of the Year 2000 readiness of
its key suppliers and other key third parties. The Company continues to work
with these parties to address the Year 2000 Issue and to obtain appropriate
assurances. The Company's operations could be materially adversely affected if
these third parties or the products or services they supply to Tier are
disrupted or impaired by the Year 2000 Issue.
There can be no assurance that the remediation, testing and certification of
the Company's systems will be successful or that the Company's key contractors
will have successful conversion programs, and that such Year 2000 Issue
compliance failures will not have a material adverse effect on the Company's
business, results of operations or financial condition.
As a result of the Company's assessment to date, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
Factors That May Affect Future Results
The following factors, among others could cause actual results to differ
materially from those contained in forward-looking statements in this Form 10-
K. 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 business process outsourcing,
. demand for our services generated by strategic partnerships and certain
prime contractors,
22
. our ability to increase both the number and size of engagements from
existing clients, and
. economic conditions in the vertical and geographic markets we serve.
Due to the relatively long sales cycles for our services in the government
services market, the timing of revenue is difficult to forecast. In addition,
the achievement of anticipated revenues is substantially dependent on our
ability to attract, on a timely basis, and retain skilled personnel. A high
percentage of our operating expenses, particularly personnel and rent, are
fixed in advance. In addition, we typically reach the annual limitation on
FICA contributions for many of our consultants before the end of the calendar
year. As a result, payroll taxes as a component of cost of sales will vary
from quarter to quarter during the fiscal year and will generally be higher at
the beginning of the calendar year. Because of the variability of our
quarterly operating results, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful, should not be relied
upon as indications of future performance and may result in volatility in the
price of our common stock. In addition, our operating results will from time
to time be below the expectations of analysts and investors.
Potential Adverse Effect on Operating Results from Dependence on Large
Projects, Limited Clients or Certain Market Sectors. The completion,
cancellation or significant reduction in the scope of a large project or a
project with certain clients would have a material adverse effect on our
business, financial condition and results of operations. Most of our contracts
are terminable by the client following limited notice and without significant
penalty to the client. We have derived, and believe that we will continue to
derive, a significant portion of our revenues from a limited number of
clients. For the twelve months ended September 30, 1999, Humana Inc. and the
State of Missouri accounted for 27.4% and 13.0% of our revenues, respectively.
The volume of work performed for specific clients is likely to vary from
period to period, and a major client in one period may not use our services in
a subsequent period. In addition, as a result of our focus in specific
vertical markets, economic and other conditions that affect the companies in
these markets could have a material adverse effect on our business, financial
condition and results of operations. See Item 3 "Legal Proceedings."
Inability to Attract and Retain Professional Staff Necessary to Existing and
Future Projects. Our inability to attract, retain and train skilled employees
could impair our ability to adequately manage and staff our existing projects
and to bid for or obtain new projects, which would have a material adverse
effect on our business, financial condition and results of operation. In
addition, the failure of our employees to achieve expected levels of
performance could adversely affect our business. Our success depends in large
part upon our ability to attract, retain, train, manage and motivate skilled
employees, particularly project managers and other senior technical personnel.
There is significant competition for employees with the skills required to
perform the services we offer. In particular, qualified project managers and
senior technical and professional staff are in great demand worldwide and
competition for such persons is likely to increase. In addition, we require
that many of our employees travel to client sites to perform services on our
behalf, which may make a position with us less attractive to potential
employees. There can be no assurance that a sufficient number of skilled
employees will continue to be available, or that we will be successful in
training, retaining and motivating current or future employees.
Dependence on Key Personnel. Our success depends in large part upon the
continued services of a number of key employees. 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 60.2% of the total common stock voting power at
23
September 30, 1999. All power to vote shares held in the Voting Trust has
been vested in the Voting Trust's trustees, Messrs. Bildner and Barton. As
a result, Messrs. Bildner and Barton will be able to control the outcome
of all corporate actions requiring shareholder approval, including changes
in our equity incentive plan, the election of a majority of our directors,
proxy contests, mergers, tender offers, open-market purchase programs or
other purchases of common stock that could give holders of our Class B
Common Stock the opportunity to realize a premium over the then-prevailing
market price for their shares of Class B Common Stock.
Potential Failure to Identify, Acquire or Integrate New Acquisitions. A
principal component of our business strategy is to expand our presence in new
or existing markets by acquiring additional businesses. From December 1996
through September 30, 1999, we acquired twelve businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or to integrate successfully any acquired businesses
without substantial expense, delay or other operational or financial problems.
Acquisitions involve a number of special risks, including:
. diversion of management's attention,
. failure to retain key personnel,
. amortization of acquired intangible assets,
. client dissatisfaction or performance problems with an acquired firm,
. assumption of unknown liabilities, and
. other unanticipated events or circumstances.
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations.
Inability to Manage Growth. If we are unable to manage our growth
effectively, such inability would have a material adverse effect on the
quality of our services, our ability to retain key personnel, and our
business, financial condition and results of operations. Our growth has
placed, and is expected to continue to place, significant demands on our
management, financial, staffing and other resources. We have expanded
geographically by opening new offices domestically and abroad, and intend to
open additional offices. Our ability to manage growth effectively will require
us to continue to develop and improve our operational, financial and other
internal systems, as well as our business development capabilities, and to
train, motivate and manage our employees. In addition, as the average size and
number of our projects continues to increase, we must be able to manage such
projects effectively. There can be no assurance that our rate of growth will
continue or that we will be successful in managing any such growth.
Dependence on Partnerships with Third Parties in Performing Certain Client
Engagements. We sometimes perform client engagements in partnership with third
parties. In the government services market, we often join with other
organizations to bid and perform an engagement. In these engagements, we may
engage subcontractors or we may act as a subcontractor to the prime contractor
of the engagement. In the commercial services market, we sometimes partner
with software or technology providers to jointly bid and perform engagements.
In both markets, we often depend on the software, resources and technology of
our partners in order to perform the engagement. There can be no assurance
that actions or failures attributable to our partners or to the prime
contractor or subcontractor will not also negatively affect our business,
financial condition or results of operations. In addition, the refusal or
inability of a partner to permit continued use of its software, resources or
technology by us, or the discontinuance or termination by the prime contractor
of our services or the services of a key subcontractor, would have a material
adverse effect on our business, financial condition and results of operations.
24
Dependence on Contracts with Government Agencies. For the fiscal year ended
September 30, 1999, approximately 37.9% of our revenues were derived from
sales to government agencies. Such government agencies may be subject to
budget cuts or budgetary constraints or a reduction or discontinuation of
government funding. A significant reduction in funds available for government
agencies to purchase IT services would have a material adverse effect on our
business, financial condition and results of operations. In addition, the loss
of a major government client, or any significant reduction or delay in orders
by such client, would have a material adverse effect on our business,
financial condition and results of operations.
Failure to Estimate Accurately Fixed Price and Performance-Based
Contracts. Our failure to estimate accurately the resources or time required
for a fixed price project or the expected volume of transactions under a
performance-based contract could have a material adverse effect on our
business, financial condition and results of operations. Under fixed price
contracts, we receive our fee if we meet specified objectives such as
completing certain components of a system installation. For performance-based
contracts, we receive our fee on a per-transaction basis, such as the number
of child support payments processed. To earn a profit on these contracts, we
rely upon accurately estimating costs involved and assessing the probability
of meeting the specified objectives or realizing the expected number of
transactions within the contracted time period. If we fail to estimate
accurately the factors upon which we base our contract pricing, we may incur
losses on these contracts. During the fiscal year ended September 30, 1999,
20.9% of our revenues were generated on a fixed price basis. We believe that
the percentage of total revenues attributable to fixed price contracts will
continue to be significant and may continue to grow.
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.
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 from
errors or omissions, there can be no assurance that such coverage will
continue to be available on reasonable terms, will be available in sufficient
amounts to cover one or more claims or that the insurer will not disclaim
coverage as to any future claim. The successful assertion for one or more
claims against us that exceed available insurance coverage or changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, would adversely affect our business,
financial condition and results of operations.
Delay or Failure to Develop New IT Solutions. Our success will depend in
part on our ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. There can be no assurance that we will be successful in
developing such IT solutions in a timely manner or that if developed we will
be successful in the marketplace. Delay in developing or failure to develop
new IT solutions would have a material adverse effect on our business,
financial condition and results of operations.
25
Substantial Competition in the IT Services Market. The IT services market is
highly competitive and is served by numerous international, national and local
firms. There can be no assurance that we will be able to compete effectively
in the market. Market participants include systems consulting and integration
firms, including national accounting firms and related entities, the internal
information systems groups of our prospective clients, professional services
companies, hardware and application software vendors, and divisions of large
integrated technology companies and outsourcing companies. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. In addition, there are relatively low barriers to entry into the IT
services market, and we have faced, and expect to continue to face, additional
competition from new entrants into the IT services market.
We believe that the principal competitive factors in the IT services market
include:
. reputation,
. project management expertise,
. industry expertise,
. speed of development and implementations,
. technical expertise,
. competitive pricing, and
. the ability to deliver results on a fixed price as well as a time and
materials basis.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
. the ability of our clients or competitors to hire, retain and motivate
project managers and other senior technical staff,
. the ownership by competitors of software used by potential clients,
. the price at which others offer comparable services,
. the ability of our clients to perform the services themselves, and
. the extent of our competitors' responsiveness to client needs.
Our inability to compete effectively on these competitive factors would have
a material adverse effect on our business, financial condition and results of
operations.
Inability to Protect Proprietary Intellectual Property. The steps we take to
protect our intellectual property rights may be inadequate to avoid the loss
or misappropriation of such information, or to detect unauthorized use of such
information. We rely on a combination of trade secrets, nondisclosure and
other contractual arrangements, and copyright 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.
26
Although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against us in the future, or that if asserted, any
such claim will be successfully defended.
Failure to Manage and Expand International Operations. For the fiscal year
ended September 30, 1999, international operations accounted for 33.7% of our
total revenues. We believe that the percentage of total revenues attributable
to international operations will continue to be significant. In addition, a
significant portion of our sales are to large multinational companies. To meet
the needs of such companies, both domestically and internationally, we must
provide worldwide services, either directly or indirectly. As a result, we
intend to expand our existing international operations and may enter
additional international markets, which will require significant management
attention and financial resources and could adversely effect our operating
margins and earnings. In order to expand international operations, we will
need to hire additional personnel and develop relationships with potential
international clients through acquisition or otherwise. To the extent that we
are unable to do so on a timely basis, our growth in international markets
would be limited, and our business, financial condition and results of
operations would be materially and adversely affected.
Our international business operations are subject to a number of risks,
including:
. difficulties in building and managing foreign operations,
. difficulties in 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 operation.
Potential Year 2000 Non-Compliance. The "Year 2000 Issue" is typically the
result of software being written using two digits rather than four to define
the applicable year. The Company uses a significant number of computer
software programs and operating systems in its service offerings, financial
business systems and administrative functions. To the extent these software
applications are unable to appropriately interpret the upcoming calendar year
"2000", remediation of such applications will be necessary.
The Company is continuing to assess the preparedness of its internal IT and
non-IT systems and has substantially completed the remediation, testing and
certification of its critical internal systems. To date, no significant Year
2000 related problems have been identified. The Company's internal systems are
largely PC-based and a majority were recently acquired or installed. As a
result, the Company believes that a high percentage of its hardware and non-IT
systems already address the Year 2000 Issue, as does a majority of its
software. The remediation, testing and certification process of its remaining
systems and software was substantially completed during the summer of 1999.
The Company has not incurred material remediation costs to date and does not
anticipate that the cost of such process will have a material adverse effect
on the Company's business, result of operations or financial condition.
In addition, the Company made an evaluation of the Year 2000 readiness of
its key suppliers and other key third parties. The Company is working with
these parties to address the Year 2000 Issue and to obtain appropriate
assurances. The Company's operations could be materially adversely affected if
these third parties or the products or services they supply to Tier are
disrupted or impaired by the Year 2000 Issue.
There can be no assurance that the remediation, testing and certification of
the Company's systems will be successful or that the Company's key contractors
will have successful conversion programs, and that such Year 2000 Issue
compliance failures will not have a material adverse effect on the Company's
business, results of operations or financial condition.
27
As a result of the Company's assessment to date, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
Potential Volatility of Stock Price. A public market for our Class B Common
Stock has existed only since the initial public offering of the Class B Common
Stock in December 1997. There can be no assurance that an active public market
will be sustained. The market for securities of early stage companies has been
highly volatile in recent years as a result of factors often unrelated to a
company's operations, 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.
Issuance of Preferred Stock May Prevent Change in Control and Adversely
Affect Market Price for Class B Common Stock. The Board of Directors has the
authority to issue preferred stock and to determine the preferences,
limitations and relative rights of shares of preferred stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by our shareholders. The preferred stock
could be issued with voting, liquidation, dividend and other rights superior
to the rights of our Class B Common Stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discourage bids for the
Class B Common Stock at a premium over the market price and adversely affect
the market price and the voting and other rights of the holders of our common
stock.
No Current Intention to Declare or Pay Dividends. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future.
Item 7A. 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 two wholly owned
subsidiaries in Australia and conducts operations in the United Kingdom
through a U.S.-incorporated subsidiary and a United Kingdom 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 engaged in foreign currency hedging
transactions on a limited basis in connection with certain acquisitions, and
no contracts are outstanding as of September 30, 1999. There can be no
assurance that a sudden and significant decline in the value of the Australian
Dollar or British Pound would not have a material adverse effect on the
Company's financial condition and results of operations.
28
Item 8. Financial Statements and Supplementary Data
See "Index to Consolidated Financial Statements" for a listing of the
financial statements filed with this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
As previously reported on the Current Report on Form 8-K filed on July 27,
1998, effective as of July 25, 1998, the Company's Audit Committee approved,
subject to ratification by its shareholders, the engagement of
PricewaterhouseCoopers LLP as its independent accountants for the fiscal year
ending September 30, 1998 and approved the resignation of the firm of Ernst &
Young LLP, who resigned as auditors of the Company effective July 24, 1998.
Ernst & Young LLP, under the rules of its profession, resigned solely due to a
prospective independence issue.
The reports of Ernst & Young LLP on the Company's financial statements for
the two fiscal years ended September 30, 1997 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended September 30, 1997, and in the subsequent
interim period, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to
the matter in their report. The Company provided Ernst & Young LLP with a copy
of the Form 8-K and requested Ernst & Young LLP furnish a letter addressed to
the Commission stating whether it agreed with the above statements. A copy of
that letter, dated July 27, 1998, was filed as Exhibit 16.1 to the Form 8-K.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers. See "Executive Officers of the Registrant" in Part I
of this report.
(b) Directors. The information required by this item is incorporated herein
by reference to the Company's definitive proxy statement to be filed pursuant
to Regulation 14A (the "1999 Proxy Statement"), under the headings "Election
of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and
"Executive Officers," which the Company intends to file with the Securities
and Exchange Commission within 120 days of the Company's fiscal year ended
September 30, 1999.
Item 11. Executive Compensation
The information required under this item may be found under the section
captioned "Compensation of Executive Officers" in the 1999 Proxy Statement and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item may be found under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
the 1999 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required under this Item may be found under the section
captioned "Election of Directors--Certain Related Transactions" in the 1999
Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements. See "Index to Consolidated
Financial Statements" on Page F-1.
(2) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not
applicable, not required, were filed subsequent to the filing of
the Form 10-K or because the information required to be set forth
therein is included in the consolidated financial statements or in
notes thereto.
(3) Exhibits. See "Exhibit Index."
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
(c) Exhibits. See "Exhibit Index."
(d) Financial Statement Schedules. See "Index to Consolidated Financial
Statements" on page F-1.
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
Report of Independent Accountants.......................................... F-2
Report of Independent Auditors............................................. F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Income.......................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
Financial Statement Schedule II............................................ F-29
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Tier Technologies, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Tier Technologies, Inc. and its subsidiaries at September 30, 1999
and 1998, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 29, 1999
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Tier Technologies, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Tier Technologies, Inc. for the nine
month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the result of operations and cash flows of Tier
Technologies, Inc. for the nine month period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Walnut Creek, California
October 6, 1997
F-3
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
----------------
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................. $10,121 $22,466
Restricted cash............................................ 819 712
Short-term investments..................................... 8,971 16,834
Accounts receivable, net of allowance for doubtful accounts
of $2,285 in 1999 and $260 in 1998........................ 26,151 18,335
Prepaid expenses and other current assets.................. 2,653 1,399
------- -------
Total current assets..................................... 48,715 59,746
Equipment and improvements, net.............................. 7,012 2,371
Notes and accrued interest receivable from related parties... 1,486 1,871
Intangible assets, net....................................... 23,913 9,794
Other assets................................................. 2,818 721
------- -------
Total assets............................................ $83,944 $74,503
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 2,759 $ 3,263
Accrued liabilities........................................ 2,618 934
Accrued subcontractor expenses............................. 1,113 2,503
Accrued compensation and related liabilities............... 3,476 2,310
Income taxes payable....................................... 995 450
Deferred income............................................ 1,506 500
Capital lease obligations due within one year.............. 381 67
Other current liabilities.................................. 27 24
------- -------
Total current liabilities................................ 12,875 10,051
Capital lease obligations, less current portion.............. 443 163
Other liabilities............................................ 358 117
------- -------
Total liabilities....................................... 13,676 10,331
------- -------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value; authorized shares--4,579.... -- --
Common stock, no par value; authorized shares--44,260;
issued and outstanding shares--12,260 in 1999 and 11,861
in 1998................................................... 66,012 62,656
Notes receivable from shareholders......................... (1,773) (2,159)
Deferred compensation...................................... (352) (591)
Accumulated other comprehensive income (loss).............. (101) (1,210)
Retained earnings.......................................... 6,482 5,476
------- -------
Total shareholders' equity............................... 70,268 64,172
------- -------
Total liabilities and shareholders' equity.............. $83,944 $74,503
======= =======
See accompanying notes.
F-4
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended Nine-Months
September 30, Ended
--------------- September 30,
1999 1998 1997
------- ------- -------------
Revenues......................................... $91,976 $57,725 $22,479
Cost of revenues................................. 56,236 37,273 14,917
------- ------- -------
Gross profit..................................... 35,740 20,452 7,562
Costs and expenses:
Selling and marketing.......................... 6,095 3,009 1,836
General and administrative..................... 18,988 9,743 4,397
Compensation charge related to business
combinations.................................. 608 737 470
Purchased in-process technology................ 4,000 -- --
Reserve for contract dispute................... 1,856 -- --
Depreciation and amortization.................. 3,864 1,169 259
------- ------- -------
Income from operations........................... 329 5,794 600
Interest income.................................. 1,398 1,136 70
Interest expense................................. 77 156 169
------- ------- -------
Income before income taxes....................... 1,650 6,774 501
Provision for income taxes....................... 644 2,642 201
------- ------- -------
Net income....................................... $ 1,006 $ 4,132 $ 300
======= ======= =======
Basic net income per share....................... $ 0.08 $ 0.45 $ 0.06
======= ======= =======
Shares used in computing basic net income per
share........................................... 12,056 9,231 5,400
======= ======= =======
Diluted net income per share..................... $ 0.08 $ 0.39 $ 0.05
======= ======= =======
Shares used in computing diluted net income per
share........................................... 12,869 10,624 5,794
======= ======= =======
See accompanying notes.
F-5
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Preferred
Stock Common Stock Notes Accumulated
------------- -------------------------------- Receivable Other Total
Class A Class B From Deferred Comprehensive Retained Shareholders'
Shares Amount Shares Amount Shares Amount Shareholders Compensation Income (Loss) Earnings Equity
------ ------ ------- ------ ------- ------- ------------ ------------ ------------- -------- -------------
Balance at
December 31,
1996............. -- $ -- 1,720 $ 32 2,580 $ 47 $ (95) $ -- $ -- $1,044 $ 1,028
Issuance of
Series A
convertible
preferred stock
for cash, net of
issuance costs
of $318......... 421 1,892 (95) (2) 95 2 -- -- -- -- 1,892
Exercise of
stock options... -- -- 660 1,350 660 846 (2,196) -- -- -- --
Tax benefit of
stock options
exercised....... -- -- -- 270 -- 404 -- -- -- -- 674
Payment on notes
receivable...... -- -- -- -- -- -- 37 -- -- -- 37
Net income...... -- -- -- -- -- -- -- -- -- 300 300
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- (40) -- (40)
---- ------ ----- ------ ------ ------- ------- ----- ------- ------ -------
Balance at
September 30,
1997............. 421 1,892 2,285 1,650 3,335 1,299 (2,254) -- (40) 1,344 3,891
Exercise of
stock options... -- -- -- -- 249 933 -- -- -- -- 933
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan... -- -- -- -- 11 116 -- -- -- -- 116
Tax benefit of
stock options
exercised....... -- -- -- -- -- 544 -- -- -- -- 544
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock.... (421) (1,892) (645) (12) 1,066 1,904 -- -- -- -- --
Issuance of
Class B common
stock, net of
issuance costs
of $2,258....... -- -- -- -- 5,460 54,856 -- -- -- -- 54,856
Payments on
notes
receivable...... -- -- -- -- -- -- 95 -- -- -- 95
Issuance of
Class B common
stock in
business
combinations.... -- -- -- -- 100 1,366 -- (701) -- -- 665
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 110 -- -- 110
Net income...... -- -- -- -- -- -- -- -- -- 4,132 4,132
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- (1,170) -- (1,170)
---- ------ ----- ------ ------ ------- ------- ----- ------- ------ -------
Balance at
September 30,
1998............. -- -- 1,640 1,638 10,221 61,018 (2,159) (591) (1,210) 5,476 64,172
Exercise of
stock options... -- -- -- -- 377 1,244 -- -- -- -- 1,244
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan... -- -- -- -- 46 388 -- -- -- -- 388
Tax benefit of
stock options
exercised....... -- -- -- -- -- 611 -- -- -- -- 611
Payments on
notes
receivable...... -- -- -- -- -- -- 386 -- -- -- 386
Issuance of
Class B common
stock and
options in
business
combinations.... -- -- -- -- 51 1,527 -- -- -- -- 1,527
Repurchase of
common stock.... -- -- -- -- (75) (414) -- -- -- -- (414)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 239 -- -- 239
Net income...... -- -- -- -- -- -- -- -- -- 1,006 1,006
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 1,109 -- 1,109
---- ------ ----- ------ ------ ------- ------- ----- ------- ------ -------
Balance at
September 30,
1999............. -- $ -- 1,640 $1,638 10,620 $64,374 $(1,773) $(352) $ (101) $6,482 $70,268
==== ====== ===== ====== ====== ======= ======= ===== ======= ====== =======
Comprehensive
Income
-------------
Balance at
December 31,
1996.............
Issuance of
Series A
convertible
preferred stock
for cash, net of
issuance costs
of $318.........
Exercise of
stock options...
Tax benefit of
stock options
exercised.......
Payment on notes
receivable......
Net income...... $ 300
Foreign currency
translation
adjustment...... (40)
-------------
Balance at
September 30,
1997............. $ 260
=============
Exercise of
stock options...
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan...
Tax benefit of
stock options
exercised.......
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock....
Issuance of
Class B common
stock, net of
issuance costs
of $2,258.......
Payments on
notes
receivable......
Issuance of
Class B common
stock in
business
combinations....
Amortization of
deferred
compensation....
Net income...... $ 4,132
Foreign currency
translation
adjustment...... (1,170)
-------------
Balance at
September 30,
1998............. $ 2,962
=============
Exercise of
stock options...
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan...
Tax benefit of
stock options
exercised.......
Payments on
notes
receivable......
Issuance of
Class B common
stock and
options in
business
combinations....
Repurchase of
common stock....
Amortization of
deferred
compensation....
Net income...... $ 1,006
Foreign currency
translation
adjustment...... 1,109
-------------
Balance at
September 30,
1999............. $ 2,115
=============
See accompanying notes.
F-6
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Nine
September 30, Months Ended
------------------ September 30,
1999 1998 1997
-------- -------- -------------
Operating activities
Net income................................... $ 1,006 $ 4,132 $ 300
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............... 4,229 1,169 259
Amortization of deferred compensation....... 239 109 --
Provision for doubtful accounts............. 2,025 210 50
Deferred income taxes....................... (3,231) (721) (144)
Tax benefit of stock options exercised...... 611 544 674
Forgiveness of notes receivable from
employees.................................. 621 275 --
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable......................... (8,291) (12,680) (2,740)
Income taxes payable........................ 544 1,271 (793)
Prepaid expenses and other current assets... 34 (611) (214)
Other assets................................ 101 (545) 13
Accounts payable and accrued liabilities.... (411) 4,796 1,234
Deferred income............................. 965 466 (21)
-------- -------- -------
Net cash used in operating activities........ (1,558) (1,585) (1,382)
-------- -------- -------
Investing activities
Purchase of equipment and improvements....... (5,749) (1,759) (554)
Notes and accrued interest receivable from
related parties............................. (740) (1,228) (1,028)
Repayment on notes and accrued interest
receivable from related parties............. 454 -- --
Business combinations, net of cash acquired.. (13,168) (8,271) (915)
Restricted cash.............................. (39) (712) --
Purchases of available-for-sale securities... (28,463) (30,204) --
Sales of available-for-sale securities....... 19,328 13,370 --
Maturities of available-for-sale securities.. 16,999 -- --
Other assets................................. (104) (108) --
-------- -------- -------
Net cash used in investing activities........ (11,482) (28,912) (2,497)
-------- -------- -------
Financing activities
Borrowings under bank lines of credit........ 909 6,912 10,356
Payment of borrowings on bank lines of
credit...................................... (1,466) (9,671) (8,253)
Repurchase of common stock................... (414) -- --
Net proceeds from issuance of common stock... 388 54,972 --
Net proceeds from issuance of preferred
stock....................................... -- -- 1,892
Repayment by shareholder on note receivable.. 386 95 37
Deferred financing costs..................... -- 224 (224)
Exercise of stock options.................... 1,244 933 --
Payments on capital lease obligations........ (252) (45) (33)
Payments on notes payable to shareholders.... (26) (47) (56)
-------- -------- -------
Net cash provided by financing activities.... 769 53,373 3,719
-------- -------- -------
Effect of exchange rate changes on cash...... (74) (516) (40)
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents................................. (12,345) 22,360 (200)
Cash and cash equivalents at beginning of
period...................................... 22,466 106 306
-------- -------- -------
Cash and cash equivalents at end of period... $ 10,121 $ 22,466 $ 106
======== ======== =======
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest paid............................... $ 77 $ 96 $ 170
======== ======== =======
Income taxes paid (refunded), net........... $ 2,724 $ 1,548 $ 465
======== ======== =======
Equipment acquired under capital lease
obligations................................. $ 72 $ 219 $ --
======== ======== =======
Common stock issued in exchange for notes
receivable.................................. $ -- $ -- $ 2,196
======== ======== =======
Accrued purchase price and assumed
liabilities related to business
combinations................................ $ 3,670 $ 397 $ 531
======== ======== =======
Conversion of preferred stock into common
stock....................................... $ -- $ 1,892 $ --
======== ======== =======
Common stock issued in business
combinations................................ $ 1,328 $ 666 $ --
======== ======== =======
Restricted stock held in escrow for
employees................................... $ -- $ 701 $ --
======== ======== =======
See accompanying notes.
F-7
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
Tier Technologies, Inc. (the "Company") provides information technology
consulting, application development, software engineering, training and
business outsourcing services to large companies and government entities.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The Company
translates the accounts of its foreign subsidiaries using the local foreign
currency as the functional currency. The assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars using exchange rates in effect
at the balance sheet date, revenues and expenses are translated using the
average exchange rate for the period, and gains and losses from this
translation process are included in shareholders' equity. Foreign currency
transaction gains and losses have not been material to the Consolidated
Statements of Income for the years ended September 30, 1999 and 1998, and the
nine months ended September 30, 1997.
In September 1997, the Company changed its fiscal year end to September 30.
Accounting for Business Combinations
Contingent payments are generally recorded as additional purchase price at
the time the payment can be determined beyond a reasonable doubt and the
amounts are amortized over the estimated remaining useful life of the acquired
assets. If a contingent payment is based, in part, on a seller's continuing
employment with the Company, the payments are recorded as a compensation
charge related to business combinations over the vesting period when the
amount is deemed probable to be made.
Use of Estimates
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 and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although management believes that the estimates and
assumptions used in preparing the accompanying consolidated financial
statements and related notes are reasonable in light of known facts and
circumstances, actual results could differ from those estimates.
Revenue Recognition
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.
F-8
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
Unbilled receivables represent revenue recognized in excess of amounts billed
in accordance with contractual billing terms. Unbilled receivables were
$8,390,000 and $3,444,000 at September 30, 1999 and 1998, respectively.
Revenues derived from sales to governmental agencies were approximately
$34,846,000, $20,862,000 and $10,133,000 for the years ended September 30,
1999 and 1998, and the nine months ended September 30, 1997, respectively.
Credit Risk and Significant Clients
Financial instruments that potentially subject the Company to significant
levels of credit risk are accounts receivable.
The Company extends credit based on an evaluation of its client's financial
condition and does not require collateral. The Company's historical credit
losses have not been significant, except for the reserve established due to a
contract dispute. See Note 13, "Contract Dispute."
For the year ended September 30, 1999, revenues from two clients totaled
approximately $25,200,000 and $11,986,000 which represented 27.4% and 13.0% of
total revenues, respectively. Accounts receivable balances at September 30,
1999 relating to these two clients amounted to approximately $6,530,000. For
the year ended September 30, 1998, revenues from three clients totaled
approximately $15,271,000, $11,525,000 and $6,471,000, which represented
26.5%, 20.0% and 11.2% of total revenues, respectively. Accounts receivable
balances at September 30, 1998 relating to these three clients amounted to
approximately $11,372,000. During the nine months ended September 30, 1997,
revenues from three clients totaled approximately $5,019,000, $4,734,000 and
$4,437,000, which represented 22%, 21% and 20% of total revenues,
respectively. Accounts receivable balances at September 30, 1997 relating to
these three clients amounted to approximately $1,611,000.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at amounts that approximate fair value,
based on quoted market prices. Cash equivalents consist principally of
investments in interest-bearing demand deposit accounts with financial
institutions and highly liquid debt securities of corporations, state
governments, municipalities and the U.S. Government.
Restricted Cash
In accordance with an acquisition agreement, the Company deposited cash in
an escrow account which will be released to the sellers of the acquired
business upon the satisfaction of certain contingencies. The Company has
classified this deposit as restricted cash.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, notes receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities.
Short-Term Investments
The Company has classified all short-term investments as available-for-sale.
Available-for-sale securities are recorded at amounts that approximate fair
market value based on quoted market prices and have included
F-9
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
investment-grade municipal securities and commercial paper. Realized gains and
losses and declines in value judged to be other-than-temporary on available-
for-sale securities are included in income. Unrealized and realized gains and
losses have not been material to the Consolidated Statements of Income for the
years ended September 30, 1999 and 1998 and the nine months ended September
30, 1997.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and amortization
are computed using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term, which range from three to five
years. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in operations in the period realized.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations, such as equipment and improvements, and intangible assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of the
assets.
Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, (SFAS 86) "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Under the standard, capitalization of software development costs begins upon
the establishment of technological feasibility. To date, all such amounts have
been charged to expenses.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provides the disclosure required in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123").
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rules and laws that
are expected to be in effect when the differences are expected to reverse.
Net Income Per Share
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") and
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98"). Under FAS 128, basic net income per share is computed by dividing the
net income for the period by the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed by
dividing the net income for the period by the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares,
F-10
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
composed of unvested restricted common stock, incremental common shares
issuable upon the exercise of stock options and warrants and upon conversion
of preferred stock, are included in diluted net income per share to the extent
such shares are dilutive.
Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes standards for reporting comprehensive income
and its components, including presentation in an annual financial statement
that is displayed with the same prominence as other annual financial
statements. Various components of comprehensive income may, for example,
consist of foreign currency items and unrealized gains and losses on certain
investments classified as available-for-sale.
Segment Reporting
The Company is managed through four reportable segments: commercial
services, government services, Australian operations and United Kingdom
operations. The commercial services segment provides information technology
("IT") consulting, application development and software engineering services
to Fortune 1000 clients in the United States. The government services segment
provides IT consulting, application development, legal and policy consulting,
and business process outsourcing services to state and local government
entities in the United States. The Australian operations segment provides IT
consulting, application development, call center and software engineering
services to clients in the public and private sectors in Australia. The United
Kingdom operations segment provides IT consulting, business process
reengineering, software engineering and application development services to
clients in the public and private sectors in the United Kingdom. The Company
follows the requirements of Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131").
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements and related notes to conform to the current year
presentation.
Impact of Recently Issued Accounting Standards
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position No. 98-1("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs related to internal software that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs of
materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project);
and interest costs incurred when developing computer software for internal use
should be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Accordingly, the Company will
adopt SOP 98-1 in its consolidated financial statements for the year ending
September 30, 2000. The adoption of SOP 98-1 is not expected to have a
material effect on the consolidated financial statements of the Company.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires costs of start-up
activities and
F-11
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP 98-5 is not expected to have a material impact on the
consolidated financial statements of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The Company is required to adopt this statement in the fourth quarter
of fiscal year 2001. 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 has not yet determined
the impact, if any, that the adoption of FAS 133 will have on the consolidated
financial statements.
2. Net Income Per Share
Net income per share is calculated as follows:
Year Ended Nine Months
September 30, Ended
------------- September 30,
1999 1998 1997
------ ------ -------------
(in thousands, except per
share data)
Numerator:
Net income.................................... $1,006 $4,132 $ 300
====== ====== =====
Denominator for basic income per share-weighted
average common shares outstanding.............. 12,056 9,231 5,400
Effects of dilutive securities:
Common stock options.......................... 684 1,274 274
Convertible preferred stock................... -- 90 120
Common stock held in escrow................... 129 29 --
------ ------ -----
Denominator for diluted net income per share-
adjusted weighted average common shares and
assumed conversions............................ 12,869 10,624 5,794
====== ====== =====
Basic net income per share...................... $ 0.08 $ 0.45 $0.06
====== ====== =====
Diluted net income per share.................... $ 0.08 $ 0.39 $0.05
====== ====== =====
Options to purchase approximately 1,519,000 million shares of Class B common
stock at a price ranging from $10.88 to $17.81 per share were outstanding at
September 30, 1999, but were not included in the computation of diluted net
income per share because the options' exercise prices were greater than the
average market price of the shares.
F-12
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Balance Sheet Components
The components of equipment and improvements are as follows:
September 30,
---------------
1999 1998
------- ------
(in thousands)
Computer equipment and software............................. $ 7,455 $2,482
Furniture, equipment and leasehold improvements............. 2,317 723
------- ------
9,772 3,205
Less: Accumulated depreciation and amortization............. (2,760) (834)
------- ------
$7,012 $2,371
======= ======
Depreciation and amortization expense related to equipment and improvements
for the years ended September 30, 1999 and 1998, and the nine months ended
September 30, 1997, was $1,928,000, $600,000 and $104,000, respectively. The
cost of assets acquired under capital leases is $1,195,000 and $296,000 and
the related accumulated amortization is $407,000 and $107,000 at September 30,
1999 and 1998, respectively.
The components of acquired intangible assets are as follows:
September 30,
----------------
1999 1998
------- -------
(in thousands)
Intangible assets:
Goodwill................................................. $25,863 $ 9,555
Acquired workforce....................................... 990 924
------- -------
26,853 10,479
Less: Accumulated amortization............................. (2,940) (685)
------- -------
$23,913 $ 9,794
======= =======
4. Bank Lines of Credit
At September 30, 1998, the Company had a $10 million revolving credit
facility which had a maturity date of March 31, 2001. During the year ended
September 30, 1999, the Company amended its credit facility and at September
30, 1999, the Company had an $8 million revolving credit facility which
matures on May 27, 2000. The total commitment amount is limited to the lesser
of 85% of eligible accounts receivable or $8 million and is secured by first
priority liens and security interests in substantially all of the Company's
assets, including a pledge of all stock of its domestic subsidiaries and a
pledge of approximately 65% of the stock of the Company's foreign
subsidiaries. Interest is based on 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 September 30,
1999, the Company was in compliance with all financial ratios and had no
outstanding borrowings under its credit facility; however, the availability of
the total commitment amount to the Company has been reduced by an $800,000
letter of credit issued in connection with the acquisition of certain assets
and liabilities of Service Design Associates, Inc.
F-13
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Bank Lines of Credit--(continued)
Prior to March 31, 1998, the Company had a credit agreement with a bank
which provided for lines of credit of up to $2,250,000 for general corporate
purposes and $1,500,000 for acquisition purposes (including up to $500,000 for
stand-by letters of credit). The lines of credit bore interest at the bank's
prime rate (8.5% at September 30, 1997) plus 1.5% and 1.75%, respectively.
Total borrowings were limited to the lesser of $3,750,000 or 85% of eligible
accounts receivable and were secured by the Company's assets. All borrowings
under this credit facility were repaid in December 1997.
5. Commitments
The Company leases its principal facilities and certain equipment under
noncancellable operating and capital leases which expire at various dates
through 2004. Future minimum lease payments for noncancellable leases with
terms of one year or more are as follows:
Operating Capital
Leases Leases
--------- -------
Years ending September 30,
2000..................................................... $1,768 $ 439
2001..................................................... 1,305 308
2002..................................................... 1,008 142
2003..................................................... 485 22
2004..................................................... 442 --
------ -----
Total minimum lease payments............................. $5,008 911
======
Less amounts representing interest....................... (87)
-----
Present value of capital lease obligations............... 824
Less amounts due within one year......................... (381)
-----
$ 443
=====
Rent expense for the years ended September 30, 1999 and 1998, and the nine
months ending September 30, 1997, was approximately $1,277,000, $530,000 and
$184,000, respectively.
6. Shareholders' Equity
Common Stock
In February 1997, the Company's Board of Directors authorized two classes of
common stock, Class A common stock and Class B common stock. Each then
outstanding share of common stock was converted into 40 shares of Class A
common stock and 60 shares of Class B common stock. All share and per share
information in the accompanying financial statements has been retroactively
adjusted to reflect this conversion. In October 1997, the Board of Directors
increased the authorized shares of Class B common stock to 42,600,000.
The holders of Class A common stock and Class B common stock have 10 votes
per share and 1 vote per share, respectively. Each share of Class A common
stock will automatically convert into one share of Class B common stock upon
transfer, except in limited circumstances, or at the election of the holder of
such Class A common stock.
F-14
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
Upon conversion of shares of Class A common stock into shares of Class B
common stock, such Class A common stock shares are retired from the authorized
shares and are not reissuable by the Company. The number of authorized shares
of Class A common stock was approximately 1,660,000 at September 30, 1999.
Voting Trust
In November 1997, all Class A shareholders (the "Beneficiaries") transferred
their Class A common stock into a voting trust. The Company's Chief Executive
Officer and President are the trustees of the voting trust (the "Trustees")
and have the exclusive right to vote all shares of Class A common stock held
in the voting trust. The voting trust has a term of 10 years and is renewable
by consent of the Beneficiaries and the Trustees during the last two years of
the original or an extended term. The voting trust terminates upon the earlier
of the expiration of the term or in the event of (i) an agreement of the
Trustees to terminate or (ii) the death of the sole remaining Trustee, leaving
no incumbent or identified successor.
Initial Public Offering
In December 1997, the Company completed an initial public offering of
3,400,000 shares of its Class B common stock at $8.50 per share. Of those
shares, 2,725,000 shares were sold by the Company and 675,000 shares were sold
by certain selling shareholders. In January 1998, the underwriters from the
Company's initial public offering exercised their over-allotment option to
purchase an additional 510,000 shares of Class B common stock from the Company
at the initial public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $23,900,000 after deducting the
underwriters' discount, commissions and related issuance costs. The Company
did not receive any net proceeds from the sale of shares by the selling
shareholders in the offering.
Secondary Public Offering
In June 1998, the Company completed a secondary 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 secondary public offering exercised their over-allotment option to
purchase an additional 450,000 shares of Class B common stock from the Company
at the secondary public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $31,000,000 after deducting the
underwriters' discount, commissions and related issuance costs. The Company
did not receive any net proceeds from the sale of shares by the selling
shareholders in the offering.
Common Stock Repurchase Program
In October 1998, the Board of Directors authorized the repurchase of up to
one million shares of common stock. The purchases were to be made in the open
market or in privately negotiated transactions at the discretion of the
Company's management, depending on financial and market conditions or as
otherwise provided by the Securities and Exchange Commission and the Nasdaq
rules and regulations. As of September 30, 1999, 75,000 shares have been
repurchased for a total cost of $414,000.
Preferred Stock
In July 1997, the Company issued approximately 421,000 shares of Series A
preferred stock at $5.25 per share resulting in net proceeds of approximately
$1,900,000. The Series A preferred stock had the same voting
F-15
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
rights as the Class B common stock. Series A preferred stock was initially
convertible into one share of the Class B common stock, subject to certain
antidilution provisions. On December 17, 1997, as a result of the Company's
initial public offering, approximately 421,000 shares of Series A preferred
stock automatically converted into approximately 421,000 shares of Class B
common stock. At September 30, 1999, approximately 4,579,000 shares of
preferred stock were authorized.
Stock Options
For the year ended December 31, 1996, the Company issued to employees
options to purchase 440,000 shares of Class A common stock and 660,000 shares
of Class B common stock at exercise prices ranging from $0.12 to $1.82 per
share. Options for 200,000 shares of Class A common stock and 300,000 shares
of Class B common stock vested upon grant. The remaining options vested one-
third upon the completion of the Company's initial public offering in December
1997, one-third on December 31, 1997, and the final one-third on December 31,
1998. In February 1997, the Company issued options to purchase an additional
240,000 shares of Class A common stock at an exercise price of $3.58 per
share. As of September 30, 1999, options for 660,000 shares of Class A common
stock and 660,000 shares of Class B common stock had been exercised at prices
ranging from $0.12 to $3.58 per share (weighted average exercise price of
$1.66 per share) and options for 20,000 shares of Class A common stock at an
exercise price of $3.58 per share remain outstanding. These outstanding
options will expire in 2002. The weighted average fair value of these options
granted during the nine months ended September 30, 1997 was $0.48 per share.
At September 30, 1999, all of these options were vested.
F-16
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
1996 Equity Incentive Plan
In February 1997, the Company adopted the 1996 Equity Incentive Plan (the
"Plan"), under which the Board of Directors may issue incentive stock options
for Class B common stock to employees and nonstatutory stock options, stock
bonuses or the right to purchase restricted stock to employees, consultants
and outside directors. The Board of Directors or a committee designated by the
Board determines who shall receive awards, the number of shares and the
exercise price (which cannot be less than the fair market value at date of
grant for incentive stock options and other awards). Options granted under the
Plan expire no more than 10 years from the date of grant and must vest at a
rate of at least 20% per year over five years from date of grant. Incentive
stock options granted to employees deemed to own more than 10% of the combined
voting power of all classes of stock of the Company must have an exercise
price of at least 110% of the market price of the stock at the date of grant
and the options may not be exercisable after the expiration of five years from
the date of grant. Through September 30, 1999, no compensation expense had
been recorded in connection with stock based employee incentive awards under
the Plan. At September 30, 1999 and September 30, 1998, the number of shares
authorized for issuance under the Plan was approximately 5,989,000 and
2,989,000, respectively. A summary of activity under the Plan is as follows:
Weighted
Number of Average
Shares Exercise Price
-------------- --------------
(in thousands)
Options outstanding at December 31, 1996...... -- $ --
Options granted.............................. 1,783 4.02
Options cancelled............................ (40) 3.33
-----
Options outstanding at September 30, 1997..... 1,743 3.93
Options granted.............................. 1,201 13.76
Options cancelled............................ (136) 9.23
Options exercised............................ (249) 3.71
-----
Options outstanding at September 30, 1998..... 2,559 8.28
Options granted.............................. 1,936 10.31
Options cancelled............................ (543) 11.13
Options exercised............................ (377) 3.30
-----
Options outstanding at September 30, 1999..... 3,575 9.47
=====
The weighted average fair value of options granted to employees under the
Plan during the years ended September 30, 1999, 1998 and the nine months ended
September 30, 1997 was $5.43, $5.51 and $0.85 per share, respectively. At
September 30, 1999, 1998 and 1997, there were 1,505,000, 845,000 and 207,000
options exercisable at a weighted average exercise price of $10.07, $6.83 and
$3.31, respectively. At September 30, 1999, options to purchase approximately
1,788,000 shares of Class B common stock were available for grant. The
weighted average remaining life of outstanding options under the Plan at
September 30, 1999 was 8.52 years.
F-17
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
The following table summarizes information about stock options outstanding at
September 30, 1999:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- -------------- ---------------- -------------- ------------- --------------
(in thousands) (in thousands)
$2.45--$3.25 451 7.40 $ 2.98 291 $ 2.95
$4.25--$5.78 410 5.35 $ 5.25 212 $ 5.18
$6.00--$6.00 433 9.59 $ 6.00 10 $ 6.00
$6.81--$7.03 391 9.74 $ 6.90 74 $ 6.85
$7.06--$10.88 635 8.91 $ 9.50 310 $10.61
$13.88--$14.25 385 9.02 $14.14 188 $14.17
$14.38--$15.19 473 8.99 $14.89 158 $15.19
$16.13--$17.00 343 9.00 $16.31 234 $16.17
$17.75--$17.75 20 9.33 $17.75 20 $17.75
$17.81--$17.81 34 8.75 $17.81 8 $17.81
----- -----
$2.45--$17.81 3,575 8.52 $ 9.47 1,505 $10.07
===== =====
Employee Stock Purchase Plan
In October 1997, the Company adopted the Employee Stock Purchase Plan. The
Company reserved a total of 100,000 shares of Class B common stock for
issuance under the plan. The plan has consecutive six-month purchase periods
and eligible employees may purchase Class B common stock at 85% of the lesser
of the fair market value of the Company's Class B common stock on the first
day or the last day of the applicable purchase period. The two purchase
periods ending in the year ended September 30, 1999 resulted in proceeds of
approximately $388,000 from the sale of 46,000 shares. The first purchase
period ended in May 1998 and resulted in proceeds of approximately $116,000
from the sale of approximately 11,000 shares.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The effect of applying the FAS 123 fair value method to the Company's stock-
based awards results in net income and net income per share as follows:
Year Ended Nine Months
September 30, Ended
-------------- September 30,
1999 1998 1997
------ ------ -------------
(in thousands, except per
share data)
Net income, as reported................... $1,006 $4,132 $300
Net income (loss), pro forma.............. (2,062) 2,616 165
Basic net income per share, as reported... 0.08 0.45 0.06
Basic net income (loss) per share, pro
forma.................................... (0.17) 0.28 0.03
Diluted net income per share, as
reported................................. 0.08 0.39 0.05
Diluted net income (loss) per share, pro
forma.................................... (0.17) 0.25 0.03
F-18
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
Year Ended Nine Months
September 30, Ended
----------------------- September 30,
1999 1998 1997
----------- ----------- -------------
Expected dividend yield................ 0% 0% 0%
Expected volatility.................... 82.3% 65% 0%
Risk-free interest rate................ 4.18%-5.77% 4.79%-5.60% 6.48%
Expected life of the option............ 0.5-5 years 0.5-4 years 1-5 years
7. Alliance Agreement
In September 1999, the Company entered into a long-term strategic alliance
("Alliance Agreement"), with Siemens Business Services Limited ("SBS"). Under
the Alliance Agreement, the Company has committed to utilizing a minimum
amount of resources from the SBS Application Services Center ("ASC"). The
Company will market the ASC's services worldwide in exchange for fees based on
the utilization of resources. To the extent there is a shortfall in minimum
utilization, the Company's obligation under the Alliance Agreement shall not
exceed $17,400,000 over the five-year life of the agreement. The Company will
also receive approximately $11,200,000 for consultancy services provided over
the life of the Alliance Agreement.
8. Acquisitions
All acquisitions have been accounted for using the purchase method of
accounting and intangible assets are being amortized using the straight-line
method. Initial purchase price includes cash paid and stock issued at the date
of acquisition, estimated acquisition costs and any guaranteed future
consideration.
On December 16, 1996, the Company acquired the intangible assets of Chicago
Consulting Alliance, LLC ("CCA"). CCA was based in Chicago, Illinois and
provided consulting services for the custom design of software and computer
systems for business applications. The initial purchase price was
approximately $170,000. As of September 30, 1999, intangible assets of
approximately $170,000 are being amortized over a six-year period.
On December 31, 1996, the Company acquired certain assets and liabilities of
Encore Consulting, Inc. ("Encore"), a Missouri-based corporation which
provided consulting services for computer systems integration on a government
contract. The initial purchase price was approximately $726,000 and
liabilities assumed were approximately $59,000. Additional acquisition costs
of approximately $20,000 were incurred. Tangible assets acquired were
approximately $538,000. As of September 30, 1999, intangible assets of
approximately $267,000 are being amortized over a six-year period. Contingent
payments of up to $300,000 were to be made if renewals of a significant client
contract occur and provided that the key employee/sellers continue to be
employed by the Company. Based on the annual renewals of such contract,
contingent payments to the former Encore shareholders of $150,000 were
expensed during each of the year ended September 30, 1998 and the nine months
ended September 30, 1997 as compensation charge related to business
combinations.
On January 2, 1997, the Company acquired the intangible assets of Five
Points Consulting, LLC ("Five Points") which was based in Atlanta, Georgia.
Five Points custom designed software and computer systems for special business
applications. The initial purchase price was approximately $284,000. As of
September 30, 1999, intangible assets of approximately $284,000 are being
amortized over a six-year period.
F-19
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
On March 10, 1997, the Company acquired the intangible assets of Tangent
Group, Pty. Limited ("Tangent Group"), an Australian entity which provided
computer systems consulting services. The initial purchase price was
approximately $488,000 (converted to U.S. dollars as of the date of the
acquisition). As of September 30, 1999, intangible assets recorded of
approximately $421,000 (converted into U.S. dollars using the September 30,
1999 exchange rate) are being amortized over a six-year period. In addition,
the Company recorded a liability to pay $120,000 in guaranteed minimum
royalties. The royalty is based on 3% of the Company's gross revenues
generated by its Australian operations. The maximum royalties to be paid over
the first three-year period are approximately $240,000. The minimum royalty of
$120,000 was included in the initial purchase price and any additional amounts
will be included in the purchase price when accrued.
On July 11, 1997, the Company acquired certain assets and liabilities of
Albanycrest, Limited ("Albanycrest"), a United Kingdom private limited
company, which provided information and management consulting services on the
design of software and computer systems. The initial purchase price was
approximately $335,000, tangible assets acquired were approximately $300,000
and liabilities assumed were approximately $243,000 (all converted into U.S.
dollars as of the date of the acquisition). As of September 30, 1999,
intangible assets of approximately $299,000 (converted into U.S. dollars using
the September 30, 1999 exchange rate) are being amortized over a six-year
period. During the year ended September 30, 1998 and nine months ended
September 30, 1997, approximately $477,000 and $319,000, respectively, of
compensation charge related to business combinations was recorded with respect
to certain payments made to former shareholders based on performance criteria
and continued employment. The performance criteria included renewal of a
specific contract and minimum levels of both the number of consultants and
billing amounts.
Effective March 1, 1998, the Company acquired certain assets and liabilities
of Sancha Computer Services Pty Limited and Sancha Software Development Pty
Limited ("Sancha Group"), Australian entities which provided computer systems
consulting services. The initial purchase price was approximately $5,219,000,
of which $4,554,000 was paid in cash and $666,000 in Class B common stock (all
converted into U.S. dollars as of the date of the acquisition). In addition,
liabilities assumed were approximately $66,000. Tangible assets of
approximately $40,000 were acquired. Additional acquisition costs of
approximately $397,000 were incurred. As of September 30, 1999, intangible
assets of approximately $6,472,000 (converted into U.S. dollars using the
September 30, 1999 exchange rate) are being amortized over a period of 8 to 15
years. Contingent payments totaling approximately $696,000 and $312,000 were
paid during the years ended September 30, 1999 and 1998, respectively.
Additional contingent payments of up to approximately $650,000 (based on
September 30, 1999 exchange rate of AU $1.54 to US $1.00) may be paid by May
15, 2000 if certain performance targets are met. The performance targets
specify the achievement of certain revenue levels of the continuing business
measured annually over a two-year period.
Effective April 1, 1998, the Company acquired certain assets and liabilities
of Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which
provided information technology consulting services to develop and implement
call center applications. The initial purchase price was approximately
$788,000 and liabilities assumed were approximately $165,000 (both converted
into U.S. dollars as of the date of the acquisition). Additional acquisition
costs of approximately of $211,000 were incurred. Total tangible assets and
accounts receivable acquired were approximately $214,000. Contingent payments
of approximately $124,000 were paid during the year ended September 30, 1999.
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 recorded as
compensation charge related to business combinations at the time it is deemed
probable that such payments will 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
F-20
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
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 are reflected as deferred compensation on the balance sheet
and are being amortized over the three year vesting period. In March 1999,
approximately 16,000 of these shares were released from escrow. As of
September 30, 1999, approximately $349,000 of compensation expense has been
amortized and intangible assets of approximately $905,000 (converted into U.S.
dollars using the September 30, 1999 exchange rate) are being amortized over a
six-year period.
Effective August 1, 1998, the Company acquired certain assets and
liabilities of Infact Pty Limited as trustee of the Infact Unit Trust
("Infact"), an Australian entity which provided information technology
consulting services. The initial purchase price was approximately $3,242,000,
tangible assets acquired were approximately $23,000 and liabilities assumed
were approximately $156,000 (all converted into U.S. dollars as of the date of
the acquisition). Additional acquisition costs of $57,000 were incurred. As of
September 30, 1999, intangible assets of approximately $4,483,000 (converted
into U.S. dollars using the September 30, 1999 exchange rates) are being
amortized over a period of 8 to 15 years. Contingent payments of approximately
$1,008,000 in cash and stock were earned during the year ended September 30,
1999. Approximately $246,000 of this first year contingent payment was
contingent upon employment and expensed during the year as a compensation
charge related to business combination and the remaining $762,000 was recorded
as additional purchase price. The remaining contingent payments of up to
approximately $716,000 in cash (based on a current exchange rate of AU $1.54
to US $1.00) and approximately 25,000 shares of the Company's Class B common
stock may be paid for the period ended August 1, 2000 if certain performance
targets are met. Such amounts are held in escrow prior to the achievement of
the performance targets. The performance targets specify the achievement of
certain levels of profit before taxes and revenues of the continuing business
measured annually. Approximately 71% of such payments will be accounted for as
additional purchase price and the remaining payments will be treated as
business combination 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.
Effective November 30, 1998, the Company acquired all the issued and
outstanding capital stock of Midas Computer Software Limited ("Midas"), a
United Kingdom entity which provided data warehouse migration services. The
initial purchase price totaled approximately $3,907,000 (converted into U.S.
dollars as of the date of the acquisition), of which approximately $2,579,000
was paid in cash and acquisition costs and approximately $1,328,000 was
recorded as a result of the issuance of the Company's Class B common stock
with a guaranteed minimum value of approximately $1,317,000 (converted into
U.S. dollars using the September 30, 1999 exchange rates) three years from the
effective date of the acquisition. Additional acquisition costs of $374,000
were incurred. Tangible assets acquired were approximately $1,813,000 and
liabilities assumed were approximately $1,692,000. Additional contingent
payments of up to approximately $12,300,000 (based on the exchange rate at the
time of the agreement of GBP 0.61 to US $1.00), may be paid in cash and shares
of the Company's Class B common stock over a three-year period based on
achieving certain performance targets. Contingent payments will be accrued
when earned and recorded as additional purchase price. As of September 30,
1999, intangible assets of approximately $4,113,000 (converted into U.S.
dollars using the September 30, 1999 exchange rate) are being amortized over a
period of 8 years.
Effective January 1, 1999, the Company acquired all the issued and
outstanding capital stock of ADC Consultants Pty Limited ("ADC"), an
Australian entity that provided data management services. The initial purchase
price was approximately $2,565,000 in cash (converted into U.S. dollars as of
the date of the acquisition). Total liabilities assumed were $310,000 and
tangible assets acquired were $365,000. Additional contingent payments of up
to approximately $1,561,000 (based on September 30, 1999 exchange rate of
AU $1.54 to US $1.00) may be paid in cash and shares of the Company's Class B
common stock over a three year period
F-21
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
based on the acquired business achieving certain levels of profits before
taxes and revenues measured annually over the three-year period. Contingent
payments will be accrued when earned and recorded as additional purchase
price. As of September 30, 1999, intangible assets of approximately $2,664,000
(converted into U.S. dollars using the September 30, 1999 exchange rate) are
being amortized over a period of 8 years.
Effective March 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Service Design Associates, Inc. ("SDA"), an Indiana
corporation that provided payment processing, policy and IT systems services
for state and local government child support agencies. The initial purchase
price was approximately $4,351,000. Total liabilities assumed were
approximately $1,087,000. Total tangible assets acquired were approximately
$415,000. As of September 30, 1999, intangible assets of approximately
$5,023,000 are being amortized over a period of 8 years. In addition to the
initial purchase price of the acquisition, contingent payments of up to
approximately $900,000 in cash and $3.2 million in shares of the Company's
Class B common stock or cash, at the Company's election, will be paid to SDA
upon the achievement of certain performance targets over a three-year period.
Of the total contingent payments, SDA will be entitled to $500,000 cash upon
the award of a certain client contract with a specified revenue and gross
profit level and will be entitled to the remaining contingent payments on the
second and third anniversaries of the acquisition based upon the acquired
business achieving certain levels of profits before taxes and revenues over
that three-year period. In connection with the acquisition, Tier caused a
letter of credit of up to $800,000 to be issued as additional security for an
obligation of the surviving company. Contingent payments will be accrued when
earned and recorded as additional purchase price.
Effective May 1, 1999, the Company acquired certain assets and assumed
certain liabilities of the Technology Training Services division ("TTS") of
Automated Concepts, Inc., a leading provider of training services to the IT
professionals of Fortune 500 companies and other major corporations. The
initial purchase price was $1,713,000 in cash. Additional acquisition costs of
$95,000 were incurred. Total liabilities assumed were $71,000 and tangible
assets acquired were $131,000. Additional contingent payments of up to $1.5
million may be paid in shares of the Company's Class B common stock and cash
over a two-year period based on the acquired business achieving certain levels
of gross profit and revenues measured annually over the two-year period.
Shares of the Company's Class B common stock equal to $1.5 million based on
the average closing price of the Company's Class B common stock for the five
trading days preceding the agreement date of April 6, 1999, are currently in
an escrow account. If contingent performance requirements are met, the number
of shares released will be determined utilizing the average closing price of
the Company's Class B common stock for the five trading days preceding each
performance anniversary. In the event the value of the shares in the escrow
account is not sufficient to satisfy the additional contingent payments, such
shortfall shall be paid in cash. Any shares not released at the end of the
two-year performance period will be returned to the Company. Contingent
payments will be accrued when earned and recorded as additional purchase
price. As of September 30, 1999, intangible assets of approximately $1,748,000
are being amortized over a period of 8 years.
The Company recorded a charge to earnings for the $4 million purchase of the
exclusive worldwide licensing rights to components of a large scale,
enterprise-wide commercial billing system currently under development by the
Company for a client, which had not reached technological feasibility and had
no alternative future use. The license, which was effective May 19, 1999,
includes all additions, enhancements, and improvements to the software to the
extent that the Company is employed by the licensor to make such changes in
the future. The completion of the software is expected to occur in the second
quarter of fiscal year 2000. Once developed, this software would require
significant customization prior to a sale to a customer. If the development of
the software is not completed, the Company's cash flows and operations would
not be materially adversely affected.
The accompanying consolidated financial statements include the results of
operations of these acquired businesses for periods subsequent to the
respective acquisition dates.
F-22
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
Pro Forma Disclosure of Significant Acquisitions (Unaudited)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if Sancha Group, Infact
and Midas had been purchased by the Company as of October 1, 1997, after
including the impact of certain adjustments, such as increased amortization
expense due to recording of intangible assets:
Year Ended September
30,
-----------------------
1999 1998
----------- -----------
(in thousands,
except per share data)
Revenues............................................ $ 92,692 $ 71,603
Net income.......................................... 830 4,779
Net income per share................................ 0.07 0.51
Diluted net income per share........................ 0.06 0.44
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.
9. Related Party Transactions
Notes Receivable
The Company has outstanding notes receivable from certain officers and
employees of the Company as of September 30, 1999 and 1998, which total
approximately $975,000 and $1,557,000, respectively. These notes bear interest
at rates ranging from 5.75% to 9.00% and have due dates ranging from three to
ten years. Certain of these notes are being forgiven in accordance with the
terms of the officers' and employees' agreements and have an aggregate balance
of approximately $279,000 at September 30, 1999.
Notes receivable from shareholders issued in connection with the exercise of
options to purchase Class B common stock are due in February 2007, bear
interest at 6.99%, are secured and full recourse, and have a balance of
approximately $1,773,000 as of September 30, 1999. The related parties have
pledged a total of 241,902 shares of the Company's common stock as security
for the notes. As of September 30, 1999, the pledged stock had a market value
of approximately $1,663,000.
Guaranty of Obligation
On December 22, 1998, the Company guaranteed a portion of an obligation of
James L. Bildner, the Company's Chief Executive Officer, with respect to his
California residence (the "Guaranty"). The Company's liability under the
Guaranty is capped at $1,000,000. In connection with the Guaranty, Mr. Bildner
had previously pledged to the Company shares of the Company's common stock
owned by him with a fair market value of at least 110% of the Guaranty amount
and agreed to indemnify the Company for any loss, liability or expense
incurred in connection with the Guaranty. Effective June 30, 1999, the Company
amended the pledge agreement with Mr. Bildner such that his pledge to the
Company is set at 126,619 shares of the Company's common stock, which as of
September 30, 1999 had a market value of $870,506. Mr. Bildner continues to
indemnify the Company for any loss, liability or expense incurred in
connection with the Guaranty.
F-23
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Segment and Geographic Areas
Financial information by geographic area is as follows:
Year Ended Nine Months
September 30, Ended
---------------- September 30,
1999 1998 1997
------- ------- -------------
(in thousands)
Revenues:
United States............................... $60,989 $45,286 $19,407
Australia................................... 20,091 7,575 2,049
United Kingdom.............................. 10,896 4,864 1,023
------- ------- -------
Total......................................... $91,976 $57,725 $22,479
======= ======= =======
Income (loss) from operations:
United States............................... $ 224 $ 4,115 $ 456
Australia................................... 1,279 852 206
United Kingdom.............................. (1,174) 827 (62)
------- ------- -------
Total......................................... $ 329 $ 5,794 $ 600
======= ======= =======
September 30,
------------------------------
1999 1998 1997
------- ------- -------------
(in thousands)
Identifiable assets:
United States............................... $55,629 $60,442 $ 8,129
Australia................................... 20,772 12,983 1,258
United Kingdom.............................. 7,543 1,078 1,109
------- ------- -------
Total......................................... $83,944 $74,503 $10,496
======= ======= =======
The United States revenues for the years ended September 30, 1999 and 1998,
and the nine months ended September 30, 1997, include revenues from one
project with a U.S. company performed in Australia of approximately $110,000,
$4,165,000 and $2,111,000.
Segment Reporting
The Company is managed through four reportable segments, commercial
services, government services, Australian operations and United Kingdom
operations. The commercial services segment provides information technology
("IT") consulting, application development and software engineering services
to Fortune 1000 clients in the United States. The government services segment
provides IT consulting, application development, legal and policy consulting,
and business process outsourcing services to state and local government
entities in the United States. The Australian operations segment provides IT
consulting, application development and software engineering services to
clients in the public and private sectors in Australia. The United Kingdom
operations segment provides IT consulting, business process reengineering,
software engineering and application development services to clients in the
public and private sector in the United Kingdom.
The Company evaluates its segment performance and allocates resources based
on revenue and gross profit (net revenue less direct costs), 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, interest
income (expense), other income (expense) and income tax expense in segment
profitability. The accounting policies of the reportable segments are the same
as those described in Note 1. The
F-24
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Segment and Geographic Areas--(continued)
table below presents financial information for the four reportable segments and
for items that cannot be allocated to the operating segments (in thousands):
United
Commercial Government Australian Kingdom
Services Services Operations Operations Other Total
---------- ---------- ---------- ---------- ------ -------
1999
Revenues................ $29,477 $29,474 $20,091 $10,896 $2,038 $91,976
Gross profit............ 13,434 10,390 7,923 3,354 639 35,740
1998
Revenues................ 25,383 19,903 7,575 4,864 -- 57,725
Gross profit............ 9,225 7,048 2,758 1,421 -- 20,452
1997 (nine month period)
Revenues................ 9,523 9,884 2,049 1,023 -- 22,479
Gross profit............ 3,260 3,511 438 353 -- 7,562
11. Income Taxes
The domestic and foreign components of income before income taxes are as
follows:
Year Ended Nine
September 30, Months Ended
-------------- September 30,
1999 1998 1997
------ ------ -------------
(in thousands)
United States................................... $1,771 $5,127 $356
Foreign......................................... (121) 1,647 145
------ ------ ----
Total......................................... $1,650 $6,774 $501
====== ====== ====
F-25
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes--(continued)
September 30,
---------------
1999 1998
------- ------
(in thousands)
Deferred tax liabilities:
Accrual basis to cash basis adjustments................... $ -- $ 158
Depreciation.............................................. -- 140
Other..................................................... 222 205
------- ------
Total deferred tax liabilities.............................. 222 503
Deferred tax assets:
Vacation accruals......................................... 175 229
Accrued expenses.......................................... 114 107
Accrued revenue........................................... 423 57
Accrued rent.............................................. 4 8
Accrued bonus............................................. 165 137
Depreciation.............................................. 18 --
Intangibles............................................... 645 122
Accounts receivable allowance............................. 866 99
Deferred miscellaneous revenue............................ -- 133
Purchased in-process technology........................... 1,432 --
Foreign tax credit carryforward........................... 572 156
Valuation allowance....................................... (572) (156)
------- ------
Total deferred tax assets................................... 3,842 892
------- ------
Net deferred tax assets..................................... $ 3,620 $ 389
======= ======
Effective January 1, 1996, the Company changed from the cash to the accrual
method of accounting for income tax purposes. Differences in income tax basis
existing at that date were amortized to taxable income over a four-year
period.
At September 30, 1999, the Company had approximately $572,000 of foreign tax
credit carryforward for tax reporting purposes available to offset future U.S.
Federal Income Tax. Such foreign tax credit carryforward will expire in 2004.
The benefit from the foreign tax credit carryforward may be limited in certain
circumstances. The Company believes sufficient uncertainty exists regarding
the realizability of the foreign tax credit such that a valuation allowance is
required.
F-26
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes--(continued)
Significant components of the provision for income taxes are as follows:
Nine
Year Ended Months
September 30, Ended
--------------- September
1999 1998 30, 1997
------- ------ ---------
Current:
Federal............................................ $ 3,112 $2,527 $ 144
State.............................................. 378 362 47
Foreign............................................ 385 474 154
------- ------ -----
3,875 3,363 345
------- ------ -----
Deferred (benefit):
Federal............................................ (2,891) (645) (123)
State.............................................. (340) (76) (21)
------- ------ -----
(3,231) (721) (144)
------- ------ -----
Total provision for income taxes..................... $ 644 $2,642 $ 201
======= ====== =====
The effective tax rate differs from the applicable U.S. statutory federal
income tax rate as follows:
Nine
Year Ended Year Ended Months Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
U.S statutory federal tax rate... 34.0% 34.0% 34.0%
State taxes, net of federal tax
benefit......................... 4.0% 4.0% 6.1%
Tax exempt interest income....... (20.5)% (3.2)% --
Tax effect of foreign
operations...................... 19.6% -- --
Other............................ 1.9% 4.2% --
----- ---- ----
Effective tax rate............. 39.0% 39.0% 40.1%
===== ==== ====
12. Retirement Plan
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating
employees may defer a portion of their pretax earnings up to the Internal
Revenue Service annual contribution limit. The Company's contributions to the
401(k) Plan are discretionary. The Company has not contributed any amounts to
the 401(k) Plan to date.
13. 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 discussion with the prime contractor, the Company filed a federal
civil action against the prime contractor for the amounts the Company is due.
At that time, the Company established a reserve for the entire 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
F-27
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Contract Dispute--(continued)
sanctions which may be levied in the future by the client of the prime
contractor. The Company denies the allegations and intends to vigorously
pursue its own claim against the prime contractor. The parties to the action
have commenced voluntary discovery. In the event the prime contractor prevails
in its action, the Company's financial condition, results of operations and
cash flows would be materially and adversely affected.
14. Subsequent Events
Effective October 1, 1999, the Company acquired all the issued and
outstanding capital stock of Simsion Bowles & Associates ("SBA"), an
Australian entity which provides business process reengineering and
integration of e-commerce consulting services. The initial purchase price
totaled approximately $2,567,000 (converted into U.S. dollars as of the date
of the acquisition) in cash. The acquisition will be accounted for using the
purchase method of accounting. Additional contingent payments of up to
approximately $3,052,000 (based on a current exchange rate of AU $1.54 to US
$1.00) may be paid in cash and shares of the Company's Class B common stock
over a three year period based on achieving certain performance targets.
Contingent payments will be accrued when earned and recorded as additional
purchase price. Intangible assets of approximately $2,397,000 will be recorded
and amortized using the straight-line method over an eight to ten-year period.
In October 1999, the Company (through its Australian subsidiary) entered
into a $2,100,000 revolving line of credit with St. George Bank Limited of
Australia (based on a current exchange rate of AU $1.54 to $1.00). Under the
terms of the agreement, the principal balance of the credit line will reduce
by approximately $195,000 per quarter, beginning February 2000, to a maximum
line of $1,300,000. The line of credit bears interest at fixed rates that are
set at the time of each drawdown on the line.
F-28
TIER TECHNOLOGIES, INC.
SCHEDULE II
(in thousands)
Balance at Balance at
Beginning end of
of Period Additions Write-offs period
---------- --------- ---------- ----------
Year Ended September 30, 1999
Allowance for doubtful receivables...... $260 $2,243 $(218) $2,285
Year Ended September 30, 1998
Allowance for doubtful receivables...... 50 320 (110) 260
Nine Months Ended September 30, 1997
Allowance for doubtful receivables...... -- 113 (63) 50
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ James L. Bildner
By: _________________________________
Dated: December 10, 1999 James L. Bildner
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Bildner, William G. Barton and George
K. Ross, and each of them, his attorneys-in-fact and agents, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ James L. Bildner Chairman of the Board and December 10, 1999
____________________________________ Chief Executive Officer
James L. Bildner (principal executive
officer)
/s/ William G. Barton President, Chief Technology December 10, 1999
____________________________________ Officer and Director
William G. Barton
/s/ George K. Ross Executive Vice President and December 10, 1999
____________________________________ Chief Financial Officer
George K. Ross (principal financial
officer and principal
accounting officer)
/s/ Ronald L. Rossetti Director December 10, 1999
____________________________________
Ronald L. Rossetti
/s/ Samuel Cabot III Director December 10, 1999
____________________________________
Samuel Cabot III
/s/ William Van Faasen Director December 10, 1999
____________________________________
William Van Faasen
/s/ Morgan Guenther Director December 10, 1999
____________________________________
Morgan Guenther
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
------- ------------------- ----
2.1 Business Purchase Agreement dated as of August 1, 1998 by and
between Infact Pty Limited as trustee of the Infact Unit Trust
and Tier Technologies (Australia) Pty Limited (the schedules
and annexures to the Business Purchase Agreement have been
omitted as permitted by the rules and regulations of the
Securities and Exchange Commission (SEC) but will be provided
supplementally to the SEC upon request) (1)....................
2.2 First Amendment to Business Purchase Agreement dated as of
September 30, 1998 by and between Infact Pty Limited, as
trustee of the Infact Unit Trust and Tier Technologies
(Australia) Pty Limited (14)...................................
3.1 Amended and Restated Articles of Incorporation (14)............
3.2 Amended and Restated Bylaws (2)................................
4.1 Form of Class B Common Stock Certificate (3)...................
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Class B Common Stock of the Registrant.........................
10.1 Amended and Restated 1996 Equity Incentive Plan (8)*...........
10.2 Second Amended and Restated Employment Agreement by and between
the Registrant and James L. Bildner, dated as of February 16,
1998 (4)*
10.3 Second Amended and Restated Employment Agreement by and between
the Registrant and William G. Barton, dated as of February 16,
1998 (4)*......................................................
10.4 Investors' Rights Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*..........................
10.5 Stock Purchase Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*..........................
10.6 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of December 31, 1996 (3)............
10.7 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of January 2, 1997 (3)..............
10.8 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of May 31, 1997 (3).................
10.9 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of May 31, 1997 (3).................
10.10 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of July 15, 1997 (3)................
10.11 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4).......................................
10.12 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4).......................................
Exhibit
Number Exhibit Description Page
------- ------------------- ----
10.13 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of December 31, 1996 (3)...........
10.14 Full Recourse Secured Promissory Note, dated as of February 28,
1997, and Amended and Restated Pledge Agreement, dated as of
August 1, 1997, by and between the Registrant and William G.
Barton (3).....................................................
10.15 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of February 28, 1997 (3)...........
10.16 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of July 15, 1997 (3)...............
10.17 Full Recourse Promissory Note by and between the Registrant and
F. Thomas Latham, dated as of July 15, 1997 (3)................
10.18 Amended and Restated Employment Agreement by and between the
Registrant and George K. Ross, dated as of February 16, 1998
(4)*...........................................................
10.19 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 3, 1997 (3)...............
10.20 Office Lease by and between Urban West Business Park, Colony MB
Partners, L.P., as Landlord, and Tier Corporation, a California
Corporation, as Tenant, as amended July 29, 1997 (3)...........
10.21 Form of Indemnification Agreement (3)..........................
10.22 Tier Corporation 401(k) Plan, Summary Plan Description (3).....
10.23 Asset Purchase Agreement by and among the Registrant, Encore
Consulting LLC, David M. Beman, Thomas E. McLeod and Robert
Myers, dated as of December 31, 1996 (3).......................
10.24 Asset Purchase Agreement by and among the Registrant,
Albanycrest Limited, a Limited Liability Company Incorporated
in England, and Andrew David Armstrong, Thomas Thomson and
Howard Moore, dated as of July 11, 1997 (3)....................
10.25 Agreement for provision of consulting services by and between
the Registrant and Kaiser Foundation Health Plan, Inc. (3).....
10.26 Agreement for provision of consulting services by and between
the Registrant and the State of Missouri (3)...................
10.27 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Arizona) (3)............
10.28 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Australia) (3)..........
10.29 Employee Stock Purchase Plan (2)*..............................
10.30 Voting Trust Agreement (3).....................................
10.31 Form of Buy-Sell Agreement between James L. Bildner and William
G. Barton (2)..................................................
10.32 Business Purchase Agreement by and among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited,
dated as of February 26, 1998 (5)..............................
10.33 Amendment of Business Purchase Agreement, among Sancha Computer
Services PtyLimited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited, dated as of
March 20, 1998 (5).............................................
Exhibit
Number Exhibit Description Page
------- ------------------- ----
10.34 Revolving Credit Agreement by and between the Registrant, Tier
Technologies (United Kingdom) Inc. and BankBoston, N.A. (4)....
10.35 Agreement for provision of consulting services by and between
the Registrant and Humana, Inc. (4)............................
10.36 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 10, 1998 (4)..............
10.37 Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998 (6).....................
10.38 Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998 (6).....................
10.39 Amended Agreement by and between the Registrant and the State
of Missouri, dated August 3, 1998 (14).........................
10.40 Amended and Restated Pledge Agreement and Promissory Note by
and between Registrant and William G. Barton (14)..............
10.41 Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (14)..........................................
10.42 Second Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (14)..........................................
10.43 Guaranty Agreement by the Registrant in favor of NationsBank,
N.A. with respect to a promissory note made by James L. and
Nancy J. Bildner, dated as of December 22, 1998 (9)............
10.44 Indemnification Agreement, dated December 22, 1998, by and
between the Registrant and James L. and Nancy J. Bildner (9)...
10.45 Pledge Agreement dated as of December 22, 1998, by and between
the Registrant and James L. Bildner (9)........................
10.46 Agreement for the sale and purchase of the entire issued share
capital of Midas Computer Software Limited, dated November 26,
1998, by and between Robert William Thompson, Yvonne Jayne
Thompson, Dominic Frost, Ian Smith and the other parties named
in Schedule 1 thereto and the Registrant (10)..................
10.47 Amended and Restated 1996 Equity Incentive Plan, dated January
28, 1999 (11)*.................................................
10.48 Agreement for provision of consulting services by and between
the Registrant and the State of New Jersey, division of Family
Development (11)...............................................
10.49 Asset Purchase Agreement dated as of May 17, 1999 by and
between the Registrant and Humana, Inc. (12)...................
10.50 End User Agreement dated as of May 17, 1999 between the
Registrant and Humana, Inc. (12)...............................
10.51 End User Agreement dated as of May 19, 1999 between the
Registrant and Humana, Inc. (12)...............................
10.52 Amended and Restated Pledge Agreement, dated as of June 30,
1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
10.53 Second Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
10.54 Third Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
Exhibit
Number Exhibit Description Page
------- ------------------- ----
10.55 Third Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and William G. Barton.
(13)...........................................................
10.56 Amended and Restated Revolving Credit Agreement, dated as of
May 28, 1999, by and between the Registrant, Tier Technologies
(United Kingdom) and BankBoston, N.A. (13).....................
10.57 First Amendment to Amended and Restated Revolving Credit
Agreement, dated as of June 30, 1999, by and between the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (13)..........................................
10.58 Standard Services Contract Agreement, dated as of June 1, 1999,
by and between the Registrant and the Maryland Department of
Human Resources. (13)..........................................
10.59 Contract, dated as of May 27, 1999, by and between the
Registrant and the State of Tennessee Department of Human
Services. (13).................................................
10.60 Contract for Goods and/or Services, dated August 10, 1999, by
and between the Registrant and the Government of the District
of Columbia....................................................
10.61 Alliance Agreement in Support of Project Uxbridge dated
September 1, 1999, by and between Tier Technologies (United
Kingdom) Inc. and Siemens Business Services Limited............
10.62 Second Amendment to Amended and Restated Revolving Credit
Agreement, dated as of September 30, 1999, by and between the
Registrant, Tier Technologies (United Kingdom) Inc. and
BankBoston, N.A................................................
10.63 Employment Agreement by and between the Registrant and James R.
Weaver, dated April 19, 1999.*.................................
16.1 Letter re: change in certifying accountant (7).................
21.1 Subsidiaries of the Registrant.................................
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants....................................................
23.2 Consent of Ernst & Young LLP, Independent Auditors.............
27.1 Financial Data Schedule........................................
- --------
* Management contract or compensatory plan required to be filed as an
exhibit to this report.
(1) Filed as an exhibit to the Current Report on Form 8-K, filed August 21,
1998, and incorporated herein by reference.
(2) Filed as an exhibit to Form S-1/A No. 333-37661), filed on November 17,
1997, and incorporated herein by reference.
(3) Filed as an exhibit to Form S-1 (No. 333-37661), filed on October 10,
1997, and incorporated herein by reference.
(4) Filed as an exhibit to Form S-1/A (No. 333-52065), filed on May 7, 1998,
and incorporated herein by reference.
(5) Filed as an exhibit to the Current Report on Form 8-K, filed March 27,
1998, and incorporated herein by reference.
(6) Filed as an exhibit to Form 10-Q, filed August 14, 1998, and incorporated
herein by reference.
(7) Filed as an exhibit to the Current Report on Form 8-K, filed July 27,
1998, and incorporated herein by reference.
(8) Filed as Schedule A to Schedule 14C Information, filed November 6, 1998,
and incorporated herein by reference.
(9) Filed as an exhibit to Form 10-Q, filed February 12, 1999, and
incorporated herein by reference.
(10) Filed as an exhibit to the Current Report on Form 8-K, filed December 17,
1998, and incorporated herein by reference.
(11) Filed as an exhibit to Form 10-Q, filed May 13, 1999, and incorporated
herein by reference.
(12) Filed as an exhibit to the Current Report on Form 8-K, filed June 16,
1999, and incorporated herein by reference.
(13) Filed as an exhibit to Form 10-Q, filed August 13, 1999, and incorporated
herein by reference.
(14) Filed as an exhibit to Form 10-K, filed December 21, 1998, and
incorporated herein by reference.