<PAGE>
Filed Pursuant to Rule 424(a)
File No. 333-52065
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 14, 1998
3,000,000 SHARES
LOGO
CLASS B COMMON STOCK
-----------
Of the 3,000,000 shares of Class B Common Stock offered hereby, 1,775,000
shares are being sold by the Company and 1,225,000 shares are being sold by the
Selling Shareholders. See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of the shares by the Selling
Shareholders. The Company's Class B Common Stock is quoted on the Nasdaq
National Market under the symbol "TIER." On May 6, 1998, the last reported sale
price of the Class B Common Stock was $18.25 per share. See "Price Range of
Class B Common Stock."
The capital stock of the Company consists of Class A Common Stock and Class B
Common Stock (collectively, the "Common Stock"). The two classes are
substantially identical, except that the Class A Common Stock is entitled to
ten votes per share on all matters and the Class B Common Stock is entitled to
one vote per share on all matters, and each share of Class A Common Stock is
convertible into one share of Class B Common Stock and converts automatically
upon a transfer, except for certain limited permitted transfers. Holders of the
Class B Common Stock, voting as a separate class, are entitled to elect two of
the currently authorized five Directors of the Company, and holders of the
Class A and Class B Common Stock, voting together as a single class, are
entitled to elect three Directors. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS B COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS (2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..... $ $ $ $
- ----------------------------------------------------------------------------------
Total (3)..... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and the Selling
Shareholders, estimated at $580,000 and $250,000, respectively.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 450,000 shares of Class B Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Class B Common Stock are offered by the several Underwriters,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the shares of
Class B Common Stock will be made at the offices of Adams, Harkness & Hill,
Inc., Boston, Massachusetts, on or about , 1998.
ADAMS, HARKNESS & HILL, INC. ______________NATIONSBANC MONTGOMERY SECURITIES LLC
The date of this Prospectus is , 1998.
<PAGE>
TIER TECHNOLOGIES. TAKING THE RISK OUT OF CHANGE.
Tier Technologies provides information technology services to Fortune 1000
companies and government entities, enabling these organizations to migrate
their enterprise-wide IT systems to new technologies.
[Graphic: A representation of the Tier Migration Solution methodology,
indicating each of its four phases, Business Assessment and Scoping,
Application Effectiveness Scoring, IT Strategy, Architecture and Prototyping
and Information Technology Implementation.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."
"Tier Technologies" is a registered servicemark of the Company. All
trademarks and trade names referred to in this Prospectus are the property of
their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Investors should carefully consider the
risk factors related to the purchase of Class B Common Stock of the Company.
See "Risk Factors."
THE COMPANY
Tier Technologies, Inc. ("Tier" or the "Company") provides information
technology ("IT") consulting, application development and software engineering
services that facilitate the migration of clients' enterprise-wide systems and
applications to leading edge technologies. To adapt to change and remain
competitive, large corporations and government entities have sought to harness
their intellectual and informational capital by investing in advanced IT
systems. The Tier Migration Solution is a methodology developed to evaluate or
"score" the efficacy of a client's existing embedded IT capital. This approach
allows the Company to supplement and replace IT systems incrementally, preserve
viable components of the client's existing architecture and integrate advanced
technologies to meet the client's specific business needs rather than buying or
building totally new systems.
Applying the Tier Migration Solution, the Company first assesses a client's
existing business processes and 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. The Company applies the Tier Migration Solution to all
client projects in combination with a formal internal risk assessment program
that enables the Company to manage and benchmark projects on an on-going basis.
Tier's Migration Solution seeks to "take the risk out of change."
Through eleven offices located in the United States, Australia and the United
Kingdom, the Company works closely with its clients to determine, evaluate and
implement an IT strategy that allows the Company to rapidly adopt, deploy and
transfer emerging technologies in a cost-effective manner. Tier combines its
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. The
Company's clients consist primarily of Fortune 1000 companies with information-
intensive businesses and government entities with large volume information and
technology needs, including Humana Inc., Equifax Europe (UK) Ltd., the State of
Missouri, the Commonwealth of Australia and Kaiser Foundation Health Plan, Inc.
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: (i) concentrate on
migration opportunities; (ii) pursue strategic acquisitions; (iii) expand in
key vertical markets; (iv) develop strategic partnerships; (v) expand its
geographic presence; (vi) actively brand the Tier Migration Solution; and (vii)
attract and retain highly skilled employees. This strategy has allowed the
Company to increase revenues from $11.2 million in the six months ended March
31, 1997 to $21.8 million in the six months ended March 31, 1998. The Company's
workforce has grown from 54 on January 1, 1995 to 231 on September 30, 1997 and
to 338 on March 31, 1998.
From December 1996 through the date of this Prospectus, Tier acquired seven
IT service providers for a total cost of approximately $10.0 million in cash
and Class B Common Stock, excluding future contingent payments, to broaden its
client base, acquire additional technical expertise and supplement human
resources in key vertical markets. The Company believes these acquisitions have
enabled it to gain access to international labor markets and to compete
effectively for highly skilled employees who have particular geographic
preferences.
3
<PAGE>
THE OFFERING
Class B Common Stock offered by:
The Company........................... 1,775,000 shares
The Selling Shareholders.............. 1,225,000 shares
Common Stock to be outstanding after the
offering(1)............................... 1,639,762 shares of Class A Common
Stock
9,626,535 shares of Class B Common
Stock
Use of proceeds........................... For working capital and general
corporate purposes, including
potential future acquisitions.
Nasdaq National Market symbol............. TIER
- --------
(1) Excludes 2,088,346 shares of Class B Common Stock issuable upon the
exercise of stock options outstanding at March 31, 1998 (at a weighted
average exercise price of $5.65 per share) under the Company's Amended and
Restated 1996 Equity Incentive Plan and 20,000 shares of Class A Common
Stock issuable upon the exercise of stock options outstanding at March 31,
1998 (at a weighted average exercise price of $3.58 per share). See Note 9
of Notes to Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE-MONTH SIX MONTHS
NINE MONTHS FISCAL YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED MARCH 31,
------------------------------- SEPTEMBER 30, SEPTEMBER 30, ---------------
1993 1994 1995 1996 1996 1997(1) 1997 1998
------- ------- ------- ------- ------------- ------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $3,651 $5,597 $12,373 $16,197 $11,790 $22,479 $11,206 $21,823
Cost of revenues........ 3,026 4,419 9,066 11,616 8,669 14,917 7,676 14,437
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 625 1,178 3,307 4,581 3,121 7,562 3,530 7,386
Costs and expenses:
Selling and marketing.. 37 272 627 975 577 1,836 871 1,416
General and
administrative........ 369 816 1,560 2,574 1,774 4,397 2,007 3,703
Depreciation and
amortization.......... 14 18 45 80 56 274 83 423
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 205 72 1,075 952 714 1,055 569 1,844
Interest (income) and
expense, net........... 16 17 61 74 50 99 52 (324)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 189 55 1,014 878 664 956 517 2,168
Provision for income
taxes.................. - - 570 351 266 384 206 878
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 189 $ 55 $ 444 $ 527 $ 398 $ 572 $ 311 $ 1,290
======= ======= ======= ======= ======= ======= ======= =======
Basic net income per
share(2)............... $ 0.02 $ - $ 0.04 $ 0.11 $ 0.08 $ 0.11 $ 0.07 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
basic net income per
share(2)............... 10,000 10,930 10,062 4,988 5,220 5,400 4,619 7,643
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per
share(2)............... $ 0.02 $ - $ 0.04 $ 0.10 $ 0.07 $ 0.10 $ 0.06 $ 0.14
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
diluted net income per
share(2)............... 10,000 10,930 10,062 5,246 5,478 5,794 4,793 8,953
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
investments........................... $15,295 $14,843 $44,875
Working capital........................ 20,133 20,062 50,094
Total assets........................... 35,388 36,436 66,468
Total long-term debt, less current
portion............................... 129 129 129
Total shareholders' equity............. 30,195 31,624 61,656
</TABLE>
- --------
(1) In September 1997, the Company changed its fiscal year end to September 30.
(2) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(3) Adjusted (i) to give effect to the exercise of options to purchase 70,000
shares of Class B Common Stock by certain Selling Shareholders prior to
this offering at a weighted average exercise price of $4.80 per share in
order to sell such shares in this offering and the associated tax benefit;
and (ii) to reflect the purchase of certain assets of Simpson Fewster & Co.
Pty Limited for a purchase price of $1.5 million effective as of April 1,
1998, including the issuance of 48,768 shares of the Company's Class B
Common Stock.
(4) Adjusted to give effect to the sale of 1,775,000 shares of Class B Common
Stock by the Company in this offering at the assumed public offering price
of $18.25 per share and the application of the estimated net proceeds
therefrom.
----------------
Tier was incorporated in the State of California in 1991. The Company
maintains its principal executive offices at 1350 Treat Boulevard, Suite 250,
Walnut Creek, California 94596. The Company's telephone number is (925) 937-
3950.
----------------
Except as otherwise noted, all information in this Prospectus assumes (i) no
exercise of the Underwriters' over-allotment option; and (ii) the exercise of
options to purchase 70,000 shares of Class B Common Stock by certain Selling
Shareholders prior to this offering in order to sell such shares in this
offering. See "Capitalization," "Description of Capital Stock" and
"Underwriting."
5
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information in this Prospectus before purchasing the Class B Common
Stock offered by this Prospectus. Except for the historical information
contained herein, the discussion in this Prospectus contains certain forward-
looking statements that involve risks and uncertainties. When used in this
Prospectus, the words "believes," "expects," "anticipates," "intends,"
"estimates," "should," "will likely" and similar expressions are intended to
identify such forward-looking statements. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed here. Important
factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
Variability of Quarterly Operating Results. The Company's revenues and
operating results are subject to significant variation from quarter to quarter
due to a number of factors, including the number, size and scope of projects
in which the Company is engaged; the contractual terms and degree of
completion of such projects; start-up costs including software sublicense fees
incurred in connection with the initiation of large projects; competitive
pressures on pricing of the Company's services; any delays incurred in
connection with, or early termination of, a project; employee utilization
rates; the number of billable days in a particular quarter; the adequacy of
provisions for losses; the accuracy of estimates of resources required to
complete ongoing projects; demand for the Company's services generated by
strategic partnerships and certain prime contractors; the Company's ability to
increase both the number and size of engagements from existing clients; and
economic conditions in the vertical and geographic markets served by the
Company. Due to the relatively long sales cycles for the Company's services in
the government services market, the timing of revenue is difficult to
forecast. In addition, the achievement of anticipated revenues is
substantially dependent on the Company's ability to attract, on a timely
basis, and retain skilled personnel. A high percentage of the Company's
operating expenses, particularly personnel and rent, are fixed in advance.
Changes in the number, scope, duration or progress toward completion, of the
Company's projects or in employee utilization rates would cause significant
variations in operating results in any particular quarter. In addition, the
Company typically reaches the annual limitation on its FICA contributions for
many of its consultants before the end of the calendar year. As a result,
payroll taxes as a component of cost of sales will vary from quarter to
quarter during the fiscal year and will generally be higher at the beginning
of the calendar year. Therefore, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful, should
not be relied upon as indications of future performance and may result in
volatility in the price of the Class B Common Stock. Due to the foregoing
factors, among others, the Company's operating results will from time to time
be below the expectations of the analysts and investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Concentration of Revenues; Dependence on Large Projects; Risk of
Termination. The Company has derived, and believes that it will continue to
derive, a significant portion of its revenues from a limited number of
clients. For the six months ended March 31, 1998, the State of Missouri,
Unisys Corporation ("Unisys"), Equifax Europe (UK) Ltd. ("Equifax") and Humana
Inc. ("Humana") accounted for 20.5%, 19.6%, 11.9% and 11.5% of the Company's
revenues, respectively. The volume of work performed for specific clients is
likely to vary from year to year, and a major client in one year may not use
the Company's services in a subsequent year. For example, Kaiser Foundation
Health Plan, Inc. ("Kaiser") accounted for 68.1% of the Company's revenues in
1995 but only 9.3% of the Company's revenues in the six months ended March 31,
1998 as significant portions of the Company's engagement have been completed.
Most of the Company's contracts are terminable by the client following limited
notice and without significant penalty to the client. The completion,
cancellation or significant reduction in the scope of a large project could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the amount of the Company's services
required by any of its clients can
6
<PAGE>
be adversely affected by a number of factors, including technological
developments and the internal budget cycles of such clients. As a result of
the Company's focus in specific vertical markets, economic and other
conditions that affect these industries could lead to a reduction in capital
spending on IT projects, government spending cuts or general budgetary
constraints, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Clients."
Need to Attract and Retain Professional Staff. The Company's success will
depend in large part upon its ability to attract, retain, train, manage and
motivate skilled employees, particularly project managers and other senior
technical personnel. There is significant competition for employees with the
skills required to perform the services the Company offers. In particular,
qualified project managers and senior technical and professional staff are in
great demand worldwide and competition for such persons is likely to increase.
In addition, the Company requires that a significant number of its employees
travel to client sites to perform services on its behalf, which may make a
position with the Company less attractive to potential employees. There can be
no assurance that a sufficient number of skilled employees will continue to be
available to the Company, or that the Company will be successful in training,
retaining and motivating current or future employees. The Company's inability
to attract, retain and train skilled employees or failure of its employees to
achieve expected levels of performance could impair the Company's ability to
adequately manage and staff its existing projects and to bid for or obtain new
projects, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Human
Resources."
Dependence on Key Personnel. The Company's success will depend in large part
upon the continued services of a number of key employees, including its Chief
Executive Officer and Chairman of the Board of Directors, James L. Bildner,
and its President and Chief Technology Officer, William G. Barton. The loss of
the services of either of Messrs. Bildner or Barton or of one or more of the
Company's other key personnel could have a material adverse effect on the
Company's business. Although the Company has entered into employment
agreements with each of Messrs. Bildner and Barton, either of them may
terminate their employment agreement at any time. If one or more of the
Company's key employees resigns from the Company to join a competitor or to
form a competing company, the loss of such personnel and any resulting loss of
existing or potential clients to any such competitor could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event of the loss of any such personnel, there can be no
assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices or procedures by such
personnel. See "Business--Intellectual Property Rights" and "Management--
Employment Agreements."
Control by Principal Shareholders; Voting Trust. All of the holders of Class
A Common Stock have entered into a voting trust (the "Voting Trust") with
respect to their shares of Class A Common Stock, which represents 63.0% of the
Common Stock voting power after this offering. All power to vote shares held
in the Voting Trust has been vested in the Voting Trust's trustees, Messrs.
Bildner and Barton. As a result, Messrs. Bildner and Barton will be able to
control the outcome of all corporate actions requiring shareholder approval,
including changes in the Company's equity incentive plans for its employees,
the election of a majority of the Company's directors, proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give holders of the Company's Class B
Common Stock the opportunity to realize a premium over the then-prevailing
market price for their shares of Class B Common Stock. The concentration of
voting control could have the effect of delaying or preventing a change in
control of the Company and may affect the market price of the Class B Common
Stock. The holders of the Class A Common Stock also hold a number of shares of
Class B Common Stock that will represent 21.8% of the shares of Class B Common
Stock outstanding after this offering. If such holders vote their shares of
Class B Common Stock as a block, they may be able to elect all of the
directors to be elected solely by the holders of the Class B Common Stock
after this
7
<PAGE>
offering. In addition, as authorized by the California Corporations Code and
based upon provisions in the Company's Amended and Restated Bylaws (the
"Bylaws") and the concentration of voting control, Messrs. Bildner and Barton
may take any action which may be taken at any meeting of shareholders, subject
to certain exceptions related to the election of directors, by written consent
without formally convening a meeting of shareholders. The Company believes
that it may be necessary to increase the authorized number of shares under the
Company's Amended and Restated 1996 Equity Incentive Plan prior to its next
annual meeting and may circulate a resolution to that effect to its control
shareholders for approval during the last quarter of fiscal 1998 or the first
quarter of fiscal 1999. In addition, the Articles and Bylaws currently permit
shareholders to require cumulative voting in connection with the election of
directors, subject to certain requirements; however, the Articles and Bylaws
also provide that cumulative voting will be eliminated effective as of the
first record date for an annual meeting that the Company has equity securities
listed on Nasdaq and has 800 or more holders of its equity securities. See
"Description of Capital Stock." In addition, holders of an aggregate of
779,762 shares of Class A Common Stock have entered into agreements with the
Company which may restrict their ability to transfer shares of Class A Common
Stock following termination of employment with the Company. Such agreements
would effectively delay the conversion of such shares of Class A Common Stock
and may perpetuate the control of the Company by the Voting Trustees.
Risks Associated with Rapid Technological Advances. The Company's success
will depend in part on its ability to develop IT solutions that keep pace with
continuing changes in technology, evolving industry standards and changing
client preferences. There can be no assurance that the Company will be
successful in developing such IT solutions in a timely manner or that if
developed the Company will be successful in the marketplace. Delay in
developing or failure to develop new IT solutions would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Strategy."
Risks Associated with Possible Acquisitions. A principal component of the
Company's business strategy is to grow by acquiring additional businesses to
expand its presence in new or existing markets. From December 1996 through the
date of this Prospectus, the Company acquired seven businesses. There can be
no assurance that the Company will be able to identify, acquire or profitably
manage additional businesses or to integrate successfully any acquired
businesses into the Company without substantial expense, delay or other
operational or financial problems. Acquisitions may also involve a number of
special risks, including diversion of management's attention, failure to
retain key personnel, amortization of acquired intangible assets, client
dissatisfaction or performance problems with an acquired firm, assumption of
unknown liabilities, or other unanticipated events or circumstances, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
any acquired business will achieve anticipated revenues and operating results.
The failure of the Company to manage its acquisition strategy successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Acquisitions," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy."
Management of Growth. The Company's growth has placed, and is expected to
continue to place, significant demands on its management, financial, staffing
and other resources. The Company has expanded geographically by opening new
offices domestically and abroad, and intends to open additional offices. The
Company's ability to manage its growth effectively will require it to continue
to develop and improve its operational, financial and other internal systems,
as well as its business development capabilities, and to train, motivate and
manage its employees. In addition, the Company's future success will depend in
large part upon its ability to continue to estimate project parameters
accurately, to maintain employee utilization rates and project quality and to
meet delivery dates, particularly if the average size and number of the
Company's projects continues to increase. If the Company is unable to manage
its growth and projects effectively, such inability would have a material
adverse effect on the quality of the
8
<PAGE>
Company's services, its ability to retain key personnel, and its business,
financial condition and results of operations. There can be no assurance that
the Company's rate of growth will continue or that the Company will be
successful in managing any such growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Associated with Partnerships; Risk of Termination or
Nonperformance. The Company sometimes performs client engagements in
partnership with third parties. In the government services market, the Company
often joins with other organizations, such as Unisys or BDM International,
Inc., to bid and perform an engagement. In these engagements, the Company is a
subcontractor to the prime contractor of the engagement. In the commercial
services market, the Company sometimes partners with software or technology
providers to jointly bid and perform engagements. In both markets, the Company
often depends on the software, resources and technology of its partners in
order to perform the engagement. There can be no assurance that actions or
failures attributable to the Company's partners or to the prime contractor
will not also negatively affect the Company's business, financial condition or
results of operations. In addition, the refusal or inability of a partner to
permit continued use of its software, resources or technology would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Strategy" and "--Clients."
Project Risks; Liability to Clients; Client Dissatisfaction. Many of the
Company's engagements involve projects which are critical to the operations of
its clients' businesses and provide benefits that may be difficult to
quantify. The failure of the Company, or of the prime contractor on an
engagement in which the Company is a subcontractor, to meet a client's
expectations in the performance of its services could damage the Company's
reputation and adversely affect its ability to attract new business, and could
have a material adverse effect upon its business, financial condition and
results of operations. The Company has undertaken, and may in the future
undertake, projects in which the Company guarantees performance based upon
defined operating specifications or guaranteed delivery dates. Unsatisfactory
performance or unanticipated difficulties or delays in completing such
projects may result in client dissatisfaction and a reduction in payment to,
or payment of damages (as a result of litigation or otherwise) by, the
Company, which could have a material adverse effect upon its business,
financial condition and results of operations. In addition, unanticipated
delays could necessitate the use of more resources than initially budgeted by
the Company for a particular project, which also could have a material adverse
effect upon its business, financial condition and results of operations. Any
failure in a client's system could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. There can be no assurance that the limitations of liability set forth
in the Company's service contracts will be enforceable or will otherwise
protect the Company from liability for damages. Although the Company maintains
general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms, will be available in sufficient amounts to
cover one or more claims or that the insurer will not disclaim coverage as to
any future claim. The successful assertion of one or more claims against the
Company that exceed available insurance coverage or changes in the Company's
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, would adversely affect the Company's
business, financial condition and results of operations. See "Business--
Representative Engagements" and "--Clients."
Reliance on Government Contracts; Risk of Termination. For the nine-month
fiscal year ended September 30, 1997 and the six months ended March 31, 1998,
approximately 45% of the Company's revenues were derived from sales to
government agencies. A significant reduction in government funds available for
agencies or departments to which Tier supplies IT services, either due to
budget cuts or the imposition of budgetary constraints, or a determination by
the particular federal, state or foreign government that funding of such
agencies or departments should be reduced or discontinued, would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the loss of a major government client, or
any significant reduction or delay in orders by such
9
<PAGE>
client, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Sales and
Marketing" and "--Clients."
Fixed Price Contracts; Budget Overruns. During the nine-month fiscal year
ended September 30, 1997 and the six months ended March 31, 1998, 12.4% and
20.1%, respectively, of the Company's revenues were generated on a fixed price
basis, rather than on a time and materials basis. The Company believes that
the percentage of total revenues attributable to fixed price contracts will
continue to be significant and may continue to grow. The Company's failure to
estimate accurately the resources required for a fixed price project or its
failure to complete its contractual obligations in a timely manner consistent
with the project plan upon which its fixed price contract is based could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may establish prices before
project design specifications are finalized, which could result in a fixed
price that proves to be too low and therefore adversely affects the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Substantial Competition. The IT services market is highly competitive and is
served by numerous international, national and local firms. Market
participants include systems consulting and integration firms, including
national accounting firms and related entities, the internal information
systems groups of its prospective clients, professional services companies,
hardware and application software vendors, and divisions of large integrated
technology companies and outsourcing companies. Many of these competitors have
significantly greater financial, technical and marketing resources, generate
greater revenues and have greater name recognition than the Company. In
addition, there are relatively low barriers to entry into the IT services
market, and the Company has faced, and expects to continue to face, additional
competition from new entrants into the IT services market.
The Company believes that the principal competitive factors in the IT
services market include reputation, project management expertise, industry
expertise, speed of development and implementation, technical expertise,
competitive pricing, and the ability to deliver results on a fixed price as
well as a time and materials basis. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability of its clients or competitors to hire, retain
and motivate project managers and other senior technical staff; the ownership
by competitors of software used by potential clients; the price at which
others offer comparable services; the ability of its clients to perform the
services themselves; and the extent of its competitors' responsiveness to
client needs. There can be no assurance that the Company will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not cause the Company's
revenues or income to decline or otherwise materially adversely affect its
business, financial condition and results of operations. See "Business--
Competition."
Intellectual Property Rights; Limited Protection; Inability to Resell or
Reuse Rights. The Company relies on a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect its intellectual property rights. The Company enters into
confidentiality agreements with its employees, generally requires that its
consultants and clients enter into such agreements and limits access to its
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to avoid the loss or misappropriation
of its proprietary information, or that the Company will be able to detect
unauthorized use of such information and take appropriate steps to enforce its
intellectual property rights.
A portion of the Company's business involves the development of software
applications for specific client engagements. Ownership of such software is
the subject of negotiation with each particular client and is typically
assigned to the client. The Company also develops software application
frameworks, and may retain ownership or marketing rights to these application
frameworks, which may be adapted through further customization for future
client projects. Certain clients have prohibited the Company from
10
<PAGE>
marketing the software and application frameworks developed for them entirely
or for specified periods of time or to specified third parties, and there can
be no assurance that clients will not demand similar or other restrictions in
the future. Issues relating to the ownership of and rights to use software and
application frameworks can be complicated, and there can be no assurance that
disputes will not arise that affect the Company's ability to resell or reuse
such software and application frameworks.
Although the Company believes that its services and products do not infringe
on the intellectual property rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future, or that
if asserted, any such claim will be successfully defended. See "Business--
Intellectual Property Rights."
Risks of Conducting International Operations. For the nine-month fiscal year
ended September 30, 1997 and the six months ended March 31, 1998,
international operations accounted for 13.7% and 19.1% of the Company's total
revenues, respectively. The Company believes that the percentage of total
revenues attributable to international operations will continue to be
significant and may continue to grow. In addition, a significant portion of
the Company's sales are to large multinational companies. To meet the needs of
such companies, both domestically and internationally, the Company must
provide worldwide services, either directly or indirectly. As a result, the
Company intends to expand its existing international operations and enter
additional international markets, which will require significant management
attention and financial resources and could adversely affect the Company's
operating margins and earnings. In order to expand international operations,
the Company will need to hire additional personnel and develop relationships
with potential international clients through acquisition or otherwise. To the
extent that the Company is unable to do so on a timely basis, any growth of
the Company in international markets would be limited, and the Company's
business, financial condition and results of operations would be materially
and adversely affected.
The Company's international business operations are subject to a number of
risks, including, but not limited to, difficulties in building and managing
foreign operations, enforcing agreements and collecting receivables through
foreign legal systems, longer payment cycles, fluctuations in the value of
foreign currencies and unexpected regulatory, economic or political changes in
foreign markets. The Company does not generally engage in hedging
transactions, but may do so in the future. There can be no assurance that
these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Year 2000. Many existing computer programs were designed and developed
without considering the impact of the upcoming change in the century and
consequently used only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000 (the "Year 2000 Issue"). In connection with providing
IT services to clients, the Company will evaluate existing systems and, to the
extent such systems will become a part of the client's upgraded system, will
correct any Year 2000 Issues, but does not specifically seek Year 2000
projects. Purchasing patterns of clients and potential clients may be affected
by Year 2000 Issues as companies expend significant resources to make existing
systems Year 2000 compliant. These expenditures may result in reduced funds
available to fund migration projects, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company is in the process of formulating and implementing a program
designed to ensure that all software used in connection with the Company's
services and internal operations systems will manage and manipulate data
involving the transition of dates from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such dates. The Company
currently anticipates that it will not incur material costs in connection with
such program. While the Company has received assurances thus far from its
service providers that they will be Year 2000 compliant, no assurance can be
11
<PAGE>
given that such compliance will in fact exist by the Year 2000. To the extent
service providers to the Company are not Year 2000 compliant or the Company
discovers issues within its internal systems, such failures could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have outstanding an aggregate of 1,639,762 shares of Class A
Common Stock and an aggregate of 9,626,535 shares of Class B Common Stock,
based upon the number of shares outstanding as of May 7, 1998. In addition to
the 3,000,000 shares sold in this offering, 3,910,666 shares of the
outstanding Class B Common Stock (which were sold in the Company's initial
public offering or issued upon exercise of stock options covered by a
registration statement) will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
remaining 2,715,869 shares of Class B Common Stock and all of the outstanding
shares of Class A Common Stock held by existing shareholders are restricted
securities as that term is defined under the Securities Act (the "Restricted
Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. As a result of
contractual restrictions and provisions of Rule 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 14,697 shares of Class B Common Stock will be eligible for immediate sale
upon completion of this offering; (ii) 348,759 shares of Class B Common Stock
will be eligible for sale under Rule 144 after July 28, 1998; (iii) 860,000
shares of Class A Common Stock and 763,620 shares of Class B Common Stock will
be eligible for sale upon expiration of lock-up agreements 90 days after the
date of this Prospectus; (iv) 779,762 shares of Class A Common Stock and
1,488,812 shares of Class B Common Stock will be eligible for sale upon
expiration of lock-up agreements on December 17, 1998; and (v) the remaining
99,981 shares of Class B Common Stock will be eligible for sale from time to
time thereafter upon expiration of their respective one-year holding periods
under Rule 144. To the extent that a significant portion of such shares are
sold by the holders thereof, such sales may adversely affect the market price
of the Class B Common Stock. Pursuant to an agreement between the Company and
the holders of 415,953 shares of Class B Common Stock, such holders are
entitled to certain demand and piggyback registration rights with respect to
such shares. If such holders, by exercising their demand registration rights,
cause a large number of shares to be registered and sold in the public market,
such sales could have an adverse effect on the market price for the Class B
Common Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
Unspecified Use of Proceeds. The principal purposes of this offering are to
increase the Company's working capital and to provide funds for general
corporate purposes, including potential future acquisitions. The Company has
not yet identified specific uses for the net proceeds, and, pending such uses,
the Company expects that it will invest such net proceeds in investment-grade
securities, including short-term, interest-bearing money market funds.
Accordingly, the Company's management will have broad discretion as to the use
of such net proceeds without any action or approval of the Company's
shareholders. See "Use of Proceeds."
Potential Volatility of Stock Price. A public market for the Class B Common
Stock has existed only since the initial public offering of the Class B Common
Stock in December 1997. There can be no assurance that an active public market
will be sustained. The market for securities of early stage companies has been
highly volatile in recent years as a result of factors often unrelated to a
company's operations. Factors such as quarterly variations in operating
results, announcements of technological innovations or new products or
services by the Company or its competitors, general conditions in the IT
industry or the industries in which Tier's clients compete, changes in
earnings estimates by securities analysts and general economic conditions such
as recessions or high interest rates could contribute to the
12
<PAGE>
volatility of the price of the Class B Common Stock and could cause
significant fluctuations. Further, in the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against the issuing company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. There can be no assurance that such litigation will not be
instituted in the future with respect to the Company.
Issuance of Preferred Stock; Potential Adverse Effects to Holders of Common
Stock. The Board of Directors has the authority to issue Preferred Stock and
to determine the preferences, limitations and relative rights of shares of
Preferred Stock and to fix the number of shares constituting any series and
the designation of such series, without any further vote or action by the
Company's shareholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Class B
Common Stock. The potential issuance of Preferred Stock may delay or prevent a
change in control of the Company, discourage bids for the Class B Common Stock
at a premium over the market price and adversely affect the market price and
the voting and other rights of the holders of the Common Stock. See
"Description of Capital Stock--Preferred Stock."
No Dividends. The Company has never declared or paid cash dividends on its
capital stock and does not anticipate paying any cash dividends in the
foreseeable future. See "Dividend Policy."
13
<PAGE>
ACQUISITIONS
From December 1996 through the date of this Prospectus, the Company made
seven strategic acquisitions for a total cost of approximately $10.0 million
in cash and shares of Class B Common Stock, excluding future contingent
payments, all of which were structured and accounted for as asset purchases.
See Notes 10 and 15 of Notes to Consolidated Financial Statements. Acquisition
prices were determined based on arm's length negotiations with unaffiliated
third parties. Factors considered by the Company in making such determinations
included geographic opportunities, consulting resources and strategic client
relationships offered through the acquisition.
As of December 16, 1996, the Company acquired certain assets and liabilities
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 CCA acquisition allowed
the Company to expand its geographic and client base into the Chicago market.
The cost of the acquisition was $170,000.
As of 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 under a
government contract. The Encore acquisition added to Tier's established state
government IT practice. The cost of the acquisition totaled $934,000. A
$150,000 contingent payment is payable by the Company upon the renewal of this
contract in July 1998.
On January 2, 1997, the Company acquired certain assets and liabilities of
Five Points Consulting, LLC ("Five Points"), which was based in Atlanta,
Georgia. Five Points provided custom designed software and computer systems
for special business applications. Tier acquired Five Points for its
technological expertise with Java, as well as to expand into the southeastern
United States. The cost of the acquisition totaled $284,000.
On March 10, 1997 the Company acquired certain assets and liabilities of
Tangent Group, Pty, Limited ("Tangent Group"), an Australian entity which
provided computer systems consulting services. The Tangent Group acquisition
provided Tier with a local base to support its Australian IT practice and a
foundation for Tier's resource and recruiting needs for a project being
conducted for the Australian federal government. The cost of the acquisition
totaled $488,000. In addition, the Company will pay at least $120,000 in
royalties over the first two-year period following the acquisition. The
royalty is based on 3.0% of the Company's gross revenues generated by its
Australian operations. The maximum amount of royalties to be paid over the
first three-year period following the acquisition is approximately $240,000.
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 Albanycrest acquisition added to Tier's
financial services expertise and provided a platform for the expansion of
Tier's international practice into the United Kingdom and Europe. The total
purchase price, including contingent payments, was $1.4 million.
As of March 1, 1998, the Company acquired certain assets and liabilities of
Sancha Computer Services Pty Limited and Sancha Software Development Pty
Limited (collectively, "Sancha"), each of which was an Australian company in
the business of providing IT services. Tier acquired Sancha for its range of
services designed for Australia's insurance providers. The purchase price of
$5.2 million was paid $4.6 million in cash and the remainder through the
issuance of 51,213 shares of Class B Common Stock, subject to certain transfer
restrictions. Contingent payments of up to $1.6 million will be paid if
certain performance criteria are met.
As of April 1, 1998, the Company acquired certain assets and liabilities of
Simpson Fewster & Co. Pty Limited ("SFC"), an Australian company that provided
IT consulting services to develop and implement
14
<PAGE>
call center applications. The Company acquired SFC to enable it to provide
additional services required by its Australian government and insurance
clients. The purchase price of $1.5 million was paid $788,000 in cash and the
remainder through the issuance of approximately 48,768 shares of Class B
Common Stock. Contingent payments will be paid if certain performance criteria
are met.
While the Company in the ordinary course of business regularly evaluates and
enters into negotiations relating to potential acquisition opportunities, as
of the date of this Prospectus, there are no existing commitments or
agreements with respect to any future acquisitions.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,775,000 shares of
Class B Common Stock offered by the Company hereby, after deducting the
estimated underwriting discounts and estimated offering expenses payable by
the Company, are estimated to be approximately $30.0 million. The Company will
not receive any proceeds from the sale of shares by the Selling Shareholders.
See "Principal and Selling Shareholders."
The Company intends to use the net proceeds from this offering for working
capital and other general corporate purposes. In the normal course of
business, the Company evaluates potential acquisitions of businesses that
would complement or expand the Company's business. A portion of the net
proceeds may be used for one or more such acquisitions, although the Company
has no present commitments or agreements with respect to any such acquisitions
and no portion of the net proceeds has been allocated for any specific
acquisition. Pending such uses, the Company intends to invest the net proceeds
of this offering in investment-grade securities, including short-term,
interest-bearing money market funds.
PRICE RANGE OF CLASS B COMMON STOCK
The following table sets forth the reported high and low sale prices of the
Class B Common Stock on the Nasdaq National Market, under the symbol "TIER,"
for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
FISCAL 1998 ------- ----
<S> <C> <C>
First Quarter (from December 17)............................... $10 3/4 $ 8 1/2*
Second Quarter................................................. 18 1/8 8 7/8
Third Quarter (through May 6).................................. 23 1/4 16 3/8
</TABLE>
- --------
*Initial public offering price per share.
On May 6, 1998, the last reported closing price for the Class B Common Stock
on the Nasdaq National Market was $18.25. As of May 5, 1998, there were
approximately 62 holders of record of the Class B Common Stock.
DIVIDEND POLICY
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.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on an actual, pro forma and pro forma as adjusted basis. The
capitalization information set forth in the table below is qualified by the
more detailed Consolidated Financial Statements and Notes thereto include
elsewhere in this Prospectus, and should be read in conjunction with such
Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt(3)..................... $ 65 $ 65 $ 65
======= ======= =======
Long-term debt, less current
portion(3)............................ $ 129 $ 129 $ 129
------- ------- -------
Shareholders' equity:
Preferred stock, no par value per
share, 4,579,047 shares authorized
and no shares issued and
outstanding, actual, pro forma and
pro forma as adjusted............... - - -
Class A common stock, no par value,
1,659,762 shares authorized and
1,639,762 shares issued and
outstanding, actual, pro forma and
pro forma as adjusted(4)............ 1,638 1,638 1,638
Class B common stock, no par value,
42,600,000 shares authorized;
7,732,767 shares issued and
outstanding, actual, 7,851,535
shares issued and outstanding, pro
forma and 9,626,535 shares issued
and outstanding, pro forma as
adjusted(4)......................... 27,906 29,335 59,367
Notes receivable from shareholders... (2,159) (2,159) (2,159)
Foreign currency translation
adjustment.......................... (96) (96) (96)
Retained earnings.................... 2,906 2,906 2,906
------- ------- -------
Total shareholders' equity......... 30,195 31,624 61,656
------- ------- -------
Total capitalization............. $30,324 $31,753 $61,785
======= ======= =======
</TABLE>
- --------
(1) Adjusted (i) to give effect to the exercise of options to purchase 70,000
shares of Class B Common Stock by certain Selling Shareholders prior to
this offering at a weighted average exercise price of $4.80 per share in
order to sell such shares in this offering and the associated tax benefit;
and (ii) to reflect the purchase of certain assets of SFC for a purchase
price of $1.5 million effective as of April 1, 1998, including the
issuance of 48,768 shares of the Company's Class B Common Stock.
(2) Adjusted to give effect to the sale of 1,775,000 shares of Class B Common
Stock offered by the Company hereby at the assumed offering price of
$18.25 per share and the application of the estimated net proceeds
therefrom.
(3) See Notes 6, 7 and 8 of Notes to Consolidated Financial Statements.
(4) Based on the number of shares outstanding as of March 31, 1998. Excludes
(i) 20,000 shares of Class A Common Stock issuable upon the exercise of
outstanding options (at an exercise price of $3.58 per share); and (ii)
2,088,346 shares of Class B Common Stock issuable upon the exercise of
outstanding stock options under the Company's Amended and Restated 1996
Equity Incentive Plan (the "Plan") (at a weighted average exercise price
of $5.65 per share). Also excludes 785,624 shares of Class B Common Stock
reserved for issuance under the Plan and 100,000 shares of Class B Common
Stock reserved for issuance under the Company's Employee Stock Purchase
Plan. See "Management--Incentive Plans" and Note 9 to Notes to
Consolidated Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data set forth below for the years ended
December 31, 1995 and December 31, 1996, and for the nine-month fiscal year
ended September 30, 1997 have been derived from the Consolidated Financial
Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is included herein. The Selected
Consolidated Financial Data presented below for the years ended December 31,
1993 and December 31, 1994, for the nine months ended September 30, 1996 and
for the six months ended March 31, 1997 and 1998 have been derived from the
Company's unaudited consolidated financial statements and have been prepared
on the same basis and, in the opinion of management, include 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. These historical results are not
necessarily indicative of the results to be expected for any future periods.
The Selected Consolidated Financial Data should be read in conjunction with,
and are qualified by, the Consolidated Financial Statements and Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE-MONTH SIX MONTHS
NINE MONTHS FISCAL YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED ENDED MARCH 31,
----------------------------- SEPTEMBER 30, SEPTEMBER 30, ---------------
1993 1994 1995 1996 1996 1997(1) 1997 1998
------ ------ ------- ------- ------------- ------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $3,651 $5,597 $12,373 $16,197 $11,790 $22,479 $11,206 $21,823
Cost of revenues........ 3,026 4,419 9,066 11,616 8,669 14,917 7,676 14,437
------ ------ ------- ------- ------- ------- ------- -------
Gross profit............ 625 1,178 3,307 4,581 3,121 7,562 3,530 7,386
Costs and expenses:
Selling and marketing.. 37 272 627 975 577 1,836 871 1,416
General and
administrative........ 369 816 1,560 2,574 1,774 4,397 2,007 3,703
Depreciation and
amortization.......... 14 18 45 80 56 274 83 423
------ ------ ------- ------- ------- ------- ------- -------
Income from operations.. 205 72 1,075 952 714 1,055 569 1,844
Interest (income) and
expense, net........... 16 17 61 74 50 99 52 (324)
------ ------ ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 189 55 1,014 878 664 956 517 2,168
Provision for income
taxes.................. - - 570 351 266 384 206 878
------ ------ ------- ------- ------- ------- ------- -------
Net income.............. $ 189 $ 55 $ 444 $ 527 $ 398 $ 572 $ 311 $ 1,290
====== ====== ======= ======= ======= ======= ======= =======
Basic net income per
share(2)............... $ 0.02 $ - $ 0.04 $ 0.11 $ 0.08 $ 0.11 $ 0.07 $ 0.17
====== ====== ======= ======= ======= ======= ======= =======
Shares used in computing
basic net income per
share(2)............... 10,000 10,930 10,062 4,988 5,220 5,400 4,619 7,643
====== ====== ======= ======= ======= ======= ======= =======
Diluted net income per
share(2)............... $ 0.02 $ - $ 0.04 $ 0.10 $ 0.07 $ 0.10 $ 0.06 $ 0.14
====== ====== ======= ======= ======= ======= ======= =======
Shares used in computing
diluted net income per
share(2)............... 10,000 10,930 10,062 5,246 5,478 5,794 4,793 8,953
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30, MARCH 31,
1993 1994 1995 1996 1997 1998
---- ---- ------ ------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
investments.................. $ 13 $ 22 $ - $ 306 $ 106 $15,295
Working capital............... 297 236 920 1,191 2,234 20,133
Total assets.................. 647 907 2,316 4,133 10,823 35,388
Long-term debt, less current
portion...................... - 5 156 576 1,608 129
Total shareholders' equity.... 330 316 686 1,028 4,163 30,195
</TABLE>
- --------
(1) In September 1997, the Company changed its fiscal year end to September
30.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
per share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Tier provides IT consulting, application development and software
engineering services that facilitate the migration of clients' enterprise-wide
systems and applications to leading edge technologies. Through eleven offices
located in three countries, the Company works closely with its Fortune 1000,
government and other clients to determine, evaluate and implement an IT
strategy that allows it to rapidly adopt, deploy and transfer emerging
technologies while preserving viable elements of the client's installed IT
base. The Company's revenues increased from $11.2 million in the six months
ended March 31, 1997 to $21.8 million in the six months ended March 31, 1998.
The Company's workforce has grown from 54 on January 1, 1995 to 231 on
September 30, 1997 and to 338 on March 31, 1998.
The Company's revenues are derived primarily from professional fees billed
to clients on either a time and materials or a fixed price basis. Time and
materials revenues are recognized as services are performed. Fixed price
revenues are recognized using the percentage-of-completion method, based upon
the ratio of costs incurred to total estimated project costs. During the nine-
month fiscal year ended September 30, 1997 and the six months ended March 31,
1998, 12.4% and 20.1%, respectively, of the Company's revenues were generated
on a fixed price basis. The Company believes that the percentage of total
revenues attributable to fixed price contracts will continue to be significant
and may continue to grow. The Company's risk management committee monitors all
material projects, focusing primarily on factors such as size of revenue and
credit exposure to the Company, number of resources employed, progress against
defined project milestones, clarity of user expectations and definition of
project scope. Substantially all of Tier's contracts are terminable by the
client following limited notice and without significant penalty to the client.
To date, the Company has generally been able to obtain an adjustment in its
fees following a significant change in the assumptions upon which the original
estimate was made, but there can be no assurance that the Company will be
successful in obtaining adjustments in the future. Currently, the Company has
no specific concerns with respect to potential losses or overruns under
existing contracts.
The Company has derived, and believes that it will continue to derive, a
significant portion of its revenues from a small number of large clients. For
many of these clients, the Company performs a number of different projects
pursuant to multiple contracts or purchase orders. For the six months ended
March 31, 1998, the State of Missouri, Unisys, Equifax and Humana accounted
for 20.5%, 19.6%, 11.9% and 11.5% of the Company's revenues, respectively.
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.
From December 1996 through the date of this Prospectus, the Company made
seven acquisitions for a total cost of approximately $10.0 million in cash and
shares of Class B Common Stock, excluding future contingent payments, all of
which were structured and accounted for as asset purchases. These acquisitions
helped to expand the Company's operations in the United States, to establish
the Company's operations in Australia and the United Kingdom, to broaden the
Company's client base and technical expertise and to supplement its access to
human resources. For the nine-month fiscal year ended September 30, 1997 and
the six months ended March 31, 1998, international operations accounted for
13.7% and 19.1% of the Company's total revenues, respectively. The Company
believes that the percentage of total revenues attributable to international
operations will continue to be significant and may continue to grow.
International operations may subject the Company to foreign currency
translation
19
<PAGE>
adjustments and transaction gains and losses for amounts denominated in
foreign currencies. The Company does not generally engage in hedging
transactions, but may do so in the future.
In September 1997, the Company changed its fiscal year end to September 30.
Fiscal year 1997 is comprised of 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:
<TABLE>
<CAPTION>
NINE-MONTH SIX MONTHS
YEAR ENDED NINE MONTHS FISCAL YEAR ENDED
DECEMBER 31, ENDED ENDED MARCH 31,
-------------- SEPTEMBER 30, SEPTEMBER 30, ------------
1995 1996 1996 1997 1997 1998
------ ------ ------------- ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 73.3 71.7 73.5 66.4 68.5 66.2
------ ------ ----- ----- ----- -----
Gross profit............ 26.7 28.3 26.5 33.6 31.5 33.8
Costs and expenses:
Selling and
marketing............ 5.0 6.0 4.9 8.1 7.8 6.5
General and
administrative....... 12.6 15.9 15.0 19.6 17.9 17.0
Depreciation and
amortization......... 0.4 0.5 0.5 1.2 0.7 1.9
------ ------ ----- ----- ----- -----
Income from operations.. 8.7 5.9 6.1 4.7 5.1 8.4
Interest (income) and
expense, net........... 0.5 0.5 0.5 0.4 0.5 (1.5)
------ ------ ----- ----- ----- -----
Income before income
taxes.................. 8.2 5.4 5.6 4.3 4.6 9.9
Provision for income
taxes.................. 4.6 2.1 2.2 1.8 1.8 4.0
------ ------ ----- ----- ----- -----
Net income.............. 3.6% 3.3% 3.4% 2.5% 2.8% 5.9%
====== ====== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Revenues. Revenues increased 94.7% to $21.8 million for the six months ended
March 31, 1998 from $11.2 million in the six months ended March 31, 1997. This
increase resulted primarily from internal growth, including an expanded client
base and several significant new contracts and related software sublicense
fees, and from the inclusion of revenues from acquisitions completed from
December 1996 to July 1997. The period ended March 31, 1998 also included one
month of revenues from the Sancha acquisition completed during the quarter.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries and
independent contractor costs, employee benefits and travel expenses. Gross
profit increased 109.2% to $7.4 million for the six months ended March 31,
1998 from $3.5 million in the six months ended March 31, 1997. Gross margin
increased to 33.8% for the six months ended March 31, 1998 from 31.5% in the
six months ended March 31, 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.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, product literature and advertising and
marketing expenditures. Selling and marketing expenses increased 62.6% to $1.4
million for the six months ended March 31, 1998 from $871,000 in the six
months ended March 31, 1997. As a percentage of revenues, selling and
marketing expenses decreased to 6.5% for the six months ended March 31, 1998
from 7.8% in the six months ended March 31, 1997. The increase in total
selling and marketing expenses was primarily attributable to the addition of
sales and marketing personnel and the Company's increased advertising and
marketing efforts and was partially
20
<PAGE>
offset by the use of sales and marketing personnel in direct project start-up
expenditures included in cost of revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management functions, human
resources, recruiting, finance, accounting and information systems, as well as
professional fees related to legal, audit, tax, external reporting, and
investor relations matters. General and administrative expenses increased
84.5% to $3.7 million for the six months ended March 31, 1998 from $2.0
million in the six months ended March 31, 1997. As a percentage of revenues,
general and administrative expenses decreased to 17.0% for the six months
ended March 31, 1998 from 17.9% in the six months ended March 31, 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.
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. Depreciation and amortization increased 409.6% to $423,000
for the six months ended March 31, 1998 from $83,000 in the six months ended
March 31, 1997. As a percentage of revenues, depreciation and amortization
increased to 1.9% for the six months ended March 31, 1998 from 0.7% in the six
months ended March 31, 1997. The increase in total depreciation and
amortization expenses was primarily attributable to the depreciation
associated with increased capital expenditures and the amortization of
increased intangible assets.
Interest Income and Interest Expense, Net. The Company had net interest
income of $324,000 for the six months ended March 31, 1998 compared to net
interest expense of $52,000 for the six months ended March 31, 1997. This
change was primarily attributable to the Company's repayment of all bank
borrowings under its bank lines of credit and the interest income generated
from its investment of proceeds from the initial public offering.
Provision for Income Taxes. Provision for income taxes increased 326.2% to
$878,000 for the six months ended March 31, 1998 from $206,000 in the six
months ended March 31, 1997. The effective tax rate for the six months ended
March 31, 1998 was 40.5%, compared to 39.8% for the six months ended March 31,
1997.
NINE-MONTH FISCAL YEAR ENDED SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Revenues increased 90.7% to $22.5 million for the nine-month
fiscal year ended September 30, 1997 from $11.8 million in the nine months
ended September 30, 1996. This increase resulted primarily from revenues
associated with the five acquisitions completed since December 1996, internal
growth, including $2.1 million from a significant new contract, and an
increase in billing rates for the Company's IT consultants.
Gross Profit. Gross profit increased 142.3% to $7.6 million for the nine-
month fiscal year ended September 30, 1997 from $3.1 million in the nine
months ended September 30, 1996. Gross margin increased to 33.6% for the nine-
month fiscal year ended September 30, 1997 from 26.5% in the nine months ended
September 30, 1996. The improvement in gross margin was primarily attributable
to an increased use of salaried employees as opposed to hourly employees,
higher billing rates, larger contracts and an increased use of fixed price
contracts.
Selling and Marketing. Selling and marketing expenses increased 218.2% to
$1.8 million for the nine-month fiscal year ended September 30, 1997 from
$577,000 in the nine months ended September 30, 1996. As a percentage of
revenues, selling and marketing expenses increased to 8.1% for the nine-month
fiscal year ended September 30, 1997 from 4.9% in the nine months ended
September 30, 1996.
21
<PAGE>
This increase was primarily attributable to the addition of sales and
marketing personnel and the Company's increased participation in conferences
and trade shows.
General and Administrative. General and administrative expenses increased
147.9% to $4.4 million for the nine-month fiscal year ended September 30, 1997
from $1.8 million in the nine months ended September 30, 1996. As a percentage
of revenues, general and administrative expenses increased to 19.6% for the
nine-month fiscal year ended September 30, 1997 from 15.0% in the nine months
ended September 30, 1996. This increase was primarily attributable to building
the infrastructure to support, manage and control the Company's growth. The
Company believes that general and administrative expenses will continue to
increase as the Company grows but that such expenses will decrease as a
percentage of revenues as the Company realizes economies of scale from its
administrative infrastructure.
Depreciation and Amortization. Depreciation and amortization increased
389.3% to $274,000 for the nine-month fiscal year ended September 30, 1997
from $56,000 in the nine months ended September 30, 1996. As a percentage of
revenues, depreciation and amortization increased to 1.2% for the nine-month
fiscal year ended September 30, 1997 from 0.5% in the nine months ended
September 30, 1996. The increase in depreciation and amortization expense was
primarily due to the depreciation associated with increased capital
expenditures and the amortization of increased intangible assets.
Interest Income and Interest Expense, Net. Interest income and interest
expense, net increased 98.0% to a net expense of $99,000 for the nine-month
fiscal year ended September 30, 1997 from a net expense of $50,000 in the nine
months ended September 30, 1996. This increase was primarily attributable to
the increase in borrowings under the Company's bank lines of credit to fund
working capital, capital expenditures and acquisitions.
Provision for Income Taxes. Provision for income taxes increased 44.4% to
$384,000 for the nine-month fiscal year ended September 30, 1997 from $266,000
in the nine months ended September 30, 1996. The effective tax rate for fiscal
1997 was 40.2%, compared to 40.0% for the nine months ended September 30,
1996.
FISCAL YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Revenues. Revenues increased 30.9% to $16.2 million for fiscal 1996 from
$12.4 million in fiscal 1995. This increase was primarily attributable to an
increase in billing rates, an increase in revenue from government service
contracts and the overall growth of the business.
Gross Profit. Gross profit increased 38.5% to $4.6 million for fiscal 1996
from $3.3 million in fiscal 1995. Gross margin increased to 28.3% for fiscal
1996 from 26.7% in fiscal 1995. This increase was primarily attributable to an
increased use of salaried employees rather than hourly employees, higher
billing rates, larger contracts and an increased use of fixed price contracts.
Selling and Marketing. Selling and marketing expenses increased 55.5% to
$975,000 for fiscal 1996 from $627,000 in fiscal 1995. As a percentage of
revenues, selling and marketing expenses increased to 6.0% for fiscal 1996
from 5.0% in fiscal 1995. This increase was primarily attributable to the
hiring of additional sales and marketing employees during the period.
General and Administrative. General and administrative expenses increased
65.0% to $2.6 million for fiscal 1996 from $1.6 million in fiscal 1995. As a
percentage of revenues, general and administrative expenses increased to 15.9%
for fiscal 1996 from 12.6% in fiscal 1995. This increase was primarily
attributable to building the infrastructure to support, manage and control the
Company's growth.
Depreciation and Amortization. Depreciation and amortization increased 77.8%
to $80,000 for fiscal 1996 from $45,000 in fiscal 1995. This increase was
primarily due to increased capital expenditures and the associated
depreciation.
22
<PAGE>
Interest Income and Interest Expense, Net. Interest income and interest
expense, net increased 21.3% to a net expense of $74,000 for fiscal 1996 from
a net expense of $61,000 in fiscal 1995. This increase was primarily
attributable to an increase in borrowings.
Provision for Income Taxes. Provision for income taxes decreased 38.4% to
$351,000 for fiscal 1996 from $570,000 in fiscal 1995. The effective tax rate
for fiscal 1996 was 40.0% from 56.2% for fiscal 1995. The decrease in the
effective tax rate was primarily attributable to a one-time tax expense of
$165,000 taken in 1995 related to the Company's recording of deferred income
taxes upon dissolution of Tier Group, a partnership, and the transfer of
assets to the Company. Excluding this one-time tax expense, the effective tax
rate for fiscal 1995 would have been 40.0%.
23
<PAGE>
SELECTED QUARTERLY STATEMENTS OF INCOME
The following tables set forth certain unaudited consolidated quarterly
statement of income data for each of the nine quarters ending March 31, 1998.
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
Prospectus. The Company's operating results for any one quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $3,836 $4,068 $3,886 $4,407 $6,799 $7,343 $8,337 $9,150 $12,672
Cost of revenues........ 2,972 2,982 2,715 2,947 4,729 4,814 5,374 5,680 8,756
------ ------ ------ ------ ------ ------ ------ ------ -------
Gross profit............ 864 1,086 1,171 1,460 2,070 2,529 2,963 3,470 3,916
Costs and expenses:
Selling and marketing.. 188 189 200 398 473 641 722 815 601
General and
administrative........ 466 609 699 800 1,207 1,531 1,659 1,800 1,903
Depreciation and
amortization.......... 16 19 21 24 59 79 136 171 252
------ ------ ------ ------ ------ ------ ------ ------ -------
Income from operations.. 194 269 251 238 331 278 446 684 1,160
Interest (income) and
expense, net........... 15 17 18 24 28 33 38 (56) (269)
------ ------ ------ ------ ------ ------ ------ ------ -------
Income before income
taxes.................. 179 252 233 214 303 245 408 740 1,429
Provision for income
taxes.................. 72 101 93 85 121 97 166 300 579
------ ------ ------ ------ ------ ------ ------ ------ -------
Net income.............. $ 107 $ 151 $ 140 $ 129 $ 182 $ 148 $ 242 $ 440 $ 850
====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF
REVENUES:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 77.5 73.3 69.9 66.9 69.6 65.6 64.5 62.1 69.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 22.5 26.7 30.1 33.1 30.4 34.4 35.5 37.9 30.9
Costs and expenses:
Selling and marketing.. 4.9 4.6 5.1 9.0 7.0 8.7 8.7 8.9 4.7
General and
administrative........ 12.1 15.0 18.0 18.2 17.6 20.8 19.9 19.7 15.0
Depreciation and
amortization.......... 0.4 0.5 0.5 0.5 0.9 1.1 1.6 1.8 2.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations.. 5.1 6.6 6.5 5.4 4.9 3.8 5.3 7.5 9.2
Interest (income) and
expense, net........... 0.4 0.4 0.5 0.5 0.4 0.5 0.4 (0.6) (2.1)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 4.7 6.2 6.0 4.9 4.5 3.3 4.9 8.1 11.3
Provision for income
taxes.................. 1.9 2.5 2.4 2.0 1.8 1.3 2.0 3.3 4.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 2.8% 3.7% 3.6% 2.9% 2.7% 2.0% 2.9% 4.8% 6.7%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
24
<PAGE>
The Company's revenues and operating results are subject to significant
variation from quarter to quarter due to a number of factors, including the
number, size and scope of projects in which the Company is engaged; the
contractual terms and degree of completion of such projects; start-up costs
including software sublicense fees incurred in connection with the initiation
of large projects; competitive pressures on pricing of the Company's services;
any delays incurred in connection with, or early termination of, a project;
employee utilization rates; the number of billable days in a particular
quarter; the adequacy of provisions for losses; the accuracy of estimates of
resources required to complete ongoing projects; demand for the Company's
services generated by strategic partnerships and certain prime contractors;
the Company's ability to increase both the number and size of engagements from
existing clients; and economic conditions in the vertical and geographic
markets served by the Company. Due to the relatively long sales cycles for the
Company's services in the government services market, the timing of revenue is
difficult to forecast. In addition, the achievement of anticipated revenues is
substantially dependent on the Company's ability to attract, on a timely
basis, and retain skilled personnel.
A high percentage of the Company's operating expenses, particularly
personnel and rent, are fixed in advance. Changes in the number, scope,
duration or progress toward completion, of the Company's projects or in
employee utilization rates would cause significant variations in operating
results in any particular quarter. In addition, the Company typically reaches
the annual limitation on its FICA contributions for many of its consultants
before the end of the calendar year. As a result, payroll taxes as a component
of cost of revenues will vary from quarter to quarter during the fiscal year
and will generally be higher at the beginning of the calendar year. As a
result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful, should not be relied upon as
indications of future performance and may result in volatility in the price of
the Company's Class B Common Stock in the public market. Due to the foregoing
factors, among others, the Company's operating results will from time to time
be below the expectations of the public market analysts and investors.
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 public offering of Class B
Common Stock in December 1997 and received net proceeds totaling approximately
$24 million, including proceeds from the exercise of the over-allotment option
in January 1998. To date, the Company has used $3.1 million of the proceeds
from the initial public offering to repay outstanding indebtedness, $5.5
million for business combinations and $600,000 for capital equipment and
leasehold improvements, with the remainder held as cash, cash equivalents and
investments.
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions. In March 1998,
the Company entered into a $10 million revolving credit facility (the "Credit
Facility"). The Credit Facility allows the Company to borrow the lesser of the
sum of 85% of eligible accounts receivable or $10 million. The Credit Facility
bears interest, at the Company's option, at the adjusted LIBOR rate plus 2.5%
or an alternate base rate plus 0.5%. The alternate base rate is the greater of
the bank's base rate or the federal funds effective rate plus 0.5%. The Credit
Facility is secured by all of the Company's assets and contains certain
restrictive covenants, including limitations on amounts of loans the Company
may extend to officers and employees, the incurrence of additional debt and
the payment of dividends. The Credit Facility requires the maintenance of
certain financial ratios, including a minimum quarterly net income requirement
and a limit on total liabilities to earnings before interest, taxes,
depreciation and amortization. As of March 31, 1998, there were no borrowings
outstanding under the Credit Facility.
Net cash (used in) provided by operating activities was $(177,000) in fiscal
1995, $491,000 in fiscal 1996, $(1.6) million in the nine-month fiscal year
ended September 30, 1997 and $130,000 in the six
25
<PAGE>
months ended March 31, 1998. Throughout these periods, the Company experienced
increases in receivables as a result of increases in the Company's sales
volume, which were partially offset by increases in accounts payable and
accrued expenses in those periods.
Net cash used in investing activities totaled $116,000, $297,000, $3.0
million and $14.7 million for fiscal 1995, fiscal 1996, the nine-month fiscal
year ended September 30, 1997 and the six months ended March 31, 1998,
respectively. These activities consisted primarily of purchases of equipment
and leasehold improvements in fiscal 1995 and fiscal 1996. In the nine-month
fiscal year ended September 30, 1997 and the six months ended March 31, 1998,
the Company made several acquisitions in addition to the purchase of equipment
and leasehold improvements. In the six months ended March 31, 1998, the
Company made significant purchases of marketable securities.
Net cash provided by financing activities totaled $271,000, $112,000, $4.4
million and $21.6 million for fiscal 1995, fiscal 1996, the nine-month fiscal
year ended September 30, 1997 and the six months ended March 31, 1998,
respectively. In the nine-month fiscal year ended September 30, 1997, the
Company raised gross proceeds of $2.2 million through the issuance of 420,953
shares of Series A Preferred Stock and increased its borrowing by $2.1 million
under its former credit facility. In the six months ended March 31, 1998, the
Company raised $23.9 million in its initial public offering of Class B Common
Stock and paid $2.8 million outstanding under its line of credit.
The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, together with
the anticipated net proceeds from this offering, will be adequate to fund the
Company's operations for at least the next 12 months. There can be no
assurance that changes will not occur that would consume available capital
resources before such time. The Company's capital requirements depend on
numerous factors, including potential acquisitions, the timing of the receipt
of accounts receivable and employee growth. To the extent that the Company's
existing capital resources, together with the anticipated net proceeds of this
offering, are insufficient to meet its capital requirements, the Company will
have to raise additional funds. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all.
YEAR 2000
The Company is in the process of formulating and implementing a program
designed to ensure that all software used in connection with the Company's
services and internal operations systems will manage and manipulate data
involving the transition of dates from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such dates. The Company
currently anticipates that it will not incur material costs in connection with
such program. While the Company has received assurances thus far from its
service providers that they will be Year 2000 compliant, no assurance can be
given that such compliance will in fact exist by the Year 2000. To the extent
service providers to the Company are not Year 2000 compliant or the Company
discovers issues within its internal systems, such failures could have a
material adverse effect on the Company's business, financial condition and
results of operations.
26
<PAGE>
BUSINESS
Tier Technologies, Inc. ("Tier" or the "Company") provides information
technology ("IT") consulting, application development and software engineering
services that facilitate the migration of clients' enterprise-wide systems and
applications to leading edge technologies. Tier provides IT migration
solutions by applying the Tier Migration Solution, 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?"
and "Taking the risk out of change." Through eleven offices located in three
countries, the Company works closely with its Fortune 1000, government and
other clients to determine, evaluate and implement an IT strategy that allows
it to rapidly adopt, deploy and transfer emerging technologies while
preserving viable elements of the client's installed IT base. 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 provides high value,
cost-effective, flexible solutions that minimize the risks associated with
migration to new technologies.
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 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.
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. According to Dataquest Incorporated, the
worldwide market for IT professional services was estimated to be $187 billion
in 1997, with a projected annual growth rate of approximately 17% through the
year 1999. The Company believes that successful IT service providers will be
characterized by (i) significant experience in the migration of enterprise-
wide IT systems; (ii) an ability to adopt, deploy and transfer relevant,
emerging technologies rapidly and reliably; (iii) an understanding of the
client's industry, business and existing IT environments; (iv) successful
management of the risks inherent in large system projects; and (v) the ability
to deliver services on a global basis.
27
<PAGE>
THE TIER MIGRATION SOLUTION
Tier works closely with its clients to determine, evaluate and implement an
IT strategy that allows it to rapidly adopt, deploy and transfer emerging
technologies while preserving viable elements of the client's installed IT
base. Tier combines its significant understanding of enterprise-wide IT
systems with its expertise in vertical industries, such as healthcare,
financial services and government services, to provide clients with rapid and
flexible migration solutions to their IT needs. By helping clients to maintain
their core IT systems, Tier believes it provides high value, cost effective,
flexible solutions that minimize the risks associated with system
improvements.
The Tier Migration Solution is 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, Tier's risk management committee regularly
evaluates the risks inherent in the project. If the risk management committee
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."
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:
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 exists. Since December 1996,
Tier has acquired seven IT service providers in order to add three domestic
and four international locations, broaden the Company's technical expertise in
areas such as Java and expand its professional resources by 159 IT
consultants.
Expand 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 healthcare, financial services, government services and
telecommunications. 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.
Develop Strategic Partnerships. The Company develops strategic partnerships
with service and technology providers pursuant to which Tier jointly bids and
performs certain engagements. These relationships offer Tier identifiable
revenue opportunities. The Company believes these relationships
28
<PAGE>
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.
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, 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?" and "Taking the risk out
of change." The 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 offers
competitive compensation and benefits including stock option and other stock-
based awards, and has developed a career advancement program that offers
employees career enrichment opportunities, individualized up-training and
cross-training programs, on-the-job learning opportunities and annual training
allowances.
SERVICES AND METHODOLOGY
The Company provides IT consulting, application development and software
engineering services which 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 formal risk assessment program 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. The Company has developed custom applications in several
vertical markets, including healthcare, financial
29
<PAGE>
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.
LOGO
[Graphic: A representation of Tier's four phase methodology for meeting
clients' IT 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 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.
30
<PAGE>
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. 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 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 provides post-implementation services, 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. Given the importance of this process, the
Company's risk management committee (the "Committee") includes the Company's
Chief Executive, Technology and Financial Officers. Using the risk management
assessment map developed in Phase I of Tier's Migration Solution, the
Committee evaluates projects on a regular basis against a checklist of risk
factors and assigns a status that determines the frequency of intervention and
review required. The Committee 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 Committee detects areas of
concern, it investigates the matter at an early stage and takes appropriate
corrective action to mitigate potential costs and delays.
REPRESENTATIVE ENGAGEMENTS
The following are examples of Tier's IT migration engagements:
Healthcare Process Improvement. In an engagement for a national HMO, Tier
completed the implementation of a Medicare compliance system that reduced the
HMO's application process cycle time from six weeks to two days, which in turn
accelerated its Medicare collections. By adding an improved input and analysis
"front end" to the HMO's existing insurance claims processing system, Tier
leveraged the most beneficial components of the HMO's existing technology
infrastructure. In a second project for the HMO, Tier developed an enterprise-
wide budget development system to allow the HMO's nationwide staff of
controllers, analysts and cost center managers to run financial simulations
and receive real-time feedback. The project increased the quality of the
client's budgets and significantly reduced their
31
<PAGE>
development time. The new system was integrated with the HMO's existing
accounting and finance applications to provide a financial control solution at
a fraction of the cost of a complete system replacement. Over a four-year
period, Tier has completed more than a dozen strategic projects for the HMO.
International Risk Management Application. Tier is currently performing a
multi-national engagement for a worldwide financial services and information
company to develop a global check authorization system. This $10 million, 18-
month project encompasses the redesign of business processes, a full migration
of application software, specifications for the selective replacement of
system hardware and the creation of a data warehouse for decision support.
Tier was chosen over its competitors for its industry expertise in process
redesign, simulation modeling, technical architecture, database design, rapid
application development, project management and its ability to rapidly
implement this complex project.
Child Welfare Case Management Solution. Tier, in conjunction with Unisys,
developed and implemented an integrated child welfare case management system
for a state government's health and human services department. By focusing on
improved workflow, integrated data management and the use of distributed
client/server technology, the Company believes the case management system will
increase the amount of time available for the case worker to work directly
with families, while also improving the quality and timeliness of information.
The case management system supports the state's child protective services
intake hotline, report investigation, case planning and outcome management and
financial and staff management.
Transportation System Solutions. Tier successfully completed a multi-phased
$1.3 million migration project for a state's department of transportation to
develop a fleet management system, including a preventive maintenance program
and a mechanized warranty system. The Company's IT solution utilized an
advanced client/server technology and leveraged components from two existing
mainframe systems. The system provides complete fleet management services to
over 200 users throughout the state. The client performed an extensive cost-
benefit analysis prior to developing the system and determined that the
improved service of the equipment will pay for the system within two years.
Tier is currently performing an $8.8 million, multi-phased client/server
project to redesign the department's multiple legacy transportation management
systems into one highly integrated decision making tool.
SALES AND MARKETING
The Company markets and sells its services through a direct sales force. As
of March 31, 1998, Tier employed 12 full-time, dedicated sales and marketing
staff. 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 two
strategic business units ("SBUs"): Commercial Services, which targets
healthcare, financial services, telecommunications and other commercial
markets and Government Services, which targets the fast-growing health and
human services and state strategic IT markets.
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) strategic partnerships with third
parties under which the Company jointly bids and performs certain engagements;
(ii) industry networking and referrals from existing clients; (iii) government
requests for proposals; (iv) directed sales activities identified by other
strategic business units within the Company; and (v) a national marketing
program. The Company believes
32
<PAGE>
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 through print advertising, direct mail,
media 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 which result in both repeat and long-term
engagements. Of the Company's clients with revenues in excess of $50,000 in
fiscal 1996, 88% (15 of 17) were clients in the nine-month fiscal year ended
September 30, 1997 and generated revenues in excess of $50,000 in such
subsequent period.
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 six months ended
March 31, 1998, the State of Missouri, Unisys, Equifax and Humana accounted
for 20.5%, 19.6%, 11.9% and 11.5% of the Company's revenues, respectively.
The following is a list of representative clients of the Company within the
last twelve months:
FINANCIAL SERVICES/INSURANCE TELECOMMUNICATIONS
Allstate Insurance Company GTE Mobilnet Incorporated
Bank of America, N.T. & S.A. Time Customer Service, Inc.
Bank of Melbourne Telstra Corporation Limited
Bay View Capital Corporation US West Communications, Inc.
Equifax Europe (UK) Ltd.
FAI Insurances Limited GOVERNMENT
General Electric Capital Services, Broken Hill Properties Information
Inc. Technology Pty Ltd
MMI General Insurance Ltd. Commonwealth of Australia*
National Australia Bank Cook County, Illinois
Royal & Sun Alliance Insurance Murray-Darling Basin Commission
Australia Limited State of Arizona*
State of Missouri (multiple
HEALTH CARE agencies)
Blue Cross/Blue Shield of Florida, State of Nevada*
Inc. State of Wisconsin
FORTIS Australia Limited
Hospital Benefit Fund of Western
Australia Inc.
Humana Inc.
Kaiser Foundation Health Plan, Inc.
Southshore Hospital
OTHER INDUSTRIES
Chevron Information Technology
Company
E & J Gallo Wineries
Kodak Australasia Limited
Matson Navigation Company, Inc.
The Boeing Company
TruServ Corporation
US Foodservice, Inc.
- --------
* Indicates that the Company was engaged as a subcontractor for certain
project engagements for the client.
33
<PAGE>
In its Government Services SBU, the Company sometimes obtains project
engagements through prime contractors such as Unisys and BDM International,
Inc. For example, in a project for the State of Arizona, Tier was responsible
for the complete IT strategy, architecture, design, software development and
testing as a subcontractor to Unisys, which was engaged by the State to
implement a new child welfare system. 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. The
Company will continue to seek subcontracting relationships with parties such
as Unisys and BDM International, Inc.
Until fiscal 1997, Company revenues were generated primarily through Tier's
domestic operations. For the nine-month fiscal year ended September 30, 1997
and the six months ended March 31, 1998, international operations accounted
for 13.7% and 19.1% of the Company's total revenues, respectively. See Note 12
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 a low level of employee turnover. As
of March 31, 1998, the Company had a workforce of 338, including 291 IT
consultants of which 143 were salaried employees, 50 were hourly employees and
98 were independent contractors (who were primarily located in Tier's
international offices). The workforce also includes 12 sales and marketing
employees and 35 general and administrative employees. Of the Company's total
workforce at March 31, 1998, 60.9%, 30.5% and 8.6% were located in the United
States, Australia and the United Kingdom, respectively.
The Company employs a Vice President, Staffing, a Director of Recruiting,
four full-time recruiters and two part-time 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. The Company attracts and retains employees by offering
significant 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. Given the rapid pace of
technological evolution, the Company recognizes that skill obsolescence is a
fundamental concern for IT professionals. As a key component of the Company's
employee retention program, Tier has developed a program that enables each
employee to specify their career goals and develop a plan to achieve those
goals. The program includes specific career enrichment opportunities,
individualized up-training and cross-training, on-the-job learning
opportunities and challenging assignments. As part of the program, each
consultant works under the guidance of a practice manager and senior
technology expert within their practice. All employees receive annual training
allowances which can be utilized for an array of career development needs such
as internal and external seminars and computer-based training. 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
34
<PAGE>
integrated technology companies and outsourcing companies. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than
the Company. In addition, there are relatively low barriers to entry into the
IT services market, and the Company has faced, and expects to continue to
face, additional competition from new entrants into the IT services market.
The Company believes that the principal competitive factors in the IT
services market include reputation, project management expertise, industry
expertise, speed of development and implementation, technical expertise,
competitive pricing and the ability to deliver results on a fixed price as
well as a time and materials basis. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability of its clients or competitors to hire, retain
and motivate project managers and other senior technical staff; the ownership
by competitors of software used by potential clients; the price at which
others offer comparable services; the ability of its clients to perform the
services themselves; and the extent of its competitors' responsiveness to
client needs. There can be no assurance that the Company will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not cause the Company's
revenues or income to decline or otherwise materially adversely affect its
business, financial condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS
Tier's success has resulted, in part, from its methodologies and other
proprietary 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 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.
Software developed by Tier in connection with a client engagement 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.
FACILITIES
Tier's principal executive offices are located at 1350 Treat Boulevard,
Suite 250, Walnut Creek, California. The Company's lease on these premises
covers approximately 9,745 square feet and expires November 30, 2001. The
Company also operates through facilities in Atlanta, Georgia; Chicago,
Illinois; Jacksonville, Florida; Jefferson City, Missouri; Louisville,
Kentucky; Phoenix, Arizona; Swallowfield, England; and Canberra, Melbourne and
Sydney, Australia, none of which are owned by the Company. Tier anticipates
that additional space will be required as its business expands and believes
that it will be able to obtain suitable space as needed.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER SIGNIFICANT EMPLOYEES
The executive officers, directors and other significant employees of the
Company and their ages as of May 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James L. Bildner................... 44 Chairman of the Board and Chief Executive Officer
William G. Barton.................. 41 President, Chief Technology Officer and Director
George K. Ross..................... 56 Executive Vice President, Chief Financial Officer
and Director
James Weaver....................... 40 President, Government Services Division
Andrew Armstrong................... 47 Managing Director, UK
Tom Thomson........................ 46 Managing Director, UK
John Starkey....................... 54 Managing Director, Australia
Bradley H. Nickels................. 36 Senior Vice President, Business Development and
Operations, Government Services Division and
Secretary
Jacqueline R. Hampton.............. 45 Vice President, Business Development and
Operations, Commercial Services Division
Bryan D. McCaul.................... 40 Vice President, Resource Management
Judith LaMotte..................... 48 Vice President, Staffing
John W. Reasner.................... 59 Vice President, Human Resources
F. Thomas Latham................... 52 Vice President, Business Development, Commercial
Services Division
Albert A. Arthur................... 45 Vice President, Business Development, Government
Services Division
Samuel Cabot III(1)(2)(3).......... 57 Director
Ronald L. Rossetti(1)(2)(3)........ 54 Director
</TABLE>
- --------
(1)Member of the Compensation Committee of the Board of Directors.
(2)Member of the Audit Committee of the Board of Directors.
(3)Class B Director.
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. In 1984, Mr. Bildner founded J. Bildner & Sons,
Inc., a specialty retailer, and served as its Chairman of the Board and Chief
Executive Officer from its inception to December 1994. J. Bildner & Sons, Inc.
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in July
1988 and emerged from reorganization in October 1989. Mr. Bildner received an
A.B. from Dartmouth College and a J.D. from Case Western Reserve School of
Law.
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. From 1990 to 1991, Mr. Barton was employed as an IT management
consultant at Titan Consulting, an IT consulting firm. From 1979 to 1990, Mr.
Barton held various positions leading to Director of Advanced Business Systems
at American Express Card Services, a financial services company. Previously,
Mr. Barton held positions within the IT industry as a systems analyst,
software engineer and programmer. 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 February 1998, and has served as Chief
Financial Officer since February 1997. From
36
<PAGE>
February 1997 until February 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. Between 1979 and 1992, Mr.
Ross was Corporate Vice President, Controller for Axel Johnson, Inc., a highly
diversified private holding company. Mr. Ross has also held corporate and
operating positions with RJR Nabisco, Inc. and served as a senior consultant
with Ernst & Young LLP. 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. 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 IT 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 IT 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
State College and is pursuing an M.S. in Agency Management and Administration
from California University.
Mr. Armstrong joined the Company as Managing Director, UK in July 1997 in
connection with the Company's acquisition of Albanycrest. Mr. Armstrong was
employed by Albanycrest as Managing Director from November 1996 until July
1997. From 1995 to 1996, Mr. Armstrong served as an independent consultant.
From 1992 to 1995, he was employed as principal project manager for Siemens
Nixdorf Information Systems Ltd., an IT company. From 1990 to 1992, Mr.
Armstrong was an independent consultant and prior to that time he was employed
with The Macleod Group and with Armstrong Associates Ltd./Data Center
Management Ltd.
Mr. Thomson joined Tier as Managing Director, UK in July 1997 in connection
with the Company's acquisition of Albanycrest. From 1996 to July 1997, Mr.
Thomson was Senior Project Manager for Siemens Nixdorf Information Systems
Ltd. From 1993 to 1996, he served as Senior Project Manager with Perot
Systems, a worldwide IT services company. From 1989 to 1993, Mr. Thomson was
Senior Project Manager for Oasis.
Mr. Starkey joined the Company in August 1997 as Managing Director,
Australia. From 1992 to 1997, Mr. Starkey was employed with Texas Instruments,
a digital signal processing solutions company, most recently serving as
Regional Director Asia, Australia and New Zealand. From 1988 to 1992, Mr.
Starkey was with Cincom serving as General Manager of Australia and New
Zealand. Prior to that time Mr. Starkey was employed with Computer Power and
was New South Wales Manager for Computer Science of Australia.
Mr. Nickels, one of the initial founders of the Company, has served as
Senior Vice President, Business Development and Operations, Government
Services Division since April 1998. He served as Vice President of the
Government Services SBU from January 1996 until April 1998. From October 1991
to December 1995, he served as a principal consultant and project manager at
the Company. From 1988 to 1992, Mr. Nickels was a project manager at American
Express Travel Related Services. Mr. Nickels received a B.S. in Computer
Science from Arizona State University.
Ms. Hampton joined the Company as Vice President, Business Solutions SBU in
June 1997. She has served as Vice President, Business Development and
Operations, Commercial Services Division since April 1998. From September 1995
to April 1997, Ms. Hampton was Vice President for Worldwide Professional
Services at Netscape Communications, an Internet browser company. From April
1992 to September 1995, Ms. Hampton served as Vice President of Professional
Services, Western Area, for Sybase, a software provider. From 1989 to 1992,
she was a managing consultant at Oracle Corporation. Between 1983 and
37
<PAGE>
1989 she held various senior management and consulting positions with Ernst &
Young LLP and Andersen Consulting. She received a B.S. in Biochemistry and
Microbiology from San Diego State University and an MBA from Boston
University.
Mr. McCaul has served as Vice President, Resource Management since April
1998. From March 1993 until April 1998, he served as Vice President and Chief
Information/Technology Officer of the Company. From 1990 to March 1993, he was
a senior consultant and trainer for Montare International, a technology
consulting firm. From 1986 to 1990, Mr. McCaul was a senior systems analyst
with Texas Instruments Software, a software provider. Mr. McCaul received a
B.S. in Business Administration and an M.S. in Computer Science from the
University of Kansas.
Ms. LaMotte joined the Company in February 1997 as Director of Staffing and
Field Human Resources and is now serving as Vice President, Staffing. From
1994 to 1997, Ms. LaMotte served as Director, Staffing and Field Human
Resources Operations at Sybase, Inc., a professional services company. From
1990 to 1994, she was an independent consultant and contract recruiter for
Adaptec, Inc., a hardware and software data transfer solutions company, and
from 1988 to 1990 Ms. LaMotte served as Human Resources Manager for Apple
Computer. Ms. LaMotte received a B.S. in International Relations from
Georgetown University and a Masters Degree in Industrial and Labor Relations
from Cornell University.
Mr. Reasner joined the Company as Vice President, Human Resources in January
1997. From 1989 to December 1996, Mr. Reasner served as Vice President--Human
Resources for Pilkington, Barnes, Hind, a global contact lens and solution
manufacturer where he was responsible for its world-wide human resources
function. Mr. Reasner received a B.A. from Monmouth College.
Mr. Latham has served as Vice President, Business Development, Commercial
Services Division since April 1998. From August 1996 until April 1998, he
served as Vice President, Commercial Services SBU. From March 1995 to August
1996, Mr. Latham was the President of Distributed Business Technology
Solutions, an IT consulting company. From February 1993 to February 1995, he
was a Senior Director at Florida Power and Light, one of the country's largest
providers of electricity-related services. From 1981 to February 1993, he
served as Vice President, Strategic Business Systems and Vice President,
Technology at American Express.
Mr. Arthur joined Tier in February 1997 as Director, National Account Sales
and has served as the Company's Vice President, Business Development,
Government Services Division since April 1998. He served as Vice President,
Strategic Business Development of the Company from June 1997 until April 1998.
From April 1996 to March 1997, Mr. Arthur was employed by Texas Instruments
Software, where he was the Trading Area Manager for the western United States
and Canada. From August 1995 until April 1996, he served as Director of
Financial Business Development (Bay Area) for Oracle Corporation, a software
provider. From 1988 until August 1995, he served as Global Account Manager for
Bank of America, N.T. & S.A. He received an A.B. degree from Stanford
University.
Mr. Cabot has served as a Director of the Company since January 1997. He has
served as president of Samuel Cabot Inc., a manufacturer and marketer of
premium quality exterior stains and architectural coatings, since 1978. He is
also on the board of directors of Plasticolors, Inc., Blue Cross/Blue Shield
of Massachusetts, Inc., the National Paint and Coatings Association and the
Associated Industries of Massachusetts. Mr. Cabot received an A.B. from
Dartmouth College and an MBA from Boston University.
Mr. Rossetti has served as a Director of the Company since November 1995.
Since February 1997, he has served as President of Riverside Capital Partners,
Inc., a venture capital investment firm. From 1976 until September 1994, Mr.
Rossetti was President, Chief Executive Officer and a director of Nature Food
Centers, Inc. Mr. Rossetti is also on the Boards of Directors of General
Nutrition Co. and City Sports, the advisory board of Hamilton Associates and
serves as a trustee of Northeastern University. He received a B.S. from
Northeastern University.
38
<PAGE>
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. All directors hold office until the
next annual meeting of the Company, or until their successors have been duly
elected and qualified. There are no family relationships between any of the
executive officers or directors of the Company.
The Bylaws authorize a range of directors, numbering between five and nine.
Currently, the Company has designated a Board of five directors. The Company
is actively seeking two additional qualified directors, unaffiliated with the
Company, which process the Company anticipates will be completed within six
months of this offering. Upon an increase in the number of directors to seven,
the holders of shares of Class B Common Stock will elect three directors and
the remaining four directors will be elected by holders of Class A and Class B
Common Stock, voting together. See "Description of Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors maintains an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. Rossetti and Cabot,
reviews the results and scope of the annual audit and the services provided by
the Company's independent auditors. The Compensation Committee, consisting of
Messrs. Rossetti and Cabot, establishes the compensation of officers of the
Company and administers the Company's compensation programs, including the
grant of stock options.
DIRECTOR COMPENSATION
The members of the Company's Board of Directors are reimbursed for
reasonable travel expenses incurred in attending Board meetings. In addition,
non-employee members of the Board of Directors receive a grant, upon their
initial appointment, of fully vested options to purchase 5,000 shares of Class
B Common Stock and an annual grant, upon their re-election thereafter, of
fully vested options to purchase 5,000 shares of Class B Common Stock under
the Company's Amended and Restated 1996 Equity Incentive Plan. See "--
Incentive Plans."
EMPLOYMENT AGREEMENTS
In December 1996, the Company entered into an employment agreement with
James L. Bildner, the Company's Chairman of the Board and Chief Executive
Officer, for a term which currently expires on August 1, 2001. Under the
agreement, as amended as of February 16, 1998, Mr. Bildner receives an annual
base salary of $455,000 and is eligible to receive an annual incentive bonus
of up to 85% of base salary based on achievement of certain Company
performance milestones or other goals to be determined by the Compensation
Committee. For calendar year 1998, the Compensation Committee has determined
that at least 50% of all incentive compensation earned by Mr. Bildner will be
paid in the form of options to purchase Class B Common Stock having an
exercise price equal to the fair market value of the Class B Common Stock on
the date of grant. The remaining 50% will be paid in cash or options, at Mr.
Bildner's election. Any options issued as annual incentive compensation for
1998 will be granted on December 31, 1998. Under the agreement, Mr. Bildner
also received a $50,000 relocation loan, which bears interest at 5.75% per
annum and is forgivable over a three-year period beginning on December 31,
1996 (the "Relocation Loan"), and a monthly housing allowance of $2,750 (for a
three-year period beginning December 31, 1996), payable in advance upon
request of Mr. Bildner. The agreement also provides, among other things, that
if Mr. Bildner's employment with the Company is terminated (i) by the Company
for cause (as defined in the agreement), other than Mr. Bildner's conviction
of a felony, the Company will pay to Mr. Bildner his base salary and benefits
for a period of 24 months from the date of termination; or (ii) by the Company
without cause or by Mr. Bildner for good reason (as defined in the agreement),
the outstanding principal balance and accrued interest under the Relocation
Loan will be forgiven, all outstanding unvested options held by Mr. Bildner
will immediately vest and the Company will pay Mr. Bildner a lump sum amount
equal to the discounted present value of 24 months of a base salary plus 100%
of the maximum amount of all incentive compensation Mr. Bildner could have
earned during the year in which the termination occurs. Benefits substantially
similar to those set forth in clause (ii) above are
39
<PAGE>
provided in the event of termination of Mr. Bildner's employment due to death
or disability and, upon any event of termination, the Company will take all
action required to release Mr. Bildner from any personal guaranties of Company
indebtedness. Pursuant to this agreement Mr. Bildner also received an option
to purchase 80,000 shares of Class A Common Stock and 120,000 shares of Class
B Common Stock at an exercise price equal to 100% of the fair market value of
such stock on the date of grant, which vested immediately. He also received an
option for 120,000 shares of Class A Common Stock and 180,000 shares of Class
B Common Stock, all of which has vested except 33.3% which will vest on
December 31, 1998. See "--Executive Compensation" and "Certain Transactions."
In December 1996, the Company entered into an employment agreement with
William G. Barton, the Company's President and Chief Technology Officer, for a
term which currently expires on August 1, 2001. Under the agreement, as
amended as of February 16, 1998, Mr. Barton receives an annual base salary of
$310,000 and is eligible to receive an annual incentive bonus of up to 75% of
base salary based on achievement of certain Company performance milestones or
other goals to be determined by the Compensation Committee. For calendar year
1998, the Compensation Committee has determined that at least 50% of all
incentive compensation earned by Mr. Barton will be paid in the form of
options to purchase Class B Common Stock having an exercise price equal to the
fair market value of the Class B Common Stock on the date of grant. The
remaining 50% shall be paid in cash or options, at Mr. Barton's election. Any
options issued as annual incentive compensation for 1998 will be granted on
December 31, 1998. Under the agreement, Mr. Barton also received an education
loan up to $50,000, which bears interest at 5.75% per annum and is forgivable
over approximately three years (the "Education Loan"). The agreement also
provides, among other things, that if Mr. Barton's employment with the Company
is terminated (i) by the Company for cause (as defined in the agreement),
other than Mr. Barton's conviction of a felony, the Company will pay to Mr.
Barton his base salary and benefits for a period of 24 months from the date of
termination; or (ii) by the Company without cause or by Mr. Barton for good
reason (as defined in the agreement), the outstanding principal balance and
accrued interest under the Education Loan will be forgiven, all outstanding
unvested options held by Mr. Barton will immediately vest and the Company will
pay Mr. Barton a lump sum amount equal to the discounted present value of 24
months of base salary plus 100% of the maximum amount of all incentive
compensation Mr. Barton could have earned during the year in which the
termination occurs. Benefits substantially similar to those set forth in
clause (ii) above are provided in the event of termination of Mr. Barton's
employment due to death or disability and, upon any event of termination, the
Company will take all action required to release Mr. Barton from any personal
guaranties of Company indebtedness. Pursuant to this agreement, Mr. Barton
received an option to purchase 120,000 shares of Class A Common Stock and
180,000 shares of Class B Common Stock, at an exercise price equal to 110% of
the fair market value of such stock on the date of grant, all of which has
vested except 33.3% which will vest on December 31, 1998. See "--Executive
Compensation" and "Certain Transactions."
In February 1997, the Company entered into an employment agreement with
George K. Ross, the Company's Executive Vice President and Chief Financial
Officer, for a term which expires on August 1, 2001. Under the agreement, as
amended as of February 16, 1998, Mr. Ross receives an annual base salary of
$230,000 and is eligible to receive an annual incentive bonus of up to 65% of
base salary based on achievement of certain Company performance milestones or
other goals to be determined by the Compensation Committee. For calendar year
1998, the Compensation Committee has determined that at least 50% of all
incentive compensation earned by Mr. Ross will be paid in the form of options
to purchase Class B Common Stock having an exercise price equal to the fair
market value of the Class B Common Stock on the date of grant. The remaining
50% will be paid in cash or options, at Mr. Ross' election. Any options issued
as annual incentive compensation for 1998 will be granted on December 31,
1998. In the event the agreement is terminated by Mr. Ross for good reason (as
defined in the agreement) or by the Company other than for cause (as defined
in the agreement), Mr. Ross will be entitled to receive his full salary for a
period of six months from the date of such termination and a pro rata portion
of all incentive compensation Mr. Ross could have earned during the year the
termination occurs. The agreement also provides that the
40
<PAGE>
Company offer an unsecured relocation loan of up to $20,000, bearing simple
interest at 5.81% per annum, which amount shall be forgiven over three years
so long as Mr. Ross remains employed by the Company. Pursuant to this
agreement, Mr. Ross received an option to purchase 105,000 shares of Class B
Common Stock, at an exercise price equal to 100% of the fair market value of
such stock on the date of grant, which option vests ratably on the first three
annual anniversaries of the grant. In the event of a sale of substantially all
of the assets of the Company, a change in control of the Company or upon the
termination of James L. Bildner as Chief Executive Officer of the Company, the
option fully vests immediately. See "--Executive Compensation" and "Certain
Transactions."
The valuation of options to be issued as annual incentive compensation for
calendar year 1998 pursuant to the employment agreements described above shall
be in the sole discretion of the Compensation Committee using the Black-
Scholes option valuation methodology. Accordingly, the Company can not
estimate the number of options to be issued pursuant to such employment
agreements as annual incentive compensation at this time.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned by the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers for the twelve-month period ended
September 30, 1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------ -------------------
NUMBER OF SHARES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION(*) SALARY BONUS COMPENSATION OPTIONS GRANTED (#)
- ------------------------------ -------- -------- ------------ -------------------
<S> <C> <C> <C> <C>
James L. Bildner(2)........ $242,293 $171,931 $43,749(3) 720,000
Chairman of the Board and
Chief Executive Officer
Williams G. Barton(4)...... 209,856 139,785 - 520,000
President and Chief
Operating Officer
Bryan D. McCaul(4)......... 163,542 25,050 - 110,000
Vice President and Chief
Information/Technology
Officer
Bradley H. Nickels......... 163,542 25,000 - 110,000
Vice President, Government
Services
F. Thomas Latham........... 131,250 23,125 - 77,500
Vice President, Commercial
Services
</TABLE>
- --------
* Mr. George K. Ross, the Company's Executive Vice President, Chief Financial
Officer and a member of its Board of Directors, joined the Company in
February 1997. From February 1, 1997 through September 30, 1997, Mr. Ross
received salary of $109,375 and bonus of $17,500. In addition, the Company
granted Mr. Ross options to purchase 130,000 shares of the Company's Class B
Common Stock, forgave $4,065 of debt and accrued interest thereon owed by
Mr. Ross to the Company arising from a housing and relocation loan and paid
Mr. Ross certain other compensation totaling $2,500.
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation described in this table does not include perquisites and
other personal benefits received by the Named Executive Officers which do
not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for such Named Executive Officer.
(2) Mr. Bildner joined the Company as an employee in December 1996.
Previously, Mr. Bildner served as a consultant to the Company pursuant to
a consulting agreement between the Company and his employer, Argus
Corporation, pursuant to which Argus was paid $198,890 during the twelve
months ended December 31, 1996.
(3) Represents forgiveness of debt and accrued interest thereon owed by Mr.
Bildner to the Company arising from loans made for housing and relocation
expenses. See "Management--Employment Agreements" and "Certain
Transactions."
(4) Effective February 16, 1998, Mr. Barton's title was changed to President
and Chief Technology Officer and, effective April 1, 1998, Mr. McCaul's
title was changed to Vice President, Resource Management.
41
<PAGE>
The following table sets forth information concerning options granted to the
Named Executive Officers during the twelve-month period ended September 30,
1997.
OPTION GRANTS IN THE TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
-------------------------------------------------------- -----------------------
NUMBER OF
SHARES PERCENT
UNDERLYING TOTAL OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED (#) EMPLOYEES(1) ($/SHARE)(2) DATE 5% 10%
- ---- ------------------ ------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James L. Bildner........ 200,000 Class A(4) 7.2% $1.65 12/30/06 $ 2,439,000 $ 4,079,000
300,000 Class B(4) 10.8 1.65 12/30/06 3,659,000 6,119,000
120,000 Class A(5) 4.3 3.58 2/27/02 872,000 1,213,000
100,000 Class B(6) 3.6 5.77 7/30/02 508,000 792,000
William G. Barton....... 120,000 Class A(5) 4.3 1.82 12/30/01 1,083,000 1,424,000
180,000 Class B(5) 6.5 1.82 12/30/01 1,625,000 2,136,000
120,000 Class A(5) 4.3 3.58 2/27/02 872,000 1,213,000
100,000 Class B(6) 3.6 5.77 7/30/02 508,000 792,000
Bradley H. Nickels...... 100,000 Class B(7) 3.6 3.25 2/27/07 1,060,000 1,880,000
10,000 Class B(6) 0.4 5.25 7/31/07 86,000 168,000
Bryan D. McCaul......... 100,000 Class B(7) 3.6 3.25 2/27/07 1,060,000 1,880,000
10,000 Class B(6) 0.4 5.25 7/31/07 86,000 168,000
F. Thomas Latham........ 67,500 Class B(7) 2.4 3.25 2/27/07 715,000 1,269,000
10,000 Class B(6) 0.4 5.25 7/31/07 86,000 168,000
</TABLE>
- --------
(1) Based on an aggregate of 2,783,075 options granted to employees in the
twelve-month period ended September 30, 1997, including options granted to
the Named Executive Officers.
(2) The exercise price equals or exceeds the fair market value of the stock as
of the grant date as determined by the Board of Directors after
consideration of a number of factors, including, but not limited to, the
Company's financial performance, the price of shares of equity securities
sold to or purchased by outside investors and third-party appraisals.
(3) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Class B Common Stock based on the public
offering price in the Company's initial public offering of $8.50 per
share, compounded annually for the term of the option. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Class B Common Stock and overall stock market conditions. There can be
no assurance that the Class B Common Stock will appreciate at any
particular rate, or at all, in future years.
(4) Options vest 40% on the date of grant and then 20% on each of the first
three anniversaries of the date of grant; provided, however, that 20% vest
upon completion of this offering. Certain of these options were exercised
in advance of vesting, subject to a right of repurchase by the Company at
such option's exercise price.
(5) Options vest 33.3% on each of the first three anniversaries of the date of
the option; provided, however, that 33.3% vested immediately upon
completion of the Company's initial public offering on December 17, 1997
with the remaining shares vesting over the scheduled period. Certain of
these options were exercised in advance of vesting, subject to a right of
repurchase by the Company at such option's exercise price.
(6) Options vest 25% on each of the first four anniversaries of the date of
grant.
(7) Options vest 33.3% on each of the first three anniversaries of the date of
grant.
42
<PAGE>
The following table sets forth certain information regarding option
exercises during the twelve-month period ended September 30, 1997 and the
value of unexercised options held as of September 30, 1997 by the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN THE TWELVE-MONTH PERIOD ENDED SEPTEMBER 30,
1997AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END(2)
ACQUIRED ON VALUE ---------------------------------- -------------------------
NAME EXERCISE (#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Bildner........ 910,000 $1,256,000 10,000 100,000 $49,000 $273,000
William G. Barton....... 410,000 429,000 10,000 100,000 49,000 273,000
Bradley H. Nickels...... - - - 110,000 - 558,000
Bryan D. McCaul......... - - - 110,000 - 558,000
F. Thomas Latham........ - - - 77,500 - 387,000
</TABLE>
- --------
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) The value of unexercised in-the-money options is calculated based on the
initial public offering price of $8.50 per share. Amounts reflected are
based on such estimated fair market value minus the aggregate exercise
price and do not necessarily reflect that the optionee sold such stock.
INCENTIVE PLANS
Amended and Restated 1996 Equity Incentive Plan. The Company's Amended and
Restated 1996 Equity Incentive Plan (the "Plan") provides for grants to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and for grants to employees,
directors and consultants of non-qualified stock options, restricted stock and
stock bonuses. The purposes of the Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentives to the employees and consultants of the Company and to
promote business.
In October 1997, the Company amended the Plan to authorize a total of
2,989,333 shares of Class B Common Stock for issuance pursuant to the Plan. As
of March 31, 1998, options to purchase 2,088,346 shares of Class B Common
Stock were outstanding at a weighted average exercise price of $5.65. As of
March 31, 1998, 785,624 shares were available for future grant under the Plan.
The Company believes that it may be necessary to increase the authorized
number of shares under the Plan prior to its next annual meeting and may
circulate a resolution to that effect to its control shareholders for approval
during the last quarter of fiscal 1998 or the first quarter of fiscal 1999.
The increase in the number of shares authorized under the Plan will depend
upon factors such as increased hiring, acquisition activity and increased
incentives to current employees, including the issuance of options as annual
incentive compensation pursuant to employment agreements with certain
executive officers. See "--Employment Agreements."
The Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the power to determine the terms of
the options granted, including the exercise price, the number of shares
subject to the option and the exercisability thereof, and the form of
consideration payable upon exercise. Except as permitted by the Compensation
Committee, options granted under the Plan are not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. The exercise price of all incentive stock options
granted under the Plan must be at least equal to the fair market value of the
Class B Common Stock on the date of grant. The exercise price of non-qualified
stock options may not be less than 85% of the fair market value of a share of
Class B Common Stock on the date of grant. With respect to any optionee who
owns 10% or more of the Company's outstanding capital stock, the exercise
price of any incentive stock option granted
43
<PAGE>
to such optionee must equal or exceed 110% of the fair market value of the
Class B Common Stock on the grant date and the term of the option must not
exceed five years. The aggregate fair market value of the Class B Common Stock
(determined at the time the option is granted) with respect to which incentive
stock options granted to an individual first become exercisable in any
calendar year shall not exceed $100,000. No more than 300,000 shares (subject
to shareholder approval of a recent increase in this number) may be granted
pursuant to options to any one person under the Plan in any single fiscal
year. The term of all options (other than options granted to any optionee who
owns 10% or more of the Company's outstanding capital stock) may not exceed
ten years.
The Compensation Committee may grant restricted shares, i.e., shares of
Class B Common Stock which are subject to transfer restrictions determined by
the Compensation Committee and subject to substantial risk of forfeiture
unless and until specific conditions established by the Compensation Committee
at the time of grant are met. Such conditions may be based on continuing
employment or achievement of pre-established performance goals, or both, as
determined by the Compensation Committee.
The Plan also authorizes the Compensation Committee to award or to offer
bonuses of shares of Class B Common Stock, either restricted or unrestricted,
and as current or deferred compensation, in lieu of all or any portion of the
cash compensation to which the employee is entitled, for a number of shares
having a value on the grant date equal to the amount of such cash
compensation.
Stock options and performance-based restricted stock granted under the Plan
are intended to be "performance-based compensation" and therefore not subject
to the deduction limitation of Code Section 162(m).
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in the year ended December 31, 1996 adopted the disclosure-only
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Restricted and unrestricted stock
bonuses under the Plan would, however, involve an earnings charge.
The Plan was approved by the Board of Directors and shareholders and became
effective on February 10, 1997. Unless terminated sooner, the Plan will
terminate automatically on February 9, 2007. The Board of Directors has the
authority to amend, suspend or terminate the Plan, subject to any required
shareholder approval under applicable law. Notwithstanding the foregoing, no
amendment, suspension or termination of the Plan shall alter or impair an
interest granted to a beneficiary under the Plan without such beneficiary's
written consent.
Employee Stock Purchase Plan. In October 1997, the Company adopted an
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 100,000 shares
of Class B Common Stock are reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code, permits eligible
employees to purchase shares of Class B Common Stock through payroll
deductions. Eligible employees may select a rate of payroll deduction between
1% and 10% of their cash compensation, but not more than 500 shares may be
purchased per participant on any purchase date. The price of stock purchased
under the purchase plan will be 85% of the lower of the fair market value of
the Common Stock at the beginning or the end of the six-month purchase period.
Employees will generally be eligible to participate if they are employed by
the Company on the beginning of a purchase period. Employees may end their
participation in the Purchase Plan at any time, and participation ends
automatically on termination of employment with the Company.
The Board of Directors may amend, suspend or terminate the Purchase Plan at
any time, to be effective immediately after the close of any purchase period.
However, the Board of Directors may not, without shareholder approval,
materially increase the number of shares of Class B Common Stock available for
issuance, alter the purchase price formula so as to reduce the purchase price
payable for shares of
44
<PAGE>
Class B Common Stock, or materially modify the eligibility requirements for
participation. The Purchase Plan will in all events terminate on September 30,
2007, unless terminated earlier by the Board of Directors.
401(k) Plan. The Company maintains a 401(k) profit-sharing and deferred
contribution plan (the "401(k) Plan"). All employees of the Company who have
reached 21 years of age and who have completed one month of employment are
eligible to participate in the 401(k) Plan, pursuant to which each participant
may contribute up to 15% of eligible compensation (up to a statutorily
prescribed annual limit of $10,000 in 1998). Although the Company is permitted
to contribute to the 401(k) Plan, it has not made such contributions in the
past. Participants vest in Company contributions, if any, ratably on the third
through seventh anniversaries of the Company's contribution. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
45
<PAGE>
CERTAIN TRANSACTIONS
The Company retained the consulting services of Argus Corporation ("Argus"),
a consulting firm for which the Company's Chairman of the Board and Chief
Executive Officer, James L. Bildner, was then a principal, for payments
aggregating $198,890 for services rendered during the year ended December 31,
1996.
The Company has made loans to certain employees in connection with their
exercise of stock options, the payment of taxes associated with those
exercises, relocation expenses, costs associated with the purchase of housing,
educational expenses and personal purposes. All loans are made pursuant to
full-recourse, interest-bearing promissory notes and certain notes are secured
by a pledge of Common Stock held by the employee. Interest rates range from
5.59% to 9.00% and vary based on the term of the loan and its date of
origination. Generally, the loans have ten-year terms, with the exception of
forgivable loans which have three-year terms and are typically forgiven
ratably over the note's term so long as the employee remains with the Company
and housing loans, which are payable upon termination of employment, subject
to forgiveness in their entirety if the employee remains with the Company for
three years. Loans to Mr. Bildner total $1,859,302, of which $135,250 plus
accrued interest may be forgiven. Loans to Mr. Barton total $1,164,558, of
which $47,677 plus accrued interest may be forgiven. Loans to Mr. Ross total
$105,000, which amount plus accrued interest may be forgiven in its entirety.
Loans to Mr. Latham total $27,500, which amount plus accrued interest may be
forgiven in its entirety. See "Management--Employment Agreements."
The Company has entered into employment agreements with Mr. Bildner, Mr.
Barton, its President and Chief Technology Officer, and Mr. Ross, its
Executive Vice President and Chief Financial Officer. See "Management--
Employment Agreements."
In July 1997, certain officers, directors and more than 5% shareholders
participated in the private placement of shares of the Company's Series A
Preferred Stock (the "Private Placement"). Messrs. Barton, Cabot, Ross and
Rossetti purchased 9,524, 3,810, 4,762 and 9,524 shares of Series A Preferred
Stock, respectively, at a price of $5.25 per share, which price was determined
based on arm's length negotiations with unaffiliated third parties. The
Private Placement was made pursuant to Rule 506 of Regulation D under the Act.
Upon the closing of the Company's initial public offering, these shares
automatically converted into an equal number of shares of Class B Common
Stock. These shareholders have identical registration rights to those of other
purchasers in the Private Placement. See "Description of Capital Stock--
Registration Rights."
In August 1997, the Company entered into an agreement (the "Direct Sale
Agreement") with AH&H Partners Fund Limited Partnership, Wilson Hitchings (who
served as a director of the Company until September 1997), Leon Normand (who
served as a director of the Company until September 1997), Robert Butorac,
James Hinson and Greg Bowen (the "Selling Founders"), wherein the Selling
Founders agreed to sell a total of 95,238 shares of their Class A Common Stock
(which, upon the consummation of the sale converted to an equal number of
shares of Class B Common Stock) to the AH&H Partners Fund Limited Partnership.
Messrs. Hitchings and Normand each received approximately $113,636, before
payment of expenses associated with the transaction. The purchase price was
determined based on arm's length negotiations with unaffiliated third parties.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements provide such persons with
indemnification, to the maximum extent permitted by the Company's Articles or
Bylaws or by the California General Corporation Law, against all expenses,
claims, damages, judgments and other amounts (including amounts paid in
settlement) for which such persons become liable as a result of acting on
behalf of the Company, subject to certain limitations.
46
<PAGE>
In August 1996, the Company repurchased 5,000 shares of its common stock
from one of its directors, William C. Lavin, upon his resignation, for a total
of $74,970, which price was determined based on book value per share in
accordance with the terms of his stock purchase agreement. This amount is
payable to Mr. Lavin pursuant to the terms of a promissory note. The note
bears interest at 8.25% per annum over five years and principal and interest
thereunder are payable monthly. The description of this transaction does not
reflect the Company's recapitalization, pursuant to which each outstanding
share of common stock was exchanged for 40 shares of Class A Common Stock and
60 shares of Class B Common Stock.
47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of March 31, 1998, and as adjusted to
reflect the sale of Class B Common Stock offered hereby, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than five percent of
the outstanding shares of Common Stock; (ii) each director of the Company;
(iii) each of the Named Executive Officers; (iv) all officers and directors of
the Company as a group; and (v) each of the Selling Shareholders. Unless
otherwise indicated below, to the knowledge of the Company, all persons listed
below have sole voting and investment power with respect to their shares of
Common Stock, except to the extent authority is shared by spouses under
applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES OF AFTER THE OFFERING(1)
---------------------------------- CLASS B ----------------------------------
NUMBER NUMBER PERCENT OF COMMON NUMBER NUMBER PERCENT OF
EXECUTIVE OFFICERS, DIRECTORS OF CLASS A OF CLASS B TOTAL VOTING STOCK OF CLASS A OF CLASS B TOTAL VOTING
AND 5% STOCKHOLDERS(2) SHARES SHARES POWER(3) OFFERED SHARES SHARES POWER(3)
- ----------------------------- ---------- ---------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Bildner(4)..... 1,659,762 560,000 70.1% 75,000 1,659,762 485,000 64.9%
William G. Barton(4).... 1,659,762 545,524 70.1 150,000 1,659,762 395,524 64.7
George K. Ross.......... - 89,762 * 10,000 - 79,762 *
F. Thomas Latham........ - 22,500 * - - 22,500 *
Bryan McCaul............ 115,070 333,333 6.1 100,000 115,070 233,333 5.3
Bradley H. Nickels...... 115,070 333,333 6.1 150,000 115,070 183,333 5.1
Samuel Cabot III........ - 8,810 * - - 8,810 *
Ronald L. Rossetti...... - 14,524 * - - 14,524 *
All officers and
directors as a group(16
persons)............... 1,659,762 1,966,119 75.0 515,000 1,659,762 1,451,119 67.8
<CAPTION>
OTHER SELLING
SHAREHOLDERS(2)(5)
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Albemarle Partners...... - 10,000 * 5,000 - 5,000 *
Andrew Armstrong(6)..... - 15,000 * 15,000 - 0 -
Greg Bowen.............. 119,303 301,666 6.2 125,000 119,303 176,666 5.3
Robert G. Butorac....... 93,425 301,666 5.1 150,000 93,425 151,666 4.2
James B. Hinson......... 97,754 301,666 5.3 125,000 97,754 176,666 4.4
Wilson Hitchings........ 93,425 303,333 5.1 150,000 93,425 153,333 4.2
Leon Normand............ 93,425 303,333 5.1 125,000 93,425 178,333 4.3
Deborah Rogers.......... - 55,000 * 30,000 - 25,000 *
Tom Thomson(6).......... - 15,000 * 15,000 - 0 -
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from March 31, 1998 are considered outstanding
for the purpose of calculating the percentage of voting power of such
person but not for the purpose of calculating the percentage of voting
power of any other person. The number of shares subject to stock options
that are exercisable within 60 days of March 31, 1998 is as follows: Mr.
Bildner, 10,000 shares of Class A Common Stock and 80,000 shares of Class
B Common Stock; Mr. Barton, 10,000 shares of Class A Common Stock and
60,000 shares of Class B Common Stock; Mr. Ross, 85,000 shares of Class B
Common Stock; Mr. Latham, 22,500 shares of Class B Common Stock; Mr.
McCaul, 33,333 shares of Class B Common Stock; Mr. Nickels, 33,333 shares
of Class B Common Stock; Mr. Cabot, 5,000 shares of Class B Common Stock;
Mr. Rossetti, 5,000 shares of Class B Common Stock; Mr. Armstrong, 15,000
shares of Class B Common Stock; Mr. Bowen, 1,666 shares of Class B Common
Stock; Mr. Butorac, 1,666 shares of Class B Common Stock; Mr. Hinson,
1,666 shares of Class B Common Stock; Mr. Hitchings, 3,333 shares of Class
B Common Stock; Mr. Normand, 3,333 shares of Class B Common Stock; Ms.
Rogers, 55,000 shares of Class B Common Stock; Mr. Thomson, 15,000 shares
of Class B Common Stock; and all officers and directors as a group, 20,000
shares of Class A Common Stock and 382,499 shares of Class B Common Stock.
(2) The address of each of the officers, directors and Selling Shareholders
listed above, other than Albemarle Partners, is c/o Tier Technologies,
Inc., 1350 Treat Boulevard, Suite 250, Walnut Creek, CA 94596.
(3) In calculating the percentage of total voting power, the voting power of
shares of Class A Common Stock (ten votes per share) and Class B Common
Stock (one vote per share) is aggregated. Applicable percentage of
beneficial ownership is based on 7,781,535 shares of Class B Common Stock
outstanding as of March 31, 1998 (adjusted to reflect the issuance of
48,768 shares in the SFC acquisition, but excluding 70,000 shares to be
issued upon exercise of outstanding options upon completion of this
offering) and 9,626,535 shares of Class B Common Stock outstanding after
completion of this offering (which includes the shares issued in the SFC
acquisition, the options exercised in connection with this offering and
the shares to be sold by the Company).
(4) Includes all shares of Class A Common Stock held in the Voting Trust as to
which Messrs. Bildner and Barton exercise voting control as trustees.
Messrs. Bildner and Barton disclaim beneficial ownership of 1,219,762
shares of Class A Common Stock. See "Description of Capital Stock--Voting
Trust."
(5) Employees of the Company, with the exception of Albemarle Partners.
(6) Includes options to purchase 1,252 shares of Class B Common Stock which
will vest more than 60 days after March 31, 1998, but prior to the
consummation of the offering.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 1,659,762 shares of
Class A Common Stock, without par value, 42,600,000 shares of Class B Common
Stock, without par value, and 4,579,047 shares of Preferred Stock. As of March
31, 1998, there were 1,639,762 shares of Class A Common Stock outstanding held
by a voting trust for the benefit of ten shareholders, and 7,732,767 shares of
Class B Common Stock outstanding held by 54 holders of record.
CLASS A AND CLASS B COMMON STOCK
Voting Rights. Each share of Class A Common Stock entitles the holder to ten
votes and each share of Class B Common Stock entitles the holder to one vote
on all matters submitted to a vote of the shareholders. Except as described
below, holders of the Class A Common Stock and Class B Common Stock vote
together as a single class on all matters presented for a vote of the
shareholders. However, holders of the Class B Common Stock, voting as a
separate class, elect that number of Directors which is the largest integral
number which is less than 50% of the authorized number of Directors (i.e. two
of the present five directors) (the "Class B Specified Voting Right"). The
holders of Class A and Class B Common Stock, voting together, elect the
remaining members of the Board (i.e. three of the present five directors).
Immediately following this offering, the holders of Class A Common Stock will
retain effective control, and will continue to direct the business, management
and policies of the Company through holding 63.0% of the combined voting power
of the outstanding Class A and Class B Common Stock and the ability to elect
three of the currently authorized five members of the Board of Directors. The
holders of the Class A Common Stock also hold a number of shares of Class B
Common Stock that will represent 21.8% of the shares of Class B Common Stock
outstanding after this offering.
Directors may be removed with or without cause by the holders of the class
of stock that elected them or, to the extent permitted by applicable law, with
cause by the Board of Directors. A vacancy on the Board created by the removal
or resignation of a director or an increase in the authorized number of
directors may be filled either by directors in office or, if the directors
have not filled the vacancy, by the shareholders. Elections or appointments
for any such vacancies shall be made in accordance with the Class B Specified
Voting Right.
Voting Trust. All of the current holders of Class A Common Stock (the
"Beneficiaries") have transferred their Class A Common Stock into a Voting
Trust. James L. Bildner and William G. Barton 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. Shares held in the Voting Trust
are evidenced by a voting trust certificate. The Voting Trust has a term of
ten 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 original or an
extended 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.
Shares of Class A Common Stock transferred to Messrs. Bildner and Barton
remain within the Voting Trust; however, Messrs. Bildner and Barton have each
agreed with the Underwriters that in the event any shares of Class A Common
Stock are transferred to him (other than a transfer by Messrs. Bildner or
Barton to the other), he shall immediately convert all of such transferred
shares into shares of Class B Common Stock, which will cause such shares to be
removed from the Voting Trust. Shares of Class A Common Stock transferred to
any Beneficiary other than Messrs. Bildner and Barton, other than transfers of
Class A Common Stock into the Voting Trust or a transfer of such shares from
the Voting Trust back to the person or entity which transferred the shares
into the Voting Trust, will result in the conversion of such shares into an
equal number of shares of Class B Common Stock.
49
<PAGE>
Buy-Sell Agreement. In November 1997, Messrs. Bildner and Barton entered
into a buy-sell agreement ("Buy-Sell Agreement") respecting their ownership of
shares of Class A Common Stock. Under the terms of the Buy-Sell Agreement,
they each agree, (i) that for five years from the date of the Buy-Sell
Agreement they will not voluntarily transfer their shares of Class A Common
Stock, or their voting trust certificates, if the transfer would result in a
conversion of Class A Common Stock to Class B Common Stock, and that after
five years from the date of the Buy-Sell Agreement, they grant each other a
right of first refusal on such shares on any such transfer; (ii) that on the
death of one of them, the other has an obligation to purchase the shares of
Class A Common Stock (or the voting trust certificate for such shares) of the
deceased party; (iii) that they will maintain life insurance policies at their
own expense on each others' lives to fund in part the obligation to purchase
the shares at the death of the other; (iv) that the Buy-Sell Agreement
terminates on the termination of the Voting Trust or if earlier, on the death
of both parties; (v) that the price for the shares of Class A Common Stock (or
the voting trust certificates) is the market price of the shares of Class B
Common Stock on the date that the right or obligation to purchase arises; and
(vi) that there is no restriction on the parties' ability to amend the Buy-
Sell Agreement without the consent of any other person.
Dividends. Holders of Class A and Class B Common Stock are entitled to
receive dividends at the same rate if, as and when declared by the Board of
Directors of the Company out of any funds legally available therefore, subject
to the dividend rights of any Preferred Stock that may be issued and
outstanding. If a dividend is declared on either class of Common Stock, a
proportionate dividend must be paid to the other. No dividend may be declared
or paid in shares of Class A Common Stock.
Convertibility. Each share of Class A Common Stock is convertible at any
time at the option of the holder into Class B Common Stock on a share-for-
share basis. Shares of Class A Common Stock will be automatically converted
into shares of Class B Common Stock on the happening of certain transfers
described below. Transfers of shares of Class A Common Stock are also subject
to the terms of the Voting Trust Agreement. The Class B Common Stock has no
conversion rights.
Each share of Class A Common Stock shall automatically be converted into
Class B Common Stock, on a share-for-share basis, in the event that the
beneficial or record ownership of such share of Class A Common Stock shall be
transferred (including, without limitation, by way of gift, settlement, will
or intestacy) to any person or entity except for (i) transfers to Messrs.
Bildner and Barton, subject to Messrs. Bildner and Barton's agreement with the
Underwriters that in the event any shares of Class A Common Stock are
transferred to him (other than a transfer by Messrs. Bildner or Barton to the
other), he shall immediately convert all of such transferred shares into
shares of Class B Common Stock, which will cause such shares to be removed
from the Voting Trust; or (ii) a transfer of Class A Common Stock into the
Voting Trust, or a transfer of such shares from the Voting Trust back to the
person or entity which transferred the shares into the Voting Trust.
Liquidation Rights. In the event of the liquidation of the Company, after
satisfaction of amounts payable to creditors and distribution to the holders
of outstanding Preferred Stock, if any, of amounts to which they may be
preferentially entitled, holders of the Class A Common Stock and Class B
Common Stock are entitled to share ratably in the assets available for
distribution to the shareholders.
Other Provisions. There are no preemptive rights to subscribe to any
additional securities which the Company may issue and there are no redemption
provisions or sinking fund provisions applicable to the Class A or Class B
Common Stock, nor is either class subject to calls or assessments by the
Company. All outstanding shares are, and all shares to be outstanding upon
completion of this offering will be, legally issued, fully paid and
nonassessable.
50
<PAGE>
PREFERRED STOCK
Under the Articles, the Board of Directors has the authority, without
further action by the shareholders, to issue up to 4,579,047 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock and to fix the number of shares constituting any series and
the designations of such series. The issuance of Preferred Stock with voting
or conversion rights could adversely affect the voting power or other rights
of the holders of Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present intention to issue any Preferred Stock.
BYLAW PROVISIONS
The Company's Bylaws provide that special meetings of the shareholders may
be called only by the Board of Directors, the Chairman of the Board, the
President, the Chief Executive Officer of the Company, or by one or more
shareholders holding shares entitled to cast not less than 10% of the
aggregate votes entitled to be cast at such meeting. The Bylaws also provide
that any action which may be taken at any meeting of shareholders, subject to
certain exceptions relating to the election of directors, may be taken without
a meeting if written consents approving the action are signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to take such action at a meeting of shareholders.
Accordingly, the holders of the Class A Common Stock may take certain actions
by written consent without formally convening a meeting of shareholders and
without giving prior notice to the holders of the Class B Common Stock. The
Bylaws provide that shareholders may not bring business before or nominate
directors at a meeting of shareholders unless certain advance notice
requirements are satisfied. In addition, the Articles and Bylaws provide for
the automatic elimination of the cumulative voting rights of shareholders in
the election of directors as soon as the Company has 800 shareholders of
record. Without cumulative voting, the holders of a majority of the voting
power of the Common Stock can determine the composition of the Board of
Directors.
REGISTRATION RIGHTS
The holders ("Registration Rights Holders") of 415,953 shares of Class B
Common Stock are entitled to certain rights with respect to registration of
such shares under the Securities Act, pursuant to an Investors' Rights
Agreement dated July 28, 1997. In particular, under certain circumstances and
subject to certain conditions, the Registration Rights Holders can require the
Company to register shares under the Act, which right becomes exercisable one
year from the closing of this offering. The Registration Rights Holders were
also granted certain "piggy-back" registration rights, whereby on two
occasions during the period beginning on July 28, 1997 and ending on July 27,
2002, they may include shares in any Company registration of shares of Common
Stock under the Securities Act, other than a registration relating solely to
employee benefit plans or a registration on a form which does not permit the
registration of shares by selling shareholders, and subject to the ability of
the Underwriters to limit the participation of the Registration Rights Holders
due to marketing concerns. All Registration Rights Holders have waived
registration rights with respect to this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class B Common Stock is ChaseMellon
Shareholder Services ("Chase"). Chase's address is 235 Montgomery Street, 23rd
Floor, San Francisco, California 94104, and its telephone number is (415) 743-
1444.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 1,639,762 shares of Class A Common Stock and an aggregate of
9,626,535 shares of Class B Common Stock, based upon the number of shares
outstanding as of May 7, 1998. The Class A Common Stock is convertible on a
share-for-share basis into Class B Common Stock and must be converted to
effect any public sale of such stock. In addition to the 3,000,000 shares sold
in this offering, 3,910,666 shares of the outstanding Class B Common Stock
(which were sold in the Company's initial public offering or issued upon
exercise of stock options covered by a registration statement) will be freely
tradeable without restriction or further registration under the Securities Act
unless such shares are purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act. The remaining 2,715,869
shares of Class B Common Stock and all of the outstanding shares of Class A
Common Stock held by existing shareholders are restricted securities as that
term is defined under the Securities Act (the "Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act. As a result of contractual restrictions and
provisions of Rule 144, 144(k) and 701, additional shares will be available
for sale in the public market as follows: (i) 14,697 shares of Class B Common
Stock will be eligible for immediate sale upon completion of this offering;
(ii) 348,759 shares of Class B Common Stock will be eligible for sale under
Rule 144 after July 28, 1998; (iii) 860,000 shares of Class A Common Stock and
763,620 shares of Class B Common Stock will be eligible for sale upon
expiration of lock-up agreements 90 days after the date of this Prospectus;
(iv) 779,762 shares of Class A Common Stock and 1,488,812 shares of Class B
Common Stock will be eligible for sale upon expiration of lock-up agreements
on December 17, 1998; and (v) the remaining 99,981 shares of Class B Common
Stock will be eligible for sale from time to time thereafter upon expiration
of their respective one-year holding periods under Rule 144. Sales of
substantial numbers of shares of Class B Common Stock of the Company in the
public market following this offering could adversely affect the market price
of the Class B Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates of the
Company, whose Restricted Shares have been fully paid for and held for at
least a year from the later of the date of the issuance by the Company or
acquisition from an affiliate of the Company, may sell such securities in
brokers' transactions or directly to market makers, provided the number of
shares sold in any three-month period does not exceed the greater of 1% of the
then outstanding shares of the Class B Common Stock (approximately 96,626
shares, based on the number of shares to be outstanding after this offering)
or the average weekly trading volume in the public market during the four
calendar weeks preceding the filing of the seller's Form 144. Sales under Rule
144 are also subject to certain notice of sale requirements and availability
of current public information concerning the Company. After two years have
elapsed from the later of the issuance of Restricted Shares by the Company or
their acquisition from an affiliate of the Company, such shares may be sold
without limitation, pursuant to Rule 144(k), by persons who have not been
affiliates of the Company for at least three months. Rule 144 also provides
that affiliates who are selling shares that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement.
Restricted Shares that have been issued in reliance on Rule 701 (such as
shares of Class B Common Stock issued under the Plan) may be resold by persons
other than affiliates of the Company, subject only to the manner of sale
provisions of Rule 144, and may be resold by affiliates of the Company under
Rule 144 without compliance with its one-year holding period requirement.
Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of their shares to certain "qualified institutional buyers," as
defined in Rule 144A.
52
<PAGE>
Certain shareholders of the Company hold registration rights. See
"Description of Capital Stock--Registration Rights." If such holders exercise
their demand registration rights and cause a large number of shares to be
registered and sold in the public market, such sales may have a material
adverse effect on the market price of the Class B Common Stock. If the Company
is required in a Company-initiated registration to register the shares held by
such holders pursuant to the exercise of their piggyback registration rights,
such sales may have a material adverse effect on the Company's ability to
raise needed capital.
At March 31, 1998, the Company had outstanding options to purchase 2,008,346
shares of Class B Common Stock. The Company has filed a Form S-8 registration
statement under the Securities Act to register all shares of Class B Common
Stock issuable under the Plan and the Purchase Plan. Shares of Class B Common
Stock issued pursuant to the S-8 registration statement will be eligible for
resale in the public market, subject to the Rule 144 limitations applicable to
affiliates of the Company.
Sales of substantial numbers of shares of Class B Common Stock in the public
market could adversely affect the market price of the Class B Common Stock and
could impair the Company's ability to raise capital through a sale of its
equity securities.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Adams,
Harkness & Hill, Inc. and NationsBanc Montgomery Securities LLC are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company and the Selling Shareholders, the respective numbers of shares of
Class B Common Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CLASS B
UNDERWRITER COMMON STOCK
----------- -----------------
<S> <C>
Adams, Harkness & Hill, Inc................................
NationsBanc Montgomery Securities LLC......................
---------
Total.................................................... 3,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all shares offered hereby, if
any are taken.
The Underwriters propose to offer the shares of Class B Common Stock in part
directly to the public at the public offering price set forth on the cover
page of this Prospectus, and in part to certain securities dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Class B Common Stock
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 450,000
additional shares of Class B Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,000,000 shares of Class
B Common Stock offered hereby. The Underwriters may exercise such option only
to cover over-allotments in connection with the sale of the 3,000,000 shares
of Class B Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell, or otherwise
dispose of any shares of Class B Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of Adams,
Harkness & Hill, Inc., except for the shares of Class B Common Stock offered
hereby and except that the Company may issue securities pursuant to the Plan
and the Purchase Plan. In addition, the Company's directors, executive
officers and certain other of the Company's officers and the Selling
Shareholders have agreed with the Underwriters not to offer to sell, contract
to sell, or otherwise sell, dispose of, loan, pledge, or grant any rights with
respect to any shares of Class A or Class B Common Stock owned beneficially by
them, other than as a bona fide gift to a person or entity who agrees in
writing to be bound the foregoing restrictions, without the prior written
consent of Adams, Harkness & Hill, Inc.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
54
<PAGE>
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the Class
B Common Stock during the "cooling off" period immediately preceding the
commencement of sales in the offering. The Commission has, however, adopted
exemptions from these rules that permit passive market making under certain
conditions. These rules permit an Underwriter to continue to make a market
subject to the conditions, among others, that its bid not exceed the highest
bid by a market maker not connected with the offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to
these exemptions, certain Underwriters, selling group members (if any), or
their respective affiliates may engage in passive market making in the Class B
Common Stock during the cooling off period.
In order to facilitate the offering of the Class B Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class B Common Stock. Specifically, the Underwriters
may over-allot the Class B Common Stock in connection with this offering,
creating a short position in the Class B Common Stock for their own account.
In addition, to cover over-allotments or to stabilize the price of the Class B
Common Stock, the Underwriters may bid for, and purchase, shares of the Class
B Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing Class B
Common Stock in this offering, if the Underwriters repurchase previously
distributed Class B Common Stock in transactions to cover their short
positions, in stabilization transactions or otherwise. Finally, the
Underwriters may bid for, and purchase, shares of the Class B Common Stock in
market making transactions and impose penalty bids. These activities may
stabilize or maintain the market price of the Class B Common Stock above the
market level that may otherwise prevail. The Underwriters are not required to
engage in these activities, and may terminate any such activities at any time.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against, or contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
In July 1997, the Company issued 420,953 shares of Series A Preferred Stock,
resulting in aggregate proceeds of approximately $2.2 million. Certain
employees of Adams, Harkness & Hill, Inc., one of the Representatives,
purchased an aggregate of 38,574 shares of the Company's Series A Preferred
Stock for an aggregate purchase price of approximately $203,000, which was
converted into 38,574 shares of the Company's Class B Common Stock upon
completion of the Company's initial public offering. Such individuals also
agreed not to offer, sell, contract to sell or otherwise dispose of such
shares of Common Stock until December 17, 1998. For services as placement
agent in connection with the Series A Preferred Stock financing, Adams,
Harkness & Hill, Inc. received approximately $100,000 (approximately $68,000
net of certain expenses). In August 1997, AH&H Partners Fund Limited
Partnership, a related party to Adams, Harkness & Hill, Inc., purchased 95,238
shares of the Company's Class B Common Stock from certain of the Company's
shareholders for an aggregate purchase price of approximately $500,000. See
"Certain Transactions." In connection with the Company's initial public
offering, AH&H Partners Fund Limited Partnership agreed not to offer, sell,
contract to sell or otherwise dispose of such shares of Common Stock until
December 17, 1998.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Paul, Hastings, Janofsky & Walker LLP, San Francisco,
California. Certain legal matters with respect to this offering are being
passed upon for the Underwriters by Cooley Godward LLP, San Diego, California.
55
<PAGE>
EXPERTS
The Consolidated Financial Statements of Tier Technologies, Inc. as of
December 31, 1996 and September 30, 1997 and each of the two years in the
period ended December 31, 1996 and for the nine-month period ended September
30, 1997 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
The financial statements of Albanycrest Limited as of June 30, 1997 and for
the period from November 13, 1996 (inception) through June 30, 1997 appearing
in this Prospectus and the Registration Statement have been audited by Ernst &
Young, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and audit.
The Consolidated Financial Statements of Sancha Computer Group Pty Ltd. as
of June 30, 1997 and for the years ended June 30, 1995, 1996 and 1997
appearing in this Prospectus and the Registration Statement have been audited
by Ernst & Young, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and audit.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-1
(herein together with all amendments thereto referred to as the "Registration
Statement") filed by the Company with the Commission under the Securities Act.
This Prospectus does not contain all the information contained in the
Registration Statement, certain portions of which are omitted as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement including the exhibits and schedules thereto, which
may be inspected at the Commission's offices without charge or copies of which
may be obtained from the Commission upon payment of prescribed fees.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
Commission. Reports, proxy and information statements and other information
filed by the Company with the Commission pursuant to the informational
requirements of the Exchange Act, can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the Regional Offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661. Copies thereof can also be obtained by written request addressed to the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
In addition, the Registration Statement, including the exhibits and schedules
thereto, and such reports, proxy and information statements and other
information filed electronically by the Company are also available at the
Commission's website at http://www.sec.gov.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Shareholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
ALBANYCREST LIMITED
Report of Independent Auditors........................................... F-21
Balance Sheet............................................................ F-22
Statement of Income...................................................... F-23
Statement of Shareholders' Equity........................................ F-24
Statement of Cash Flows.................................................. F-25
Notes to Financial Statements............................................ F-26
SANCHA COMPUTER GROUP PTY LTD
Report of Independent Auditors........................................... F-28
Consolidated Balance Sheets.............................................. F-29
Consolidated Statements of Income........................................ F-30
Consolidated Statements of Stockholders' Equity.......................... F-31
Consolidated Statements of Cash Flows.................................... F-32
Notes to Consolidated Financial Statements............................... F-33
SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Introduction............................................................. F-36
Selected Unaudited Pro Forma Condensed Consolidated Statements of Income
for the Nine Months Ended September 30, 1997............................ F-37
Selected Unaudited Pro Forma Condensed Consolidated Statements of Income
for the Six Months Ended March 31, 1998................................. F-38
Notes to the Selected Unaudited Pro Forma Condensed Consolidated
Financial Statements.................................................... F-39
</TABLE>
F-1
<PAGE>
TIER TECHNOLOGIES, INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Tier Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Tier
Technologies, Inc. as of December 31, 1996 and September 30, 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for the years ended December 31, 1995 and 1996 and 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tier Technologies, Inc. at
December 31, 1996 and September 30, 1997, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1996 and for the
nine month period ended September 30, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
October 6, 1997
F-2
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, MARCH 31,
1996 1997 1998
------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 305,546 $ 106,435 $ 7,072,223
Short-term investments............... -- -- 8,222,879
Accounts receivable, net of allowance
for doubtful accounts of $0 in 1996,
$50,000 in 1997, and $100,000 in
1998................................ 2,978,119 5,905,809 9,224,369
Income taxes receivable.............. 26,750 693,235 --
Prepaid expenses and other current
assets.............................. 73,018 285,779 498,550
---------- ----------- -----------
Total current assets................... 3,383,433 6,991,258 25,018,021
Equipment and improvements, net........ 337,184 773,666 1,274,412
Notes and accrued interest receivable
from related parties.................. -- 1,011,650 1,178,329
Deferred financing costs............... -- 223,597 --
Acquired intangible assets, net........ 347,833 1,754,579 7,282,531
Other assets........................... 64,215 68,060 635,153
---------- ----------- -----------
Total assets........................... $4,132,665 $10,822,810 $35,388,446
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank lines of
credit.............................. $ 223,116 $ 1,232,111 $ --
Accounts payable..................... 841,979 1,373,358 1,402,560
Accrued liabilities.................. 35,390 652,322 1,263,096
Accrued compensation and related
liabilities......................... 785,378 1,228,295 1,493,196
Income taxes payable................. -- -- 575,974
Deferred income...................... 54,309 33,762 81,091
Notes payable to current and former
shareholders........................ 69,487 52,704 32,319
Capital lease obligations due within
one year............................ 42,690 31,198 32,566
Deferred income taxes................ 139,663 153,116 3,969
---------- ----------- -----------
Total current liabilities.............. 2,192,012 4,756,866 4,884,771
Borrowings under bank lines of credit,
less current portion.................. 432,916 1,526,441 --
Accrued royalties...................... -- 59,385 59,385
Notes payable to current and former
shareholders, less current portion.... 96,960 57,244 51,988
Capital lease obligations, less current
portion............................... 46,193 24,944 76,659
Deferred income taxes.................. 336,631 234,656 120,548
Commitments and contingent liabilities
Shareholders' equity:
Convertible preferred stock, no par
value; Authorized shares--4,579,047
Issued and outstanding shares-- none
in 1996, 420,953 in 1997, none in
1998................................ -- 1,892,223 --
Common stock, no par value;
Authorized shares-- 44,259,762
Issued and outstanding shares--
4,300,000 in 1996, 5,620,000 in
1997, and 9,372,529 in 1998......... 78,812 2,948,852 29,543,995
Notes receivable from shareholders... (94,830) (2,253,430) (2,158,600)
Foreign currency translation
adjustment.......................... -- (40,198) (96,342)
Retained earnings.................... 1,043,971 1,615,827 2,906,042
---------- ----------- -----------
Total shareholders' equity............. 1,027,953 4,163,274 30,195,095
---------- ----------- -----------
Total liabilities and shareholders'
equity................................ $4,132,665 $10,822,810 $35,388,446
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
----------------------- ----------------------- -----------------------
1995 1996 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $12,373,309 $16,197,466 $11,790,231 $22,478,643 $11,206,323 $21,822,563
Cost of revenues........ 9,065,832 11,616,662 8,668,805 14,916,846 7,676,379 14,436,706
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 3,307,477 4,580,804 3,121,426 7,561,797 3,529,944 7,385,857
Costs and expenses:
Selling and marketing.. 626,954 975,236 576,967 1,836,082 871,016 1,416,145
General and
administrative........ 1,560,589 2,573,942 1,774,601 4,397,315 2,007,071 3,703,190
Depreciation and
amortization.......... 45,018 80,350 55,546 273,676 83,318 422,851
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.. 1,074,916 951,276 714,312 1,054,724 568,539 1,843,671
Interest income......... 435 3,866 3,065 70,429 15,611 407,799
Interest expense........ 61,504 77,625 53,468 169,299 67,251 83,039
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 1,013,847 877,517 663,909 955,854 516,899 2,168,431
Provision for income
taxes.................. 570,336 351,007 265,563 383,998 206,398 878,216
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 443,511 $ 526,510 $ 398,346 $ 571,856 $ 310,501 $ 1,290,215
=========== =========== =========== =========== =========== ===========
Basic net income per
share.................. $ 0.04 $ 0.11 $ 0.08 $ 0.11 $ 0.07 $ 0.17
=========== =========== =========== =========== =========== ===========
Shares used in computing
basic net income per
share.................. 10,061,644 4,987,946 5,219,780 5,399,560 4,618,791 7,642,587
=========== =========== =========== =========== =========== ===========
Diluted net income per
share.................. $ 0.04 $ 0.10 $ 0.07 $ 0.10 $ 0.06 $ 0.14
=========== =========== =========== =========== =========== ===========
Shares used in computing
diluted net income per
share.................. 10,061,644 5,245,810 5,477,645 5,794,155 4,793,062 8,952,682
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, THE NINE MONTHS ENDED SEPTEMBER
30, 1997, AND THE SIX MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTES FOREIGN
-------------------- ----------------------------------------------- RECEIVABLE CURRENCY
CLASS A CLASS B FROM TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS ADJUSTMENT EARNINGS
-------- ---------- ---------- ---------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............. -- $ -- 4,600,000 $ 46,000 6,900,000 $ 69,000 $ -- $ -- $ 73,950
Retirement of
common stock and
assumption of
liabilities by
Tier Group
partners upon
the dissolution
of the
partnership..... -- -- (2,200,000) 82,662 (3,300,000) 123,993 (94,830) -- --
Issuance of
common stock for
cash and notes
receivable...... -- -- 200,000 14,644 300,000 21,966 (31,610) -- --
Repurchase of
common stock.... -- -- (400,000) (30,759) (600,000) (46,139) -- -- --
Net income...... -- -- -- -- -- -- -- -- 443,511
-------- ---------- ---------- ---------- ---------- ----------- ----------- -------- ----------
Balance at
December 31,
1995............. -- -- 2,200,000 112,547 3,300,000 168,820 (126,440) -- 517,461
Repurchase of
common stock.... -- -- (480,000) (81,022) (720,000) (121,533) 31,610 -- --
Net income...... -- -- -- -- -- -- -- -- 526,510
-------- ---------- ---------- ---------- ---------- ----------- ----------- -------- ----------
Balance at
December 31,
1996............. -- -- 1,720,000 31,525 2,580,000 47,287 (94,830) -- 1,043,971
Issuance of
Series A
convertible
preferred stock
for cash, net of
issuance costs
of $317,778..... 420,953 1,892,223 (95,238) (1,746) 95,238 1,746 -- -- --
Exercise of
stock options... -- -- 660,000 1,350,040 660,000 846,000 (2,196,040) -- --
Tax benefit of
exercise of
stock options... -- -- -- 269,600 -- 404,400 -- -- --
Payment on notes
receivable...... -- -- -- -- -- -- 37,440 -- --
Net income...... -- -- -- -- -- -- -- -- 571,856
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- (40,198) --
-------- ---------- ---------- ---------- ---------- ----------- ----------- -------- ----------
Balance at
September 30,
1997............. 420,953 1,892,223 2,284,762 1,649,419 3,335,238 1,299,433 (2,253,430) (40,198) 1,615,827
Exercise of
employee stock
options
(unaudited)..... -- -- -- -- 45,363 145,162 -- -- --
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock
(unaudited)..... (420,953) (1,892,223) (645,000) (11,822) 1,065,953 1,904,045 -- -- --
Offering
proceeds, net of
issuance costs
of $3,605,241
(including
underwriter's
over allotment
option)
(unaudited)..... -- -- -- -- 3,235,000 23,892,258 -- -- --
Payments on
notes receivable
(unaudited)..... -- -- -- -- -- -- 94,830 -- --
Issuance of
Class B common
stock in
business
combination
(unaudited)..... -- -- -- -- 51,213 665,500 -- -- --
Net income
(unaudited)..... -- -- -- -- -- -- -- -- 1,290,215
Foreign currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- (56,144) --
-------- ---------- ---------- ---------- ---------- ----------- ----------- -------- ----------
Balance as of
March 31, 1998
(unaudited)..... -- $ -- 1,639,762 $1,637,597 7,732,767 $27,906,398 $(2,158,600) $(96,342) $2,906,042
======== ========== ========== ========== ========== =========== =========== ======== ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1994............. $ 188,950
Retirement of
common stock and
assumption of
liabilities by
Tier Group
partners upon
the dissolution
of the
partnership..... 111,825
Issuance of
common stock for
cash and notes
receivable...... 5,000
Repurchase of
common stock.... (76,898)
Net income...... 443,511
-------------
Balance at
December 31,
1995............. 672,388
Repurchase of
common stock.... (170,945)
Net income...... 526,510
-------------
Balance at
December 31,
1996............. 1,027,953
Issuance of
Series A
convertible
preferred stock
for cash, net of
issuance costs
of $317,778..... 1,892,223
Exercise of
stock options... --
Tax benefit of
exercise of
stock options... 674,000
Payment on notes
receivable...... 37,440
Net income...... 571,856
Foreign currency
translation
adjustment...... (40,198)
-------------
Balance at
September 30,
1997............. 4,163,274
Exercise of
employee stock
options
(unaudited)..... 145,162
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock
(unaudited)..... --
Offering
proceeds, net of
issuance costs
of $3,605,241
(including
underwriter's
over allotment
option)
(unaudited)..... 23,892,258
Payments on
notes receivable
(unaudited)..... 94,830
Issuance of
Class B common
stock in
business
combination
(unaudited)..... 665,500
Net income
(unaudited)..... 1,290,215
Foreign currency
translation
adjustment
(unaudited)..... (56,144)
-------------
Balance as of
March 31, 1998
(unaudited)..... $30,195,095
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
---------------------- ----------------------- ------------------------
1995 1996 1996 1997 1997 1998
----------- --------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............. $ 443,511 $ 526,510 $ 398,346 $ 571,856 $ 310,501 $ 1,290,215
Adjustments to
reconcile net income
to net cash (used in)
provided by operating
activities:
Depreciation and
amortization.......... 45,018 80,350 55,547 273,676 82,430 409,161
Provision for doubtful
accounts.............. -- -- -- 50,000 62,836 50,000
Deferred income taxes.. 570,336 (94,042) -- (88,522) (94,042) (263,255)
Change in operating
assets and
liabilities:
Accounts receivable... (1,231,926) (420,868) (634,325) (2,739,995) (1,962,357) (3,368,560)
Income taxes
receivable........... -- (26,750) (5,261) (666,485) (725,933) --
Prepaid expenses and
other current
assets............... 11,592 (72,218) (100,771) (213,861) (648,915) (84,162)
Other assets.......... (9,405) (31,234) 281 13,312 (68,336) (533,890)
Accounts payable and
accrued liabilities.. 14,661 487,793 534,951 1,234,267 1,999,364 1,313,500
Income taxes payable.. -- -- -- -- -- 1,269,209
Deferred income....... (20,972) 41,438 -- (20,547) -- 47,329
----------- --------- --------- ----------- ----------- -----------
Net cash (used in)
provided by operating
activities............. (177,185) 490,979 248,768 (1,586,299) (1,044,452) 129,547
INVESTING ACTIVITIES
Purchase of equipment
and improvements....... (116,039) (145,449) (49,716) (553,867) (171,387) (600,220)
Notes and accrued
interest receivable
from related parties... -- -- -- (1,027,706) -- (166,679)
Business combinations,
net of cash acquired... -- (152,008) -- (1,384,387) (1,166,396) (5,492,123)
Purchases of available-
for-sale securities.... -- -- -- -- -- (9,283,078)
Sales of available-for-
sale securities........ -- -- -- -- -- 1,060,199
Other assets............ -- -- -- -- -- (179,813)
----------- --------- --------- ----------- ----------- -----------
Net cash used in
investing activities... (116,039) (297,457) (49,716) (2,965,960) (1,337,783) (14,661,714)
FINANCING ACTIVITIES
Borrowings under bank
lines of credit........ 443,322 688,116 312,307 10,356,122 1,903,647 6,912,010
Payment of borrowings on
bank lines of credit... (160,000) (450,000) (400,000) (8,253,602) (134,058) (9,670,562)
Repurchase of common
stock.................. (36,898) (36,635) (36,635) -- -- --
Net proceeds from
issuance of common
stock.................. 5,000 -- -- -- -- 23,892,258
Net proceeds from sale
of preferred stock..... -- -- -- 1,892,223 -- --
Repayment by shareholder
on note receivable..... -- -- -- 37,440 -- 94,830
Deferred financing
costs.................. -- -- -- (223,597) -- 223,597
Exercise of stock
options................ -- -- -- -- -- 145,162
Tax benefit of exercise
of stock options....... -- -- -- 674,000 674,000 --
Payments on capital
lease obligations...... (15,517) (46,594) (40,240) (32,741) (17,267) (17,555)
Borrowings under
(payments on) notes
payable to
shareholders........... 35,000 (42,863) (34,484) (56,499) (20,286) (25,641)
----------- --------- --------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. 270,907 112,024 (199,052) 4,393,346 2,406,036 21,554,099
Effect of exchange rate
changes on cash........ -- -- -- (40,198) 538 (56,144)
----------- --------- --------- ----------- ----------- -----------
Net (decrease) increase
in cash and cash
equivalents............ (22,317) 305,546 -- (199,111) 24,339 6,965,788
Cash and cash
equivalents at
beginning of period.... 22,317 -- -- 305,546 -- 106,435
----------- --------- --------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 305,546 $ -- $ 106,435 $ 24,339 $ 7,072,223
=========== ========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION
Cash paid during the
year for:
Interest paid.......... $ 54,760 $ 74,789 $ 53,468 $ 170,188 $ 64,717 $ 83,039
=========== ========= ========= =========== =========== ===========
Income taxes paid
(refunded), net....... $ 800 $ 472,600 $ 322,600 $ 465,000 $ 302,000 $ (127,495)
=========== ========= ========= =========== =========== ===========
Equipment acquired
under capital lease
obligations........... $ 130,512 $ 8,734 $ 8,734 $ -- $ -- $ 70,638
=========== ========= ========= =========== =========== ===========
Retirement of common
stock and assumption
of liabilities by Tier
Group partners upon
the dissolution of the
partnership........... $ 111,825 $ -- $ -- $ -- $ -- $ --
=========== ========= ========= =========== =========== ===========
Common stock issued in
exchange for notes
receivable............ $ 126,440 $ -- $ -- $ 2,196,040 $ 2,196,040 $ --
=========== ========= ========= =========== =========== ===========
Repurchase of common
stock in exchange for
forgiveness of notes
receivable............ $ -- $ 31,610 $ 31,610 $ -- $ -- $ --
=========== ========= ========= =========== =========== ===========
Repurchase of common
stock in exchange for
a note payable........ $ 40,000 $ 134,310 $ 134,310 $ -- $ -- $ --
=========== ========= ========= =========== =========== ===========
Accrued purchase price
and assumed
liabilities related to
business
combinations.......... $ -- $ 427,049 $ -- $ 715,949 $ 545,819 $ --
=========== ========= ========= =========== =========== ===========
Conversion of preferred
stock into common
stock................. $ -- $ -- $ -- $ -- $ -- $ 1,892,233
=========== ========= ========= =========== =========== ===========
Common stock issued in
business combination.. $ -- $ -- $ -- $ -- $ -- $ 665,500
=========== ========= ========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Tier Technologies, Inc. (the "Company") provides information technology
consulting, application development and software engineering services to large
companies and government entities.
The Company was formerly owned by Tier Group (a partnership) and its
partners. In November 1995, the partners of Tier Group transferred all of the
assets of the partnership to the Company and simultaneously dissolved the
partnership. In conjunction with this dissolution, certain partners assumed
the outstanding liabilities of Tier Group and other partners contributed
additional capital in the form of notes payable to the Company. As a result of
the transaction, the shares owned by Tier Group were retired and the partners
of Tier Group retained identical ownership and voting percentages. The
transferred assets and liabilities of Tier Group were recorded at historical
cost.
Basis of Presentation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. 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
credited or charged to shareholders' equity. Foreign currency transaction
gains and losses have not been material.
In September 1997, the Company changed its fiscal year end to September 30.
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 results of operations during the reporting period.
Actual results could differ from those estimates.
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and the six months ended March 31, 1997 and 1998 are unaudited but have
been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of its results of
operations and cash flows for this period. Operating results for the nine
months ended September 30, 1996 and 1997 and the six months ended March 31,
1997 and 1998 are not necessarily indicative of the results that may be
expected for any future periods.
Revenue Recognition
The majority of the Company's revenues are from time and material contracts
and are recognized as services are performed. Revenues from fixed price
contracts are recognized using the percentage-of-
F-7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. Actual results of contracts may differ from management's estimates and
such differences could be material to the consolidated financial statements.
Most of the Company's contracts are terminable by the client following limited
notice and without significant penalty to the client. The completion,
cancellation or significant reduction in the scope of a large project could
have a material adverse effect on the Company's business, financial condition
and results of operations. Unbilled receivables were $0, $676,021 and
$2,241,322 at December 31, 1996, September 30, 1997 and March 31, 1998,
respectively. An unbilled receivable from one client accounted for 11% and 16%
of total accounts receivable at September 30, 1997 and March 31, 1998,
respectively.
Revenues derived from governmental agencies were $799,211, $2,709,706,
$10,133,147 and $9,783,201 for the years ended December 31, 1995 and 1996, the
nine months ended September 30, 1997, and the six months ended March 31, 1998,
respectively. During the six months ended March 31, 1998, the Company recorded
$1,887,950 in software sublicense revenue from one customer.
Credit Evaluation and Significant Clients
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.
During the six months ended March 31, 1998, revenues from four clients
totaled $4,472,565, $4,268,884, $2,593,754 and $2,504,282 which represented
21%, 20%, 12% and 12% of total revenues, respectively. Accounts receivable
balances at March 31, 1998 relating to these four clients amounted to
$4,257,821. During the nine months ended September 30, 1997, revenues from
three clients totaled $5,019,140, $4,734,373 and $4,436,656, which represented
22%, 21% and 20% of total revenues, respectively. Accounts receivable balances
at September 30, 1997 relating to these three clients amounted to $1,610,627.
During 1996, revenues from two clients totaled $9,471,534 and $2,338,730,
which represented 59% and 15% of total revenues, respectively. Accounts
receivable balances at December 31, 1996 relating to these two clients
amounted to $1,727,702. During 1995, sales to one client totaled $8,423,946,
which represented approximately 68% of total revenues.
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.
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.
Deferred Financing Costs
Deferred financing costs represented costs incurred in connection with the
Company's initial public offering of the Company's Class B common stock. This
amount was recorded as a reduction of shareholders' equity upon the completion
of the initial public offering of Class B common stock in December 1997.
F-8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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, in the year ended December 31, 1996, adopted the
disclosure-only alternative described 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 has adopted Financial Accounting Standards Statement No 128,
"Earnings per Share" ("FAS 128"), which replaced the calculation of primary
and fully diluted net income per share with basic and diluted net income per
share. Unlike primary net income per share, basic net income per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted net income per share is very similar to the previously reported fully
diluted net income per share.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of
convertible preferred stock, options and warrants to purchase common stock,
issued at prices substantially below the per share price sold in the Company's
initial public offering in December 1997, previously included in the
computation of shares outstanding pursuant to Staff Accounting Bulletin Nos.
55, 64 and 83, are now excluded from the computation. Basic and diluted net
income per share for years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 have been restated to apply the
requirements of FAS 128 and SAB 98.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these Statements in fiscal year 1999.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no impact on the Company's consolidated financial position, results of
operations or cash flows.
F-9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and 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
and the U.S. Government. The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within three months of their
acquisition date.
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. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. Interest on securities classified
as available-for-sale is included in interest income. Unrealized and realized
gains and losses have not been material. Accordingly, the Company has not made
a provision for such amounts in its consolidated balance sheets.
3. NET INCOME PER SHARE
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
---------------------- --------------------- ---------------------
1995 1996 1996 1997 1997 1998
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net income............ $ 443,511 $ 526,510 $ 398,346 $ 571,856 $ 310,501 $1,290,215
=========== ========== ========== ========== ========== ==========
Denominator for basic
net income per share--
weighted average common
shares outstanding..... 10,061,644 4,987,946 5,219,780 5,399,560 4,618,791 7,642,587
Effects of dilutive
securities:
Common stock options.. -- 257,864 257,865 274,323 174,271 1,129,687
Convertible preferred
stock................ -- -- -- 120,272 -- 180,408
----------- ---------- ---------- ---------- ---------- ----------
Denominator for diluted
net income per share--
adjusted weighted
average common shares
and assumed
conversions............ 10,061,644 5,245,810 5,477,645 5,794,155 4,793,062 8,952,682
=========== ========== ========== ========== ========== ==========
Basic net income per
share.................. $ 0.04 $ 0.11 $ 0.08 $ 0.11 $ 0.07 $ 0.17
=========== ========== ========== ========== ========== ==========
Diluted net income per
share.................. $ 0.04 $ 0.10 $ 0.07 $ 0.10 $ 0.06 $ 0.14
=========== ========== ========== ========== ========== ==========
</TABLE>
4. EQUIPMENT AND IMPROVEMENTS
The components of equipment and improvements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Computer equipment and
software............... $ 441,229 $ 870,180
Furniture, equipment and
leasehold
improvements........... 58,901 183,816
--------- ----------
500,130 1,053,996
Less accumulated
depreciation and
amortization........... (162,946) (280,330)
--------- ----------
$ 337,184 $ 773,666
========= ==========
</TABLE>
F-10
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. EQUIPMENT AND IMPROVEMENTS--(CONTINUED)
The cost of assets acquired under capital leases is $155,382 and $155,382
and the related accumulated amortization is $49,723 and $71,727 at December
31, 1996 and September 30, 1997, respectively.
5. ACQUIRED INTANGIBLES AND OTHER ASSETS
The components of acquired intangibles are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Acquired client contracts and client lists, less
accumulated amortization of $820 in 1996 and
$131,638 in 1997................................ $304,657 $1,537,294
Acquired workforce, less accumulated amortization
of $200 in 1996 and $17,951 in 1997............. 43,176 217,285
-------- ----------
$347,833 $1,754,579
======== ==========
</TABLE>
The components of other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Acquisition costs and long-term receivables..... $29,535 $36,512
Deposits........................................ 34,680 31,548
------- -------
$64,215 $68,060
======= =======
</TABLE>
6. BANK LINES OF CREDIT
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. At December 31, 1996 and September 30,
1997, the outstanding borrowings were $555,532 and $2,417,813, respectively.
Interest payments were due monthly. At December 31, 1997, all outstanding
principal and remaining interest borrowed under the $1,500,000 line of credit
converted into a term loan to be repaid over four years.
The Company also had an equipment line of credit agreement with the same
bank. Under the agreement, the Company could borrow up to $399,500 through May
31, 1998 at variable rates of 1.75% above the bank's prime rate. At December
31, 1996 and September 30, 1997, the Company had outstanding borrowings of
$100,500 and $252,440, respectively, of this amount. Interest payments were
due monthly and, at six-month intervals, all outstanding principal and
interest converted into term loans to be repaid over three years.
At September 30, 1997, the Company had an equipment term loan of $88,299
with the same bank which was intended to mature August 31, 2001 at a variable
interest rate of 1.75% above the bank's prime rate. Accrued interest and
principal were due monthly through maturity.
F-11
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
6. BANK LINES OF CREDIT--(CONTINUED)
Certain executive officers personally guaranteed borrowings under the bank
lines of credit.
Among other provisions, the bank lines of credit required the Company to
maintain certain minimum financial ratios. At September 30, 1997, the Company
was not in compliance with certain financial ratios and had received a letter
from the bank waiving such noncompliance.
Payments on the outstanding balances of the lines of credit and term loan
were to be made as follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
-------------
<S> <C>
1998.............................................................. $1,232,111
1999.............................................................. 448,043
2000.............................................................. 496,186
2001.............................................................. 469,468
2002 and thereafter............................................... 112,744
----------
$2,758,552
==========
</TABLE>
On March 31, 1998, the Company entered into a $10 million revolving credit
facility with another bank and simultaneously paid all its outstanding amounts
under the previous credit facility and canceled the previous agreements. This
facility matures on March 31, 2001. Total borrowings are limited to the lesser
of 85% of eligible accounts receivable or $10 million and are secured by the
Company's assets. Interest is charged monthly and is based on, at the
Company's option, the adjusted LIBOR rate plus 2.5% or an alternate base rate
plus 0.5%. The alternate base rate is the greater of the bank's base rate or
the federal funds effective rate plus 0.5%. Among other provisions, the bank
lines of credit require the Company to maintain certain minimum financial
ratios. As of March 31, 1998, the Company had no outstanding borrowings under
its credit facility.
7. NOTES PAYABLE TO CURRENT AND FORMER SHAREHOLDERS
The unsecured notes payable to current and former shareholders are payable
at interest rates ranging from 8.25% to 9.00%. The notes payable to current
and former shareholders are payable as follows:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
-------------
<S> <C>
1998................................................................ $ 52,704
1999................................................................ 23,743
2000................................................................ 25,824
2001................................................................ 7,677
--------
$109,948
========
</TABLE>
8. COMMITMENTS
The Company leases its principal facilities and certain equipment under
operating and capital leases which expire at various dates through 2001.
Future minimum lease payments for noncancellable leases with terms of one year
or more are as follows:
F-12
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
8. COMMITMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -------
<S> <C> <C>
Years ending September 30,
1998................................................... $ 325,079 $31,198
1999................................................... 304,442 21,606
2000................................................... 251,356 17,072
2001................................................... 224,376 --
2002................................................... 37,396 --
---------- -------
Total minimum lease payments........................... $1,142,649 69,876
==========
Less amounts representing interest..................... (13,734)
-------
Present value of capital lease obligations............. 56,142
Less amounts due within one year....................... (31,198)
-------
$24,944
=======
</TABLE>
Rent expense for years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997 was $93,616, $163,700 and $183,823, respectively.
9. 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 and Class B common stock have 10 votes and 1 vote,
respectively. Each share of Class A common stock will 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. 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. As a result of such conversions, the number of
authorized shares of Class A common stock is 1,659,762 at March 31, 1998.
Voting Trust
All of the current Class A shareholders (the "Beneficiaries") have
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 2 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.
F-13
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
9. SHAREHOLDERS' EQUITY--(CONTINUED)
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 million after
deducting the underwriters' discount, commissions, and related issuance costs.
Convertible Preferred Stock
In July 1997, the Company issued 420,953 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 rights as the Class B common
stock. Series A preferred stock is 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, 420,953 shares
of Series A preferred stock converted into 420,953 shares of Class B common
stock.
Stock Options
For the year ended December 31, 1996, the Company issued options to purchase
440,000 shares of Class A common stock and 660,000 shares of Class B common
stock. The options were issued to two officers of the Company 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 vest one-third upon the completion of the
Company's initial public offering in December 1997, one-third on December 31,
1997 and one-third on December 31, 1998. These same two officers were granted
options in February 1997 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,
1997, options for 660,000 shares of Class A 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. In January
1998, these officers were issued additional options to purchase 140,000 shares
of Class B common stock at an exercise price of $10.88 per share, which were
immediately vested upon grant. The weighted average fair value of options
granted to these two employees during the year ended December 31, 1996 and the
nine months ended September 30, 1997 were $0.18 and $0.48 per share,
respectively. At March 31, 1998, 360,000 shares of nonvested stock issued
pursuant to exercises were subject to repurchase.
1996 Equity Incentive Plan
In February 1997, the Company adopted the Plan, under which the Board of
Directors may issue Class B incentive stock options to employees and
nonstatutory stock options, stock bonuses or the right to purchase restricted
stock to employees, consultants and outside directors. Upon the adoption of
the Plan, the Company reserved 1,250,000 shares of Class B common stock for
issuance under the Plan, of which 100,000 shares are reserved for outside
directors. The Board of Directors 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, or
85% of the fair market value for nonstatutory
F-14
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
9. SHAREHOLDERS' EQUITY--(CONTINUED)
stock options). 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 5
years from date of grant. In July 1997, the Plan was amended to increase the
number of shares authorized for issuance under the Plan to 1,811,714. In
October 1997, the Plan was amended to increase the number of shares of Class B
common stock authorized for issuance under the Plan to 2,989,333.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996......... -- $ --
Options granted................................ 1,782,675 3.91
Options cancelled.............................. (39,600) 3.33
--------- -----
Options outstanding at September 30, 1997........ 1,743,075 3.93
Options granted................................ 523,134 11.27
Options cancelled.............................. (62,500) 7.53
Options exercised.............................. (45,363) 2.99
--------- -----
Options outstanding at March 31, 1998............ 2,158,346 $5.62
========= =====
</TABLE>
The weighted average fair value of options granted to employees under the
Plan during the nine months ended September 30, 1997 was $0.85 per share. At
March 31, 1998, options to acquire 682,369 Class B common shares had vested
and no shares of nonvested stock issued pursuant to exercises of options were
subject to repurchase. At March 31, 1998 options to purchase 785,624 shares of
Class B common stock were available for grant. The weighted average remaining
life of outstanding options under the Plan at March 31, 1998 is 9.19 years.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options has equaled or exceeded the market price of the
underlying common stock on the grant date, no compensation expense has been
recorded.
Pro forma information regarding net income and net income per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of FAS 123. Under this
method, the estimated fair value of the options is amortized to expense over
the options' vesting period. The effect of applying FAS 123 fair value method
to the Company's stock-based awards results in net income and net income per
share as follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Net income, as reported............... $526,510 $571,856
Net income, pro forma................. 524,710 436,902
Basic net income per share, as
reported............................. 0.11 0.11
Basic net income per share, pro
forma................................ 0.11 0.08
Diluted net income per share, as
reported............................. 0.10 0.10
Diluted net income per share, pro
forma................................ 0.10 0.08
</TABLE>
F-15
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
9. 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:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Expected dividend yield................. 0% 0%
Expected volatility..................... 0% 0%
Risk-free interest rate................. 5.78% 6.48%
Expected life of the option............. 1-4 years 1-5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its adjusted effect will not be fully reflected until 1999.
Employee Stock Purchase Plan
In October 1997, the Company adopted the Employee Stock Purchase Plan. The
Company has 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 first purchase
period commenced in February 1998.
10. ACQUISITIONS
On December 16, 1996, the Company acquired certain assets and liabilities 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 cost of the acquisition was
$170,329 and was accounted for as a purchase. Intangible assets recorded 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 S corporation, which
provided consulting services for computer systems integration on a government
contract. The cost of the acquisition totalled $934,268 and was accounted for
as a purchase. Intangible assets are being amortized over a six-year period. A
contingent payment of $150,000 was accrued in July 1997, upon the first year's
renewal of the government contract, and an additional $150,000 is payable by
the Company upon the second year's renewal of this contract.
On January 2, 1997, the Company acquired certain assets and liabilities 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 cost of the acquisition totalled $283,775 and was
accounted for as a purchase. Intangible assets recorded are being amortized
over a six year period.
F-16
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. ACQUISITIONS--(CONTINUED)
On March 10, 1997, the Company acquired certain assets and liabilities of
Tangent Group, Pty. Limited ("Tangent Group") an Australian entity which
provided computer systems consulting services. The cost of the acquisition
totalled $487,698 and the transaction was accounted for as a purchase.
Intangible assets recorded are being amortized over a six-year period. In
addition, the Company will pay at least $120,000 in royalties over the first
two year period following the acquisition. 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.
On July 11, 1997, the Company acquired certain assets and liabilities of
Albanycrest Limited, a United Kingdom private limited company, which provided
information and management consulting services on the design of software and
computer systems. The purchase price totalled $868,135 and the transaction was
accounted for as a purchase. Intangible assets recorded are being amortized
over a six-year period. During the six months ended March 31, 1998, the
purchase price was adjusted for additional acquisition costs and all
contingent payments were paid to former shareholders based on performance
criteria. At March 31, 1998, the final purchase price totalled $1,373,973,
including the contingent payments.
On 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 cost of the acquisition totaled $5,219,507, of which
$4,554,007 was paid in cash and $665,500 was issued for common stock. The
acquisition was accounted for as a purchase. Intangible assets in the amount
of $5,202,858 are being amortized over a period of 8 to 15 years. A contingent
payment totaling approximately $297,000 will be paid in equal installments
over May, June and July of 1998 if certain performance targets are met. In
addition, additional contingent payments of up to $1,324,000 may be paid by
May 15, 2000 if certain performance targets are met.
The accompanying consolidated financial statements include the results of
operations of these acquired businesses for periods subsequent to the
respective acquisition dates.
Pro Forma Disclosure of Significant Subsidiaries (Unaudited)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if Albanycrest had been
purchased by the Company at its inception on November 1, 1996 and as if the
Sancha Group had been purchased by the Company as of January 1, 1997, after
including the impact of certain adjustments, such as the unaudited pro forma
adjustment for increased amortization expense due to recording of intangible
assets:
<TABLE>
<CAPTION>
NINE-MONTH SIX-MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30, MARCH 31,
1996 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
Revenues............................. $18,217,583 $29,105,225 $24,883,520
Net income........................... 761,447 1,101,545 1,653,114
Basic net income per share........... $ 0.15 $ 0.20 $ 0.21
Diluted net income per share......... $ 0.14 $ 0.19 $ 0.18
</TABLE>
The pro forma results of operations 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.
F-17
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
11. NOTES RECEIVABLE FROM RELATED PARTIES
The Company's outstanding notes receivable as of September 30, 1997, which
total $942,426, are from certain officers who are also shareholders of the
Company. These notes bear interest at rates ranging from 5.75% to 9.0% and
have due dates ranging from three to ten years. Certain of these notes with
original principal amounts totaling $212,927 are being forgiven in accordance
with the terms of the officers' employment agreements and have an aggregate
balance of $190,869 at September 30, 1997.
In February 1997, the Company advanced a total of $2,196,040 to two
shareholders, who are also executive officers of the Company, in connection
with the exercise of options to purchase common stock. These notes are due in
February 2007, bear interest at 6.99%, are secured and are full recourse.
12. SEGMENT AND GEOGRAPHIC AREAS
The Company operates in one industry segment, information technology
consulting, and markets its services in the United States, Australia and the
United Kingdom.
The following table presents a summary of operating information and certain
year end balance sheet information by geographic region:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Revenues:
United States........................ $12,373,309 $16,197,466 $19,406,743
Australia............................ -- -- 2,048,493
United Kingdom....................... -- -- 1,023,407
----------- ----------- -----------
Total.................................. $12,373,309 $16,197,466 $22,478,643
=========== =========== ===========
Income from operations:
United States........................ $ 1,074,916 $ 951,276 $ 591,607
Australia............................ -- -- 205,890
United Kingdom....................... -- -- 257,227
----------- ----------- -----------
Total.................................. $ 1,074,916 $ 951,276 $ 1,054,724
=========== =========== ===========
Identifiable assets:
United States........................ $ 2,315,833 $ 4,132,665 $ 8,145,337
Australia............................ -- -- 1,257,348
United Kingdom....................... -- -- 1,420,125
----------- ----------- -----------
Total.................................. $ 2,315,833 $ 4,132,665 $10,822,810
=========== =========== ===========
</TABLE>
13. INCOME TAXES
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
---------- -------- -------------
<S> <C> <C> <C>
United States................................. $1,013,847 $877,517 $491,566
Foreign....................................... -- -- 464,288
---------- -------- --------
Total....................................... $1,013,847 $877,517 $955,854
========== ======== ========
</TABLE>
F-18
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
13. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax liabilities:
Accrual basis to cash basis adjustments......... $499,213 $374,412
Depreciation.................................... 34,328 46,580
Other........................................... 226 113,100
-------- --------
Total deferred tax liabilities.................... 533,767 534,092
Deferred tax assets:
Vacation accruals............................... 21,593 72,182
Accrued expenses................................ -- 20,435
Accrued revenue................................. 21,724 2,032
Accrued rent.................................... 14,156 11,738
Intangibles..................................... -- 19,933
Accounts receivable allowance................... -- 20,000
-------- --------
Total deferred tax assets......................... 57,473 146,320
-------- --------
Net deferred tax liabilities...................... $476,294 $387,772
======== ========
</TABLE>
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 are being amortized to taxable income over a four-year
period.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Current:
Federal................................... $ -- $373,151 $252,394
State..................................... -- 71,898 65,844
Foreign................................... -- -- 154,282
-------- -------- --------
-- 445,049 472,520
Deferred (benefit):
Federal................................... 480,021 (74,646) (75,358)
State..................................... 90,315 (19,396) (13,164)
-------- -------- --------
570,336 (94,042) (88,522)
-------- -------- --------
Total provision for income taxes............ $570,336 $351,007 $383,998
======== ======== ========
</TABLE>
F-19
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996AND THE SIX MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
13. INCOME TAXES--(CONTINUED)
The effective tax rate differs from the applicable U.S. statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
U.S. statutory federal tax rate............ 34% 34% 34%
State taxes, net of federal tax benefit.... 6 6 6
Deferred income taxes recorded upon
dissolution of Tier Group................. 16 -- --
------ ------ ---
Effective tax rate......................... 56% 40% 40%
====== ====== ===
</TABLE>
Prior to December 31, 1994, earnings of the Company accrued to Tier Group
for income tax purposes through consulting and management agreements. Any U.S.
federal and state income taxes on the earnings of the partnership were payable
by the partners and, accordingly, no provision for U.S. federal or state
income taxes was made for those years, with the exception of minimum state
franchise taxes. Effective January 1, 1995, the Company terminated its
consulting and management agreements with Tier Group. In connection with the
dissolution of Tier Group and the transfer of all of its assets and
liabilities, the Company recorded deferred income taxes related to temporary
differences associated with the transfer of assets and liabilities. The
recording of such deferred income taxes resulted in a charge to the provision
for income taxes of approximately $165,000 in the year ended December 31,
1995.
The income tax provisions for the six months ended March 31, 1997 and 1998
are computed based on the estimated tax rate in effect for the full fiscal
year.
14. 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.
15. SUBSEQUENT EVENTS (UNAUDITED)
On April 1, 1998, the Company acquired certain assets and liabilities of
Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which provided
IT consulting services to develop and implement call center applications. The
cost of the acquisition totaled approximately $1,500,000, of which $788,000
was paid in cash and $712,000 was issued in Class B common stock. The SFC
acquisition was accounted for as a purchase. Certain contingent payments may
be paid upon the achievement of future performance targets.
Secondary Public Offering of Common Stock
In May 1998, the Board of Directors authorized the Company to proceed with a
secondary public offering of the Company's Class B common stock.
F-20
<PAGE>
ALBANYCREST LIMITED
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Albanycrest Limited
We have audited the accompanying balance sheet of Albanycrest Limited as of
June 30, 1997 and the related statements of income, shareholders' equity and
cash flows for the period from inception (November 13, 1996) to June 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 United Kingdom auditing standards
which do not differ in any significant respect from United States 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 financial position of Albanycrest Limited at
June 30, 1997 and the results of its operations and its cash flows for the
period from inception (November 13, 1996) to June 30, 1997 in conformity with
United States generally accepted accounting principles.
Ernst & Young
Chartered Accountants
Reading, England
September 30, 1997
F-21
<PAGE>
ALBANYCREST LIMITED
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1997
---------------
<S> <C>
ASSETS
Current assets:
Cash........................................................ (Pounds) 31,796
Accounts receivable......................................... 109,141
Accrued revenue............................................. 49,152
---------------
Total assets.................................................. (Pounds)190,089
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ (Pounds)118,672
Accrued and other liabilities............................... 34,850
---------------
Total current liabilities..................................... 153,522
Shareholders' equity:
Ordinary shares - nominal value (Pounds)1 per share; at
amounts paid up; 1,000 shares authorized, issued and
outstanding at June 30, 1997............................... 1,000
Retained earnings........................................... 36,567
---------------
37,567
---------------
Notes receivable from shareholders.......................... (1,000)
---------------
Total shareholders' equity.................................... 36,567
---------------
Total liabilities and shareholders' equity.................... (Pounds)190,089
===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
ALBANYCREST LIMITED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
INCEPTION
(NOVEMBER 13, 1996)
TO JUNE 30, 1997
-------------------
<S> <C>
Revenues.................................................... (Pounds)829,957
Operating expenses:
Cost of revenues.......................................... 778,345
General and administrative................................ 4,285
---------------
Total operating expenses.................................... 782,630
---------------
Income before provision for income taxes.................... 47,327
Provision for income taxes.................................. 10,760
---------------
Net income.................................................. (Pounds) 36,567
===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
ALBANYCREST LIMITED
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ORDINARY SHARES TOTAL
-------------------- RETAINED NOTES FROM SHAREHOLDERS'
SHARES AMOUNT EARNINGS SHAREHOLDERS EQUITY
------ ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Issuance of ordinary
shares to founders..... 1,000 (Pounds)1,000 (Pounds) -- (Pounds)(1,000) (Pounds) --
Net income.............. -- -- 36,567 -- 36,567
----- ------------- -------------- -------------- --------------
Balance at June 30,
1997................... 1,000 (Pounds)1,000 (Pounds)36,567 (Pounds)(1,000) (Pounds)36,567
===== ============= ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
ALBANYCREST LIMITED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(NOVEMBER 13, 1996)
TO JUNE 30, 1997
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ (Pounds)36,567
Adjustments to reconcile net income to net cash provided
by operating activities
Changes in assets and liabilities:
Accounts receivable................................... (109,141)
Accrued revenue....................................... (49,152)
Accounts payable...................................... 118,672
Accrued and other liabilities......................... 34,850
--------------
Net cash provided by operating activities................. 31,796
Cash at beginning of period............................... --
--------------
Cash at end of period..................................... (Pounds)31,796
==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
ALBANYCREST LIMITED
NOTES TO FINANCIAL STATEMENTS
1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Albanycrest Limited ("Albanycrest") provides information technology ("IT')
consulting, conforming applications development and systems integration
services.
Albanycrest was incorporated in November 1996 under the laws of England and
Wales as a private limited company.
On July 11, 1997, the shareholders and directors of Albanycrest entered into
an agreement with Tier Technologies, Inc., a California corporation, for the
sale of Albanycrest's business. The accompanying financial statements do not
reflect any adjustments arising from this agreement.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("US GAAP').
These financial statements do not comprise statutory accounts of Albanycrest
within the meaning of section 240 of the Companies Act 1985, as amended, of
Great Britain. Albanycrest has not prepared any such accounts.
Concentrations
Sales to one customer accounted for 100% of Albanycrest's revenue from the
date of inception to June 30, 1997. The loss of this customer would have a
material adverse effect on Albanycrest's business, financial condition and
results of operations.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Revenue Recognition
Revenue is derived from time and material contracts and recognized during
the period in which the services are provided.
Income Taxes
Income taxes are computed using the liability method, in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income tax assets and liabilities are
determined based on temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates
and laws.
2 ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
--------------
<S> <C>
Income tax authorities.................................... (Pounds)10,760
Accrued expenses.......................................... 14,926
Other..................................................... 9,164
--------------
(Pounds)34,850
==============
</TABLE>
F-26
<PAGE>
ALBANYCREST LIMITED
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3 INCOME TAXES
Albanycrest is subject to taxes in the United Kingdom. The income tax expense
for the period ending June 30, 1997 consists entirely of a current charge
computed at the United Kingdom statutory rate.
4 RELATED PARTY TRANSACTIONS
Included within cost of revenues is an amount of approximately
(Pounds)313,000 relating to consulting costs invoiced by three companies.
Albanycrest shareholders are also shareholders and directors of these
companies.
F-27
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sancha Computer Group Pty Ltd
We have audited the accompanying consolidated balance sheets of Sancha
Computer Group Pty Ltd. as of June 30, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sancha Computer Group Pty
Ltd. at June 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
Ernst & Young
Sydney, Australia
April 29, 1998
F-28
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $362,850 $ 547,380
Accounts receivable, net................................. 383,171 417,534
Other receivables........................................ 32,817 53,241
-------- ----------
Total current assets....................................... 778,838 1,018,155
Equipment and furniture, net............................... 17,683 37,281
-------- ----------
Total assets............................................... $796,521 $1,055,436
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft........................................... $103,299 $ 197,687
Accounts payable......................................... 144,589 228,259
Accrued liabilities...................................... 21,487 26,634
Accrued compensation and related liabilities............. 66,081 85,923
Accounts payable to affiliated entities.................. 54,663 65,310
Income taxes payable..................................... 96,725 132,452
-------- ----------
Total current liabilities.................................. 486,844 736,265
Other liabilities.......................................... 10,718 17,626
Stockholders' equity:
Common stock A$1 par; authorized shares - 82,000; Issued
and outstanding shares - 8,005 in 1996 and 1997......... 6,551 6,551
Settlement funds......................................... 44,415 9,496
Foreign currency translation adjustment.................. 21,542 1,884
Retained earnings........................................ 226,451 283,614
-------- ----------
Total stockholders' equity................................. 298,959 301,545
-------- ----------
Total liabilities and stockholders' equity................. $796,521 $1,055,436
======== ==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................ $4,300,362 $5,159,888 $7,176,518 $3,750,299 $3,637,882
Cost of revenues........ 2,641,510 3,145,145 4,656,204 2,465,729 2,478,014
---------- ---------- ---------- ---------- ----------
Gross profit............ 1,658,852 2,014,743 2,520,314 1,284,570 1,159,868
General and
administrative
expense................ 310,123 599,270 749,379 330,271 432,693
---------- ---------- ---------- ---------- ----------
Net operating income.... 1,348,729 1,415,473 1,770,935 954,299 727,795
Interest income......... 11,454 15,435 18,848 10,116 7,814
Interest expense........ (1,862) (1,184) (951) (812) (351)
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 1,358,321 1,429,724 1,788,832 963,603 734,638
Provision for income
taxes.................. 62,989 102,737 133,685 72,013 34,711
---------- ---------- ---------- ---------- ----------
Net income.............. $1,295,332 $1,326,987 $1,655,147 $ 891,590 $ 699,927
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-30
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK CURRENCY TOTAL
------------- SETTLEMENT TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT FUNDS ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 30, 1994.. 1,604 $1,894 $ 9,457 $ -- $ 225,423 $ 236,774
Dividends paid........ -- -- -- -- (192,487) (192,487)
Distributions paid.... -- -- -- -- (1,160,414) (1,160,414)
Net income............ -- -- -- -- 1,295,332 1,295,332
Foreign currency
translation
adjustment........... -- -- -- (2,528) -- (2,528)
----- ------ -------- -------- ----------- -----------
Balance, June 30, 1995.. 1,604 1,894 9,457 (2,528) 167,854 176,677
Stock issued.......... 6,401 4,657 -- -- -- 4,657
Units issued.......... -- -- 34,958 -- -- 34,958
Dividends paid........ -- -- -- -- (126,452) (126,452)
Distributions paid.... -- -- -- -- (1,141,938) (1,141,938)
Net income............ -- -- -- -- 1,326,987 1,326,987
Foreign currency
translation
adjustment........... -- -- -- 24,070 -- 24,070
----- ------ -------- -------- ----------- -----------
Balance, June 30, 1996.. 8,005 6,551 44,415 21,542 226,451 298,959
Units redeemed........ -- -- (34,919) -- -- (34,919)
Dividends paid........ -- -- -- -- (204,022) (204,022)
Distributions paid.... -- -- -- -- (1,393,962) (1,393,962)
Net income............ -- -- -- -- 1,655,147 1,655,147
Foreign currency
translation
adjustment........... -- -- -- (19,658) -- (19,658)
----- ------ -------- -------- ----------- -----------
Balance, June 30, 1997.. 8,005 6,551 9,496 1,884 283,614 301,545
Dividends paid
(unaudited).......... -- -- -- -- (122,500) (122,500)
Distributions paid
(unaudited).......... -- -- -- -- (130,842) (130,842)
Net income
(unaudited).......... -- -- -- -- 699,927 699,927
Foreign currency
translation
adjustment
(unaudited).......... -- -- -- (76,473) -- (76,473)
----- ------ -------- -------- ----------- -----------
Balance, December 31,
1997 (unaudited)....... 8,005 $6,551 $ 9,496 $(74,589) $ 730,199 $ 671,657
===== ====== ======== ======== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------- ------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 1,295,332 $ 1,326,987 $ 1,655,147 891,590 699,927
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation.......... 19,792 14,948 6,340 4,692 6,102
Write down of
equipment and
furniture............ 6,592 -- -- -- --
Changes in operating
assets and
liabilities:
Accounts
receivable......... (51,510) (151,435) (34,363) (170,660) (350,224)
Other receivables... -- (32,104) (20,424) (2,774) (908)
Bank overdraft...... 186,430 (83,131) 94,388 68,224 (63,395)
Accounts payable.... -- 144,589 83,670 39,171 2,947
Accrued
liabilities........ 12,125 9,362 5,147 55,574 69,990
Accrued compensation
and related
liabilities........ 39,860 21,135 19,842 (63,625) (24,676)
Other liabilities... 7,472 3,246 6,908 4,122 (2,202)
Income taxes
payable............ (55,357) 58,414 35,727 (30,637) (63,411)
Accounts payable to
affiliated
entities........... 47,442 (29,982) 10,647 28,125 (65,310)
----------- ----------- ----------- -------- --------
Net cash provided by
operating activities... 1,508,178 1,282,029 1,863,029 823,802 208,840
INVESTING ACTIVITIES
Purchases of equipment
and furniture.......... (18,341) (15,802) (25,938) (15,024) (6,844)
----------- ----------- ----------- -------- --------
Net cash used in
investing activities... (18,341) (15,802) (25,938) (15,024) (6,844)
FINANCING ACTIVITIES
Dividends paid.......... (192,487) (126,452) (204,022) (260,800) (122,500)
Distributions paid...... (1,160,414) (1,141,938) (1,393,962) (526,737) (130,842)
Repayments on loan...... 92,393 -- -- -- --
Units issued............ -- 34,958 (34,919) (34,919) --
Stockholders' capital
issued................. -- 4,657 -- -- --
----------- ----------- ----------- -------- --------
Net cash provided by
(used in) financing
activities............. (1,260,508) (1,228,775) (1,632,903) (822,456) (253,342)
Effect of exchange rate
changes on cash........ (2,528) 24,070 (19,658) (12,815) (76,473)
----------- ----------- ----------- -------- --------
Net increase (decrease)
in cash................ 226,801 61,522 184,530 (26,493) (127,819)
Cash at beginning of
period................. 74,527 301,328 362,850 362,850 547,380
----------- ----------- ----------- -------- --------
Cash at end of period... $ 301,328 $ 362,850 $ 547,380 336,357 419,561
=========== =========== =========== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......... $ 1,862 $ 1,184 $ 951 $ 812 $ 345
=========== =========== =========== ======== ========
Income tax paid....... $ 118,346 $ 50,925 $ 129,507 $ 12,013 $ 34,711
=========== =========== =========== ======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Sancha Computer Services Pty Limited and its subsidiaries ("the Group") are
organized under the laws of Australia.
The Group comprises the following wholly owned entities:
Sancha Computer Group Pty Ltd
Sancha Computer Services Pty Ltd
Sancha Computer Services Unit Trust
Sancha Software Development Pty Ltd
Sancha Research Pty Ltd
Balesyn Computer Services Pty ltd
Balesyn Unit Trust
The Group is in the business of providing computer consultancy services to
businesses primarily in New South Wales, Victoria, Western Australia and South
Australia.
Basis of Presentation
The Company's financial statements are prepared using the accrual basis
under generally accepted accounting principles. The financial statements of
the subsidiaries are consolidated where the parent company controls the
subsidiary.
The Group operates wholly in Australia and conducts all transactions in
Australian dollars. The financial statements have been translated into U.S.
dollars, unless otherwise denoted, with the functional currency being
Australian dollars. All assets and liabilities are translated at the exchange
rate at the end of the period. Changes in stockholders' equity are translated
at the rate applicable on the day the transaction occurred. Income and expense
items are translated using the average rate for the period. Resulting
translation adjustments are included in stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Accordingly, the actual amounts could differ from those estimates. Any
adjustments applied to estimated amounts are recognized in the year in which
such adjustments are determined.
Cash
Cash consists of demand deposits and bank overdrafts held at a major
financial institution.
Revenue Recognition
Revenue from consultancy services is recognized as the service is performed.
F-33
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Equipment and Furniture
Equipment and furniture are stated at cost. Depreciation of equipment and
furniture is computed using straight-line and declining balance methods over
the estimated useful lives of individual classes of assets, which range from
four to eight years. The cost and accumulated depreciation of fixed assets
sold or otherwise disposed are removed from the accounts and the resulting
gain or loss is included in income in the period realized.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and deferred tax liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Two of the operating entities which form part of the Group are unit trusts
established pursuant to trust deeds. Under Australian Taxation Law, unit
trusts are not required to pay tax on their net income provided the net
taxable income is distributed in full to the unitholders. Therefore, the
actual tax payable by the Group only represents tax payable on the income
earned by the companies which form part of the Group.
The Australian company tax rate was 33%, 36% and 36% for the years ended
June 30, 1995, 1996 and 1997, respectively.
Concentration of Credit Risk
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses
which, when realized, have been within the range of management's expectations.
Employee Entitlements
Provision is made for the Group's liability for employee entitlements
arising from services rendered by employees to the period end. These
entitlements are payable pursuant to Australian employment legislation.
Entitlements expected to be paid within one year are recorded at their nominal
amount. Employee entitlements payable later than one year are recorded at the
present value of the estimated future cash outflows relating to those
entitlements and are classified as other long-term liabilities.
2. EQUIPMENT AND FURNITURE
The components of equipment and furniture are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------- --------
<S> <C> <C>
Equipment................................................. $99,785 $125,909
Furniture................................................. 3,461 3,275
------- --------
103,246 129,184
Less Accumulated Depreciation............................. (85,563) (91,903)
------- --------
$17,683 $ 37,281
======= ========
</TABLE>
F-34
<PAGE>
SANCHA COMPUTER GROUP PTY LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. LINE OF CREDIT
Sancha Software Development Pty Limited had a line of credit agreement with
a financial institution which provided for maximum principle borrowings of
$60,000. Interest accrues at 13% per annum and amounts are secured by a debt
and interest guarantee by certain stockholders.
There were no amounts outstanding at June 30, 1997 and 1996 under this
agreement.
4. STOCKHOLDERS' EQUITY
The following table shows the shares issued and outstanding as at the end of
each period:
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Ordinary Shares -- Par
Value A$1, 72,000
Shares Authorized ..... 1,600 8,000 8,000
Class A Stock -- Par
Value A$1, 2,000 Shares
Authorized............. 1 1 1
Class B Stock -- Par
Value A$1, 2,000 Shares
Authorized............. 1 1 1
Class C Stock -- Par
Value A$1, 2,000 Shares
Authorized............. 1 1 1
Class D Stock -- Par
Value A$1, 2,000 Shares
Authorized............. 1 1 1
Class E Stock -- Par
Value A$1, 2,000 Shares
Authorized............. -- 1 1
</TABLE>
5. RETIREMENT PLAN
The Company has a statutory obligation under the laws of Australia to
contribute certain amounts into a regulated superannuation fund on behalf of
all employees, except where certain exemptions apply. The Company has no
involvement with the management, control or organization of the Fund. The
participants are fully vested at all times in both employee contributions and
statutory employer contributions. Employer contributions to superannuation
funds expensed in the financial statements for the years ended June 30, 1995,
1996 and 1997 were $49,121, $239,368 and $136,066, respectively.
6. SUBSEQUENT EVENTS
Pursuant to a Sale Agreement dated February 26, 1998 the Company sold
substantially all of the assets relating to its computer consulting business
to Tier Technologies (Australia) Pty Limited, a subsidiary of Tier
Technologies Inc. which is incorporated in the United States. The effective
date of the sale is March 1, 1998. The financial statements do not include any
adjustments to the recorded amounts of assets and liabilities which may result
from this transaction.
F-35
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The selected unaudited pro forma condensed consolidated financial
information for the Company set forth below gives effect to the acquisition of
certain assets and liabilities of Albanycrest Ltd. ("Albanycrest") and Sancha
Computer Group Pty Ltd. ("Sancha"). The historical financial information set
forth below has been derived from, and is qualified by reference to, the
financial statements of the Company, Albanycrest and Sancha and should be read
in conjunction with those financial statements and the notes thereto included
elsewhere herein. The selected unaudited pro forma condensed consolidated
statement of income data for the nine months ended September 30, 1997 and the
six months ended March 31, 1998 set forth below gives effect to the
acquisitions as if both occurred on January 1, 1997. The selected unaudited
pro forma condensed consolidated financial information set forth below
reflects certain adjustments, including adjustments to reflect the
amortization of the intangible assets. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected unaudited pro forma
condensed consolidated financial information set forth below does not purport
to represent what the consolidated results of operations or financial
condition of the Company would actually have been if the Albanycrest and
Sancha acquisitions and related transactions had in fact occurred on such date
or to project the future consolidated results of operations or financial
condition of the Company.
F-36
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMPANY ALBANYCREST SANCHA PRO FORMA PRO FORMA
FOR THE NINE FOR THE SIX FOR THE NINE BUSINESS FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED COMBINATION MONTHS ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, ADJUSTMENTS SEPTEMBER 30,
1997 1997 (1) 1997 (1) COMBINED (2)(3) 1997
------------- ------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $22,478,643 $1,366,859 $5,259,723 $29,105,225 $ -- $29,105,225
Cost of revenues........ 14,916,846 1,281,856 3,473,715 19,672,417 -- 19,672,417
----------- ---------- ---------- ----------- --------- -----------
Gross profit............ 7,561,797 85,003 1,786,008 9,432,808 -- 9,432,808
Costs and expenses:
Selling and marketing.. 1,836,082 -- -- 1,836,082 -- 1,836,082
General and
administrative........ 4,397,315 7,057 671,156 5,075,528 -- 5,075,528
Depreciation and
amortization.......... 273,676 -- 4,700 278,376 320,346 598,722
----------- ---------- ---------- ----------- --------- -----------
Income from
operations............ 1,054,724 77,946 1,110,152 2,242,822 (320,346) 1,922,476
Interest income......... 70,429 -- 12,656 83,085 -- 83,085
Interest expense........ 169,299 -- 354 169,653 -- 169,653
----------- ---------- ---------- ----------- --------- -----------
Income before income
taxes.................. 955,854 77,946 1,122,454 2,156,254 (320,346) 1,835,908
Provision for income
taxes.................. 383,998 17,721 161,237 562,956 171,407 734,363
----------- ---------- ---------- ----------- --------- -----------
Net income.............. $ 571,856 $ 60,225 $ 961,217 $ 1,593,298 $(491,753) $ 1,101,545
=========== ========== ========== =========== ========= ===========
Pro forma basic net
income per share (4)... $ 0.20
===========
Shares used in computing
pro forma basic net
income per share (4)... 5,450,773
===========
Pro forma diluted net
income per share (4)... $ 0.19
===========
Shares used in computing
pro forma diluted net
income per share (4)... 5,845,368
===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMPANY SANCHA PRO FORMA
FOR THE SIX FOR THE FIVE PRO FORMA FOR THE SIX
MONTHS ENDED MONTHS ENDED BUSINESS MONTHS ENDED
MARCH 31, FEBRUARY 28, COMBINATION MARCH 31,
1998 1998 (1) COMBINED ADJUSTMENTS (3) 1998
------------ ------------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $21,822,563 $3,060,957 $24,883,520 $ -- $24,883,520
Cost of revenues........ 14,436,706 2,041,731 16,478,437 -- 16,478,437
----------- ---------- ----------- --------- -----------
Gross profit............ 7,385,857 1,019,226 8,405,083 -- 8,405,083
Costs and expenses:
Selling and marketing.. 1,416,145 -- 1,416,145 -- 1,416,145
General and
administrative........ 3,703,190 257,396 3,960,586 -- 3,960,586
Depreciation and
amortization.......... 422,851 5,085 427,936 151,872 579,808
----------- ---------- ----------- --------- -----------
Income from operations.. 1,843,671 756,745 2,600,416 (151,872) 2,448,544
Interest income......... 407,799 5,181 412,980 -- 412,980
Interest expense........ 83,039 142 83,181 -- 83,181
----------- ---------- ----------- --------- -----------
Income before income
taxes.................. 2,168,431 761,784 2,930,215 (151,872) 2,778,343
Provision for income
taxes.................. 878,216 75,054 953,270 171,959 1,125,229
----------- ---------- ----------- --------- -----------
Net income.............. $ 1,290,215 $ 686,730 $ 1,976,945 $(323,831) $ 1,653,114
=========== ========== =========== ========= ===========
Pro forma basic net
income per share (4)... $ 0.21
===========
Shares used in computing
pro forma basic net
income per share (4)... 7,690,705
===========
Pro forma diluted net
income per share (4)... $ 0.18
===========
Shares used in computing
pro forma diluted net
income per share (4)... 9,000,800
===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro forma and offering adjustments for statements of income for the nine
months ended September 30, 1997 and the six months ended March 31, 1998 are as
follows:
1. The Albanycrest and Sancha condensed statements of income are presented
after translation using the local currency as the functional currency.
2. Reflects the amortization of intangible assets acquired in the Albanycrest
acquisition recorded at $565,628 amortized over a six year period.
3. Reflects the amortization of intangible assets acquired in the Sancha
acquisition recorded at $5,202,858 amortized over eight to fifteen years.
4. Basic net income per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net income per share is
computed using the weighted average number of shares of common stock
outstanding plus all dilutive common stock equivalents, which include stock
options and convertible preferred stock. Basic and diluted net income per
share amounts have been adjusted to reflect the issuance of 51,213 shares
of common stock issued as part of the Sancha acquisition as if the shares
had been outstanding for all periods presented.
F-39
<PAGE>
GLOBAL DELIVERY CAPABILITIES
Tier Technologies has eleven sales locations in the United States, Australia
and the United Kingdom.
[MAP DEPICTING GEOGRAPHIC AREAS COVERED BY TIER AND LIST OF LOCATION OF
OFFICES]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Acquisitions............................................................. 14
Use of Proceeds.......................................................... 16
Price Range of Class B Common Stock...................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 27
Management............................................................... 36
Certain Transactions..................................................... 46
Principal and Selling Shareholders....................................... 48
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 55
Experts.................................................................. 56
Additional Information................................................... 56
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
LOGO
[TIER TECHNOLOGIES LOGO]
CLASS B COMMON STOCK
------------
PROSPECTUS
------------
ADAMS, HARKNESS & HILL, INC.
NATIONSBANC MONTGOMERY
SECURITIES LLC
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
