<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TIER TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 7373 94-3145844
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
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1350 TREAT BOULEVARD, SUITE 250
WALNUT CREEK, CALIFORNIA 94596
(925) 937-3950
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Office)
---------------
JAMES L. BILDNER, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
TIER TECHNOLOGIES, INC.
1350 TREAT BOULEVARD, SUITE 250
WALNUT CREEK, CALIFORNIA 94596
(925) 937-3950
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------
Copies to:
MORGAN P. GUENTHER, ESQ. D. BRADLEY PECK, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP COOLEY GODWARD LLP
345 CALIFORNIA STREET 4365 EXECUTIVE DRIVE, SUITE 1100
SAN FRANCISCO, CALIFORNIA 94104 SAN DIEGO, CALIFORNIA 92121
(415) 835-1600 (619) 550-6000
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED SHARE (1) OFFERING PRICE (1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Class B Common Stock (no
par value)............. 3,450,000 $18.00 $62,100,000 $18,319.50
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low price
per share of the Class B Common Stock on May 5, 1998.
(2) Includes 450,000 shares issuable upon exercise of the Underwriters' over-
allotment option.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 SECURITIESMAY 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 BUYNOR 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 7, 1998
3,000,000 SHARES
TIER TECHNOLOGIES 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 isentitled to ten
votes per share on all matters and the Class B Common Stock is entitled to one
vote per share onall matters, and each share of Class A Common Stock is
convertible into one share of Class B Common Stock andconverts automatically
upon a transfer, except for certain limited permitted transfers. Holders of the
Class BCommon Stock, voting as a separate class, are entitled to elect two of
the currently authorized five Directors ofthe Company, and holders of the Class
A and Class B Common Stock, voting together as a single class, are entitledto
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS (2)
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<S> <C> <C> <C> <C>
Per Share..... $ $ $ $
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Total (3)..... $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Actof 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 Stocksolely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissionsand 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 license 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 is 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 provides
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 startup 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 license 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.
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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.
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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
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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
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<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.
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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
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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
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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
Eastman Kodak Co.
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.
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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
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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.
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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 April 1998, Mr. Ross also served as Senior Vice President.
From September 1992 to January 1997, Mr. Ross was a partner at Capital
Partners, a private equity investment firm. 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. 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. 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. 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. 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
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. 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. 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
pursuant to the employment agreements described above shall be in the sole
discretion of the Compensation Committee. 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.
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<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, immediately following this offering, the holders of Class B
Common Stock will have insufficient voting power, in the aggregate, to call
special meetings of shareholders and 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
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. 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 nor 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.
55
<PAGE>
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.
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.
56
<PAGE>
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.
57
<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
Statements 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............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant and the Selling Shareholders in connection with the offering
described in this Registration Statement. All amounts, except the SEC
registration fee, the NASD filing fee and the Nasdaq listing fee are
estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 18,320
NASD Filing Fee.................................................... 6,710
Nasdaq Listing Fee................................................. 17,500
Printing and Engraving Expenses.................................... 143,000
Accounting Fees and Expenses....................................... 220,000
Legal Fees and Expenses............................................ 300,000
Blue Sky Fees and Expenses (including fees of counsel)............. 10,000
Miscellaneous expenses............................................. 114,470
--------
Total.......................................................... $830,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IV of the Registrant's Amended and Restated Articles of
Incorporation provides for the indemnification of the officers and directors
of the Registrant to the fullest extent permissible under California law. In
addition, Article IX, Section 1 of the Registrant's Amended and Restated
Bylaws requires that the Registrant indemnify, and, in certain instances,
advance expenses to, its agents, with respect to certain costs, expenses,
judgments, fines, settlements and other amounts incurred in connection with
any proceeding, to the fullest extent permitted by applicable law. Pursuant to
its Articles and Bylaws, the Registrant has entered into indemnification
agreements with each of its officers and directors, the form of which is filed
as Exhibit 10.24.
Section 317(b) of the California Corporations Code (the "Corporations Code")
provides that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any "proceeding" (as defined in Section
317(a) of the Corporations Code), other than an action by or in the right of
the corporation to procure a judgment in its favor, by reason of the fact that
such person is or was a director, officer, employee or other agent of the
corporation (collectively, an "Agent"), against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding if the Agent acted in good faith and in a manner the
Agent reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct was unlawful.
Section 317(c) of the Corporations Code provides that a corporation shall
have power to indemnify any Agent who was or is a party or is threatened to be
made a party to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact
that such person is or was an Agent, against expenses actually and reasonably
incurred by the Agent in connection with the defense or settlement of such
action if the Agent acted in good faith and in a manner such Agent believed to
be in the best interest of the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made
thereunder for any of the following: (i) in respect of any claim, issue or
matter as to which the Agent shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such
proceeding is or was pending shall determine that such Agent is fairly and
reasonably entitled to indemnification for expenses, (ii) of amounts paid in
settling or otherwise disposing of a pending action without court approval and
(iii) of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
II-1
<PAGE>
Section 317(d) of the Corporations Code requires that an Agent be
indemnified against expenses actually and reasonably incurred to the extent
the Agent has been successful on the merits in the defense of proceedings
referred to in subdivisions (b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is
proper in the circumstances because the Agent has met the applicable standard
of conduct set forth in Section 317(b) or (c), by any of the following: (i) a
majority vote of a quorum consisting of directors who are not parties to the
proceeding, (ii) if such a quorum of directors is not obtainable, by
independent legal counsel in a written opinion, (iii) approval of the
shareholders, provided that any shares owned by the Agent may not vote
thereon, or (iv) the court in which such proceeding is or was pending.
Pursuant to Section 317(f) of the Corporations Code, the corporation may
advance expenses incurred in defending any proceeding upon receipt of an
undertaking by the Agent to repay such amount if it is ultimately determined
that the Agent is not entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification
shall be made under Section 317 where it appears that it would be inconsistent
with a provision of the corporation's articles, bylaws, a shareholder
resolution or an agreement which prohibits or otherwise limits
indemnification, or where it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
Section 317(i) authorized a corporation to purchase and maintain insurance
on behalf of an Agent for liabilities arising by reason of the Agent's status,
whether or not the corporation would have the power to indemnify the Agent
against such liability under the provisions of Section 317.
Section 10 of the Underwriting Agreement between the Underwriters, the
Registrant and the Selling Shareholders, provides that the Underwriters shall
indemnify and hold harmless the Selling Shareholders and the Registrant from
and against any liability caused by any materially misleading or untrue
statement or omission in the Registration Statement or Prospectus furnished to
the Registrant by the Underwriter for use therein.
In addition, Article IX, Section 1 of the Bylaws of the Registrant
authorizes the Registrant to purchase and maintain insurance on behalf of any
person indemnified by the Company. The Registrant currently maintains a
directors and officers liability policy in the amount of $3,000,000.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities that were not registered under
the Act (issuances prior to February 1997 do 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):
In January 1997, the Company issued 3,000 shares of Common Stock to James L.
Bildner upon the exercise of a stock option with an exercise price of $12.48
per share. The Company received total consideration of $37,440.
From January 1996 to March 3, 1998, the Company granted options to purchase
a total of 680,000 shares of Class A Common Stock and 2,811,309 shares of
Class B Common Stock at exercise prices ranging from $0.125 per share to
$10.875 per share.
In February 1997, 1,840,000 shares of Class A Common Stock and 2,760,000
shares of Class B Common Stock were issued to certain employees and directors
of the Registrant in exchange for 46,000 shares of Common Stock.
II-2
<PAGE>
In February 1997, the Company issued 80,000 shares of Class A Common Stock
and 120,000 shares of Class B Common Stock to James L. Bildner upon the
exercise of a stock option with an exercise price of $1.65 per share. The
Company received total consideration of $330,000.
In February 1997, the Company issued 120,000 shares of Class A Common Stock
and 180,000 shares of Class B Common Stock to James L. Bildner upon the
exercise of a stock option with an exercise price of $1.65 per share. The
Company received total consideration of $495,000.
In February 1997, the Company issued 120,000 shares of Class A Common Stock
and 180,000 shares of Class B Common Stock to William G. Barton upon the
exercise of a stock option with an exercise price of $1.82 per share. The
Company received total consideration of $546,000.
In February 1997, the Company issued 110,000 shares of Class A Common Stock
and 180,000 shares of Class B Common Stock to James L. Bildner upon the
exercise of a stock option with an exercise price of $3.58 per share. The
Company received total consideration of $393,800.
In February 1997, the Company issued 120,000 shares of Class A Common Stock
and 180,000 shares of Class B Common Stock to William G. Barton upon the
exercise of a stock option with an exercise price of $3.58 per share. The
Company received total consideration of $393,800.
In July 1997, pursuant to the terms of an equity financing of the Company
(the "Equity Financing"), the Registrant issued a total of 420,953 shares of
the Company's Series A Convertible Preferred Stock to the following
shareholders: Albermarie Partners; Allen I. Bildner; Allyn C. Woodward, Jr.;
Barry A. Sylvetsky; Benjamin A. Marsh; Bernad K. Chiu; Donald Baron; Delaware
Charter Guarantee & Trust Co. (TTEE) fbo George K. Ross; Eunice Buckland;
Francis H. Zenie; Frederick Mark D'Annolfo; Ira Stepanian; John L. Newbold;
Thomas Newbold; John W. Adams; Josef von Rickenbach; Kevin M. McCafferty;
Larry Moore; Merchants' Fund; Nucon Capital Corporation; Peter Goodman; Ralph
Casazzone; Richard K. Bendetson; Richard N. Goldman & Co.; Ronald E. English;
Ronald L. Rossetti; Samuel Cabot III; Scott H. Cummings; Sherif A. Nada;
Steven J. Sheftel; Tucks Point LP; and William G. Barton. The price per share
was $5.25, for an aggregate consideration of $2,210,003. In connection with
the Equity Financing, Adams, Harkness & Hill, Inc. received a commission of
$68,374.
In December 1997, the Company issued 14,697 shares of Class B Common Stock
to David Beman upon the exercise of a stock option with an exercise price of
$2.45 per share. The Company received total consideration of $36,008.
In March 1998, the Company issued 51,213 shares of Class B Common Stock to
Sancha Pty Limited, Nordrana Pty Limited, Shatten Pty Limited and Julian
Midwinter & Associates Pty Limited as partial consideration for its
acquisition of certain assets and liabilities of Sancha Computer Services Pty
Limited and Sancha Software Development Pty Limited which totaled $5.2
million.
In April 1998, the Company issued 48,768 shares of Class B Common Stock to
Simpson Fewster & Co. Pty Limited as trustee for the SFC Unit Trust for the
benefit of Mark Jonathan Simpson and Jody Louise Fewster as partial
consideration for its acquisition of certain assets and liabilities of Simpson
Fewster & Co. Pty Limited which totaled $1.5 million.
The shares of capital stock and other securities issued in the above
transactions were offered and sold in reliance upon the exemptions from
registration under Section 4(2) and Section 3(a)(9) of the Securities Act, or
Regulation D or Rule 701 promulgated under the Securities Act, relative to
sales by an issuer not involving any public offering. The recipients of the
above-described securities represented their intention to acquire the
securities for investment only and not with a view to distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. All recipients had adequate access, through employment or other
relationship, to information about the Registrant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Articles of Incorporation
3.2** Amended and Restated Bylaws
4.1** Form of Class B Common Stock Certificate
4.2** See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles and Amended and Restated Bylaws of the Registrant defining
rights of the holders of Class B Common Stock of the Registrant
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP, Counsel to the
Registrant, as to the legality of the shares being registered
10.1** Amended and Restated 1996 Equity Incentive Plan
10.2 Second Amended and Restated Employment Agreement by and between the
Registrant and James L. Bildner, dated as of February 16, 1998
10.3 Second Amended and Restated Employment Agreement by and between the
Registrant and William G. Barton, dated as of February 16, 1998
10.4** Investors' Rights Agreement by and among the Registrant and holders of
the Registrant's Series A Convertible Preferred Stock, dated as of
July 28, 1997
10.5** Stock Purchase Agreement by and among the Registrant and holders of
the Registrant's Series A Convertible Preferred Stock, dated as of
July 28, 1997
10.6** Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of December 31, 1996
10.7** Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of January 2, 1997
10.8** Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of May 31, 1997
10.9** Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of May 31, 1997
10.10** Full Recourse Promissory Note by and between the Registrant and James
L. Bildner, dated as of July 15, 1997
10.11 Amended and Restated Full Recourse Secured Promissory Note, dated as
of April 1, 1998, and Amended and Restated Pledge Agreement dated
April 1, 1998, by and between the Registrant and James L. Bildner.
10.12 Amended and Restated Full Recourse Secured Promissory Note, dated as
of April 1, 1998, and Amended and Restated Pledge Agreement dated
April 1, 1998, by and between the Registrant and James L. Bildner.
10.13** Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of December 31, 1996
10.14** Full Recourse Secured Promissory Note, dated as of February 28, 1997,
and Amended and Restated Pledge Agreement, dated as of August 1, 1997,
by and between the Registrant and William G. Barton
10.15** Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of February 28, 1997
10.16** Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of July 15, 1997
10.17** Full Recourse Promissory Note by and between the Registrant and F.
Thomas Latham, dated as of July 15, 1997
10.18 Amended and Restated Employment Agreement by and between the
Registrant and George K. Ross, dated as of February 16, 1998
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.19** Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 3, 1997
10.20** Office Lease by and between Urban West Business Park, Colony MB
Partners, L.P., as Landlord, and Tier Corporation, a California
Corporation, as Tenant, as amended July 29, 1997
10.21** Form of Indemnification Agreement
10.22** Tier Corporation 401(k) Plan, Summary Plan Description
10.23** Asset Purchase Agreement by and among the Registrant, Encore
Consulting LLC, Robert D. Beman, Thomas E. McCleod and David Myers,
dated as of December 31, 1996
10.24** Asset Purchase Agreement by and among the Registrant, Albanycrest
Limited, a Limited Liability Company Incorporated in England, and
Andrew David Armstrong, Thomas Thomson and Howard Moore, dated as of
July 11, 1997
10.25** Agreement for provision of consulting services by and between the
Registrant and Kaiser Foundation Health Plan, Inc.
10.26** Agreement for provision of consulting services by and between the
Registrant and the State of Missouri
10.27** Agreement for provision of consulting services by and between the
Registrant and Unisys Corporation (Arizona)
10.28** Agreement for provision of consulting services by and between the
Registrant and Unisys Corporation (Australia)
10.29** Form of Voting Trust Agreement
10.30** Employee Stock Purchase Plan
10.31** Voting Trust Agreement
10.32** Form of Buy-Sell Agreement between James L. Bildner and William G.
Barton
10.33*** Business Purchase Agreement by and among Sancha Computer Services Pty
Limited, Sancha Software Development Pty Limited and Tier
Technologies (Australia) Pty Limited, dated as of February 26, 1998
10.34*** Amendment of Business Purchase Agreement, among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited and
Tier Technologies (Australia) Pty Limited.
10.35 Revolving Credit Agreement by and between the Registrant, Tier
Technologies (United Kingdom) Inc. and BankBoston, N.A.
10.36 Agreement for provision of consulting services by and between the
Registrant and Humana, Inc.
10.37 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 10, 1998
21.1** Subsidiaries of the Registrant
23.1* Consent of Paul, Hastings, Janofsky & Walker LLP (included in legal
opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3 Consent of Ernst & Young, Independent Auditors
23.4 Consent of Ernst & Young, Independent Auditors
24.1 Powers of Attorney (included in signature page in Part II of the
Registration Statement)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-37661), as amended, initially filed on October 10, 1997, and
incorporated herein by reference.
*** Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
March 27, 1998, and incorporated herein by reference.
(b) Financial Statement Schedules
None
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WALNUT CREEK, STATE OF
CALIFORNIA, ON THE 7TH DAY OF MAY, 1998.
Tier Technologies, Inc.
/s/ James L. Bildner
By: _________________________________
JAMES L. BILDNER CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Bildner, William G. Barton and George
K. Ross, and each of them, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith to this Registration Statement and any
subsequent registration statement filed by the Registrant pursuant to Rule
462(b) of the Securities Act, which related to this Registration Statement)
and to file the same with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents,
or any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
/s/ James L. Bildner Chairman of the May 7, 1998
- ------------------------------------- Board and Chief
JAMES L. BILDNER Executive Officer
(Principal
Executive Officer)
/s/ William G. Barton President, Chief May 7, 1998
- ------------------------------------- Technology Officer
WILLIAM G. BARTON and Director
/s/ George K. Ross Executive Vice May 7, 1998
- ------------------------------------- President, Chief
GEORGE K. ROSS Financial Officer
and Director
(Principal
Financial and
Accounting Officer)
Director
- -------------------------------------
RONALD L. ROSSETTI
/s/ Samuel Cabot III Director May 7, 1998
- -------------------------------------
SAMUEL CABOT III
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Articles of Incorporation
3.2** Amended and Restated Bylaws
4.1** Form of Class B Common Stock Certificate
4.2** See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles and Amended and Restated Bylaws of the
Registrant defining rights of the holders of Class B Common
Stock of the Registrant
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP, Counsel
to the Registrant, as to the legality of the shares being
registered
10.1** Amended and Restated 1996 Equity Incentive Plan
10.2 Second Amended and Restated Employment Agreement by and
between the Registrant and James L. Bildner, dated as of
February 16, 1998
10.3 Second Amended and Restated Employment Agreement by and
between the Registrant and William G. Barton, dated as of
February 16, 1998
10.4** Investors' Rights Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997
10.5** Stock Purchase Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997
10.6** Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of December 31, 1996
10.7** Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of January 2, 1997
10.8** Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of May 31, 1997
10.9** Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of May 31, 1997
10.10** Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of July 15, 1997
10.11 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the
Registrant and James L. Bildner.
10.12 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the
Registrant and James L. Bildner.
10.13** Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of December 31, 1996
10.14** Full Recourse Secured Promissory Note, dated as of February
28, 1997, and Amended and Restated Pledge Agreement, dated
as of August 1, 1997, by and between the Registrant and
William G. Barton
10.15** Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of February 28, 1997
10.16** Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of July 15, 1997
10.17** Full Recourse Promissory Note by and between the Registrant
and F. Thomas Latham, dated as of July 15, 1997
10.18 Amended and Restated Employment Agreement by and between
the Registrant and George K. Ross, dated as of February 16,
1998
10.19** Full Recourse Promissory Note by and between the Registrant
and George K. Ross, dated as of February 3, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<C> <S> <C>
10.20** Office Lease by and between Urban West Business Park,
Colony MB Partners, L.P., as Landlord, and Tier
Corporation, a California Corporation, as Tenant, as
amended July 29, 1997
10.21** Form of Indemnification Agreement
10.22** Tier Corporation 401(k) Plan, Summary Plan Description
10.23** Asset Purchase Agreement by and among the Registrant,
Encore Consulting LLC, Robert D. Beman, Thomas E. McCleod
and David Myers, dated as of December 31, 1996
10.24** Asset Purchase Agreement by and among the Registrant,
Albanycrest Limited, a Limited Liability Company
Incorporated in England, and Andrew David Armstrong,
Thomas Thomson and Howard Moore, dated as of July 11, 1997
10.25** Agreement for provision of consulting services by and
between the Registrant and Kaiser Foundation Health Plan,
Inc.
10.26** Agreement for provision of consulting services by and
between the Registrant and the State of Missouri
10.27** Agreement for provision of consulting services by and
between the Registrant and Unisys Corporation (Arizona)
10.28** Agreement for provision of consulting services by and
between the Registrant and Unisys Corporation (Australia)
10.29** Form of Voting Trust Agreement
10.30** Employee Stock Purchase Plan
10.31** Voting Trust Agreement
10.32** Form of Buy-Sell Agreement between James L. Bildner and
William G. Barton
10.33*** Business Purchase Agreement by and among Sancha Computer
Services Pty Limited, Sancha Software Development Pty
Limited and Tier Technologies (Australia) Pty Limited,
dated as of February 26, 1998
10.34*** Amendment of Business Purchase Agreement, among Sancha
Computer Services Pty Limited, Sancha Software Development
Pty Limited and Tier Technologies (Australia) Pty Limited.
10.35 Revolving Credit Agreement by and between the Registrant,
Tier Technologies (United Kingdom) Inc. and BankBoston,
N.A.
10.36 Agreement for provision of consulting services by and
between the Registrant and Humana, Inc.
10.37 Full Recourse Promissory Note by and between the
Registrant and George K. Ross, dated as of February 10,
1998
21.1** Subsidiaries of the Registrant
23.1* Consent of Paul, Hastings, Janofsky & Walker LLP (included
in legal opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3 Consent of Ernst & Young, Independent Auditors
23.4 Consent of Ernst & Young, Independent Auditors
24.1 Powers of Attorney (included in signature page in Part II
of the Registration Statement)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-37661), as amended, initially filed on October 10, 1997, and
incorporated herein by reference.
*** Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
March 27, 1998, and incorporated herein by reference.
2
<PAGE>
EXHIBIT 10.2
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
------------------------------------------------
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") dated as
of February 16, 1998 by and between TIER TECHNOLOGIES, INC., a California
corporation (the "Company") and JAMES L. BILDNER ("Bildner").
In consideration of the mutual benefits derived from this Agreement and of
the agreements, covenants and provisions hereof, the parties hereto agree as
follows:
1. EMPLOYMENT
----------
1.1. Position. During the Term (as hereinafter defined) of this
--------
Agreement and subject to the terms and conditions set forth herein, the Company
agrees to employ Bildner as its Chairman of the Board and Chief Executive
Officer, reporting only to the Board of Directors of the Company.
1.2. Election to Office. During the Term of this Agreement, the Company
------------------
shall use its best efforts to sustain and continue Bildner's position and
designation as Chairman of the Board and Chief Executive Officer.
1.3. Fulfillment of Duties. As long as the Company sustains and
---------------------
continues Bildner's position and designation as Chairman and Chief Executive
Officer of the Company, Bildner shall (i) devote his full-time efforts during
normal business hours to the performance of his services hereunder, except
during vacation periods and periods of illness or incapacity and except that
nothing in this Agreement shall preclude Bildner from devoting reasonable
periods required for serving as a director, or member of a committee of, or
holding other positions, in any organization involving no conflict of interest
with the interests of the Company and (ii) perform his services hereunder
faithfully, diligently and to the best of his skill and ability.
1.4. Location. During the Term of this Agreement, Bildner will perform
--------
his duties and services at such locations as he shall deem appropriate, except
that Bildner agrees to make such business trips to the Company's principal
executive offices and to other locations as may be reasonable and necessary in
the performance of his services hereunder.
2. COMPENSATION AND BENEFITS
-------------------------
2.1. Salary. In consideration of and as compensation for the services
------
agreed to be performed by Bildner hereunder, the Company agrees to pay Bildner
during the Term of this Agreement a base salary (the "Base Salary") of not less
than $455,000 per year, payable bi-monthly in accordance with the Company's
regular payroll practices. The Company may review Bildner's Base Salary and
other compensation (including bonuses and incentive compensation) from time to
time during the Term of
1
<PAGE>
this Agreement and, at the recommendation of the Compensation Committee of the
Board of Directors of the Company (the "Committee"), may increase his Base
Salary or other compensation (including bonuses and incentive compensation) from
time to time. Any increase in Base Salary or other compensation (including
bonuses or incentive compensation) shall in no way limit or reduce any other
obligation of the Company hereunder and, once established at an increased rate,
Bildner's Base Salary hereunder shall not be reduced.
2.2 Incentive Compensation. During the term of this Agreement, in
----------------------
addition to the Base Salary provided in Section 2.1 above, Bildner shall be
eligible to receive additional incentive compensation, in an amount not to
exceed 85% of Bildner's then applicable Base Salary, upon achievement of
performance or other goals to be established from time to time by the Committee.
Such incentive compensation may be payable in cash, or in stock, stock options
or other stock based awards, or in any combination of cash and stock based
awards, as shall be determined by the Committee.
2.3 Participation in Benefit Plans. During the Term of this Agreement,
------------------------------
Bildner shall be entitled to participate in any pension plans, profit-sharing
plans and group insurance, medical, hospitalization, disability and other
benefit plans presently in effect (a partial list of which is attached hereto as
Exhibit A) or hereinafter adopted, which plans are generally applicable to the
most senior executives of the Company and to the extent he is eligible under the
general provisions thereof.
2.4 Reimbursement of Expenses. The Company will reimburse Bildner for all
-------------------------
business expenses, including, without limitation, traveling, entertainment and
similar expenses, incurred by Bildner on behalf of the Company during the Term
of this Agreement if such expenses are ordinary and necessary business expenses
incurred on behalf of the Company pursuant to the Company's standard expense
reimbursement policy, provided that Bildner shall provide the Company with such
itemized accounts, receipts or documentation for such expenses as are required
under the Company's policy regarding the reimbursement of such expenses.
2.5 Vacation and Sick Leave. During the Term of this Agreement, Bildner
-----------------------
will be entitled to three weeks of paid vacation per year. Bildner shall also
be entitled to paid sick leave in accordance with the policy applicable to the
other senior executives of the Company.
2.6 Relocation Loan and Housing Allowance.
-------------------------------------
(a) Concurrent with the execution of the First Amended and Restated
Agreement of December 31, 1996, the Company funded an unsecured loan to Bildner
in the principal amount of $50,000 bearing simple interest at 5.75% per annum
(the "Relocation Loan"). Repayment of the principal amount of the Relocation
Loan and any interest payable thereon shall continue to be forgiven, as follows:
(i) on a pro rata
2
<PAGE>
basis, during Bildner's employment with the Company, upon the close of business
on the last business day of each month commencing with the month ending December
31, 1996 and ending November 30, 1999 and (ii) in its entirety under the
circumstances set forth in Section 4.2 hereof. In the event that Bildner's
employment under this Agreement is terminated by Bildner without Good Reason (as
defined herein) or for Cause as defined in Section 4.1(iii)(C), Bildner shall
pay the total of unforgiven principal and interest due under the Relocation Loan
within ninety (90) days of the occurrence of such event. The Relocation Loan
shall be evidenced by a promissory note in form acceptable to Bildner and the
Company and consistent with the terms of this Agreement.
(b) During each month of his employment until the month ending
December 31, 1999, Bildner shall be entitled to receive a housing allowance of
$2,750 per month, which amount may be issued on a monthly basis, or at the
option of Bildner, in advance (the "Housing Allowance"). If the Housing
Allowance is paid in advance, and thereafter Mr. Bildner's employment hereunder
shall terminate for any reason whatsoever before December 31, 1999, Mr. Bildner
shall pay the Company, within ninety (90) days of such termination, an amount
equal to $2,750 for each complete month remaining from the date of his
termination to the month ending on December 31, 1999.
3. TERM
----
3.1. Term. The "Term" of employment under this Agreement means the
----
period commencing on December 31, 1996 and expiring on August 1, 2001 or the
earlier termination hereof pursuant to Section 4.1.
4. TERMINATION OF EMPLOYMENT
-------------------------
4.1. Events of Termination. Upon the occurrence of any of the
---------------------
events described in this Section 4.1 during the Term of this Agreement,
Bildner's employment hereunder shall terminate and Bildner shall be entitled to
the benefits provided in Section 4.2 hereof.
(i) Termination of Bildner's employment with the Company
due to Bildner's death.
(ii) If, as a result of Bildner's incapacity due to
physical or mental illness, injury or disability, Bildner shall have been absent
from his duties with the Company on a full-time basis for three consecutive
months, and within thirty days after the receipt of written Notice of
Termination (as hereinafter defined) he shall not have returned to the full-time
performance of his duties, the Company may terminate Bildner's employment for
"Disability." "Absent from his duties" means, for the purposes of this Section
4.1(ii), that Bildner is devoting less than 40 hours per week to his duties
under this Agreement.
3
<PAGE>
(iii) The Company shall be entitled to terminate Bildner's
employment for Cause. For purposes of this Agreement, "Cause" shall mean:
(A) the willful and continued failure by Bildner to
substantially perform his duties with the Company in good faith (other
than any such failure resulting from his incapacity due to physical or
mental illness, injury or disability or any such actual or anticipated
failure resulting from his termination for Good Reason (as hereinafter
defined)), after a demand for substantial performance is delivered to
him by the Board of Directors of the Company which identifies, in
reasonable detail, the manner in which the Board of Directors believes
that Bildner has not substantially performed his duties in good faith;
(B) the willful engaging by Bildner in conduct which causes
material harm to the Company, monetarily or otherwise; or
(C) Bildner's conviction of a felony arising from conduct
during the Term of this Agreement.
For purposes of this Subsection 4.1(iii), no act, or failure to act,
on Bildner's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company or its shareholders.
Notwithstanding the foregoing, Bildner shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than two-
thirds of the entire membership of the Board of Directors at a meeting of the
Board of Directors called and held for such purpose (after ten days notice to
him and an opportunity for him, together with his counsel, to appear before the
Board of Directors), finding that Bildner was guilty of conduct set forth above
in clauses (A), (B) or (C) of this Subsection 4.1(iii) and setting forth, in
reasonable detail, the basis for such finding.
(iv) Bildner shall be entitled to terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall, without Bildner's
express written consent, mean:
(A) the assignment to Bildner of any duties substantially
inconsistent with his status as Chairman and Chief Executive Officer
of the Company;
(B) a reduction by the Company in Bildner's Base Salary as in
effect on the date hereof or as the same may be increased from time to
time;
4
<PAGE>
(C) the relocation of the Company's principal executive offices
to a location not approved by Bildner or the Company's requiring
Bildner to be based in a location not approved by Bildner;
(D) the failure by the Company to continue in effect any
pension, health, compensation or other benefit plan in which Bildner
participates (including those listed on Exhibit A), or any similar
plans hereafter adopted, unless an equitable arrangement (as
determined by an employee benefit consultant of national standing
selected by the Company and reasonably satisfactory to Bildner),
embodied in an ongoing substitute or alternative plan, has been made
with respect to such plan, or the failure by the Company to continue
his participation therein, or the taking of any action by the Company
which would directly or indirectly materially reduce any of such
benefits or deprive Bildner of any material fringe benefit presently
enjoyed by him;
(E) the failure of the Company to obtain a satisfactory
agreement from any successor (by means of merger, consolidation, sale
of assets or otherwise) to assume and agree to perform this Agreement
as contemplated by Section 5 hereof; or
(F) any purported termination of Bildner's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (v) of this Section 4.1 (and, if
applicable, Subsection (iii) of this Section 4.1); and for purposes of
this Agreement, no such purported termination shall be effective.
Bildner's right to terminate his employment pursuant to this
Subsection 4.1(iv) shall not be affected by his incapacity due to
physical or mental illness, injury or disability. The Company may,
solely during the period of such incapacity, make arrangements for the
discharge of any of Bildner's duties hereunder by another officer of
the Company, but any such arrangement shall not affect or in any way
diminish Bildner's rights hereunder.
(v) Any purported termination by the Company or by Bildner shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Sections 4.3 and 8.1 hereof.
(vi) Notwithstanding the pendency of a Notice of Dispute (as
hereinafter defined), the Company will continue to pay Bildner his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue his participation in
all incentive compensation, bonus, option, benefit and insurance plans in which
he was participating when the notice giving rise to the dispute was given (or
provide Bildner with benefits substantially
5
<PAGE>
similar, as determined by an employee benefit consultant of national standing
selected by the Company and reasonably satisfactory to Bildner, to those under
such plans), until the dispute is finally resolved. Amounts paid under this
Section 4.1 (vi) are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement or otherwise. If it is finally determined that Bildner terminated his
employment for other than Good Reason or the Company rightfully terminated
Bildner's employment for Cause, Bildner shall reimburse the Company for all
amounts paid to him under this Section 4.1(vi) (less any amounts determined to
be owing to Bildner under any other provision of this Agreement), with interest
thereon calculated at a rate of six percent per annum.
4.2. Effect of Termination.
---------------------
(i) Upon the termination of Bildner's employment as a result of his
Disability, Bildner shall be entitled to receive:
(A) for an additional twenty-four months after the date of such
termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) one hundred
percent (100%) of the maximum amount of incentive compensation for
which Bildner could have become eligible during the year in which such
termination occurs.
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse.
(C) forgiveness of any then outstanding principal amount plus
accrued interest of the Relocation Loan in its entirety.
(D) the indemnity described in Section 4.2(vi) hereto.
(ii) Upon the termination of Bildner's employment as a result of his
death, Bildner's heirs, devisees, executors or other legal representatives
shall receive:
(A) for an additional twenty-four months from the date of such
termination, his Base Salary and any and all benefits to which he is
6
<PAGE>
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) one hundred
percent (100%) of the maximum amount of incentive compensation for
which Bildner could have become eligible during the year in which such
termination occurs.
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse.
(C) forgiveness of any then outstanding principal amount plus
accrued interest of the Relocation Loan in its entirety.
(D) the indemnity described in Section 4.2(vi) hereto.
(iii) Subject to Section 4.l (vi) hereof: (a) if Bildner's
employment shall be terminated for Cause as described in Section 4.1(iii)(A) or
(B) hereto, the Company shall pay Bildner his full Base Salary and other
benefits to which he is entitled for a period of twenty-four months, and shall
continue to provide the indemnity described in Section 4.2(vi) hereto; and (b)
if Bildner's employment shall be terminated for Cause as described in Section
4.1(iii)(C) hereto, the Company shall pay Bildner his full Base Salary and other
benefits to which he is entitled, through the Date of Termination at the rate in
effect at the time the Notice of Termination is given, and the Company shall
have no further obligations to him under this Agreement, with the exception of
the indemnity described in Section 4.2(vi) hereto. Upon any such termination
for Cause, the outstanding principal amount of the Relocation Loan plus accrued
interest shall be due and payable in full.
(iv) If Bildner's employment by the Company shall be terminated (a)
by the Company other than for Cause, Death or Disability, or (b) by Bildner for
Good Reason, then Bildner shall be entitled to the benefits provided below:
(A) the Company shall pay Bildner, not later than the fifth day
following the Date of Termination, a lump sum in cash equal to the sum
of (i) twenty-four months of Base Salary, at the rate of Bildner's
Base Salary on the Date of Termination, discounted to the then present
value at a discount rate of ten percent per annum applied to each
future payment
7
<PAGE>
from the time it would have become payable; and (ii) one hundred
percent (100%) of the maximum amount of incentive compensation for
which Bildner could have become eligible during the year in which such
termination occurs;
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse; and
(C) forgiveness of the then outstanding principal balance plus
accrued interest of the Relocation Loan in its entirety.
(D) the indemnity described in Section 4.2(vi) hereto.
(v) Bildner shall not be required to mitigate the amount of any
payment provided for in this Section 4.2 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in this
Section 4.2 be subject to set-off or reduced by any compensation earned by him
as the result of employment by another employer or by benefits after the Date of
Termination, or otherwise.
(vi) In connection with the termination of Bildner's employment for
any reason, the Company will take all necessary action to release Bildner from
any obligations under any guarantees by Bildner of the Company's corporate debt.
Bildner's employment shall not be terminated until such time as he is removed or
replaced with respect to any such guarantee. In addition, after the Date of
Termination, the Company will indemnify Bildner for any claims, including all
legal fees and expenses associated therewith, made by any lender with respect to
any such guarantee.
4.3. Certain Definitions. For the purposes of this Section 4, the
-------------------
following terms shall have the meanings set forth in this Section 4.3:
(i) "Notice of Termination" means a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of employment under the provision so indicated.
8
<PAGE>
(ii) "Date of Termination" means (i) if employment is terminated for
Disability, thirty days after Notice of Termination is given (provided that
Bildner shall not have returned to the performance of his duties on a full-time
basis during such thirty-day period), and (ii) if employment is terminated
pursuant to Subsection (iii) or (iv) of Section 4.1 or for any other reason, the
date specified in the Notice of Termination (which, in the case of a termination
pursuant to Subsection (iii) of Section 4.1, shall not be less than ten days
and, in the case of a termination pursuant to Subsection (iv) of Section 4.1,
shall not be more than sixty days, respectively, from the date such Notice of
Termination is given); provided that if within thirty days after any Notice of
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination (a "Notice of
Dispute"), the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a Notice of Dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence.
5. SUCCESSORS
----------
5.1. Assumption by Successors. The Company shall require any successor
------------------------
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Bildner to compensation from the Company in the same
amount and on the same terms as he would be entitled hereunder if he terminates
his employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
6. NON-COMPETITION AND CONFIDENTIALITY
-----------------------------------
6.1. Non-Competition. During Bildner's employment by the Company
---------------
hereunder and during the period of one year after the termination of Bildner's
employment hereunder by the Company for Cause or by Bildner for other than Good
Reason:
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<PAGE>
(i) Bildner will not directly compete with the business of the
Company so as to cause the Company to lose material revenue from any client
account which is in existence on the Date of Termination.
(ii) Bildner will not directly or indirectly employ or solicit for
employment any person whom he knows to be an employee of the Company or any
subsidiary of the Company.
6.2. Confidential Information.
------------------------
(a) Bildner agrees and acknowledges that the Confidential
Information of the Company (as hereinafter defined) is valuable, special and
unique to its business; that such business depends on such Confidential
Information; and that the Company wishes to protect such Confidential
Information by keeping it confidential for the use and benefit of the Company.
Based on the foregoing, Bildner agrees to undertake the following obligations
with respect to such Confidential Information:
(i) Bildner agrees to keep any and all Confidential
Information in trust for the use and benefit of the Company;
(ii) Bildner agrees that, except as required by Bildner's
duties hereunder or authorized in writing by the Company, he will not
at any time during and for five years after the termination of his
employment with the Company, disclose or use, directly or indirectly,
any Confidential Information of the Company;
(iii) Bildner agrees to take all reasonable steps necessary, or
reasonably requested by the Company, to ensure that all Confidential
Information of the Company is kept confidential for the use and
benefit of the Company; and
(iv) Bildner agrees that, upon termination of his employment by
the Company or at any other time the Company may in writing so
request, he will promptly deliver to the Company all materials
constituting Confidential Information (including all copies thereof)
that are in the possession of or under the control of Bildner.
Bildner further agrees that, if requested by the Company to return any
Confidential Information pursuant to this Subsection 6.2(a) (iv), he
will not make or retain any copy of or extract from such materials.
(b) For purposes of this Section 6.2, Confidential Information means
any and all information developed by or for the Company of which Bildner gained
knowledge by reason of his employment by the Company prior the date hereof or
his employment under this Agreement that is not generally known in any industry
in which the Company is or may become engaged. Confidential Information
includes, but is not
10
<PAGE>
limited to, any and all information developed by or for the Company concerning
plans, marketing and sales methods, materials, processes, business forms,
procedures, devices used by the Company, contractors and customers with which
the Company has dealt prior to Bildner's termination of employment with the
Company, plans for development of new products, services and expansion into new
areas or markets, internal operations, and any trade secrets and proprietary
information of any type owned by the Company together with all written, graphic
and other materials relating to all or any part of the same.
In the event that Bildner is, in the opinion of his legal counsel
(which counsel shall be acceptable to the Company in its reasonable discretion),
required to disclose any Confidential Information to any federal, state, local
or foreign judicial, legislative, administrative or other authority, agency or
instrumentality or is required to disclose such Confidential Information by
reason of his fiduciary duties to the Company or its shareholders or by any
federal, state, local or foreign securities, blue-sky or other similar laws,
rules, regulations or ordinances, then, notwithstanding anything in this Section
6.2 to the contrary, Bildner may disclose such Confidential Information to the
extent, and to the persons and entities, so required without any liability
hereunder, without constituting a breach hereunder and without giving rise to a
right of the Company to terminate Bildner's employment (for Cause or otherwise)
hereunder. Bildner shall notify the Company of any disclosure required to be
made in connection with the preceding sentence as soon as practicable after
Bildner becomes aware of such required disclosure.
7. REMEDIES
--------
7.1. Injunctive Relief. Bildner acknowledges and agrees that the
-----------------
covenants and obligations contained in Sections 6.1 and 6.2 relate to special,
unique and extraordinary matters and that a violation of any of the terms of
such sections will cause the Company irreparable injury for which adequate
remedy at law is not available. Therefore, Bildner agrees that the Company
shall be entitled to an injunction, restraining order, or other equitable relief
from any court of competent jurisdiction, restraining Bildner from committing
any violation of the covenants and obligations set forth in Sections 6.1 and 6.2
hereof.
7.2. Remedies Cumulative. The Company's rights and remedies under
-------------------
Section 7.1 hereof are cumulative and are in addition to any other rights and
remedies the Company may have at law or in equity.
11
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8. MISCELLANEOUS
-------------
8.1. Notices. Any written notice, required or permitted under this
-------
Agreement, shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight courier. Written notices must be delivered to the
receiving party at his or its address on the signature page of this Agreement.
The parties may change the address at which written notices are to be received
in accordance with this section.
8.2. Assignment. Neither the Company nor Bildner may assign, transfer,
----------
or delegate its or his rights or obligations hereunder and any attempt to do so
shall be void. This Agreement shall be binding upon and shall inure to the
benefit of the Company and its successors and assigns.
8.3. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties with respect to the subject matter hereof, and all other prior
agreements, written or oral, are hereby merged herein and are of no further
force or effect. This Agreement may be modified or amended only by a written
agreement that is signed by the Company and Bildner. No waiver of any section
or provision of this Agreement will be valid unless such waiver is in writing
and signed by the party against whom enforcement of the waiver is sought. The
waiver by the Company of any section or provision of this Agreement shall not
apply to any subsequent breach of this Agreement. Captions to the various
sections in this Agreement are for the convenience of the parties only and shall
not affect the meaning or interpretation of this Agreement. This Agreement may
be executed in several counterparts, each of which shall be deemed an original,
but together they shall constitute one and the same instrument.
8.4. Severability. The provisions of this Agreement shall be deemed
------------
severable, and if any part of any provision is held illegal, void, or invalid
under applicable law such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If
any provision of this Agreement is held illegal, void, or invalid in its
entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
8.5. Continuing Obligations. Sections 4.2, 6.1 and 6.2 of this
----------------------
Agreement shall continue and survive the termination of this Agreement.
8.6. Applicable Law. This Agreement and the rights and obligations of
--------------
the Company and Bildner thereunder shall be governed by and construed and
enforced under the laws of the State of California applicable to agreements made
and to be performed entirely within such State.
12
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
The "Company"
TIER TECHNOLOGIES, INC.
By: /s/ George K. Ross
-----------------------------
Title: Executive Vice President, Chief
Financial Officer
--------------------------
Address: 1350 Treat Blvd., Ste. 250
Walnut Creek, CA 94596
"Bildner"
/s/ James L. Bildner
---------------------------------
JAMES L. BILDNER
ADDRESS: 1350 TREAT BLVD., STE. 250
WALNUT CREEK, CA 94596
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EXHIBIT A
Benefits for Bildner's Employment Agreement
-------------------------------------------
1. Group Term and Key Man Life Insurance
2. Standard medical plan.
3. Standard three weeks vacation.
4. Standard 11 holidays.
5. Standard long term disability insurance.
6. Automobile (owned by company) or mutually acceptable allowance in
lieu thereof.
7. Pension supplement.
8. Standard defined benefit pension plan.
9. Incentive Compensation plan.
10. D & O liability insurance.
11. Annual physical examination.
12. Thrift savings (401(k) Plan.)
13. Personal liability insurance.
14. Other.
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EXHIBIT 10.3
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
------------------------------------------------
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") dated as
of February 16, 1998 by and between TIER TECHNOLOGIES, INC., a California
corporation (the "Company") and WILLIAM G. BARTON ("Barton").
In consideration of the mutual benefits derived from this Agreement and of
the agreements, covenants and provisions hereof, the parties hereto agree as
follows:
1. EMPLOYMENT
----------
1.1. Position. During the Term (as hereinafter defined) of this
--------
Agreement and subject to the terms and conditions set forth herein, the Company
agrees to employ Barton as its President and Chief Technology Officer, reporting
to the Chief Executive Officer and the Board of Directors of the Company.
1.2. Election to Office. During the Term of this Agreement, the Company
------------------
shall use its best efforts to sustain and continue Barton's position and
designation as President and Chief Technology Officer.
1.3. Fulfillment of Duties. As long as the Company sustains and
---------------------
continues Barton's position and designation as President and Chief Technology
Officer of the Company, Barton shall (i) devote his full-time efforts during
normal business hours to the performance of his services hereunder, except
during vacation periods and periods of illness or incapacity and except that
nothing in this Agreement shall preclude Barton from devoting reasonable periods
required for serving as a director, or member of a committee of, or holding
other positions, in any organization involving no conflict of interest with the
interests of the Company and (ii) perform his services hereunder faithfully,
diligently and to the best of his skill and ability.
1.4. Location. During the Term of this Agreement, Barton will perform
--------
his duties and services at the Company's principal executive offices in Walnut
Creek, California, except that Barton agrees to make such business trips to
other locations as may be reasonable and necessary in the performance of his
services hereunder.
2. COMPENSATION AND BENEFITS
-------------------------
2.1. Salary. In consideration of and as compensation for the services
------
agreed to be performed by Barton hereunder, the Company agrees to pay Barton
during the Term of this Agreement a base salary (the "Base Salary") of not less
than $310,000 per year, payable bi-monthly in accordance with the Company's
regular payroll practices. The Company may review Barton's Base Salary and
other compensation (including bonuses and incentive compensation) from time to
time during the Term of
1
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this Agreement and, at the recommendation of the Compensation Committee of the
Board of Directors of the Company (the "Committee"), may increase his Base
Salary or other compensation (including bonuses and incentive compensation) from
time to time. Any increase in Base Salary or other compensation (including
bonuses or incentive compensation) shall in no way limit or reduce any other
obligation of the Company hereunder and, once established at an increased rate,
Barton's Base Salary hereunder shall not be reduced.
2.2 Incentive Compensation. During the term of this Agreement, in
----------------------
addition to the Base Salary provided in Section 2.1 above, Barton shall be
eligible to receive additional incentive compensation, in an amount not to
exceed 75% of Barton's then applicable Base Salary, upon achievement of
performance or other goals to be established from time to time by the Committee.
Such incentive compensation may be payable in cash, or in stock, stock options
or other stock based awards, or in any combination of cash and stock based
awards, as shall be determined by the Committee.
2.3 Participation in Benefit Plans. During the Term of this Agreement,
------------------------------
Barton shall be entitled to participate in any pension plans, profit-sharing
plans and group insurance, medical, hospitalization, disability and other
benefit plans presently in effect (a partial list of which is attached hereto as
Exhibit A) or hereinafter adopted, which plans are generally applicable to the
most senior executives of the Company and to the extent he is eligible under the
general provisions thereof.
2.4 Reimbursement of Expenses. The Company will reimburse Barton for all
-------------------------
business expenses, including, without limitation, traveling, entertainment and
similar expenses, incurred by Barton on behalf of the Company during the Term of
this Agreement if such expenses are ordinary and necessary business expenses
incurred on behalf of the Company pursuant to the Company's standard expense
reimbursement policy, provided that Barton shall provide the Company with such
itemized accounts, receipts or documentation for such expenses as are required
under the Company's policy regarding the reimbursement of such expenses.
2.5 Vacation and Sick Leave. During the Term of this Agreement, Barton
-----------------------
will be entitled to three weeks of paid vacation per year. Barton shall also be
entitled to paid sick leave in accordance with the policy applicable to the
other senior executives of the Company.
2.6 MBA Loan Reimbursement. During each month of the term, commencing
----------------------
with the month beginning January 1, 1997 and ending with the month December 31,
1999, the Company will pay Barton the sum of $1,278, payable in a single
installment monthly in arrears concurrent with the payment of his Base Salary.
Barton shall apply these payments against the outstanding principal amount of an
educational loan made in Barton by a third party lender in the aggregate
principal amount of $46,000 (the "MBA Loan"). The original
2
<PAGE>
principal amount of the MBA Loan, less all payments from time to time made to
Barton under this Section 2.6, is referred to herein as the MBA Loan Balance.
3. TERM
----
3.1. Term. The "Term" of employment under this Agreement means the period
----
commencing on December 31, 1996 and expiring on August 1, 2001 or the earlier
termination hereof pursuant to Section 4.1.
4. TERMINATION OF EMPLOYMENT
-------------------------
4.1. Events of Termination. Upon the occurrence of any of the
---------------------
events described in this Section 4.1 during the Term of this Agreement, Barton's
employment hereunder shall terminate and Barton shall be entitled to the
benefits provided in Section 4.2 hereof.
(i) Termination of Barton's employment with the Company due
to Barton's death.
(ii) If, as a result of Barton's incapacity due to physical
or mental illness, injury or disability, Barton shall have been absent from his
duties with the Company on a full-time basis for three consecutive months, and
within thirty days after the receipt of written Notice of Termination (as
hereinafter defined) he shall not have returned to the full-time performance of
his duties, the Company may terminate Barton's employment for "Disability."
"Absent from his duties" means, for the purposes of this Section 4.1(ii), that
Barton is devoting less than 40 hours per week to his duties under this
Agreement.
(iii) The Company shall be entitled to terminate Barton's
employment for Cause. For purposes of this Agreement, "Cause" shall mean:
(A) the willful and continued failure by Barton to
substantially perform his duties with the Company in good faith (other
than any such failure resulting from his incapacity due to physical or
mental illness, injury or disability or any such actual or anticipated
failure resulting from his termination for Good Reason (as hereinafter
defined)), after a demand for substantial performance is delivered to
him by the Board of Directors of the Company which identifies, in
reasonable detail, the manner in which the Board of Directors believes
that Barton has not substantially performed his duties in good faith;
(B) the willful engaging by Barton in conduct which causes
material harm to the Company, monetarily or otherwise; or
3
<PAGE>
(C) Barton's conviction of a felony arising from conduct during
the Term of this Agreement.
For purposes of this Subsection 4.1(iii), no act, or failure to act,
on Barton's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company or its shareholders.
Notwithstanding the foregoing, Barton shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than two-
thirds of the entire membership of the Board of Directors at a meeting of the
Board of Directors called and held for such purpose (after ten days notice to
him and an opportunity for him, together with his counsel, to appear before the
Board of Directors), finding that Barton was guilty of conduct set forth above
in clauses (A), (B) or (C) of this Subsection 4.1(iii) and setting forth, in
reasonable detail, the basis for such finding.
(iv) Barton shall be entitled to terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall, without Barton's
express written consent, mean:
(A) the assignment to Barton of any duties substantially
inconsistent with his status as President and Chief Technology Officer
of the Company;
(B) a reduction by the Company in Barton's Base Salary as in
effect on the date hereof or as the same may be increased from time to
time;
(C) the relocation of the Company's principal executive offices
to a location not approved by Barton or the Company's requiring Barton
to be based in a location not approved by Barton;
(D) the failure by the Company to continue in effect any
pension, health, compensation or other benefit plan in which Barton
participates (including those listed on Exhibit A), or any similar
plans hereafter adopted, unless an equitable arrangement (as
determined by an employee benefit consultant of national standing
selected by the Company and reasonably satisfactory to Barton),
embodied in an ongoing substitute or alternative plan, has been made
with respect to such plan, or the failure by the Company to continue
his participation therein, or the taking of any action by the Company
which would directly or indirectly materially reduce any of such
benefits or deprive Barton of any material fringe benefit presently
enjoyed by him;
4
<PAGE>
(E) the failure of the Company to obtain a satisfactory
agreement from any successor (by means of merger, consolidation, sale
of assets or otherwise) to assume and agree to perform this Agreement
as contemplated by Section 5 hereof; or
(F) any purported termination of Barton's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (v) of this Section 4.1 (and, if
applicable, Subsection (iii) of this Section 4.1); and for purposes of
this Agreement, no such purported termination shall be effective.
Barton's right to terminate his employment pursuant to this
Subsection 4.1(iv) shall not be affected by his incapacity due to
physical or mental illness, injury or disability. The Company may,
solely during the period of such incapacity, make arrangements for the
discharge of any of Barton's duties hereunder by another officer of
the Company, but any such arrangement shall not affect or in any way
diminish Barton's rights hereunder.
(v) Any purported termination by the Company or by Barton shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Sections 4.3 and 8.1 hereof.
(vi) Notwithstanding the pendency of a Notice of Dispute (as
hereinafter defined), the Company will continue to pay Barton his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue his participation in
all incentive compensation, bonus, option, benefit and insurance plans in which
he was participating when the notice giving rise to the dispute was given (or
provide Barton with benefits substantially similar, as determined by an employee
benefit consultant of national standing selected by the Company and reasonably
satisfactory to Barton, to those under such plans), until the dispute is finally
resolved. Amounts paid under this Section 4.1 (vi) are in addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement or otherwise. If it is finally
determined that Barton terminated his employment for other than Good Reason or
the Company rightfully terminated Barton's employment for Cause, Barton shall
reimburse the Company for all amounts paid to him under this Section 4.1(vi)
(less any amounts determined to be owing to Barton under any other provision of
this Agreement), with interest thereon calculated at a rate of six percent per
annum.
4.2. Effect of Termination.
---------------------
(i) Upon the termination of Barton's employment as a result of his
Disability, Barton shall be entitled to receive:
5
<PAGE>
(A) for an additional twenty-four months after the date of such
termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) one hundred
percent (100%) of the maximum amount of incentive compensation for
which Barton could have become eligible during the year in which such
termination occurs.
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse.
(C) an amount equal to the MBA Loan Balance.
(D) the indemnity described in Section 4.2(vi) hereto.
(ii) Upon the termination of Barton's employment as a result of his
death, Barton's heirs, devisees, executors or other legal representatives shall
receive:
(A) for an additional twenty-four months from the date of such
termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) one hundred
percent (100%) of the maximum amount of incentive compensation for
which Barton could have become eligible during the year in which such
termination occurs.
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse.
6
<PAGE>
(C) an amount equal to the MBA Loan Balance.
(D) the indemnity described in Section 4.2(vi) hereto.
(iii) Subject to Section 4.l (vi) hereof: (a) if Barton's employment
shall be terminated for Cause as described in Section 4.1(iii)(A) or (B) hereto,
the Company shall pay Barton his full Base Salary and other benefits to which he
is entitled for a period of twenty-four months, and shall continue to provide
the indemnity described in Section 4.2(vi) hereto; and (b) if Barton's
employment shall be terminated for Cause as described in Section 4.1(iii)(C)
hereto, the Company shall pay Barton his full Base Salary and other benefits to
which he is entitled, through the Date of Termination at the rate in effect at
the time the Notice of Termination is given, and the Company shall have no
further obligations to him under this Agreement, with the exception of the
indemnity described in Section 4.2(vi) hereto.
(iv) If Barton's employment by the Company shall be terminated (a)
by the Company other than for Cause, Death or Disability, or (b) by Barton for
Good Reason, then Barton shall be entitled to the benefits provided below:
(A) the Company shall pay Barton, not later than the fifth day
following the Date of Termination, a lump sum in cash equal to the sum
of (i) twenty-four months of Base Salary, at the rate of Barton's Base
Salary on the Date of Termination, discounted to the then present
value at a discount rate of ten percent per annum applied to each
future payment from the time it would have become payable; and (ii)
one hundred percent (100%) of the maximum amount of incentive
compensation for which Barton could have become eligible during the
year in which such termination occurs;
(B) any options to purchase stock (common or otherwise) in the
Company granted pursuant to any plan or otherwise, or any equivalent
or similar rights which appreciate or tend to appreciate as the value
of the Company's stock appreciates, shall become immediately
accelerated and fully vested and any restrictions on such options or
equivalent or similar rights shall, to the extent permissible under
applicable securities laws, fully lapse; and the Company shall
endeavor to cause any restrictions on such options or equivalent or
similar rights not lapsed by operation of this clause to so lapse; and
(C) an amount equal to the MBA Loan Balance.
(D) the indemnity described in Section 4.2(vi) hereto.
7
<PAGE>
(v) Barton shall not be required to mitigate the amount of any
payment provided for in this Section 4.2 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in this
Section 4.2 be subject to set-off or reduced by any compensation earned by him
as the result of employment by another employer or by benefits after the Date of
Termination, or otherwise.
(vi) In connection with the termination of Barton's employment for any
reason, the Company will take all necessary action to release Barton from any
obligations under any guarantees by Barton of the Company's corporate debt.
Barton's employment shall not be terminated until such time as he is removed or
replaced with respect to any such guarantee. In addition, after the Date of
Termination, the Company will indemnify Barton for any claims, including all
legal fees and expenses associated therewith, made by any lender with respect to
any such guarantee.
4.3. Certain Definitions. For the purposes of this Section 4, the
-------------------
following terms shall have the meanings set forth in this Section 4.3:
(i) "Notice of Termination" means a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of employment under the provision so indicated.
(ii) "Date of Termination" means (i) if employment is terminated for
Disability, thirty days after Notice of Termination is given (provided that
Barton shall not have returned to the performance of his duties on a full-time
basis during such thirty-day period), and (ii) if employment is terminated
pursuant to Subsection (iii) or (iv) of Section 4.1 or for any other reason, the
date specified in the Notice of Termination (which, in the case of a termination
pursuant to Subsection (iii) of Section 4.1, shall not be less than ten days
and, in the case of a termination pursuant to Subsection (iv) of Section 4.1,
shall not be more than sixty days, respectively, from the date such Notice of
Termination is given); provided that if within thirty days after any Notice of
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination (a "Notice of
Dispute"), the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a Notice of Dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence.
8
<PAGE>
5. SUCCESSORS
----------
5.1. Assumption by Successors. The Company shall require any successor
------------------------
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Barton to compensation from the Company in the same
amount and on the same terms as he would be entitled hereunder if he terminates
his employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
6. NON-COMPETITION AND CONFIDENTIALITY
-----------------------------------
6.1. Non-Competition. During Barton's employment by the Company
---------------
hereunder and during the period of one year after the termination of Barton's
employment hereunder by the Company for Cause or by Barton for other than Good
Reason:
(i) Barton will not directly compete with the business of the
Company so as to cause the Company to lose material revenue from any client
account which is in existence on the Date of Termination.
(ii) Barton will not directly or indirectly employ or solicit for
employment any person whom he knows to be an employee of the Company or any
subsidiary of the Company.
6.2. Confidential Information.
------------------------
(a) Barton agrees and acknowledges that the Confidential Information
of the Company (as hereinafter defined) is valuable, special and unique to its
business; that such business depends on such Confidential Information; and that
the Company wishes to protect such Confidential Information by keeping it
confidential for the use and benefit of the Company. Based on the foregoing,
Barton agrees to undertake the following obligations with respect to such
Confidential Information:
(i) Barton agrees to keep any and all Confidential Information
in trust for the use and benefit of the Company;
9
<PAGE>
(ii) Barton agrees that, except as required by Barton's duties
hereunder or authorized in writing by the Company, he will not at any
time during and for five years after the termination of his employment
with the Company, disclose or use, directly or indirectly, any
Confidential Information of the Company;
(iii) Barton agrees to take all reasonable steps necessary, or
reasonably requested by the Company, to ensure that all Confidential
Information of the Company is kept confidential for the use and
benefit of the Company; and
(iv) Barton agrees that, upon termination of his employment by
the Company or at any other time the Company may in writing so
request, he will promptly deliver to the Company all materials
constituting Confidential Information (including all copies thereof)
that are in the possession of or under the control of Barton. Barton
further agrees that, if requested by the Company to return any
Confidential Information pursuant to this Subsection 6.2(a) (iv), he
will not make or retain any copy of or extract from such materials.
(b) For purposes of this Section 6.2, Confidential Information means
any and all information developed by or for the Company of which Barton gained
knowledge by reason of his employment by the Company prior the date hereof or
his employment under this Agreement that is not generally known in any industry
in which the Company is or may become engaged. Confidential Information
includes, but is not limited to, any and all information developed by or for the
Company concerning plans, marketing and sales methods, materials, processes,
business forms, procedures, devices used by the Company, contractors and
customers with which the Company has dealt prior to Barton's termination of
employment with the Company, plans for development of new products, services and
expansion into new areas or markets, internal operations, and any trade secrets
and proprietary information of any type owned by the Company together with all
written, graphic and other materials relating to all or any part of the same.
In the event that Barton is, in the opinion of his legal counsel
(which counsel shall be acceptable to the Company in its reasonable discretion),
required to disclose any Confidential Information to any federal, state, local
or foreign judicial, legislative, administrative or other authority, agency or
instrumentality or is required to disclose such Confidential Information by
reason of his fiduciary duties to the Company or its shareholders or by any
federal, state, local or foreign securities, blue-sky or other similar laws,
rules, regulations or ordinances, then, notwithstanding anything in this Section
6.2 to the contrary, Barton may disclose such Confidential Information to the
extent, and to the persons and entities, so required without any liability
hereunder, without constituting a breach hereunder and without giving rise to a
right of the Company to terminate Barton's employment (for Cause or otherwise)
hereunder.
10
<PAGE>
Barton shall notify the Company of any disclosure required to be made in
connection with the preceding sentence as soon as practicable after Barton
becomes aware of such required disclosure.
7. REMEDIES
--------
7.1. Injunctive Relief. Barton acknowledges and agrees that the
-----------------
covenants and obligations contained in Sections 6.1 and 6.2 relate to special,
unique and extraordinary matters and that a violation of any of the terms of
such sections will cause the Company irreparable injury for which adequate
remedy at law is not available. Therefore, Barton agrees that the Company shall
be entitled to an injunction, restraining order, or other equitable relief from
any court of competent jurisdiction, restraining Barton from committing any
violation of the covenants and obligations set forth in Sections 6.1 and 6.2
hereof.
7.2. Remedies Cumulative. The Company's rights and remedies under
-------------------
Section 7.1 hereof are cumulative and are in addition to any other rights and
remedies the Company may have at law or in equity.
8. MISCELLANEOUS
-------------
8.1. Notices. Any written notice, required or permitted under this
-------
Agreement, shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight courier. Written notices must be delivered to the
receiving party at his or its address on the signature page of this Agreement.
The parties may change the address at which written notices are to be received
in accordance with this section.
8.2. Assignment. Neither the Company nor Barton may assign, transfer,
----------
or delegate its or his rights or obligations hereunder and any attempt to do so
shall be void. This Agreement shall be binding upon and shall inure to the
benefit of the Company and its successors and assigns.
8.3. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties with respect to the subject matter hereof, and all other prior
agreements, written or oral, are hereby merged herein and are of no further
force or effect. This Agreement may be modified or amended only by a written
agreement that is signed by the Company and Barton. No waiver of any section or
provision of this Agreement will be valid unless such waiver is in writing and
signed by the party against whom enforcement of the waiver is sought. The
waiver by the Company of any section or provision of this Agreement shall not
apply to any subsequent breach of this Agreement. Captions to the various
sections in this Agreement are for the convenience of the parties only and shall
not affect the meaning or interpretation of this Agreement. This Agreement may
be executed in several counterparts, each of which shall be deemed an original,
but together they shall constitute one and the same instrument.
11
<PAGE>
8.4. Severability. The provisions of this Agreement shall be deemed
------------
severable, and if any part of any provision is held illegal, void, or invalid
under applicable law such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If
any provision of this Agreement is held illegal, void, or invalid in its
entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
8.5. Continuing Obligations. Sections 4.2, 6.1 and 6.2 of this
----------------------
Agreement shall continue and survive the termination of this Agreement.
8.6. Applicable Law. This Agreement and the rights and obligations of
--------------
the Company and Barton thereunder shall be governed by and construed and
enforced under the laws of the State of California applicable to agreements made
and to be performed entirely within such State.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
The "Company"
TIER TECHNOLOGIES, INC.
By: /s/ James L. Bildner
---------------------------
Title: Chairman of the Board,
Chief Executive Officer
------------------------
Address: 1350 Treat Blvd., Ste. 250
Walnut Creek, CA 94596
"Barton"
/s/ William G. Barton
-------------------------------
WILLIAM G. BARTON
ADDRESS: 1350 TREAT BLVD., STE. 250
WALNUT CREEK, CA 94596
13
<PAGE>
EXHIBIT A
Benefits for Barton's Employment Agreement
------------------------------------------
1. Group Term and Key Man Life Insurance
2. Standard medical plan.
3. Standard three weeks vacation.
4. Standard 11 holidays.
5. Standard long term disability insurance.
6. Automobile (owned by company) or mutually acceptable allowance in
lieu thereof.
7. Pension supplement.
8. Standard defined benefit pension plan.
9. Incentive Compensation plan.
10. D & O liability insurance.
11. Annual physical examination.
12. Thrift savings (401(k) Plan.)
13. Personal liability insurance.
14. Other.
14
<PAGE>
EXHIBIT 10.11
AMENDED AND RESTATED
FULL RECOURSE
SECURED
PROMISSORY NOTE
$1,218,800.00 April 1, 1998
- ------------- Walnut Creek, California
WHEREAS, on February 28, 1997, James L. Bildner ("Maker") entered into two
promissory notes payable to Tier Technologies, Inc. ("Holder") totaling
$1,218,800.00 due February 28, 2007 (the "First Notes"), secured by a mortgage
filed upon Maker's residence in Manchester, Massachusetts and a pledge agreement
secured by certain shares of common stock of Holder dated as of February 28,
1997 (the "Pledge Agreement"); and
WHEREAS, on August 1, 1997, the First Notes were combined into one note
(the "August Note") and the Pledge Agreement was amended and restated (the
"First Amended and Restated Pledge Agreement"); and
WHEREAS, pursuant to Section 11(b) of the First Amended and Restated Pledge
Agreement, if at the end of any fiscal quarter, the Fair Market Value of the
Pledged Collateral (as defined therein) exceeds the balance due under the August
Note, upon the request of Maker, Holder must release any excess collateral; and
WHEREAS, Maker and Holder wish to amend and restate the August Note and
replace it with a revised note (this "Note") and to amend and restate the First
Amended and Restated Pledge Agreement (the "Second Amended and Restated Pledge
Agreement") to remove specific references to the number of shares pledged to
facilitate the operation of Section 11(b) in the future:
FOR VALUE RECEIVED, Maker promises to pay Holder, or order, at 1350 Treat
Boulevard, Suite 250, Walnut Creek, California or such other place as Holder may
from time to time designate, in lawful money of the United States, the principal
sum of one million, two hundred and eighteen thousand, eight hundred dollars
($1,218,800.00), plus interest thereon from the date hereof until paid in full,
as set forth below.
1. Interest. Interest on the principal sum of this Note shall accrue at
--------
the rate of 6.99% per annum, compounded annually, based on a 365-day year and
the actual number of days elapsed from and after the date of the First Notes.
2. Payments. The entire principal sum and all accrued but unpaid interest
--------
and any other sums payable hereunder shall be due and payable in full on
February 28, 2007.
3. Prepayment. This Note may be prepaid in whole or in part, at any time,
----------
without penalty or premium.
1
<PAGE>
4. Application of Payments. All payments received by Holder shall be
-----------------------
applied first to accrued interest, then to other charges due with respect to
this Note, the Second Amended and Restated Pledge Agreement or any other
document executed by Maker in connection therewith, and then to then-unpaid
principal balance.
5. Security. This Note is secured by a first priority security interest
--------
in shares of Tier Technologies, Inc. Class A Common Stock, pursuant to the
Second Amended and Restated Pledge Agreement.
6. Default and Remedies.
--------------------
a. Default. Maker will be in default under this Note if (i) Maker
-------
fails to make a payment of principal and/or interest hereunder when due, (ii)
Maker breaches any other covenant or agreement under this Note, or (iii) an
event of default occurs under the Second Amended and Restated Pledge Agreement.
b. Remedies. Upon Maker's default, Holder may (i) upon fifteen (15)
--------
days' written notice to Maker, declare the entire principal sum and all accrued
and unpaid interest hereunder immediately due and payable and (ii) exercise any
and all of the remedies provided in the Second Amended and Restated Pledge
Agreement and law.
7. Waivers. Except as otherwise expressly provided in the Second Amended
-------
and Restated Pledge Agreement, Maker, and any endorsers or guarantors hereof,
severally waive diligence, presentment, protest and demand and also notice of
dishonor of this Note, and expressly agrees that this Note, or any payment
hereunder, may be extended from time to time without notice, and consent to the
acceptance of further security or the release of any security for this Note, all
without in any way affecting the liability of Maker or any endorsers or
guarantors hereof. No extension of time for the payment of this Note, or any
installment hereof, agreed to by Holder with any person now or hereafter liable
for the payment of this Note, shall affect the original liability of Maker under
this Note, even if Maker is not a party to such agreement. Holder may waive its
right to require performance of or compliance with any term, covenant or
condition of this Note only by express written waiver.
8. Miscellaneous.
-------------
a. Maker shall pay all costs, including, without limitation,
reasonable attorneys' fees and costs incurred by Holder in collecting the sums
due hereunder or in connection with the release of any security for this Note
whether or not any legal action is actually filed, litigated or prosecuted to
judgment or award. In the event of any action or legal proceeding concerning
this Note or the enforcement of any rights hereunder, Holder shall be entitled
to, in addition to any other relief to which Holder may be entitled, all legal
and court costs and expenses, including reasonable attorneys' fees, incurred by
Holder in connection with such action.
b. This Note may be modified only by a written agreement executed by
Maker and Holder.
c. This Note shall be governed by California law.
2
<PAGE>
d. The terms of this Note shall inure to the benefit of and bind
Maker and Holder and their respective heirs, legal representatives and
successors and assigns.
e. Time is of the essence with respect to all matters set forth in
this Note.
f. If this Note is destroyed, lost or stolen, Maker will deliver a
new Note to Holder on the same terms and conditions as this Note, with a
notation of the unpaid principal and accrued and unpaid interest in substitution
of the prior Note. Holder shall furnish to Maker reasonable evidence that the
Note was destroyed, lost or stolen and any security or indemnity that may be
reasonably required by Maker in connection with the replacement of this Note.
IN WITNESS WHEREOF, Maker has executed this Amended and Restated Note
as of the date and year first above written.
Maker: /s/ James L. Bildner
-------------------------------
James L. Bildner
THIS AMENDED AND RESTATED PROMISSORY NOTE IS MADE AND GIVEN IN REPLACEMENT OF
CERTAIN PROMISSORY NOTES DATED February 28, 1997, IN THE AGGREGATE PRINCIPAL
AMOUNT OF $1,218,800.00, ISSUED BY THE MAKER TO THE ORDER OF THE HOLDER AND IS
NOT INTENDED TO BE A NOVATION.
3
<PAGE>
SECOND AMENDED AND RESTATED PLEDGE AGREEMENT
This SECOND AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of April 1, 1998,
is between TIER TECHNOLOGIES, INC. (the "Company") and JAMES L. BILDNER
("Bildner").
WHEREAS, on February 28, 1997, Bildner entered into two promissory notes
payable to the Company totaling $1,218,800.00 due February 28, 2007 (the "First
Notes"), secured by a mortgage filed upon Bildner's residence in Manchester,
Massachusetts and a pledge agreement relating to certain shares of common stock
of the Company owned by Bildner dated as of February 28, 1997 (the "Pledge
Agreement"); and
WHEREAS, on August 1, 1997, the First Notes were combined into one note (the
"August Note") and the Pledge Agreement was amended and restated (the "First
Amended and Restated Pledge Agreement"); and
WHEREAS, pursuant to Section 11(b) of the First Amended and Restated Pledge
Agreement, if, at the end of any fiscal quarter, the Fair Market Value of the
Pledged Collateral (as defined therein) exceeds the balance due under the August
Note, upon the request of Bildner the Company must release any excess
collateral; and
WHEREAS, Bildner and the Company wish to amend and restate the August Note and
replace it with a revised note (the "April 1998 Note") and to amend and restate
the First Amended and Restated Pledge Agreement (this "Second Amended and
Restated Pledge Agreement") in order to facilitate the operation of Section
11(b) thereof:
For good and valuable consideration and to secure the payment of Bildner's
indebtedness to the Company, the parties agree as follows:
1. Bildner's Indebtedness.
----------------------
(a) In connection herewith Bildner has delivered the April 1998 Note, payable
to the order of the Company in an aggregate principal amount of one million, two
hundred and eighteen thousand, eight hundred dollars ($1,218,800.00).
(b) In accordance with Section 11 hereof, the number of shares of Class A
Common Stock of the Company set forth on Schedule A hereto, which are currently
beneficially owned by Bildner, shall serve as the security for the April 1998
Note (the "Shares").
(c) Bildner has executed the April 1998 Note and is required to secure the
April 1998 Note by delivery of this Agreement.
2. Pledge. Bildner hereby pledges to the Company, and grants to the Company a
------
security interest in, the following (the "Pledged Collateral"): (i) the Shares
and the certificates representing the
1
<PAGE>
Shares; and (ii) securities of the Company associated with the Shares issued
in connection with any stock dividend or stock split, or securities of the
Company issued in connection with a recapitalization, merger, reorganization
or similar transaction.
3. Security for Obligations.
------------------------
(a) This Agreement secures the payment of all of Bildner's present and future
obligations, duties, and liabilities under the April 1998 Note and under this
Agreement (all referred to as the "Obligations").
(b) This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (i) remain in full force and effect until payment in full
of the Obligations; (ii) be binding upon Bildner and his successors and assigns;
and (iii) inure to the benefit of the Company and its successors, transferees,
and assigns.
4. Delivery of Pledged Shares. All certificates or instruments representing or
--------------------------
evidencing the Shares shall be held by or on behalf of the Company under this
Agreement and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Company. If Bildner fails to perform
any Obligation contained in this Agreement, the Company may itself perform, or
cause performance of, that Obligation, and the expenses of the Company incurred
in connection with that performance shall be payable by Bildner under Section 9
hereto.
5. Representations and Warranties. Bildner represents and warrants as follows:
------------------------------
(a) Bildner is the beneficial owner of the Pledged Collateral free and clear
of any lien on the Pledged Collateral except for the security interest created
by this Agreement and the other terms and conditions set forth in the Stock
Option Agreements. The Pledged Collateral is held of record by the Tier
Technologies, Inc. Voting Trust.
(b) The pledge of the Pledged Collateral under this Agreement creates a valid
and perfected first priority interest in the Pledged Collateral, securing the
payment of the Obligations.
(c) No authorization, approval, or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required either
(i) for the pledge by Bildner of the Pledged Collateral under this Agreement or
for the execution, delivery, or performance of this Agreement by Bildner; or
(ii) for the exercise by the Company of the voting or other rights provided for
in this Agreement or the remedies in respect of the Pledged Collateral under
this Agreement (other than restrictions under any federal or state securities
law applicable to the offer or sale of unregistered securities).
2
<PAGE>
6. Rights in Absence of Default.
----------------------------
(a) So long as there has been and is no Event of Default: (i) involving
failure to make the payment described in Section 2 of the April 1998 Note, or
(ii) involving the voluntary placement by Bildner of a lien upon all or a
significant portion of the Pledged Collateral:
(i) Bildner shall be entitled to exercise any and all voting and other
consensual rights pertaining to any or all of the Shares.
(ii) Securities of the Company associated with the Shares issued in
connection with any stock dividend or stock split, or securities of the Company
issued in connection with a recapitalization, merger, reorganization or similar
transaction shall be immediately delivered to the Company as Pledged Collateral
in the same form as so received (with any necessary endorsement). Any other
dividends, distributions, or interest paid or payable in respect of, or
instruments and other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Pledged Collateral shall be paid to Bildner.
(iii) Company shall execute and deliver (or cause to be executed and
delivered) to Bildner all such proxies and other instruments as Bildner may
reasonably request for the purpose of enabling him to exercise the voting and
other rights that he is entitled to exercise pursuant to paragraph (i) of this
Section 6(a).
(b) When and so long as there is an Event of Default (i) involving failure to
make the payment described in Section 2 of the April 1998 Note, or (ii)
involving the voluntary placement by Bildner of a lien upon all or a
significant portion of the Pledged Collateral, all rights of Bildner to exercise
the voting and other rights that he would otherwise be entitled to exercise
pursuant to Section 6(a)(i) shall cease, and all those rights shall become
vested in the Company, which shall then have the sole right to exercise those
voting and other rights.
7. Transfers and Liens. Bildner agrees that he will not (i) sell or otherwise
-------------------
dispose of, or grant any option with respect to, any of the Pledged Collateral
without the prior written consent of the Company; or (ii) voluntarily create any
lien upon or with respect to any of the Pledged Collateral, except for the
security interest under this Agreement.
8. Events of Default; Remedies upon Default.
----------------------------------------
(a) The following shall constitute Events of Default ("Events of Default")
under this Agreement:
(i) If Bildner fails to perform or observe any term, covenant, or
Obligation under this Agreement or the April 1998 Note, or if any representation
or warranty made by Bildner in this Agreement or the April 1998 Note is untrue
or misleading in any material respect as of the date with respect to which that
representation or warranty was made;
(ii) If a notice of lien, levy, or assessment is filed or recorded with
respect to all or a substantial part of the Pledged Collateral, except for a
lien that relates to current taxes not yet due
3
<PAGE>
and payable, and if the applicable claim is not discharged or satisfied within
ninety (90) days of Bildner's actual knowledge of that filing or recordation
(such effected Pledged Collateral shall hereinafter be referred to as the
"Effected Collateral");
(iii) If all or a substantial part of the Pledged Collateral is attached,
seized, or subjected to a writ or distress warrant, or is levied upon, or comes
within the possession of any receiver, trustee, custodian, or assignee for the
benefit of creditors, and that Pledged Collateral is not returned to Bildner or
the writ, distress warrant, or levy is not dismissed, stayed, or lifted within
ninety (90) days (such effected Pledged Collateral shall hereinafter be referred
to as the "Effected Collateral").
(iv) Provided; however, with respect to subparagraphs 8(a)(ii) and (iii)
hereto, if prior to the end of such ninety (90) day period, Bildner provides the
Company with additional collateral to secure the April 1998 Note with a Fair
Market Value (as defined in Section 11 hereto) equal to or exceeding the Fair
Market Value of the Effected Collateral, which collateral may be Shares or cash
(or such other collateral, subject to the consent of the Company, which consent
shall not be unreasonably withheld) at the discretion of Bildner and which
collateral Bildner hereby agrees shall be subject to the terms of this
Agreement, no Event of Default shall be deemed to have occurred.
(b) When and so long as there is any Event of Default, the Company may
exercise in respect of the Pledged Collateral, in addition to other rights and
remedies provided for in this Agreement or otherwise available to it, all the
rights and remedies of a secured party upon a default under the Uniform
Commercial Code in effect in the State of California at that time.
(c) Notwithstanding anything else contained herein to the contrary, so long
as there has been and is no Event of Default: (i) involving failure to make the
payment described in Section 2 of the April 1998 Note, or (ii) involving the
voluntary placement by Bildner of a lien upon all or a significant portion of
the Pledged Collateral, Bildner shall be entitled to exercise any and all voting
and other consensual rights pertaining to any or all of the Shares.
9. Expenses. On demand, Bildner will pay the Company all reasonable expenses,
--------
including attorneys' fees and costs, which the Company may incur in connection
with (i) the exercise or enforcement of any of the rights of the Company under
this Agreement; or (ii) Bildner's failure to perform or observe any of the
provisions of this Agreement.
10. Security Interest Absolute. All rights and security interests of the
--------------------------
Company, and all Obligations of Bildner, under this Agreement shall be absolute
and unconditional irrespective of: (i) any lack of validity or enforceability
of the April 1998 Note or any other agreement or instrument relating to it; (ii)
any change in the time, manner, or place of payment of, or in any other term of,
any of the Obligations, or any other amendment or waiver of or consent to any
departure from the April 1998 Note; (iii) any exchange, release, or non-
perfection of any other collateral, or any release, amendment, or waiver of any
of the Obligations; or (iv) any other circumstance that might otherwise
constitute a defense available to, or a discharge of, Bildner in respect of the
Obligations or of this Agreement.
11. Adjustments; Release of Security. The Company and Bildner hereby agree:
--------------------------------
4
<PAGE>
(a) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is less than the balance due under the April
1998 Note, the Company shall notify Bildner within ten (10) days. Bildner
shall, within forty-five (45) days of receipt of such notice, deposit with the
Company such additional cash, shares of common stock of the Company, or both, at
the option of Bildner, with a value equal or greater than the deficiency, which
additional collateral shall be subject to the terms of this Agreement. Each
such deposit pursuant to this Section 11(a) shall be reflected by an appropriate
notation to Schedule A hereto.
(b) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is greater than the balance due under the April
1998 Note (the "Excess Collateral"), upon ten (10) days notice, Bildner may
withdraw or cause the withdrawal of all or a portion of the Excess Collateral,
provided that no fractional Shares shall be released pursuant to this
subparagraph 11(b). In lieu of any fractional Shares to which Bildner would
otherwise be entitled, the Company shall pay cash equal to such fraction
multiplied by the Fair Market Value. The release of Shares and payment in lieu
of fractional shares pursuant to this Section 11(b) shall be reflected by an
appropriate notation to Schedule A hereto.
(c) Upon fifteen (15) days prior written notice from Bildner of his intent
to sell all or a portion of the Pledged Collateral, the Company may release such
Pledged Collateral (such Pledged Collateral shall be referred to herein as the
"Released Collateral"), provided that prior to such release Bildner provides the
Company with an undertaking that Bildner will pay to the Company in cash an
amount equal to the Fair Market Value of such Released Collateral and any
interest relating thereto under the April 1998 Note as of the date of such
payment (which payment shall be reflected in the balance due to the Company from
Bildner under the April 1998 Note) within five (5) business days of such sale.
(d) For the purposes of this Agreement, the term "Fair Market Value" shall
mean; (i) if the Company's stock is not publicly traded on a national securities
exchange or the Nasdaq National Market System, as determined by the most recent
third-party valuation relating to the Shares, or (ii) if the Company's stock is
publicly traded on a national securities exchange or the Nasdaq National Market
System, as determined by the most recent closing price of the Company's stock.
12. Further Assurances. Bildner agrees that at any time and from time to time,
------------------
at his expense, Bildner will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that the Company may request, in order to perfect and protect any
security interest granted or purported to be granted by this Agreement or to
enable the Company to exercise and enforce its rights and remedies under this
Agreement with respect to any Pledged Collateral.
13. Entire Agreement; Amendment; Waiver. This Agreement and the April 1998
-----------------------------------
Note embody the entire agreement of the parties hereto with respect to the
subject matter of this Agreement and supersede all prior agreements with respect
to that subject matter. This Agreement may not be amended or modified except in
a writing signed by both parties. No waiver of any provision of this Agreement
shall be deemed to, or shall, operate as a waiver of any other provision,
whether or not
5
<PAGE>
similar, nor shall any waiver constitute a continuing waiver. Except as
expressly provided in this Agreement, no waiver shall be binding unless
executed in writing by the party making the waiver.
14. Notices. All notices and other communications provided for under this
-------
Agreement shall be given as follows:
If to the Company:
TIER TECHNOLOGIES, INC.
1350 Treat Boulevard, Suite 250
Walnut Creek, CA 94596
Attn: Chief Financial Officer
If to Bildner:
JAMES L. BILDNER
5 Boardman Avenue
Manchester, MA 01944
15. Captions. Captions are used for reference purposes only and should be
--------
ignored in the interpretation of the Agreement. Unless the context requires
otherwise, all references in this Agreement to Sections are to the sections of
this Agreement.
16. Governing Law; Terms. This Agreement shall be governed by and construed in
--------------------
accordance with the laws of the State of California applicable to contracts
wholly made and performed in the State of California. Unless otherwise defined
above, terms defined in
6
<PAGE>
Division 9 of the Uniform Commercial Code as adopted in the State of California
are used in this Agreement with their statutory meanings.
The parties have duly executed this Agreement as of the date first written
above.
TIER TECHNOLOGIES, INC.
By: /s/ George K. Ross
____________________________
George K. Ross
Its: Senior Vice President and
Chief Financial Officer
JAMES L. BILDNER
/s/ James L. Bildner
____________________________
James L. Bildner
7
<PAGE>
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain SECOND AMENDED AND RESTATED
PLEDGE AGREEMENT dated as of April 1, 1998 (the "Agreement"), the undersigned
hereby sells, assigns, and transfers to TIER TECHNOLOGIES, INC. (the "Company"),
____________ (__________) shares of Class A Common Stock of the Company,
standing in the undersigned's name on the books of the Company represented by
Certificate No(s). ______ delivered herewith. The undersigned does hereby
irrevocably constitute and appoint the Secretary of the Company as the
undersigned's attorney-in-fact, with full power of substitution, to transfer
this stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE AGREEMENT.
DATED: April 1, 1998
JAMES L. BILDNER
/s/ James L. Bildner
____________________________
James L. Bildner
Instructions: Please sign this Stock Power above, but do not fill in any blanks
other than the signature lines.
The purpose of this Stock Power and Assignment Separate from Stock Certificate
is to enable the Company to acquire the Shares in accordance with the terms of
the Agreement.
8
<PAGE>
SCHEDULE A
PLEDGED SHARES AND
OTHER COLLATERAL
FAIR MARKET VALUE OF OTHER COLLATERAL
DATE SHARES PLEDGED SHARES PLEDGED /VALUE
- ---- --------------- -------------------- -----------------
April 1, 1998 70,656 $1,218,816
SHARES RELEASED PURSUANT
TO SECTION 11(b)
DATE SHARES RELEASED
---- ---------------
9
<PAGE>
EXHIBIT 10.12
AMENDED AND RESTATED
FULL RECOURSE
SECURED
PROMISSORY NOTE
$283,600.00 April 1, 1998
- ----------- Walnut Creek, California
WHEREAS, on February 28, 1997, James L. Bildner ("Maker") entered into a
promissory note payable to Tier Technologies, Inc. ("Holder") in the amount of
$283,600, due February 28, 2007 (the "First Note"), secured by shares of Class A
Common Stock of the Holder pursuant to a pledge agreement dated as of February
28, 1997 (the "Pledge Agreement"); and
WHEREAS, pursuant to Section 11(b) of the Pledge Agreement, if at the end of any
fiscal quarter, the Fair Market Value of the Pledged Collateral (as defined
therein) exceeds the balance due under the First Note, upon the request of
Maker, Holder must release any excess collateral; and
WHEREAS, the Maker and Holder wish to amend and restate the First Note and
replace it with a revised note (this "Note") and to amend and restate the Pledge
Agreement (the "Amended and Restated Pledge Agreement") to remove specific
references to the number of shares pledged to facilitate this operation of
Section 11(b) in the future:
FOR VALUE RECEIVED, Maker promises to pay Holder, or order, at 1350 Treat
Boulevard, Suite 250, Walnut Creek, California or such other place as Holder may
from time to time designate, in lawful money of the United States, the principal
sum of two hundred and eighty-three thousand, six hundred dollars ($283,600.00),
plus interest thereon from the date hereof until paid in full, as set forth
below.
1. Interest. Interest on the principal sum of this Note shall accrue at
--------
the rate of 6.78% per annum, compounded annually, based on a 365-day year and
the actual number of days elapsed from and after the date of the First Note.
2. Payments. The entire principal sum and all accrued but unpaid interest
--------
and any other sums payable hereunder shall be due and payable in full on
February 28, 2007.
3. Prepayment. This Note may be prepaid in whole or in part, at any time,
----------
without penalty or premium.
4. Application of Payments. All payments received by Holder shall be
-----------------------
applied first to accrued interest, then to other charges due with respect to
this Note, the Amended and Restated Pledge Agreement or any other document
executed by Maker in connection therewith, and then to then-unpaid principal
balance.
1
<PAGE>
5. Security. This Note is secured by a first priority security interest
--------
in shares of Tier Technologies, Inc. Class A Common Stock pursuant to the
Amended and Restated Pledge Agreement.
6. Default and Remedies.
--------------------
a. Default. Maker will be in default under this Note if (i) Maker
-------
fails to make a payment of principal and/or interest hereunder when due, (ii)
Maker breaches any other covenant or agreement under this Note, or (iii) an
event of default occurs under the Amended and Restated Pledge Agreement.
b. Remedies. Upon Maker's default, Holder may (i) upon fifteen (15)
--------
days' written notice to Maker, declare the entire principal sum and all accrued
and unpaid interest hereunder immediately due and payable and (ii) exercise any
and all of the remedies provided in the Amended and Restated Pledge Agreement
and law.
7. Waivers. Except as otherwise expressly provided in the Amended and
-------
Restated Pledge Agreement, Maker, and any endorsers or guarantors hereof,
severally waive diligence, presentment, protest and demand and also notice of
dishonor of this Note, and expressly agrees that this Note, or any payment
hereunder, may be extended from time to time without notice, and consent to the
acceptance of further security or the release of any security for this Note, all
without in any way affecting the liability of Maker or any endorsers or
guarantors hereof. No extension of time for the payment of this Note, or any
installment hereof, agreed to by Holder with any person now or hereafter liable
for the payment of this Note, shall affect the original liability of Maker under
this Note, even if Maker is not a party to such agreement. Holder may waive its
right to require performance of or compliance with any term, covenant or
condition of this Note only by express written waiver.
8. Miscellaneous.
-------------
a. Maker shall pay all costs, including, without limitation,
reasonable attorneys' fees and costs incurred by Holder in collecting the sums
due hereunder or in connection with the release of any security for this Note
whether or not any legal action is actually filed, litigated or prosecuted to
judgment or award. In the event of any action or legal proceeding concerning
this Note or the enforcement of any rights hereunder, Holder shall be entitled
to, in addition to any other relief to which Holder may be entitled, all legal
and court costs and expenses, including reasonable attorneys' fees, incurred by
Holder in connection with such action.
b. This Note may be modified only by a written agreement executed by
Maker and Holder.
c. This Note shall be governed by California law.
d. The terms of this Note shall inure to the benefit of and bind
Maker and Holder and their respective heirs, legal representatives and
successors and assigns.
e. Time is of the essence with respect to all matters set forth in
this Note.
2
<PAGE>
f. If this Note is destroyed, lost or stolen, Maker will deliver a
new Note to Holder on the same terms and conditions as this Note, with a
notation of the unpaid principal and accrued and unpaid interest in substitution
of the prior Note. Holder shall furnish to Maker reasonable evidence that the
Note was destroyed, lost or stolen and any security or indemnity that may be
reasonably required by Maker in connection with the replacement of this Note.
IN WITNESS WHEREOF, Maker has executed this Amended and Restated Note
as of the date and year first above written.
Maker: /s/ James L. Bildner
----------------------------------
James L. Bildner
THIS AMENDED AND RESTATED NOTE IS MADE AND GIVEN IN REPLACEMENT OF A CERTAIN
PROMISSORY NOTE DATED February 28, 1997, IN THE PRINCIPAL AMOUNT OF $283,000.00,
ISSUED BY THE MAKER TO THE ORDER OF THE HOLDER AND IS NOT INTENDED TO BE A
NOVATION.
3
<PAGE>
AMENDED AND RESTATED PLEDGE AGREEMENT
This PLEDGE AGREEMENT, dated as of April 1, 1998, is between TIER
TECHNOLOGIES, INC. (the "Company") and JAMES L. BILDNER ("Bildner").
WHEREAS, on February 28, 1997, Bildner entered into a promissory note payable
to the Company in the amount of $283,600, due February 28, 2007 (the "First
Note"), secured by shares of Class A Common Stock of the Company owned by
Bildner pursuant to a pledge agreement dated as of February 28, 1997 (the
"Pledge Agreement"); and
WHEREAS, pursuant to Section 11(b) of the Pledge Agreement, if, at the end of
any fiscal quarter, the Fair Market Value of the Pledged Collateral (as defined
therein) exceeds the balance due under the First Note, upon the request of
Bildner, the Company must release any excess collateral; and
WHEREAS, Bildner and the Company wish to amend and restate the First Note and
replace it with a revised note (the "April 1998 Note") and to amend and restate
the Pledge Agreement (this "Agreement") in order to facilitate the operation of
Section 11(b) thereof:
For good and valuable consideration and to secure the payment of Bildner's
indebtedness to the Company, the parties agree as follows:
1. Bildner's Indebtedness.
----------------------
(a) In connection herewith Bildner has delivered the April 1998 Note, payable
to the order of the Company in an aggregate principal amount two hundred and
eighty-three thousand, six hundred dollars ($283,600.00).
(b) In accordance with Section 11 hereof, the number of shares of Class A
Common Stock of the Company set forth on Schedule A hereto, which are currently
beneficially owned by Bildner, shall serve as the security for the Note (the
"Shares").
(c) Bildner has executed the Note and is required to secure the April 1998
Note by delivery of this Agreement.
2. Pledge. Bildner hereby pledges to the Company, and grants to the Company a
------
security interest in, the following (the "Pledged Collateral"): (i) the Shares
and the certificates representing the Shares; and (ii) securities of the Company
associated with the Shares issued in connection with any stock dividend or stock
split, or securities of the Company issued in connection with a
recapitalization, merger, reorganization or similar transaction.
1
<PAGE>
3. Security for Obligations.
------------------------
(a) This Agreement secures the payment of all of Bildner's present and future
obligations, duties, and liabilities under the Note and under this Agreement
(all referred to as the "Obligations").
(b) This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (i) remain in full force and effect until payment in full
of the Obligations; (ii) be binding upon Bildner and his successors and assigns;
and (iii) inure to the benefit of the Company and its successors, transferees,
and assigns.
4. Delivery of Pledged Shares. All certificates or instruments representing or
--------------------------
evidencing the Shares shall be held by or on behalf of the Company under this
Agreement and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Company. If Bildner fails to perform
any Obligation contained in this Agreement, the Company may itself perform, or
cause performance of, that Obligation, and the expenses of the Company incurred
in connection with that performance shall be payable by Bildner under Section 9
hereto.
5. Representations and Warranties. Bildner represents and warrants as follows:
------------------------------
(a) Bildner is the beneficial owner of the Pledged Collateral free and clear
of any lien on the Pledged Collateral except for the security interest created
by this Agreement and the other terms and conditions set forth in the Stock
Option Agreements. The Pledged Collateral is held of record by the Tier
Technologies, Inc. Voting Trust.
(b) The pledge of the Pledged Collateral under this Agreement creates a valid
and perfected first priority interest in the Pledged Collateral, securing the
payment of the Obligations.
(c) No authorization, approval, or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required either
(i) for the pledge by Bildner of the Pledged Collateral under this Agreement or
for the execution, delivery, or performance of this Agreement by Bildner; or
(ii) for the exercise by the Company of the voting or other rights provided for
in this Agreement or the remedies in respect of the Pledged Collateral under
this Agreement (other than restrictions under any federal or state securities
law applicable to the offer or sale of unregistered securities).
6. Rights in Absence of Default.
----------------------------
(a) So long as there has been and is no Event of Default: (i) involving
failure to make the payment described in Section 2 of the April 1998 Note, or
(ii) involving the voluntary placement by Bildner of a lien upon all or a
significant portion of the Pledged Collateral:
2
<PAGE>
(i) Bildner shall be entitled to exercise any and all voting and other
consensual rights pertaining to any or all of the Shares.
(ii) Securities of the Company associated with the Shares issued in
connection with any stock dividend or stock split, or securities of the Company
issued in connection with a recapitalization, merger, reorganization or similar
transaction shall be immediately delivered to the Company as Pledged Collateral
in the same form as so received (with any necessary endorsement). Any other
dividends, distributions, or interest paid or payable in respect of, or
instruments and other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Pledged Collateral shall be paid to Bildner.
(iii) The Company shall execute and deliver (or cause to be executed and
delivered) to Bildner all such proxies and other instruments as Bildner may
reasonably request for the purpose of enabling him to exercise the voting and
other rights that he is entitled to exercise pursuant to paragraph (i) of this
Section 6(a).
(b) When and so long as there is an Event of Default (i) involving failure to
make the payment described in Section 2 of the April 1998 Note, or (ii)
involving the voluntary placement by Bildner of a lien upon all or a
significant portion of the Pledged Collateral, all rights of Bildner to exercise
the voting and other rights that he would otherwise be entitled to exercise
pursuant to Section 6(a)(i) shall cease, and all those rights shall become
vested in the Company, which shall then have the sole right to exercise those
voting and other rights.
7. Transfers and Liens. Bildner agrees that he will not (i) sell or otherwise
-------------------
dispose of, or grant any option with respect to, any of the Pledged Collateral
without the prior written consent of the Company; or (ii) voluntarily create any
lien upon or with respect to any of the Pledged Collateral, except for the
security interest under this Agreement.
8. Events of Default; Remedies upon Default.
----------------------------------------
(a) The following shall constitute Events of Default ("Events of Default")
under this Agreement:
(i) If Bildner fails to perform or observe any term, covenant, or
Obligation under this Agreement or the April 1998 Note, or if any representation
or warranty made by Bildner in this Agreement or the April 1998 Note is untrue
or misleading in any material respect as of the date with respect to which that
representation or warranty was made;
(ii) If a notice of lien, levy, or assessment is filed or recorded with
respect to all or a substantial part of the Pledged Collateral, except for a
lien that relates to current taxes not yet due and payable, and if the
applicable claim is not discharged or satisfied within ninety (90) days of
Bildner's actual knowledge of that filing or recordation (such effected Pledged
Collateral shall hereinafter be referred to as the "Effected Collateral");
3
<PAGE>
(iii) If all or a substantial part of the Pledged Collateral is attached,
seized, or subjected to a writ or distress warrant, or is levied upon, or comes
within the possession of any receiver, trustee, custodian, or assignee for the
benefit of creditors, and that Pledged Collateral is not returned to Bildner or
the writ, distress warrant, or levy is not dismissed, stayed, or lifted within
ninety (90) days (such effected Pledged Collateral shall hereinafter be referred
to as the "Effected Collateral").
(iv) Provided; however, with respect to subparagraphs 8(a)(ii) and (iii)
hereto, if prior to the end of such ninety (90) day period, Bildner provides the
Company with additional collateral to secure the April 1998 Note with a Fair
Market Value (as defined in Section 11 hereto) equal to or exceeding the Fair
Market Value of the Effected Collateral, which collateral may be Shares or cash
(or such other collateral, subject to the consent of the Company, which consent
shall not be unreasonably withheld) at the discretion of Bildner and which
collateral Bildner hereby agrees shall be subject to the terms of this
Agreement, no Event of Default shall be deemed to have occurred.
(b) When and so long as there is any Event of Default, the Company may
exercise in respect of the Pledged Collateral, in addition to other rights and
remedies provided for in this Agreement or otherwise available to it, all the
rights and remedies of a secured party upon a default under the Uniform
Commercial Code in effect in the State of California at that time.
(c) Notwithstanding anything else contained herein to the contrary, so long
as there has been and is no Event of Default: (i) involving failure to make the
payment described in Section 2 of the April 1998 Note, or (ii) involving the
voluntary placement by Bildner of a lien upon all or a significant portion of
the Pledged Collateral, Bildner shall be entitled to exercise any and all voting
and other consensual rights pertaining to any or all of the Shares.
9. Expenses. On demand, Bildner will pay the Company all reasonable expenses,
--------
including attorneys' fees and costs, which the Company may incur in connection
with (i) the exercise or enforcement of any of the rights of the Company under
this Agreement; or (ii) Bildner's failure to perform or observe any of the
provisions of this Agreement.
10. Security Interest Absolute. All rights and security interests of the
--------------------------
Company, and all Obligations of Bildner, under this Agreement shall be absolute
and unconditional irrespective of: (i) any lack of validity or enforceability
of the April 1998 Note or any other agreement or instrument relating to it; (ii)
any change in the time, manner, or place of payment of, or in any other term of,
any of the Obligations, or any other amendment or waiver of or consent to any
departure from the April 1998 Note; (iii) any exchange, release, or non-
perfection of any other collateral, or any release, amendment, or waiver of any
of the Obligations; or (iv) any other circumstance that might otherwise
constitute a defense available to, or a discharge of, Bildner in respect of the
Obligations or of this Agreement.
4
<PAGE>
11. Adjustments; Release of Security. The Company and Bildner hereby agree:
--------------------------------
(a) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is less than the balance due under the April
1998 Note, the Company shall notify Bildner within ten (10) days. Bildner
shall, within forty-five (45) days of receipt of such notice, deposit with the
Company such additional cash, shares of common stock of the Company, or both, at
the option of Bildner, with a value equal or greater than the deficiency, which
additional collateral shall be subject to the terms of this Agreement. Each
such deposit pursuant to this Section 11(a) shall be reflected by an appropriate
notation to Schedule A hereto.
(b) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is greater than the balance due under the April
1998 Note (the "Excess Collateral"), upon ten (10) days notice, Bildner may
withdraw or cause the withdrawal of all or a portion of the Excess Collateral,
provided that no fractional Shares shall be released pursuant to this
subparagraph 11(b). In lieu of any fractional Shares to which Bildner would
otherwise be entitled, the Company shall pay cash equal to such fraction
multiplied by the Fair Market Value. The release of shares and payment in lieu
of fractional shares pursuant to this Section 11(b) shall be reflected by an
appropriate notation to Schedule A hereto.
(c) Upon fifteen (15) days prior written notice from Bildner of his intent
to sell all or a portion of the Pledged Collateral, the Company may release such
Pledged Collateral (such Pledged Collateral shall be referred to herein as the
"Released Collateral"), provided that prior to such release Bildner provides the
Company with an undertaking that Bildner will pay to the Company in cash an
amount equal to the Fair Market Value of such Released Collateral and any
interest relating thereto under the April 1998 Note as of the date of such
payment (which payment shall be reflected in the balance due to the Company from
Bildner under the April 1998 Note) within five (5) business days of such sale.
(d) For the purposes of this Agreement, the term "Fair Market Value" shall
mean; (i) if the Company's stock is not publicly traded on a national securities
exchange or the Nasdaq National Market System, as determined by the most recent
third-party valuation relating to the Shares, or (ii) if the Company's stock is
publicly traded on a national securities exchange or the Nasdaq National Market
System, as determined by the most recent closing price of the Company's stock.
12. Further Assurances. Bildner agrees that at any time and from time to time,
------------------
at his expense, Bildner will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that the Company may request, in order to perfect and protect any
security interest granted or purported to be granted by this Agreement or to
enable the Company to exercise and enforce its rights and remedies under this
Agreement with respect to any Pledged Collateral.
13. Entire Agreement; Amendment; Waiver. This Agreement and the April 1998
-----------------------------------
Note embody the entire agreement of the parties hereto with respect to the
subject matter of this
5
<PAGE>
Agreement and supersede all prior agreements with respect to that subject
matter. This Agreement may not be amended or modified except in a writing
signed by both parties. No waiver of any provision of this Agreement shall be
deemed to, or shall, operate as a waiver of any other provision, whether or
not similar, nor shall any waiver constitute a continuing waiver. Except as
expressly provided in this Agreement, no waiver shall be binding unless
executed in writing by the party making the waiver.
14. Notices. All notices and other communications provided for under this
-------
Agreement shall be given as follows:
If to the Company:
TIER TECHNOLOGIES, INC.
1350 Treat Boulevard, Suite 250
Walnut Creek, CA 94596
Attn: Chief Financial Officer
If to Bildner:
JAMES L. BILDNER
5 Boardman Avenue
Manchester, MA 01944
15. Captions. Captions are used for reference purposes only and should be
--------
ignored in the interpretation of the Agreement. Unless the context requires
otherwise, all references in this Agreement to Sections are to the sections of
this Agreement.
16. Governing Law; Terms. This Agreement shall be governed by and construed in
--------------------
accordance with the laws of the State of California applicable to contracts
wholly made and performed in the State of California. Unless otherwise defined
above, terms defined in Division 9 of the Uniform Commercial Code as adopted in
the State of California are used in this Agreement with their statutory
meanings.
The parties have duly executed this Agreement as of the date first written
above.
TIER TECHNOLOGIES, INC.
By: /s/ George K. Ross
____________________________
George K. Ross
Its: Senior Vice President and
Chief Financial Officer
JAMES L. BILDNER
/s/ James L. Bildner
____________________________
James L. Bildner
6
<PAGE>
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain PLEDGE AGREEMENT dated as of
April 1, 1998 (the "Agreement"), the undersigned hereby sells, assigns, and
transfers to TIER TECHNOLOGIES, INC. (the "Company"), __________ (__________)
shares of Class A Common Stock of the Company, standing in the undersigned's
name on the books of the Company represented by Certificate No(s). ______
delivered herewith. The undersigned does hereby irrevocably constitute and
appoint the Secretary of the Company as the undersigned's attorney-in-fact, with
full power of substitution, to transfer this stock on the books of the Company.
THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT.
DATED: April 1, 1998
JAMES L. BILDNER
/s/ James L. Bildner
____________________________
James L. Bildner
Instructions: Please sign this Stock Power above, but do not fill in any blanks
other than the signature lines.
The purpose of this Stock Power and Assignment Separate from Stock Certificate
is to enable the Company to acquire the Shares in accordance with the terms of
the Agreement.
7
<PAGE>
SCHEDULE A
PLEDGED SHARES AND
OTHER COLLATERAL
FAIR MARKET VALUE OF OTHER COLLATERAL
DATE SHARES PLEDGED SHARES PLEDGED /VALUE
---- -------------- --------------------- ----------------
April 1, 1998 16,441 $283,607.25
SHARES RELEASED PURSUANT
TO SECTION 11(b)
DATE SHARES RELEASED
---- ---------------
8
<PAGE>
EXHIBIT 10.18
FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated as of February 16, 1998, by
and between TIER TECHNOLOGIES, INC., a California corporation (the "Company")
and GEORGE K. ROSS ("Ross").
In consideration of the mutual benefits derived from this Agreement and of
the agreements, covenants and provisions hereof, the parties hereto agree as
follows:
1. EMPLOYMENT
----------
1.1. Position. During the Term (as hereinafter defined) of this
--------
Agreement and subject to the terms and conditions set forth herein, the Company
agrees to employ Ross as its Executive Vice President and Chief Financial
Officer, reporting to the Chief Executive Officer.
1.2. Election to Office. During the Term of this Agreement, the Company
------------------
shall use its best efforts to sustain and continue Ross's position and
designation as Executive Vice President and Chief Financial Officer, subject to
Section 1.3 hereof.
1.3. Fulfillment of Duties. Ross shall devote his full-time efforts to
---------------------
the performance of his services hereunder, except during vacation periods and
periods of illness or incapacity, and shall perform his services hereunder
faithfully, diligently and to the best of his skill and ability. If Ross
desires to serve as a director, or member of a committee of, any organization
involving no conflict of interest with the interests of the Company, he shall
first obtain the written consent of the Company's Chief Executive Officer.
1.4. Location. During the Term of this Agreement, Ross will perform his
--------
duties and services at the Company's principal executive offices in Walnut
Creek, California, or such other location as designated by the Chief Executive
Officer, and Ross agrees to make such business trips to other locations as may
be reasonable and necessary in the performance of his services hereunder.
2. COMPENSATION AND BENEFITS
-------------------------
2.1. Salary. In consideration of and as compensation for the services
------
agreed to be performed by Ross hereunder, the Company agrees to pay Ross during
the Term of this Agreement a base salary (the "Base Salary") of not less than
$230,000 per year, payable semi-monthly in accordance with the Company's regular
payroll practices. The Company may review Ross's Base Salary and other
compensation (including bonuses and incentive compensation) from time to time
during the Term of this Agreement and, at the recommendation of the Compensation
Committee of Board of Directors of the Company (the "Committee"), may increase
his Base Salary or other compensation (including bonuses and incentive
compensation) from time to time. Any increase in Base
1
<PAGE>
Salary or other compensation (including bonuses and incentive compensation)
shall in no way limit or reduce any other obligation of the Company hereunder.
2.2. Incentive Compensation. During the term of this Agreement, in
----------------------
addition to the Base Salary provided in Section 2.1 above, Ross shall be
eligible to receive additional incentive compensation in an amount not to exceed
65% of Ross' then applicable Base Salary, upon achievement of performance or
other goals to be established from time to time by the Committee. Such
incentive compensation may be payable in cash, or in stock, stock options or
other stock based awards, or in any combination of cash and stock based awards,
as shall be determined by the Committee.
2.3. Stock Option. Ross received, within forty-five (45) days
------------
following execution of this original Agreement of February 1, 1997, an option
(the "Option") to purchase 105,000 shares of Company Class B common stock at an
exercise price which shall be at least the minimum exercise price required by
law, pursuant to an option agreement on the Company's standard form. Subject to
the terms of the Option, one-third of the Option (i.e., 35,000 shares) shall
vest on each of the first, second and third anniversary dates of this original
Agreement of February 1, 1997; provided, however, the Option shall vest as
provided in Section 4.2 or as otherwise set forth in the option agreement.
Notwithstanding anything to the contrary, the Option shall vest in its entirety
immediately upon the sale of substantially all of the assets of the Company,
upon a change in control of the Company or upon the termination, for any reason,
of the services of James L. Bildner as the Company's Chief Executive Officer.
2.4. Participation in Benefit Plans. During the Term of this Agreement,
------------------------------
Ross shall be entitled to participate in any pension plans, profit-sharing plans
and group insurance, medical, hospitalization, disability and other benefit
plans presently in effect (a partial list of which is attached hereto as Exhibit
A) or hereinafter adopted, which plans are generally applicable to the most
senior executives of the Company and to the extent he is eligible under the
general provisions thereof.
2.5. Reimbursement of Expenses. The Company will reimburse Ross for all
-------------------------
business expenses, including, without limitation, traveling, entertainment and
similar expenses, incurred by Ross on behalf of the Company during the Term of
this Agreement if such expenses are ordinary and necessary business expenses
incurred on behalf of the Company pursuant to the Company's standard expense
reimbursement policy, provided that Ross shall provide the Company with such
itemized accounts, receipts or documentation for such expenses as are required
under the Company's policy regarding the reimbursement of such expenses.
2.6. Vacation and Sick Leave. During the Term of this Agreement, Ross
-----------------------
will be entitled to three weeks of paid vacation per year. Ross shall also be
entitled to paid sick leave in accordance with the policy applicable to the
other senior executives of the Company.
2
<PAGE>
2.7. Relocation Loan. Concurrent with the execution of the original
---------------
Agreement on February 1, 1997, the Company offered an unsecured loan to Ross in
the principal amount of $20,000 bearing simple interest at 5.81% per annum,
which amount may be taken all at once or in installments (the "Relocation
Loan"). Repayment of the principal amount of the Relocation Loan and any
interest payable thereon shall be forgiven, as follows: (i) on a pro rata
basis, during Ross's employment with the Company, upon the close of business on
the last business day of each month commencing with the first full month in
which sums are advanced under this Agreement and ending January 31, 2000 and
(ii) in its entirety under the circumstances set forth in Section 4.2 hereof.
In the event that Ross's employment under this Agreement is terminated by Ross
without Good Reason (as defined herein) or for Cause as defined in Section
4.1(iii), Ross shall pay the total of unforgiven principal and interest due
under the Relocation Loan within ninety (90) days of the occurrence of such
event. The Relocation Loan shall be evidenced by a promissory note in form
acceptable to Ross and the Company consistent with the terms of this Agreement.
3. TERM
----
3.1. Term. The "Term" of employment under this Agreement means the
----
period commencing on the date hereof and expiring on August 1, 2001 or the
earlier termination hereof pursuant to Section 4.1.
4. TERMINATION OF EMPLOYMENT
-------------------------
4.1. Events of Termination. Upon the occurrence of any of the
---------------------
events described in this Section 4.1 during the Term of this Agreement, Ross's
employment hereunder shall terminate and Ross shall be entitled to the benefits
provided in Section 4.2 hereof.
(i) Termination of Ross's employment with the Company due
to Ross's death.
(ii) If, as a result of Ross's incapacity due to physical
or mental illness, injury or disability, Ross shall have been absent from his
duties with the Company on a full-time basis for thirty consecutive days, and
within five days after the receipt of written Notice of Termination (as
hereinafter defined) he shall not have returned to the full-time performance of
his duties, the Company may terminate Ross's employment for "Disability."
"Absent from his duties" means, for the purposes of this Section 4.1( ii ), that
Ross is devoting less than 30 hours per week to his duties under this Agreement.
(iii) The Company shall be entitled to terminate Ross's
employment for Cause. For purposes of this Agreement, "Cause" shall mean:
(A) the willful and continued failure by Ross to
substantially perform his duties with the Company in good faith (other
than any such
3
<PAGE>
failure resulting from his incapacity due to physical or
mental illness, injury or disability or any such actual or anticipated
failure resulting from his termination for Good Reason (as hereinafter
defined)), after a demand for substantial performance is delivered to
him by the Board of Directors of the Company which identifies, in
reasonable detail, the manner in which the Board of Directors believes
that Ross has not substantially performed his duties in good faith;
(B) the willful engaging by Ross in conduct which causes
material harm to the Company, monetarily or otherwise; or
(C) Ross's conviction of a felony arising from conduct during
the Term of this Agreement.
(iv) Ross shall be entitled to terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall, without Ross's
express written consent, mean:
(A) the assignment to Ross of any duties substantially
inconsistent with his status as Executive Vice President and Chief
Financial Officer of the Company;
(B) a reduction by the Company in Ross's Base Salary as in
effect on the date hereof;
(C) the failure of the Company to obtain a satisfactory
agreement from any successor (by means of merger, consolidation, sale
of assets or otherwise) to assume and agree to perform this Agreement
as contemplated by Section 5 hereof; or
Ross's right to terminate his employment pursuant to this Subsection
4.1(iv) shall not be affected by his incapacity due to physical or mental
illness, injury or disability. The Company may, solely during the period of
such incapacity, make arrangements for the discharge of any of Ross's duties
hereunder by another officer of the Company, but any such arrangement shall not
affect or in any way diminish Ross's rights hereunder.
(v) Any purported termination by the Company or by Ross shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Sections 4.3 and 8.1 hereof.
4.2. Effect of Termination.
---------------------
(i) Upon the termination of Ross's employment as a result of his
Disability, Ross shall be entitled to receive:
4
<PAGE>
(A) for an additional six months after the date of such
termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) a pro rata
portion of the maximum amount of incentive compensation for which Ross
could have become eligible during the year in which such termination
occurs.
(B) the Option shall become immediately accelerated and fully
vested and any restrictions on such Option shall, to the extent
permissible under applicable securities laws, fully lapse; and the
Company shall endeavor to cause any restrictions on such options or
equivalent or similar rights not lapsed by operation of this clause to
so lapse.
(C) forgiveness of the entire outstanding balance of the
Relocation Loan.
(D) the indemnity described in Section 4.2(vi) hereto.
(ii) Upon the termination of Ross's employment as a result of his
death, Ross's heirs, devisees, executors or other legal representatives shall
receive:
(A) for an additional six months from the date of such
termination, his Base Salary and any and all benefits to which he is
entitled on the date of such termination under the Company's pension,
life, disability, accident and health and other benefit plans in
accordance with the provisions of such plans; and (B) a pro rata
portion of the maximum amount of incentive compensation for which Ross
could have become eligible during the year in which such termination
occurs.
(B) the Option shall become immediately accelerated and fully
vested and any restrictions on such Option shall, to the extent
permissible under applicable securities laws, fully lapse; and the
Company shall endeavor to cause any restrictions on such options or
equivalent or similar rights not lapsed by operation of this clause to
so lapse.
(C) forgiveness of the entire outstanding balance of the
Relocation Loan.
(D) the indemnity described in Section 4.2(vi) hereto.
(iii) Subject to Section 4.l (vi) hereof if Ross's employment shall
be terminated by the Company for Cause hereto or by Ross without Good Reason,
the
5
<PAGE>
Company shall pay Ross his full Base Salary and other benefits to which he is
entitled, through the Date of Termination at the rate in effect at the time the
Notice of Termination is given, and the Company shall have no further
obligations to him under this Agreement, with the exception of the indemnity
described in Section 4.2(vi) hereto.
(iv) If Ross's employment by the Company shall be terminated (a) by
the Company other than for Cause, Death or Disability or (b) by Ross for Good
Reason, then Ross shall be entitled to the benefits provided below:
(A) the Company shall pay Ross, not later than the fifth day
following the Date of Termination, a lump sum in cash equal to the sum
of (i) six months of Base Salary, at the rate of Ross's Base Salary on
the Date of Termination, discounted to the then present value at a
discount rate of ten percent per annum applied to each future payment
from the time it would have become payable; and (ii) a pro rata
portion of the maximum amount of incentive compensation for which Ross
could have become eligible during the year in which such termination
occurs;
(B) the Option, together with any other options to purchase
stock (common or otherwise) in the Company granted pursuant to any
plan or otherwise, or any equivalent or similar rights which
appreciate or tend to appreciate as the value of the Company's stock
appreciates, shall become immediately accelerated and fully vested and
any restrictions on such options or equivalent or similar rights
shall, to the extent permissible under applicable securities laws,
fully lapse; and the Company shall endeavor to cause any restrictions
on such options or equivalent or similar rights not lapsed by
operation of this clause to so lapse; and
(C) forgiveness of the entire outstanding balance of the
Relocation Loan.
(D) the indemnity described in Section 4.2(vi) hereto.
(v) Ross shall not be required to mitigate the amount of any payment
provided for in this Section 4.2 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4.2 be
subject to set-off or reduced by any compensation earned by him as the result of
employment by another employer or by benefits after the Date of Termination, or
otherwise.
(vi) In connection with the termination of Ross's employment for any
reason, the Company will take all necessary action to release Ross from any
obligations under any guarantee by Ross of the Company's corporate debt. Ross's
employment shall not be terminated until such time as he is removed or replaced
with respect to any such guarantee. In addition, after the Date of
Termination, the Company will indemnify Ross for any claims, including all legal
fees and expenses associated therewith, made by any lender with respect to any
such guarantee.
6
<PAGE>
4.3. Certain Definitions. For the purposes of this Section 4, the
-------------------
following terms shall have the meanings set forth in this Section 4.3:
(i) "Notice of Termination" means a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of employment under the provision so indicated.
(ii) "Date of Termination" means (i) if employment is terminated
for Disability, five days after Notice of Termination is given (provided that
Ross shall not have returned to the performance of his duties on a full-time
basis during such five-day period), and (ii) if employment is terminated
pursuant to Subsection (iii) or (iv) of Section 4.1 or for any other reason, the
date specified in the Notice of Termination (which, in the case of a termination
pursuant to Subsection (iii) of Section 4.1, shall not be less than ten days
and, in the case of a termination pursuant to Subsection (iv) of Section 4.1,
shall not be more than sixty days, respectively, from the date such Notice of
Termination is given); provided that if within thirty days after any Notice of
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the termination (a "Notice of
Dispute"), the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a Notice of Dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence.
5. SUCCESSORS
----------
5.1. Assumption by Successors. The Company shall require any successor
------------------------
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Ross to compensation from the Company in the same
amount and on the same terms as he would be entitled hereunder if he terminates
his employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
7
<PAGE>
6. NON-COMPETITION AND CONFIDENTIALITY
-----------------------------------
6.1. Non-Competition. During Ross's employment by the Company hereunder
---------------
and during the period of one year after the termination of Ross's employment
hereunder by the Company for Cause or by Ross for other than Good Reason:
(i) Ross will not directly compete with the business of the Company
so as to cause the Company to lose material revenue from any client account
which is in existence on the Date of Termination.
(ii) Ross will not directly or indirectly employ or solicit for
employment any person whom he knows to be an employee of the Company or any
subsidiary of the Company.
6.2. Confidential Information.
------------------------
(a) Ross agrees and acknowledges that the Confidential Information of
the Company (as hereinafter defined) is valuable, special and unique to its
business; that such business depends on such Confidential Information; and that
the Company wishes to protect such Confidential Information by keeping it
confidential for the use and benefit of the Company. Based on the foregoing,
Ross agrees to undertake the following obligations with respect to such
Confidential Information:
(i) Ross agrees to keep any and all Confidential Information in
trust for the use and benefit of the Company;
(ii) Ross agrees that, except as required by Ross's duties
hereunder or authorized in writing by the Company, he will not at any
time during and for five years after the termination of his employment
with the Company, disclose or use, directly or indirectly, any
Confidential Information of the Company;
(iii) Ross agrees to take all reasonable steps necessary, or
reasonably requested by the Company, to ensure that all Confidential
Information of the Company is kept confidential for the use and
benefit of the Company; and
(iv) Ross agrees that, upon termination of his employment by the
Company or at any other time the Company may in writing so request, he
will promptly deliver to the Company all materials constituting
Confidential Information (including all copies thereof) that are in
the possession of or under the control of Ross . Ross further agrees
that, if requested by the Company to return any Confidential
Information pursuant to this Subsection 6.2(a) (iv), he will not make
or retain any copy of or extract from such materials.
8
<PAGE>
(b) For purposes of this Section 6.2, Confidential Information means
any and all information developed by or for the Company of which Ross gained
knowledge by reason of his employment by the Company prior the date hereof or
his employment under this Agreement that is not generally known in any industry
in which the Company is or may become engaged. Confidential Information
includes, but is not limited to, any and all information developed by or for the
Company concerning plans, marketing and sales methods, materials, processes,
business forms, procedures, devices used by the Company, contractors and
customers with which the Company has dealt prior to Ross's termination of
employment with the Company, plans for development of new products, services and
expansion into new areas or markets, internal operations, and any trade secrets
and proprietary information of any type owned by the Company together with all
written, graphic and other materials relating to all or any part of the same.
In the event that Ross is, in the opinion of his legal counsel (which
counsel shall be acceptable to the Company in its reasonable discretion),
required to disclose any Confidential Information to any federal, state, local
or foreign judicial, legislative, administrative or other authority, agency or
instrumentality or is required to disclose such Confidential Information by
reason of his fiduciary duties to the Company or its shareholders or by any
federal, state, local or foreign securities, blue-sky or other similar laws,
rules, regulations or ordinances, then, notwithstanding anything in this Section
6.2 to the contrary, Ross may disclose such Confidential Information to the
extent, and to the persons and entities, so required without any liability
hereunder, without constituting a breach hereunder and without giving rise to a
right of the Company to terminate Ross's employment (for Cause or otherwise)
hereunder. Ross shall notify the Company of any disclosure required to be made
in connection with the preceding sentence as soon as practicable after Ross
becomes aware of such required disclosure.
7. REMEDIES
--------
7.1. Injunctive Relief. Ross acknowledges and agrees that the covenants
-----------------
and obligations contained in Sections 6.1 and 6.2 relate to special, unique and
extraordinary matters and that a violation of any of the terms of such sections
will cause the Company irreparable injury for which adequate remedy at law is
not available. Therefore, Ross agrees that the Company shall be entitled to an
injunction, restraining order, or other equitable relief from any court of
competent jurisdiction, restraining Ross from committing any violation of the
covenants and obligations set forth in Sections 6.1 and 6.2 hereof.
7.2. Remedies Cumulative. The Company's rights and remedies under
-------------------
Section 7.1 hereof are cumulative and are in addition to any other rights and
remedies the Company may have at law or in equity.
8. MISCELLANEOUS
-------------
8.1. Notices. Any written notice, required or permitted under this
-------
Agreement, shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight
9
<PAGE>
courier. Written notices must be delivered to the receiving party at his or its
address on the signature page of this Agreement. The parties may change the
address at which written notices are to be received in accordance with this
section.
8.2. Assignment. Neither the Company nor Ross may assign, transfer, or
----------
delegate its or his rights or obligations hereunder and any attempt to do so
shall be void. This Agreement shall be binding upon and shall inure to the
benefit of the Company and its successors and assigns.
8.3. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties with respect to the subject matter hereof, and all other prior
agreements, written or oral, are hereby merged herein and are of no further
force or effect. This Agreement may be modified or amended only by a written
agreement that is signed by the Company and Ross . No waiver of any section or
provision of this Agreement will be valid unless such waiver is in writing and
signed by the party against whom enforcement of the waiver is sought. The
waiver by the Company of any section or provision of this Agreement shall not
apply to any subsequent breach of this Agreement. Captions to the various
sections in this Agreement are for the convenience of the parties only and shall
not affect the meaning or interpretation of this Agreement. This Agreement may
be executed in several counterparts, each of which shall be deemed an original,
but together they shall constitute one and the same instrument.
8.4. Severability. The provisions of this Agreement shall be deemed
------------
severable, and if any part of any provision is held illegal, void, or invalid
under applicable law such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If
any provision of this Agreement is held illegal, void, or invalid in its
entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
8.5. Continuing Obligations. Sections 4.2, 6.1 and 6.2 of this
----------------------
Agreement shall continue and survive the termination of this Agreement.
8.6. Applicable Law. This Agreement and the rights and obligations of
--------------
the Company and Ross thereunder shall be governed by and construed and enforced
under the laws of the State of California applicable to agreements made and to
be performed entirely within such State.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
TIER TECHNOLOGIES, INC.
By: /s/ James L. Bildner
---------------------------
Title: Chairman of the Board,
Chief Executive Officer
------------------------
Address: 1350 Treat Blvd., Ste. 250
Walnut Creek, CA 94596
/s/ George K. Ross
-------------------------------
GEORGE K. ROSS
Address: 1350 Treat Blvd., Ste. 250
Walnut Creek, CA 94596
11
<PAGE>
EXHIBIT A
Benefits for Ross's Employment Agreement
----------------------------------------
1. Group Term Insurance
2. Standard medical plan.
3. Standard three weeks vacation.
4. Standard company-approved holidays.
5. Standard long term disability insurance.
6. Standard defined benefit pension plan.
7. D & O liability insurance.
8. 401(k) Plan
12
<PAGE>
EXHIBIT 10.35
REVOLVING CREDIT AGREEMENT
Dated as of March 31, 1998
among
TIER TECHNOLOGIES, INC.
and
TIER TECHNOLOGIES (UNITED KINGDOM) INC.
(collectively, the "Borrowers")
and
BANKBOSTON, N.A.
as Bank and
Letter of Credit Issuer
<PAGE>
-i-
TABLE OF CONTENTS
SECTION I Page
DEFINITIONS 1
1.1 Definitions................................................. 1
1.2 Accounting Terms............................................ 12
SECTION II
DESCRIPTION OF CREDIT...................................................... 12
2.1 The Loans................................................... 12
2.2 Notice and Manner of Borrowing or Conversion of Loans....... 13
2.3 (a) Commitment Fee.......................................... 13
(b) Closing Fee............................................. 14
2.4 Reduction of Commitment Amount.............................. 14
2.5 The Note.................................................... 14
2.6 Duration of Interest Periods................................ 14
2.7 Interest Rates and Payments of Interest..................... 15
2.8 Changed Circumstances....................................... 15
2.9 Overdraft Facility.......................................... 17
2.10 Capital Requirements........................................ 18
2.11 Prepayments of the Loans.................................... 19
2.12 Method of Payment........................................... 19
2.13 Default Rate Interest, Etc.................................. 19
2.14 Indemnity................................................... 19
2.15 Computation of Interest and Fees............................ 20
2.16 The Letters of Credit....................................... 20
2.17 Letter of Credit Fees....................................... 21
SECTION III
CONDITIONS OF LOANS........................................................ 21
3.1 Conditions Precedent to Initial Revolving Loan,
and Letter of Credit....................................... 21
3.2 Conditions Precedent to all Loans and Letters of Credit..... 24
<PAGE>
-ii-
SECTION IV
REPRESENTATIONS AND WARRANTIES............................................ 25
4.1 Organization and Qualification............................. 25
4.2 Corporate Authority........................................ 25
4.3 Valid Obligations.......................................... 25
4.4 Consents or Approvals...................................... 25
4.5 Title to Properties: Absence of Encumbrances............... 26
4.6 Financial Statements....................................... 26
4.7 Changes.................................................... 26
4.8 Defaults................................................... 26
4.9 Taxes...................................................... 26
4.10 Litigation................................................. 27
4.11 Use of Proceeds............................................ 27
4.12 Subsidiaries............................................... 27
4.13 Holding Company and Investment Company..................... 27
4.14 Compliance with ERISA...................................... 27
4.15 Environmental Matters...................................... 27
SECTION V
AFFIRMATIVE COVENANTS..................................................... 29
5.1 Financial Statements and other Reporting Requirements...... 29
5.2 Conduct of Business........................................ 31
5.3 Maintenance and Insurance.................................. 32
5.4 Taxes...................................................... 32
5.5 Inspection by the Bank..................................... 32
5.6 Maintenance of Books and Records........................... 33
5.7 Current Ratio.............................................. 33
5.8 Minimum Quarterly Net Income............................... 33
5.9 Consolidated Total Liabilities to EBITDA Ratio............. 33
5.10 EBIT/Interest Expense Ratio................................ 33
5.11 Further Assurances......................................... 34
SECTION VI
NEGATIVE COVENANTS........................................................ 34
6.1 Indebtedness............................................... 34
6.2 Contingent Liabilities..................................... 34
<PAGE>
-iii-
6.3 Leases..................................................... 35
6.4 Sale and Leaseback......................................... 35
6.5 Encumbrances............................................... 35
6.6 Merger: Consolidation: Sale or Lease of Assets;
Other Acquisitions........................................ 36
6.7 Additional Stock Issuance.................................. 36
6.8 Equity Distributions....................................... 36
6.9 Capital Expenditures....................................... 37
6.10 Investments................................................ 37
6.11 ERISA...................................................... 37
6.12 Transactions with Affiliates............................... 37
6.13 No Amendments to Certain Documents......................... 37
SECTION VII
DEFAULTS.................................................................. 38
7.1 Events of Default.......................................... 38
7.2 Remedies................................................... 40
SECTION VIII
SECURITY.................................................................. 41
SECTION IX
MISCELLANEOUS ............................................................41
9.1 Notices.................................................... 41
9.2 Expenses................................................... 42
9.3 Set-Off.................................................... 42
9.4 Term of Agreement.......................................... 42
9.5 No Waivers................................................. 43
9.6 Governing Law.............................................. 43
9.7 Amendments................................................. 43
9.8 Binding Effect of Agreement................................ 43
9.9 Successors and Assigns..................................... 43
9.10 Counterparts............................................... 45
9.11 Partial Invalidity......................................... 45
9.12 Captions................................................... 45
9.13 WAIVER OF JURY TRIAL....................................... 45
9.14 Entire Agreement........................................... 45
<PAGE>
-iv-
EXHIBITS
EXHIBIT A - Form of Promissory Note
EXHIBIT B - Form of Notice of Borrowing or Conversion
EXHIBIT C - Indebtedness; Encumbrances
EXHIBIT D - Litigation
EXHIBIT E - Subsidiaries
EXHIBIT F - Form of Report of Borrowing Base Certificate
EXHIBIT G - Form of Report of Chief Financial Officer
EXHIBIT H - Form of Opinion of Counsel to the Company
EXHIBIT I - Trademarks
<PAGE>
REVOLVING CREDIT AGREEMENT
Dated as of March 31, 1998
THIS REVOLVING CREDIT AGREEMENT is made as of March 31, 1998, by and among
TIER TECHNOLOGIES, INC., a California corporation (the "Company"), TIER
TECHNOLOGIES (UNITED KINGDOM) INC., a Delaware corporation ("Tier UK"), and
BANKBOSTON, N.A. (the "Bank"), a national banking association.
SECTION I
---------
DEFINITIONS
-----------
1.1 Definitions.
-----------
All capitalized terms used in this Agreement or in the Note or in any
certificate, report or other document made or delivered pursuant to this
Agreement (unless otherwise defined therein) shall have the meanings assigned to
them below:
Adjusted LIBOR Rate. Applicable to any Interest Period, shall mean, for
-------------------
any LIBOR Loan, a rate per annum equal to (x) the rate quoted by the Bank at
--- -----
11:00 a.m. London time (or as soon thereafter as practical) at which deposits in
dollars are offered by prime commercial banks to prime commercial banks in the
London interbank Eurodollar market two Business Days before the first day of
such Interest Period for a period equal to such Interest Period and in an amount
equal to such LIBOR Loan, divided by (y) one (1) minus the Reserve Requirement,
if any, for each such LIBOR Loan for such Interest Period.
Affected Loans. See Section 2.8(a).
--------------
Agreement. This Agreement, as the same may be supplemented or amended from
---------
time to time.
AIU Insurance Policy. The Insolvency Risk Insurance Policy issued to the
--------------------
Company by AIU North America Inc. with a policy limit of liability of
$4,500,000.
Alternate Base Rate. The greater of (i) the rate of interest announced
-------------------
from time to time by the Bank at its head office as its Base Rate, and (ii) the
Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if
necessary, to the next 1/8 of 1%).
<PAGE>
-2-
Alternate Base Rate Loan. Any Revolving Loan bearing interest determined
------------------------
with reference to the Alternate Base Rate.
Bank. See Preamble.
----
Borrower. The Company or any Borrowing Subsidiary, and Borrowers shall
-------- ---------
mean the Company and each Borrowing Subsidiary.
Borrowing Base. As of the date of any determination, the lesser of (i) the
--------------
Commitment Amount or (ii) 85% of the amount of aggregate Eligible Receivables;
provided that without the Bank's consent, at no time may greater than 10%
- --------
(except as set forth below) of the Borrowing Base consist of Eligible
Receivables that are owed by a single customer, and provided further that at no
-------- -------
time may greater than 30% of the Borrowing Base consist of Foreign Receivables.
Notwithstanding the first proviso set forth in the preceding sentence, but
subject to the second proviso set forth in such sentence, with respect to (i)
each of the following entities or any wholly-owned subsidiary of such entity and
(ii) any future customers as may be determined by the Bank in its sole
discretion, up to 25% of the Borrowing Base may consist of Eligible Receivables
that are owed by such entity or wholly-owned subsidiary: Kaiser, Humana, Inc.,
Unisys Corporation, BDM, Inc., or Equifax, Inc., provided that such customer (or
--------
in the event such customer does not have a separate credit rating, such
customer's parent corporation) maintains at least a BBB rating or its equivalent
with respect to its debt obligations, as rated by Standard & Poor's Rating
Services, Moody's Investors Service, Inc. or Duff & Phelps Credit Rating Co.
(the "Approved Credit Rating"). In addition, up to 25% of the Borrowing Base
may consist of Eligible Receivables that are owed by the State of Missouri or
any department, agency or authority of such State, provided that the State of
--------
Missouri, or if the applicable customer is a department, agency or authority of
such State which has a separate credit rating, such department, agency or
authority, maintains the Approved Credit Rating.
Borrowing Base Certificate. See Section 3.1(n).
--------------------------
Borrowing Subsidiary. Tier Technologies (United Kingdom) Inc., a Delaware
--------------------
corporation.
Business Day. (i) For all purposes other than as covered by clause (ii)
------------
below, any day other than a Saturday, Sunday or legal holiday on which banks in
Boston, Massachusetts or New York, New York are open for the conduct of a
substantial part of their commercial banking business; and (ii) with respect to
all notices and determinations in connection with, and payments of principal and
interest on, LIBOR Loans, any day that is a Business Day
<PAGE>
-3-
described in clause (i) and that is also a day for trading by and between banks
in U.S. Dollar deposits in the London interbank market.
Capital Expenditures. To the extent capitalized in accordance with GAAP,
--------------------
any expenditure for fixed assets, including assets being constructed (whether or
not completed), leasehold improvements, capital leases under GAAP, installment
purchases of machinery and equipment, acquisitions of real estate and other
similar expenditures including (a) in the case of a purchase, the entire
purchase price, whether or not paid during the fiscal period in question, (b) in
the case of a capital lease, the capitalized amount thereof (determined in
accordance with GAAP), and (c) without duplication, expenditures in or from any
construction-in-progress account, but excluding expenditures made with the
proceeds of insurance to replace a damaged or destroyed asset and expenditures
made with the proceeds of the sale of an asset, up to an amount not greater than
the then-book value of such sold asset, to replace such asset.
Closing Date. March 31, 1998.
------------
Code. The Internal Revenue Code of 1986 and the rules and regulations
----
thereunder, collectively, as the same may from time to time be supplemented or
amended and remain in effect.
Collateral means all real and personal property of any Borrower pledged as
----------
collateral under the Pledge Agreements, the Security Agreement, or under any
other instrument or agreement now or hereafter in effect between or among the
Bank, and the Borrowers or any other Person, or any of them, which provides
collateral security for the payment and performance of all or any portion of the
Obligations.
Collateral Instruments. Letters of credit, guarantees, indemnities and
----------------------
performance bonds in form and substance satisfactory to the Overdraft Bank
issued or to be issued by the Overdraft Bank to or for the account of Tier
Technologies (United Kingdom) Inc. pursuant to Section 2.9.
Commitment Amount. $10,000,000 or any lesser amount, including zero,
-----------------
resulting from a termination or reduction of such amount in accordance with
Section 2.4 or Section 7.2.
Company. See Preamble.
-------
Consolidated Current Assets. As at any date as of which the amount thereof
---------------------------
shall be determined, all amounts that should, in accordance with GAAP, be
included as current assets on the consolidated balance sheet of the Company and
its Subsidiaries as at such date.
<PAGE>
-4-
Consolidated Current Liabilities. At any date as of which the amount
--------------------------------
thereof shall be determined, all amounts that should, in accordance with GAAP,
be included as current liabilities on the consolidated balance sheet of the
Company and its Subsidiaries as at such date, plus, to the extent not already
included therein, all Loans and all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless such Indebtedness
is renewable or extendable at the option of the Company or any Subsidiary to a
date more than one year from the date of determination.
Consolidated Net Income. The consolidated net income of the Company and
-----------------------
its Subsidiaries, after deduction of all expenses, taxes and other proper
charges, determined in accordance with GAAP.
Consolidated Total Liabilities. At any date as of which the amount
------------------------------
thereof shall be determined, all obligations that should, in accordance with
GAAP, be classified as liabilities on the consolidated balance sheet of the
Company and its Subsidiaries, including in any event all Indebtedness.
Controlled Group. All trades or businesses (whether or not incorporated)
----------------
under common control that, together with the Company, are treated as a single
employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA.
Counter Indemnities. Any indemnity or counter indemnity from Tier
-------------------
Technologies (United Kingdom) Inc., in favor of the Overdraft Bank with respect
to any Collateral Instrument issued to or for the account of Tier Technologies
(United Kingdom) Inc., in the standard form of indemnity or counter indemnity
used by the Overdraft Bank or in such other form and substance as may be
satisfactory to the Overdraft Bank and including (without limitation) any letter
of credit application incorporating indemnification language satisfactory to the
Overdraft Bank.
Default. An Event of Default or event or condition that, but for the
-------
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.
EBIT. In relation to the Company and its Subsidiaries for any period, an
----
amount equal to the Consolidated Net Income determined in accordance with GAAP
for such period, plus the following to the extent deducted in computing such
----
Consolidated Net Income for such period: (a) Interest Expense for such period,
and (b) taxes on income for such period, but minus (i) any income that is
-----
generated from any source other than the Company's ordinary operations and (ii)
any capitalized software costs.
<PAGE>
-5-
EBITDA. In relation to the Company and its Subsidiaries for any period, an
------
amount equal to the Consolidated Net Income determined in accordance with GAAP
for such period, plus the following to the extent deducted in computing such
----
Consolidated Net Income for such period: (a) Interest Expense for such period,
(b) taxes on income for such period, (c) depreciation for such period, (d)
amortization for such period, and (e) one-time non-recurring charges which are
related to acquisitions and actually deducted in calculating EBITDA in such
period, but minus (x) all gains (or plus all losses) attributable to the sale or
-----
other disposition of assets in such period other than in the ordinary course of
business, (y) any income that is generated from any source other than the
Company's ordinary operations and (z) any capitalized software costs. It is
understood and agreed that the EBITDA for the period in question of any Person
acquired (whether by merger, sale of substantially all assets, or otherwise) by
the Company during such period, calculated in accordance with this definition,
shall be included in the EBITDA of the Company for such period.
Eligible Receivables. Such Receivables which from time to time shall not
--------------------
be deemed unacceptable to the Bank in its sole discretion in all respects. A
Receivable shall, however, in no event be deemed to be eligible (i) unless, if
it is not a Foreign Receivable of Tier Technologies (Australia) Pty, Ltd., it is
subject to a first priority perfected security interest in favor of the Bank;
(ii) unless such Receivable continues to be in full conformity with the
warranties and covenants made by any of the Borrowers with respect thereto
contained herein and in the Security Agreement; (iii) unless no more than ninety
(90) days shall have elapsed from the invoice date; (iv) to the extent that such
Receivable is not subject to set off, counterclaim, allowance, adjustment or
dispute and there have been no allowances or adjustments other than as shown on
the invoice; (v) if the Receivable is an obligation of an Affiliate of the
Company, or if it is due from the United States Government or any agency thereof
unless a first lien in favor of the Bank is perfected on such Receivable, or if
it is due from a debtor believed to be bankrupt, insolvent or generally unable
to pay its debts as they become due; (vi) unless such Receivable arose in the
ordinary course of business; (vii) unless such Receivable arose from the
performance of services by any Borrower which have been fully and satisfactorily
performed; and (viii) unless such Receivable is not subject to any prior or
subsequent assignment, claim, lien or security interest other than (a) that in
favor of the Bank or (b) Permitted Encumbrances. A Foreign Receivable shall in
no event be deemed eligible unless it is covered by the AIU Insurance Policy or
secured by a letter of credit acceptable to the Bank.
Encumbrances. See Section 6.5.
------------
ERISA. The Employee Retirement Income Security Act of 1974 and the rules
-----
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.
<PAGE>
-6-
Environmental Laws. Any and all applicable foreign, federal, state and
------------------
local environmental, health or safety statutes, laws, regulations, rules,
ordinances, policies and rules or common law (whether now existing or hereafter
enacted or promulgated), of all governmental agencies, bureaus or departments
which may now or hereafter have jurisdiction over the Company or any of its
Subsidiaries and all applicable judicial and administrative and regulatory
decrees, judgments and orders, including common law rulings and determinations,
relating to injury to, or the protection of, real or personal property or human
health or the environment, including, without limitation, all requirements
pertaining to reporting, licensing, permitting, investigation, remediation and
removal of emissions, discharges, releases or threatened releases of Hazardous
Materials, chemical substances, pollutants or contaminants whether solid, liquid
or gaseous in nature, into the environment or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of such Hazardous Materials, chemical substances, pollutants or
contaminants.
Event of Default. Any event described in Section 7.1.
----------------
Federal Funds Effective Rate. For any day, a fluctuating interest rate per
----------------------------
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by the Bank
from three Federal funds brokers of recognized standing selected by the Bank.
Foreign Receivables. A Receivable payable by an entity that is located in
-------------------
neither the United States nor Canada.
GAAP. Generally accepted accounting principles in the United States of
----
America as in effect from time to time, applied on a consistent basis.
Guarantees. As applied to the Company and its Subsidiaries, all
----------
guarantees, endorsements or other contingent, or surety obligations with respect
to obligations of others whether or not reflected on the consolidated balance
sheet of the Company and its Subsidiaries, including any obligation to furnish
funds, directly or indirectly (whether by virtue of partnership arrangements, by
agreement to keep-well or otherwise), through the purchase of goods, supplies or
services, or by way of stock purchase, capital contribution, advance or loan, or
to enter into a contract for any of the foregoing, for the purpose of payment of
obligations of any other person or entity.
Guarantors. Each Subsidiary of the Company, acting as guarantor under the
----------
Guaranty.
<PAGE>
-7-
Guaranty. That certain Guaranty dated as of March 31, 1998 from each
--------
Guarantor in favor of the Bank in form and substance satisfactory to the Bank.
Hazardous Material. Any substance (i) the presence of which requires or
------------------
may hereafter require notification, investigation or remediation under any
Environmental Law; (ii) which is or becomes defined as a "hazardous waste",
"hazardous material" or "hazardous substance" or "controlled industrial waste"
or "pollutant" or "contaminant" under any present or future Environmental Law or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.) and any applicable local statutes and the regulations promulgated
thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of any foreign country, the United States, any state
of the United States, or any political subdivision thereof to the extent any of
the foregoing has or had jurisdiction over the Company; or (iv) without
limitation, which contains gasoline, diesel fuel or other petroleum products,
asbestos or polychlorinated biphenyls ("PCB's").
Indebtedness. As applied to the Company and its Subsidiaries, (i) all
------------
obligations for borrowed money or other extensions of credit whether or not
secured or unsecured, absolute or contingent, including, without limitation,
unmatured reimbursement obligations with respect to letters of credit or
guarantees issued for the account of or on behalf of the Company and its
Subsidiaries and all obligations representing the deferred purchase price of
property, other than accounts payable arising in the ordinary course of
business, (ii) all obligations evidenced by bonds, notes, debentures or other
similar instruments, (iii) all obligations secured by any mortgage, pledge,
security interest or other lien on property owned or acquired by the Company or
any of its Subsidiaries whether or not the obligations secured thereby shall
have been assumed, (iv) that portion of all obligations arising under capital
leases that is required to be capitalized on the consolidated balance sheet of
the Company and its Subsidiaries, and (v) all Guarantees.
Interest Expense. For any specified period, the aggregate interest and
----------------
other financing expenses that shall have become due and payable on Indebtedness
to any Person (including the Bank), including fees with respect to such
Indebtedness and interest under capitalized leases, all determined in accordance
with GAAP.
Interest Period. With respect to each LIBOR Loan, the period commencing on
---------------
the date of the making or continuation of or conversion to such LIBOR Loan and
ending one, two, three or six months thereafter, as the Company may elect in the
applicable Notice of Borrowing or Conversion;
<PAGE>
-8-
provided that:
- --------
(i) any Interest Period (other than an Interest Period determined
pursuant to clause (iii) below) that would otherwise end on a day that is
not a Business Day shall be extended to the next succeeding Business Day
unless, in the case of LIBOR Loans, such Business Day falls in the next
calendar month, in which case such Interest Period shall end on the
immediately preceding Business Day;
(ii) any Interest Period applicable to a LIBOR Loan that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (iii) below, end on the last
Business Day of a calendar month;
(iii) any Interest Period that would otherwise end after the Revolving
Credit Termination Date shall end on the Revolving Credit Termination Date;
and
(v) notwithstanding clauses (iii) and (iv) above, no Interest Period
applicable to a LIBOR Loan shall have a duration of less than one month;
and if any Interest Period applicable to such Loans would be for a shorter
period, such Interest Period shall not be available hereunder.
Investment. As applied to the Company and its Subsidiaries, the purchase
----------
or acquisition of any share of capital stock, partnership or limited liability
company interest, evidence of indebtedness or other equity security of any other
person or entity, any loan, advance or extension of credit to, or contribution
to the capital of, any other person or entity, any real estate held for sale or
investment, any commodities futures contracts held other than in connection with
bona fide hedging transactions, any other investment in any other person or
entity, and the making of any commitment or acquisition of any option to make an
Investment.
Kaiser. Collectively, Kaiser Foundation Health Plan, Inc. and its
------
subsidiaries.
Letter of Credit. Letters of credit in the form customarily issued by the
----------------
Bank as standby, documentary or commercial letters of credit, issued by the
Bank, at the request and for the account of a Borrower.
Letter of Credit Obligations. At any time, the aggregate Stated Amount of
----------------------------
Letters of Credit outstanding at such time, plus the aggregate amount of any
unreimbursed draws under outstanding Letters of Credit.
<PAGE>
-9-
LIBOR Loan. Any Revolving Loan bearing interest at a rate determined with
----------
reference to the Adjusted LIBOR Rate.
Loan. A loan made to a Borrower by the Bank pursuant to Section II of this
----
Agreement, and "Loans" means all of such loans, collectively.
Loan Documents. Collectively, this Agreement, the Note, the Guaranties,
--------------
the Security Agreements, the Pledge Agreement, and the Letters of Credit (and
related documentation and agreements), together with all agreements and other
instruments contemplated thereby and all schedules, exhibits and annexes
thereto, as the same may from time to time be amended and in effect.
Maximum Overdraft Amount. The Sterling equivalent of $500,000, as the
-------------------------
same may be reduced from time to time in accordance with Section 2.9, or if the
Overdraft Facility is terminated pursuant to the provisions hereof, zero.
Net Worth. As of any date of determination, the Consolidated stockholders'
---------
equity of the Company and its Subsidiaries.
Note. A promissory note of a Borrower, substantially in the forms of
----
Exhibit A-1 and A-2 hereto, as applicable, evidencing the obligation of such
- -------------------
Borrower to the Bank to repay the Loans.
Notice of Borrowing or Conversion. See Section 2.2.
---------------------------------
Obligations. Any and all obligations of the Borrowers to the Bank
-----------
hereunder of every kind and description, direct or indirect, absolute or
contingent, primary or secondary, due or to become due, now existing or
hereafter arising, regardless of how they arise or by what agreement or
instrument, if any, and including obligations to perform acts and refrain from
taking action as well as obligations to pay money.
Overdraft Bank. The Bank, acting through its London branch.
--------------
Overdraft Facility. See Section 2.9.
------------------
PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to
----
any or all of its functions under ERISA.
Permitted Encumbrances. See Section 6.5.
----------------------
<PAGE>
-10-
Person. An individual, partnership, corporation, limited liability company
------
or partnership, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
Plan. At any time, an employee pension or other benefit plan that is
----
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by the Company or any
member of the Controlled Group for employees of the Company or any member of the
Controlled Group or (ii) if such Plan is established, maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which the Company or any member of the
Controlled Group is then making or accruing an obligation to make contributions
or has within the preceding five Plan years made contributions.
Pledge Agreement. The Pledge Agreement dated as of the date hereof
----------------
executed and delivered by the Company to the Bank.
Qualified Investments. As applied to the Company and its Subsidiaries,
---------------------
investments in (i) notes, bonds or other obligations of the United States of
America or any agency thereof that as to principal and interest constitute
direct obligations of or are guaranteed by the United States of America; (ii)
certificates of deposit or other deposit instruments or accounts of banks or
trust companies organized under the laws of the United States or any state
thereof that have capital and surplus of at least $100,000,000, (iii) commercial
paper that is rated not less than prime-one or A-1 or their equivalents by
Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively,
or their successors, and (iv) any repurchase agreement secured by any one or
more of the foregoing.
Receivables. All rights of the Company or any of its Subsidiaries to
-----------
payment for goods sold, leased or otherwise marketed in the ordinary course of
business and all rights of the Company or any of its Subsidiaries to payment for
services rendered in the ordinary course of business and all sums of money or
other proceeds due thereon pursuant to transactions with account debtors, except
for that portion of the sum of money or other proceeds due thereon that relate
to sales, use or property taxes in conjunction with such transactions, recorded
on books of account in accordance with GAAP.
Regulatory Change. Any change after the date of this Agreement in United
-----------------
States federal, state or foreign laws or regulations (including Regulation D) or
the adoption or making after such date of any orders, rulings, interpretations,
directives, guidelines or requests applying to a class of banks including the
Bank, of or under any United States federal, state, or foreign laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
<PAGE>
-11-
Reimbursement Obligations. The aggregate non-contingent reimbursement or
-------------------------
repayment obligations of the Company with respect to amounts drawn under the
Letter of Credit.
Reserve Requirement. For any LIBOR Loans for any Interest Period (or, as
-------------------
the case may be, shorter period), the average maximum rate at which reserves
(including marginal, supplemental or emergency reserves, if any) are required to
be maintained during such period under Regulation D by member banks of the
Federal Reserve System in Boston, Massachusetts with deposits exceeding one
billion dollars against "Eurocurrency liabilities" (as such term is used in
Regulation D). Without limiting the effect of the foregoing, the Reserve
Requirement shall reflect any other reserves required to be maintained by such
member banks by reason of any Regulatory Change against: (i) any category of
liabilities which includes deposits by references to which the Adjusted LIBOR
Rate is to be determined as provided in the definition of "Adjusted LIBOR Rate",
as applicable, in this Section 1, or (ii) any category of extensions of credit
or other assets which include LIBOR Loans.
Revolving Loans. The Loans made to the Company pursuant to Section 2.1(a)
---------------
of this Agreement and advances made on the Overdraft Facility pursuant to
Section 2.9 of this Agreement.
Revolving Credit Termination Date. The date that is 3 years from the date
---------------------------------
of this Agreement.
Security Agreement. The Security Agreement dated as of the date hereof and
------------------
executed and delivered by the Borrowers to the Bank.
Security Documents. Collectively, (a) the Loan Documents and (b) all other
------------------
agreements, instruments, or contracts by which any of the Obligations shall be
evidenced or under or in respect of which the Bank or any of the nominees,
agents, or representatives of the Bank shall have, any rights or interest as
security for the payment or performance of all or any part of the Obligations.
Solvent. With respect to the Company and its Subsidiaries on a particular
-------
date, measured on a consolidated basis, that on such date (i) the fair value of
the property (tangible or intangible) of the Company and its Subsidiaries is
greater than the total amount of liabilities, including, without limitation,
contingent liabilities, of the Company and its Subsidiaries, (ii) the amount
that will be required to pay the probable liabilities of the Company and its
Subsidiaries on their debts as they become absolute and matured will not be
greater than the fair salable value of the assets of the Company and its
Subsidiaries at such time, (iii) the Company and its Subsidiaries are able to
realize upon their assets and pay their debts and other liabilities,
<PAGE>
-12-
contingent obligations and other commitments as they mature in the normal course
of business, (iv) the Company and its Subsidiaries do not intend to, and do not
believe that they will, incur debts or liabilities beyond the Company's and its
Subsidiaries' ability to pay as such debts and liabilities mature, and (v) the
Company and its Subsidiaries are not engaged in business or a transaction, and
are not about to engage in business or a transaction, for which the Company's
and its Subsidiaries' properties would constitute unreasonably small capital
after giving due consideration to prevailing practices in the industry in which
the Company and its Subsidiaries are engaged. In computing the amount of any
contingent liability at any time, it is intended that such liability will be
compounded at the amount which, in light of all the facts and circumstances
existing at such time, represents the amount that might reasonably be expected
to become an actual or matured liability.
Stated Amount. With respect to each Letter of Credit outstanding at any
-------------
given time, the maximum amount then available to be drawn thereunder (without
regard to whether any conditions to drawing could then be met).
Sterling or (Pounds). Pounds Sterling in lawful currency of the United
--------------------
Kingdom.
Sterling Base Rate. The annual rate of interest announced from time to
------------------
time by the Bank's London branch as its "base rate" for loans denominated in
Sterling.
Subsidiary. Any corporation, association, joint stock company, business
----------
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a majority of the members of the board of directors or
other governing body of such entity is held or controlled by the Company or a
Subsidiary of the Company; or any other such organization the management of
which is directly or indirectly controlled by the Company or a Subsidiary of the
Company through the exercise of voting power or otherwise; or any joint venture,
whether incorporated or not, in which the Company has a 50% ownership interest.
Tier UK. See Preamble.
-------
Total Overdraft Usage. See Section 2.9.
---------------------
Unisys Corporation. Collectively, Unisys Corporation and its subsidiaries
------------------
1.2 Accounting Terms. All terms of an accounting character shall have the
----------------
meanings assigned thereto by GAAP, modified to the extent, but only to the
extent, that such meanings are specifically modified herein.
<PAGE>
-13-
SECTION II
----------
DESCRIPTION OF CREDIT
---------------------
2.1 The Loans. (a) Subject to the terms and conditions hereof, the Bank
---------
agrees to make Revolving Loans to the Company, and the Company may borrow, repay
and reborrow from time to time between the Closing Date and the Revolving Credit
Termination Date, such amounts as the Company may request, provided that the
--------
aggregate principal amount of all Loans at any one time outstanding hereunder
(after giving effect to all amounts requested) plus the Letter of Credit
----
Obligations plus the Total Overdraft Usage shall not exceed the Borrowing Base
----
and provided, further, that at the time the Company requests a Revolving Loan
-------- -------
and after giving effect to the making thereof, no Default or Event of Default
has occurred and is continuing. Any Revolving Loan not repaid by the Revolving
Credit Termination Date shall be due and payable on the Revolving Credit
Termination Date.
(b) Provided that no Default shall have occurred and be continuing, the
Company may convert all or any part (in integral multiples of $500,000) of any
outstanding Loan into a Loan of any other type provided for in this Agreement in
the same aggregate principal amount, on any Business Day (which, in the case of
a conversion of a LIBOR Loan, shall be the last day of the Interest Period
applicable to such LIBOR Loan). The Company shall give the Bank prior notice of
each such conversion (which notice shall be effective upon receipt) in
accordance with Section 2.2.
(c) The Company may, prior to the Revolving Credit Termination Date, prepay
the principal balance of the Revolving Loans in accordance with Section 2.11.
Any amounts so prepaid may, subject to the terms and conditions of this
Agreement, be reborrowed by the Company prior to the Revolving Credit
Termination Date.
2.2 Notice and Manner of Borrowing or Conversion of Loans. (a) Whenever
-----------------------------------------------------
the Company desires to obtain or continue a Loan hereunder or convert an
outstanding Loan into a Loan of another type provided for in this Agreement, the
Company shall notify the Bank (which notice shall be irrevocable) by telephone
or facsimile received no later than 10:00 a.m. Boston time on the date one
Business Day before the day on which the requested Loan is to be made or
continued as or converted to an Alternate Base Rate Loan, and received no later
than 10:00 a.m. Boston time on the date three Business Days before the day on
which the requested Loan is to be made or continued as or converted to a LIBOR
Loan. Such notice shall specify (i) the effective date and amount of each Loan
or portion thereof to be continued or converted, subject to the limitations set
forth in Section 2.1, (ii) the interest rate option to be applicable thereto,
and (iii) the duration of the applicable Interest Period, if any (subject to the
provisions of the definition of Interest Period and Section 2.6). Each such
notification (a "Notice of
<PAGE>
-14-
Borrowing or Conversion") shall be immediately followed by a written
confirmation thereof by the Company in substantially the form of Exhibit B
---------
hereto, provided that if such written confirmation differs in any material
--------
respect from the action taken by the Bank, the records of the Bank shall control
absent manifest error.
(b) Subject to the terms and conditions hereof, the Bank shall make each
Loan on the effective date specified therefor by crediting the amount of such
Loan to the Company's demand deposit account with the Bank or if no such account
exists, by disbursing such funds as directed by the Company.
2.3 (a) Commitment Fee. The Company shall pay to the Bank a commitment
--------------
fee computed at the rate of three tenths of one percent (.30%) per annum on the
average daily amount of the unborrowed portion of the Commitment Amount during
each quarter or portion thereof. Commitment fees shall be payable quarterly in
arrears, on the last day of each calendar quarter of each year beginning on the
first such date following the date hereof, and on the Revolving Credit
Termination Date.
(b) Closing Fee. The Company shall pay to the Bank a closing fee of
-----------
$11,000, payable on the Closing Date.
2.4 Reduction of Commitment Amount. The Company may from time to time by
------------------------------
written notice delivered to the Bank at least three Business Days prior to the
date of the requested reduction, reduce by $100,000 or integral multiples
thereof any unborrowed portion of the Commitment Amount. No reduction of the
Commitment Amount shall be subject to reinstatement.
2.5 The Note. (a) The Loans shall be evidenced by the Note in the form of
--------
Exhibit A-1 attached hereto, payable to the order of the Bank and having a final
- -----------
maturity of March 31, 2001. The Note shall be dated on or before the date of the
first Loan and shall have the blanks therein appropriately completed.
(b) The Bank shall, and is hereby irrevocably authorized by the Borrowers
to, enter on the schedule forming a part of the Note or otherwise in its records
appropriate notations evidencing the date and the amount of each Loan, the
interest rate applicable thereto and the date and amount of each payment of
principal made by the Borrower with respect thereto; and in the absence of
manifest error, such notations shall constitute conclusive evidence thereof. The
Bank is hereby irrevocably authorized by the Borrowers to attach to and make a
part of the Note a continuation of any such schedule as and when required. No
failure on the part of the Bank to make any notation as provided in this
subsection (b) shall in any way affect any Loan or the rights or obligations of
the Bank or the Borrowers with respect thereto.
<PAGE>
-15-
2.6 Duration of Interest Periods. (a) Subject to the provisions of the
----------------------------
definition of Interest Period, the duration of each Interest Period applicable
to a Loan shall be as specified in the applicable Notice of Borrowing or
Conversion. The Company shall have the option to elect a subsequent Interest
Period to be applicable to such Loan by giving notice of such election to the
Bank received no later than 10:00 a.m. Boston time on the date one Business Day
before the end of the then applicable Interest Period if such Loan is to be
continued as or converted to an Alternate Base Rate Loan and three Business Days
before the end of the then applicable Interest Period is such Loan is to be
continued as or converted to a LIBOR Loan.
(b) If the Bank does not receive a notice of election of duration of an
Interest Period for a LIBOR Loan pursuant to subsection (a) above within the
applicable time limits specified therein, or if, when such notice must be given,
a Default exists, the Company shall be deemed to have elected to convert such
Loan in whole into an Alternate Base Rate Loan on the last day of the then
current Interest Period with respect thereto.
(c) Notwithstanding the foregoing, the Company may not select an Interest
Period that would end, but for the provisions of the definition of Interest
Period, after the Revolving Credit Termination Date.
2.7 Interest Rates and Payments of Interest. (a) Each Base Rate Loan
---------------------------------------
shall bear interest on the outstanding principal amount thereof at a rate per
annum equal to the Alternate Base Rate plus one half of one percent (.50%),
which rate shall change contemporaneously with any change in the Alternate Base
Rate. Such interest shall be payable in arrears on the last day of each month
commencing April 30, 1998, and when such Loan is due (whether at maturity, by
reason of acceleration, prepayment or otherwise).
(b) Each LIBOR Loan shall bear interest on the outstanding principal amount
thereof, for each Interest Period applicable thereto, at a rate per annum equal
to the Adjusted LIBOR Rate plus two and one half percent (2.5%). Such interest
shall be payable in arrears for such Interest Period on the last day thereof and
when such LIBOR Loan is due (whether at maturity, by reason of acceleration,
prepayment or otherwise) and, if such Interest Period is longer than three
months, at intervals of every three months after the first day thereof.
2.8 Changed Circumstances.
---------------------
(a) in the event that:
(i) on any date on which the Adjusted LIBOR Rate would otherwise be
set the Bank shall have determined in good faith (which determination shall
be final and
<PAGE>
-16-
conclusive) that adequate and fair means do not exist for ascertaining
the Adjusted LIBOR Rate, or
(ii) at any time the Bank shall have determined in good faith (which
determination shall be final and conclusive) that:
(A) the making or continuation of or conversion of any Loan to a LIBOR
Loan has been made impracticable or unlawful by (1) the occurrence of a
contingency that materially and adversely affects the London interbank
market or (2) compliance by the Bank in good faith with any applicable law
or governmental regulation, guideline or order or interpretation or change
thereof by any governmental authority charged with the interpretation or
administration thereof or with any request or directive of any such
governmental authority (whether or not having the force of law); or
(B) the Adjusted LIBOR Rate shall no longer represent the effective
cost to the Bank for U.S. dollar deposits in the interbank market for
deposits in which it regularly participates;
then, and in any such event, the Bank shall forthwith so notify the Company
thereof. Until the Bank notifies the Company that the circumstances giving rise
to such notice no longer apply, the obligation of the Bank to allow selection by
the Company of the type of Loan affected by the contingencies described in this
Section 2.8(a) (herein called "Affected Loans") shall be suspended. If at the
---------------
time the Bank so notifies the Company, the Company has previously given the Bank
a Notice of Borrowing or Conversion with respect to one or more Affected Loans
but such Loans have not yet gone into effect, such notification shall be deemed
to be void and the Company may borrow Loans of a non-affected type by giving a
substitute Notice of Borrowing or Conversion pursuant to Section 2.2 hereof.
Upon such date as shall be specified in such notice (which shall not be
earlier than the date such notice is given) the Company shall, with respect to
the outstanding Affected Loans,
prepay the same, together with interest thereon and any amounts required to be
paid pursuant to Section 2.13, and may borrow a Loan of another type in
accordance with Section 2.1 hereof by giving a Notice of Borrowing or Conversion
pursuant to Section 2.2 hereof.
(b) in case any law, regulation, treaty or official directive or the
interpretation or application thereof by any court or by any governmental
authority charged with the administration thereof or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law):
<PAGE>
-17-
(i) subjects the Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by the Company or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of the Bank imposed by the United States of
America or any political subdivision thereof, or
(ii) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, the Bank (other than such
requirements as are already included in the determination of the Adjusted
LIBOR Rate), or
(iii) imposes upon the Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to the Bank,
reduce the income receivable by the Bank or impose any expense upon the Bank
with respect to any Loans, the Bank shall notify the Company thereof. The
Company agrees to pay to the Bank the amount of such increase in cost, reduction
in income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by the Bank of a statement in the
amount and setting forth the Bank's calculation thereof, which statement shall
be deemed true and correct absent manifest error.
2.9 Overdraft Facility.
------------------
(a) Subject to the terms and conditions of this Agreement, including,
without limitation, the conditions of this Section 2.9, Tier UK may from time to
time between the date hereof and the Revolving Credit Termination Date (i)
utilize an overdraft facility on a Sterling-denominated current account with the
Overdraft Bank in the name of Tier UK (the "Overdraft Facility") by causing
checks or other items denominated in Sterling to be presented for payment
against such current account in amounts greater than the then available balance
in such current account and (ii) request that the Overdraft Bank agree to issue
Collateral Instruments to or for the account of Tier UK upon receipt by it of a
duly-completed and executed Counter Indemnity from Tier UK in respect of each
such Collateral Instrument, in form and substance satisfactory to the Overdraft
Bank provided that the aggregate amount of all liabilities of Tier UK in respect
of the Overdraft Facility and all such Counter Indemnities (whether contingent
or otherwise) (the "Total Overdraft Usage") shall not exceed the Maximum
Overdraft Amount. As to the Overdraft Facility, each such presentation shall be
deemed to be a request by Tier UK for a utilization of the Overdraft Facility in
an amount equal to the excess of such check or other item over such available
balance, and shall be irrevocable. Notwithstanding the foregoing, at no time
shall the Total Overdraft Usage exceed
<PAGE>
-18-
the Maximum Overdraft Amount. After the occurrence of an Event of Default, the
Overdraft Bank may terminate the Overdraft Facility in its entirety and reduce
the Maximum Overdraft Amount to zero with immediate effect at its sole
discretion by written notice to the Company and Tier UK, and the entire
principal amount of the debit balance in the Overdraft Facility, together with
all interest accrued thereon, shall become immediately due and payable. The
entire principal amount of the debit balance in the Overdraft Facility, together
with all interest accrued thereon, shall be due and payable on the Revolving
Credit Termination Date.
(b) If at any time the outstanding amount of the debit balance in the
Overdraft Facility plus the aggregate amount of all liabilities in respect of
all Counter Indemnities shall exceed the Maximum Overdraft Amount (due to
currency fluctuations or otherwise), the Borrowers hereby jointly and severally,
absolutely and unconditionally promise to immediately repay the amount of such
excess to the Bank for the account of the Overdraft Bank.
(c) Any amounts borrowed under the Overdraft Facility shall be deemed to be
Revolving Loans hereunder and shall be evidenced by the Note in the form of
Exhibit A-2 attached hereto.
- -----------
(d) Interest on the Overdraft Facility shall be payable on the day to day
cleared debit balance in Tier UK's current account maintained with the Overdraft
Bank. Except as provided in Section 2.13 hereto, interest on the Overdraft
Facility shall be payable at the annual percentage rate of interest determined
by the Bank to be the sum of (i) the Sterling Base Rate, plus (ii) two and one
----
half percent (2.5%). The rate of interest on the Overdraft Facility shall be
adjusted from time to time to reflect changes in the Sterling Base Rate. Any
such change in such rate of interest shall become effective on the date of the
change in the Sterling Base Rate. The Borrowers jointly and severally promise to
pay interest on the Overdraft Facility (i) monthly in arrears on the last day of
each calendar month, commencing on the first such date following the Closing
Date and (ii) the date on which the Overdraft Facility is repaid in full.
(e) Interest due with respect to the Overdraft Facility shall be paid to
the Bank for the account of the Overdraft Bank.
(f) Tier UK shall, on the date of issuance or any extension or renewal of
any Collateral Instrument and at such other time or times as such charges are
customarily made by the Overdraft Bank, pay a fee (in each case, a "Collateral
Instrument Fee") to the Overdraft Bank in respect of each Collateral Instrument
equal to the rate of two and one half percent (2.5%) plus the Overdraft Bank's
----
customary issuance fee, such fee to be for the account of the Overdraft Bank.
<PAGE>
-19-
(g) The Company hereby absolutely and unconditionally promises to pay to
the Bank any amounts borrowed by Tier UK under the Overdraft Facility and
guarantees to the Bank that Tier UK will duly and punctually pay and perform all
of its Obligations to the Bank under the Overdraft Facility and otherwise under
this Agreement.
2.10 Capital Requirements. If after the date hereof the Bank determines
--------------------
that (i) the adoption of or change in any law, rule, regulation or guideline
regarding capital requirements for banks or bank holding companies, or any
change in the interpretation or application thereof by any governmental
authority charged with the administration thereof, or (ii) compliance by the
Bank or its parent bank holding company with any guideline, request or directive
of any such entity regarding capital adequacy (whether or not having, the force
of law), has the effect of reducing the return on the Bank's or such holding
company s capital as a consequence of the Bank s commitment to make Loans
hereunder to a level below that which the Bank or such holding company could
have achieved but for such adoption, change or compliance (taking into
consideration the Bank's or such holding company's then existing policies with
respect to capital adequacy and assuming the full utilization of such entity's
capital) by any amount deemed by the Bank to be material, then the Bank shall
notify the Company thereof. The Company agrees to pay to the Bank the amount of
such reduction in the return on capital as and when such reduction is
determined, upon presentation by the Bank of a statement in the amount and
setting forth the Bank's calculation thereof, which statement shall be deemed
true and correct absent manifest error. In determining such amount, the Bank may
use any reasonable averaging and attribution methods.
2.11 Prepayments of the Loans. (a) Voluntary Prepayments. Revolving Loans
------------------------
that are LIBOR Loans may be prepaid at any time, without premium or penalty, on
the last day of any interest Period applicable thereto, upon three Business
Days' notice. Revolving Loans that are Alternate Base Rate Loans may be prepaid
at any time, without premium or penalty, upon one Business Day's notice. Any
interest accrued on the amounts so prepaid to the date of such payment must be
paid at the time of any such payment. No prepayment of the Revolving Loans shall
affect the Commitment Amount or impair the Company's right to borrow as set
forth in Section 2.1.
(b) Mandatory Prepayments. If at any time the sum of the aggregate
outstanding amount of the Revolving Loans plus the Total Overdraft Usage plus
---- ----
the Letter of Credit Obligations exceeds the Borrowing Base, as reflected in the
Borrowing Base Certificate then most recently delivered to the Bank pursuant to
Section 5.1, the Borrowers immediately shall make a prepayment of the Revolving
Loans in an amount not less than such excess.
2.12 Method of Payment. The Bank shall, and the Borrowers hereby
-----------------
authorize the Bank to, debit the amount of any payments and prepayments of
principal and all payments of
<PAGE>
-20-
interest, fees and other amounts payable hereunder to the demand deposit account
of the Borrowers with the Bank.
2.13 Default Rate Interest, Etc. Each overdue amount under this Agreement
--------------------------
or under any of the other Loan Documents (including, without limitation, all
principal, interest and fees outstanding) shall bear interest from and including
the due date thereof until paid, compounded daily and payable on demand, at a
rate per annum (the "Default Rate") equal to (x) if such due date occurs prior
to the end of an Interest Period, 2% above the interest rate applicable to such
Loan for such Interest Period until the expiration of such Interest Period, and
thereafter, 2% above the rate then applicable to Alternate Base Rate Loans; and
(y) in all other cases, 2% above the rate then applicable to Alternate Base Rate
Loans.
2.14 Indemnity. Each of the Borrowers agrees to indemnify the Bank and to
---------
hold the Bank harmless from and against any loss, cost or expense (including
loss of anticipated profits) that the Bank may sustain or incur as a consequence
of (a) a default by any Borrower in payment of the principal amount of or any
interest or any LIBOR Loans as and when due and payable, including any such loss
or expense arising from interest or fees payable by the Bank to lenders of funds
obtained by it in order to maintain its LIBOR Loans, (b) a default by any
Borrower in making a borrowing or conversion after such Borrower has given (or
is deemed to have given) a Notice of Borrowing or Conversion relating thereto in
accordance with Section 2.2 or (c) the making of any payment of a LIBOR Loan or
the making of any conversion of any such LIBOR Loan to an Alternate Base Rate
Loan on a day that is not the last day of the applicable Interest Period with
respect thereto, including interest or fees payable by the Bank to lenders of
funds obtained by it in order to make any such LIBOR Loans.
2.15 Computation of Interest and Fees. Interest and all fees payable
--------------------------------
hereunder shall be computed daily on the basis of a year of 360 days and paid
for the actual number of days for which due. If the due date for any payment of
principal is extended by operation of law, interest shall be payable for such
extended time. If any payment required by this Agreement becomes due on a day
that is not a Business Day such payment may be made on the next succeeding
Business Day (subject to clause (i) of the definition of Interest Period), and
such extension shall be included in computing interest in connection with such
payment.
2.16 The Letters of Credit. (a) Upon the terms and subject to the
---------------------
conditions of this Agreement, and in reliance upon the representations,
warranties and covenants of the Company made herein, the Bank agrees to issue,
to the extent permitted by law and the Uniform Customs and Practice for
Documentary Credits, International Chamber of Commerce Publication No. 500 (or
any successor thereto), one or more Letters of Credit on the application and for
the account of the Company, during the period from the date hereof to the
Revolving Credit Termination Date, provided that the Stated Amount of Letters of
--------
Credit outstanding at any time, plus the
----
<PAGE>
-21-
aggregate amount of all unreimbursed draws under such outstanding Letters of
Credit, shall not at any time be the lesser of (i) $5,000,000 or (ii) when added
to the outstanding amount of Revolving Loans at such time, exceed the Borrowing
Base; and provided further that at the time the Company requests the issuance of
-------- -------
a Letter of Credit and after giving effect to the issuance thereof, there has
not occurred and is not continuing a Default or an Event of Default. It is
understood and agreed by the parties hereto that amounts drawn under such
Letters of Credit shall become immediately due and payable by the Company to the
Bank, for the account of the Bank, and shall bear interest at the rate then
applicable to Revolving Loans that are LIBOR Loans, and, if not paid forthwith
shall, to the extent there is availability under the Borrowing Base, be added to
the Revolving Loans and shall be immediately due and payable upon the maturity
of the Revolving Loans. The issuance of any such Letter of Credit shall result
in a reduction of availability under the Borrowing Base in accordance with
Section 2.1. In addition, all Letters of Credit shall have a stated expiration
date not to exceed 365 days. A Letter of Credit may, subject to the terms and
conditions of this Agreement, be renewed for an additional period not to exceed
365 days. Each Letter of Credit shall, in any event, expire not later than five
Business Days prior to the Revolving Credit Termination Date.
(b) In order to evidence such Letters of Credit, the Borrower shall enter
into, with the Bank, such agreements and execute such instruments and documents
as the Bank requires, including, but not limited to, a letter of credit
application and agreement.
2.17 Letter of Credit Fees. A Letter of Credit fee shall be payable
---------------------
quarterly in arrears on the last Business Day of each calendar quarter and on
the Revolving Credit Termination Date to the Bank, on each Letter of Credit
issued at a rate per annum equal to two and one half percent (2.5%) multiplied
by the face amount of such Letter of Credit.
SECTION III
-----------
CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Revolving Loan, and Letter of Credit.
--------------------------------------------------------------------
The obligation of the Bank to make the initial Revolving Loan and to issue the
initial Letter of Credit is subject to the fulfillment on the date hereof of
each of the following conditions precedent:
(a) Loan Documents, Etc.
--------------------
(i) Each of the Loan Documents shall have been duly and properly
authorized, executed and delivered by the respective parties thereto and shall
be in full force and effect on and as of the Closing Date.
<PAGE>
-22-
(ii) Executed original counterparts of each of the Loan Documents, as
executed and delivered by the respective parties thereto, shall have been
delivered to the Bank.
(b) Legality of Transactions. No change in applicable law or regulation
------------------------
shall have occurred as a consequence of which it shall have become and continue
to be unlawful (a) for the Bank to perform any of its agreements or obligations
under any of the Loan Documents to which it is a party on the Closing Date, or
(b) for the Company or any of its Subsidiaries to perform any of their
respective agreements or obligations under any of the Loan Documents to which
they are a party on the Closing Date.
(c) Representations and Warranties. Each of the representations and
------------------------------
warranties made by or on behalf of the Company or any of its Subsidiaries to the
Bank in this Agreement or the other Loan Documents shall be true and correct in
all material respects when made, and shall, for all purposes of this Agreement,
be deemed to be repeated on and as of the Closing Date, and shall be true and
correct in all material respects on and as of such date.
(d) Performance, Etc. The Company and each of its Subsidiaries shall have
----------------
duly and properly performed, complied with and observed each of its respective
covenants, agreements and obligations contained in any of the Loan Documents to
which it is a party or by which it is bound which are required to be performed
on or prior to the Closing Date. No event shall have occurred on or prior to the
Closing Date and be continuing on such Closing Date, and no condition shall
exist on such Closing Date, which constitutes a Default or an Event of Default.
(e) Certified Copies of Charter Documents. The Bank shall have received
-------------------------------------
from the Company and each of its Subsidiaries, respectively, a copy, certified
by a duly authorized officer of each such entity, to be true and complete on the
Closing Date, of (i) its respective charter or other incorporation documents, as
in effect on such date of certification, certified by the Secretary of State of
the jurisdiction of its incorporation, and (ii) its by-laws as in effect on such
date.
(f) Proof of Corporate Action. The Bank shall have received from the
-------------------------
Company and each of its Subsidiaries, respectively, a copy, certified by a duly
authorized officer of each such entity, to be true and complete on the Closing
Date, of records of all corporate action taken by the Company and each of its
Subsidiaries to authorize (a) its execution and delivery of the Loan Documents
to which it is or is to become a party, (b) its performance of all of its
agreements and obligation under each of such documents, and (c) with respect to
the Borrowers, any borrowings and other transactions contemplated by this
Agreement.
<PAGE>
-23-
(g) Incumbency Certificate. The Bank shall have received from the Company
----------------------
and each of its Subsidiaries, respectively, an incumbency certificate, dated the
Closing Date and signed by a duly authorized officer of each such entity, and
giving the name and bearing a specimen signature of each individual who shall be
authorized: (a) to sign, in the name and on behalf of the Company and each of
its Subsidiaries, respectively, each of the Loan Documents and to which it is or
is to become a party; (b) with respect to the Borrowers, to make application for
the Loans or conversion thereof; and (c) to give notices to take other action on
its behalf under the Loan Documents.
(h) Proceedings and Documents. All corporate, governmental and other
-------------------------
proceedings in connection with the transactions contemplated by the Loan
Documents and all instruments and documents incidental thereto, shall be in form
and substance reasonably satisfactory to the Bank and the Bank shall have
received all such counterpart originals or certified or other copies of all such
installments and documents as the Bank shall have reasonably requested.
(i) Good Standing Etc. The Bank shall have received a certificate from the
-----------------
Secretary of State of their respective jurisdictions of incorporation as to the
Company's and each of its Subsidiaries' legal existence and good standing in
such state and listing all documents on file for each such entity in the office
of said Secretary of State. The Bank shall also have received certificates of
qualification to do business from any jurisdictions in which the Company and
each of its Subsidiaries, respectively, is required to be qualified.
(j) Facility Fee. The Company shall have complied with its obligation
------------
under Section 2.3 to pay the closing fee.
(k) Legal Opinion. The Bank shall have received a written legal opinion,
-------------
addressed to the Bank, dated the Closing Date, from Paul, Hastings, Janofsky &
Walker LLP, counsel to the Company and its Subsidiaries, in form and substance
satisfactory to the Bank.
(l) Financial Condition. The Bank shall be satisfied that the financial
-------------------
statements referred to in Section 4.6 fairly present the financial condition of
the Company and its Subsidiaries as at the close of business on the date thereof
and the results of operations for the periods then ended, and that there has
been no material adverse change in the assets, business, operations or financial
condition the Company and such Subsidiaries, taken as a whole, since the most
recent financial statements referred to therein.
(m) Security Documents; U.C.C. Search Reports, Insurance. The Security
----------------------------------------------------
Documents and the appropriate financing statements (in the name of the Company)
and other documents in respect thereto and necessary to enable the Bank to
perfect a legal, valid and enforceable first-priority security interest
thereunder shall have been duly executed by the
<PAGE>
-24-
Company and duly filed or recorded, as applicable, in all appropriate filing
offices or other locations necessary for the perfection of such first-priority
interests, and all other actions necessary for the perfection of such interests
shall have been completed. The Bank shall have received reports concerning the
results of searches of the Uniform Commercial Code filing offices for the
Company in each jurisdiction where Collateral is located made no more than 7
days prior to the Closing Date. The Bank shall have received satisfactory
evidence that such insurance as is required by the Security Documents to be in
effect in respect of all property and fixtures of the Company and each of its
Subsidiaries is in effect and the interest of the Bank as loss payee and
additional insured has been duly endorsed upon all instruments of insurance
issued in respect of such property. Without limitation of the foregoing
sentence, the Bank shall also have received satisfactory evidence that the
Company maintains adequate liability insurance (including insurance relating to
product liability matters) and the interest of the Bank as additional insured
has been duly endorsed on all such instruments of insurance. All such insurance
shall provide for 30 days' advance written notice to the Bank of any
cancellation thereof.
(n) Borrowing Base Certificate. The Company shall have delivered to the
--------------------------
Bank a certificate in the form of Exhibit F (a "Borrowing Base Certificate"),
---------
dated as of the Closing Date.
3.2 Conditions Precedent to all Loans and Letters of Credit. The
-------------------------------------------------------
obligation of the Bank to make each Loan and issue each Letter of Credit,
including the initial Revolving Loan and initial Letter of Credit, or continue
or convert Loans to Loans of the other type, is further subject to the following
conditions:
(a) timely receipt by the Bank of the Notice of Borrowing or Conversion as
provided in Section 2.2;
(b) the representations and warranties contained in Section IV shall be
true and accurate in all material respects on and as of the date of such Notice
of Borrowing or Conversion and on the effective date of the making, continuation
or conversion of each Loan or issuance of each Letter of Credit as though made
at and as of each such date (except to the extent that such representations and
warranties expressly relate to an earlier date), and no Default or Event of
Default shall have occurred and be continuing, or would result from such Loan;
further, the Bank may without waiving this condition consider it fulfilled, and
a representation by the Company to such effect made, if no written notice to the
contrary, dated the date of such Loan or Letter of Credit is received from the
Company, and in the event that the Company submits such a written notice, the
conditions set forth in this Section 3.2(b) will be considered fulfilled if such
notice specifies in detail the exceptions to the representations and warranties
as of the date of
<PAGE>
-25-
such Loan or Letter of Credit, the exceptions as stated in such notice are
satisfactory to the Bank in its sole discretion, and the Bank so notifies the
Company;
(c) the resolutions referred to in Section 3.1.(f) shall remain in full
force and effect;
(d) the Bank shall have received a Borrowing Base Certificate that is
satisfactory to the Bank; and
(e) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for the Bank, would make
it illegal or against the policy of any governmental agency or authority for the
Bank to make Loans or issue Letters of Credit hereunder.
The making of each Loan and issuance of each Letter of Credit shall be
deemed to be a representation and warranty by the Company on the date of the
making, continuation or conversion of such Loan or issuance of such Letter of
Credit as to the accuracy of the facts referred to in subsection (b) of this
Section 3.2, except to the extent that such representation and warranty shall be
modified to reflect the effect of any action or inaction on the part of the
Borrower which is expressly permitted hereunder.
SECTION IV
--------
REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Bank to enter into this Agreement and to make Loans
hereunder, the Company represents and warrants to the Bank that:
4.1 Organization and Qualification. Each of the Company and its
------------------------------
Subsidiaries (a) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, (b) has all
requisite corporate power to own its property and conduct its business as now
conducted and as presently contemplated and (c) is duly qualified and in good
standing as a foreign corporation and is duly authorized to do business in each
jurisdiction where the nature of its properties or business requires such
qualification. Since its inception, the Borrower has not transacted business
under any other name or trade name other than Tier Technologies, Inc., Tier
Corporation, TSource and The Information Engineering Resource Corporation. The
Company maintains its principal place of business at its offices located in
Walnut Creek, California; Tier UK maintains its principal place of business at
its offices located in the United Kingdom.
<PAGE>
-26-
4.2 Corporate Authority. The execution, delivery and performance of this
-------------------
Agreement, the Note and the other Loan Documents and the transactions
contemplated hereby are within the corporate power and authority of such Person
and have been authorized by all necessary corporate proceedings, and do not and
will not (a) require any consent or approval of the stockholders of the Company
or such Subsidiary, (b) contravene any provision of the charter documents or by-
laws of the Company or any of its Subsidiaries or any law, rule or regulation
applicable to the Company or any of its Subsidiaries, (c) contravene any
provision of, or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would constitute an
event of default under, any other agreement, instrument, order or undertaking
binding on the Company or any of its Subsidiaries, or (d) result in or require
the imposition of any Encumbrance on any of the properties, assets or rights of
the Company or any of its Subsidiaries.
4.3 Valid Obligations. This Agreement, the Note and the other Loan
-----------------
Documents and all of their respective terms and provisions are the legal, valid
and binding obligations of the Company and its Subsidiaries, enforceable in
accordance with their respective terms except as limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors' rights generally, and except as the remedy of specific performance
or of injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
4.4 Consents or Approvals. The execution, delivery and performance of this
---------------------
Agreement, the Note and the other Loan Documents and the transactions
contemplated herein do not require any approval or consent of, or filing or
registration with, any governmental or other agency or authority, or any other
party.
4.5 Title to Properties: Absence of Encumbrances. Each of the Company and
--------------------------------------------
its Subsidiaries has good and marketable title to all of the properties, assets
and rights of every name and nature now purported to be owned by it, including,
without limitation, such properties, assets and rights as are reflected in the
financial statements referred to in Section 4.6 (except such properties, assets
or rights as have been disposed of in the ordinary course of business since the
date thereof), free from all Encumbrances except Permitted Encumbrances or those
Encumbrances disclosed in Exhibit C hereto, and, except as so disclosed, free
---------
from all defects of title that might materially adversely affect such
properties, assets or rights, taken as a whole.
4.6 Financial Statements. The Company has furnished the Bank its
--------------------
consolidated balance sheet as of September 30, 1997 and its consolidated
statements of income, changes in stockholders' equity and cash flow for the
fiscal year then ended, and related footnotes, audited and certified by Ernst &
Young LLP. The Company has also furnished the Bank its
<PAGE>
-27-
consolidated balance sheet as of December 31, 1997 and its consolidated
statements of income, changes in stockholders' equity and cash flow for the
fiscal quarter then ended, certified by the principal financial officer of the
Company but subject, however, to normal, recurring year-end adjustments that
shall not in the aggregate be material in amount. All such financial statements
were prepared in accordance with GAAP throughout the periods specified and
present fairly the financial position of the Company and its Subsidiaries as of
such dates and the results of the operations of the Company and its Subsidiaries
for such periods. There are no liabilities, contingent or otherwise, not
disclosed in such financial statements that involve a material amount.
4.7 Changes. Since the date of the most recent financial statements
-------
referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, business or prospects of the Company or any of
its Subsidiaries other than changes in the ordinary course of business, the
effect of which has not, in the aggregate, been materially adverse.
4.8 Defaults. As of the date of this Agreement, no Default exists.
--------
4.9 Taxes. The Company and each Subsidiary have filed all federal, state
-----
and other tax returns required to be filed, and all taxes, assessments and other
governmental charges due from the Company and each Subsidiary have been fully
paid. The Company and each Subsidiary have established on their books reserves
adequate for the payment of all federal, state and other tax liabilities.
4.10 Litigation. Except as set forth on Exhibit D hereto, there is no
---------- ---------
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of the Company's or any Subsidiary's officers, threatened, against the
Company or any Subsidiary that, if adversely determined, could result in a
material judgment not fully covered by insurance, could result in a forfeiture
of all or any substantial part of the property of the Company or its
Subsidiaries, or could otherwise have a material adverse effect on the assets,
business or prospects of the Company or any Subsidiary.
4.11 Use of Proceeds. No portion of any Loan is to be used for the
---------------
"purpose of purchasing or carrying" any "margin stock" as such terms are used in
Regulations G,T,U and X of the Board of Governors of the Federal Reserve System;
and the Company is not engaged in the business of extending credit to others for
such purpose.
4.12 Subsidiaries. As of the date of this Agreement, all the Subsidiaries
------------
of the Company are listed on Exhibit E hereto. The Company or a Subsidiary of
---------
the Company is the owner, free and clear of all liens and encumbrances, of all
of the issued and outstanding stock of each Subsidiary. All shares of such stock
have been validly issued and are fully paid and
<PAGE>
-28-
nonassessable, and no rights to subscribe to any additional shares have been
granted, and no options, warrants or similar rights are outstanding.
4.13 Holding Company and Investment Company. Neither the Company nor any
--------------------------------------
of its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935 or the Investment Company Act of 1940, as amended.
4.14 Compliance with ERISA. The Company and each member of the Controlled
---------------------
Group have fulfilled their obligations under the minimum funding standards of
ERISA and the Code with respect to each Plan and are in compliance in all
material respects with the applicable provisions of ERISA and the Code, and have
not incurred any liability to the PBGC (other than liability for premiums which
have been paid when due) or a Plan under Title IV of ERISA; and no "prohibited
transaction" or "reportable event" (as such terms are defined in ERISA) has
occurred with respect to any Plan.
4.15 Environmental Matters.
---------------------
(a) The Company and each of its Subsidiaries have obtained all permits,
licenses and other authorizations which are required under all Environmental
Laws, except to the extent failure to have any such permit, license or
authorization would not have a material adverse effect on the business,
financial condition or operations of the Company and its Subsidiaries. The
Company and each of its Subsidiaries are in compliance with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply would
not have a material adverse effect on the business, financial condition or
operations of the Company and its Subsidiaries.
(b) No notice, notification, demand, request for information, citation,
summons or order has been issued, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or threatened by any
governmental or other entity with respect to any alleged failure by the Company
or any of its Subsidiaries to have any permit, license or authorization required
in connection with the conduct of its business or with respect to any
Environmental Laws, including, without limitation, Environmental Laws relating
to the generation, treatment, storage, recycling, transportation, disposal or
release of any Hazardous Materials.
<PAGE>
-29-
(c) To the best of the Company's knowledge no material, oral or written
notification of a release of a Hazardous Material has been filed by or on behalf
of the Company or any of its Subsidiaries and no property now or previously
owned, leased or used by the Company or any of its Subsidiaries is listed or
proposed for listing on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
on any similar state list of sites requiring investigation or clean-up.
(d) There are no liens or encumbrances arising under or pursuant to any
Environmental Laws on any of the real property or properties owned, leased or
used by the Company or any of its Subsidiaries and no governmental actions have
been taken or are in process which could subject any of such properties to such
liens or encumbrances or, as a result of which the Company or any of its
Subsidiaries would be required to place any notice or restriction relating to
the presence of Hazardous Materials at any property owned by it in any deed to
such property.
(e) Neither the Company nor any of its Subsidiaries nor, to the best
knowledge of the Company, any previous owner, tenant, occupant or user of any
property owned, leased or used by the Company or any of its Subsidiaries has (i)
engaged in or permitted any operations or activities upon or any use or
occupancy of such property, or any portion thereof, for the purpose of or in any
way involving the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal (whether legal or illegal,
accidental or intentional) of any Hazardous Materials on, under, in or about
such property, except to the extent commonly used in day-to-day operations of
such property and in such case only in compliance with all Environmental Laws,
or (ii) transported any Hazardous Materials to, from or across such property
except to the extent commonly used in day-to-day operations of such property
and, in such case, in compliance with, all Environmental Laws; nor to the best
knowledge of the Company have any Hazardous Materials migrated from other
properties upon, about or beneath such property, nor, to the best knowledge of
the Company, are any Hazardous Materials presently constructed, deposited,
stored or otherwise located on, under, in or about such property except to the
extent commonly used in day-to-day operations of such property and, in such
case, in compliance with, all Environmental Laws.
4.16 Collateral. All of the Obligations under or in respect of the Loan
----------
Documents will, at all times from and after the execution and delivery of each
of the Security Documents, be entitled to the benefits of and be secured by each
of such Security Documents to the extent provided therein.
4.17 Trademarks, Etc. Borrower is duly licensed or otherwise entitled to
---------------
use all trademarks, service marks and trade names which are used in the
operation of its business as
<PAGE>
-30-
presently conducted and as shown on Exhibit I hereto. No claim is pending or, as
---------
far as the Borrower can reasonably foresee, threatened against Borrower
contesting the use of any such trademarks, service marks and trade names nor
does the Borrower know of any valid basis for any such claims.
4.18 Solvency. The Company and its Subsidiaries are, and after giving
--------
effect to the transactions contemplated hereby, will be, Solvent.
SECTION V
---------
AFFIRMATIVE COVENANTS
---------------------
So long as the Bank has any commitment to lend hereunder or any Loan or
other Obligation hereunder remains outstanding, the Company covenants as
follows:
5.1 Financial Statements and other Reporting Requirements. The Company
-----------------------------------------------------
shall furnish to the Bank:
(a) as soon as available to the Company, but in any event within 90 days
after the end of each of its fiscal years, a consolidated and consolidating
balance sheet as of the end of, and a related consolidated and consolidating
statement of income, changes in stockholders' equity and cash flow for, such
year, audited and certified by Ernst & Young LLP (or other independent certified
public accountants acceptable to the Bank) in the case of such consolidated
statements, and certified by the chief financial officer in the case of such
consolidating statements; and, concurrently with such financial statements, a
copy of said certified public accountants' management report and a written
statement by such accountants that, in the making of the audit necessary for
their report and opinion upon such financial statements they have obtained no
knowledge of any Default or, if in the opinion of such accountants any such
Default exists, they shall disclose in such written statement the nature and
status thereof;
(b) as soon as available to the Company, but in any event within 45 days
after the end of each of its fiscal quarters, a consolidated and consolidating
balance sheet as of the end of, and a related consolidated and consolidating
statement of income and cash flow for, the period then ended, certified by the
principal financial officer of the Company but subject, however, to normal,
recurring year-end adjustments that shall not in the aggregate be material in
amount, along with the original projections for such period and the same
financial statements for the same period of the prior year;
<PAGE>
-31-
(c) concurrently with the delivery of each financial statement pursuant to
subsections (a) and (b) of this Section 5.1, a report in substantially the
form of Exhibit G hereto signed on behalf of the Company by its chief
---------
financial officer;
(d) within 30 days after the end of (i) each month in which any Loan or
Letter of Credit is outstanding and (ii) each fiscal quarter in which no Loan or
Letter of Credit is outstanding, a Borrowing Base Certificate provided that
--------
the Company shall be required to furnish to the Bank a Borrowing Base
Certificate prior to requesting its first Loan or Letter of Credit hereunder;
(e) promptly after the receipt thereof by the Company, copies of any
reports submitted to the Company by independent public accountants in connection
with any interim review of the accounts of the Company made by such accountants;
(f) promptly after the same are available, copies of all proxy statements,
financial statements and reports as the Company shall send to its stockholders
or as the Company may file with the Securities and Exchange Commission or any
governmental authority at any time having jurisdiction over the Company or its
Subsidiaries;
(g) if and when the Company gives or is required to give notice to the PBGC
of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to
any Plan that might constitute grounds for a termination of such Plan under
Title IV of ERISA, or knows that any member of the Controlled Group or the plan
administrator of any Plan has given or is required to give notice of any such
Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;
(h) immediately upon becoming aware of the existence of any condition or
event that constitutes a Default, written notice thereof specifying the nature
and duration thereof and the action being or proposed to be taken with respect
thereto;
(i) promptly upon becoming aware of any litigation or of any investigative
proceedings by a governmental agency or authority commenced or threatened
against the Company or any of its Subsidiaries of which it has notice, the
outcome of which would or might have a materially adverse effect on the assets,
business or prospects of the Company or the Company and its Subsidiaries on a
consolidated basis, written notice thereof and the action being or proposed to
be taken with respect thereto;
(j) promptly upon becoming aware of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Company or
any of its Subsidiaries regarding any potential violation of Environmental Laws
or any spill, release,
<PAGE>
-32-
discharge or disposal of any Hazardous Material, written notice thereof and the
action being or proposed to be taken with respect thereto;
(k) on each anniversary of the date hereof, for so long as Receivables from
such entities or their wholly-owned subsidiaries comprise part of the Borrowing
Base, the then-current rating of the debt obligations of each of Kaiser, State
of Missouri and/or its departments, agencies or authorities, as applicable,
Humana, Inc., Unisys Corporation, BDM, Inc., Equifax, Inc. (or in the event any
such customer does not have a separate credit rating, the rating of such
customer's parent corporation)and any other customer, the Eligible Receivables
from which comprise greater than 10% of the Borrowing Base, as rated by Standard
& Poor's Rating Services, Moody's Investors Service, Inc. or Duff & Phelps
Credit Rating Co.;
(l) at the end of each six-month period after the date hereof, a "pipeline"
report describing the status of all outstanding and future projects with
customers;
(m) on or before September 30 of each year, a projected consolidated
balance sheet and projected consolidated statements of income, changes in
stockholders' equity and cash flow for the next succeeding year, together with
supporting assumptions;
(n) within 30 days after the end of each fiscal quarter, a Receivables
aging report; and
(o) from time to time, such other financial data and information about the
Company or its Subsidiaries as the Bank may reasonably request.
5.2 Conduct of Business. Each of the Company and its Subsidiaries shall:
-------------------
(a) duly observe and comply in all material respects with all applicable
laws and valid requirements of any governmental authorities relative to its
corporate existence, rights and franchises, to the conduct of its business and
to its property and assets (including without limitation all Environmental Laws
and ERISA), and shall maintain and keep in full force and effect all licenses
and permits necessary in any material respect to the proper conduct of its
business;
(b) maintain its corporate existence; and
(c) remain engaged substantially in the business of information technology
consulting.
<PAGE>
-33-
5.3 Maintenance and Insurance . Each of the Company and its Subsidiaries
-------------------------
shall maintain its properties in good repair, working order and condition as
required for the normal conduct of its business. Each of the Company and its
Subsidiaries shall at all times maintain liability and casualty insurance with
financially sound and reputable insurers in such amounts as the officers of the
Company in the exercise of their reasonable judgment deem to be adequate, and
shall also maintain the AIU Insurance Policy or such replacement policy as may
be approved by the Bank, in such manner. The Bank shall be named as loss payee
and additional insured under, and shall be given 30 days' prior written notice
of any cancellation of; all such insurance. If the Company or any of its
Subsidiaries fails to provide such insurance, the Bank, in its sole and complete
discretion, may provide such insurance and charge the cost thereof to the
Company's deposit account with the Agent. Any payment not recovered from the
Company or its Subsidiaries shall bear interest at the Alternate Base Rate then
in effect. The Bank shall not, by the fact of approving, disapproving,
accepting, obtaining or failing to obtain any such insurance, incur liability
for the form or legal sufficiency of insurance contracts, solvency of insurance
companies or payment of lawsuits, and the Borrowers hereby expressly assumes
full responsibility therefor and liability, if any, thereunder. The Company
shall furnish to the Bank certificates or other evidence satisfactory to the
Bank of compliance with the foregoing insurance provisions.
5.4 Taxes. The Company shall pay or cause to be paid all taxes,
-----
assessments or governmental charges on or against it or any of its Subsidiaries
or its or their properties on or prior to the time when they become due, except
for taxes, assessments or governmental charges which are being contested in good
faith by the Company and for which the Company has established and maintains
adequate reserves for payment.
5.5 Inspection by the Bank. The Company shall permit the Bank or its
----------------------
designees, at any reasonable time and at reasonable intervals of time, and upon
reasonable notice (or if a Default shall have occurred and is continuing, at any
time and without prior notice), to (i) visit and inspect the properties of the
Company and its Subsidiaries, (ii) examine and make copies of and take abstracts
from the books and records of the Company and its Subsidiaries, and (iii)
discuss the affairs, finances and accounts of the Company and its Subsidiaries
with their appropriate officers, employees and accountants. In handling such
information the Bank shall exercise the same degree of care that it exercises
with respect to its own proprietary information of the same types to maintain
the confidentiality of any non-public information thereby received or received
pursuant to subsections 5. 1(a), (b), or (c) except that disclosure of such
information may be made (i) to the subsidiaries or affiliates of the Bank in
connection with their present or prospective business relations with the
Company, (ii) to prospective transferees or purchasers of an interest in the
Loans, (iii) as required by law, regulation, rule or order, subpoena, judicial
order or similar order and (iv) as may be required in connection with the
examination, audit or similar investigation of the Bank.
<PAGE>
-34-
5.6 Maintenance of Books and Records. Each of the Company and its
--------------------------------
Subsidiaries shall keep adequate books and records of account, in which true and
complete entries will be made reflecting all of its business and financial
transactions, and such entries will be made in accordance with GAAP and
applicable law.
5.7 Current Ratio. The Company shall at all times maintain a ratio of
-------------
Consolidated Current Assets to Consolidated Current Liabilities of at least 2.0
to 1.
5.8 Minimum Quarterly Net Income. The Company shall earn Consolidated Net
----------------------------
Income of at least $1.00 in every fiscal quarter, plus at least $1,000,000 in
each fiscal year.
5.9 Consolidated Total Liabilities to EBITDA Ratio. The Company shall at
----------------------------------------------
all times maintain a ratio of Consolidated Total Liabilities to EBITDA,
calculated on a rolling four quarter basis, as follows:
Quarter ending June 30, 1998: less than 4.0
Quarter ending September 30, 1998: less than 3.5
Quarter ending December 31, 1998: less than 3.0
Quarter ending March 31, 1999: less than 2.5
Quarter ending June 30, 1999: less than 2.0
Quarter ending September 30, 1999: less than 2.0
Quarter ending December 31, 1999 and
at the end of each quarter thereafter: less than 1.75
5.10 EBIT/Interest Expense Ratio The Company shall at all times maintain a
---------------------------
ratio of EBIT to Interest Expense of not less than 3.0 to 1.
5.11 Further Assurances. At any time and from time to time the Company
------------------
shall, and shall cause each of its Subsidiaries to, execute and deliver such
further instruments and take such further action as may reasonably be requested
by the Bank to effect the purposes of this Agreement, the Note and the other
Loan Documents.
SECTION IV
----------
NEGATIVE COVENANTS
- ------------------
So long as the Bank has any commitment to lend hereunder or any Loan or
other Obligation hereunder remains outstanding, the Company covenants as
follows:
<PAGE>
-35-
6.1 Indebtedness. Neither the Company nor any of its Subsidiaries shall
------------
create, incur, assume, guarantee or be or remain liable with respect to any
Indebtedness other than the following:
(a) Indebtedness of the Company or any of its Subsidiaries to the Bank or
any of its affiliates;
(b) Indebtedness of any Subsidiary to the Company which involves terms no
less favorable to the Company or such Subsidiary than would the terms of a
similar agreement or transaction with any person other than an affiliate.
(c) Indebtedness existing as of the date of this Agreement and disclosed
on Exhibit C hereto or in the financial statements referred to in Section 4.6;
---------
and
(d) Indebtedness secured by Permitted Encumbrances.
(e) Indebtedness which, when combined with all other Indebtedness included
in (c) and (d) above, does not exceed ten percent (10%) of EBITDA for the twelve
month period immediately preceding the incurring of such Indebtedness.
6.2 Contingent Liabilities. Neither the Company nor any of its
----------------------
Subsidiaries shall create, incur, assume, guarantee or remain liable with
respect to any Guarantees other than the following:
(a) Guarantees in favor of the Bank or any of its affiliates;
(b) Guarantees existing on the date of this Agreement and disclosed on
Exhibit C hereto or in the financial statements referred to in Section 4.6;
- ------- -
(c) Guarantees resulting from the endorsement of negotiable instruments
for collection in the ordinary course of business; and
(d) Guarantees of normal trade debt relating to the acquisition of goods
and supplies.
6.3 Leases. Neither the Company nor any of its Subsidiaries shall during
------
any fiscal year enter into any leases of real or personal property as lessee,
except for capital leases or leases providing for payments in any one fiscal
year (whether or not such payments are termed rent) in the aggregate of less
than $1,000,000.
<PAGE>
-36-
6.4 Sale and Leaseback. Neither the Company nor any of its Subsidiaries
------------------
shall enter into any arrangement, directly or indirectly, whereby it shall sell
or transfer any property owned by it in order to lease such property or lease
other property that the Company or any such Subsidiary intends to use for
substantially the same purpose as the property being sold or transferred.
6.5 Encumbrances. Neither the Company nor any of its Subsidiaries shall
------------
create, incur, assume or suffer to exist any mortgage, pledge, security
interest, lien or other charge or encumbrance, including the lien or retained
security title of a conditional vendor upon or with respect to any of its
property or assets ("Encumbrances"), or assign or otherwise convey any right to
receive income, including the sale or discount of accounts receivable with or
without recourse, except the following ("Permitted Encumbrances"):
----------------------
(a) Encumbrances in favor of the Bank or any of its affiliates;
(b) liens for taxes, fees, assessments and other governmental charges to
the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;
(c) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen' s and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;
(d) judgment liens that shall not have been in existence for a period
longer than 30 days after the creation thereof or, if a stay of execution shall
have been obtained, for a period longer than 30 days after the expiration of
such stay;
(e) rights of lessors under capital leases; and
(f) easements, rights of way, restrictions and other similar charges or
Encumbrances relating to real property and not interfering in a material way
with the ordinary conduct of its business.
<PAGE>
-37-
6.6 Merger: Consolidation: Sale or Lease of Assets; Other Acquisitions.
------------------------------------------------------------------
Neither the Company nor any of its Subsidiaries shall sell, lease or otherwise
dispose of assets or properties in excess of $100,000 during any fiscal year
(valued at the lower of cost or market), other than sales of inventory in the
ordinary course of business in any fiscal year; or liquidate, merge or
consolidate into or with any other person or entity, or otherwise acquire any
other entity, provided that any Subsidiary of the Company may merge or
--------
consolidate into or with (i) the Company if no Default would result from such
merger and if the Company is the surviving company, or (ii) any other wholly-
owned Subsidiary of the Company and provided further that the Company or any
----------------
Subsidiary of the Company may enter into a merger in which it is the surviving
entity or otherwise acquire another entity if the aggregate cash portion of the
consideration paid by the Company or any Subsidiary does not exceed twenty
percent (20%) of Net Worth, in which case the Company shall provide the Bank a
certificate showing pro forma compliance with all covenants hereunder, and no
Event of Default as a result of such transaction.
6.7 Additional Stock Issuance. The Company shall not permit any of its
-------------------------
Subsidiaries to issue any additional shares of its capital stock or other equity
securities, any options therefor or any securities convertible thereto other
than to the Company. Neither the Company nor any of its Subsidiaries shall sell,
transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except (i) to the Company or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section 6.6.
6.8 Equity Distributions. The Company shall not pay any dividends on any
--------------------
class of its capital stock or make any other distribution or payment on account
of or in redemption, retirement or purchase of such capital stock; provided that
--------
this Section shall not apply to (i) the issuance, delivery or distribution by
the Company of shares of its common stock pro rata to its existing shareholders
and (ii) the purchase or redemption by the Company of its capital stock with the
proceeds of the issuance of additional shares of capital stock.
6.9 Capital Expenditures. Neither the Company nor any of its Subsidiaries
--------------------
shall make Capital Expenditures in excess of the following amounts in each year
specified below, exclusive of Capital Expenditures incurred in connection with
the acquisition of any Person:
Fiscal Year Maximum Capital Expenditure
------------------- ---------------------------
1998 $1,500,000
1999 $3,000,000
2000 $6,000,000
and thereafter
<PAGE>
-38-
6.10 Investments. Except as permitted in Section 6.6, neither the Company
-----------
nor any of its Subsidiaries shall make or maintain any Investments other than
(i) existing Investments in Subsidiaries and additional Investments in such
Subsidiaries in the ordinary course of its business, (ii) Qualified Investments,
and (iii) up to $2,000,000 aggregate amount of loans to employees of the Company
and any Subsidiaries who are shareholders of the Company.
6.11 ERISA. Neither the Company nor any member of the Controlled Group
-----
shall permit any Plan maintained by it to (i) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code, (ii) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or
not waived, or (iii) terminate any Plan in a manner that could result in the
imposition of a lien or encumbrance on the assets of the Company or any of its
Subsidiaries pursuant to Section 4068 of ERISA.
6.12 Transactions with Affiliates. None of the Company nor any of its
----------------------------
Subsidiaries will enter into or participate in any agreements or transactions of
any kind with any affiliate, except: agreements or transactions (in each case)
in the ordinary course of business and on an arms-length basis which (i) do not
violate or otherwise conflict with any of the terms of any of the Security
Documents, (ii) require the payment of no fees, charges or commissions by the
Company or such Subsidiaries to any affiliate except those which are reasonable
and disclosed to the Bank, (iii) are disclosed on the books, accounts and
records of the Company or such Subsidiaries, and (iv) involve terms no less
favorable to the Company or such Subsidiaries than would be the terms of a
similar agreement or transaction with any person other than an affiliate.
6.13 No Amendments to Certain Documents. The Company will not at any time
----------------------------------
cause or permit any of the charter or other incorporation documents or by-laws
of the Company or any of its Subsidiaries to be modified, amended or
supplemented in any respect whatever, except for such modification or amendment
as would not effect any change adverse to the Bank, or have a material adverse
effect on the business, property, assets, operations or condition (financial or
otherwise) of the Company or any of its Subsidiaries, without the express prior
written agreement, consent or approval of the Bank.
SECTION VII
-----------
DEFAULTS
--------
7.1 Events of Default. There shall be an Event of Default hereunder if any
-----------------
of the following events occurs:
<PAGE>
-39-
(a) the Company shall fail to pay when due (i) any amount of principal of
any Loans, or (ii) any amount of interest thereon or any fees or expenses
payable hereunder or under the Note within five days of the due date therefor;
or
(b) The Company shall fail to perform any term, covenant or agreement
contained in Sections 5.1(h), 5.5, 5.7 through 5.10 or Section VI; or
(c) the Company shall fail to perform any covenant contained in Sections
5.1(g), 5.1(i) or 5.2, and such failure shall continue for 30 days; or
(d) the Company shall fail to perform any term, covenant or agreement
(other than in respect of subsections 7.1(a) through (c) hereof) contained in
this Agreement and such default shall continue for 30 days after notice thereof
has been sent to the Company by the Bank; or
(e) any representation or warranty of the Company made in this Agreement
or in the Note or any other Loan Document or any other documents or agreements
executed in connection with the transactions contemplated by this Agreement or
in any certificate delivered hereunder shall prove to have been false in any
material respect upon the date when made or deemed to have been made; or
(f) there shall occur any material adverse change in the assets,
liabilities, financial condition, business or prospects of the Company or the
Company and its Subsidiaries, taken as a whole, as determined by the Bank acting
in good faith; or
(g) the Company or any of its Subsidiaries shall fail to pay at maturity,
or within any applicable period of grace, any obligations for borrowed monies or
advances, or for the use of real or personal property, or fail to observe or
perform any term, covenant or agreement evidencing or securing such obligations
for borrowed monies or advances, or relating to such use of real or personal
property, the result of which failure is to permit the holder or holders of such
Indebtedness to cause such Indebtedness to become due prior to its stated
maturity upon delivery of required notice, if any; or
(h) the Company or any of its Subsidiaries shall (i) apply for or consent
to the appointment of, or the taking of possession by, a receiver, custodian,
trustee, liquidator or similar official of itself or of all or a substantial
part of its property, (ii) be generally not paying its debts as such debts
become due, (iii) make a general assignment for the benefit of its creditors,
(iv) commence a voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (v) take any action or commence any case or proceeding
under any law
<PAGE>
-40-
relating to bankruptcy, insolvency, reorganization, winding-up or composition or
adjustment of debts, or any other law providing for the relief of debtors, (vi)
fail to contest in a timely or appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under the Federal
Bankruptcy Code or other law, (vii) take any action under the laws of its
jurisdiction of incorporation or organization similar to any of the foregoing,
or (viii) take any corporate action for the purpose of effecting any of the
foregoing; or
(i) a proceeding or case shall be commenced, without the application or
consent of the Company or any of its Subsidiaries in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets, or (iii) similar relief in respect of it, under
any law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts or any other law providing for the relief of
debtors, and such proceeding or case shall continue undismissed, or unstayed and
in effect, for a period of 30 days; or an order for relief shall be entered in
an involuntary case under the Federal Bankruptcy Code, against the Company or
such Subsidiary; or action under the laws of the jurisdiction of incorporation
or organization of the Company or any of its Subsidiaries similar to any of the
foregoing shall be taken with respect to the Company or such Subsidiary and
shall continue unstayed and in effect for any period of 30 days; or
(j) a judgment or order for the payment of money shall be entered against
the Company or any of its Subsidiaries by any court, or a warrant of attachment
or execution or similar process shall be issued or levied against property of
the Company or such Subsidiary, that in the aggregate exceeds $500,000 in value
and such judgment, order, warrant or process shall continue undischarged or
unstayed for 45 days, unless the same shall be covered by insurance in a manner
satisfactory to the Bank; or
(k) the Company or any member of the Controlled Group shall fail to pay
when due an amount or amounts aggregating in excess of $500,000 that it shall
have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or
notice of intent to terminate a Plan or Plans shall be filed under Title IV of
ERISA by the Company, any member of the Controlled Group, any plan administrator
or any combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate or to cause a trustee to be appointed to
administer any such Plan or Plans or a proceeding shall be instituted by a
fiduciary of any such Plan or Plans against the Company and such proceedings
shall not have been dismissed within 45 days thereafter; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any such Plan or Plans must be terminated; or
<PAGE>
-41-
(l) there shall occur a Default or Event of Default under any of the Loan
Documents or under any of the documents with respect to any equipment lease
line to be entered into between the Bank and the Company.
7.2 Remedies. Upon the occurrence of an Event of Default described in
--------
subsections 7.1(h) and (i), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at the Bank's option and upon the Bank's
declaration:
(a) the Bank's commitment to make any further Loans hereunder shall
terminate;
(b) the unpaid principal amount of the Loans together with accrued interest
and all other Obligations hereunder shall become immediately due and payable
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived;
(c) the Bank may exercise any and all rights it has under this Agreement,
the Note or any other documents or agreements executed in connection herewith,
or at law or in equity, and proceed to protect and enforce the Bank's rights by
any action at law, in equity or other appropriate proceeding; and
(d) upon termination of the commitment or acceleration of the Loans, as
provided for above, the Borrowers shall, as specified in written notice by the
Bank, either (i) immediately deliver to the Bank, in immediately available
funds, to be held pursuant to a cash collateral agreement in substantially the
form that at the time is customarily being used by the Bank in similar
situations, an amount equal to the Letter of Credit Obligations (the "Letter of
Credit Amount"), or (ii) with the consent of the beneficiary or beneficiaries
thereof, cause any Letter of Credit to be canceled in a manner satisfactory to
the Bank. In connection with the delivery of the Letter of Credit Amount, the
Borrowers shall provide the Bank with such documentation as the Bank may from
time to time request to perfect its rights in the Letter of Credit Amount,
including, without limitation, pledge agreements and financing statements in
form and substance satisfactory to the Bank. The Bank shall hold the Letter of
Credit Amount in its own name for the exclusive purpose of applying such Letter
of Credit Amount toward the immediate payment of amounts which are thereafter
drawn under any Letter of Credit, and, to the extent of such payment,
Reimbursement Obligations shall be deemed to be satisfied. Upon the expiry date
of all Letters of Credit, any Letter of Credit Amount remaining after
satisfaction of the Reimbursement Obligations shall be available to the Bank for
application to any Obligations that are then due and payable. The Borrowers
shall remain liable for any deficiency.
SECTION VIII
------------
<PAGE>
-42-
SECURITY
--------
The Obligations shall be secured by (a) a blanket lien on all of the assets
and rights of the Company and each Subsidiary, including accounts receivable,
contract rights, inventory, chattel paper, documents and instruments, general
intangibles, plant and equipment, goods and consumer goods pursuant to the terms
of the Security Agreement, and (b) the Pledge Agreement, pursuant to which the
Company shall pledge to the Bank all of the issued and outstanding capital stock
of each Subsidiary.
SECTION IX
----------
MISCELLANEOUS
-------------
9.1 Notices. Unless otherwise specified herein, all notices hereunder to
-------
any party hereto shall be in writing and shall be deemed to have been given when
delivered by hand, when properly deposited in the mails postage prepaid, when
sent by telex, answer back received, or electronic facsimile transmission, or
when delivered to the telegraph company or overnight courier, addressed to such
party at its address indicated below:
If to the Company or Tier UK, at
1350 Treat Boulevard
Suite 250
Walnut Creek, CA 94596
Attention: Chief Financial Officer
Telephone: 510-937-3950
Fax: 510-937-3902
If to the Bank, at
100 Federal Street
High Technology Division
Boston, MA 02110
Attention: Daniel G. Head, Jr.
Telephone: 617-434-7524
Fax: 617-434-0819
<PAGE>
-43-
or at any other address specified by such party in writing.
9.2 Expenses. The Company will pay on demand all expenses of the Bank in
--------
connection with the preparation, waiver or amendment of this Agreement, the
Note, the other Loan Agreements and all other documents executed in connection
therewith, or the administration, default or collection of the Loans or other
Obligations or administration, default, collection in connection with the Bank's
exercise, preservation or enforcement of any of its rights, remedies or options
thereunder, including, without limitation, fees of outside legal counsel or the
allocated costs of in-house legal counsel, accounting, consulting, brokerage or
other similar professional fees or expenses, and any fees or expenses associated
with any travel or other costs relating to any appraisals or examinations
conducted in connection with the Obligations or any collateral therefor, and the
amount of all such expenses shall, until paid, bear interest at the rate
applicable to principal hereunder (including any default rate).
9.3 Set-Off. Regardless of the adequacy of any collateral or other means
-------
of obtaining repayment of the Obligations, any deposits, balances or other sums
credited by or due from the head office of the Bank or any of its branch offices
to the Company may, at any time and from time to time after the occurrence of an
Event of Default hereunder, without notice to the Company or compliance with any
other condition precedent now or hereafter imposed by statute, rule of law, or
otherwise (all of which are hereby expressly waived) be set off, appropriated,
and applied by the Bank against any and all obligations of the Company to the
Bank or any of its affiliates in such manner as the bead office of the Bank or
any of its branch offices in their sole discretion may determine, and the
Company hereby grants the Bank a continuing security interest in such deposits,
balances or other sums for the payment and performance of all such obligations.
9.4 Term of Agreement. This Agreement shall continue in full force and
-----------------
effect so long as the Bank has any commitment to make Loans hereunder or any
Loan or any Obligation hereunder shall be outstanding.
9.5 No Waivers. No failure or delay by the Bank in exercising any right,
----------
power or privilege hereunder or under the Note or under any other documents or
agreements executed in connection herewith shall operate as a waiver thereof;
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein and in the Note provided are cumulative and not
exclusive of any rights or remedies otherwise provided by agreement or law.
9.6 Governing Law. This Agreement and the Note shall be deemed to be
-------------
contracts made under seal and shall be construed in accordance with and governed
by the laws of the
<PAGE>
-44-
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
9.7 Amendments. Neither this Agreement nor the Note nor any provision
----------
hereof or thereof may be amended, waived, discharged or terminated except by a
written instrument signed by the Bank and, in the case of amendments, by the
Company.
9.8 Binding Effect of Agreement. This Agreement shall be binding upon and
---------------------------
inure to the benefit of the Company and the Bank and their respective successors
and assigns; provided that the Company may not assign or transfer its rights or
obligations hereunder. The Bank may sell, transfer or grant participation in the
Note without the prior written consent of the Company, and the Company agrees
that any transferee or participant shall be entitled to the benefits of Sections
2.8, 2.10, 2.14, 5.5 and 9.3 to the same extent as if such transferee or
participant were the Bank hereunder; provided that notwithstanding any such
transfer or participation, the Company may, for all purposes of this Agreement,
treat the Bank as the person entitled to exercise all rights hereunder and under
the Note and to receive all payments with respect thereto. The Bank shall
provide to the Company not less than ten (10) days prior written notice of any
transfer of or participation in the Note.
9.9 Successors and Assigns.
----------------------
(a) The Bank may at any time grant to one or more banks or other financial
institutions (each, a "Participant") participating interests in its commitment
to make Loans hereunder or in any or all of its Loans on such terms as the Bank
may think fit. In the event of any such grant by the Bank of a participating
interest to a Participant, whether or not upon notice to the Company, the Bank
shall remain responsible for the performance of its obligations hereunder, and
the Company shall continue to deal solely and directly with the Bank in
connection with the Bank's rights and obligations under this Agreement. Any
agreement pursuant to which the Bank may grant such a participating interest
shall provide that the Bank shall retain the sole right and responsibility to
enforce the obligations of the Borrowers hereunder including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement, provided that such participation agreement may
--------
provide that the Bank will not agree, without the consent of the Participant, to
any modification, amendment or waiver of this Agreement requiring the consent,
agreement or approval of the Bank. The Borrowers agree that each Participant
shall be entitled to the benefits of Sections 2.8 (other than benefits that
otherwise would be available due to the foreign status of such Participant) and
2.10 with respect to its participating interest, to the extent such Bank would
be entitled to such benefits if the participation had not been entered into or
sold. An assignment or other transfer which is not permitted by paragraph (ii)
below
<PAGE>
-45-
shall be given effect for purposes of this Agreement only to the extent of a
participating interest granted in accordance with this paragraph (a).
(b) The Bank may at any time assign to one or more banks or other financial
institutions (each, an "Assignee") all, or a part of all, of its rights,
interests and obligations under this Agreement and the Notes (or any one of its
Notes) on such terms, as between the Bank and each of its Assignees, as the Bank
may think fit (it being understood that any such assignments do not have to be
made pro rata among the facilities), and such Assignee shall assume such rights,
--- ----
interests and obligations, pursuant to an instrument executed by such Assignee
and the Bank, provided, that (i) prior to assigning any interest to any Assignee
--------
hereunder, the Bank will (A) notify the Company in writing identifying the
proposed Assignee and stating the aggregate principal amount of the proposed
interest to be assigned, and (B) prior to the occurrence of an Event of Default,
receive the prior written consent of the Company which consent may not be
unreasonably withheld or delayed, and (ii) the Bank will not assign to any
Assignee less than an aggregate amount equal to $2,000,000 of its commitments to
issue Loans hereunder and interest in the Notes (as such interest may be reduced
pursuant to the terms hereof) or the remaining amount of its commitments to
issue Loans hereunder. It is understood and agreed that the proviso contained in
the immediately preceding sentence shall not be applicable in the case of, and
this paragraph (b) shall not restrict, (i) an assignment or other transfer by
the Bank to an Affiliate or (ii) a collateral assignment or other similar
transfer to a Federal Reserve Bank. Upon execution and delivery of such an
instrument and payment by such Assignee to the Bank of an amount equal to the
purchase price agreed between the Bank and such Assignee, such Assignee shall be
a Bank party to this Agreement and shall have all the rights, interests and
obligations of a Bank with the commitment to issue Loans hereunder as set forth
in such instrument of assumption, and the transferor Bank shall be released from
its obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this paragraph (b), the transferor Bank and the Company shall make
appropriate arrangements so that, if required, new Notes are issued to the
Assignee.
(c) No Assignee or Participant shall be entitled to receive any greater
payment under Sections 2.8 and 2.10 than the Bank would have been entitled to
receive with respect to the rights transferred, unless such transfer is made at
a time when the circumstances giving rise to such greater payment did not exist.
9.10 Counterparts. This Agreement may be signed in any number of
------------
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.
<PAGE>
-46-
9.11 Partial Invalidity. The invalidity or unenforceability of any, one
------------------
or more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.
9.12 Captions. The captions and headings of the various sections and
--------
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.
9.13 WAIVER OF JURY TRIAL. THE BANK AND THE COMPANY AGREE THAT NEITHER OF
--------------------
THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT,
PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS
AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE
RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH
ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN
WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK
AND THE COMPANY, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER
THE BANK NOR THE COMPANY HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
9.14 Entire Agreement. This Agreement, the Note, the other Loan Documents
----------------
and the documents and agreements executed in connection herewith constitute the
final agreement of the parties hereto and supersede any prior agreement or
understanding, written or oral, with respect to the matters contained herein and
therein.
<PAGE>
-47-
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
TIER TECHNOLOGIES, INC.
By /s/ George K. Ross
---------------------------
Name: George K. Ross
Title: CFO/Senior Vice President
TIER TECHNOLOGIES
(UNITED KINGDOM) INC.
By /s/ George K. Ross
---------------------------
Name: George K. Ross
Title: CFO/Secretary/Treasurer
BANKBOSTON, N.A.
By /s/ Daniel G. Head, Jr.
---------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.36
MASTER AGREEMENT FOR CONSULTING SERVICES
----------------------------------------
This Master Agreement for Consulting Services ("Agreement") is entered into as
of the 10th day of February, 1998, by and between TIER TECHNOLOGIES, INC.
(CONSULTANT) AND HUMANA INC. (HUMANA).
WITNESSETH: That, for and in consideration of the mutual promises and covenants
- ----------
hereinafter contained, the parties hereto agree as follows:
ARTICLE 1: GENERAL DESCRIPTION AND SCOPE OF SERVICE
- --------- ----------------------------------------
1.1 Consultant agrees to provide to Humana such technical assistance and
assistance in design, development and implementation, programming, training,
consulting, project management, use of expertise and related services as are
described in such Schedules as are executed from time to time by both parties to
this Agreement (the "Schedules"). Such services shall be provided in accordance
with the provision of this Agreement and within guidelines established by
Humana. Only Time & Materials Schedules may be executed pursuant to this
Agreement and made a part hereof ("Schedule"). Each Schedule shall be
consecutively numbered to facilitate identification and, when executed by an
authorized representative of both parties, shall be incorporated herein and made
a part hereof.
1.1.1 Each Schedule will contain the names of the Consultant
employees performing services covered by that Schedule, their job
classification, the hourly rate of payment applicable to each listed
Consultant employee (the "Hourly Rate"), the work location of each
Consultant employee, the name of Humana's Project Manager and such
additional information, terms and conditions as the parties may agree
upon and wish to include.
1.1.2 In the event of any conflict between the terms and
conditions of this Agreement and the terms and conditions of any
Schedule, the terms and conditions of such Schedule shall govern.
1.2 For all Schedules, the scope of Consultant's work effort must be
coordinated with appropriate personnel designated by Humana and shall at all
times be subject to the parameters established by Humana from time to time.
1.3 Humana's owned, controlled and/or managed affiliates ("Affiliates") and
subsidiaries may execute Schedules under this Agreement and for purposes of any
such Schedules under this Agreement and for purposes of any such Schedule shall
be considered the "Humana" as that term is used herein.
1.4 Unless otherwise mutually agreed to by the parties in writing, (i)
Consultant agrees not to hire or to solicit the employment of any personnel of
Humana with whom Consultant has contact during the performance of any Schedule
for the term of such Schedule and for twelve (12) months thereafter, and (ii)
Humana agrees not to hire or to solicit the employment of any of the
Consultant's employees assigned to Humana to perform services under any Schedule
during the term of such Schedule and for twelve (12) months thereafter. If one
party violates this section 1.4 of the Agreement, the offending party shall pay
the other party a total of 25% of the total annual compensation of the new
position with the offending party.
ARTICLE 2: STATEMENT OF WORK
- --------- -----------------
2.1 A statement of the scope of work (the "Statement") shall be attached to each
Schedule as an Attachment A and shall be incorporated therein and made a part
---------- -
thereof. Any Statement attached to a Schedule shall
<PAGE>
contain a description of, and the Schedule for, the tasks to be performed by
Consultant, and such additional information as the parties may agree upon and
wish to include.
2.1.1 Each Schedule referred to herein shall be deemed to
include any such Statement.
2.1.2 Schedule 2.0, Attachment A, "Documents describing the
Statement is hereby attached and incorporated herein by reference.
ARTICLE 3: ORGANIZATION OF PERSONNEL SUPPLIED BY CONSULTANT
- --------- ------------------------------------------------
3.1 Consultant shall appoint for each Schedule, at no charge to Humana, a
qualified member of its staff who will operate as the Consultant's main
interface between Humana and Consultant, who will ensure that Consultant
personnel coordinate and interface with Humana personnel in a manner
satisfactory to Humana, and who will assist Humana in resolving any problems.
3.2 Humana shall have the right to interview and otherwise evaluate all
Consultant personnel assigned to perform any services under any Schedule and to
accept or reject any individual based upon the background experience indicated
by the individual. In the event that any Consultant employee performing
services under any Schedule is found to be unacceptable to Humana for cause or
without cause, including, but not limited to, demonstration that he or she is
not qualified to perform, Humana shall notify Consultant of such fact and
Consultant shall immediately remove said employee from performing services under
that Schedule and, if requested by Humana, promptly provide a qualified
replacement. Humana is the sole judge as to the performance capability. In the
event that any Consultant employee assigned to perform services under any
Schedule is found to be unacceptable to Humana for any other reason, Humana
shall notify Consultant of such fact and Consultant shall immediately take
appropriate corrective action. In such circumstances of immediate removal,
effective immediately no additional fees or expenses shall be incurred by Humana
for this Consultant employee.
3.3 Consultant agrees to use its best efforts to insure the continuity of
Consultant employees assigned to perform services under any Schedule. Any
reassignment by Consultant of those of its employees assigned to perform
services under any Schedule must be with Humana's prior written consent and upon
thirty (30) day prior written notice to Humana. In the event Consultant
reassigns any of its employees assigned to perform services under any Schedule
(other than at the request of Humana to other Humana projects), Consultant will
promptly provide a suitable replacement of the same skill level acceptable to
Humana. There will be no charge to Humana for such replacement for a reasonable
period of time (to be agreed upon between Humana and Consultant) while the
replacement employee acquires the necessary orientation and education to make a
productive contribution substantially equal to that of the employee replaced.
If Consultant is unable to replace employee with a person of like skill and
experience, Consultant shall reimburse Humana for any additional costs incurred
by Humana as a result of having to replace such Consultant through another
Contractor service in order to complete the task described in the Schedule. At
Humana's sole option, instead of replacing said Consultant employee or if
suitable Consultant employee cannot be found in a reasonable period of time,
Humana can terminate the Schedule and receive all work performed to date plus a
refund of all services provided by Consultants employee.
3.4 Consultant, in performance of this Agreement, is acting as an independent
contractor, personnel supplied by Consultant hereunder are not Humana's
personnel or agents, and Consultant assumes full responsibility for their acts.
Consultant shall be solely responsible for the payment of compensation of
Consultant employees
2
<PAGE>
assigned to perform services hereunder, and such employees shall be informed
that they are not entitled to the provision of any Humana employee benefits.
Humana shall not be responsible for payment of worker's compensation, disability
or other similar benefits, unemployment or other similar insurance or for
withholding income or other similar taxes or social security for any Consultant
employee, but such responsibility shall solely be that of Consultant.
ARTICLE 4: ORGANIZATION OF PERSONNEL SUPPLIED BY HUMANA
- --------- --------------------------------------------
4.1 Humana shall designate an appropriate Humana representative as Humana's
Project Manager for each Schedule. The Humana's Project manager will be charged
with responsibility of acting as Consultant's principal point of interface with
Humana for the services covered by the Schedule involved, and, in the case of
any Schedule, will direct, define, and schedule the tasks to be performed by
Consultant employees contemplated by the applicable Statement.
ARTICLE 5: STATUS MEETINGS
- --------- ---------------
5.1 If Humana so requests, Consultant shall hold periodic status meetings with
Humana management in order to review the status of Consultant activities. Such
meetings will be conducted at such locations as are mutually agreed to by Humana
and Consultant.
ARTICLE 6: FEES AND EXPENSES; RECORDS; TAXES
- --------- ---------------------------------
6.1 Consultant shall invoice Humana, monthly, for the technical services and
assistance in design, programming, consulting, training, project management, and
related services provided to Humana by Consultant personnel under any Schedule
in accordance with the Hourly Rate set forth opposite each Consultant employee
listed on that Schedule. Such Hourly Rate shall be as mutually agreed to by the
parties hereto, but in no event shall exceed Consultant's standard published
rate for an employee in that job classification. Payment is due within thirty
(30) days of receipt of invoice. Any contested charges shall not prevent the
timely payment of uncontested charges. Late payments shall incur late charges
at the rate of 1 1/2 percent per month. Charges by consultant are listed in
Schedule 1.0, Attachment A, which is attached hereto and incorporated herein.
6.1.1 For work performed pursuant to any Schedule, Consultant personnel
shall enter time worked into Humana's time reporting system daily and Consultant
shall submit authorized time sheets to Humana each week showing the number of
hours worked by Consultant employees.
6.2 In addition to the charges invoiced in accordance with Sections 6.1 hereof,
Consultant shall invoice Humana, monthly, for expenses incurred during the prior
period as a result of performing services in accordance with any Schedule. Such
expenses shall be limited to reasonable out-of-pocket expenses necessarily and
actually incurred by Consultant in the performance of its services hereunder,
provided that: (i) Humana has given its prior written consent for any such
expenses; (ii) the expenses have been detailed on a form acceptable to Humana
and submitted to an authorized representative of Humana and of Consultant for
review and approval in accordance with Humana's and Consultant's expense review
and approval policies; and (iii) Consultant submits supporting documentation in
addition to the approved expense form. Upon receipt of copies of detailed
receipts for each reimbursable item, Humana agrees to reimburse Consultant for
actual and reasonable direct expenses, including, but not limited to,
transportation and living cost, incurred by
3
<PAGE>
Consultant. With the exception of trips which have been preapproved and/or
specifically requested by Humana and with the exception of trips to Humana
facilities which were specifically included as part of an plan which has been
preapproved by Humana, Consultant agrees to provide Humana with estimates of any
direct expenses to be incurred and obtain Humana's written approval before said
expenses are incurred. Airfare will be compensated at the lowest fare possible
of the tourist or coach-economy rate. Mileage for personal automobile will be
compensated at the then current allowable I.R.S. rate. If a rental car is used
in lieu of a personal automobile, reimbursement shall be at the actual vehicle
rate (in no case more than the mid-size vehicle rate) plus gasoline and/or
mileage charges but excluding all optional charges. Other forms of ground
transportation shall be reimbursed at reasonable actual cost. It is understood
that Humana shall not reimburse Consultant for normal commutation expenses or
for travel and living expenses incurred by any Consultant employee in performing
services at a Humana facility located in the same metropolitan area as that
employee's home base. It is also understood that any entertainment by or on
behalf of Consultant shall be at no cost to Humana unless exception is granted
in writing in advance by Humana's Project Manager. Certain expenses are not
reimbursable by Humana. These include but are not limited to: Consultant travel
time, personal entertainment or travel, Consultant personal items, valet and
laundry service, office supplies and equipment, commercial secretarial services,
commercial telephone and fax services, and any unauthorized expense. Except for
amounts disputed by Humana, Humana shall pay invoices for approved direct
expenses with all copies of the detail receipts within thirty (30) days of
Humana's receipt of such invoices. Any disputed charges and/or expenses shall
not affect payment of non-disputed charges and/or expenses, in accordance with
the terms of this Agreement.
6.3 Consultant shall maintain complete and accurate accounting records, in a
form in accordance with generally accepted accounting principles, to
substantiate Consultant's charges hereunder. Such records shall include, but
not be limited to, payroll records, attendance cards and job summaries, and
Consultant shall retain such records for a minimum period of four (4) years from
the date of final payment under the Schedule to which such records relate.
ARTICLE 7: PATENT AND COPYRIGHT INDEMNITY
- --------- ------------------------------
7.1 Consultant shall defend and/or handle at its own cost and expense any claim
or action against Humana, its parent company, its subsidiaries and affiliated
companies, for infringement of any patent, copyright or similar property right
(including, but not limited to, misappropriation of trade secrets and any
infringement by Consultant and its employees of the ViaSoft and Sterling
software licensed software) based on any deliverable or any other materials
furnished hereunder (unless said infringement results directly from Consultant's
compliance with Humana's standards or specifications) by Consultant or based on
Humana's use thereof. Consultant shall have the sole right to conduct the
defense of any such claim or action and all negotiations for its settlement or
compromise, unless otherwise mutually agreed upon and expressed in writing
signed by the parties hereto. Humana will make available to Consultant any
deliverables and/or works made for hire by Consultant pursuant to a Schedule
which are necessary to the defense of Consultant against any claim of
infringement for the duration of Consultant's legal defense.
7.2 In addition, Consultant shall indemnify and hold Humana, its subsidiaries
and affiliated companies, harmless from and against any and all liabilities,
losses, damages, costs and expenses (including reasonable attorneys' fees)
associated with any such claim or action incurred by Humana in accordance with
this Article 7.
4
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7.3 If such infringement claim or action has occurred or, in Consultant's
judgment is likely to occur, Humana shall allow Consultant, at Consultant's
option and expense, to either: (i) procure for Humana the right to continue
using said deliverable and/or materials; (b) modify such deliverable and/or
materials to become non-infringing (provided that such modification does not
adversely affect Humana's intended use of the deliverable and/or materials as
contemplated hereunder); (c) replace said deliverable and/or materials with an
equally suitable, compatible and functionally equivalent non-infringing
deliverable and/or materials at no additional charge to Humana; or (d) if none
of the foregoing alternatives is reasonably available to Consultant, upon
written request Humana shall return the deliverable and/or materials in question
to Consultant and Consultant shall refund all moneys paid by Humana in respect
of such deliverable and/or materials and accept return of same.
ARTICLE 8: CONFIDENTIAL INFORMATION OF HUMANA
- --------- ----------------------------------
8.1 During the term of this Agreement and surviving its expiration or
termination, Consultant will regard and preserve as confidential all information
related to the business of Humana, its parent company and its subsidiaries and
affiliated companies and its or their clients, patients and/or enrollees or
ViaSoft or Sterling Software that may be obtained from any source as a result of
this Agreement. Consultant will not, without first obtaining Humana's written
consent, disclose to any person, firm or enterprise or use for its benefit any
information relating to the pricing, methods, processes, financial data, lists,
apparatus, statistics, programs, research, development or related information of
Humana, its subsidiaries or affiliated companies or its clients, patients,
and/or enrollees concerning past, present or future business activities of said
entities, and the results of the provision of services performed by Consultant
under this Agreement.
8.1.1 Upon the written request of Humana, Consultant shall deliver to
Humana all items, including, but not limited to, drawings, descriptions, test
data or other papers or documents, which may contain any Humana confidential
information, as well as any copies thereof, that Consultant has in its
possession.
8.1.2 Confidential Information does not include:
(a) information that is in the public domain prior to the disclosure or
becomes part of the public domain through no wrongful act of the Consultant,
(b) information that was in lawful possession of the Consultant prior to
the disclosure,
(c) information that was independently developed by Consultant outside
the scope of this Agreement, and
(d) information that was disclosed to Consultant by a third party who
was in lawful possession of the information.
8.2 All materials, including, but not limited to, programs, documentation,
reports, manuals, visual aids, and any other materials prepared by Consultant
under any Schedule shall be deemed to be a work made for hire and made in the
course of the services rendered hereunder and shall belong exclusively to
Humana, with Humana having the right to obtain and to hold in its own name
copyrights, registrations or such other protections as may be appropriate to the
subject matter, and any extensions and renewals thereof. Consultant agrees to
give Humana, and any person designated by Humana, reasonable assistance, at
Humana's expense, required to perfect the rights defined in this Section 8.2.
Unless otherwise agreed to by the parties, Consultant shall immediately upon the
effective date of termination of each Schedule turn over to Humana all materials
developed pursuant to such Schedule, including, but not limited to, working
papers, narrative descriptions, reports, and data. Consultant agrees to retain
no copies of any such materials.
5
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8.3 Each Consultant and Consultant's staff providing services to Humana shall
sign Humana's standard security and data access forms.
8.4 In the event either party breaches any of its obligations under this
Article 8, the breaching party will indemnify and hold harmless the non-
breaching party from and against any and all harm, injury, damages, costs and
expenses incurred by the non-breaching party arising out of the said breach. In
addition, the non-breaching party will be entitled to obtain injunctive relief
against the breaching party.
ARTICLE 9: WARRANTIES
- --------- ----------
9.1 Consultant warrants and represents that it has full authority to enter into
this Agreement and to consummate the transactions contemplated hereby and that
this Agreement is not in conflict with any other Agreement to which Consultant
is a party or by which it may be bound.
9.2 Consultant warrants and represents that each of its employees assigned to
perform technical assistance and assistance in design, development and
implementation, programming, consulting, training, project management and
related services under any Schedule shall have the proper skill, training and
background for his/her level of competence as specified in the Schedule so as to
be able to perform in a competent and professional manner.
9.3 Unless otherwise specified in an individual Schedule, all materials and
products developed under each Schedule by Consultant, whether or not such
Schedule is completed, are the property of Humana. Consultant warrants and
represents that Humana shall receive good and marketable title to all materials
and products developed under this Agreement, unless otherwise specified in an
individual Schedule, free and clear of all liens, claims, encumbrances and
security interest whatsoever of a third party.
9.4 Consultant represents the term "Total Business Solution" shall mean the
proposal given to Humana by the team of three companies, Tier Technologies,
Inc., VIASOFT and Sterling Software (Southern) Inc., who formed a business
relationship (Tier Team) to deliver the complete business solution for the
Humana New Billing System and further includes, but is not limited to, the
following documents and representations:
a. Humana New Billing System Request for Proposal (RFP) presented to
respondents on December 5, 1997.
b. RFP Response from the Tier Team, with Tier Technologies accepting
ultimate responsibility for the completion of all proposed activities.
c. Correspondence to Thomas Latham from Ben Stivers at Humana dated
1/16/97.
d. Written responses to the correspondence dated 1/16/97.
e. Project Plan including deliverables by Tier Team.
f. Software sub-License Agreement between Humana Inc. and Consultant,
covering the software from ViaSoft Inc. and Sterling Software Southern
Inc.
g. All documents listed on Schedule 2.0, Attachment A, which are not
included above.
All of the above items which are in document form are attached hereto and
incorporated herein by reference.
Consultant agrees that following the execution of this Master Agreement for
Consulting Services, it shall promptly enter into a one-year Maintenance and
Support Services Agreement. This agreement shall provide that Consultant will
6
<PAGE>
deliver up to $690,000 of warrant and support deliverables as mutually agreed
upon by Consultant and Humana. Consultant agrees that the service levels of
these services shall be substantially similar to those outlined in the attached
draft maintenance and support services agreement hereinafter referred to as
Exhibit D.
9.5 CONSULTANT MAKES NO OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXCEPT
AS PROVIDED HEREIN, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE OR MERCHANTABILITY, NOR ARE ANY SUCH WARRANTIES TO BE IMPLIED
WITH RESPECT TO THE SERVICES FURNISHED HEREUNDER.
ARTICLE 10: TERM
- ---------- ----
10.1 This Agreement shall commence on the date first above written and shall
continue in full force and effect thereafter until terminated in accordance with
the provisions of this Agreement. In such case, Humana agrees to pay Consultant
for all fees and expenses (as described in Article 6 herein) incurred by
Consultant up to the effective date of termination, including reasonable costs
of the unexpired Lease Commitments as well as the reasonable unamortized costs
of improvements, reasonable capital costs and reasonable fixtures to its office
and the development space used and/or leased as required for Consultant to
fulfill its obligations under this Agreement. Lease Commitments shall be limited
to those items listed on Schedule 10.0, Attachment and as added following
contract signing.
Consultant may terminate this Agreement upon satisfactory completion of all work
described in all outstanding Schedules with ninety days prior written notice to
Humana.
10.2 In the event of any material breach of this Agreement by either party
hereto, the other party may (reserving cumulatively all other remedies and
rights under this Agreement and in law and in equity) terminate this Agreement,
in whole or in part, by giving 90 days' prior written notice thereof; provided,
however, that this Agreement shall not terminate at the end of said 90 days'
notice period if the party in breach has cured the breach of which it has been
notified prior to the expiration of said 90 days.
10.3 Termination of this Agreement shall not affect rights and/or obligation of
the parties which arose prior to any such termination (unless otherwise provided
herein) and such rights and/or obligations shall survive any such termination.
ARTICLE 11: SECURITY REGULATIONS
- ---------- --------------------
11.1 Consultant's personnel will be instructed to comply with Humana's physical
and data security regulations applicable to each Humana location. Consultant's
personnel, when deemed appropriate by Humana, will be issued visitor
identification cards and each such card will be surrendered by Consultant's
personnel, upon demand by Humana, upon termination of the Schedule pursuant to
which Consultant's personnel are performing services hereunder or upon
termination of the Agreement.
11.2 Consultant shall coordinate all security activities relating to providing
its personnel with access to Humana's information systems through the designated
security contact at Humana location. It is the responsibility of the
Consultant to notify the Humana when any of its personnel who have been granted
access to Humana facilities, Confidential Information or other systems are
terminated, transferred, begin
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leave of absence, or no longer need access to the Humana Confidential
Information within twenty-four (24) hours of such a change.
ARTICLE 12: WORK POLICY
- ---------- -----------
12.1 Unless otherwise agreed to by the parties, Consultant's personnel, while
working on Humana's premises, shall observe the working hours, working rules and
holiday schedules of Humana applicable to such Humana premises. Humana agrees
to provide reasonable working space, resources and materials which are necessary
for the performance of such services under such Schedule; provided, however,
that such working space, resources and/or materials are agreed upon by Humana in
the Schedule for such services and the use of any such working space, resources
and/or materials is arranged so as to minimize any disruption to Humana's normal
business operations.
ARTICLE 13: TAXES
- ---------- -----
13.1 The charges for services provided hereunder do not include taxes. Humana
agrees to pay any tax for which it is responsible hereunder, which may be levied
on or assessed against Humana directly, and, if any such tax is paid by
Consultant, to reimburse Consultant therefor upon receipt by Humana of proof of
payment acceptable to Humana. If Consultant is required to pay sales or usage
taxes imposed with respect to this Agreement or any license granted hereunder,
Consultant shall collect said taxes from Humana and remit to the proper taxing
authority, and shall include a separate line item for said sales and usage tax
on the invoice to Humana. Any other taxes imposed with respect to this
Agreement or any license granted hereunder shall be the responsibility of
Consultant.
ARTICLE 14: LIABILITY
- ---------- ---------
14.1 EXCEPT FOR CONSULTANT'S OBLIGATIONS AS SET FORTH IN ARTICLE 23, IN NO
EVENT SHALL HUMANA OR CONSULTANT BE LIABLE, ONE TO THE OTHER, FOR INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE
FURNISHING, PERFORMANCE, OR USE OF ANY PRODUCTS OR SERVICES PROVIDED PURSUANT TO
THIS AGREEMENT.
ARTICLE 15: ASSIGNMENT
- ---------- ----------
15.1 This Agreement shall be binding upon the parties' respective successor and
permitted assigns. Neither party may assign this Agreement, and/or any of its
rights and obligations hereunder except to a successor corporation through
merger or consolidation, without the prior written consent of the other party,
such consent not to be unreasonably withheld, and any such attempted assignment
shall be void. Subject to the foregoing, all of the terms, conditions,
covenants, and agreements contained herein shall inure to the benefit of, and be
binding upon, any such successor corporation and any permitted assignees of the
respective parties hereto. It is further understood and agreed that consent by
either part to such assignment in one instance shall not constitute consent by
the part to any other assignment.
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ARTICLE 16: EXCUSABLE DELAY
- ---------- ---------------
16.1 In no event shall either party be liable to the other for any delay or
failure to perform hereunder, which delay or failure to perform is due to causes
beyond the control of said party, including, but not limited to, acts of God;
acts of the public enemy; acts of the United States of America, or any State,
territory or political subdivision thereof or of the District of Columbia;
fires; floods; epidemics; quarantine restrictions; strikes or freight embargoes.
16.1.1 Notwithstanding the foregoing, in every case the delay or failure
to perform must be beyond the control and without the fault or negligence of the
party claiming excusable delay.
16.2 Performance times under this Agreement shall be considered extended for a
period of time equivalent to the time lost because of any delay which is
excusable hereunder; provided, however, that, if any such delay shall, in the
aggregate, last for a period of more than 30 days, the party not relying on the
excusable delay, at its option, may terminate this Agreement as it relates to
the Schedule involved.
ARTICLE 17: ADVERTISING OR PUBLICITY
- ---------- ------------------------
17.1 Neither Consultant nor Humana shall use the name of the other in any
advertising or publicity releases without securing the prior written approval of
the other. Consultant shall not use Humana associates or Humana name or Humana
logo in any advertising or reference or marketing material in any way and shall
not use Humana name in any way for any reference, unless written permission is
received by Consultant from Humana in each circumstance Humana name, reference
or logo is used by Consultant. In the event either party breaches any of its
obligations under this Article 17, the breaching party will indemnify and hold
harmless the non-breaching party from and against any and all harm, injury,
damages, costs and expenses incurred by the non-breaching party arising out of
the said breach. In addition, the non-breaching party will be entitled to
obtain injunctive relief against the breaching party.
ARTICLE 18: NOTICES
- ---------- -------
18.1 Any notices or other communications required or permitted to be given or
delivered under this Agreement shall be in writing (unless otherwise
specifically provided herein) and shall be sufficiently given if delivered
personally or mailed by certified or registered, postage prepaid, return receipt
requested, to:
For Humana: Humana Inc.
- ---------- 500 West Main Street
Louisville, Kentucky 40202
Attention: Director of Purchasing
For Consultant: Tier Technologies, Inc.
- -------------- James L. Bildner
Chairman and CEO
Suite 250
1350 Treat Blvd
Walnut Creek, CA 94596
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Copy to: Tier Technologies, Inc.
- ------- George F. Ross
Sr. V.P. and CEO
Suite 850
1350 Treat Blvd
Walnut Creek, CA 94596
18.2 Any such notice or other communication shall be deemed to be given as of
the date it is personally delivered or when placed in the mails in the manner
specified. Neither party shall be allowed to refuse acceptance of delivery.
ARTICLE 19: GOVERNING LAW
- ---------- -------------
19.1 The validity of this Agreement, the construction of the terms, and the
interpretation of the rights and duties of the parties shall be governed by the
laws of the Commonwealth of Kentucky, without giving effect to its conflict of
law principles. The parties agree that the courts of Jefferson County,
Kentucky, shall be the exclusive courts of jurisdiction and venue for any
litigation, special proceeding or other proceeding as between the parties that
may be brought, or arise out of, or in connection with, or by reason of this
Agreement.
ARTICLE 20: MODIFICATIONS AND AMENDMENTS
- ---------- ----------------------------
20.1 No modification, amendment, supplement to or waiver of this Agreement or
any of its provisions shall be binding upon the parties hereto unless made in
writing and duly signed by both parties.
20.2 A failure or delay of either party to this Agreement to enforce at any
time any of the provisions of this Agreement, or to exercise any option which is
herein provided, or to require at any time performance of any of the provisions
hereof, shall in no way be construed to be a waiver of such provision of this
Agreement or shall not excuse the other party's performance of such, nor affect
any rights at a later time to enforce the provision.
ARTICLE 21: SEVERABILITY
- ---------- ------------
21.1 In the event any one or more of the provisions of the Agreement shall for
any reason be held to be invalid, illegal or unenforceable, the remaining
provisions of this Agreement shall be unimpaired, and the invalid, illegal or
unenforceable provision shall be replaced by a mutually acceptable provision,
which, being valid, legal and enforceable, comes closest to the intention of the
parties underlying the invalid, illegal or unenforceable provision. If any
provision of this Agreement is held to be excessively broad as to duration,
geographical scope, activity or subject, it is to be construed by limiting and
reducing it, so as to be enforceable to the extent compatible with applicable
law. If any provision of this Agreement or the application of any such
provision shall be held by a tribunal of competent jurisdiction to be contrary
to law, the remaining previsions of this Agreement shall continue in full force
and effect.
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ARTICLE 22: ENTIRETY OF AGREEMENT
- ---------- ---------------------
22.1 The terms and conditions of any and all Exhibits, Schedules and
attachments to this Agreement are incorporated herein by this reference and
shall constitute part of this Agreement as if fully set forth herein. This
Agreement, together with all Exhibits, Schedules, and attachments hereto,
constitutes the entire Agreement between the parties and supersedes all previous
agreements, promises, representations, whether written or oral, except as
provided in Article 9.4 herein, between the parties with respect to the subject
matter hereof.
ARTICLE 23: INSURANCE
- ---------- ---------
23.1 Consultant shall be liable for and shall indemnify and hold Humana
harmless against any loss or damage arising from the fault or negligence of
Consultant, its officers, employees, agents, and representatives. Humana
shall be liable for and shall indemnify and hold Consultant harmless against any
loss or damage arising from the fault or negligence of Humana, its officers,
employees, agents and representatives. Consultant agrees to carry and to
provide certificates of insurance with Humana shown as a certificate holder of
the following insurance coverage which are listed on Schedule 23.0, Attachment A
which attached hereto and incorporated herein by reference.
Such above insurance shall not be canceled or the coverage thereunder
reduced. Humana shall be named as an 'additional insured' on all insurance
policies, except worker's compensation. Such insurance shall be primary and
noncontributory to any insurance maintained by Humana. If any Consultant to be
assigned by Humana is a subcontractor of Consultant, Consultant shall furnish
Humana, upon request, with evidence that Consultant's insurance covers such
Consultant or that such subcontractor of Consultant maintains the same types and
level of insurance as that required of Consultant hereunder.
IN WITNESS HEREOF, the parties hereto, each acting under due and proper
authority, have executed this Agreement as of the day, month and year first
written below.
HUMANA INC. TIER TECHNOLOGIES, INC.
By: /s/ George W. Vieth By: /s/ James L. Bildner
------------------------------ ------------------------------
(Authorized Signature) (Authorized Signature)
Name: George W. Vieth Name: James L. Bildner
---------------------------- ----------------------------
(Type or Print) (Type or Print)
Title: Vice President Strategy & Systems Title: Chairman & CEO
--------------------------- ----------------------------
Date: 2-16-98 Date: 2/12/98
--------------------------- ----------------------------
11
<PAGE>
EXHIBIT 10.37
FULL RECOURSE
PROMISSORY NOTE
$85,000.00 Feb. 10, 1998
Walnut Creek, California
FOR VALUE RECEIVED, George K. Ross, an individual ("MAKER") promises to
pay Tier Technologies, Inc., a California corporation ("HOLDER"), or order, at
1350 Treat Boulevard, Suite 250, Walnut Creek, California or such other place as
Holder may from time to time designate, in lawful money of the United States,
the principal sum of eighty-five thousand dollars ($85,000.00) plus interest
thereon from the date hereof until paid in full, as set forth below.
1. Interest. Interest on the principal sum of this Note shall accrue at
--------
the rate of 5.59% per annum, compounded annually, based on a 365 day year and
the actual number of days elapsed.
2. Payments/Forgiveness. The entire principal sum and all accrued but
--------------------
unpaid interest and any other sums payable hereunder shall be due and payable in
full upon the earliest occurrence of either of the following events (a "Trigger
Event"): (1) termination of Maker's employment with the Holder for any reason or
(2) the sale of the Property purchased with the proceeds of this Note as
described in Section 4 below; provided, however, that the entire principal sum
advanced and all accrued but unpaid interest shall be forgiven by Holder on July
31, 2001 if no Trigger Event has sooner occurred.
3. Prepayment. This Note may be prepaid in whole or in part, at any
----------
time, without penalty or premium. Partial prepayments shall be applied first to
accrued interest, then to other charges due with respect to this Note, and then
to then-unpaid principal balance.
4. Security. Maker represents that he intends to use the proceeds of
--------
this Note to purchase residential property located in San Francisco, California
(the "Property"). Upon purchase of such Property, notice shall promptly be
delivered to Holder by Maker and repayment of this Note shall be secured by a
second deed of trust on the Property (the "Deed of Trust"). Maker shall execute
and deliver to Holder all documents, instruments or agreements required by
Holder in connection with the creation and recordation of the Deed of Trust.
5. Default and Remedies.
--------------------
a. Default. Maker will be in default under this Note if (i) Maker
-------
fails to make a payment of principal and/or interest hereunder when due, (ii)
Maker fails to deliver the Deed of Trust as soon as is practicable after
purchase of the Property, or (iii) Maker breaches any other covenant or
agreement under this Note or under the Deed of Trust.
b. Remedies. Upon Maker's default, Holder may (i) upon written notice
--------
to Maker, declare the entire principal sum and all accrued and unpaid interest
hereunder immediately due and payable and (ii) exercise any and all of the
remedies provided under this Note, the Deed of Trust or at law.
<PAGE>
6. Waivers. Maker, and any endorsers or guarantors hereof, severally
-------
waive diligence, presentment, protest and demand and also notice of dishonor of
this Note, and expressly agrees that this Note, or any payment hereunder, may
be extended from time to time without notice, all without in any way affecting
the liability of Maker or any endorsers or guarantors hereof. No extension of
time for the payment of this Note, or any installment hereof, agreed to by
Holder with any person now or hereafter liable for the payment of this Note,
shall affect the original liability of Maker under this Note, even if Maker is
not a party to such agreement. Holder may waive its right to require performance
of or compliance with any term, covenant or condition of this Note only by
express written waiver.
7. Miscellaneous.
-------------
a. Maker shall pay all costs, including, without limitation,
reasonable attorneys' fees and costs incurred by Holder in collecting the sums
due hereunder, whether or not any legal action is actually filed, litigated or
prosecuted to judgment or award. In the event of any action or legal
proceeding concerning this Note or the enforcement of any rights hereunder,
Holder shall be entitled to, in addition to any other relief to which the Holder
may be entitled, all legal and court costs and expenses, including reasonable
attorneys' fees, incurred by Holder in connection with such action.
b. This Note may be modified only by a written agreement executed by
Maker and Holder.
c. This Note shall be governed by California law.
d. The terms of this Note shall inure to the benefit of and bind
Maker and Holder and their respective heirs, legal representatives and
successors and assigns.
e. Time is of the essence with respect to all matters set forth in
this Note.
f. If this Note is destroyed, lost or stolen, Maker will deliver a
new Note to Holder on the same terms and conditions as this Note, with a
notation of the unpaid principal and accrued and unpaid interest in
substitution of the prior Note. Holder shall furnish to Maker reasonable
evidence that the Note was destroyed, lost or stolen and any security or
indemnity that may be reasonably required by Maker in connection with the
replacement of this Note.
IN WITNESS WHEREOF, Maker has executed this Note as of the date and year
first above written.
Maker: /s/ George K. Ross
_____________________________
George K. Ross
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report pertaining to Tier Technologies, Inc. dated October 6,
1997 included in the Registration Statement (Form S-1) and related Prospectus
of Tier Technologies, Inc. for the registration of 3,000,000 shares of its
Class B common stock.
/s/ Ernst & Young LLP
Walnut Creek, California
May 6, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report pertaining to Albanycrest Limited dated September 30,
1997 included in the Registration Statement (Form S-1) and related Prospectus
of Tier Technologies, Inc. for the registration of 3,000,000 shares of its
Class B common stock.
/s/ Ernst & Young
Reading, England
May 6, 1998
<PAGE>
EXHIBIT 23.4
CONSENT TO ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report pertaining to Sancha Computer Group Pty Ltd dated April
29, 1998, included in the Registration Statement (Form S-1) and related
Prospectus of Tier Technologies, Inc. for the registration of 3,000,000 shares
of its Class B common stock.
/s/ Ernst & Young
Sydney, Australia
May 6, 1998
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