<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 23, 1998 (OCTOBER 23,
1998)
TIER TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C> <C>
CALIFORNIA 000-23195 94-3145844
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
1350 TREAT BOULEVARD, SUITE 250
WALNUT CREEK, CALIFORNIA 94596
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES) (ZIP CODE)
(925) 937-3950
(REGISTRANT'S TELEPHONE
NUMBER,
INCLUDING AREA CODE)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
On October 13, 1998, Tier Technologies, Inc. (the "Company") announced that
it would restate its financial statements for the nine-month fiscal year ended
September 30, 1997 and for the two subsequent quarters ended December 31, 1997
and March 31, 1998 to reflect changes in accounting for certain payments made
in connection with two business combinations. Such payments will be treated as
compensation expense rather than purchase price.
The Company has now issued restated financial statements for the nine-month
fiscal year ended September 30, 1997, which have been audited by the Company's
former independent auditors, Ernst & Young LLP, and unaudited restated
financial statements for the six months ended March 31, 1997 and March 31,
1998. A copy of the audited financial statements referred to above, together
with the report of Ernst & Young LLP thereon, is attached to this current
report on Form 8-K as Exhibit 99.1. The unaudited restated financial
statements referred to above are included in the Company's amended filings on
Forms 10-Q dated October 21, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Restated Financial Data Schedule
99.1 Restated financial statements for the fiscal year ended September 30,
1997 and auditor's report thereon
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TIER TECHNOLOGIES, INC.
By: /s/ George K. Ross
----------------------------------
George K. Ross
Executive Vice President and
Chief Financial Officer
Date: October 23, 1998
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Restated Financial Data Schedule
99.1 Restated financial statements for the fiscal year ended September
30, 1997 and auditor's report thereon
</TABLE>
3
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the Employee Stock Purchase Plan and Amended and
Restated 1996 Equity Incentive Plan of Tier Technologies, Inc. of our report
dated October 6, 1997 with respect to the consolidated financial statements of
Tier Technologies, Inc. included in response to Item 5 of Form 8-K of Tier
Technologies, Inc. filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Walnut Creek, California
October 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 106,435
<SECURITIES> 0
<RECEIVABLES> 5,955,809
<ALLOWANCES> 50,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,118,318
<PP&E> 1,053,996
<DEPRECIATION> 280,330
<TOTAL-ASSETS> 10,495,619
<CURRENT-LIABILITIES> 4,756,866
<BONDS> 0
0
1,892,223
<COMMON> 2,948,852
<OTHER-SE> (2,253,430)
<TOTAL-LIABILITY-AND-EQUITY> 10,495,619
<SALES> 0
<TOTAL-REVENUES> 22,478,643
<CGS> 14,916,846
<TOTAL-COSTS> 6,702,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,299
<INCOME-PRETAX> 501,604
<INCOME-TAX> 201,390
<INCOME-CONTINUING> 300,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,214
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
<PAGE>
EXHIBIT 99.1
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 Flow........................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
</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 MARCH 31,
1996 30, 1997 1998
------------ ----------- -----------
(RESTATED) (UNAUDITED)
(RESTATED)
<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
and $50,000 in 1997 and $100,000 in
1998................................. 2,978,119 5,905,809 9,224,369
Income taxes receivable............... 26,750 820,295 --
Prepaid expenses and other current
assets............................... 73,018 285,779 498,550
---------- ----------- -----------
Total current assets.................... 3,383,433 7,118,318 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 1,300,328 6,404,953
Other assets............................ 64,215 68,060 635,153
---------- ----------- -----------
Total assets........................ $4,132,665 $10,495,619 $34,510,868
========== =========== ===========
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 1,568,196
Income taxes payable.................. -- -- 271,944
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 4,655,741
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................... 336,631 179,107 40,147
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, 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 1,344,185 2,337,895
---------- ----------- -----------
Total shareholders' equity.......... 1,027,953 3,891,632 29,626,948
---------- ----------- -----------
Total liabilities and shareholders'
equity............................. $4,132,665 $10,495,619 $34,510,868
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, MARCH 31,
----------------------- ----------------------- -----------------------
1995 1996 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (RESTATED) (UNAUDITED) (UNAUDITED)
(RESTATED) (RESTATED)
<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
Compensation charge
related to business
combinations.......... -- -- -- 469,422 50,000 552,134
Depreciation and
amortization.......... 45,018 80,350 55,546 258,504 83,318 369,045
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.. 1,074,916 951,276 714,312 600,474 518,539 1,345,343
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.................. 1,013,847 877,517 663,909 501,604 466,899 1,670,103
Provision for income
taxes.................. 570,336 351,007 265,563 201,390 186,298 676,393
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 443,511 $ 526,510 $ 398,346 $ 300,214 $ 280,601 $ 993,710
=========== =========== =========== =========== =========== ===========
Basic net income per
share.................. $ 0.04 $ 0.11 $ 0.08 $ 0.06 $ 0.06 $ 0.13
=========== =========== =========== =========== =========== ===========
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 $ 0.05 $ 0.06 $ 0.11
=========== =========== =========== =========== =========== ===========
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 AND 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
-------- ----------- ---------- ---------- ---------- ----------- ------------ ----------- ----------
(RESTATED)
<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...... -- -- -- -- -- -- -- -- 300,214
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) 1,344,185
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) (1,829,223) (645,000) (11,822) 1,065,953 1,904,045 -- -- --
Offering
proceeds, net of
issuance cost 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)..... -- -- -- -- -- -- -- -- 993,710
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 $2,337,895
======== =========== ========== ========== ========== =========== =========== ======== ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
(RESTATED)
<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...... 300,214
Foreign currency
translation
adjustment...... (40,198)
-------------
Balance at
September 30,
1997............. 3,891,632
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 cost 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)..... 993,710
Foreign currency
translation
adjustment
(unaudited)..... (56,144)
-------------
Balance as of
March 31, 1998
(unaudited)...... $29,626,948
=============
</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)
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 443,511 $ 526,510 $ 398,346 $ 300,214 $ 280,601 $ 993,710
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities:
Depreciation and
amortization.......... 45,018 80,350 55,547 258,504 82,430 355,355
Provision for doubtful
accounts.............. -- -- -- 50,000 62,836 50,000
Deferred income taxes.. 570,336 (94,042) -- (144,071) (113,137) (288,108)
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) (793,545) (726,938) --
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 2,049,364 1,388,500
Income taxes payable... -- -- -- -- -- 1,092,239
Deferred income........ (20,972) 41,438 -- (20,547) -- 47,329
----------- --------- --------- ----------- ----------- ------------
Net cash (used in)
provided by operating
activities............. (177,185) 490,979 248,768 (2,055,722) (1,044,452) (347,587)
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) -- (914,964) (1,166,396) (5,014,989)
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) (2,496,537) (1,337,783) (14,184,580)
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
issuance 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 $ -- $ 530,623 $ 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. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement
The accompanying restated consolidated balance sheets as of September 30,
1997, and March 31, 1998, and the accompanying restated consolidated
statements of income for the nine months ended September 30, 1997 and for the
six months ended March 31, 1997 and March 31, 1998, have been restated to
treat as compensation expense certain payments made in connection with two
business combinations that were previously treated as purchase price. The
effect of these restatements is to reduce previously reported net income for
the nine months ended September 30, 1997, the six months ended March 31, 1997
and the six months ended March 31, 1998 by $271,000 (or $0.05 diluted net
income per share), $30,000 (no effect on diluted net income per share) and
$297,000 (or $0.03 diluted net income per share), respectively, and to
decrease previously reported shareholders' equity at September 30, 1997 and
March 31, 1998 by $271,000 and $568,000, respectively. These restatements do
not affect previously reported cash flows and future amortization expenses
related to these acquisitions will be based on the reduced and restated
purchase price.
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.
F-7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Interim Financial Information
The interim financial statements for the nine months ending 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-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
for one client accounted for 11% and 16% of total accounts receivables 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 and
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 Evaluations 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 ending 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.
F-8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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, as previously reported in the Company's
Form 8-K dated March 9, 1998.
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
F-9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
2. FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with in significant 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
---------- --------- --------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net income............ $ 443,511 $ 526,510 $ 398,346 $ 300,214 $ 280,601 $ 993,710
========== ========= ========= ========= ========= =========
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 $ 0.06 $ 0.06 $ 0.13
========== ========= ========= ========= ========= =========
Diluted net income per
share.................. $ 0.04 $ 0.10 $ 0.07 $ 0.05 $ 0.06 $ 0.11
========== ========= ========= ========= ========= =========
</TABLE>
F-10
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
The costs 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
------------ -------------
(RESTATED)
<S> <C> <C>
Acquired client contracts and client lists less
accumulated amortization of $820 in 1996 and
$116,466 in 1997................................ $304,657 $1,083,043
Acquired workforce, less accumulated amortization
of $200 in 1996 and $17,951 in 1997............. 43,176 217,285
-------- ----------
$347,833 $1,300,328
======== ==========
The components of other assets are as follows:
<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 are
limited to the lesser of $3,750,000 or 85% of eligible accounts receivable and
are 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.
F-11
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BANK LINES OF CREDIT--(CONTINUED)
The Company also had an equipment line of credit agreement with the same
bank. Under the agreement, the Company may borrow up to $399,500 through May
31, 1998 at variable interest 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 are due monthly through maturity.
Certain executive officers have 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>
<S> <C>
YEARS ENDING SEPTEMBER 30,
--------------------------
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 account 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>
F-12
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<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
ending 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 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)
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 provision. 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 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.
F-14
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHAREHOLDERS' EQUITY--(CONTINUED)
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES 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 are as follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(RESTATED)
<S> <C> <C>
Net income, as reported........................... $526,510 $300,214
Net income, pro forma............................. 524,710 165,260
Basic net income per share, as reported........... 0.11 0.06
Basic net income per share, pro forma............. 0.11 0.03
Diluted net income per share, as reported......... 0.10 0.05
Diluted net income per share, pro forma........... 0.10 0.03
</TABLE>
F-15
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, SEPTEMBER 30,
1996 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 totaled $784,268 and was accounted for
as a purchase. Intangible assets are being amortized over a six-year period.
Based on the renewal of a significant client contract, a contingent payment to
the former shareholders of $150,000 was expensed during the nine months ended
September 30, 1997 as a compensation charge made in connection with the
business combination during the year. An additional $150,000 is payable in
October 1998 by the Company upon the second year's renewal of the client
contract.
On January 2, 1997, the Company acquired certain assets and liabilities of
Five Points Consulting, LLC ("Five Points") 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)
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 $577,750 and the transaction was
accounted for as a purchase. Intangible assets recorded are being amortized
over a six-year period. During the nine months ended September 30, 1997 and
six months ended March 31, 1998, $319,422 and $477,134, respectively, of
compensation expense was recorded with respect to certain payments paid to
former shareholders based on performance criteria and continued employment.
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 Encore had been
purchased by the Company at its inception on April 15, 1996, and Albanycrest
had been purchased by the Company at its inception on November 1, 1996, and
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 adjustments for income taxes which would have been recorded if Encore
had not been an S corporation (based on tax laws in effect during the
applicable period) and 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>
<CAPTION>
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenues............................ $18,217,583 $29,105,225 $24,883,520
Net income.......................... 761,447 844,869 1,356,609
Net income per share................ 0.15 0.15 0.18
Diluted net income per share........ 0.14 0.14 0.15
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and are not intended to be a projection of future results.
F-17
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 totalling $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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(RESTATED)
<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 (loss) from operations:
United States........................ $ 1,074,916 $ 951,276 $ 456,779
Australia............................ -- -- 205,890
United Kingdom....................... -- -- (62,195)
----------- ----------- -----------
Total.................................. $ 1,074,916 $ 951,276 $ 600,474
=========== =========== ===========
Identifiable assets:
United States........................ $ 2,315,833 $ 4,132,665 $ 8,129,214
Australia............................ -- -- 1,257,348
United Kingdom....................... -- -- 1,109,057
----------- ----------- -----------
Total.................................. $ 2,315,833 $ 4,132,665 $10,495,619
=========== =========== ===========
13. INCOME TAXES
The domestic and foreign components of income before income taxes are as
follows:
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(RESTATED)
<S> <C> <C> <C>
United States........................ $ 1,013,847 $ 877,517 $ 356,738
Foreign.............................. -- -- 144,866
----------- ----------- -----------
Total............................... $ 1,013,847 $ 877,517 $ 501,604
=========== =========== ===========
</TABLE>
F-18
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
------------ -------------
(RESTATED)
<S> <C> <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................................ -- 75,482
Accounts receivable allowance.............. -- 20,000
-------- --------
Total deferred tax assets.................... 57,473 201,869
-------- -------- ---
Net deferred tax liabilities................. $476,294 $332,223
======== ========
</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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(RESTATED)
<S> <C> <C> <C>
Current:
Federal............................ $ -- $ 373,151 $ 144,394
State.............................. -- 71,898 46,785
Foreign............................ -- -- 154,282
----------- ----------- ---------
-- 445,049 345,461
Deferred (benefit):
Federal............................ 480,021 (74,646) (122,575)
State.............................. 90,315 (19,396) (21,496)
----------- ----------- ---------
570,336 (94,042) (144,071)
----------- ----------- ---------
Total provision for income taxes..... $ 570,336 $ 351,007 $ 201,390
=========== =========== =========
</TABLE>
F-19
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Effective April 1, 1998, the Company acquired certain assets and liabilities
of Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which
provided IT consulting services to develop and implement call center
applications. The cost of the acquisition totaled approximately $788,000 which
was paid in cash. The SFC acquisition was accounted for as a purchase.
Additional contingent payments may be paid based on the achievement of future
performance targets and the continued employment of certain key
employee/sellers with the Company. These payments will be charged as
compensation expense at the time the payments are deemed probable to be made.
In addition, 48,768 shares of the Company's Class B common stock, valued as of
the date of the acquisition at approximately $701,000, were issued and are
held in escrow and will be released over three years provided that the key
employee/sellers are employed by the Company on the release dates. The value
of these shares will be reflected as deferred compensation on the balance
sheet and amortized over the three year vesting period.
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
