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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK
ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-3145844
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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1350 TREAT BOULEVARD, SUITE 250
WALNUT CREEK, CALIFORNIA 94596
(925) 937-3950
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class B Common
Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $143,623,000 on December 16, 1998 based on the
last reported sale price of the registrant's Class B Common Stock on the
Nasdaq National Market on such date. As of December 16, 1998, the number of
shares outstanding of the registrant's Class A Common Stock was 1,639,762 and
the number of shares outstanding of the registrant's Class B Common Stock was
10,426,615.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended September
30, 1998. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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TIER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business....................................................... 3
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 12
Item 6. Selected Financial Data........................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation........................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26
Item 8. Financial Statements and Supplementary Data.................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 27
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PART III
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Item 10. Directors and Executive Officers of the Registrant............. 27
Item 11. Executive Compensation......................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management. 28
Item 13. Certain Relationships and Related Transactions................. 28
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 29
SIGNATURES
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Certain statements contained in this report, including statements regarding
the development of the Company's services, markets and future demand for the
Company's services, and other statements regarding matters that are not
historical facts, are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995). When used in this report, the words
"believes", "expects", "anticipates", "intends", "estimates", "shows", "will
likely" and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements include risks and uncertainties;
consequently, actual results may differ materially from those expressed or
implied thereby. Factors that could cause actual results to differ materially
include, but are not limited to, those factors listed in the "Factors That May
Affect Future Results" section, as set forth beginning on page 20 of this
report. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements or factors to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
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PART I
ITEM 1. BUSINESS
GENERAL
Tier Technologies, Inc. ("Tier" or the "Company") provides information
technology ("IT") consulting, application development and software engineering
services that facilitate the transformation of clients' enterprise-wide legacy
systems and applications to leading edge technologies. Tier provides IT
migration solutions by applying the Tier Migration SolutionSM, a methodology
by which the Company evaluates or "scores" the efficacy of a client's existing
imbedded IT capital against its business goals. Tier has branded its Migration
Solution around such themes as: "How do you fix the machine without turning it
off?"SM and "Taking the risk out of change."SM Through offices located in the
United States, Australia and the United Kingdom, the Company works closely
with its Fortune 1000, government and other clients to determine, evaluate and
implement an IT strategy that allows it to rapidly adopt, deploy and transfer
emerging technologies while preserving viable elements of the client's legacy
systems. Tier combines significant understanding of enterprise-wide IT systems
with expertise in vertical industries such as healthcare, financial services
and government services to provide clients with rapid and flexible migration
solutions. By helping clients maintain their core IT systems, Tier believes
that it provides high value, cost-effective, flexible solutions that minimize
the risks associated with migration to new technologies.
Tier was incorporated in the State of California in 1991. 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. From
December 1996 through September 30, 1998, the Company made eight acquisitions
for a total purchase price of approximately $11 million in cash and shares of
Class B Common Stock, excluding future contingent payments. These acquisitions
helped the Company to expand its operations in the United States, to establish
its operations in Australia and the United Kingdom, to broaden the Company's
client bases and technical expertise and to supplement its human resources.
See Note 7 to Notes to Consolidated Financial Statements.
BACKGROUND
Today, large corporations and government agencies often face a number of
challenges, including a rapidly changing operating environment, intense
competitive pressures and accelerating technological change. To adapt to
change and remain competitive, these organizations have sought to harness
their intellectual and informational capital by investing in advanced IT
systems. As these organizations have become increasingly dependent on more
complex IT systems, their ability to integrate advanced technologies in a
rapid, reliable and cost-effective manner has become critical to their
success.
The migration of enterprise-wide IT systems, which is the process of
incrementally supplementing and replacing legacy IT system components to
integrate advanced technologies, has become a key competitive strategy. This
process enables an organization to preserve the imbedded capital in its
installed base of IT systems, to obtain the benefits of technological
innovations and to mitigate some of the risks, costs and delays inherent in
full system replacements. Migration provides organizations with an important
alternative to the traditional limits of a "buy versus build" analysis.
Several forces are driving the increased use of rapid migration strategies. As
a result of the increasing pace of technological change along with rapid
changes in competitive and business environments, the useful lives of new
technologies have tended to shorten dramatically. To capture more of the
benefits of these technologies, IT projects must be designed and completed
relatively quickly or they risk being out of date upon completion.
Organizations are re-using existing IT components both to preserve the
significant imbedded capital represented by those systems and to achieve new
functionality. For example, mainframe computers are now being used as high
volume servers in distributed computing environments because of their data
storage capacity and transaction processing speeds. As the length and scope of
an IT project expands, so too does the likelihood that the project will fail
to satisfy time, cost or functionality expectations. Consequently,
organizations seek high-impact IT solutions that can be implemented quickly.
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Given the complex and mission-critical nature of IT systems, many
organizations choose to outsource the development and eventual migration of
these systems to new technologies. The Company believes that successful IT
service providers will be characterized by:
. significant experience in the migration of enterprise-wide IT systems;
. an ability to adopt, deploy and transfer relevant, emerging technologies
rapidly and reliably;
. an understanding of the client's industry, business and existing IT
environments;
. successful management of the risks inherent in large system projects; and
. the ability to deliver services on a global basis.
THE TIER MIGRATION SOLUTION
The Tier Migration Solution is generally applied to all of the Company's
projects. Initially, the Company assesses a client's existing business
processes and clearly defines the scope of the project, including a
determination of the client's expectations for quantifiable business
improvement. The Company then analyzes the client's existing IT system to
determine which areas would benefit the most from the application of new
technologies. When this assessment is completed, Tier develops a specific IT
strategy that uses a system architecture consistent with the client's existing
environment and takes advantage of new technologies. Tier then implements the
recommended IT strategy. Throughout all phases, the Company evaluates the risks
inherent in the project. If the Company detects areas of concern, it
investigates the matter at an early stage and takes appropriate corrective
action to mitigate potential costs and delays. The Tier Migration Solution
seeks to "take the risk out of change."SM
STRATEGY
The Company seeks to become the leading provider of comprehensive IT
migration solutions to Fortune 1000 companies and large government entities.
The Company's strategy includes the following elements:
Concentrate on Migration Opportunities. The Company focuses on the migration
of enterprise-wide IT systems to leading edge technologies for Fortune 1000
companies and large government entities. The Company maintains proficiency in
relevant mainstream and legacy technologies, while also developing expertise in
high demand, emerging technologies that are expected to facilitate the
Company's development and deployment of IT solutions. This strategy allows Tier
to function effectively in open architecture IT environments and to rapidly
adopt, deploy and transfer emerging technologies within existing IT systems.
Pursue Strategic Acquisitions. Tier considers potential acquisitions which
may expand the Company's presence in key geographic or vertical marketplaces,
supplement the Company's technical scope or industry expertise or allow it to
acquire additional human resources or strategic client relationships. Given the
highly fragmented nature of the IT services marketplace, the Company believes
significant acquisition opportunities exist. From December 1996 through
September 30, 1998, Tier has acquired eight IT service providers in order to
add domestic and international locations, broaden the Company's technical
expertise and expand its professional resources.
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, insurance 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. The Company believes these
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relationships provide a number of competitive advantages, including (i)
enabling the Company to broaden its client base; (ii) allowing the Company to
project its staffing needs and more fully maximize employee utilization; and
(iii) maintaining the Company's technological leadership through the
deployment of leading edge applications.
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?"SM and "Taking the risk
out of change."SM 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 (1)
offers competitive compensation and benefits including stock option and other
stock-based awards; (2) has developed a career advancement program that offers
employees career enrichment opportunities, individualized up-training and
cross-training programs, on-the-job learning opportunities and annual training
allowances; and (3) has developed centralized work sites or "application
development centers" where consultants work on projects for clients located
throughout the country, thus reducing the need for travel by consultants.
SERVICES AND METHODOLOGY
The Company provides IT consulting, application development and software
engineering services that facilitate the migration of its clients' existing IT
systems to leading edge technologies. These services are typically provided on
an enterprise-wide basis. Tier's methodology for providing migration services
combines the ability to evaluate or "score" the efficacy of the client's
imbedded IT capital in comparison to its stated business goals, with a risk
assessment process to manage and benchmark projects on an on-going basis. Tier
maintains a high level of vertical market and industry expertise. As a result,
the Company is able to understand the environment and business rules in which
its clients operate. This approach allows Tier to retain, reuse, repeat and
distribute its experiential knowledge throughout the Company and to achieve
significant improvements in cost, quality and time to deployment on client
projects.
Services
The Company seeks to rapidly implement cost-effective IT solutions through a
flexible combination of one or more of the following services:
Repeatable Transfer Solution. In some situations, the Company identifies
existing, transferable IT applications or components that satisfy a portion of
the client's needs. Tier addresses the client's remaining functional elements
through either custom built applications or packaged software. Transfer
solutions greatly shorten the development cycle by providing a working system
as the starting point for the IT solution. For example, between government
agencies, the Company has successfully transferred components of IT systems
that it has built to solve complex child support and welfare requirements.
Custom Build. The Company often custom builds an IT solution or component
for the client. Even in a custom build solution, the Company's consultants
strive to re-use components of a client's legacy environment and to extract,
update, and forward engineer business rules from legacy programs. The Company
has developed custom
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applications in several vertical markets, including healthcare, financial
services, government services and telecommunications, using advanced languages
such as Java, Forte, PowerBuilder and COOL:Gen. The Company's technical
professionals have implemented custom applications on a variety of platforms
and working environments, such as mainframe, Windows NT, UNIX and other
distributed platforms, using a number of databases, including Oracle, Sybase,
DB2, SQL Server and Informix. Tier has also developed Internet/intranet, data
warehouse, web-enabled legacy and e-commerce applications, as well as
applications in the more established mainframe and client/server environments.
Packaged Software. When the most appropriate solution for a client includes
a commercially available application package, the Company evaluates,
recommends, implements and integrates applications software. The Company has
developed expertise with commercial applications in areas such as operations
resource management, e-commerce and procurement.
Methodology
The Company has developed the Tier Migration Solution over numerous client
engagements and relies on this methodology to provide services in various
industries and technical environments. The four-phase scaleable, repeatable
and leverageable methodology is modular in design and the various phases can
be tailored depending on the scope of a client's needs.
[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 usually a business requirements and scope
document that provides a clear charter for the project and a risk management
assessment map to measure project performance throughout the project's life
cycle.
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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. Generally, Tier conducts an in-
depth analysis of the existing IT application portfolio using a qualitative
method of "scoring" to determine which areas would benefit most from the
application of new technologies. The resulting matrix correlates the client's
business functions with the most suitable IT solution. Once agreed to by the
client, the application scoring matrix becomes a roadmap to assist in
determining whether to replace or re-use components of the client's existing
IT system.
Phase III--IT Strategy, Architecture and Prototyping. The Company develops a
specific IT migration strategy to address the development, transfer or
acquisition of new IT solutions and their integration into the client's
existing business environment. Tier may model critical business rules to test
the underlying assumptions of the IT migration solution and often prepares an
early look-and-feel prototype to allow the user to visualize the resulting
integrated IT environment. Ultimately, Tier provides clients with a defined IT
architecture designed to meet the client's expectations specified at the
beginning of the engagement.
Phase IV--Information Technology Implementation. Tier implements the IT
solution. The Company employs rapid IT processes and incorporates the
Company's collective experience in managing enterprise-wide IT projects in
areas such as packaged software implementation, custom software development,
quality assurance and testing, systems integration, client testing and
acceptance, implementation and help desk support. The output of this final
phase is an implemented IT solution set. Following installation, the Company
and the client may conduct a post-project assessment to evaluate the
effectiveness of the new IT solution against the business improvement goals
established in Phase I. In addition, the Company often provides post-
implementation services, such as on-going software maintenance and
enhancements, help desk support and training of end users and in-house IT
staff.
Across all four phases of its methodology, Tier employs a comprehensive risk
management process. The Company believes that its emphasis on risk management
is a critical component of its methodology, particularly in a market that
increasingly demands service providers to undertake large scale projects while
maintaining a high success rate. Using the risk management assessment map
developed in Phase I of Tier's Migration Solution, the Company evaluates
projects on a periodic basis against a checklist of risk factors which
determines the frequency of intervention and review required. The Company
typically focuses on the following risk factors: size of revenue and credit
exposure to the Company, number of resources employed, progress against
defined project milestones, clarity of user expectations, definition of
project scope, use of new technology, effectiveness of project management
personnel and other quantitative and qualitative measures as may be
appropriate to a particular project. If the Company detects areas of concern,
it investigates the matter at an early stage and takes appropriate corrective
action to mitigate potential costs and delays.
SALES AND MARKETING
The Company markets and sells its services through a direct sales force. As
of September 30, 1998, Tier had a sales and marketing staff of 17. 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,
insurance 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.
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The sales team derives leads through (i) industry networking and referrals
from existing clients; (ii) government requests for proposals; (iii) strategic
partnerships with third parties under which the Company jointly bids and
performs certain engagements; (iv) directed sales activities identified by
other strategic business units within the Company; and (v) a national
marketing program. The Company believes that its use of these multiple sales
and marketing activities results in a shorter sales cycle than generally
experienced by other providers.
The Company's marketing program includes targeted software industry trade
shows; joint marketing through strategic partnership arrangements;
participation in user groups; provision of speakers to technology conferences;
publication of white papers, articles and direct client newsletters; and
distribution of marketing materials and public relations announcements.
CLIENTS
The Company's clients consist primarily of Fortune 1000 companies with
information-intensive businesses and government entities with large volume
information and technology needs. Tier's sales and marketing objective is to
develop relationships with clients that result in both repeat and long-term
engagements.
Tier has derived, and believes that it will continue to derive, a
significant portion of its revenues from a small number of large clients, many
of which engage the Company on a number of projects. For the twelve months
ended September 30, 1998, Humana Inc., the State of Missouri and Unisys
Corporation accounted for 26.5%, 20.0% and 11.2% of the Company's revenues,
respectively. Most of our contracts can be terminated by the client with
little or no notice and the completion, cancellation or significant reduction
in the scope of a large project would have a material adverse effect on the
Company's business, financial condition and results of operations.
In its Government Services SBU, the Company sometimes obtains project
engagements through prime contractors. The Company believes that it has been
able to secure large, complex government projects with low acquisition costs
by capitalizing on the reputation, marketing infrastructure and government
relationships of these prime contractors, while at the same time allowing the
prime contractors to leverage Tier's IT competency in their bid proposals. For
the fiscal year ended September 30, 1998, approximately 36.1% of Tier's
revenues were derived from sales to government agencies. Such government
agencies may be subject to budget cuts or budgetary constraints or a reduction
or discontinuation of government funding. A significant reduction in funds
available for government agencies to purchase IT services would have a
material adverse effect on Tier's business, financial condition and results of
operations.
Until fiscal 1997, Company revenues were generated primarily through Tier's
domestic operations. For the twelve-month fiscal year ended September 30, 1998
and the nine-month fiscal year ended September 30, 1997, international
operations accounted for 21.5% and 13.7% of the Company's total revenues,
respectively. See Note 9 to Notes to Consolidated Financial Statements. The
Company believes that the percentage of total revenues attributable to
international operations will continue to be significant and may continue to
grow.
HUMAN RESOURCES
Tier's approach to managing human resources has allowed the Company to meet
its staffing needs while also achieving what the Company believes to be a low
level of employee turnover. As of September 30, 1998, the Company had a
workforce of 569, including 503 IT consultants of which 209 were salaried
employees, 62 were hourly employees and 232 were independent or sub-
contractors, a substantial number of which were located in Tier's
international offices. The workforce also includes 17 sales and marketing
employees and 49 general and administrative employees. Of the Company's total
workforce as of September 30, 1998, 63.6%, 31.3% and 5.1% were located in the
United States, Australia and the United Kingdom, respectively.
The Company employs a Senior Vice President of Human Resources Management
and five full-time recruiters who pursue a three level employee-sourcing
strategy. The primary sources include employee referrals,
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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 that can be utilized for an array of career development needs such
as internal and external seminars and computer-based training. In addition,
the Company has developed centralized work sites or "application development
centers" where consultants work on projects for clients located throughout the
country, thus reducing the need for travel by consultants. The Company
believes that there is a shortage of, and significant competition for, IT
professionals and that its future success is highly dependent upon its ability
to attract, train, motivate and retain skilled IT consultants with the
advanced technical skills necessary to perform the services offered by the
Company.
COMPETITION
The IT services market is highly competitive and is served by numerous
international, national and local firms. Market participants include systems
consulting and integration firms, including national accounting firms and
related entities, the internal information systems groups of its prospective
clients, professional services companies, hardware and application software
vendors, and divisions of large integrated technology companies and
outsourcing companies. Many of these competitors have significantly greater
financial, technical and marketing resources, generate greater revenues and
have greater name recognition than the Company. In addition, there are
relatively low barriers to entry into the IT services market, and the Company
has faced, and expects to continue to face, additional competition from new
entrants into the IT services market.
The Company believes that the principal competitive factors in the IT
services market include reputation, project management expertise, industry
expertise, speed of development and implementation, technical expertise,
competitive pricing and the ability to deliver results on a fixed price as
well as a time and materials basis. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability of its clients or competitors to hire, retain
and motivate project managers and other senior technical staff; the ownership
by competitors of software used by potential clients; the price at which
others offer comparable services; the ability of its clients to perform the
services themselves; and the extent of its competitors' responsiveness to
client needs. There can be no assurance that the Company will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not cause the Company's
revenues or income to decline or otherwise materially adversely affect its
business, financial condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS
Tier's success has resulted, in part, from its methodologies and other
intellectual property rights. The Company relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary
rights of third parties from whom the Company licenses intellectual property.
The Company enters into confidentiality agreements with its employees and with
many of its consultants and clients, and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter the misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of
this information and take appropriate steps to enforce its intellectual
property rights.
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A portion of our business involves the development of software applications
for specific client engagements. Ownership of such software is the subject of
negotiation with each particular client and is typically assigned to the
client. In limited situations, the Company may retain ownership, or obtain a
license from its client, which permits Tier or a third party to market the
software for the joint benefit of the client and Tier or for the sole benefit
of Tier.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were executive officers of the Company as of December
16, 1998:
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NAME AGE POSITION WITH THE COMPANY
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James L. Bildner............ 44 Chairman of the Board and Chief Executive
Officer
William G. Barton........... 42 President, Chief Technology Officer and
Director
George K. Ross.............. 57 Executive Vice President, Chief Financial
Officer, Secretary and Director
James Weaver................ 41 President, Government Services Division
Charles Shuetrim............ 57 Managing Director, Australia
Andrew Armstrong............ 47 Managing Director, United Kingdom
Bradley H. Nickels.......... 37 Senior Vice President, Business Development
and Operations, Government Services Division
Stephen McCarty............. 45 Senior Vice President, Human Resources
Management
Laura B. DePole............. 34 Vice President, Finance and Chief Accounting
Officer
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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 information
technology management consultant at Titan Consulting, an information
technology 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 information technology 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 1998, has served as Chief Financial Officer
since February 1997 and has served as Secretary since July 1998. From February
1997 until April 1998, Mr. Ross also served as Senior Vice President. From
September 1992 to January 1997, Mr. Ross was a partner at Capital Partners, a
private equity investment firm. 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.
10
<PAGE>
Mr. Weaver joined Tier as President, Government Services Division in May
1998. From June 1997 until May 1998, Mr. Weaver served as Vice President,
Government Solutions of BDM International, Inc., an IT company, where he was
responsible for SBU strategic planning, policy and procedure development,
client base expansion and overall business planning and development. From
March 1995 until June 1997, he served as National Program Director, Public
Sector for Unisys Corporation, an IT company. Prior to that time, he served as
Director Public Sector Services with Lockheed Information Management Services
and District Manager with the Commonwealth of Virginia, Division of Child
Support Enforcement. Mr. Weaver received a B.A. in Psychology from California
State College and is pursuing a M.S. in Agency Management and Administration
from California University.
Mr. Shuetrim joined the Company as Managing Director, Australia, in October
1998. Mr. Shuetrim is a director of Sancha Computer Services Pty. Limited and
Sancha Software Development Pty. Limited, which entities were acquired by Tier
in March 1998, and has served as a director responsible for the conduct of
these computer services businesses since 1986.
Mr. Armstrong joined the Company as Managing Director, United Kingdom in
July 1997 in connection with the Company's acquisition of Albanycrest. Mr.
Armstrong was employed by Albanycrest as Managing Director from November 1996
until July 1997. From 1995 to 1996, Mr. Armstrong served as an independent
consultant. From 1992 to 1995, he was employed as principal project manager
for Siemens Nixdorf Information Systems Ltd., an IT company. From 1990 to
1992, Mr. Armstrong was an independent consultant and prior to that time he
was employed with The Macleod Group and with Armstrong Associates Ltd./Data
Center Management Ltd.
Mr. 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.
Mr. McCarty joined the Company as Vice President, Human Resources Management
in October 1998. From January 1998 to October 1998, he served as a Vice
President of Renaissance Worldwide, Inc., a consulting firm. From February
1993 to January 1998, he served as a Vice President of Arthur D. Little, a
consulting firm. From March 1980 to February 1993, he served as a Vice
President of GenRAD, Inc., a technology company. Mr. McCarty received a B.A.
in Psychology from State University of New York (SUNY) at Plattsburgh and a
M.S. in Industrial/ Organizational Psychology from Rensselaer Polytechnic
Institute.
Ms. DePole has served as Vice President, Finance since October 1998 and
Chief Accounting Officer since August 1997. From August 1997 to October 1998,
Ms. DePole was also the Corporate Controller of the Company. Prior to that
time Ms. DePole was a Senior Manager at Ernst & Young LLP, an international
public accounting firm. Ms. DePole received a B.S. in Accounting from San
Francisco State University and is a Certified Public Accountant.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, legal, finance,
sales and marketing functions are located in approximately 9,745 square feet
of leased space in Walnut Creek, California. The lease for this space expires
November 30, 2001.
The Company also operates through leased facilities in
. Atlanta, Georgia;
. Jefferson City, Missouri;
. Louisville, Kentucky;
. Phoenix, Arizona;
. Canberra, Australia;
. Melbourne, Australia;
. Sydney, Australia; and
. Berkshire, England.
Tier anticipates that additional space will be required during fiscal 1999
as its business expands and believes that it will be able to obtain suitable
space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and various other legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter will have a material
adverse effect on its financial condition, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class B Common Stock is traded on the Nasdaq National Market
under the symbol "TIER." The following table sets forth for the quarterly
periods indicated the range of high and low sales prices for the Company's
Class B Common Stock since its initial public offering effective as of
December 17, 1997:
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ----- ------
<S> <C> <C>
First Quarter (from December 17)............................. 10.75 8.50 *
Second Quarter............................................... 18.13 8.88
Third Quarter................................................ 23.25 14.25
Fourth Quarter............................................... 20.50 12.13
</TABLE>
--------
*Initial public offering price per share.
The Company has never declared or paid cash dividends on its Common Stock.
The Company's credit facility contains restrictions on the Company's ability
to pay cash dividends. The Company currently intends to retain future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends in the foreseeable future.
As of December 16, 1998, there were approximately 306 holders of record of
the Company's Class B Common Stock and one holder of record of the Company's
Class A Common Stock.
12
<PAGE>
Recent Sales of Unregistered Securities
On August 7, 1998, in partial consideration for the acquisition of certain
assets of Infact Pty Limited as trustee of the Infact Unit Trust ("Infact"),
the Company issued into escrow 49,944 shares of its Class B Common Stock to
Infact, valued at approximately $927,000, in an unregistered private placement
of securities. The offer and sale of these securities were made in reliance on
the exemptions from registration under Section 4(2) and Regulation D of the
Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data of the
Company:
<TABLE>
<CAPTION>
TWELVE-MONTH NINE-MONTH NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1998 1997 1997(1) 1996 1996 1995 1994
------------- ------------- ------------- ------------- ------- ------- -----------
(UNAUDITED) (RESTATED)(2) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $57,725 $26,885 $22,479 $11,790 $16,197 $12,373 $ 5,597
Cost of revenues........ 37,273 17,864 14,917 8,669 11,616 9,066 4,419
------- ------- ------- ------- ------- ------- -------
Gross profit............ 20,452 9,021 7,562 3,121 4,581 3,307 1,178
Costs and expenses:
Selling and marketing.. 3,009 2,234 1,836 577 975 627 272
General and
administrative........ 9,743 5,197 4,397 1,774 2,574 1,560 816
Compensation charge
related to business
combinations.......... 737 469 469 -- -- -- --
Depreciation and
amortization.......... 1,169 283 260 56 80 45 18
------- ------- ------- ------- ------- ------- -------
Income from operations.. 5,794 838 600 714 952 1,075 72
Interest (income) and
expense, net........... (980) 123 99 50 74 61 17
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 6,774 715 501 664 878 1,014 55
Provision for income
taxes.................. 2,642 287 201 266 351 570 --
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 4,132 $ 428 $ 300 $ 398 $ 527 $ 444 $ 55
======= ======= ======= ======= ======= ======= =======
Basic net income per
share(3)............... $ 0.45 $ 0.11 $ 0.06 $ 0.08 $ 0.11 $ 0.04 $ --
======= ======= ======= ======= ======= ======= =======
Shares used in computing
basic net income per
share(3)............... 9,231 4,037 5,400 5,220 4,988 10,062 10,930
======= ======= ======= ======= ======= ======= =======
Diluted net income per
share(3)............... $ 0.39 $ 0.10 $ 0.05 $ 0.07 $ 0.10 $ 0.04 $ --
======= ======= ======= ======= ======= ======= =======
Shares used in computing
diluted net income per
share(3)............... 10,624 4,265 5,794 5,478 5,246 10,062 10,930
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -----------------
1998 1997 1996 1995 1994
------- ------- ------ ----- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $39,301 $ 106 $ 306 $ -- $ 22
Working capital.............................. 49,695 2,361 1,191 920 236
Total assets................................. 74,503 10,496 4,133 2,316 907
Long-term debt, net of current obligations... 202 1,608 576 156 5
Total shareholders' equity................... 64,172 3,892 1,028 686 316
</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 a discussion
of the Company's previously reported restatement of certain periods.
(3) See Notes 1 and 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
per share.
13
<PAGE>
ITEM 7. 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 offices located
in the United States, Australia and the United Kingdom, the Company works
closely with its Fortune 1000, government and other clients to determine,
evaluate and implement an IT strategy that allows it to rapidly adopt, deploy
and transfer emerging technologies while preserving viable elements of the
client's legacy systems. The Company's revenues increased to $57.7 million in
the twelve months ended September 30, 1998 from $26.9 million in the twelve
months ended September 30, 1997. The Company's workforce has grown from 231 on
September 30, 1997 to 569 on September 30, 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
twelve months ended September 30, 1998 and the nine months ended September 30,
1997, 18.3% and 12.4%, 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. Substantially all of Tier's contracts are terminable
by the client following limited notice and without significant penalty to the
client. From time to time, in the regular course of its business, the Company
negotiates the modification, termination, renewal or transition of time and
materials and fixed price contracts that may involve an adjustment to the
scope or nature of the project, billing rates or outstanding receivables. To
date, the Company has generally been able to obtain an adjustment in its fees
following a significant change in the assumptions upon which the original
estimate was made, but there can be no assurance that the Company will be
successful in obtaining adjustments in the future.
The Company has derived a significant portion of its revenues from a small
number of large clients. For many of these clients, the Company performs a
number of different projects pursuant to multiple contracts or purchase
orders. For the twelve months ended September 30, 1998, Humana Inc., the State
of Missouri and Unisys Corporation accounted for 26.5%, 20.0% and 11.2% of the
Company's revenues, respectively. The Company anticipates that a substantial
portion of its revenues will continue to be derived from a small number of
large clients. The completion, cancellation or significant reduction in the
scope of a large project would have a material adverse effect on the Company's
business, financial condition and results of operations. A significant portion
of the Company's revenues are derived from sales to government agencies. For
the fiscal year ended September 30, 1998, approximately 36.1% of the Company's
revenues were derived from sales to government agencies.
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. Senior executives manage the Company's personnel
utilization rates by carefully monitoring its needs and basing most personnel
increases on specific project requirements. To the extent revenues do not
increase at a rate commensurate with these additional expenses, the Company's
results of operations could be materially and adversely affected. In addition,
to the extent that the Company is unable to hire and retain salaried employees
to staff new or existing client engagements and retains hourly employees or
independent contractors in their place, the Company's business, financial
condition and results of operations would be materially and adversely
affected.
From December 1996 through the end of fiscal year 1998, the Company made
eight acquisitions for a total cost of approximately $11 million in cash and
shares of Class B Common Stock, excluding future contingent payments.
Generally, contingent payments are recorded as additional purchase price at
the time the payment can be determined beyond a reasonable doubt. If a
contingent payment is based, in part, on a seller's continuing employment with
the Company, the payments are recorded as compensation expense over the
vesting period when the amount is deemed probable to be made. These
acquisitions helped the Company to expand its operations in the United States,
to establish its operations in Australia and the United Kingdom, to broaden
the
14
<PAGE>
Company's client base and technical expertise and to supplement its human
resources. In fiscal year 1998, the Company acquired certain assets and
liabilities of Sancha Computer Services Pty Limited and Sancha Software
Development Pty Limited, which added significantly to the Company's insurance
application practice; certain assets of Simpson Fewster & Co. Pty Limited,
which added to the Company's IT services including turnkey call center
establishment; and certain assets and liabilities of Infact Pty Limited as
trustee of the Infact Unit Trust, which expanded the Company's project
management consulting practice. For the twelve months ended September 30, 1998
and September 30, 1997, international operations accounted for 21.5% and 11.4%
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
subject the Company to foreign currency translation adjustments and
transaction gains and losses for amounts denominated in foreign currencies.
In September 1997, the Company changed its fiscal year end to September 30.
Fiscal year 1997 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>
TWELVE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------------
1998 1997 1997 1996
----- ----------- ------------- -----------
(UNAUDITED) (RESTATED)(1) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............... 64.6 66.5 66.4 73.5
----- ----- ----- -----
Gross profit................... 35.4 33.5 33.6 26.5
Costs and expenses:
Selling and marketing........ 5.2 8.3 8.1 4.9
General and administrative... 16.9 19.3 19.6 15.0
Compensation charge related
to business combinations.... 1.3 1.7 2.1 --
Depreciation and
amortization................ 2.0 1.1 1.2 0.5
----- ----- ----- -----
Income from operations......... 10.0 3.1 2.6 6.1
Interest (income) and expense,
net........................... (1.7) 0.4 0.4 0.5
----- ----- ----- -----
Income before income taxes..... 11.7 2.7 2.2 5.6
Provision for income taxes..... 4.5 1.1 0.9 2.2
----- ----- ----- -----
Net income..................... 7.2% 1.6% 1.3% 3.4%
===== ===== ===== =====
</TABLE>
- --------
(1) See Note 1 to Notes to Consolidated Financial Statements for a discussion
of the Company's previously reported restatement of certain periods.
TWELVE-MONTH FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 114.7% to $57.7
million for the fiscal year ended September 30, 1998 from $26.9 million in the
twelve months ended September 30, 1997. This increase resulted from internal
growth, including an expanded client base and several significant new
contracts, and from acquisitions.
Gross Profit. 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 126.7% to $20.5 million for the fiscal year ended September
30, 1998 from $9.0 million
15
<PAGE>
in the twelve months ended September 30, 1997. Gross margin increased to 35.4%
for the fiscal year ended September 30, 1998 from 33.5% in the twelve months
ended September 30, 1997. The increase in gross margin was primarily
attributable to higher margins on certain large contracts and an increased use
of salaried as opposed to hourly employees, offset in part by software
sublicense fees and other start-up costs incurred in implementing a
significant new contract in the first quarter of 1998.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, travel costs and product literature.
Selling and marketing expenses increased 34.7% to $3.0 million for the fiscal
year ended September 30, 1998 from $2.2 million in the twelve months ended
September 30, 1997. As a percentage of revenues, selling and marketing
expenses decreased to 5.2% for the fiscal year ended September 30, 1998 from
8.3% in the twelve months ended September 30, 1997. The increase in total
selling and marketing expenses was primarily attributable to the addition of
sales and marketing personnel and the Company's increased selling and
marketing efforts and was partially offset by the use of sales and marketing
personnel on client projects, which costs were included in cost of revenues.
The Company expects that selling and marketing expenses will continue to
increase in future periods in absolute dollars, although such expenses may
vary as a percentage of revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management functions, human
resources, recruiting, finance, legal, accounting and information systems, as
well as professional fees related to legal, audit, tax, external reporting and
investor relations matters. General and administrative expenses increased
87.5% to $9.7 million for the fiscal year ended September 30, 1998 from $5.2
million in the twelve months ended September 30, 1997. As a percentage of
revenues, general and administrative expenses decreased to 16.9% for the
fiscal year ended September 30, 1998 from 19.3% in the twelve months ended
September 30, 1997. The increase in total general and administrative expenses
was primarily attributable to building the infrastructure to support, manage
and control the Company's growth and the increased costs of being a public
company. The Company expects that general and administrative expenses will
continue to increase in future periods in absolute dollars, although such
expenses may vary as a percentage of revenues.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations consists primarily of certain contingent
performance payments made in connection with two acquisitions completed in
calendar years 1996 and 1997. Compensation charge related to business
combinations increased 57.0% to $737,000 for the fiscal year ended September
30, 1998 from $469,000 in the twelve months ended September 30, 1997. As a
percentage of revenues, compensation charge related to business combinations
decreased to 1.3% for the fiscal year ended September 30, 1998 from 1.7% in
the twelve months ended September 30, 1997. The increase in total compensation
charge related to business combinations was primarily attributable to
contingent payments earned during the current period by previous owners of the
acquired businesses.
Depreciation and Amortization. Depreciation and amortization 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 313.2% to $1.2
million for the fiscal year ended September 30, 1998 from $283,000 in the
twelve months ended September 30, 1997. As a percentage of revenues,
depreciation and amortization increased to 2.0% for the fiscal year ended
September 30, 1998 from 1.1% in the twelve months ended September 30, 1997.
The increase in total depreciation and amortization expenses was primarily
attributable to the depreciation associated with increased capital
expenditures and the amortization of increased intangible assets resulting
from acquisitions. The Company expects that depreciation and amortization will
continue to increase in future periods in absolute dollars, although they may
vary as a percentage of revenues.
Interest Income and Interest Expense, Net. The Company had net interest
income of $980,000 for the fiscal year ended September 30, 1998 compared to
net interest expense of $123,000 for the twelve months ended September 30,
1997. This change was primarily attributable to the Company's repayment of all
borrowings under
16
<PAGE>
its bank lines of credit and interest income generated from its investment of
proceeds from its initial and secondary public offerings.
Provision for Income Taxes. The effective tax rate for the fiscal year ended
September 30, 1998 was 39.0%, compared to 40.1% for the twelve months ended
September 30, 1997. The decrease in the effective tax rate was primarily
attributable to the investment income earned on tax-exempt securities.
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. 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.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations was $469,000 for the nine-month fiscal year
ended September 30, 1997 as compared to no charge in the nine months ended
September 30, 1996. As a percentage of revenues, compensation charge related
to business combinations was 2.1% for the nine-month fiscal year ended
September 30, 1997.
Depreciation and Amortization. Depreciation and amortization increased
365.4% to $260,000 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 96.2% 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 decreased 24.2% to
$201,000 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 the
nine-months fiscal year ended September 30, 1997 was 40.2%, compared to 40.0%
for the nine months ended September 30, 1996.
17
<PAGE>
SELECTED QUARTERLY STATEMENTS OF INCOME
The following tables set forth certain unaudited consolidated quarterly
statement of income data for each of the seven quarters ending September 30,
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 Form
10-K. 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,
1997 1997 1997 1997 1998 1998 1998
------------- ------------- ------------- ------------- ------------- -------- ---------
(RESTATED)(1) (RESTATED)(1) (RESTATED)(1) (RESTATED)(1) (RESTATED)(1)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $6,799 $7,342 $8,337 $9,150 $12,672 $ 14,890 $21,012
Cost of revenues........ 4,729 4,814 5,374 5,680 8,756 9,241 13,595
------ ------ ------ ------ ------- -------- -------
Gross profit............ 2,070 2,528 2,963 3,470 3,916 5,649 7,417
Costs and expenses:
Selling and marketing.. 473 641 722 815 601 800 792
General and
administrative........ 1,207 1,531 1,659 1,800 1,903 2,725 3,316
Compensation charge
related to business
combinations.......... 50 50 369 198 354 94 90
Depreciation and
amortization.......... 59 79 121 150 219 337 463
------ ------ ------ ------ ------- -------- -------
Income from operations.. 281 227 92 507 839 1,693 2,756
Interest (income) and
expense, net........... 28 33 38 (56) (269) (219) (436)
------ ------ ------ ------ ------- -------- -------
Income before income
taxes.................. 253 194 54 563 1,108 1,912 3,192
Provision for income
taxes.................. 101 77 24 228 449 713 1,252
------ ------ ------ ------ ------- -------- -------
Net income.............. $ 152 $ 117 $ 30 $ 335 $ 659 $ 1,199 $ 1,940
====== ====== ====== ====== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
------------- ------------- ------------- ------------- ------------- -------- ---------
(RESTATED)(1) (RESTATED)(1) (RESTATED)(1) (RESTATED)(1) (RESTATED)(1)
<S> <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%
Cost of revenues........ 69.6 65.6 64.5 62.1 69.1 62.1 64.7
----- ----- ----- ----- ----- ----- -----
Gross profit............ 30.4 34.4 35.5 37.9 30.9 37.9 35.3
Costs and expenses:
Selling and marketing.. 7.0 8.7 8.7 8.9 4.7 5.4 3.8
General and
administrative........ 17.7 20.8 19.9 19.7 15.0 18.3 15.8
Compensation charge
related to business
combinations.......... 0.7 0.7 4.4 2.1 2.8 0.6 0.4
Depreciation and
amortization.......... 0.9 1.1 1.4 1.6 1.8 2.3 2.2
----- ----- ----- ----- ----- ----- -----
Income from operations.. 4.1 3.1 1.1 5.6 6.6 11.3 13.1
Interest (income) and
expense, net........... 0.4 0.5 0.4 (0.6) (2.1) (1.5) (2.1)
----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 3.7 2.6 0.7 6.2 8.7 12.8 15.2
Provision for income
taxes.................. 1.5 1.0 0.4 2.5 3.5 4.8 6.0
----- ----- ----- ----- ----- ----- -----
Net income.............. 2.2% 1.6% 0.3% 3.7% 5.2% 8.0% 9.2%
===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) See Note 1 to Notes to Consolidated Financial Statements for a discussion
of the Company's previously reported restatement of certain periods.
18
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LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company financed its operations
principally through cash flows from operating activities, the private
placement of equity securities and proceeds from borrowings under asset-based
lines of credit. The Company closed its initial and secondary public offerings
of Class B Common Stock in December 1997 and June 1998, respectively. The
Company received net proceeds totaling approximately $55 million, including
proceeds from the exercise of the over-allotment options in January 1998 and
June 1998. Through September 30, 1998, the Company had used $3.1 million of
the proceeds from the stock offerings to repay outstanding indebtedness, $8.3
million for business combinations and $1.8 million for capital equipment and
leasehold improvements, with the remainder used to fund operating activities
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 prime 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 a
prohibition against 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 September 30, 1998,
there were no borrowings outstanding under the Credit Facility.
Net cash (used in) provided by operating activities was $(1.6) million in
fiscal 1998, $(1.4) million in the nine-month fiscal year ended September 30,
1997 and $491,000 in fiscal year ended December 31, 1996. Throughout these
periods, in addition to the net income for the period, the Company experienced
increases in receivables as a result of increases in the Company's sales
volume, which were partially offset by increases in accounts payable and
accrued liabilities in those periods.
Net cash provided by financing activities totaled $53.4 million in fiscal
1998, $3.7 million in the nine-month fiscal year ended September 30, 1997 and
$112,000 in fiscal 1996. In fiscal 1998, the Company raised approximately $55
million in its public offerings of Class B Common Stock and made net payments
of $2.8 million under its line of credit. In the nine-month fiscal year ended
September 30, 1997, the Company raised gross proceeds of $1.9 million through
the issuance of 420,953 shares of Series A Preferred Stock and increased its
net borrowing by $2.1 million under its former credit facility.
The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, will be
adequate to fund the Company's operations for at least the next 12 months.
There can be no assurance that changes will not occur that would consume
available capital resources before such time. The Company's capital
requirements depend on numerous factors, including potential acquisitions, 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.
Capital expenditures, including equipment acquired under capital lease, were
approximately $2.0 million and $554,000 for fiscal 1998 and nine-month fiscal
year ended September 30, 1997. The increase in capital expenditures was
primarily due to increased workforce, geographic expansion and development of
the Company's technology infrastructure. The Company anticipates that it will
continue to have significant capital expenditures for the near term related
to, among other things, purchases of technological equipment in order to
create a network to link the Company's global operations and to support the
Company's growth, as well as potential expenditures related to new office
leases and the establishment of the Company's application development centers.
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<PAGE>
RECENT 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 in a full set of general purpose financial
statements. 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 not expected to have a
significant impact on the Company's consolidated financial position, results
of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives will be
reported in the statement of operations or as a deferred item, depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the derivative must be highly
effective in achieving offsetting changes in fair value or cash flows of the
hedged items during the term of the hedge. The Company has not yet determined
the impact, if any, that the adoption of FAS 133 will have on the consolidated
financial statements.
YEAR 2000
The "Year 2000 Issue" is typically the result of software being written
using two digits rather than four to define the applicable year. The Company
uses a significant number of computer software programs and operating systems
in its product development, financial business systems and administrative
functions. To the extent these software applications are unable to
appropriately interpret the upcoming calendar year "2000", conversion of such
applications will be necessary.
With respect to determining the preparedness of its internal IT and non-IT
systems, Tier has completed an initial assessment and has begun to identify
areas of exposure and to plan a remediation process. The Company's internal
systems are largely PC-based and a majority were recently acquired or
installed. Tier anticipates that this process and subsequent testing will be
completed in a timely manner during fiscal 1999. The Company has not incurred
material remediation costs to date and cannot currently estimate the cost of
ensuring Year 2000 compliance; however, the Company does not anticipate that
the cost of such process will have a material adverse effect on the Company's
business, result of operations or financial condition.
In addition, the Company has made an initial evaluation of the Year 2000
readiness of its key suppliers and other key third parties. The Company will
work with these parties to address the Year 2000 Issue and to obtain
appropriate assurances. To the extent that such parties are materially
adversely affected by the Year 2000 Issue, this could disrupt the Company's
operations. There can be no assurance that the conversion of the Company's
systems will be successful or that the Company's key contractors will have
successful conversion programs, and that such Year 2000 Issue compliance
failures will not have a material adverse effect on the Company's business,
results of operations or financial condition.
As a result of the Company's preliminary assessment, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others could cause actual results to differ
materially from those contained in forward-looking statements in this Form 10-
K. Tier is referred to in this section as "we" or "us".
20
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS. Our revenues and operating
results are subject to significant variation from quarter to quarter due to a
number of factors, including:
. the number, size and scope of projects in which we are engaged,
. the contractual terms and degree of completion of such projects,
. start-up costs including software sublicense fees incurred in connection
with the initiation of large projects,
. our ability to staff projects with salaried employees versus hourly
independent and sub-contractors,
. competitive pressures on the pricing of our services,
. any delays incurred in connection with, or early termination of, a
project,
. employee utilization rates,
. the number of billable days in a particular quarter,
. the adequacy of provisions for losses,
. the accuracy of estimates of resources required to complete ongoing
projects,
. demand for our services generated by strategic partnerships and certain
prime contractors,
. our ability to increase both the number and size of engagements from
existing clients, and
. economic conditions in the vertical and geographic markets we serve.
Due to the relatively long sales cycles for our services in the government
services market, the timing of revenue is difficult to forecast. In addition,
the achievement of anticipated revenues is substantially dependent on our
ability to attract, on a timely basis, and retain skilled personnel. A high
percentage of our operating expenses, particularly personnel and rent, are
fixed in advance. In addition, we typically reach the annual limitation on
FICA contributions for many of our consultants before the end of the calendar
year. As a result, payroll taxes as a component of cost of sales will vary
from quarter to quarter during the fiscal year and will generally be higher at
the beginning of the calendar year. Because of the variability of our
quarterly operating results, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful, should not be relied
upon as indications of future performance and may result in volatility in the
price of our common stock. In addition, our operating results will from time
to time be below the expectations of analysts and investors.
POTENTIAL ADVERSE EFFECT ON OPERATING RESULTS FROM DEPENDENCE ON LARGE
PROJECTS, LIMITED CLIENTS OR CERTAIN MARKET SECTORS. The completion,
cancellation or significant reduction in the scope of a large project or a
project with certain clients would have a material adverse effect on our
business, financial condition and results of operations. Most of our contracts
are terminable by the client following limited notice and without significant
penalty to the client. We have derived, and believe that we will continue to
derive, a significant portion of our revenues from a limited number of
clients. For the twelve months ended September 30, 1998, Humana Inc., the
State of Missouri and Unisys Corporation accounted for 26.5%, 20.0% and 11.2%
of our 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 our services in a subsequent year. For example, Kaiser Foundation
Health Plan, Inc. accounted for 68.1% of our revenues in 1995 but only 5.7% of
our revenues in the fiscal year ended September 30, 1998, as significant
portions of that engagement have been completed. In addition, as a result of
our focus in specific vertical markets, economic and other conditions that
affect the companies in these markets could have a material adverse effect on
our business, financial condition and results of operations.
INABILITY TO ATTRACT AND RETAIN PROFESSIONAL STAFF NECESSARY TO EXISTING AND
FUTURE PROJECTS. Our inability to attract, retain and train skilled employees
could impair our ability to adequately manage and staff our existing projects
and to bid for or obtain new projects, which would have a material adverse
effect on our business, financial condition and results of operation. In
addition, the failure of our employees to achieve expected levels of
performance could adversely affect our business. Our success depends in large
part upon our ability to attract, retain, train, manage and motivate skilled
employees, particularly project managers and other senior
21
<PAGE>
technical personnel. There is significant competition for employees with the
skills required to perform the services we offer. In particular, qualified
project managers and senior technical and professional staff are in great
demand worldwide and competition for such persons is likely to increase. In
addition, we require that many of our employees travel to client sites to
perform services on our behalf, which may make a position with us less
attractive to potential employees. There can be no assurance that a sufficient
number of skilled employees will continue to be available, or that we will be
successful in training, retaining and motivating current or future employees.
DEPENDENCE ON KEY PERSONNEL. Our success depends in large part upon the
continued services of a number of key employees, including our Chief Executive
Officer and Chairman of the Board of Directors, James L. Bildner, and our
President and Chief Technology Officer, William G. Barton. Although we have
entered into employment agreements with each of Messrs. Bildner and Barton,
either of them may terminate their employment agreements at any time. The loss
of the services of either of Messrs. Bildner or Barton could have a material
adverse effect on our business. In addition, if one or more of our key
employees resigns to join a competitor or to form a competing company, the
loss of such personnel and any resulting loss of existing or potential clients
to any such competitor could have a material adverse effect on our business,
financial condition and results of operations.
CONTROL OF COMPANY AND CORPORATE ACTIONS BY PRINCIPAL
SHAREHOLDERS. Concentration of voting control could have the effect of
delaying or preventing a change in control of us and may affect the market
price of our stock.
. All of the holders of Class A Common Stock have entered into a Voting
Trust with respect to their shares of Class A Common Stock, which
represents 61.5% of the total common stock voting power at September 30,
1998. All power to vote shares held in the Voting Trust has been vested
in the Voting Trust's trustees, Messrs. Bildner and Barton. As a result,
Messrs. Bildner and Barton will be able to control the outcome of all
corporate actions requiring shareholder approval, including changes in
our equity incentive plan, the election of a majority of our directors,
proxy contests, mergers, tender offers, open-market purchase programs or
other purchases of common stock that could give holders of our Class B
Common Stock the opportunity to realize a premium over the then-
prevailing market price for their shares of Class B Common Stock.
. The holders of Class A Common Stock also hold a number of shares of Class
B Common Stock totaling 19.8% of the Class B Common Stock outstanding at
September 30, 1998. If such holders vote their shares of Class B Common
Stock as a block, they may be able to elect a majority of the directors
to be elected solely by the holders of the Class B Common Stock.
. The California Corporations Code and our 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 on which we have equity
securities listed on Nasdaq and 800 or more holders of our equity
securities.
. Holders of an aggregate of 779,762 shares of Class A Common Stock have
entered into agreements with us that may restrict their ability to
transfer shares of Class A Common Stock following termination of their
employment with us. Such agreements would effectively delay the
conversion of such shares of Class A Common Stock and may perpetuate
control of us by the Voting Trust's trustees.
POTENTIAL FAILURE TO IDENTIFY, ACQUIRE OR INTEGRATE NEW ACQUISITIONS. A
principal component of our business strategy is to expand our presence in new
or existing markets by acquiring additional businesses. From December 1996
through September 30, 1998, we acquired eight businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or to integrate successfully any acquired businesses
without substantial expense, delay or other operational or financial problems.
Acquisitions involve a number of special risks, including:
. diversion of management's attention,
. failure to retain key personnel,
22
<PAGE>
. amortization of acquired intangible assets,
. client dissatisfaction or performance problems with an acquired firm,
. assumption of unknown liabilities, and
. other unanticipated events or circumstances.
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations.
INABILITY TO MANAGE GROWTH. If we are unable to manage our growth
effectively, such inability would have a material adverse effect on the
quality of our services, our ability to retain key personnel, and our
business, financial condition and results of operations. Our growth has
placed, and is expected to continue to place, significant demands on our
management, financial, staffing and other resources. We have expanded
geographically by opening new offices domestically and abroad, and intend to
open additional offices. Our ability to manage growth effectively will require
us to continue to develop and improve our operational, financial and other
internal systems, as well as our business development capabilities, and to
train, motivate and manage our employees. In addition, as the average size and
number of our projects continues to increase, we must be able to manage such
projects effectively. There can be no assurance that our rate of growth will
continue or that we will be successful in managing any such growth.
DEPENDENCE ON PARTNERSHIPS WITH THIRD PARTIES IN PERFORMING CERTAIN CLIENT
ENGAGEMENTS. We sometimes perform client engagements in partnership with third
parties. In the government services market, we often join with other
organizations to bid and perform an engagement. In these engagements, we are a
subcontractor to the prime contractor of the engagement. In the commercial
services market, we sometimes partner with software or technology providers to
jointly bid and perform engagements. In both markets, we often depend on the
software, resources and technology of our partners in order to perform the
engagement. There can be no assurance that actions or failures attributable to
our partners or to the prime contractor will not also negatively affect our
business, financial condition or results of operations. In addition, the
refusal or inability of a partner to permit continued use of its software,
resources or technology by us, or the discontinuance or termination by the
prime contractor of our services as a subcontractor, would have a material
adverse effect on our business, financial condition and results of operations.
DEPENDENCE ON CONTRACTS WITH GOVERNMENT AGENCIES. For the fiscal year ended
September 30, 1998, approximately 36.1% of our revenues were derived from
sales to government agencies. Such government agencies may be subject to
budget cuts or budgetary constraints or a reduction or discontinuation of
government funding. A significant reduction in funds available for government
agencies to purchase IT services would have a material adverse effect on our
business, financial condition and results of operations. In addition, the loss
of a major government client, or any significant reduction or delay in orders
by such client, would have a material adverse effect on our business,
financial condition and results of operations.
FAILURE TO ESTIMATE ACCURATELY RESOURCES REQUIRED FOR FIXED PRICE
CONTRACTS. Our failure to estimate accurately the resources or time required
for a fixed price project could have a material adverse effect on our
business, financial condition and results of operations. During the fiscal
year ended September 30, 1998, 18.3% of our revenues were generated on a fixed
price basis, rather than on a time and materials basis. We believe that the
percentage of total revenues attributable to fixed price contracts will
continue to be significant and may continue to grow.
POTENTIAL COSTS OR CLAIMS RESULTING FROM PROJECT PERFORMANCE. Many of our
engagements involve projects that are critical to the operations of our
clients' businesses and provide benefits that may be difficult to quantify.
The failure by us, or of the prime contractor on an engagement in which we are
a subcontractor, to meet a client's expectations in the performance of the
engagement could damage our reputation and adversely affect our ability to
attract new business, and could have a material adverse effect upon our
business, financial condition and results of operations. We have undertaken,
and may in the future undertake, projects in which we guarantee
23
<PAGE>
performance based upon defined operating specifications or guaranteed delivery
dates. Unsatisfactory performance or unanticipated difficulties or delays in
completing such projects may result in client dissatisfaction and a reduction
in payment to, or payment of damages (as a result of litigation or otherwise)
by us, which could have a material adverse effect upon our business, financial
condition and results of operations. In addition, unanticipated delays could
necessitate the use of more resources than we initially budgeted for a
particular project, which also could have a material adverse effect upon our
business, financial condition and results of operations.
INSUFFICIENT INSURANCE COVERAGE FOR POTENTIAL CLAIMS. Any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. There can be no assurance
that the limitations of liability set forth in our service contracts will be
enforceable or will otherwise protect us from liability for damages. Although
we maintain general liability insurance coverage, including coverage from
errors or omissions, there can be no assurance that such coverage will
continue to be available on reasonable terms, will be available in sufficient
amounts to cover one or more claims or that the insurer will not disclaim
coverage as to any future claim. The successful assertion for one or more
claims against us that exceed available insurance coverage or changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, would adversely affect our business,
financial condition and results of operations.
DELAY OR FAILURE TO DEVELOP NEW IT SOLUTIONS. Our success will depend in
part on our ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. There can be no assurance that we will be successful in
developing such IT solutions in a timely manner or that if developed we will
be successful in the marketplace. Delay in developing or failure to develop
new IT solutions would have a material adverse effect on our business,
financial condition and results of operations.
SUBSTANTIAL COMPETITION IN THE IT SERVICES MARKET. The IT services market is
highly competitive and is served by numerous international, national and local
firms. There can be no assurance that we will be able to compete effectively
in the market. Market participants include systems consulting and integration
firms, including national accounting firms and related entities, the internal
information systems groups of our prospective clients, professional services
companies, hardware and application software vendors, and divisions of large
integrated technology companies and outsourcing companies. Many of these
competitors have significantly greater financial, technical and marketing
resources, generate greater revenues and have greater name recognition than we
do. In addition, there are relatively low barriers to entry into the IT
services market, and we have faced, and expect to continue to face, additional
competition from new entrants into the IT services market.
We believe that the principal competitive factors in the IT services market
include:
. reputation,
. project management expertise,
. industry expertise,
. speed of development and implementations,
. technical expertise,
. competitive pricing, and
. the ability to deliver results on a fixed price as well as a time and
materials basis.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
. the ability of our clients or competitors to hire, retain and motivate
project managers and other senior technical staff,
. the ownership by competitors of software used by potential clients,
. the price at which others offer comparable services,
24
<PAGE>
. the ability of our clients to perform the services themselves, and
. the extent of our competitors' responsiveness to client needs.
Our inability to compete effectively on these competitive factors would have
a material adverse effect on our business, financial condition and results of
operations.
INABILITY TO PROTECT PROPRIETARY INTELLECTUAL PROPERTY. The steps we take to
protect our intellectual property rights may be inadequate to avoid the loss
or misappropriation of such information, or to detect unauthorized use of such
information. We rely on a combination of trade secrets, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect
our intellectual property rights. We also (1) enter into confidentiality
agreements with our employees, (2) generally require that our consultants and
clients enter into such agreements and (3) limit access to our proprietary
information.
Issues relating to the ownership of, and rights to use, software and
application frameworks can be complicated, and there can be no assurance that
disputes will not arise that affect our ability to resell or reuse such
software and application frameworks. A portion of our business involves the
development of software applications for specific client engagements.
Ownership of such software is the subject of negotiation with each particular
client and is typically assigned to the client. We also develop software
application frameworks, and may retain ownership or marketing rights to these
application frameworks, which may be adapted through further customization for
future client projects. Certain clients have prohibited us from marketing the
software and application frameworks developed for them entirely or for
specified periods of time or to specified third parties, and there can be no
assurance that clients will not demand similar or other restrictions in the
future.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against us in the future, or that if asserted, any
such claim will be successfully defended.
FAILURE TO MANAGE AND EXPAND INTERNATIONAL OPERATIONS. For the fiscal year
ended September 30, 1998, international operations accounted for 21.5% of our
total revenues. We believe 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 our sales are to large
multinational companies. To meet the needs of such companies, both
domestically and internationally, we must provide worldwide services, either
directly or indirectly. As a result, we intend to expand our existing
international operations and enter additional international markets, which
will require significant management attention and financial resources and
could adversely effect our operating margins and earnings. In order to expand
international operations, we will need to hire additional personnel and
develop relationships with potential international clients through acquisition
or otherwise. To the extent that we are unable to do so on a timely basis, our
growth in international markets would be limited, and our business, financial
condition and results of operations would be materially and adversely
affected.
Our international business operations are subject to a number of risks,
including, but not limited to, difficulties in building and managing foreign
operations, enforcing agreements and collecting receivables through foreign
legal systems, longer payment cycles, fluctuations in the value of foreign
currencies and unexpected regulatory, economic or political changes in foreign
markets. We have engaged in one hedging transaction for an immaterial amount
in connection with a recent acquisition in Australia. There can be no
assurance that these factors will not have a material adverse effect on our
business, financial condition and results of operations.
POTENTIAL YEAR 2000 NON-COMPLIANCE. The "Year 2000 Issue" is typically the
result of software being written using two digits rather than four to define
the applicable year. The Company uses a significant number of computer
software programs and operating systems in its product development, financial
business systems and administrative functions. To the extent these software
applications are unable to appropriately interpret the upcoming calendar year
"2000", conversion of such applications will be necessary.
With respect to determining the preparedness of its internal IT and non-IT
systems, Tier has completed an initial assessment and has begun to identify
areas of exposure and to plan a remediation process. The Company's
25
<PAGE>
internal systems are largely PC-based and a majority were recently acquired or
installed. Tier anticipates that this process and subsequent testing will be
completed in a timely manner during fiscal 1999. The Company has not incurred
material remediation costs to date and cannot currently estimate the cost of
ensuring Year 2000 compliance; however, the Company does not anticipate that
the cost of such process will have a material adverse effect on the Company's
business, result of operations or financial condition.
In addition, the Company has made an initial evaluation of the Year 2000
readiness of its key suppliers and other key third parties. The Company will
work with these parties to address the Year 2000 issue and to obtain
appropriate assurances. To the extent that such parties are materially
adversely affected by the Year 2000 Issue, this could disrupt the Company's
operations. There can be no assurance that the conversion of the Company's
systems will be successful or that the Company's key contractors will have
successful conversion programs, and that such Year 2000 Issue compliance
failures will not have a material adverse effect on the Company's business,
results of operations or financial condition.
As a result of the Company's preliminary assessment, the Company currently
believes that a formal contingency plan to address Year 2000 non-compliance is
unnecessary; however, the Company may develop such a plan if its on-going
assessment indicates areas of significant exposure.
POTENTIAL VOLATILITY OF STOCK PRICE. A public market for our Class B Common
Stock has existed only since the initial public offering of the Class B Common
Stock in December 1997. There can be no assurance that an active public market
will be sustained. The market for securities of early stage companies has been
highly volatile in recent years as a result of factors often unrelated to a
company's operations. Factors such as quarterly variations in operating
results, announcements of technological innovations or new products or
services by us or our competitors, general conditions in the IT industry or
the industries in which our clients compete, changes in earnings estimates by
securities analysts and general economic conditions such as recessions or high
interest rates could contribute to the 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 our business, financial condition and results of operations.
Any adverse determination in such litigation could also subject us to
significant liabilities. There can be no assurance that such litigation will
not be instituted in the future against us.
ISSUANCE OF PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL AND ADVERSELY
AFFECT MARKET PRICE FOR CLASS B COMMON STOCK. The Board of Directors has the
authority to issue preferred stock and to determine the preferences,
limitations and relative rights of shares of preferred stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by our shareholders. The preferred stock
could be issued with voting, liquidation, dividend and other rights superior
to the rights of our Class B Common Stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discourage bids for the
Class B Common Stock at a premium over the market price and adversely affect
the market price and the voting and other rights of the holders of our common
stock.
NO CURRENT INTENTION TO DECLARE OR PAY DIVIDENDS. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against the
U.S. dollar and currencies of the Company's subsidiaries and operations in
Australia and the United Kingdom.
Foreign Currency Exchange Rate Risk. The Company has a wholly owned
subsidiary in Australia and conducts operations in the United Kingdom through
a U.S.-incorporated subsidiary. Revenues from these
26
<PAGE>
operations are typically denominated in Australian Dollars or British Pounds,
respectively, thereby potentially affecting the Company's financial position,
results of operations and cash flows due to fluctuations in exchange rates.
The Company does not anticipate that near-term changes in exchange rates will
have a material impact on future earnings, fair values or cash flows of the
Company and has engaged in foreign currency hedging transactions on a limited
basis in connection with certain acquisitions and no contracts are outstanding
as of September 30, 1998. There can be no assurance that a sudden and
significant decline in the value of the Australian Dollar or British Pound
would not have a material adverse effect on the Company's financial condition
and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
financial statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on the Current Report on Form 8-K filed on July 27,
1998, effective as of July 25, 1998, the Company's Audit Committee approved,
subject to ratification by its shareholders, the engagement of
PricewaterhouseCoopers LLP as its independent accountants for the fiscal year
ending September 30, 1998 and approved the resignation of the firm of Ernst &
Young LLP, who resigned as auditors of the Company effective July 24, 1998.
Ernst & Young LLP, under the rules of its profession, resigned solely due to a
prospective independence issue.
The reports of Ernst & Young LLP on the Company's financial statements for
the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope,
or accounting principles.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended September 30, 1997, and in the subsequent
interim period, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to
the matter in their report. The Company provided Ernst & Young LLP with a copy
of the Form 8-K and requested Ernst & Young LLP furnish a letter addressed to
the Commission stating whether it agreed with the above statements. A copy of
that letter, dated July 27, 1998, was filed as Exhibit 16.1 to the Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers. See "Executive Officers of the Registrant" in Part I
of this report.
(b) Directors. The information required by this item is incorporated herein
by reference to the Company's definitive proxy statement to be filed pursuant
to Regulation 14A (the "1998 Proxy Statement"), under the headings "Election
of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and
"Executive Officers," which the Company intends to file with the Securities
and Exchange Commission within 120 days of the Company's fiscal year ended
September 30, 1998. A summary of the directors and their principal business
for the last five years follows:
James L. 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.
27
<PAGE>
William G. 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
information technology management consultant at Titan Consulting, an
information technology 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 information technology 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.
George K. Ross has been a Director of the Company since January 1996, has
served as Executive Vice President since 1998, has served as Chief Financial
Officer since February 1997 and has served as Secretary since July 1998. From
February 1997 until April 1998, Mr. Ross also served as Senior Vice President.
From September 1992 to January 1997, Mr. Ross was a partner at Capital
Partners, a private equity investment firm. 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.
Samuel Cabot III 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 Samuel Cabot, Inc., Plasticolors, Inc.
and Blue Cross/Blue Shield of Massachusetts, Inc. Mr. Cabot received an A.B.
from Dartmouth College and an MBA from Boston University.
Ronald L. 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 Board 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item may be found under the section
captioned "Compensation of Executive Officers" in the 1998 Proxy Statement and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item may be found under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
the 1998 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item may be found under the section
captioned "Election of Directors--Certain Related Transactions" in the 1998
Proxy Statement and is incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements. See "Index to Consolidated
Financial Statements" on Page F-1.
(2) Financial Statement Schedules. All schedules have been omitted
because they are not applicable, not required, were filed
subsequent to the filing of the Form 10-K or because the
information required to be set forth therein is included in the
consolidated financial statements or in notes thereto.
(3) Exhibits. See "Exhibit Index."
(b) Reports on Form 8-K
Form 8-K filed July 27, 1998 pursuant to Item 4 regarding a change in
Registrant's certifying accountant.
Form 8-K filed August 21, 1998 pursuant to Item 2 regarding the
acquisition of certain assets and liabilities of Infact Pty Limited as trustee
of the Infact Unit Trust.
Form 8-K/A, filed on October 20, 1998, pursuant to Item 7 attaching
financial statements and pro forma financial information related to the
acquisition of certain assets and liabilities of Infact Pty Limited as trustee
of the Infact Unit Trust.
Form 8-K/A, filed on October 21, 1998, pursuant to Item 7 attaching
restated pro forma financial information related to the acquisition of certain
assets and liabilities of Sancha Computer Group Pty Limited.
Form 8-K, filed on October 23, 1998, pursuant to Item 5 attaching restated
financial statements for the nine-month fiscal year ended September 30, 1997
to reflect changes in the accounting for certain payments made in connection
with two business combinations.
(c) Exhibits. See "Exhibit Index."
(d) Financial Statement Schedules. See "Index to Consolidated Financial
Statements" on page F-1.
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Report of Independent Auditors.............................................. F-3
Consolidated Balance Sheets................................................. F-4
Consolidated Statements of Income........................................... F-5
Consolidated Statements of Shareholders' Equity............................. F-6
Consolidated Statements of Cash Flows....................................... F-7
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Tier Technologies, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Tier
Technologies, Inc. and its subsidiaries at September 30, 1998, and the results
of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 26, 1998, except as to
Note 12, which is as of December 18, 1998
F-2
<PAGE>
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 September 30, 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for the year ended
December 31, 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
September 30, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1996 and for the nine month period ended
September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
October 6, 1997
F-3
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
(RESTATED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $22,466,299 $ 106,435
Restricted cash.................................... 711,720 --
Short-term investments............................. 16,834,392 --
Accounts receivable, net of allowance for doubtful
accounts of $260,000 in
1998 and $50,000 in 1997.......................... 18,334,997 5,905,809
Income taxes receivable............................ -- 820,295
Prepaid expenses and other current assets.......... 1,398,705 285,779
----------- -----------
Total current assets............................... 59,746,113 7,118,318
Equipment and improvements, net...................... 2,371,037 773,666
Notes and accrued interest receivable from related
parties............................................. 1,870,447 1,011,650
Acquired intangible assets, net...................... 9,794,148 1,300,328
Other assets......................................... 721,383 291,657
----------- -----------
Total assets...................................... $74,503,128 $10,495,619
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank lines of credit.............. $ -- $ 1,232,111
Accounts payable................................... 3,263,048 1,373,358
Accrued liabilities................................ 933,619 506,047
Accrued subcontractor expenses..................... 2,502,711 146,275
Accrued compensation and related liabilities....... 2,309,778 1,228,295
Income taxes payable............................... 450,283 --
Deferred income.................................... 499,865 33,762
Capital lease obligations due within one year...... 67,165 31,198
Other current liabilities ......................... 24,315 205,820
----------- -----------
Total current liabilities.......................... 10,050,784 4,756,866
Borrowings under bank lines of credit, less current
portion............................................. -- 1,526,441
Capital lease obligations, less current portion...... 163,275 24,944
Other liabilities.................................... 116,946 295,736
----------- -----------
Total liabilities................................. 10,331,005 6,603,987
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Convertible preferred stock, no par value;
authorized shares--4,579,047; issued and
outstanding shares--none in 1998 and 420,953 in
1997.............................................. -- 1,892,223
Common stock, no par value; authorized shares--
44,259,762; issued and outstanding shares--
11,861,019 in 1998 and 5,620,000 in 1997.......... 62,655,997 2,948,852
Notes receivable from shareholders................. (2,158,600) (2,253,430)
Deferred compensation.............................. (591,504) --
Foreign currency translation adjustment............ (1,209,910) (40,198)
Retained earnings.................................. 5,476,140 1,344,185
----------- -----------
Total shareholders' equity......................... 64,172,123 3,891,632
----------- -----------
Total liabilities and shareholders' equity........ $74,503,128 $10,495,619
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER SEPTEMBER DECEMBER
30, 30, 31,
1998 1997 1996
----------- ----------- -----------
(RESTATED)
<S> <C> <C> <C>
Revenues................................... $57,724,886 $22,478,643 $16,197,466
Cost of revenues........................... 37,273,429 14,916,846 11,616,662
----------- ----------- -----------
Gross profit............................... 20,451,457 7,561,797 4,580,804
Costs and expenses:
Selling and marketing.................... 3,008,536 1,836,082 975,236
General and administrative............... 9,743,334 4,397,315 2,573,942
Compensation charge related to business
combinations............................ 736,530 469,422 --
Depreciation and amortization............ 1,169,419 258,504 80,350
----------- ----------- -----------
Income from operations..................... 5,793,638 600,474 951,276
Interest income............................ 1,136,419 70,429 3,866
Interest expense........................... 156,360 169,299 77,625
----------- ----------- -----------
Income before income taxes................. 6,773,697 501,604 877,517
Provision for income taxes................. 2,641,742 201,390 351,007
----------- ----------- -----------
Net income................................. $ 4,131,955 $ 300,214 $ 526,510
=========== =========== ===========
Basic net income per share................. $ 0.45 $ 0.06 $ 0.11
=========== =========== ===========
Shares used in computing basic net income
per share................................. 9,231,296 5,399,560 4,987,946
=========== =========== ===========
Diluted net income per share............... $ 0.39 $ 0.05 $ 0.10
=========== =========== ===========
Shares used in computing diluted net income
per share................................. 10,623,998 5,794,155 5,245,810
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTES FOREIGN
-------------------- ---------------------------------------------- RECEIVABLE CURRENCY
CLASS A CLASS B FROM DEFERRED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS COMPENSATION ADJUSTMENT
-------- ---------- --------- ---------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995............ -- $ -- 2,200,000 $ 112,547 3,300,000 $ 168,820 $ (126,440) $ -- $ --
Repurchase of
common stock... -- -- (480,000) (81,022) (720,000) (121,533) 31,610 -- --
Net income...... -- -- -- -- -- -- -- -- --
-------- ---------- --------- ---------- ---------- ----------- ----------- --------- -----------
Balance at
December 31,
1996............ -- -- 1,720,000 31,525 2,580,000 47,287 (94,830) -- --
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
stock options
exercised...... -- -- -- 269,600 -- 404,400 -- -- --
Payment on notes
receivable..... -- -- -- -- -- -- 37,440 -- --
Net income
(restated)..... -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment..... -- -- -- -- -- -- -- -- (40,198)
-------- ---------- --------- ---------- ---------- ----------- ----------- --------- -----------
Balance at
September 30,
1997 (restated). 420,953 1,892,223 2,284,762 1,649,419 3,335,238 1,299,433 (2,253,430) -- (40,198)
Exercise of
stock options.. -- -- -- -- 248,707 932,494 -- -- --
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan.. -- -- -- -- 11,378 116,050 -- -- --
Tax benefit of
stock options
exercised...... -- -- -- -- -- 544,366 -- -- --
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock... (420,953) (1,892,223) (645,000) (11,822) 1,065,953 1,904,045 -- -- --
Issuance of
Class B common
stock, net of
issuance costs
of $2,257,519.. -- -- -- -- 5,460,000 54,855,612 -- -- --
Payments on
notes
receivable..... -- -- -- -- -- -- 94,830 -- --
Issuance of
Class B common
stock in
business
combinations... -- -- -- -- 99,981 1,366,400 -- (700,900) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 109,396 --
Net income...... -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment..... -- -- -- -- -- -- -- -- (1,169,712)
-------- ---------- --------- ---------- ---------- ----------- ----------- --------- -----------
Balance as of
September 30,
1998............ -- $ -- 1,639,762 $1,637,597 10,221,257 $61,018,400 $(2,158,600) $(591,504) $(1,209,910)
======== ========== ========= ========== ========== =========== =========== ========= ===========
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
---------- -------------
<S> <C> <C>
Balance at
December 31,
1995............ $ 517,461 $ 672,388
Repurchase of
common stock... -- (170,945)
Net income...... 526,510 526,510
---------- -------------
Balance at
December 31,
1996............ 1,043,971 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
stock options
exercised...... -- 674,000
Payment on notes
receivable..... -- 37,440
Net income
(restated)..... 300,214 300,214
Foreign currency
translation
adjustment..... -- (40,198)
---------- -------------
Balance at
September 30,
1997 (restated). 1,344,185 3,891,632
Exercise of
stock options.. -- 932,494
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan.. -- 116,050
Tax benefit of
stock options
exercised...... -- 544,366
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock... -- --
Issuance of
Class B common
stock, net of
issuance costs
of $2,257,519.. -- 54,855,612
Payments on
notes
receivable..... -- 94,830
Issuance of
Class B common
stock in
business
combinations... -- 665,500
Amortization of
deferred
compensation... -- 109,396
Net income...... 4,131,955 4,131,955
Foreign currency
translation
adjustment..... -- (1,169,712)
---------- -------------
Balance as of
September 30,
1998............ $5,476,140 $64,172,123
========== =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 4,131,955 $ 300,214 $ 526,510
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization...... 1,169,419 258,504 80,350
Amortization of deferred
compensation...................... 109,396 -- --
Provision for doubtful accounts.... 210,000 50,000 --
Deferred income taxes.............. (721,101) (144,071) (94,042)
Tax benefit of stock options
exercised......................... 544,366 674,000 --
Forgiveness of notes receivable
from employees.................... 275,041 -- --
Change in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable............... (12,679,855) (2,739,995) (420,868)
Income taxes payable.............. 1,270,578 (793,545) (26,750)
Prepaid expenses and other current
assets........................... (611,183) (213,861) (72,218)
Other assets...................... (545,685) 13,312 (31,234)
Accounts payable and accrued
liabilities...................... 4,795,981 1,234,267 487,793
Deferred income................... 466,103 (20,547) 41,438
------------ ----------- ---------
Net cash (used in) provided by
operating activities............... (1,584,985) (1,381,722) 490,979
------------ ----------- ---------
INVESTING ACTIVITIES
Purchase of equipment and
improvements....................... (1,759,124) (553,867) (145,449)
Notes and accrued interest
receivable from related parties.... (1,228,259) (1,027,706) --
Business combinations, net of cash
acquired........................... (8,271,310) (914,964) (152,008)
Restricted cash..................... (711,720) -- --
Purchases of available-for-sale
securities......................... (30,204,257) -- --
Sales of available-for-sale
securities......................... 13,369,865 -- --
Other assets........................ (107,638) -- --
------------ ----------- ---------
Net cash used in investing
activities......................... (28,912,443) (2,496,537) (297,457)
------------ ----------- ---------
FINANCING ACTIVITIES
Borrowings under bank lines of
credit............................. 6,912,000 10,356,122 688,116
Payment of borrowings on bank lines
of credit.......................... (9,670,552) (8,253,602) (450,000)
Repurchase of common stock.......... -- -- (36,635)
Net proceeds from issuance of common
stock.............................. 54,855,612 -- --
Net proceeds from issuance of
preferred stock.................... -- 1,892,223 --
Repayment by shareholder on note
receivable......................... 94,830 37,440 --
Deferred financing costs............ 223,597 (223,597) --
Exercise of stock options........... 932,494 -- --
Employee stock purchase plan........ 116,050 -- --
Payments on capital lease
obligations........................ (44,621) (32,741) (46,594)
Payment on notes payable to
shareholders....................... (46,516) (56,499) (42,863)
------------ ----------- ---------
Net cash provided by financing
activities......................... 53,372,894 3,719,346 112,024
------------ ----------- ---------
Effect of exchange rate changes on
cash............................... (515,602) (40,198) --
------------ ----------- ---------
Net (decrease) increase in cash and
cash equivalents................... 22,359,864 (199,111) 305,546
Cash and cash equivalents at
beginning of period................ 106,435 305,546 --
------------ ----------- ---------
Cash and cash equivalents at end of
period............................. $ 22,466,299 $ 106,435 $ 305,546
============ =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest paid..................... $ 95,658 $ 170,188 $ 74,789
============ =========== =========
Income taxes paid (refunded), net. $ 1,547,512 $ 465,000 $ 472,600
============ =========== =========
Equipment acquired under capital
lease obligations.................. $ 218,919 $ -- $ 8,734
============ =========== =========
Common stock issued in exchange for
notes receivable................... $ -- $ 2,196,040 $ --
============ =========== =========
Repurchase of common stock in
exchange for forgiveness of notes
receivable......................... $ -- $ -- $ 31,610
============ =========== =========
Repurchase of common stock in
exchange for a note payable........ $ -- $ -- $ 134,410
============ =========== =========
Accrued purchase price and assumed
liabilities related to business
combinations....................... $ 397,246 $ 530,623 $ 427,049
============ =========== =========
Conversion of preferred stock into
common stock....................... $ 1,892,223 $ -- $ --
============ =========== =========
Common stock issued in business
combinations....................... $ 665,500 $ -- $ --
============ =========== =========
Restricted stock held in escrow for
employees.......................... $ 700,900 $ -- $ --
============ =========== =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Tier Technologies, Inc. (the "Company") provides information technology
consulting, application development and software engineering services to large
companies and government entities.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
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
included in shareholders' equity. Foreign currency transaction gains and
losses have not been material to the Consolidated Statements of Income for the
year ended September 30, 1998, the nine months ended September 30, 1997 and
the year ended December 31, 1996.
In September 1997, the Company changed its fiscal year end to September 30.
Restatement
As previously reported in the Company's Current Report on Form 8-K filed on
October 23, 1998, and Form 10-Q/A's filed on October 20, 1998, the
consolidated balance sheets as of September 30, 1997 and June 30, 1998, and
the consolidated statements of income for the nine months ended September 30,
1997 and for the nine months ended June 30, 1998 were 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 was to reduce previously reported net income for the nine
months ended September 30, 1997 and the nine months ended June 30, 1998 by
$271,000 (or $0.05 diluted net income per share), and $297,000 (or $0.04
diluted net income per share), respectively, and to decrease previously
reported shareholders' equity at September 30, 1997 and June 30, 1998 by
$271,000 and $1,269,000, respectively. These restatements did not affect
previously reported cash flows and future amortization expenses related to
these acquisitions will be based on the reduced and restated purchase price.
Accounting for Business Combinations
Contingent payments are generally recorded as additional purchase price at
the time the payment can be determined beyond a reasonable doubt and the
amounts are amortized over the estimated remaining useful life of the acquired
assets. If a contingent payment is based, in part, on a seller's continuing
employment with the Company, the payments are recorded as a compensation
charge related to business combinations over the vesting period when the
amount is deemed probable to be made.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although management believes that the estimates and
assumptions used in preparing the accompanying consolidated financial
statements and related notes are reasonable in light of known facts and
circumstances, actual results could differ from those estimates.
Revenue Recognition
The 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
F-8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 would
have a material adverse effect on the Company's business, financial condition
and results of operations. Unbilled receivables were $3,444,396 and $676,021
at September 30, 1998 and 1997, respectively. An unbilled receivable for one
client accounted for 11% of total accounts receivable at September 30, 1997.
Revenues derived from sales to governmental agencies were $20,861,788,
$10,133,147 and $2,709,706 for the year ended September 30, 1998, the nine
months ended September 30, 1997 and for the year ended December 31, 1996,
respectively.
Credit Risk and Significant Clients
Financial instruments that potentially subject the Company to significant
levels of credit risk are accounts receivable.
The Company extends credit based on an evaluation of its client's financial
condition and does not require collateral. The Company's historical credit
losses have not been significant.
For the year ended September 30, 1998, revenues from three clients totaled
$15,270,779, $11,525,429 and $6,470,553 which represented 26.5%, 20.0% and
11.2% of total revenues, respectively. Accounts receivable balances at
September 30, 1998 relating to these three clients amounted to $11,372,007.
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.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at amounts that approximate fair value,
based on quoted market prices. Cash equivalents consist principally of
investments in interest-bearing demand deposit accounts with financial
institutions and highly liquid debt securities of corporations, state
governments, municipalities and the U.S. Government.
Restricted Cash
In accordance with an acquisition agreement, the Company deposited cash in
an escrow account which will be released to the sellers of the acquired
business upon the satisfaction of certain contingencies. The Company has
classified this deposit as restricted cash.
Short-Term Investments
The Company has classified all short-term investments as available-for-sale.
Available-for-sale securities are recorded at amounts that approximate fair
market value based on quoted market prices and have included investment-grade
municipal securities and commercial paper. Realized gains and losses and
declines in value
F-9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
judged to be other-than-temporary on available-for-sale securities are
included in income. Unrealized and realized gains and losses have not been
material to the Consolidated Statements of Income for the year ended September
30, 1998, the nine months ended September 30, 1997 and the year ended December
31, 1996.
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.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provides the disclosure required in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123").
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rules and laws that
are expected to be in effect when the differences are expected to reverse.
Net Income Per Share
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") and
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98"). Under FAS 128, basic net income per share is computed by dividing the
net income available to common stockholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of unvested restricted
common stock, incremental common shares issuable upon the exercise of stock
options and warrants and upon conversion of preferred stock, are included in
diluted net income per share to the extent such shares are dilutive.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements and related notes to conform to the current year
presentation.
Impact of Recently Issued Accounting Standards
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-10
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. 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 in a full set
of general purpose financial statements. 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 not expected to have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives will be
reported in the statement of operations or as a deferred item, depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the derivative must be highly
effective in achieving offsetting changes in fair value or cash flows of the
hedged items during the term of the hedge. The Company has not yet determined
the impact, if any, that the adoption of FAS 133 will have on the consolidated
financial statements.
2. NET INCOME PER SHARE
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
Numerator:
Net income....................... $ 4,131,955 $ 300,214 $ 526,510
=========== ========== ==========
Denominator for basic income per
share-weighted
average common shares outstanding. 9,231,296 5,399,560 4,987,946
Effects of dilutive securities:
Common stock options............. 1,274,093 274,323 257,864
Convertible preferred stock...... 89,957 120,272 --
Common stock held in escrow...... 28,652 -- --
----------- ---------- ----------
Denominator for diluted net income
per share-adjusted weighted
average common shares and assumed
conversions....................... 10,623,998 5,794,155 5,245,810
=========== ========== ==========
Basic net income per share......... $ 0.45 $ 0.06 $ 0.11
=========== ========== ==========
Diluted net income per share....... $ 0.39 $ 0.05 $ 0.10
=========== ========== ==========
</TABLE>
Options to purchase approximately 514,000 shares of Class B common stock at
a price ranging from $14.56 to $17.81 per share were issued during fiscal year
1998, but were not included in the computation of diluted net income per share
because the options' exercise prices were greater than the average market
price of the shares. Approximately 442,000 of these options, which expire in
fiscal year 2008, were still outstanding at September 30, 1998.
F-11
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BALANCE SHEET COMPONENTS
The components of equipment and improvements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Computer equipment and software...................... $2,482,309 $ 870,180
Furniture, equipment and leasehold improvements...... 723,063 183,816
---------- ----------
3,205,372 1,053,996
Less: Accumulated depreciation and amortization...... (834,335) (280,330)
---------- ----------
$2,371,037 $ 773,666
========== ==========
</TABLE>
Depreciation and amortization expense related to equipment and improvements
for the year ended September 30, 1998, the nine months ended September 30,
1997 and the year ended December 31, 1996, was $600,307, $104,415 and $79,330,
respectively. The cost of assets acquired under capital leases is $295,883 and
$155,382 and the related accumulated amortization is $107,005 and $71,727 at
September 30, 1998 and September 30, 1997, respectively.
The components of acquired intangible assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
----------- ----------
(RESTATED)
<S> <C> <C>
Intangible assets:
Goodwill.......................................... $ 9,555,522 $1,199,509
Acquired workforce................................ 923,623 235,236
----------- ----------
10,479,145 1,434,745
Less: Accumulated amortization...................... (684,997) (134,417)
----------- ----------
$ 9,794,148 $1,300,328
=========== ==========
</TABLE>
4. BANK LINES OF CREDIT
At September 30, 1998, the Company has a $10 million revolving credit
facility which 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 all of 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. Among other provisions, the credit
facility requires the Company to maintain certain minimum financial ratios. As
of September 30, 1998, the Company was in compliance with all financial ratios
and had no outstanding borrowings under its credit facility.
Prior to March 31, 1998, the Company had a credit agreement with a bank
which provided for lines of credit of up to $2,250,000 for general corporate
purposes and $1,500,000 for acquisition purposes (including up to $500,000 for
stand-by letters of credit). The lines of credit bore interest at the bank's
prime rate (8.5% at September 30, 1997) plus 1.5% and 1.75%, respectively.
Total borrowings were limited to the lesser of $3,750,000 or 85% of eligible
accounts receivable and were secured by the Company's assets. At September 30,
1997, the outstanding borrowings were $2,417,813. Interest payments were due
monthly. At December 31, 1997 all outstanding principal and remaining interest
borrowed under the $1,500,000 line of credit were converted into a term loan
to be repaid over four years. All borrowings under this credit facility were
repaid in December 1997.
F-12
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. BANK LINES OF CREDIT--(CONTINUED)
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 interest rates of 1.75% above the bank's prime rate. At
September 30, 1997, the Company had outstanding borrowings of $252,440.
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. All borrowings under this credit facility were repaid in December
1997.
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. All borrowings under this credit
facility were repaid in December 1997.
5. COMMITMENTS
The Company leases its principal facilities and certain equipment under
noncancellable operating and capital leases which expire at various dates
through 2003. 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,
1999.................................................. $ 694,882 $ 81,738
2000.................................................. 516,003 73,624
2001.................................................. 327,488 51,865
2002.................................................. 42,531 45,496
2003.................................................. -- 17,388
---------- --------
Total minimum lease payments.......................... $1,580,904 270,111
==========
Less amounts representing interest.................... (39,671)
--------
Present value of capital lease obligations............ 230,440
Less amounts due within one year...................... (67,165)
--------
$163,275
========
</TABLE>
Rent expense for the year ended September 30, 1998, the nine months ending
September 30, 1997, and the year ended December 31, 1996 was $530,385,
$183,823 and $163,700, respectively.
6. SHAREHOLDERS' EQUITY
Common Stock
In February 1997, the Company's Board of Directors authorized two classes of
common stock, Class A common stock and Class B common stock. Each then
outstanding share of common stock was converted into 40 shares of Class A
common stock and 60 shares of Class B common stock. All share and per share
information in the accompanying financial statements has been retroactively
adjusted to reflect this conversion. In October 1997, the Board of Directors
increased the authorized shares of Class B common stock to 42,600,000.
The holders of Class A common stock and Class B common stock have 10 votes
per share and 1 vote per share, respectively. Each share of Class A common
stock will automatically convert into one share of Class B common stock upon
transfer, except in limited circumstances, or at the election of the holder of
such Class A
F-13
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY--(CONTINUED)
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. The number of
authorized shares of Class A common stock was 1,659,762 at September 30, 1998.
Voting Trust
In November 1997, all Class A shareholders (the "Beneficiaries") transferred
their Class A common stock into a voting trust. The Company's Chief Executive
Officer and President are the trustees of the voting trust (the "Trustees")
and have the exclusive right to vote all shares of Class A common stock held
in the voting trust. The voting trust has a term of 10 years and is renewable
by consent of the Beneficiaries and the Trustees during the last 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.
Initial Public Offering
In December 1997, the Company completed an initial public offering of
3,400,000 shares of its Class B common stock at $8.50 per share. Of those
shares, 2,725,000 shares were sold by the Company and 675,000 shares were sold
by certain selling shareholders. In January 1998, the underwriters from the
Company's initial public offering exercised their over-allotment option to
purchase an additional 510,000 shares of Class B common stock from the Company
at the initial public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $23,900,000 after deducting the
underwriters' discount, commissions and related issuance costs.
Secondary Public Offering
In June 1998, the Company completed a secondary public offering of 3,000,000
shares of its Class B common stock at $15.00 per share. Of those shares,
1,775,000 shares were sold by the Company and 1,225,000 shares were sold by
certain selling shareholders. In June 1998, the underwriters from the
Company's secondary public offering exercised their over-allotment option to
purchase an additional 450,000 shares of Class B common stock from the Company
at the secondary public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $31,000,000 after deducting the
underwriters' discount, commissions and related issuance costs.
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 was 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 automatically converted into
420,953 shares of Class B common stock. At September 30, 1998, 4,579,047
shares of preferred stock were authorized.
Stock Options
For the year ended December 31, 1996, the Company issued to employees
options to purchase 440,000 shares of Class A common stock and 660,000 shares
of Class B common stock at exercise prices ranging from $0.12 to $1.82 per
share. Options for 200,000 shares of Class A common stock and 300,000 shares
of Class B
F-14
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY--(CONTINUED)
common stock vested upon grant. The remaining options vested one-third upon
the completion of the Company's initial public offering in December 1997, one-
third on December 31, 1997, and the final one-third will vest on December 31,
1998. In February 1997, the Company issued options to purchase an additional
240,000 shares of Class A common stock at an exercise price of $3.58 per
share. As of September 30, 1997, options for 660,000 shares of Class A common
stock and 660,000 shares of Class B common stock had been exercised at prices
ranging from $0.12 to $3.58 per share (weighted average exercise price of
$1.66 per share) and options for 20,000 shares of Class A common stock at an
exercise price of $3.58 per share remain outstanding. These outstanding
options will expire in 2002. The weighted average fair value of these options
granted during the nine months ended September 30, 1997, and the year ended
December 31, 1996, were $0.48 and $0.18 per share, respectively. At September
30, 1998, 280,000 shares of nonvested stock issued pursuant to exercises of
these options were subject to repurchase.
1996 Equity Incentive Plan
In February 1997, the Company adopted the 1996 Equity Incentive Plan (the
"Plan"), under which the Board of Directors may issue incentive stock options
for Class B common stock to employees and nonstatutory stock options, stock
bonuses or the right to purchase restricted stock to employees, consultants
and outside directors. The Board of Directors or a committee designated by the
Board determines who shall receive awards, the number of shares and the
exercise price (which cannot be less than the fair market value at date of
grant for incentive stock options and other awards). Options granted under the
Plan expire no more than 10 years from the date of grant and must vest at a
rate of at least 20% per year over 5 years from date of grant. Incentive stock
options granted to employees deemed to own more than 10% of the combined
voting power of all classes of stock of the Company must have an exercise
price of at least 110% of the market price of the stock at the date of grant
and the options may not be exercisable after the expiration of five years from
the date of grant. Through September 30, 1998, no compensation expense had
been recorded in connection with stock based employee incentive awards under
the Plan. At September 30, 1998 and September 30, 1997, the number of shares
authorized for issuance under the Plan was 2,989,333 and 1,811,714,
respectively. 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 4.02
Options cancelled....................................... (39,600) 3.33
--------- ------
Options outstanding at September 30, 1997................ 1,743,075 3.93
Options granted......................................... 1,201,200 13.76
Options cancelled....................................... (136,256) 9.23
Options exercised....................................... (249,040) 3.71
--------- ------
Options outstanding at September 30, 1998................ 2,558,979 $ 8.28
========= ======
</TABLE>
The weighted average fair value of options granted to employees under the
Plan during the year ended September 30, 1998 and the nine months ended
September 30, 1997 was $5.51 and $0.85 per share, respectively. At September
30, 1998, no shares of non-vested stock issued pursuant to exercises of
options were subject to repurchase. At September 30, 1998, options to purchase
181,314 shares of Class B common stock were available for grant. The weighted
average remaining life of outstanding options under the Plan at September 30,
1998 is 8.63 years.
F-15
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY--(CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.4500--
$2.4500 227,501 8.39 $ 2.4500 147,335 $ 2.4500
$3.2500--
$3.2500 633,403 8.41 $ 3.2500 262,587 $ 3.2500
$4.2500--
$5.2500 337,575 8.77 $ 4.8242 67,588 $ 4.7446
$5.7750--
$9.0000 286,300 5.46 $ 6.7241 54,158 $ 5.9891
$10.8750--
$10.8750 288,134 9.32 $10.8750 192,500 $10.8750
$13.8750--
$14.2500 329,500 9.78 $14.1362 62,500 $14.1720
$15.1875--
$15.1875 253,333 9.73 $15.1875 20,833 $15.1875
$16.1250--
$16.1250 19,999 9.78 $16.1250 19,999 $16.1250
$16.3750--
$16.3750 144,534 9.52 $16.3750 17,834 $16.3750
$17.8130--
$17.8130 38,700 9.75 $17.8130 -- --
---------- --------- ---- -------- ------- --------
$2.4500--
$17.8130 2,558,979 8.63 $ 8.2795 845,334 $ 6.8251
========= =======
</TABLE>
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The effect of applying the FAS 123 fair value method to the Company's stock-
based awards results in net income and net income per share as follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
Net income, as reported............ $4,131,955 $300,214 $526,510
Net income, pro forma.............. 2,615,712 165,260 524,710
Basic net income per share, as
reported.......................... 0.45 0.06 0.11
Basic net income per share, pro
forma............................. 0.28 0.03 0.11
Diluted net income per share, as
reported.......................... 0.39 0.05 0.10
Diluted net income per share, pro
forma............................. 0.25 0.03 0.10
</TABLE>
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
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Expected dividend yield............. 0% 0% 0%
Expected volatility................. 65% 0% 0%
Risk-free interest rate............. 4.79%-5.60% 6.48% 5.78%
Expected life of the option......... 0.5-4 years 1-5 years 1-4 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. Option valuation models such as the Black-Scholes model
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.
F-16
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY--(CONTINUED)
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes option pricing model with
the following assumptions for the year ended September 30, 1998: no dividend
yield; expected life of six months; expected volatility of 65 percent; and
risk free interest rate of 5.32 percent. The weighted-average fair value of
those purchase rights granted during the year ended September 30, 1998 was
$6.60.
Employee Stock Purchase Plan
In October 1997, the Company adopted the Employee Stock Purchase Plan. The
Company reserved a total of 100,000 shares of Class B common stock for
issuance under the plan. The plan has consecutive six-month purchase periods
and eligible employees may purchase Class B common stock at 85% of the lesser
of the fair market value of the Company's Class B common stock on the first
day or the last day of the applicable purchase period. The first purchase
period ended in May 1998 and resulted in proceeds of $116,050 from the sale of
11,378 shares. Through September 30, 1998, no compensation expense had been
recorded in connection with these purchase rights.
7. 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 using the straight-line method over a six-year period.
On December 31, 1996, the Company acquired certain assets and liabilities of
Encore Consulting, Inc. ("Encore"), a Missouri-based corporation which
provided consulting services for computer systems integration on a government
contract. The cost of the acquisition totaled $784,268 and was accounted for
as a purchase. Intangible assets are being amortized using the straight-line
method over a six-year period. Based on the renewal of a significant client
contract, contingent payments to the former Encore shareholders of $150,000
were expensed during each of the year ended September 30, 1998 and the nine
months ended September 30, 1997 as compensation charge related to business
combinations during the year.
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 totaled $283,775 and was
accounted for as a purchase. Intangible assets recorded are being amortized
using the straight-line method over a six-year period.
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
totaled $487,698 and the transaction was accounted for as a purchase.
Intangible assets recorded are being amortized using the straight-line method
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 ("Albanycrest"), a United Kingdom private limited
company, which provided information and management consulting services on the
design of software and computer systems. The purchase price totaled $577,750
and the transaction was
F-17
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACQUISITIONS--(CONTINUED)
accounted for as a purchase. Intangible assets recorded are being amortized
using the straight-line method over a six-year period. During the year ended
September 30, 1998 and nine months ended September 30, 1997, $477,134 and
$319,422, respectively, of compensation expense was recorded with respect to
certain payments paid to former shareholders based on performance criteria and
continued employment.
Effective March 1, 1998, the Company acquired certain assets and liabilities
of Sancha Computer Services Pty Limited and Sancha Software Development Pty
Limited ("Sancha Group"), Australian entities which provided computer systems
consulting services. The initial cost of the acquisition totaled $5,219,507,
of which $4,554,007 was paid in cash and $665,500 in Class B common stock. The
acquisition was accounted for as a purchase. As of September 30, 1998,
intangible assets of approximately $5.3 million are being amortized using the
straight-line method over a period of 8 to 15 years. Contingent payments
totaling approximately $312,000 were paid during the year ended September 30,
1998. Additional contingent payments of up to approximately $1.2 million
(based on a current exchange rate of AU $1.67 to US $1.00) may be paid by May
15, 2000 if certain performance targets are met.
Effective April 1, 1998, the Company acquired certain assets and liabilities
of Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which
provided information technology consulting services to develop and implement
call center applications. The initial cost of the acquisition totaled
approximately $788,000. 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 it is deemed probable such payments will be
made. In addition, 48,768 shares of the Company's Class B common stock, valued
as of the date of the acquisition at approximately $701,000, were issued and
are held in escrow and will be released over three years provided that the key
employee/sellers are employed by the Company on the release dates. The value
of these shares are reflected as deferred compensation on the balance sheet
and will be amortized over the three year vesting period. As of September 30,
1998, intangible assets of approximately $732,000 are being amortized over six
years.
Effective August 1, 1998, the Company acquired certain assets and
liabilities of Infact Pty Limited as trustee of the Infact Unit Trust
("Infact"), an Australian entity which provided information technology
consulting services. The initial cost of the acquisition totaled approximately
$3.2 million. The Infact acquisition was accounted for as a purchase. As of
September 30, 1998, intangible assets of approximately $3.1 million are being
amortized using the straight-line method over a period of 8 to 15 years.
Additional contingent purchase price payments of up to approximately $1.3
million in cash (based on a current exchange rate of AU $1.67 to US $1.00) and
approximately 50,000 shares of the Company's Class B common stock may be paid
over the two-year period ended August 1, 2000 if certain performance targets
are met. Approximately 71% of such payments will be accounted for as
additional purchase price and the remaining payments will be treated as
compensation expense at the time the payments are deemed probable to be made
because such payments are contingent, in part, on the continuing employment of
a key employee/seller.
The accompanying consolidated financial statements include the results of
operations of these acquired businesses for periods subsequent to the
respective acquisition dates.
F-18
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACQUISITIONS--(CONTINUED)
Pro Forma Disclosure of Significant Acquisitions (Unaudited)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if Albanycrest, Sancha
Group and Infact 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
YEAR ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(RESTATED)
<S> <C> <C>
Revenues......................................... $64,129,948 $31,729,413
Net income....................................... 4,732,863 1,083,179
Net income per share............................. 0.51 0.20
Diluted net income per share..................... 0.44 0.18
</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.
8. NOTES RECEIVABLE FROM RELATED PARTIES
The Company's outstanding notes receivable from related parties as of
September 30, 1998 and September 30, 1997, which total $1,557,436 and
$942,426, respectively, are from certain officers and employees of the
Company. These notes bear interest at rates ranging from 5.75% to 9.00% and
have due dates ranging from three to ten years. Certain of these notes are
being forgiven in accordance with the terms of the officers' and employees'
agreements and have an aggregate balance of $807,603 at September 30, 1998.
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 Class B common stock. These notes
receivable from shareholders are due in February 2007, bear interest at 6.99%,
are secured and full recourse, and have a balance of $2,158,600 as of
September 30, 1998.
F-19
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. 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
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
Revenues:
United States.................... $45,285,973 $19,406,743 $16,197,466
Australia........................ 7,574,703 2,048,493 --
United Kingdom................... 4,864,210 1,023,407 --
----------- ----------- -----------
Total.............................. $57,724,886 $22,478,643 $16,197,466
=========== =========== ===========
Income (loss) from operations:
United States.................... $ 4,114,495 $ 456,779 $ 951,276
Australia........................ 852,343 205,890 --
United Kingdom................... 826,800 (62,195) --
----------- ----------- -----------
Total.............................. $ 5,793,638 $ 600,474 $ 951,276
=========== =========== ===========
Identifiable assets:
United States.................... $60,442,035 $ 8,129,214 $ 4,132,665
Australia........................ 12,982,732 1,257,348 --
United Kingdom................... 1,078,361 1,109,057 --
----------- ----------- -----------
Total.............................. $74,503,128 $10,495,619 $ 4,132,665
=========== =========== ===========
</TABLE>
The United States revenues for the year ended September 30, 1998, the nine
months ended September 30, 1997 and the year ended December 31, 1996, include
revenues from one project with a U.S. company performed in Australia of
approximately $4,165,000, $2,111,000 and $0, respectively.
10. INCOME TAXES
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
United States....................... $ 5,126,597 $356,738 $877,517
Foreign............................. 1,647,100 144,866 --
----------- -------- --------
Total............................. $ 6,773,697 $501,604 $877,517
=========== ======== ========
</TABLE>
F-20
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1998 1997
--------- ----------
(RESTATED)
<S> <C> <C>
Deferred tax liabilities:
Accrual basis to cash basis adjustments.............. $ 158,084 $374,412
Depreciation......................................... 140,277 46,580
Other................................................ 205,225 113,100
--------- --------
Total deferred tax liabilities......................... 503,586 534,092
--------- --------
Deferred tax assets:
Vacation accruals.................................... 228,931 72,182
Accrued expenses..................................... 107,574 20,435
Accrued revenue...................................... 57,137 2,032
Accrued rent......................................... 8,457 11,738
Accrued bonus........................................ 136,920 --
Intangibles.......................................... 121,833 75,482
Accounts receivable allowance........................ 98,800 20,000
Deferred miscellaneous revenue....................... 132,812 --
Foreign tax credit carryforward...................... 155,902 --
Valuation allowance.................................. (155,902) --
--------- --------
Total deferred tax assets.............................. 892,464 201,869
--------- --------
Net deferred tax (assets) liabilities.................. $(388,878) $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.
At September 30, 1998, the Company has approximately $156,000 of foreign tax
credit carryforward for tax reporting purposes available to offset future
foreign income. Such foreign tax credit carryforward will expire in 2002. The
benefit from the foreign tax credit carryforward may be limited in certain
circumstances. The Company believes sufficient uncertainty exists regarding
the realizability of the deferred tax assets such that a valuation allowance
is required.
F-21
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
Current:
Federal........................... $2,527,369 $ 144,394 $373,151
State............................. 361,599 46,785 71,898
Foreign........................... 473,875 154,282 --
---------- --------- --------
3,362,843 345,461 445,049
---------- --------- --------
Deferred (benefit):
Federal........................... (645,196) (122,575) (74,646)
State............................. (75,905) (21,496) (19,396)
---------- --------- --------
(721,101) (144,071) (94,042)
---------- --------- --------
Total provision for income taxes.... $2,641,742 $ 201,390 $351,007
========== ========= ========
</TABLE>
The effective tax rate differs from the applicable U.S. statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
U.S statutory federal tax rate..... 34.0 % 34.0% 34.0%
State taxes, net of federal tax
benefit........................... 4.0 % 6.1% 6.1%
Tax exempt interest income......... (3.2)% -- --
Other.............................. 4.2 % -- --
---- ---- ----
Effective tax rate............. 39.0 % 40.1% 40.1%
==== ==== ====
</TABLE>
11. 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.
12. SUBSEQUENT EVENTS
Stock Repurchase Program
In October 1998, the Company's Board of Directors authorized a stock
repurchase program for the repurchase of up to one million shares of the
Company's Class B common stock. The timing and volume of the repurchases, if
any, will depend on market conditions. No shares have been repurchased to
date.
F-22
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS--(CONTINUED)
1996 Equity Incentive Plan
In October 1998, the Board of Directors of the Company approved and adopted
an amendment to the Amended and Restated 1996 Equity Incentive Plan (the "Plan
Amendment") to increase the number of shares of Class B common stock
authorized and reserved for issuance under the Plan to 3,989,333 shares.
Effective on November 3, 1998, the Plan Amendment was approved by a majority
of the shareholders entitled to vote thereon, acting by written consent. The
Plan Amendment was effective as of November 26, 1998.
Acquisition
Effective November 30, 1998, the Company acquired all the issued and
outstanding capital stock of Midas Computer Software Limited ("Midas"), a
United Kingdom entity which provided data warehouse migration services to
commercial and government entities. The initial cost of the acquisition
totaled approximately $3.1 million, of which approximately $2.4 million was
paid in cash and approximately $664,000 was paid in the Company's Class B
common stock. The Midas acquisition will be accounted for as a purchase.
Additional contingent payments of up to approximately $13.0 million (based on
a current exchange rate of GBP 0.61 to US $1.00), may be paid in cash and
shares of the Company's Class B common stock over a three year period based on
achieving certain performance targets. Contingent payments will be accrued
when earned and recorded as additional purchase price.
Contract Dispute
The Company received a notice dated December 17, 1998 that a prime
contractor was exercising its right to terminate one of the Company's
Australian projects alleging a breach of the sub-contract. The Company
believes that the termination is not valid and that it has not breached the
sub-contract. As of September 30, 1998, accounts receivable under the sub-
contract approximated $1.8 million, which amount currently remains unpaid. The
Company and the prime contractor are in discussion regarding a resolution of
this matter. Although the Company's investigation and negotiations with the
prime contractor are ongoing, the Company believes, based on currently
available information, the resolution of this matter will not have a material
adverse effect on its consolidated financial position, results of operations
or cash flows.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Tier Technologies, Inc.
Dated: December 21, 1998 /s/ James L. Bildner
By: ---------------------------------
James L. Bildner
Chairman of the Board andChief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Bildner, William G. Barton and George
K. Ross, and each of them, his attorneys-in-fact and agents, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ James L. Bildner Chairman of the Board and December 21, 1998
------------------------------------ Chief Executive Officer
James L. Bildner (principal executive
officer)
/s/ William G. Barton President, Chief Technology December 21, 1998
------------------------------------ Officer and Director
William G. Barton
/s/ George K. Ross Executive Vice President and December 21, 1998
------------------------------------ Chief Financial Officer
George K. Ross (principal financial
officer and principal
accounting officer)
/s/ Ronald L. Rossetti Director December 21, 1998
------------------------------------
Ronald L. Rossetti
/s/ Samuel Cabot III Director December 21, 1998
------------------------------------
Samuel Cabot III
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
<C> <S> <C>
2.1 Business Purchase Agreement dated as of August 1, 1998 by and
between Infact Pty Limited as trustee of the Infact Unit Trust
and Tier Technologies (Australia) Pty Limited (the schedules
and annexures to the Business Purchase Agreement have been
omitted as permitted by the rules and regulations of the
Securities and Exchange Commission (SEC) but will be provided
supplementally to the SEC upon request) (1)...................
2.2 First Amendment to Business Purchase Agreement dated as of
September 30, 1998 by and between Infact Pty Limited, as
trustee of the Infact Unit Trust and Tier Technologies
(Australia) Pty Limited.......................................
3.1 Amended and Restated Articles of Incorporation................
3.2 Amended and Restated Bylaws (2)...............................
4.1 Form of Class B Common Stock Certificate (3)..................
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles and Amended and Restated Bylaws of the
Registrant defining rights of the holders of Class B Common
Stock of the Registrant.......................................
10.1 Amended and Restated 1996 Equity Incentive Plan (7)*..........
10.2 Second Amended and Restated Employment Agreement by and
between the Registrant and James L. Bildner, dated as of
February 16, 1998 (4)*........................................
10.3 Second Amended and Restated Employment Agreement by and
between the Registrant and William G. Barton, dated as of
February 16, 1998 (4)*........................................
10.4 Investors' Rights Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*.........................
10.5 Stock Purchase Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*.........................
10.6 Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of December 31, 1996 (3).......
10.7 Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of January 2, 1997 (3).........
10.8 Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of May 31, 1997 (3)............
10.9 Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of May 31, 1997 (3)............
10.10 Full Recourse Promissory Note by and between the Registrant
and James L. Bildner, dated as of July 15, 1997 (3)...........
10.11 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4)......................................
10.12 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4)......................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
<C> <S> <C>
10.13 Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of December 31, 1996 (3)......
10.14 Full Recourse Secured Promissory Note, dated as of February
28, 1997, and Amended and Restated Pledge Agreement, dated as
of August 1, 1997, by and between the Registrant and William
G. Barton (3).................................................
10.15 Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of February 28, 1997 (3)......
10.16 Full Recourse Promissory Note by and between the Registrant
and William G. Barton, dated as of July 15, 1997 (3)..........
10.17 Full Recourse Promissory Note by and between the Registrant
and F. Thomas Latham, dated as of July 15, 1997 (3)...........
10.18 Amended and Restated Employment Agreement by and between the
Registrant and George K. Ross, dated as of February 16, 1998
(4)*..........................................................
10.19 Full Recourse Promissory Note by and between the Registrant
and George K. Ross, dated as of February 3, 1997 (3)..........
10.20 Office Lease by and between Urban West Business Park, Colony
MB Partners, L.P., as Landlord, and Tier Corporation, a
California Corporation, as Tenant, as amended July 29, 1997
(3)...........................................................
10.21 Form of Indemnification Agreement (3).........................
10.22 Tier Corporation 401(k) Plan, Summary Plan Description (3)....
10.23 Asset Purchase Agreement by and among the Registrant, Encore
Consulting LLC, Robert D. Beman, Thomas E. McCleod and David
Myers, dated as of December 31, 1996 (3)......................
10.24 Asset Purchase Agreement by and among the Registrant,
Albanycrest Limited, a Limited Liability Company Incorporated
in England, and Andrew David Armstrong, Thomas Thomson and
Howard Moore, dated as of July 11, 1997 (3)...................
10.25 Agreement for provision of consulting services by and between
the Registrant and Kaiser Foundation Health Plan, Inc. (3)....
10.26 Agreement for provision of consulting services by and between
the Registrant and the State of Missouri (3)..................
10.27 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Arizona) (3)...........
10.28 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Australia) (3).........
10.29 Employee Stock Purchase Plan (2)*.............................
10.30 Voting Trust Agreement (3)....................................
10.31 Form of Buy-Sell Agreement between James L. Bildner and
William G. Barton (2).........................................
10.32 Business Purchase Agreement by and among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited, dated as of
February 26, 1998 (5).........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------- ------------------- ----
<C> <S> <C>
10.33 Amendment of Business Purchase Agreement, among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited (5)..............
10.34 Revolving Credit Agreement by and between the Registrant, Tier
Technologies (United Kingdom) Inc. and BankBoston, N.A. (4)....
10.35 Agreement for provision of consulting services by and between
the Registrant and Humana, Inc. (4)............................
10.36 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 10, 1998 (4)..............
10.37 Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998 (6).....................
10.38 Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of May 22, 1998 (6).....................
10.39 Amended Agreement by and between the Registrant and the State
of Missouri, dated August 3, 1998..............................
10.40 Amended and Restated Pledge Agreement and Promissory Note by
and between Registrant and William G. Barton...................
10.41 Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A................................................
10.42 Second Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A................................................
16.1 Letter re: change in certifying accountant (6).................
21.1 Subsidiaries of the Registrant (3).............................
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants....................................................
23.2 Consent of Ernst & Young LLP, Independent Auditors.............
27.1 Financial Data Schedule........................................
</TABLE>
- --------
* Management contract or compensatory plan required to be filed as an exhibit
to this report.
(1) Filed as an exhibit to the Current Report on Form 8-K, filed August 21,
1998, and incorporated herein by reference.
(2) Filed as an exhibit to Form S-1/A No. 333-37661), filed on November 17,
1997, and incorporated herein by reference.
(3) Filed as an exhibit to Form S-1 (No. 333-37661), filed on October 10, 1997,
and incorporated herein by reference.
(4) Filed as an exhibit to Form S-1/A (No. 333-52065), filed on May 7, 1998,
and incorporated herein by reference.
(5) Filed as an exhibit to the Current Report on Form 8-K, filed March 27,
1998, and incorporated herein by reference.
(6) Filed as an exhibit to Form 10-Q, filed August 14, 1998, and incorporated
herein by reference.
(7) Filed as an exhibit to the Current Report on Form 8-K, filed July 27, 1998,
and incorporated herein by reference.
(8) Filed as Schedule A to Schedule 14C Information, filed November 6, 1998,
and incorporated herein by reference.
<PAGE>
EXHIBIT 2.2
FIRST AMENDMENT TO
BUSINESS PURCHASE AGREEMENT
THIS FIRST AMENDMENT, effective as of August 1, 1998, is made this 30th day
of September 1998, by and between Infact Pty Limited, as trustee of the Infact
Unit Trust ("INFACT"), and Tier Technologies (Australia) Pty Limited ("TIER").
WHEREAS, Infact and Tier are parties to a certain Business Purchase
Agreement dated as of August 1, 1998 (the "BUSINESS PURCHASE AGREEMENT"); and
WHEREAS, Infact and Tier desire to amend the Business Purchase Agreement.
NOW THEREFORE, for the promises made herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Infact and Tier agree as follows:
1. Amendment of the Business Purchase Agreement.
1.1. The Business Purchase Agreement is hereby amended by deleting
Section 3.6(b) in its entirety and substituting the following in
lieu thereof:
"(b) Release of 29.412% (representing Tony Barker's relative unit
holdings in Seller) of the Tier Shares and Escrow Cash in
accordance with clause 3.6(a) is subject to Tony Barker, one of
the Key Employees, remaining employed by the Buyer in the
Continuing Business for a period of eighteen months from the
Purchase Date, unless his Key Employee Contract is terminated by
the Buyer for reasons other than cause as described in clause
14.2(a) of that Key Employee Contract."
1.2. The Business Purchase Agreement is hereby amended by deleting
Section 3.7(b) in its entirety and substituting the following in
lieu thereof:
"(b) Release of 29.412% (representing Tony Barker's relative unit
holdings in Seller) of the Tier Shares and Escrow Cash in
accordance with clause 3.7(a) is subject to Tony Barker, one of
the Key Employees, remaining employed by the Buyer in the
Continuing Business for a period of eighteen months from the
Purchase Date, unless his Key Employee Contract is terminated by
the Buyer for reasons other than cause as described in clause
14.2(a) of that Key Employee Contract."
1.3. The Business Purchase Agreement is hereby amended by deleting
Section 3.8(c) in its entirety and substituting the following in
lieu thereof:
"(c) Release of 29.412% (representing Tony Barker's relative unit
holdings in Seller) of the Tier Shares and Escrow Cash in
accordance with clause 3.8(a) is subject to Tony Barker, one of
the Key Employees,
<PAGE>
remaining employed by the Buyer in the Continuing Business for a
period of eighteen months from the Purchase Date, unless his Key
Employee Contract is terminated by the Buyer for reasons other
than cause as described in clause 14.2(a) of that Key Employee
Contract."
1.4. The Business Purchase Agreement is hereby amended by deleting
Section 3.9(c) in its entirety and substituting the following in
lieu thereof:
"(c) Release of 29.412% (representing Tony Barker's relative unit
holdings in Seller) of the Tier Shares and Escrow Cash in
accordance with clause 3.6(a) is subject to Tony Barker, one of
the Key Employees, remaining employed by the Buyer in the
Continuing Business for a period of eighteen months from the
Purchase Date, unless his Key Employee Contract is terminated by
the Buyer for reasons other than cause as described in clause
14.2(a) of that Key Employee Contract."
2. Business Purchase Agreement Remains in Effect.
Except as specifically provided herein, all of the terms and condition of
the Business Purchase Agreement shall remain in full force and effect.
3. Counterparts.
This First Amendment may be signed in any number of counterparts with the
same effect as if the signatures were upon the same instrument.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to be executed
by their duly authorized officers effective as of the day and year first written
above.
INFACT PTY LIMITED,
as trustee of the Infact Unit Trust:
/s/ M. Van De Wiel /s/ A. S. Barker
------------------------------------- -------------------------------------
Witness Representative
M. Van De Wiel A. S. Barker
------------------------------------- -------------------------------------
Name (please print) Name (please print)
TIER TECHNOLOGIES (AUSTRALIA) PTY LIMITED:
/s/ George K. Ross /s/ James L. Bildner
------------------------------------- -------------------------------------
Secretary/Director Director
George K. Ross James L. Bildner
------------------------------------- -------------------------------------
Name (please print) Name (please print)
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TIER TECHNOLOGIES, INC.
James L. Bildner and George K. Ross do hereby certify that:
FIRST: They are the duly elected and acting Chairman of the Board and
Chief Executive Officer, and Executive Vice President and Chief
Financial Officer, respectively, of TIER TECHNOLOGIES, INC., a
California corporation (the "Corporation").
SECOND: The Articles of Incorporation of this corporation are amended and
restated in full to read as follows:
ARTICLE I
The name of the Corporation is TIER TECHNOLOGIES, INC.
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business, or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. AUTHORIZED CAPITALIZATION. The Corporation is authorized to issue
three classes of shares designated "Class A Common Stock," "Class B Common
Stock" and "Preferred Stock," respectively. The total number of shares of all
classes of stock that the Corporation shall have authority to issue is forty-
eight million, eight hundred thirty-eight thousand, eight hundred nine
(48,838,809) shares. The number of shares of Class A Common Stock that the
Corporation is authorized to issue is one million, six hundred fifty-nine
thousand, seven hundred sixty-two (1,659,762) shares. The number of shares of
Class B Common Stock that the Corporation is authorized to issue is forty-two
million, six hundred thousand (42,600,000) shares. The number of shares of
Preferred Stock that the Corporation is authorized to issue is four million,
five hundred seventy-nine thousand, forty-seven (4,579,047) shares.
B. PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series. Except as otherwise provided in this Article III,
the Board of Directors is hereby authorized to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock, and to fix the number of shares of any such
series of Preferred Stock, and the designation of any such series of Preferred
Stock. The Board of Directors, within the limits and restrictions stated in
this Article
<PAGE>
III or any resolution of the Board of Directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares of such series then outstanding) the number of any series
subsequent to the issuance of shares of that series.
C. CLASS A COMMON STOCK. The shares of Class A Common Stock and shares of
Class B Common Stock shall be identical in all respects and shall have equal
rights and privileges, except as set forth in this paragraph C and in paragraph
D of this Article III. Upon dissolution of the Corporation, the Class A Common
Stock and Class B Common Stock are entitled to share ratably in the assets
thereof that may be available for distribution after satisfaction of creditors
and the payment of any liquidation preference of any outstanding shares of
Preferred Stock.
1. DIVIDENDS.
(a) Subject to the provisions of Section C.1(b) below with
respect to dividends or distributions in shares of Class A Common Stock or
shares of Class B Common Stock: (i) such dividends or distributions as may be
determined from time to time may be declared and paid or made upon each share
of Class A Common Stock out of any source at the time lawfully available for
the payment of dividends, provided that concurrently identical dividends or
distributions are declared and paid or made upon each share of Class B Common
Stock and (ii) such dividends or distributions as may be determined from time
to time may be declared and paid or made upon each share of Class B Common
Stock out of any source at the time lawfully available for the payment of
dividends, provided that concurrently identical dividends or distributions are
declared and paid or made upon each share of Class A Common Stock.
(b) No dividend may be declared or paid or made upon any share of
the Corporation in shares of Class A Common Stock. In the event that a
dividend or distribution is declared and paid or made upon shares of Class A
Common Stock in shares of Class B Common Stock, concurrently an identical
dividend or distribution must be declared and paid or made upon each share of
Class B Common Stock in shares of Class B Common Stock and in the event that a
dividend or distribution is declared and paid or made upon shares of Class B
Common Stock in shares of Class B Common Stock, concurrently an identical
dividend or distribution must be declared and paid or made upon each share of
Class A Common Stock in shares of Class B Common Stock.
2. STOCK COMBINATIONS AND SUBDIVISIONS. The Corporation shall not
effect a combination (reverse stock split) or a subdivision (stock split) of
either the Class A Common Stock or the Class B Common Stock except in compliance
with the following: (i) the Class A Common Stock shall not be combined or
subdivided unless at the same time there is a proportionate combination or
subdivision of the Class B Common Stock, (ii) the Class B Common Stock shall not
be combined or subdivided unless at the same time there is a proportionate
combination or subdivision of the Class A Common Stock and (iii) neither the
Class A Common Stock nor the Class B Common Stock shall be combined or
subdivided unless an amendment to these Amended and Restated Articles of
Incorporation is approved by (in addition to any other approval by holders of
shares of the Corporation which may be required)
2
<PAGE>
the holders of shares of Class B Common Stock as provided in subsection D.3(c)
of this Article III.
3. VOTING. Subject to the provisions of subsection D.3 of this
Article III and except as otherwise required by applicable law related to class
voting rights, the holders of Class A Common Stock shall vote together with the
holders of Class B Common Stock as a single class, provided that the holders of
Class A Common Stock shall have ten (10) votes per share and the holders of
Class B Common Stock shall have one (1) vote per share on all matters that may
be submitted to a vote or consent of the shareholders. Without limiting the
generality of the foregoing:
(a) With respect to the election of Directors (whether such
election is by vote at a meeting of shareholders or by written consent of
shareholders), the holders of Class A Common Stock and Class B Common Stock
shall be entitled, voting as a single class to elect the remaining Directors
not subject to the priority right of the holders of Class B Common Stock to
elect one or more Directors as set forth in Subsection D.3(a) of this Article
III. Vacancies on the Board of Directors created by (i) the death, resignation
or removal of a Director who was elected by the holders of Class A Common
Stock and Class B Common Stock voting as a single class or (ii) an increase in
the authorized number of Directors if such vacancy is not to be filled by the
holders of Class B Common Stock voting as a separate class in accordance with
Section D.3(a) of this Article III, may be filled by those Directors (acting
by majority vote, though less than a quorum, or by the act of a sole remaining
Director) who were elected by the holders of Class A Common Stock and Class B
Common Stock voting as a single class.
(b) Except as may otherwise be required by law, any Director
elected by the holders of Class A Common Stock and Class B Common Stock voting
as a single class, or who was elected by those Directors who were elected by
the holders of Class A Common Stock and Class B Common Stock voting as a
single class to fill a vacancy, may be removed from office with or without
cause by the holders of shares of Class A Common Stock and Class B Common
Stock voting as a single class, provided that, to the extent permitted by
applicable law, any such Director may be removed for cause by the Board of
Directors.
4. CONVERSION.
(a) Each share of Class A Common Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of
such share, at the office of the Corporation or any transfer agent for the
Class A Common Stock, into one fully paid and non-assessable share of Class B
Common Stock.
(b) Each share of Class A Common Stock shall automatically be
converted into one share of Class B Common Stock in the event that the record or
beneficial ownership of such share of Class A Common Stock shall be transferred
in any manner or for any reason, voluntarily or involuntarily, by operation of
law or otherwise, provided, however, that if the beneficial or record ownership
------------------
of such share of Class A Common Stock is transferred (i) by any holder of Class
A Common Stock to a voting trust created for the holders of Class A Common Stock
("Voting Trust"), (ii) from such Voting Trust to the holder that transferred
such share of Class A Common Stock into the Voting Trust, or (iii) to any person
who was the beneficial holder of fifteen percent (15%) or more of the issued and
outstanding shares of Class
3
<PAGE>
A Common Stock (and who was also either the record holder of such shares of
Class A Common Stock or the record holder of one or more voting trust
certificates ("Voting Trust Certificates") for such shares of Class A Common
Stock held in the Voting Trust) as of the date of filing of these Amended and
Restated Articles of Incorporation with the California Secretary of State (the
"Filing Date"), regardless of the number of such shares of Class A Common Stock,
if any, held by such person on any subsequent date (each such person being
referred to as a "15% Class A Holder"), (including, for purposes of this clause
(iii), transfers to 15% Class A Holders which occur by means of a transfer of
record or beneficial ownership of one or more Voting Trust Certificates), then
such share of Class A Common Stock which is transferred as described in clause
(i), (ii) or (iii) shall not be converted into a share of Class B Common Stock,
and provided, further, that any share of Class A Common Stock which is
----------------------
transferred as described in clause (i), (ii) or (iii) shall remain subject to
the provisions of this Section C.4 of Article III. A pledge of Class A Common
Stock as security for an obligation of a holder of such stock shall not be
considered a transfer for purposes of this paragraph, unless and until
beneficial ownership is transferred to the pledgeholder. The conversion into
Class B Common Stock shall be deemed to have occurred (whether or not
certificates representing such shares are surrendered) as of the close of
business on the date of transfer, and the person or persons entitled to receive
shares of Class B Common Stock issuable upon such conversion shall be treated
for all purposes as the record holder or holders of such shares of Class B
Common Stock on that date. For purposes of this Section C.4 of Article III,
"beneficial ownership" shall be determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, as in effect
on the Filing Date.
(c) Before any shares of Class B Common Stock shall be delivered upon
conversion, the holder of shares of Class A Common Stock whose shares have been
converted into Class B Common Stock shall deliver the certificate(s)
representing such shares to the Corporation or its duly authorized agent (or if
such certificates have been lost, stolen or destroyed, such holder shall execute
an agreement satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection with such conversion), specifying the
place where the Common Stock issued in conversion thereof shall be sent. The
endorsement of the certificates shall be in a form satisfactory to the
Corporation or such agent, as the case may be.
(d) The Corporation shall, at all times, reserve and keep available
out of the authorized and unissued shares of Class B Common Stock, solely for
the purpose of effecting the conversion of the outstanding Class A Common Stock,
such number of shares of Class B Common Stock as shall from time to time be
sufficient to effect the conversion of all of the outstanding Class A Common
Stock and if, at any time, the number of authorized and unissued shares of Class
B Common Stock shall not be sufficient to effect conversion of the then
outstanding Class A Common Stock, the Corporation shall take such corporate
action as may be necessary to increase the number of authorized and unissued
shares of Class B Common Stock to such number as shall be sufficient for such
purposes.
(e) The Corporation shall pay any and all issuance and other taxes
that may be payable in respect of any issuance or delivery of shares of Class B
Common Stock on conversion of Class A Common Stock. The Corporation shall not,
however, be required to pay any tax which may be payable with respect to the
issuance of any Class B Common Stock in a
4
<PAGE>
name other than that in which the Class A Common Stock so converted was
registered, and no such issuance or delivery shall be made unless and until
the person requesting such issuance has paid to the Corporation the amount of
any such tax, or has established, to the satisfaction of the Corporation, that
such tax has been paid.
(f) All shares of Class B Common Stock which may be issued upon
conversion of the shares of Class A Common Stock will, upon issuance by the
Corporation, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
(g) All certificates representing shares of Class A Common Stock
surrendered for conversion or otherwise acquired by the Corporation (all such
shares being referred to as "Converted Shares") shall be appropriately canceled
on the books of the Corporation. Such shares shall not be reissuable by the
Corporation and the authorized number of shares of Class A Common Stock of the
Corporation shall be reduced by such amount. Within ninety (90) days after each
anniversary of the Filing Date referred to in subsection C.4(b) of this Article
III the Corporation shall file with the California Secretary of State an
amendment (a "Reduction Amendment") to these Amended and Restated Articles of
Incorporation to reflect the reduction in the authorized number of shares of
Class A Common Stock by an amount equal to the number of Converted Shares which
have become Converted Shares since the most recent to occur of the Filing Date
or the date of filing of the immediately prior Reduction Amendment or other
amendment to these Amended and Restated Articles of Incorporation ("Other
Amendment") (such shares being referred to as "New Converted Shares"), provided
--------
that, (i) the Corporation shall not be required to file a Reduction Amendment
- -----
unless the number of New Converted Shares shall equal at least 50,000 (adjusted
for any stock dividends, combinations or subdivisions subsequent to the Filing
Date), (ii) if on any occasion the Corporation shall elect to file an Other
Amendment, then it shall include in such Other Amendment provisions to reflect
any reduction in the authorized number of shares of Class A Common Stock due to
such shares having become New Converted Shares since the most recent to occur of
the Filing Date or the date of filing of the immediately prior Reduction
Amendment or Other Amendment, and (iii) if one or more Reduction Amendments
cannot be filed with the California Secretary of State without obtaining
approval of some or all of the shareholders of the Corporation, the Corporation
shall not be required to file such Reduction Amendments, and in that case it
shall follow the procedure indicated in clause (ii) above, and when all of the
authorized shares of Class A Common Stock have been converted or otherwise
reacquired by the Corporation the Class A Common Stock shall be automatically
eliminated and these Amended and Restated Articles of Incorporation shall be
amended to eliminate any statement of rights, preferences, privileges and
restrictions relating solely to the Class A Common Stock.
D. CLASS B COMMON STOCK.
1. DIVIDENDS AND DISTRIBUTIONS. Subject to the provisions of Section
C.1 of this Article III, dividends and distributions may be declared and paid or
made upon the Class B Common Stock as may be permitted by applicable law.
5
<PAGE>
2. STOCK COMBINATIONS AND SUBDIVISIONS. Subject to the provisions of
paragraph C.2 of this Article III, the Class B Common Stock may be combined or
subdivided in such manner as may be permitted by applicable law.
3. VOTING. The holders of the Class B Common Stock shall have the
voting rights set forth below in addition to the rights set forth in Section C.3
of this Article III:
(a) With respect to the election of the Board of Directors
(whether such election is by vote at a meeting of shareholders or by written
consent of shareholders), the holders of Class B Common Stock, voting as a
separate class, shall be entitled to elect that number of Directors which is
the largest integral number which is less than fifty percent (50%) of the
authorized number of Directors. Such election shall be from a slate of
Director nominees separate from a slate of Director nominees from which
holders of Class A Common Stock and Class B Common Stock voting as a single
class shall elect Directors. Vacancies on the Board of Directors created by
(i) the death, resignation or removal of a Director who was elected by the
holders of Class B Common Stock or (ii) by an increase in the authorized
number of Directors, if such vacancy is to be filled by the holders of Class B
Common Stock voting as a separate class in accordance with the immediately
preceding sentence, may be filled by those Directors (acting by majority vote,
though less than a quorum, or by the act of a sole remaining Director) who
were elected by the holders of Class B Common Stock.
(b) The holders of Class B Common Stock will be entitled to vote
as a separate class on the removal, with or without cause, of any Director
elected by the holders of Class B Common Stock; provided that, to the extent
permitted by applicable law, any such Director may be removed for cause by the
Board of Directors.
(c) The Corporation shall not, without the vote or written
consent of the holders of a majority of the then outstanding shares of Class B
Common Stock, voting together as a single class:
(i) increase the total number of authorized shares of
Class A Common Stock; or
(ii) amend these Amended and Restated Articles of
Incorporation or the Corporation's Bylaws if such amendment would change any
of the rights, preferences or privileges provided for the benefit of the Class
B Common Stock or would increase the rights, preferences or privileges of the
Class A Common Stock.
(d) At any meeting of the Corporation's shareholders at which
directors are elected or at which a vote is taken on the removal of a director
or directors elected by the holders of Class B Common Stock pursuant to
subsection D.3(a) of this Article III, then, in addition to any other quorum
requirement which must be satisfied, the presence, either in person or by proxy,
of the holders of a majority of the then outstanding shares of Class B Common
Stock shall be required to constitute a quorum for such meeting.
E. VOTING RIGHTS IF ONLY ONE CLASS OUTSTANDING. Notwithstanding anything
in these Amended and Restated Articles of Incorporation to the contrary, the
holders of Class B Common Stock shall have exclusive voting power on all matters
at any time when no shares of
6
<PAGE>
Class A Common Stock or Preferred Stock are issued and outstanding and the
holders of Class A Common Stock shall have exclusive voting power on all
matters at any time when no shares of Class B Common Stock or Preferred Stock
are issued and outstanding.
ARTICLE IV
A. LIABILITY FOR MONETARY DAMAGES. The liability of the directors of the
Corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
B. INDEMNIFICATION. This Corporation is authorized to provide
indemnification of agents (as defined in Section 317 of the California
Corporations Code) for breach of duty to the Corporation and its shareholders
through bylaw provisions or through agreements with the agents, or through
shareholder resolutions, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnification set for in Section 204 of the Corporations
Code.
ARTICLE V
Effective on the first date when the Corporation has outstanding securities
designated as qualified for trading as a national market system security on the
National Association of Securities Dealers Automated Quotation System (or any
successor national market system) and has at least 800 holders of its equity
securities as of the record date for the Corporation's most recent annual
meeting of shareholders, the ability of shareholders to cumulate votes in the
election of directors shall be automatically eliminated.
THIRD: The foregoing Amended and Restated Articles of Incorporation have
been duly approved by the Board of Directors.
FOURTH: The foregoing Amended and Restated Articles of Incorporation may
be adopted with approval by the Board of Directors alone on the basis of
Sections 510(b)(1), 510(b)(2) and 510(f) of the Corporations Code because (i)
all of the authorized shares of the Corporation's Series A Convertible Preferred
Stock have been reacquired by the Corporation and the Articles of Incorporation
are being amended to reduce the authorized number of shares of Preferred Stock,
the class to which the Series A Convertible Preferred Stock belonged, by the
number of shares so reacquired and to eliminate any statement of rights,
preferences, privileges and restrictions relating solely to that series, and
(ii) less than all of the authorized, issued and outstanding shares of the
Corporation's Class A Common Stock have been reacquired by the Corporation, and,
as required by Article III, paragraph 4(g) of the Corporation's Articles of
Incorporation, the Articles of Incorporation are being amended to reduce the
authorized number of shares of Class A Common Stock by the number of shares so
reacquired.
7
<PAGE>
James L. Bildner and George K. Ross further declare under penalty of
perjury under the laws of the State of California that the matters set forth in
this certificate are true and correct of their own knowledge.
Dated: July 15, 1998, at Walnut Creek, California
-------------
/s/ James L. Bildner
- -----------------------------
James L. Bildner
Chairman of the Board and
Chief Executive Officer
/s/ George K. Ross
- -----------------------------
George K. Ross
Executive Vice President and
Chief Financial Officer
8
<PAGE>
EXHIBIT 10.39
<TABLE>
<CAPTION>
<S> <C>
STATE OF MISSOURI NO.: C600907002-007
[State seal] OFFICE OF DATE: 07/22/98
ADMINISTRATION REQ NO: 999818640
DIV OF PUR & MAT MGMT BUYER: GARY EGGEN
PHONE: 573-751-2497 BUYER NO: 059
- -------------------------------------------------------------------------------------------------------------
RETURN AMENDMENT NO LATER THAN: RETURN AMENDMENT TO:
DATE : 08/05/98
TIME : 05:00 PM DIVISION OF PURCHASING
301 W. HIGH ST., ROOM 580
- ---------------------------------------------- HARRY S. TRUMAN BUILDING
JEFFERSON CITY, MO 65101
TO: 6971725
TIER TECHNOLOGIES
ATTN: DAVID BEMAN
500 BROADWAY, SUITE B
JEFFERSON CITY, MO 65101
- ------------------------------------------------------------------------------------------------------------
NOTIFICATION OF RENEWAL FOR CONTRACT C600907002
VARIOUS AGENCY LOCATIONS
THROUGHOUT THE STATE
- ------------------------------------------------------------------------------------------------------------
MUST BE SIGNED TO BE VALID
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
AUTHORIZATION SIGNATURE PRINTED NAME TITLE
/s/ Michael F. Newbold Michael F. Newbold VP of Legal Affairs
- ------------------------------------------------------------------------------------------------------------
COMPANY DATE
Tier Technologies 8/3/98
- ------------------------------------------------------------------------------------------------------------
MAILING ADDRESS PHONE
1350 Treat Blvd, Suite 250 925-937-3950
- ------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
Walnut Creek CA 94596
- ------------------------------------------------------------------------------------------------------------
STATE VENDOR NO. (IF KNOWN) FEDERAL TAX NO. FAX NO.
- ------------------------------------------------------------------------------------------------------------
NOTICE OF AWARD (STATE USE ONLY) CONTRACT NO:
- ------------------------------------------------------------------------------------------------------------
ACCEPTED BY STATE OF MISSOURI AS FOLLOWS:
- ------------------------------------------------------------------------------------------------------------
BUYER DATE DIRECTOR
- ------------------------------------------------------------------------------------------------------------
NO 500-0875
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------
CONTRACT: C600907002-007 PAGE 2
- -------------------------------------------------------------------------------------------------------------
<S> <C>
AMENDMENT #007 TO CONTRACT C600907002
TITLE: CONSULTING SERVICES - IEF CASE TOOL
CONTRACT PERIOD: SEPTEMBER 1, 1998 THROUGH AUGUST 31, 1999
THE STATE OF MISSOURI HEREBY EXERCISES ITS OPTION TO RENEW THE ABOVE-REFERENCED
CONTRACT.
THE CONTRACTOR SHALL INDICATE ON THE ATTACHED PRICING PAGES(S) THE FIRM FIXED PRICES
FOR THE ABOVE CONTRACT PERIOD. ANY PRICES QUOTED MUST NOT EXCEED THE PERCENTAGE OF
DECREASE STATED IN THE CONTRACT (-4%).
ALL OTHER TERMS, CONDITIONS AND PROVISIONS OF THE PREVIOUS CONTRACT PERIOD SHALL
REMAIN THE SAME AND APPLY HERETO. THE CONTRACTOR SHALL SIGN THE RETURN THIS
DOCUMENT, ALONG WITH COMPLETED PRICING, ON OR BEFORE THE DATE INDICATED.
NOTE: THE CONTRACTOR'S FAILURE TO COMPLETE AND RETURN THIS DOCUMENT SHALL NOT STOP
THE ACTION SPECIFIED HEREIN. IF THE CONTRACTOR FAILS TO COMPLETE AND RETURN THIS
DOCUMENT PRIOR TO THE RETURN DATE SPECIFIED OR THE EFFECTIVE DATE OF THE CONTRACT
PERIOD STATED ABOVE, WHICHEVER IS LATER, THE STATE MAY RENEW THE CONTRACT AT THE SAME
PRICE(S) AS THE PREVIOUS CONTRACT PERIOD OR AT THE PRICE(S) ALLOWED BY THE CONTRACT,
WHICHEVER IS LOWER.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.40
SECOND AMENDED AND RESTATED PLEDGE AGREEMENT
This SECOND AMENDED AND RESTATED PLEDGE AGREEMENT (this "Agreement"), dated as
of August 17, 1998, is between TIER TECHNOLOGIES, INC. (the "Company") and
WILLIAM G. BARTON ("Barton").
WHEREAS, on February 28, 1997, Barton entered into a promissory note payable
to the Company in the amount of $939,800, due February 28, 2007 (the "Note"),
secured by shares of Common Stock of the Company owned by Barton pursuant to a
pledge agreement dated as of February 28, 1997, as amended by the Amended and
Restated Pledge Agreement dated as of August 1, 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 Note, upon the request of Barton, the
Company must release any excess collateral; and
WHEREAS, Barton and the Company wish to amend and restate the Note and replace
it with a revised note (the "August 1998 Note") and to amend and restate the
Pledge Agreement in order to facilitate the operation of Section 11(b) thereof
and to secure the August 1998 Note with Class A Common Stock beneficially owned
by Barton:
For good and valuable consideration and to secure the payment of Barton's
indebtedness to the Company, the parties agree as follows:
1. Barton's Indebtedness.
---------------------
(a) In connection herewith Barton has delivered the August 1998 Note, payable
to the order of the Company in an aggregate principal amount of nine hundred and
thirty-nine thousand, eight hundred dollars ($939,800.00).
(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 Barton, shall serve as the security for the August 1998
Note (the "Shares").
(c) Barton has executed the August 1998 Note and is required to secure the
August 1998 Note by delivery of this Agreement.
2. Pledge. Barton 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 Barton's present and future
obligations, duties and liabilities under the August 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 Barton 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 Barton 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 Barton under Section 9
hereto.
5. Representations and Warranties. Barton represents and warrants as follows:
------------------------------
(a) Barton 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 Barton of the Pledged Collateral under this Agreement or
for the execution, delivery, or performance of this Agreement by Barton; 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 August 1998 Note, or
(ii) involving the voluntary placement by Barton of a lien upon all or a
significant portion of the Pledged Collateral:
2
<PAGE>
(i) Barton shall be entitled to exercise any and all voting and other
consensual rights pertaining to any or all of the Shares, subject to any other
agreement to which the Shares may be subject.
(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 Barton.
(iii) The Company shall execute and deliver (or cause to be executed and
delivered) to Barton all such proxies and other instruments as Barton 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 August 1998 Note, or (ii)
involving the voluntary placement by Barton of a lien upon all or a significant
portion of the Pledged Collateral, all rights of Barton 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. Barton 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 Barton fails to perform or observe any term, covenant, or
Obligation under this Agreement or the August 1998 Note, or if any
representation or warranty made by Barton in this Agreement or the August 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
Barton'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 Barton 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, Barton provides the
Company with additional collateral to secure the August 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 Barton and which
collateral Barton 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 August 1998 Note, or (ii) involving the
voluntary placement by Barton of a lien upon all or a significant portion of the
Pledged Collateral, Barton 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, Barton 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) Barton'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 Barton, under this Agreement shall be absolute
and unconditional irrespective of: (i) any lack of validity or enforceability
of the August 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 August 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, Barton in respect of the
Obligations or of this Agreement.
4
<PAGE>
11. Adjustments; Release of Security. The Company and Barton 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 August
1998 Note, the Company shall notify Barton within ten (10) days. Barton 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 Barton, 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 August
1998 Note (the "Excess Collateral"), upon ten (10) days notice, Barton 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 Barton 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 Barton 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 Barton provides the
Company with an undertaking that Barton 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 August 1998 Note as of the date of such
payment (which payment shall be reflected in the balance due to the Company from
Barton under the August 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. Barton agrees that at any time and from time to time,
------------------
at his expense, Barton 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 August 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
5
<PAGE>
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 Barton:
WILLIAM G. BARTON
1028 Pebble Beach Drive
Clayton, CA 94517
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: Executive Vice President and
Chief Financial Officer
WILLIAM G. BARTON
/s/ WILLIAM G. BARTON
- ------------------------------
William G. Barton
6
<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 August 17, 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 or in the name of Tier Technologies, Inc. Voting Trust
(of which the undersigned is beneficial owner) 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: August 17, 1998
WILLIAM G. BARTON
/s/ WILLIAM G. BARTON
- ----------------------------
William G. Barton
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
<TABLE>
<CAPTION>
FAIR MARKET VALUE OF OTHER COLLATERAL
DATE SHARES PLEDGED SHARES PLEDGED /VALUE
---- -------------- -------------------- ----------------
<S> <C> <C> <C>
August 17, 1998 58,738 $939,808
</TABLE>
SHARES RELEASED PURSUANT
TO SECTION 11(b)
DATE SHARES RELEASED
---- ---------------
8
<PAGE>
EXHIBIT 10.41
AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS AMENDMENT 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., a national banking association (the "Bank").
WHEREAS, the parties hereto are parties to a certain Revolving Credit
Agreement dated as of March 31, 1998 (the "Credit Agreement"); and
WHEREAS, the parties desire to amend the Credit Agreement in a certain
respect;
NOW THEREFORE, the parties hereto hereby agree to amend the Credit
Agreement as follows:
1. The Credit Agreement is hereby amended by deleting Section 6.10
thereof in its entirety and by substituting the following new Section in lieu
thereof:
"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,
(iii) loans outstanding to Messrs. James L. Bildner and William
G. Barton evidenced by those certain promissory notes dated in
February, 1997 and amended in August, 1997 payable by such
individuals to the Company, the aggregate outstanding principal
balance of which was $2,158,600 as of December 31, 1997, and
(iv) up to $1,800,000 aggregate principal amount of other loans
to employees of the Company and any Subsidiaries who are
shareholders of the Company. It is understood and agreed that as
the loans described in clause (iii) in the preceding sentence
are paid or otherwise reduced, the amount of the payments or
reductions shall not become available for new permitted
Investments under this Section 6.10."
2. Except as specifically provided herein, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect.
3. This Amendment 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>
IN WITNESS WHEREOF, the parties have caused this Amendment 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: EVP & CFO
TIER TECHNOLOGIES
(UNITED KINGDOM), INC.
By: /s/ GEORGE K. ROSS
------------------------------
Name: George K. Ross
Title: CFO
BANKBOSTON, N.A.
BY: /s/ TINA LINDENAUER
------------------------------
Name: Tina Lindenauer
Title: Managing Director
-2-
<PAGE>
EXHIBIT 10.42
SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS SECOND AMENDMENT is made as of September 1, 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., a national banking association (the "Bank").
WHEREAS, the parties hereto are parties to a certain Revolving Credit
Agreement dated as of March 31, 1998 as amended by an Amendment to the Revolving
Credit Agreement dated as of March 31, 1998, (the Revolving Credit Agreement as
amended by the Amendment is referred to herein as the "Credit Agreement"); and
WHEREAS, the parties desire to further amend the Credit Agreement in a
certain respect.
NOW THEREFORE, the parties hereto hereby agree to amend the Credit
Agreement as follows:
1. The Credit Agreement is hereby amended by deleting Section 6.9
thereof in its entirety and by substituting the following new Section in lieu
thereof:
"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 $2,500,000
1999 $4,500,000
2000 $7,000,000
and thereafter"
2. Except as specifically provided herein, all of the terms and
conditions of the Credit Agreement shall remain in full force and effect.
3. This Second Amendment 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>
IN WITNESS WHEREOF, the parties have caused this Second Amendment 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: EVP & CFO
TIER TECHNOLOGIES
(UNITED KINGDOM), INC
By: /s/ GEORGE K. ROSS
-------------------------------
Name: George K. Ross
Title: Director
BANKBOSTON, N.A.
By: /s/ LYNN R. SCHRADER
-------------------------------
Name: Lynn R. Schrader
Title: Vice President
-2-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-47259 and 333-68255) of Tier Technologies,
Inc. of our report dated October 26, 1998, except as to Note 12, which is as
of December 18, 1998, appearing on page F-2 of this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
December 18, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 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
the Annual Report (Form 10-K) for the year ended September 30, 1998.
/s/ Ernst & Young LLP
Walnut Creek, California
December 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 23,178
<SECURITIES> 16,834
<RECEIVABLES> 18,595
<ALLOWANCES> 260
<INVENTORY> 0
<CURRENT-ASSETS> 59,746
<PP&E> 3,205
<DEPRECIATION> 834
<TOTAL-ASSETS> 74,503
<CURRENT-LIABILITIES> 10,051
<BONDS> 0
0
0
<COMMON> 62,656
<OTHER-SE> 1,516
<TOTAL-LIABILITY-AND-EQUITY> 74,503
<SALES> 57,725
<TOTAL-REVENUES> 57,725
<CGS> 0
<TOTAL-COSTS> 37,273
<OTHER-EXPENSES> 14,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 6,774
<INCOME-TAX> 2,642
<INCOME-CONTINUING> 4,132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,132
<EPS-PRIMARY> .45
<EPS-DILUTED> .39
</TABLE>
