<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------
Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
----------------
California
(State or other jurisdiction of incorporation or organization)
94-3145844
(I.R.S. Employer Identification No.)
1350 Treat Boulevard, Suite 250
Walnut Creek, California 94596
(Address of principal executive offices)
(Zip Code)
(925) 937-3950
(Registrant's telephone number, including area code)
----------------
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.
(1) Yes [X] No [_] (2) Yes [X] No [_]
As of February 5, 1999, the number of shares outstanding of the Registrant's
Class A Common Stock was 1,639,762 and the number of shares outstanding of the
Registrant's Class B Common Stock was 10,442,321.
This report contains a total of 23 pages of which this page is number 1.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TIER TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998....................................... 3
Condensed Consolidated Statements of Income for the three
months ended December 31, 1998 and 1997...................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997...................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
Part II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................... 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
Item 6. Exhibits and Reports on Form 8-K.............................. 22
Signatures............................................................. 23
</TABLE>
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 within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Certain such forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates" or "anticipates" or the negative
thereof, other variations thereof or comparable terminology, or by discussions
of strategy, plans or intentions. 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 "Factors that May Affect Future Results" section, as set forth
beginning on page 15 of this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
of this report. 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.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $13,128 $22,466
Restricted cash................................... 735 712
Short-term investments............................ 27,762 16,834
Accounts receivable, net.......................... 18,596 18,335
Prepaid expenses and other current assets......... 1,597 1,399
------- -------
Total current assets............................ 61,818 59,746
Equipment and improvements, net..................... 2,680 2,371
Notes and accrued interest receivable from related
parties............................................ 1,852 1,871
Acquired intangibles, net........................... 14,023 9,794
Other assets........................................ 681 721
------- -------
Total assets.................................... $81,054 $74,503
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under bank line of credit.............. $ 557 $ --
Accounts payable.................................. 4,998 3,263
Accrued liabilities............................... 838 934
Accrued subcontractor expenses.................... 1,764 2,503
Accrued compensation and related liabilities...... 2,650 2,310
Income taxes payable.............................. 589 450
Deferred income................................... 59 500
Capital lease obligations due within one year..... 144 67
Other current liabilities......................... 36 24
------- -------
Total current liabilities....................... 11,635 10,051
Capital lease obligations, less current portion..... 366 163
Other liabilities................................... 249 117
------- -------
Total liabilities............................... 12,250 10,331
------- -------
Commitments and contingent liabilities..............
Shareholders' equity:
Common stock, no par value........................ 64,715 62,656
Notes receivable from shareholders................ (2,020) (2,159)
Deferred compensation............................. (526) (591)
Foreign currency translation adjustment........... (867) (1,210)
Retained earnings................................. 7,502 5,476
------- -------
Total shareholders' equity...................... 68,804 64,172
------- -------
Total liabilities and shareholders' equity...... $81,054 $74,503
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
--------------
1998 1997
------- ------
<S> <C> <C>
Revenues........................................................ $21,356 $9,150
Cost of revenues................................................ 13,156 5,680
------- ------
Gross profit.................................................... 8,200 3,470
Costs and expenses:
Selling and marketing......................................... 1,287 815
General and administrative.................................... 3,459 1,800
Compensation charge related to business combinations.......... 61 198
Depreciation and amortization................................. 527 150
------- ------
Income from operations.......................................... 2,866 507
Interest income (expense), net.................................. 456 56
------- ------
Income before income taxes...................................... 3,322 563
Provision for income taxes...................................... 1,296 228
------- ------
Net income...................................................... $ 2,026 $ 335
======= ======
Basic net income per share...................................... $ 0.17 $ 0.05
======= ======
Shares used in computing basic net income per share............. 11,881 6,139
======= ======
Diluted net income per share.................................... $ 0.16 $ 0.04
======= ======
Shares used in computing diluted net income per share........... 12,816 7,464
======= ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TIER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Operating activities:
Net income................................................. $ 2,026 $ 335
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 527 143
Amortization of deferred compensation..................... 65 --
Provision for doubtful accounts........................... 124 --
Deferred income taxes..................................... (90) (144)
Tax benefit of stock options exercised.................... 201 --
Forgiveness of notes receivable from employees............ 253 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable....................................... 783 (590)
Income taxes receivable................................... -- 517
Prepaid expenses and other current assets................. (13) 34
Other assets.............................................. -- 9
Accounts payable and accrued liabilities.................. 537 633
Income taxes payable...................................... 139 --
Deferred income........................................... (93) (11)
-------- -------
Net cash provided by operating activities.................. 4,459 926
-------- -------
Investing activities:
Purchases of equipment and improvements.................... (408) (271)
Notes and accrued interest receivable from related parties. (262) (63)
Business combinations, net of cash acquired................ (2,879) (52)
Purchases of available-for-sale securities................. (20,049) --
Sales of available-for-sale securities..................... 4,369 --
Maturities of available-for-sale securities................ 4,753 --
Other assets............................................... 41 (179)
-------- -------
Net cash used in investing activities...................... (14,435) (565)
-------- -------
Financing activities:
Borrowings under bank lines of credit...................... 832 6,911
Payments of borrowings..................................... (832) (9,671)
Net proceeds from issuance of common stock................. -- 19,972
Repayment by shareholders on notes receivable.............. 138 --
Exercise of stock options.................................. 290 144
Employee stock purchase plan............................... 238 --
Payments on capital lease obligations...................... (20) (10)
Deferred financing costs................................... -- 224
Payments on notes payable to shareholders.................. (6) (13)
-------- -------
Net cash provided by financing activities.................. 640 17,557
-------- -------
Effect of exchange rate changes on cash.................... (2) (26)
-------- -------
Net (decrease) increase in cash and cash equivalents....... (9,338) 17,892
Cash and cash equivalents at beginning of period........... 22,466 106
-------- -------
Cash and cash equivalents at end of period................. $ 13,128 $17,998
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest paid............................................. $ 73 $ 79
======== =======
Income taxes paid (refunded), net......................... $ 1,052 $ (145)
======== =======
Accrued purchase price and assumed liabilities related to
business combinations..................................... $ 1,931 $ --
======== =======
Conversion of preferred stock into common stock............ $ -- $ 1,892
======== =======
Common stock issued in business combinations............... $ 1,328 $ --
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Tier
Technologies, Inc. ("Tier" or the "Company") include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the
opinion of management, the condensed consolidated financial statements reflect
all normal and recurring adjustments which are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows as of the dates and for the periods presented. The condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all the disclosures normally
required by generally accepted accounting principles for annual financial
statements nor those normally made in the Company's Annual Report on Form 10-
K. Accordingly, reference should be made to the Company's Form 10-K filed on
December 21, 1998 and other reports the Company filed with the Securities and
Exchange Commission for additional disclosures, including a summary of the
Company's accounting policies, which have not materially changed. The
consolidated results of operations for the three months ended December 31,
1998 are not necessarily indicative of results that may be expected for the
fiscal year ending September 30, 1999 or any future period, and the Company
makes no representations related thereto.
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,
disclosures of contingent assets and liabilities and the results of operations
during the reporting period. Actual results could differ materially from those
estimates.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current year's presentation.
NOTE 2 -- REVENUE RECOGNITION
The majority of the Company's revenues are derived from time and material
contracts and are recognized as services are performed. Revenues from fixed
price contracts are recognized using the percentage-of-completion method of
contract accounting based on the ratio of incurred costs to total estimated
costs. Losses on contracts are recognized when they become known and
reasonably estimable. 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
$3,702,000 and $3,444,000 at December 31, 1998 and September 30, 1998,
respectively. An unbilled receivable for one client accounted for 10.1% of
total accounts receivable at December 31, 1998.
Revenues derived from governmental agencies were $5,260,000 and $4,641,000
for the three months ended December 31, 1998 and 1997, respectively.
NOTE 3 -- ACQUISITION
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
6
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 3 -- ACQUISITION (continued)
services to commercial and government entities. The initial cost of the
acquisition totaled approximately $3.8 million, of which approximately $2.4
million was paid in cash and approximately $1.3 million was recorded as a
result of the issuance of the Company's Class B common stock valued at the
effective date at approximately $664,000 with a guaranteed minimum value of
approximately $1.3 million three years from the effective date of the
acquisition. The Midas acquisition was accounted for under the purchase method
of accounting.
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash paid..................................................... $ 2,428
Guaranteed value of stock issued.............................. 1,328
Estimated acquisition costs................................... 151
-------
$ 3,907
=======
Tangible assets............................................... $ 1,812
Intangible assets............................................. 3,787
Liabilities assumed........................................... (1,692)
-------
$ 3,907
=======
</TABLE>
The liabilities assumed by the Company include, among other liabilities, a
debt obligation for approximately $557,000 which was repaid by the Company
prior to December 31, 1998.
Additional contingent payments of up to approximately $13.0 million (based
on the exchange rate at the time of the agreement of GBP 0.61 to US $1.00),
may be paid in cash and shares of the Company's Class B common stock over a
three-year period based on achieving certain performance targets. Contingent
payments will be accrued when earned and recorded as additional purchase
price. Intangible assets in the amount of $3.7 million are being amortized
over a period of 8 years. The accompanying condensed consolidated financial
statements include the results of operations of this acquisition for the
period subsequent to the acquisition's effective date.
Pro Forma Disclosure of Significant Acquisitions
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if two prior
acquisitions, Sancha Computer Group Pty Limited and Infact Pty Limited as
Trustee of the Infact Unit Trust, and Midas had been purchased by the Company
as of October 1, 1997, after including the impact of certain pro forma
adjustments, such as the unaudited increased amortization expense due to the
recording of intangible assets:
<TABLE>
<CAPTION>
Three Months
Ended December
31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Revenues.................................................... $22,072 $13,478
Net income.................................................. 1,854 590
Basic net income per share.................................. 0.16 0.09
Diluted net income per share................................ 0.14 0.08
</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.
7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 4 -- BANK LINES OF CREDIT
At December 31, 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 December 31, 1998, the Company was in compliance with all financial ratios
and had outstanding borrowings of $557,000 under its credit facility. As of
September 30, 1998, the Company had no outstanding borrowings.
NOTE 5 -- NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1998 1997
----------- ----------
(in thousands, except
per share data)
<S> <C> <C>
Numerator:
Net income......................................... $ 2,026 $ 335
=========== ==========
Denominator for basic net income per share-weighted
average common shares outstanding................... 11,881 6,139
Effects of dilutive securities:
Common stock options............................... 820 969
Convertible preferred stock........................ -- 356
Common stock contingently issuable................. 115 --
----------- ----------
Denominator for diluted net income per share-adjusted
weighted average common shares and assumed
conversions......................................... 12,816 7,464
=========== ==========
Basic net income per share........................... $ 0.17 $ 0.05
=========== ==========
Diluted net income per share......................... $ 0.16 $ 0.04
=========== ==========
</TABLE>
Options to purchase approximately 1,347,000 shares of Class B common stock
at a price ranging from $13.88 to $17.81 per share 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.
NOTE 6 -- COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes standards for reporting comprehensive income
and its components, including presentation in an annual financial statement
that is displayed with the same prominence as other annual financial
statements. Various components of comprehensive income may, for example,
consist of foreign currency items and unrealized gains and losses on certain
investments classified as available-for-sale.
8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 6 -- COMPREHENSIVE INCOME (continued)
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three
Months
Ended
December
31,
-----------
1998 1997
------ ----
(in
thousands)
<S> <C> <C>
Net income...................................................... $2,026 $335
Currency translation adjustment................................. 343 (26)
------ ----
Total comprehensive income...................................... $2,369 $309
====== ====
</TABLE>
NOTE 7 -- CONTINGENCIES
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 December 31, 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.
Guaranty of Obligation
On December 22, 1998, the Company guaranteed a portion of an obligation of
James L. Bildner, the Company's Chief Executive Officer, with respect to the
California residence of Mr. Bildner (the "Guaranty"). The Company's liability
under the Guaranty is capped at $1,000,000. In connection with the Guaranty,
Mr. Bildner pledged to the Company shares of Tier Technologies, Inc. common
stock owned by him with a fair market value in excess of 110% of the Guaranty
amount and agreed to indemnify the Company for any loss, liability or expense
incurred in connection with the Guaranty.
NOTE 8 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt FAS 131 in the fiscal year 1999 annual
financial statements. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of FAS 131 is expected to have no
material 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
9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
NOTE 8 -- NEW ACCOUNTING PRONOUNCEMENTS (continued)
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 will adopt FAS 133 in fiscal year 2000 and has
not yet determined the impact, if any, that the adoption of FAS 133 will have
on the consolidated financial statements.
NOTE 9 -- SUBSEQUENT EVENTS
Acquisition
Effective January 1, 1999, the Company acquired all the issued and
outstanding capital stock of ADC Consultants Pty Limited ("ADC"), an
Australian entity which provided data management services. The initial cost of
the acquisition totaled approximately $2.3 million in cash. The ADC
acquisition will be accounted for as a purchase. Additional contingent
payments of up to approximately $2.0 million (based on the exchange rate at
the time of the agreement of AUD $1.63 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.
Amended and Restated 1996 Equity Incentive Plan
On January 28, 1999 a majority of the Company's shareholders entitled to
vote thereon approved three amendments to the Company's Amended and Restated
1996 Equity Incentive Plan (the "Plan"). The first amendment increases the
number of shares of Class B common stock authorized and reserved for issuance
under the Plan from 3,989,333 to 5,989,333 shares. The second amendment
increases the maximum number of shares of Class B common stock to be granted
under the Plan to any one person in any single fiscal year from 100,000 to
300,000 shares. The third amendment increases the number of shares of Class B
common stock to be granted automatically to outside directors upon their
initial appointment and upon their re-election thereafter from 5,000 to 10,000
shares.
10
<PAGE>
ITEM 2. 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 from $9.2 million in
the three months ended December 31, 1997 to $21.4 million in the three months
ended December 31, 1998. The Company's workforce, composed of employees,
independent contractors and subcontractors, has grown from 251 on December 31,
1997, to 510 on December 31, 1998.
The Company's revenues are derived primarily from professional fees billed
to clients on either a time and materials or a fixed price basis. Time and
materials revenues are recognized as services are performed. Fixed price
revenues are recognized using the percentage-of-completion method, based upon
the ratio of costs incurred to total estimated project costs. The percentage
of the Company's revenue generated on a fixed price basis was 9.3% and 23.8%
for the three months ended December 31, 1998 and December 31, 1997,
respectively. 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 three months ended December 31, 1998, Humana Inc. and the
State of Missouri accounted for 47.3% and 15.3% 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
three months ended December 31, 1998, approximately 24.6% 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 would 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 December 31, 1998, the Company made nine
acquisitions for a total cost of approximately $14.8 million in cash and
shares of Class B common stock, excluding future contingent payments, all of
which were accounted for under the purchase method of accounting. 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.
11
<PAGE>
These acquisitions helped the Company to expand its operations in the United
States, to establish its operations in Australia and the United Kingdom, to
broaden the Company's client base and technical expertise and to supplement
its human resources. International operations accounted for 25.1% and 19.6% of
revenues for the three months ended December 31, 1998 and December 31, 1997,
respectively. The Company believes that the percentage of total revenues
attributable to international operations will continue to be significant and
may continue to grow. International operations may subject the Company to
foreign currency translation adjustments and transaction gains and losses for
amounts denominated in foreign currencies.
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>
Three Months
Ended December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues.............................................. 100.0% 100.0%
Cost of revenues...................................... 61.6% 62.1%
--------- ---------
Gross profit.......................................... 38.4% 37.9%
Costs and expenses:
Selling and marketing............................... 6.0% 8.9%
General and administrative.......................... 16.2% 19.7%
Compensation charge related to business
combinations....................................... 0.3% 2.1%
Depreciation and amortization....................... 2.5% 1.6%
--------- ---------
Income from operations................................ 13.4% 5.6%
Interest income (expense), net........................ 2.1% 0.6%
--------- ---------
Income before income taxes............................ 15.5% 6.2%
Provision for income taxes............................ 6.0% 2.5%
--------- ---------
Net income............................................ 9.5% 3.7%
========= =========
</TABLE>
Three Months Ended December 31, 1998 and December 31, 1997
Revenues. Revenues are generated primarily by providing professional
consulting services on client engagements. Revenues increased 133.4% to $21.4
million for the three months ended December 31, 1998 from $9.2 million in the
three months ended December 31, 1997. This increase resulted primarily from
internal growth, including an expanded client base and several significant new
contracts, and from the inclusion of revenue from acquisitions.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries,
independent contractor and subcontractor costs, employee benefits and travel
expenses. Gross profit increased 136.3% to $8.2 million for the three months
ended December 31, 1998 from $3.5 million in the three months ended December
31, 1997. Gross margin increased to 38.4% for the three months ended December
31, 1998 as compared to 37.9% in the three months ended December 31, 1997. The
gross margin for the most recent quarter increased primarily due to higher
margins on certain large contracts.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel costs, sales commissions, travel costs and product literature.
Selling and marketing expenses increased 57.9% to $1.3 million for the three
months ended December 31, 1998 from $815,000 in the three months ended
December 31, 1997. As a percentage of revenues, selling and marketing expenses
decreased to 6.0% for the three months ended December 31, 1998 from 8.9% in
the three months ended December 31, 1997. The increase in total selling and
marketing expenses was primarily attributable to the addition of sales and
marketing personnel to support the higher revenue base and increased selling
and marketing efforts.
12
<PAGE>
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to general management functions, human
resources, recruiting, finance, legal, accounting and information systems, as
well as professional fees related to legal, audit, tax, external financial
reporting and investor relations matters. General and administrative expenses
increased 92.2% to $3.5 million for the three months ended December 31, 1998
from $1.8 million in the three months ended December 31, 1997. As a percentage
of revenues, general and administrative expenses decreased to 16.2% for the
three months ended December 31, 1998 from 19.7% in the three months ended
December 31, 1997. The increase in total 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
general and administrative expenses as a percentage of revenues to stabilize
within a range of current levels as the Company continues to develop
appropriate internal resources to manage its rapid growth and to ensure the
quality delivery of services.
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 decreased 69.2% to $61,000 for the three months ended December
31, 1998 from $198,000 in the three months ended December 31, 1997. As a
percentage of revenues, compensation charges related to business combinations
decreased to 0.3% for the three months ended December 31, 1998 from 2.1% in
the three months ended December 31, 1997. The decrease in total compensation
charge related to business combinations was attributable to a decrease in
contingent payments earned during the current period by previous owners of the
acquired businesses.
Depreciation and Amortization. Depreciation and amortization consist
primarily of expenses associated with the depreciation of equipment and
improvements and amortization of intangible assets resulting from
acquisitions. Depreciation and amortization increased 251.3% to $527,000 for
the three months ended December 31, 1998 from $150,000 in the three months
ended December 31, 1997. As a percentage of revenues, depreciation and
amortization increased to 2.5% for the three months ended December 31, 1998
from 1.6% in the three months ended December 31, 1997. The increase in total
depreciation and amortization expense was primarily attributable to the
amortization of increased intangible assets from business combinations and the
depreciation associated with increased capital expenditures.
Interest Income and Interest Expense, Net. Net interest income increased
714.3% to $456,000 for the three months ended December 31, 1998 compared to
net interest income of $56,000 in the three months ended December 31, 1997.
This change was primarily attributable to the Company's repayment of nearly
all bank borrowings under its bank lines of credit and the interest income
generated from its investment of proceeds from the initial and secondary
public offerings.
Provision for Income Taxes. The provision for income taxes increased 468.4%
to $1.3 million for the three months ended December 31, 1998 from $228,000 in
the three months ended December 31, 1997. The effective tax rate for the three
months ended December 31, 1998 was 39.0%, compared to 40.5% for the three
months ended December 31, 1997. The reduction in the effective tax rate was
due to the tax benefit from tax-advantaged investments. The Company
anticipates its effective tax rate for the fiscal year ending September 30,
1999 will be 39.0%. The actual rate may vary due to a change in the estimated
amount or geographic mix of the Company's earnings, changes in tax law, the
effect of future acquisitions or a change in the Company's investment in tax-
advantaged securities.
Liquidity and Capital Resources
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions. The Company
maintains a $10 million revolving credit facility (the "Credit Facility")
which 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
13
<PAGE>
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 December 31, 1998, there were borrowings of $557,000
outstanding under the Credit Facility.
Net cash provided by operating activities was $4.5 million in the three
months ended December 31, 1998 and $926,000 in the three months ended December
31, 1997. The increase is largely attributable to increased net income and
lower levels of accounts receivable net of the effect of acquisitions.
Net cash used in investing activities was $14.4 million and $565,000 in the
three months ended December 31, 1998 and December 31, 1997, respectively. The
increase in investing activities is primarily attributable to the purchase of
available-for-sale securities and the acquisition of Midas. Capital
expenditures, including equipment acquired under capital lease, were
approximately $408,000 in the three months ended December 31, 1998 and
$271,000 in the three months ended December 31, 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.
Net cash provided by financing activities totaled $640,000 in the three
months ended December 31, 1998 and $17.6 million in the three months ended
December 31, 1997. In the three months ended December 31, 1998, the Company
raised approximately $528,000 from the issuance of Class B common stock. In
the three months ended December 31, 1997, the Company raised approximately
$20.0 million in its initial public offering of Class B common stock and made
net payments of $2.8 million under its line of credit.
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 are insufficient to meet
its capital requirements, the Company will have to raise additional funds.
There can be no assurance that additional funding, if necessary, will be
available on favorable terms, if at all.
Year 2000
The "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 "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.
14
<PAGE>
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-
Q. Tier is referred to in this section as "we" or "us".
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 three months ended December 31, 1998, Humana Inc. and the
State of Missouri accounted for 47.3% and 15.3% of our revenues, respectively.
The volume of work performed for specific clients is likely to vary from
period to period, and a major client in one period may not use our services in
a subsequent period. 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.
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.
15
<PAGE>
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.
Inability to Attract and Retain Professional Staff Necessary to Existing and
Future Projects. Our inability to attract, retain and train skilled employees
could impair our ability to adequately manage and staff our existing projects
and to bid for or obtain new projects, which would have a material adverse
effect on our business, financial condition and results of operation. In
addition, the failure of our employees to achieve expected levels of
performance could adversely affect our business. Our success depends in large
part upon our ability to attract, retain, train, manage and motivate skilled
employees, particularly project managers and other senior technical personnel.
There is significant competition for employees with the skills required to
perform the services we offer. In particular, qualified project managers and
senior technical and professional staff are in great demand worldwide and
competition for such persons is likely to increase. In addition, we require
that many of our employees travel to client sites to perform services on our
behalf, which may make a position with us less attractive to potential
employees. There can be no assurance that a sufficient number of skilled
employees will continue to be available, or that we will be successful in
training, retaining and motivating current or future employees.
Dependence on Key Personnel. Our success depends in large part upon the
continued services of a number of key employees, 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 61.1% of the total common stock voting power at December 31,
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 18.2% of the Class B Common Stock outstanding at
December 31, 1998.
. 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
16
<PAGE>
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 the Company. Such agreements would effectively delay the
conversion of such shares of Class A Common Stock and may perpetuate
control of the Company 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 December 31, 1998, we acquired nine businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or to integrate successfully any acquired businesses
without substantial expense, delay or other operational or financial problems.
Acquisitions involve a number of special risks, including:
. diversion of management's attention,
. failure to retain key personnel,
. amortization of acquired intangible assets,
. client dissatisfaction or performance problems with an acquired firm,
. assumption of unknown liabilities, and
. other unanticipated events or circumstances.
Any of these risks could have a material adverse effect on our business,
financial condition and results of operations.
Inability to Manage Growth. If we are unable to manage our growth
effectively, such inability would have a material adverse effect on the
quality of our services, our ability to retain key personnel, and our
business, financial condition and results of operations. Our growth has
placed, and is expected to continue to place, significant demands on our
management, financial, staffing and other resources. We have expanded
geographically by opening new offices domestically and abroad, and intend to
open additional offices. Our ability to manage growth effectively will require
us to continue to develop and improve our operational, financial and other
internal systems, as well as our business development capabilities, and to
train, motivate and manage our employees. In addition, as the average size and
number of our projects continues to increase, we must be able to manage such
projects effectively. There can be no assurance that our rate of growth will
continue or that we will be successful in managing any such growth.
Dependence on Partnerships with Third Parties in Performing Certain Client
Engagements. We sometimes perform client engagements in partnership with third
parties. In the government services market, we often join with other
organizations to bid and perform an engagement. In these engagements, we 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 three months ended
December 31, 1998, approximately 24.6% of our revenues were derived from sales
to government agencies. Such government
17
<PAGE>
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 three
months ended December 31, 1998, 9.3% of our revenues were generated on a fixed
price basis, rather than on a time and materials basis.
Potential Costs or Claims Resulting from Project Performance. Many of our
engagements involve projects that are critical to the operations of our
clients' businesses and provide benefits that may be difficult to quantify.
The failure by us, or of the prime contractor on an engagement in which we are
a subcontractor, to meet a client's expectations in the performance of the
engagement could damage our reputation and adversely affect our ability to
attract new business, and could have a material adverse effect upon our
business, financial condition and results of operations. We have undertaken,
and may in the future undertake, projects in which we guarantee performance
based upon defined operating specifications or guaranteed delivery dates.
Unsatisfactory performance or unanticipated difficulties or delays in
completing such projects may result in client dissatisfaction and a reduction
in payment to, or payment of damages (as a result of litigation or otherwise)
by us, which could have a material adverse effect upon our business, financial
condition and results of operations. In addition, unanticipated delays could
necessitate the use of more resources than we initially budgeted for a
particular project, which also could have a material adverse effect upon our
business, financial condition and results of operations.
Insufficient Insurance Coverage for Potential Claims. Any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. There can be no assurance
that the limitations of liability set forth in our service contracts will be
enforceable or will otherwise protect us from liability for damages. Although
we maintain general liability insurance coverage, including coverage from
errors or omissions, there can be no assurance that such coverage will
continue to be available on reasonable terms, will be available in sufficient
amounts to cover one or more claims or that the insurer will not disclaim
coverage as to any future claim. The successful assertion for one or more
claims against us that exceed available insurance coverage or changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, would adversely affect our business,
financial condition and results of operations.
Delay or Failure to Develop New IT Solutions. Our success will depend in
part on our ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences. There can be no assurance that we will be successful in
developing such IT solutions in a timely manner or that if developed we will
be successful in the marketplace. Delay in developing or failure to develop
new IT solutions would have a material adverse effect on our business,
financial condition and results of operations.
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.
18
<PAGE>
We believe that the principal competitive factors in the IT services market
include:
. reputation,
. project management expertise,
. industry expertise,
. speed of development and implementations,
. technical expertise,
. competitive pricing, and
. the ability to deliver results on a fixed price as well as a time and
materials basis.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
. the ability of our clients or competitors to hire, retain and motivate
project managers and other senior technical staff,
. the ownership by competitors of software used by potential clients,
. the price at which others offer comparable services,
. the ability of our clients to perform the services themselves, and
. the extent of our competitors' responsiveness to client needs.
Our inability to compete effectively on these competitive factors would have
a material adverse effect on our business, financial condition and results of
operations.
Inability to Protect Proprietary Intellectual Property. The steps we take to
protect our intellectual property rights may be inadequate to avoid the loss
or misappropriation of such information, or to detect unauthorized use of such
information. We rely on a combination of trade secrets, nondisclosure and
other contractual arrangements, and copyright and trademark laws to protect
our intellectual property rights. We also (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 three months
ended December 31, 1998, international operations accounted for 25.1% 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
19
<PAGE>
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. 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 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.
20
<PAGE>
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 3. 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 and a United Kingdom subsidiary. Revenues from
these operations are typically denominated in Australian Dollars or British
Pounds, respectively, thereby potentially affecting the Company's financial
position, results of operations and cash flows due to fluctuations in exchange
rates. The Company does not anticipate that near-term changes in exchange
rates will have a material impact on future earnings, fair values or cash
flows of the Company and has not engaged in foreign currency hedging
transactions for the three months ended December 31, 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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c. Effective November 30, 1998, in partial consideration for the
acquisition of all the issued and outstanding capital stock of Midas
Computer Software Limited ("Midas"), the Company issued 51,074 shares of
its Class B common stock, valued at approximately $664,000, in an
unregistered private placement of securities to the former shareholders
of Midas. The Company filed a Current Report on Form 8-K reporting the
acquisition on December 17, 1998. The offer and sale of these securities
were made in reliance on the exemptions from registration under Section
4(2) and Regulation S of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective November 3, 1998, the holders of approximately 65% of the
outstanding voting shares of the Company, acting by written consent in lieu of
a meeting of the shareholders, approved an amendment to increase the number of
shares of Class B common stock authorized for issuance under the Company's
Amended and Restated 1996 Equity Incentive Plan from 2,989,333 shares to
3,989,333 shares. An Information Statement pursuant to Section 14(c) of the
Securities Exchange Act of 1934 was circulated to the Company's shareholders
on or about November 6, 1998, which date was at least 20 days prior to the
effective date of the amendment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.43 Guaranty Agreement by the Registrant in favor of NationsBank, N.A.,
dated as of December 22, 1998.
10.44 Indemnification Agreement, dated December 22, 1998, by and between the
Registrant and James L. and Nancy J. Bildner.
10.45 Pledge Agreement dated as of December 22, 1998 by and between the
Registrant and James L. Bildner.
10.46 Agreement for the sale and purchase of the entire issued share capital
of Midas Computer Software Limited, dated November 26, 1998 by and
between Robert William Thompson, Yvonne Jayne Thompson, Dominic Frost,
Ian Smith and the Other Parties named in Schedule 1 thereto and the
Registrant, dated November 26, 1998.*
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to the Registrant's Current Report on Form 8-K, filed on
December 17, 1998.
(b) Reports on Form 8-K.
Form 8-K/A, filed on October 20, 1998, pursuant to Item 7 attaching
financial statement 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.
Form 8-K, filed on December 17, 1998, pursuant to Item 2 regarding the
acquisition of the entire issued and
outstanding capital stock of Midas Computer Software Limited.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tier Technologies, Inc.
Dated: February 12, 1999
/s/ James L. Bildner
By: _________________________________
James L. Bildner
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Officer)
/s/ George K. Ross
By: _________________________________
George K. Ross
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<C> <S> <C>
10.43 Guaranty Agreement by the Registrant in favor of NationsBank,
N.A., dated as of December 22, 1998.............................
10.44 Indemnification Agreement, dated December 22, 1998, by and
between the Registrant and James L. and Nancy J. Bildner........
10.45 Pledge Agreement dated as of December 22, 1998 by and between
the Registrant and James L. Bildner.............................
27.1 Financial Data Schedule.........................................
</TABLE>
<PAGE>
EXHIBIT 10.43
GUARANTY
--------
RECITALS
--------
1. On or about August 27, 1998, JAMES L. and NANCY J. BILDNER entered into
a written Promissory Note in favor of NATIONSBANK, N.A. in the principal sum of
TWO MILLION THREE HUNDRED AND TEN THOUSAND DOLLARS ($2,310,000.00).
2. Said Promissory Note was secured by:
a.) A Deed of Trust dated August 27, 1998 on real property located at
scenic Road 6 SW of Ocean, Carmel, CA 93921 in which NATIONSBANK, N.A. is named
as the Beneficiary; and
b.) A Pledge Agreement pledging certain shares of Tier Technologies,
Inc., a California corporation held in Account No. 209-71082 at NationsBanc
Montgomery Securities, LLC, the fair market value of which is required to remain
in excess of $2,310,000.00.
3. In consideration of NATIONSBANK, N.A. terminating the Pledge Agreement
in number 2(b) above, including its Power of Sale clause, the undersigned
hereinafter called "Guarantor", in recognition of the importance of JAMES L.
BILDNER as a key employee of the Guarantor, agrees as follows:
1
<PAGE>
FOR VALUABLE CONSIDERATION, Guarantor guarantees and promises to pay to
NATIONSBANK, N.A. (hereinafter called "Obligee"), on order or demand, in lawful
money of the United States, up to and including One Million Dollars ($1,000,000)
of the indebtedness of JAMES L. BILDNER and NANCY J. BILDNER (hereinafter called
collectively "Borrower"), arising or existing under that certain Promissory Note
dated AUGUST 27, 1998, a copy of which is attached hereto, marked Exhibit A and
by this reference made a part hereof as though set forth in full and that
certain Deed of Trust between JAMES L. BILDNER and Obligee dated AUGUST 27,
1998, (hereinafter collectively called the "Obligation"), a copy of which is
attached hereto, marked Exhibit B. Guarantor hereby acknowledges receipt of
unsigned copies of the Obligation to Obligee.
The word "indebtedness" is used herein in its most comprehensive sense
subject to the limitation of liability of ONE MILLION DOLLARS ($1,000,000) and
whether recovery upon such indebtedness may be or hereafter become barred by
any statute or limitations, or whether such indebtedness may be or hereafter
become otherwise unenforceable.
The Guarantor shall be entitled to a sixty (60) day period in which to cure
any default of Borrower. During any
2
<PAGE>
such period, Guarantor shall have an unconditional right to cure any default.
Guarantor's payment of any sums in default, without regard to acceleration
provisions, shall cure any payment default and allow the note to continue in
effect as if no default had occurred. However, Guarantor shall be limited in
its ability to cure defaults to a total number of five times over the life of
the loan and to no more than two times in any one year. If a payment is made by
Guarantor on behalf of Borrower pursuant to the terms of the Promissory Note and
said payment is timely, it shall not be considered a default. Additionally, any
payments made by Borrower or others on principal due and owing shall reduce the
guaranteed amount ($1,000,000) accordingly. Notwithstanding the foregoing, once
the principal amount of the obligation is reduced to One Million Three Hundred
Ten Thousand Dollars ($1,310,000), this Guaranty shall be automatically
revoked.
The obligations hereunder are joint and several, and independent of the
obligations of Borrower, and a separate action or actions may be brought and
prosecuted against Guarantor whether action is brought against Borrower or
whether Borrower is joined in any such action or actions; and
3
<PAGE>
Guarantor waives the benefit of any statute of limitations affecting its
liability hereunder or the enforcement thereof.
1. INDEMNITY. In addition to the payment of expenses pursuant to
---------
Paragraph entitled "Expenses" on Page 6, Guarantor agrees to indemnify,
defend, exonerate, pay and hold Obligee and the officers, directors, employees
and agents of Obligee (the "Indemnitees") harmless from and against any and
all liabilities, obligations, losses, damages, penalties, actions, causes of
action, judgments, suits, claims, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, the fees and
disbursements of counsel to Obligee and reasonable expert witness fees and
disbursements) for such Indemnitees in Connection with any investigative,
administrative or judicial proceeding, whether or not such Indemnitee shall be
designated a party thereto, that may be imposed on, incurred by or asserted
against such Indemnitee, in any manner relating to or arising out of or in
connection with this Guaranty (the "Indemnified Liabilities"). Notwithstanding
the foregoing, Indemnified Liabilities shall not include liabilities,
obligations, losses, damages, penalties, actions, causes of action, judgments,
suits, claims, costs, expenses and disbursements to the extent caused by or
4
<PAGE>
resulting from the gross negligence or willful misconduct of such Indemnitee.
2. NOTICE. Each Indemnitee will promptly notify Guarantor of each event
------
of which it has knowledge that may give rise to a claim under section 1.
3. DEFENSE OF ACTIONS. If any investigative, judicial or administrative
------------------
proceeding arising in connection with any of the Indemnified Liabilities is
brought against any Indemnitee indemnified or intended to be indemnified
pursuant to Section 1, Guarantor, to the extent and in the manner directed by
the Indemnitee or intended Indemnitee, will resist and defend such action,
suit or proceeding or cause the same to be resisted and defended by counsel
designated by Indemnitees (which counsel shall be satisfactory to the
Guarantor). Each Indemnitee will use its best efforts to cooperate in the
defense of any such action, suit or proceeding. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in the preceding
sentence may be unenforceable because it is violative of any law or public
policy, Guarantor shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities that is permissible under
applicable law.
5
<PAGE>
4. CONSENTS BY GUARANTOR. Guarantor authorizes Obligee, without notice or
---------------------
demand and without affecting its liability hereunder, from time to time to (a)
renew, compromise, extend, accelerate (acceleration shall be subject to
Guarantor's right to cure a default as set forth on page 3 above) or otherwise
change the time for payment of, or otherwise change the terms of the
indebtedness or any part thereof, including increase or decrease of the rate of
interest therein; (b) take and hold security for the payment of the indebtedness
guaranteed, and exchange, enforce, waive and release any such security; (c)
apply such security and direct the order or manner of sale thereof as Obligee in
its discretion may determine; and (d) release or substitute any one or more of
the endorsers or guarantors. Obligee may without notice assign this Guaranty in
whole or in part.
Guarantor waives any right to require Obligee to (a) proceed against
Borrower; (b) proceed against or exhaust any security held from Borrower; or (c)
pursue any other remedy in Obligee's power whatsoever. Guarantor waives any
defense arising by reason of the cessation from any cause whatsoever of the
liability of Borrower. Until all indebtedness of Borrower to Obligee shall have
been paid in full, Guarantor shall have no right of subrogation, and waives any
right to
6
<PAGE>
enforce any remedy which Obligee now has or may hereafter have against Borrower,
and waives any benefit of, and any right to participate in any security now or
hereafter held by Obligee. Guarantor waives all presentments, demands for
performance, notices and non-performance, protests, notices of protest, notices
of dishonor, and notices of acceptance of this Guaranty and of the existence,
creation, or incurring of new or additional indebtedness.
5. WAIVER OF DEFENSES OF CALIFORNIA CODE OF CIVIL PROCEDURE
--------------------------------------------------------
SECTION 580(d). GUARANTOR SHALL BE LIABLE TO OBLIGEE FOR ANY DEFICIENCY
- --------------
RESULTING FROM THE EXERCISE BY IT OF ANY SUCH REMEDY, EVEN THOUGH ANY RIGHTS
WHICH GUARANTOR MAY HAVE AGAINST OTHERS MIGHT BE DESTROYED. GUARANTOR
UNDERSTANDS THAT IF OBLIGEE SELECTS NON-JUDICIAL FORECLOSURE, IT WILL HAVE A
DEFENSE TO A DEFICIENCY JUDGMENT AND IT IS THAT DEFENSE WHICH THE GUARANTOR
SPECIFICALLY HEREBY WAIVES. GUARANTOR SPECIFICALLY WAIVES THE "GRADSKY DEFENSE"
AND ANY OTHER DEFENSES IT MAY BE ENTITLED TO PURSUANT TO CALIFORNIA CODE OF
-------
CIVIL PROCEDURE SECTIONS 580a, 580b, 580d AND 726. GUARANTOR WAIVES ANY RIGHT TO
- ---------------
REQUIRE OBLIGEE TO (A) PROCEED AGAINST BORROWER; (B) PROCEED AGAINST OR EXHAUST
ANY SECURITY HELD FROM BORROWER; OR (C) PURSUE ANY OTHER REMEDY IN OBLIGEE'S
POWER WHATSOEVER.
7
<PAGE>
GUARANTOR, PURSUANT TO CALIFORNIA CIVIL CODE SECTION 2856,
----------
". . . WAIVES ALL RIGHTS AND DEFENSES THAT THE GUARANTOR MAY HAVE BECAUSE THE
DEBTOR'S DEBT IS SECURED BY REAL PROPERTY. THIS MEANS, AMONG OTHER THINGS:
(1) THE CREDITOR MAY COLLECT FROM THE GUARANTOR WITHOUT FIRST FORECLOSING
ON ANY REAL OR PERSONAL PROPERTY COLLATERAL PLEDGED BY THE DEBTOR.
(2) IF THE CREDITOR FORECLOSES ON ANY REAL PROPERTY COLLATERAL PLEDGED BY
THE DEBTOR:
(A) THE AMOUNT OF THE DEBT MAY BE REDUCED ONLY BY THE PRICE FOR WHICH
THAT COLLATERAL IS SOLD AT THE FORECLOSURE SALE, EVEN IF THE COLLATERAL IS
WORTH MORE THAN THE SALE PRICE.
(B) THE CREDITOR MAY COLLECT FROM THE GUARANTOR EVEN IF THE CREDITOR, BY
FORECLOSING ON THE REAL PROPERTY COLLATERAL, HAS DESTROYED ANY RIGHT THE
GUARANTOR MAY HAVE TO COLLECT FROM THE DEBTOR.
THIS IS AN UNCONDITIONAL AND IRREVOCABLE WAIVER OF ANY RIGHTS AND
DEFENSES THE GUARANTOR MAY HAVE BECAUSE THE DEBTOR'S DEBT IS SECURED BY REAL
PROPERTY. THESE RIGHTS AND DEFENSES INCLUDE, BUT ARE NOT LIMITED TO, ANY
RIGHTS OR DEFENSES BASED UPON SECTION 580a, 580b, 580d, OR 726 OF THE CODE OF
-------
CIVIL PROCEDURE.
- ---------------
8
<PAGE>
(C) WITHOUT LIMITING ANY RIGHTS OF THE CREDITOR OR ANY GUARANTOR OR OTHER
SURETY TO USE ANY OTHER LANGUAGE TO EXPRESS AN INTENT TO WAIVE ALL RIGHTS AND
DEFENSES OF THE SURETY BY REASON OF ANY ELECTION OF REMEDIES BY THE CREDITOR,
THE FOLLOWING PROVISION SHALL BE EFFECTIVE TO WAIVE ALL RIGHTS AND DEFENSES
THE GUARANTOR OR OTHER SURETY MAY HAVE IN RESPECT OF HIS OR HER OBLIGATIONS AS
A SURETY BY REASON OF AN ELECTION OF REMEDIES BY THE CREDITOR:
THE GUARANTOR WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION
OF REMEDIES BY THE CREDITOR, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A
NON-JUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A GUARANTEED OBLIGATION,
HAS DESTROYED THE GUARANTOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST
THE PRINCIPAL BY THE OPERATION OF SECTION 580d OF THE CODE OF CIVIL PROCEDURE
-----------------------
OR OTHERWISE."
6. EXPENSES. Guarantor agrees to pay all attorneys' fees and all other
--------
costs and out-of-pocket expenses which may be incurred by Obligee in the
enforcement or collection of this Guaranty and the Guaranteed Obligation,
whether or not suit is filed.
7. INTEREST. All amounts required to be paid to Obligee by Guarantor
--------
pursuant to the provisions of this Guaranty shall bear interest from and
including the date
9
<PAGE>
upon which such amounts are due, to and excluding the date of payment thereof,
at the rate of ten (10%) percent per annum. All payments of such amounts by
Guarantor shall include any such accrued interest.
8. HEADINGS. The Section and other headings contained in this Guaranty
--------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Guaranty.
9. GOVERNING LAW. The validity, construction and performance of this
-------------
Guaranty shall be governed by the laws, without regard to the laws as to choice
or conflict of laws, of the State of California.
10. ENTIRE AGREEMENT. This Guaranty embodies the entire agreement and
----------------
understanding between the parties pertaining to the subject matter of this
Guaranty, and supersedes all prior agreements, understandings, negotiations,
representations and discussions, whether verbal or written, of the parties,
pertaining to that subject matter.
11. ASSIGNMENT. Neither this Guaranty nor any rights under this Guaranty
----------
may be assigned by Guarantor without the prior written consent of Obligee.
10
<PAGE>
12. BINDING EFFECT. The provisions of this Guaranty shall bind and inure
--------------
to the benefit of the parties hereto and their respective successors and
permitted assigns.
13. PARTIES IN INTEREST. Nothing in this Guaranty, expressed or implied,
-------------------
is intended to confer on any person or entity other than the parties any right
or remedy under or by reason of this Guaranty.
14. NOTICES. Any notice or communication required or permitted by this
-------
guaranty shall be deemed sufficiently given in writing and, if delivered
personally, when it is delivered or if deposited with the U.S. Postal Service,
postage prepaid, and addressed to the party to receive it at the address set
forth below 48 hours after such deposit as registered or certified mail.
To Obligee: NationsBank, N.A.
Attention: Frank Drury
600 Montgomery St., 37th Fl.
San Francisco, CA 94111
With copy to: Peter A. Hass, Esq.
Watson, Hoffe & Hass
3700 Barrett Avenue
P. 0. Box 5001
Richmond, CA 94805-2297
To Guarantor: Bruce Deming, Esq.
Tier Technologies, Inc.
1350 Treat Blvd., Ste. 250
Walnut Creek, CA 94596
To Borrower: James L. and Nancy J. Bildner
5 Boardman Avenue
Manchester, MA 01944
11
<PAGE>
15. AMENDMENT AND WAIVER. This Guaranty may be amended, modified or
--------------------
supplemented only by a writing executed by each of the parties. Any party may
in writing waive any provisions of this Guaranty to the extent such provision is
for the benefit of the waiving party. No action taken pursuant to this
Guaranty, including any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by that party of its or any other party's
compliance with any representations or warranties or with any provisions of this
Guaranty. No waiver by any party of a breach of any provision of this Guaranty
shall be construed as a waiver of any subsequent or different breach, and no
forbearance by a party to seek a remedy for noncompliance or breach by another
party shall be construed as a waiver of any right or remedy with respect to such
noncompliance or breach.
16. VENUE, JURISDICTION AND PROCESS. The parties agree that any suit,
-------------------------------
action or proceeding arising out of or relating to this Guaranty, or the
interpretation, performance (or breach of this Guaranty, shall be instituted in
any court of the State of California located in Monterey County, and each party
irrevocably submits to the jurisdiction of those courts and waives any and all
objections to jurisdiction or
12
<PAGE>
venue that it may have under the laws of the State of California or otherwise in
those courts in any such suit, action or proceeding.
17. PROMPT ACTION. Time is of the essence with respect to each provision
-------------
of this Guaranty.
18. SEVERABILITY. The invalidity or unenforceability of any particular
------------
provision of this Guaranty shall not affect the other provisions, and this
Guaranty shall be construed in all respects as if any invalid or unenforceable
provision were omitted.
19. FURTHER ACTION. Each party agrees to perform any further acts and to
--------------
execute and deliver any other documents which may be reasonably necessary to
effect the provisions of this Guaranty.
20. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
------------------------------------------
warranties of guarantor contained in this Guaranty shall survive the execution
and delivery of this Guaranty and shall continue until any and all Guaranteed
13
<PAGE>
Obligation has been fully paid, performed and discharged in full.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty
this 22 day of December, 1998.
GUARANTOR:
TIER TECHNOLOGIES, INC.,
a California corporation
BY: /s/ James L. Bildner BY: /s/ George K. Ross
-------------------------- --------------------
JAMES L. BILDNER, CHAIRMAN GEORGE K. ROSS, EXEC.
OF THE BOARD AND CHIEF VICE PRESIDENT AND
EXECUTIVE OFFICER CHIEF FIN. OFFICER
14
<PAGE>
EXHIBIT 10.44
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made and entered
into this 22 day of December, 1998, by and among James L. Bildner and Nancy J.
Bildner (James L. Bildner together with Nancy J. Bildner being referred to
collectively as "the Indemnitors," and each singly as an "Indemnitor") and Tier
Technologies, Inc., a corporation organized under the laws of the State of
California (the "Company").
RECITALS
A. Whereas, to evidence and secure a certain loan made by NationsBank,
N.A. ("Lender") to the Indemnitors, the Indemnitors have executed and delivered
to Lender the following documents:
1. Promissory Note dated August 27, 1998, in the principal amount of
Two Million Three Hundred Ten Thousand Dollars ($2,310,000) executed by the
Indemnitors and payable to Lender (the "Note"); and
2. Deed of Trust dated August 27, 1998, executed by James L. Bildner,
encumbering that certain real property commonly referred to as Scenic Road 6 SW
of Ocean, Carmel, California 93921 (the "Deed of Trust") (the Note and Deed of
Trust being hereinafter collectively referred to as the "Loan Documents").
B. Whereas, James L. Bildner currently serves as a director and officer of
the Company.
C. Whereas, in order to induce James L. Bildner to continue to serve as a
member of the board of directors and/or as an officer of the Company, the
Company has agreed to execute and deliver to Lender a Guaranty, by which the
Company will guarantee to Lender the payment of certain indebtedness under the
Loan Documents.
D. Whereas, in the event of any default of the Indemnitors under the Loan
Documents, the Guaranty grants to the Company the right to make payments of the
indebtedness under the Loan Documents within a certain period from the date of
the Company's receipt of notice of such default and thereby cure such default.
E. Whereas, in order to induce the Company to execute and deliver the
Guaranty to Lender, the Indemnitors have agreed to execute and deliver this
Agreement to the Company.
<PAGE>
THEREFORE, in consideration of the Recitals (which are hereby incorporated
into and shall be deemed a part of this Agreement), of the agreements hereafter
set forth, and of other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by all parties, it is agreed by and
among the parties hereto as follows:
1. Indemnity. The Indemnitors shall at all times indemnify the Company
---------
against, and hold the Company harmless from, any loss, claim, action, cause of
action, liability, cost or expense, including without limitation attorneys' fees
and expenses, which the Company may at any time sustain, incur, or be answerable
for under the Guaranty and any renewal or extension thereof, including without
limitation any payment of any part of the Note or other indebtedness under the
Loan Documents which the Company may make from time to time to cure a default on
the part of the Indemnitors.
2. Security. The indemnification obligations of the Indemnitors
--------
under this Agreement shall be secured by a pledge of Tier Technologies, Inc.
Common Stock owned by James L. Bildner, which pledge shall be evidenced
by a pledge agreement executed by James L. Bildner, upon such terms and
conditions as are customary in security arrangements of a similar nature until
the obligations secured thereby have been satisfied in full (the "Pledge
Agreement"). James L. Bildner shall, promptly at the request of the Company,
execute any additional documents or do any act reasonably required by the
Company to cause the Pledge Agreement and all necessary instruments, to be
recorded, registered and filed in such manner and in such places as may be
required by law, and to take all such other action as may be required in order
to make effective the security interest intended to be created in connection
with the Pledge Agreement and with the priorities contemplated by it. Nothing
herein shall be deemed to limit any of the terms or provisions of the Pledge
Agreement or any other present or future agreement between the Company and the
Indemnitors, and all of the Company's rights hereunder and thereunder shall be
cumulative.
3. Joint and Several Responsibility. The obligations of the Indemnitors
--------------------------------
under this Agreement shall be joint and several.
4. Nonexclusivity. The indemnification rights granted to the Company
--------------
under this Agreement shall not be deemed exclusive of, or in limitation of, any
other rights to which the Company may be entitled under applicable law,
agreement, or otherwise, including without limitation any rights of subrogation.
5. Continuation of Indemnity. All agreements and obligations of the
-------------------------
Indemnitors contained in this Agreement shall continue in force so long as the
Company
-2-
<PAGE>
shall be subject to any and all possible losses, claims, damages, expenses,
costs, or liabilities under the Guaranty, regardless of whether any Indemnitor
is serving as a director, officer, employee or agent of the Company.
6. Amendments. Neither this Agreement nor any of its provisions may be
----------
changed, amended, modified, waived or discharged orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, amendment, modification, waiver or discharge is sought.
7. Successors and Assigns. The rights granted to the Company under this
----------------------
Agreement shall inure to the benefit of the Company, its successors and assigns,
and this Agreement shall be binding upon the Indemnitors and their personal
representatives, heirs, executors, administrators and beneficiaries.
8. Severability. In the event that any one or more of the provisions
------------
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, the other provisions of the Agreement shall not
be affected, and the Agreement shall be construed as if the invalid, illegal, or
unenforceable provisions had never been contained in it.
9. Governing Law. This Agreement shall be deemed to have been entered into
-------------
in, and pursuant to the laws of, the State of California, and shall in all
respects be governed by and construed in accordance with the laws of the State
of California, exclusive of its rules governing choice of law and conflict of
laws, and with applicable laws of the United States of America.
10. Time of Essence. Time is of the essence in the performance of all the
---------------
terms of this Agreement.
11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all together
but one instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and the year first above written.
/s/ James L. Bildner
_______________________________
James L. Bildner
/s/ Nancy J. Bildner
________________________________
Nancy J. Bildner
TIER TECHNOLOGIES, INC.,
a California corporation
By: /s/ George K. Ross
_____________________________
-4-
<PAGE>
EXHIBIT 10.45
PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "Agreement"), dated as of December 22, 1998, is
between TIER TECHNOLOGIES, INC. (the "Company") and JAMES L. BILDNER
("Bildner").
WHEREAS, on December 22, 1998, Bildner entered into an indemnification
agreement with the Company dated December 22, 1998 (the "Indemnification
Agreement") pursuant to which Bildner and Nancy J. Bildner (each, an
"Indemnitor" and together, the "Indemnitors") agreed to indemnify the Company
for any loss, claim, action, cause of action, liability, cost or expense made
under or incurred in connection with that certain Guaranty dated December 22,
1998 (the "Guaranty"); and
WHEREAS, Bildner wishes to pledge certain shares of Tier Technologies,
Inc. Common Stock owned by Bildner to secure the Indemnitors' obligations
under the Indemnification Agreement.
For good and valuable consideration and to secure the payment of the
Indemnitors' obligations to the Company, the parties agree as follows:
1. Bildner's Obligations.
---------------------
(a) The Indemnitors have executed and delivered to NationsBank, N.A. (the
"Lender") a Promissory Note dated August 27, 1998 in the principal amount of
$2,310,000 (the "Note").
(b) The Company has executed and delivered the Guaranty guaranteeing the
Indemnitors' loan obligations to the Lender for an amount up to an aggregate of
$1,000,000.
(c) The Indemnitors have executed and delivered the Indemnification
Agreement indemnifying the Company for any loss, claim, action, cause of action,
liability, cost or expense made under or incurred in connection with the
Guaranty.
(d) In accordance with Section 11 hereof, the number of shares of Common
Stock of the Company set forth on Schedule A hereto, which are currently owned
by Bildner, shall serve as security for the Indemnitors' obligations under the
Indemnification Agreement (the "Shares").
2. Pledge. Bildner hereby pledges to the Company, and grants to the Company a
------
security interest in, the following (the "Pledged Collateral"): (i) the Shares
and the certificates representing the Shares; and (ii) securities of the Company
associated with the Shares issued in connection with any stock dividend or stock
split, or securities of the Company issued in connection with a
recapitalization, merger, reorganization or similar transaction.
1
<PAGE>
3. Security for Obligations.
------------------------
(a) This Agreement secures the payment of all of Bildner's present and
future obligations, duties and liabilities under the Indemnification Agreement
and under this Agreement (all referred to as the "Obligations").
(b) This Agreement shall create a continuing security interest in the
Pledged Collateral and shall (i) remain in full force and effect until payment
in full of the Obligations; (ii) be binding upon Bildner and his successors and
assigns; and (iii) inure to the benefit of the Company and its successors,
transferees, and assigns.
4. Delivery of Pledged Shares. All certificates or instruments representing or
--------------------------
evidencing the Shares shall be held by or on behalf of the Company under this
Agreement and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Company. If Bildner fails to perform
any Obligation contained in this Agreement, the Company may itself perform, or
cause performance of, that Obligation, and the expenses of the Company incurred
in connection with that performance shall be payable by Bildner under Section 9
hereto.
5. Representations and Warranties. Bildner represents and warrants as follows:
------------------------------
(a) Bildner is the beneficial and record owner of the Pledged Collateral
free and clear of any lien on the Pledged Collateral except for the security
interest created by this Agreement.
(b) The pledge of the Pledged Collateral under this Agreement creates a
valid and perfected first priority interest in the Pledged Collateral, securing
the payment of the Obligations.
(c) No authorization, approval, or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required either
(i) for the pledge by Bildner of the Pledged Collateral under this Agreement or
for the execution, delivery, or performance of this Agreement by Bildner; or
(ii) for the exercise by the Company of the voting or other rights provided for
in this Agreement or the remedies in respect of the Pledged Collateral under
this Agreement (other than restrictions under any federal or state securities
law applicable to the offer or sale of unregistered securities).
6. Rights in Absence of Default.
----------------------------
(a) So long as there has been and is no Event of Default: (i) involving
failure by either or both Indemnitors to fill its or their obligations under the
Indemnification Agreement, or (ii) involving the voluntary placement by Bildner
of a lien upon all or a significant portion of the Pledged Collateral:
(i) Bildner shall be entitled to exercise any and all voting and other
consensual rights pertaining to any or all of the Shares, subject to any other
agreement to which the Shares may be subject.
2
<PAGE>
(ii) Securities of the Company associated with the Shares issued in
connection with any stock dividend or stock split, or securities of the Company
issued in connection with a recapitalization, merger, reorganization or similar
transaction shall be immediately delivered to the Company as Pledged Collateral
in the same form as so received (with any necessary endorsement). Any other
dividends, distributions, or interest paid or payable in respect of, or
instruments and other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Pledged Collateral shall be paid to Bildner.
(iii) The Company shall execute and deliver (or cause to be executed and
delivered) to Bildner all such proxies and other instruments as Bildner may
reasonably request for the purpose of enabling him to exercise the voting and
other rights that he is entitled to exercise pursuant to paragraph (i) of this
Section 6(a).
(b) When and so long as there is an Event of Default (i) involving failure
by either or both Indemnitors to fulfill its or their obligations under the
Indemnification Agreement, or (ii) involving the voluntary placement by Bildner
of a lien upon all or a significant portion of the Pledged Collateral, all
rights of Bildner to exercise the voting and other rights that he would
otherwise be entitled to exercise pursuant to Section 6(a)(i) shall cease, and
all those rights shall become vested in the Company, which shall then have the
sole right to exercise those voting and other rights.
7. Transfers and Liens. Bildner agrees that he will not (i) sell or otherwise
-------------------
dispose of, or grant any option with respect to, any of the Pledged Collateral
without the prior written consent of the Company; or (ii) voluntarily create any
lien upon or with respect to any of the Pledged Collateral, except for the
security interest under this Agreement.
8. Events of Default; Remedies upon Default.
----------------------------------------
(a) The following shall constitute Events of Default ("Events of Default")
under this Agreement:
(i) If Bildner fails to perform or observe any term, covenant, or
Obligation under this Agreement or either Indemnitor fails to perform or observe
any term, covenant, or obligation under the Indemnification Agreement, or if any
representation or warranty made by Bildner or the Indemnitors in this Agreement
or the Indemnification Agreement is untrue or misleading in any material respect
as of the date with respect to which that representation or warranty was made;
(ii) If a notice of lien, levy, or assessment is filed or recorded with
respect to all or a substantial part of the Pledged Collateral, except for a
lien that relates to current taxes not yet due and payable, and if the
applicable claim is not discharged or satisfied within ninety (90) days of
Bildner's actual knowledge of that filing or recordation (such effected Pledged
Collateral shall hereinafter be referred to as the "Effected Collateral");
(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
3
<PAGE>
returned to Bildner or the writ, distress warrant, or levy is not dismissed,
stayed, or lifted within ninety (90) days (such effected Pledged Collateral
shall hereinafter be referred to as the "Effected Collateral").
(iv) Provided; however, with respect to subparagraphs 8(a)(ii) and (iii)
hereto, if prior to the end of such ninety (90) day period, Bildner provides the
Company with additional collateral to secure the Obligations with a Fair Market
Value (as defined in Section 11 hereto) equal to 110% of the Fair Market Value
of the Effected Collateral, which collateral may be Shares or cash (or such
other collateral, subject to the consent of the Company, which consent shall not
be unreasonably withheld) at the discretion of Bildner and which collateral
Bildner hereby agrees shall be subject to the terms of this Agreement, no Event
of Default shall be deemed to have occurred.
(b) When and so long as there is any Event of Default, the Company may
exercise in respect of the Pledged Collateral, in addition to other rights and
remedies provided for in this Agreement or otherwise available to it, all the
rights and remedies of a secured party upon a default under the Uniform
Commercial Code in effect in the State of California at that time.
(c) Notwithstanding anything else contained herein to the contrary, so long
as there has been and is no Event of Default: (i) involving failure by either or
both Indemnitors to fulfill its or their obligations under the Indemnification
Agreement, or (ii) involving the voluntary placement by Bildner of a lien upon
all or a significant portion of the Pledged Collateral, Bildner shall be
entitled to exercise any and all voting and other consensual rights pertaining
to any or all of the Shares.
9. Expenses. On demand, Bildner will pay the Company all reasonable expenses,
--------
including attorneys' fees and costs, which the Company may incur in connection
with (i) the exercise or enforcement of any of the rights of the Company under
this Agreement; or (ii) Bildner's failure to perform or observe any of the
provisions of this Agreement.
10. Security Interest Absolute. All rights and security interests of the
--------------------------
Company, and all Obligations of Bildner, under this Agreement shall be absolute
and unconditional irrespective of: (i) any lack of validity or enforceability
of the Indemnification Agreement 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 Indemnification Agreement; (iii) any exchange,
release, or non-perfection of any other collateral, or any release, amendment,
or waiver of any of the Obligations; or (iv) any other circumstance that might
otherwise constitute a defense available to, or a discharge of, Bildner in
respect of the Obligations or of this Agreement.
11. Adjustments; Release of Security. The Company and Bildner hereby agree:
--------------------------------
(a) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is less than 110% of the potential or actual
dollar value of the Company's obligation under the Guaranty plus any actual
amounts paid by the Company in connection with the Guaranty, the Company shall
notify Bildner within ten (10) days. Bildner shall, within forty-five (45) days
of receipt of such notice, deposit with the Company such additional cash, shares
of
4
<PAGE>
common stock of the Company, or both, at the option of Bildner, with a value
equal or greater than the deficiency, which additional collateral shall be
subject to the terms of this Agreement. Each such deposit pursuant to this
Section 11(a) shall be reflected by an appropriate notation to Schedule A
hereto.
(b) If at the end of any fiscal quarter of the Company, the Fair Market
Value of the Pledged Collateral is greater than 110% of the potential or actual
value of the Company's obligation under the Guaranty plus any actual amounts
paid by the Company in connection with the Guaranty (the "Excess Collateral"),
upon ten (10) days notice, Bildner may withdraw or cause the withdrawal of all
or a portion of the Excess Collateral, provided that no fractional Shares shall
be released pursuant to this subparagraph 11(b). In lieu of any fractional
Shares to which Bildner would otherwise be entitled, the Company shall pay cash
equal to such fraction multiplied by the Fair Market Value. The release of
shares and payment in lieu of fractional shares pursuant to this Section 11(b)
shall be reflected by an appropriate notation to Schedule A hereto.
(c) Upon fifteen (15) days prior written notice from Bildner of his intent
to sell all or a portion of the Pledged Collateral, the Company may release such
Pledged Collateral (such Pledged Collateral shall be referred to herein as the
"Released Collateral"), provided that prior to such release Bildner provides the
Company with an undertaking that Bildner will pay to the Company in cash an
amount equal to 110% of the Fair Market Value of such Released Collateral and
any actual amounts paid by the Company in connection with the Guaranty as of the
date of such payment within five (5) business days of such sale.
(d) For the purposes of this Agreement, the term "Fair Market Value" shall
mean; (i) if the Company's stock is not publicly traded on a national securities
exchange or the Nasdaq National Market System, as determined by the most recent
third-party valuation relating to the Shares, or (ii) if the Company's stock is
publicly traded on a national securities exchange or the Nasdaq National Market
System, as determined by the most recent closing price of the Company's stock.
12. Further Assurances. Bildner agrees that at any time and from time to time,
------------------
at his expense, Bildner will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that the Company may request, in order to perfect and protect any
security interest granted or purported to be granted by this Agreement or to
enable the Company to exercise and enforce its rights and remedies under this
Agreement with respect to any Pledged Collateral.
13. Entire Agreement; Amendment; Waiver. This Agreement and the
-----------------------------------
Indemnification Agreement embody the entire agreement of the parties hereto with
respect to the subject matter of this Agreement and supersede all prior
agreements with respect to that subject matter. This Agreement may not be
amended or modified except in a writing signed by both parties. No waiver of
any provision of this Agreement shall be deemed to, or shall, operate as a
waiver of any other provision, whether or not 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.
5
<PAGE>
14. Notices. All notices and other communications provided for under this
-------
Agreement shall be given as follows:
If to the Company:
TIER TECHNOLOGIES, INC.
1350 Treat Boulevard, Suite 250
Walnut Creek, CA 94596
Attn: Chief Financial Officer
If to Bildner:
JAMES L. BILDNER
5 Boardman Avenue
Manchester, MA 01944
15. Captions. Captions are used for reference purposes only and should be
--------
ignored in the interpretation of the Agreement. Unless the context requires
otherwise, all references in this Agreement to Sections are to the sections of
this Agreement.
16. Governing Law; Terms. This Agreement shall be governed by and construed in
--------------------
accordance with the laws of the State of California applicable to contracts
wholly made and performed in the State of California. Unless otherwise defined
above, terms defined in Division 9 of the Uniform Commercial Code as adopted in
the State of California are used in this Agreement with their statutory
meanings.
The parties have duly executed this Agreement as of the date first written
above.
TIER TECHNOLOGIES, INC.
By: /s/ George K. Ross
------------------
George K. Ross
Its: Executive Vice President and
Chief Financial Officer
JAMES L. BILDNER
/s/ James L. Bildner
- --------------------
James L. Bildner
6
<PAGE>
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain PLEDGE AGREEMENT dated as of
December __, 1998 (the "Agreement"), the undersigned hereby sells, assigns, and
transfers to TIER TECHNOLOGIES, INC. (the "Company"), __________ (__________)
shares of Class B Common Stock of the Company, standing in the undersigned's
name on the books of the Company represented by Certificate No(s). ______
delivered herewith. The undersigned does hereby irrevocably constitute and
appoint the Secretary of the Company as the undersigned's attorney-in-fact, with
full power of substitution, to transfer this stock on the books of the Company.
THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT.
DATED: December __, 1998
JAMES L. BILDNER
/s/ James L. Bildner
- --------------------
James L. Bildner
Instructions: Please sign this Stock Power above, but do not fill in any blanks
other than the signature lines.
The purpose of this Stock Power and Assignment Separate from Stock Certificate
is to enable the Company to acquire the Shares in accordance with the terms of
the Agreement.
7
<PAGE>
SCHEDULE A
PLEDGED SHARES AND
OTHER COLLATERAL
<TABLE>
<CAPTION>
FAIR MARKET OTHER
VALUE OF SHARES COLLATERAL
DATE SHARES PLEDGED PLEDGED /VALUE
---- -------------- ------- ------
<S> <C> <C> <C>
December 22, 1998
</TABLE>
SHARES RELEASED PURSUANT
TO SECTION 11(b)
DATE SHARES RELEASED
---- ---------------
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,863
<SECURITIES> 27,762
<RECEIVABLES> 18,981
<ALLOWANCES> 385
<INVENTORY> 0
<CURRENT-ASSETS> 61,818
<PP&E> 3,681
<DEPRECIATION> 1,000
<TOTAL-ASSETS> 81,054
<CURRENT-LIABILITIES> 11,635
<BONDS> 0
0
0
<COMMON> 64,715
<OTHER-SE> 4,089
<TOTAL-LIABILITY-AND-EQUITY> 81,054
<SALES> 21,356
<TOTAL-REVENUES> 21,356
<CGS> 0
<TOTAL-COSTS> 13,156
<OTHER-EXPENSES> 5,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 3,322
<INCOME-TAX> 1,296
<INCOME-CONTINUING> 2,026
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,026
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
