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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23195
TIER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
California 94-3145844
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
</TABLE>
1350 Treat Boulevard, Suite 250
Walnut Creek, California 94596
(925) 937-3950
(Address of principal executive offices and registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Common
Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $78,065,582 on November 29, 2000 based on the
last reported sale price of the registrant's Class B Common Stock on the
Nasdaq National Market on such date. As of November 29, 2000, the number of
shares outstanding of the registrant's Class A Common Stock was 1,135,114 and
the number of shares outstanding of the registrant's Class B Common Stock was
11,536,316.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended September
30, 2000. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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TIER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
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Item 1. Business...................................................... 3
Item 2. Properties.................................................... 11
Item 3. Legal Proceedings............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........... 11
<CAPTION>
PART II
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<C> <S> <C>
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 27
Item 8. Financial Statements and Supplementary Data................... 28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 28
<CAPTION>
PART III
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Item 10. Directors and Executive Officers of the Registrant............ 29
Item 11. Executive Compensation........................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 29
Item 13. Certain Relationships and Related Transactions................ 29
<CAPTION>
PART IV
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<C> <S> <C>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 29
SIGNATURES
</TABLE>
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements contained in this report, including statements regarding
the development of the Company's services, markets and future demand for the
Company's services, and other statements regarding matters that are not
historical facts, are "forward-looking statements" within the meaning of
federal securities laws. When used in this report, the words "believes",
"expects", "anticipates", "intends", "estimates", "shows", "will likely" and
similar expressions are intended to identify such forward-looking statements.
Such forward-looking statements include risks and uncertainties; consequently,
actual results may differ materially from those expressed or implied thereby.
Factors that could cause actual results to differ materially from those set
forth herein include, but are not limited to, those factors listed in the
"Factors That May Affect Future Results" section, as set forth beginning on
page 22 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.
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PART I
Item 1. Business
General
Tier Technologies, Inc. ("Tier" or the "Company") is a vertically-focused
global consulting firm that delivers end-to-end business solutions to its
national and multinational clients. Tier, which was incorporated in the State
of California in 1991, operates its business through four strategic business
units ("SBU"): U.S. Government Services, U.S. Commercial Services, Australian
Operations, and United Kingdom Operations. See Note 11 to Notes to
Consolidated Financial Statements for certain financial information regarding
these strategic business units. Tier works closely with its Fortune 1000,
government and other clients to formulate, evaluate and implement strategies
that allow clients to rapidly channel emerging technologies into business
operations. Tier combines this understanding of enterprise-wide systems with
deep domain knowledge in the vertical industries of healthcare, financial
services, insurance, utilities and government. In government, the Company
focuses on the areas of state health and human services, transportation,
justice and public safety, natural resources and tax and revenue. The
Company's ability to understand the specific industry environment and business
rules in which its clients operate allows Tier to retain, reuse, repeat and
distribute its experiential knowledge throughout the Company and to achieve
significant improvements in cost, quality and deployment on client projects.
Tier provides these business solutions utilizing a variety of delivery
offerings that are targeted to specific client industries and governmental
agencies and include solutions that link systems and technology improvements
to increased operating efficiencies. These services are offered to its clients
across all strategic business units under five broad delivery offering
categories: Business Process Reengineering ("BPR"), Systems Design and
Integration ("Systems"), Vertical Application Service Provider ("Vertical
ASP"), Business Process Outsourcing ("BPO"), and Systems and Technology
Training ("Training"). Several of Tier's engagements involve providing a
combination of these delivery offerings as part of the overall project. Tier
brings to its client relationships specific industry knowledge, proven
delivery capability and proprietary applications, such as Kids 1stSM and
FundFinderSM. The combination of domain expertise and technical capability
allows the Company to create new business models and improve operating
processes that result in quantifiable returns on investment for its clients.
Background
Today, large corporations and government agencies face a competitive and
complex operating environment. Consolidation, globalization, the impact of the
internet, regulatory changes and the complexity of technology and operating
system advancements have fundamentally changed the way businesses operate. As
a result, the market's preference for consulting services has undergone an
equally profound change. Firms that provided only limited or generic services
or only offer technology-specific answers are seen as too narrowly focused.
The market now demands that the firm of choice offer a comprehensive business
solution, grounded in specific and relevant business knowledge and proven
experience.
The last several years have brought significant change to the government
health and human services market in particular. The need for real time
information, consolidation, new statutory regulations in some markets and
deregulation in others, and the demand for more effective information exchange
between government agencies and local constituents in an internet environment,
have created one of the most complex business environments of the last several
decades.
For example, in U.S. state government health and human services, the
environment surrounding child support, specifically, has undergone massive
change as case volume has skyrocketed. Nationally, the number of child support
cases has risen from 15.2 million in 1992 to 16.4 million cases in 1999. Over
$15.8 billion in child support payments were collected in 1999, a 100%
increase from 1992 collections of only $7.9 billion.
The U.S. Personal Responsibility and Work Opportunity Reconciliation Act of
1996 ("PRWORA") requires states to place in operation an automated state
centralized unit, or linked local units to collect and
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disburse child support payments. The unit must provide a single, automated
process to collect and disburse child support payments by generating income
withholding orders and notices to employers, accurately identifying payments,
disbursing payments to custodial parents and furnishing parents with a record
of support payment status. Centralized collection units assist states with a
growing caseload and simplify the withholding process for employers by
eliminating the need for them to send checks to multiple entities and
locations. As wage withholding has become a requirement for a larger segment
of the non-custodial parent population, the need for centralization has been
intensified.
In addition, collecting delinquent child support payments has become more
complex. Under PRWORA, the Financial Institution Data Match ("FIDM") program
was created. Among the provisions of this sweeping legislation is a
requirement for all states to match delinquent obligors against records in
every financial institution doing business in that state. When a match is
identified, the State child support programs enforcement agencies issue liens
or levies on the accounts to collect the past-due child support. Each state is
required to institute a FIDM program.
Within the global commercial market, the push towards consolidation is
evident in the healthcare, financial services, insurance and utilities
industries. Especially important in each of these vertical markets is the
drive for business process improvements that deliver operating efficiencies.
More organizations are competing on a global scale and are addressing global
issues with limited, regional or non-optimized systems and procedures. The
U.S. healthcare industry, for example, which is estimated at $1 trillion, is
composed of an array of participants, including providers, purchasers and
insurers functioning interdependently within the complex framework of the U.S.
healthcare system. Consumers are demanding increasing choice in the way they
access services, which has led to growth among point-of-service plans, a
hybrid of a health maintenance organization and a preferred provider
organization. Leading edge organizations must develop business processes
around these advances in services or lag the market.
In the financial services and insurance arenas, consolidation among the
banking, insurance and securities industries continues to mount. The advent of
on-line products has increased focus on data security and information
controls. On the utility front, the large-scale unbundling of mature power
companies has led to the redefinition of payment and rate structuring, and
wide-ranging requirements for new revenue tracking systems and procedures.
Further complicating the general business environment has been the evolution
of the internet and its impact on both the reality and perception of the way
these vertical markets serve their customers and stakeholders. Many companies
have seen the adoption of on-line services as the sole solution to their
competitive environments. The Company believes that these adoption strategies
are flawed unless they include more comprehensive changes in business
operating systems, processes and strategies that are in alignment with the
underlying systems and processes that drive these industries.
The Company believes it has a mature business model that has evolved from a
chain of discrete delivery offerings, to a continuum of high value-add
services. Consulting activities are now linked not only to systems
implementation, but to the client's business strategy, through client
collaboration that starts with strategic business consulting at the top
executive levels of our clients, through technology consulting, systems
implementation and training.
Strategy
The Company's strategy includes the following elements:
Leverage Expertise in Key Vertical Markets. The Company intends to continue
to increase its client base and leverage its expertise by focusing its
business development and marketing efforts on high-value opportunities in
certain vertical markets, such as healthcare, financial services, insurance,
utilities and government--especially in the areas of state health and human
services, transportation, justice and public safety, natural resources and
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tax and revenue. Within the global commercial market, Tier has developed
specific expertise in areas such as healthcare claims processing, billing
systems, customer relationship management, membership systems and operations,
financial credit and transaction processing and systems, insurance claims and
underwriting operation systems and utilities business and process improvement
solutions. Within the global government markets, Tier has developed expertise
in areas such as child support and child support enforcement services, child
welfare services, traditional welfare, payment processing, training and
procurement processes. The Company believes that the best market opportunities
for its services are large organizations with intensive information processing
needs.
Provide End-to-End Solutions. The Company recognizes that a business
requires more than just the adoption of on-line capabilities as an answer to
its competitive environments. The Company's strategy envisions a single-source
solution-provider that can rapidly deploy a team of senior experts with proven
industry expertise and technology capability that spans the entire business
environment and includes implementation and operation. The Company believes
that this combination of a more "holistic" approach and deep domain expertise
provides the best value proposition.
Actively Brand Tier Name and Corporate Values. The Company intends to
continue to develop market recognition and acceptance of the Company's
services by an aggressive campaign designed to increase global awareness of
the Company's expertise and capabilities. The Company believes that it is well
positioned to increase name recognition among its target market segments, and
to develop brand loyalty among its current client base. The Company will
conduct business as "Tier" rather than "Tier Technologies, Inc.", as Tier's
current breadth of services is more comprehensive than just a pure technology
consulting company. The Company intends to create brand identity through the
use of several "corporate attributes," such as "Expect A LotSM," "We have a
Passion for ResultsSM," "Beyond TalkSM," and "There is a Strategy for
Everything We DoSM." In the Company's judgment, these attributes will serve as
global corporate, cultural and business descriptors, and define its commitment
to excellence, end-to-end solutions and customer satisfaction. The Company's
branding campaign seeks to exploit the competitive advantages provided by the
Company's global capabilities. In addition, the Company is branding some of
its leading-edge proprietary software applications, namely Kids 1stSM--the
child support payment processing application and FundFinderSM--the financial
institution data matching application.
Attract and Retain High Value Employees. Tier maintains programs and
personnel to identify, hire, train and retain highly skilled professionals who
are a critical element in its ability to deliver high quality services to
clients and to the long-term success of the Company. In addition, the Company
offers a competitive compensation package and a career advancement program
that offers employees career enrichment opportunities and technical training
opportunities. The Company's international presence allows it to offer
international assignments to its consultants that provide opportunities to
gain knowledge and experience under an international "best practices" program.
The Company is committed to the "seller-doer" model, under which, our
traditional sales force is supplemented by industry experts that have the
ability to translate industry-specific challenges into business development
opportunities. Seller-doers maintain an ongoing client relationship at the
senior executive level, well past the initial sales effort. By maintaining
this relationship, seller-doers can ensure the quality of the business
solution being provided as well as identify other value-added opportunities to
meet the changing needs of our clients.
Develop and Respond to Strategic Partnerships and Acquisitions. The Company
develops strategic partnerships with service and technology providers in the
pursuit of new business development opportunities. The Company believes these
relationships provide competitive advantages, including enabling the Company
to broaden its client base and maintaining the Company's technological
leadership through the deployment of leading edge applications. Tier considers
potential acquisitions which may further expand its presence in key geographic
or vertical marketplaces, supplement its technical scope or industry
expertise, or allow it to acquire additional human resources or strategic
client relationships. From December 1996 through September 30, 2000, the
Company made fifteen acquisitions which helped to expand the Company's
operations in the United States,
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to establish its operations in Australia and the United Kingdom, to broaden
the Company's client base, service offerings and technical expertise and to
supplement its human resources.
Services and Clients
Tier's services are categorized under five broad delivery offerings:
Business Process Reengineering, Systems Design and Integration, Vertical
Application Service Provider, Business Process Outsourcing, and Systems and
Technology Training. Revenue contributed by delivery offering is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
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2000 1999 1998
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(in thousands)
<S> <C> <C> <C>
BPR.................................................... $ 17,082 $ 2,027 $ 4,864
Systems................................................ 39,761 65,208 43,140
Vertical ASP........................................... 22,415 4,928 --
BPO.................................................... 17,826 7,577 8,738
Training............................................... 9,764 6,309 801
Other.................................................. 2,576 5,927 182
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Total.............................................. $109,424 $91,976 $57,725
======== ======= =======
</TABLE>
These delivery offerings are targeted primarily to five vertical markets:
government, healthcare, financial services, insurance and utilities. Tier has
suites of services that it provides under each of these delivery offerings and
several of the Company's engagements involve providing a combination of these
delivery offerings as part of the overall project. Some representative client
engagements include:
Business Process Reengineering. Our suite of BPR advisory services is
designed to help senior management improve the effectiveness of corporate
strategy, process or operations by assessing the business needs and reviewing
the business functions, plans and directions. These services generate a
fundamental rethinking of a customer's business systems and processes and are
aimed at achieving dramatic improvements in key performance measures.
Information technology consulting services help the Company's clients assess
different technology strategies and, in doing so, align their technology
strategy with their business and process strategy. These services support a
client's information technology initiatives by providing strategic,
architectural, operational and implementation planning. For example, the
Company has provided consulting services to a major U.S. utility company to
develop accurate strategic performance metrics for a field operations unit and
install activity-based cost disciplines.
Systems Design and Integration. Client demand for applications, especially
e-commerce applications, has increased, stimulated by market forces that
include globalization and supply chain integration. The Company is focused on
enhancing functionality through the development of applications directed
towards the vertical markets and domains in which it practices. Through the
development of proven enterprise-wide applications in the various vertical
markets on which Tier is focused, the Company has developed strong credentials
and expertise. One example is a significant government project, in which the
Company is responsible for providing the design, development, implementation
and management of a child support system that meets the requirements of
PRWORA, including full facility management services and user training. Tier
provides all technical support services to the client, including analysis,
design, programming, testing, training, implementation and operations. In the
healthcare sector, the Company developed a web-based eligibility and claim
submission application for a major healthcare client which has over 10,000
providers. The application provided a user-friendly web interface and included
an extranet application to allow providers on the client's managed care
program to check patient eligibility and submit claims using a browser. The
Company has successfully developed several large-scale systems for a state's
Department of Transportation, including fleet and travel management systems.
The system was designed as a custom fit for the unique characteristics of
fleet management within the state. The Company designed, implemented, managed
and executed the data conversion of a legacy billing system, as well as the
implementation of a new client/server application for a major healthcare
provider. The project, which included billing, cash posting, collections and
utilities functions, analyzed and coordinated over 13 million records.
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Vertical Application Service Provider. As a Vertical Application Service
Provider, Tier operates entire business processes on behalf of clients
utilizing core proprietary software applications on a per-transaction basis.
Our clients benefit from our industry expertise and knowledge of the
regulatory environment. In addition, the ability to customize Tier's core
proprietary software applications makes this solution a scalable and flexible
option for our clients who wish to increase efficiencies while reducing costs
and risk. We believe our ability to offer a flexible, industry-specific
solution differentiates Tier services from the generic hosting services
provided by traditional ASPs. Within the government sector, the Company has
developed proprietary applications such as Kids 1stSM--a child support payment
processing application and FundFinderSM--the financial institution data
matching application. For our child support payment processing Vertical ASPs,
each state has the ability to select service options including a government-
to-consumer web application, full processing of child support financial
instruments and customer service/call center options. In addition, the Company
provides outreach activities for states including the design of web sites,
brochures and supporting participation documents. On an annualized basis, the
Company is currently processing over $2 billion of child support payments for
eight states in the United States.
The Company's strong understanding of child support enforcement and banking
issues, as well as strong technology skills are well suited to meet the
requirements of FIDM. The Company was awarded one of the first FIDM contracts
in the U.S. Tier's proprietary software application, FundFinder, provides the
government-to-business interface between all of a state's financial
institutions and a state's child support enforcement division.
Business Process Outsourcing. Given the need for increasing sophistication
within the information technology ("IT") workplace, outsourcing is
increasingly viewed by the corporate community as an optimization strategy.
More clients are looking to outsource their IT functions as well as the
responsibility for large project oversight on internal systems projects. Tier
provides its clients with professional personnel with the necessary
technological expertise and project management skills. Tier's Australian
Operations SBU has a team of senior project managers that can be deployed to
outsource the management of large systems projects. The U.S. Government
Services SBU has provided application development programming resources on an
outsourced basis for several agencies of a state for over three years.
Systems and Technology Training. With the confluence of technology, new and
changing systems, the increased use of web-based data and processes and
operational realignment, training has become a serious issue for most
corporations. The ability to have large groups of personnel trained in current
applications is critical to the success of many businesses, particularly as
many companies move into a global as well as an internet environment. The
Company offers a suite of systems and technology training courses that
includes boot camps and systems training programs for a range of Fortune 1000
clients. Tier also designs customized corporate training programs to meet the
needs of specific clients.
Client Mix. For the fiscal year ended September 30, 2000, Tier had revenues
of $109.4 million. Tier has derived, and believes that it will continue to
derive, a significant portion of its revenues from a small number of large
clients, many of which engage the Company on a number of projects. For the
twelve months ended September 30, 2000, no client accounted for more than 10%
of the Company's revenues. Most of the Company's contracts can be terminated
by the client with little or no notice and the completion, cancellation or
significant reduction in the scope of a large project could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Until fiscal 1997, Company revenues were generated primarily through Tier's
domestic operations. For the fiscal year ended September 30, 2000,
international operations accounted for 36.6% of the Company's total revenues.
See Note 11 to Notes to Consolidated Financial Statements. The Company
believes that the percentage of total revenues attributable to international
operations will continue to be significant and may continue to grow.
For the fiscal year ended September 30, 2000, approximately 59.3% of Tier's
worldwide revenues were derived from sales to government agencies. Such
government agencies may be subject to budget cuts or budgetary constraints or
a reduction or discontinuation of government funding. A significant reduction
in funds
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available for government agencies to purchase services offered by the Company
could have a material adverse effect on Tier's business, financial condition
and results of operations.
Sales and Marketing
The Company's clients consist primarily of Fortune 1000 companies with
information-intensive businesses and government entities with large volume
information and technology needs. Tier's sales and marketing objective is to
develop relationships with clients that result in both repeat and long-term
engagements.
Because the Company is focused specifically on vertical market expertise,
the sales delivery model differs from some of our competitors. Rather than
using only a traditional commissioned sales force, the Company also utilizes
the seller-doer model, which allows thought leadership within the vertical
markets to emerge as a key sales tool. The seller-doers are typically members
of the management team, who have a wide range of industry contacts,
significant reputation in the industry and the ability to develop, sell and
successfully manage major engagements.
As a result of its vertically-focused sales channel approach, the Company
believes that it is able to penetrate markets quickly and with lower sales
acquisition costs. In order to more clearly define the delivery of its
services and to reflect the needs of its clients, the Company has organized
its sales effort into four strategic business units: U.S. Commercial Services,
which targets healthcare, financial services, insurance services, utilities
and other commercial markets; U.S. Government Services, which targets the
fast-growing health and human services arena, justice and public safety,
transportation and tax and revenue; Australian Operations, which targets
Australia-based opportunities and United Kingdom Operations which targets
opportunities in the United Kingdom.
The sales team derives leads through industry networking and referrals from
existing clients; government agencies' requests for proposals; strategic
partnerships with third parties under which the Company jointly bids and
performs certain engagements; directed sales activities identified by other
strategic business units within the Company; and an international marketing
program. The Company believes that its use of these multiple marketing
channels results in a shorter sales cycle than generally experienced by other
providers.
The Company believes its marketing program will further benefit from its
vigorous branding campaign, and includes joint marketing through strategic
partnership arrangements; provision of speakers to industry, academic and
government conferences; publication of white papers and articles; and
distribution of collateral material and public relations announcements.
Human Resources
As of September 30, 2000, the Company had a workforce of 918, including 539
consultants, of which 346 were salaried employees, 23 were hourly employees
and 170 were independent or sub-contractors. The workforce also includes 224
employees who support its Vertical ASP facilities, 42 sales and marketing
employees and 113 general and administrative employees. Of the Company's total
workforce as of September 30, 2000, 66.3%, 30.7% and 3.0% were located in the
United States, Australia and the United Kingdom, respectively.
The Company has a global Human Resources Department that is primarily
responsible for day-to-day human resources operations as well as
organizational development initiatives and the administration of the Company's
overall compensation and benefits policy. The Company also has a Resource
Management Department which is responsible for consultant utilization and
deployment and, as part of its recruiting efforts, pursues a three level
employee-sourcing strategy. The primary sources include employee referrals,
job fairs, internet job postings and direct recruiting. Tier also has
established national and international sources through preferred-rate
partnerships with recruiting suppliers. If peak staffing demand exceeds these
resources, the Company may engage external recruiting agencies to locate
consultants on a permanent or temporary basis or draw from its existing
contractor relationships. Given the rapid pace of technological evolution,
Tier recognizes that skill obsolescence is a fundamental concern for
professionals. Tier attracts and retains employees by offering
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technical training opportunities as well as management skills training in the
areas of project management and project administration, a stock option award
program and a competitive benefits and compensation package. Tier's senior
consultants work with their more seasoned colleagues within the vertical
markets to develop requisite seller-doer skills. As a key component of the
Company's employee retention program, Tier has developed and implemented a
performance based compensation structure supported by a performance planning
and review ("PPAR") process that allows each employee and his or her manager
to develop performance plans with specific measurable objectives. The result
of implementing the PPAR program is a focus by each employee on what he or she
needs to achieve to perform at the highest level, which directly influences
compensation. The Company believes that there is a shortage of, and
significant competition for, professionals and that its future success is
highly dependent upon its ability to attract, train, motivate and retain
skilled consultants with the advanced technical skills necessary to perform
the services offered by the Company.
Competition
The professional services market is highly competitive and is served by
numerous international, national and local firms. Market participants include
systems consulting and integration firms, including national accounting firms
and related entities, the internal information systems groups of the Company's
prospective clients, professional services companies, hardware and application
software vendors, and divisions of large integrated technology companies and
outsourcing companies. Many of these competitors have significantly greater
financial, technical and marketing resources, generate greater revenues and
have greater name recognition than the Company. In addition, there are
relatively low barriers to entry into the professional services market, and
the Company has faced, and expects to continue to face, additional competition
from new entrants.
The Company believes that the principal competitive factors include
reputation, project management expertise, deep industry expertise, speed of
development and implementation, technical expertise, competitive pricing and
the ability to deliver results both on a fixed price or transaction-based as
well as a time and materials basis. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the ability of its clients or competitors to hire, retain
and motivate project managers and other senior technical staff, the ownership
by competitors of software used by potential clients, the price at which
others offer comparable services, the ability of its clients to perform the
services themselves, and the extent of its competitors' responsiveness to
client needs. There can be no assurance that the Company will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not cause the Company's
revenues or income to decline or otherwise materially adversely affect its
business, financial condition and results of operations.
Intellectual Property Rights
Tier's success has resulted, in part, from its methodologies and other
intellectual property rights. The Company relies upon a combination of
nondisclosure and other contractual arrangements and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary
rights of third parties from whom the Company licenses intellectual property.
The Company enters into confidentiality agreements with its employees and with
many of its consultants and clients, and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter the misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of
this information and take appropriate steps to enforce its intellectual
property rights.
A portion of the Company's business involves the development of software
applications for specific client engagements. Ownership of such software is
the subject of negotiation with each particular client and is typically
assigned to the client. In limited situations, the Company may retain
ownership, or obtain a license from its client, which permits Tier or a third
party to market the software for the joint benefit of the client and Tier or
for the sole benefit of Tier.
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Executive Officers of the Registrant
The following persons were executive officers of the Company as of November
29, 2000:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- ------------------------------------------------------------
<S> <C> <C>
James L. Bildner........ 46 Chairman of the Board, President and Chief Executive Officer
James R. Weaver......... 43 President, U. S. Operations
Stephen McCarty......... 47 Senior Vice President, Human Resources Management
Laura B. DePole......... 36 Senior Vice President, Chief Financial Officer, Secretary
and Treasurer
David Laidlaw........... 59 President, International Operations
Richard E. Kristensen... 50 President, U.S. Commercial Services
Barbara M. Pivnicka..... 47 Senior Vice President and Chief Marketing Officer
</TABLE>
Mr. Bildner joined Tier as Chairman of the Board in November 1995 and became
Chief Executive Officer in December 1996. From December 1994 to December 1996,
Mr. Bildner was employed as a principal of Argus Management Corporation, a
management consulting firm. Mr. Bildner serves on the Board of Visitors of the
Tucker Foundation and the Case Western Reserve School of Law. Mr. Bildner is a
trustee of Lesley University, an Overseer of Children's Hospital and Medical
Center and serves on the Board of Directors of Australia's Lizard Island Reef
Research Foundation. A frequent speaker and author on business issues, Mr.
Bildner holds an A.B. from Dartmouth College and a J.D. from Case Western
Reserve School of Law.
Mr. Weaver joined Tier as President, Government Services Division in May
1998 and became President, U.S. Operations in August 2000. From June 1997
until May 1998, Mr. Weaver served as Vice President, Government Solutions of
BDM International, Inc., an information technology company, where he was
responsible for strategic planning, policy and procedure development, client
base expansion and overall business planning and development. From March 1995
until June 1997, he served as National Program Director, Public Sector for
Unisys Corporation, an information technology company. Prior to that time, he
served as Director, Public Sector Services with Lockheed Information
Management Services and District Manager with the Commonwealth of Virginia,
Division of Child Support Enforcement. Mr. Weaver received a B.A. in
Psychology from California University of Pennsylvania.
Mr. McCarty joined the Company as Senior Vice President, Human Resources
Management in October 1998. From January 1998 to October 1998, he served as a
Vice President of Renaissance Worldwide, Inc., a consulting firm. From
February 1993 to January 1998, he served as a Vice President of Arthur D.
Little, a consulting firm. Mr. McCarty received a B.A. in Psychology from
State University of New York (SUNY) at Plattsburgh and a M.S. in
Industrial/Organizational Psychology from Rensselaer Polytechnic Institute.
Ms. DePole has served as Senior Vice President, Chief Financial Officer,
Secretary and Treasurer since January 2000 and Chief Accounting Officer since
August 1997. Ms. DePole previously served as Senior Vice President, Finance
from April 1999 to January 2000. From October 1998 to April 1999, Ms. DePole
was Vice President, Finance and from August 1997 to October 1998, Ms. DePole
was also the Corporate Controller of the Company. Prior to that time, Ms.
DePole was a Senior Manager at Ernst & Young LLP, an international public
accounting firm. Ms. DePole received a B.S. in Accounting from San Francisco
State University and is a Certified Public Accountant.
Mr. Laidlaw joined the Company as President, International Operations in
March 1999. From January 1996 through February 1999, Mr. Laidlaw served as
General Manager for the IBM Global Services Australia Consulting and Systems
Integration Unit. From 1966 through December 1995, Mr. Laidlaw held various
other positions within IBM information technology services units in Australia,
the United Kingdom and the Asia Pacific region. Mr. Laidlaw received a B.S.
and M.S. in Engineering from Melbourne University.
Mr. Kristensen joined the Company as President, U.S. Commercial Services in
March 2000. From January 1999 to February 2000, Mr. Kristensen served as
President and Chief Operating Officer of The SCA Group. From
10
<PAGE>
September 1993 to December 1998, Mr. Kristensen served as President and Chief
Executive Officer of Harris Chapman & Company. Mr. Kristensen received an MBA
in Organizational Behavior from University of Pittsburgh and a B.A. in English
and Psychology from Kenyon College.
Ms. Pivnicka joined the Company as Senior Vice President and Chief Marketing
Officer in August 2000. From January 1986 to August 2000, Ms. Pivnicka was
with Deloitte & Touche LLP, an international public accounting firm and from
1994 to 2000, served as Director of Marketing. Ms. Pivnicka received a B.A. in
the Honors Program with a double major in English and Art History from the
University of San Francisco.
Item 2. Properties
The Company's headquarters and principal administrative functions are
located in approximately 11,150 square feet of leased space in Walnut Creek,
California. The lease for this space expires November 30, 2002. The Company
also operates through leased facilities in thirteen additional states, the
United Kingdom and Australia. Tier anticipates that additional space will be
required during fiscal 2001, as its business expands and believes that it will
be able to obtain suitable space as needed.
Item 3. Legal Proceedings
The Company is involved in various litigation and legal matters that have
arisen in the ordinary course of business. Management believes that the
ultimate resolution of any existing matters will not have a material adverse
effect on the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended September 30, 2000.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class B Common Stock is traded on the Nasdaq National Market
under the symbol "TIER." The following table sets forth the range of high and
low sales prices for the Company's Class B Common Stock for the quarterly
periods indicated:
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
------------ ------------
High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter.................................... $13.88 $5.69 $17.50 $5.56
Second Quarter................................... 9.19 6.13 20.00 7.88
Third Quarter.................................... 7.19 4.00 9.56 5.06
Fourth Quarter................................... 7.63 5.03 8.59 6.41
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors.
As of November 29, 2000, there were approximately 324 holders of record of
the Company's Class B Common Stock and one holder of record of the Company's
Class A Common Stock.
12
<PAGE>
Item 6. Selected Financial Data
The following table summarizes selected consolidated financial data of the
Company. The historical results are not necessarily indicative of results to
be expected for any future period.
<TABLE>
<CAPTION>
Year Ended Twelve-Month Nine-Month Nine-Month
September 30, Period Ended Period Ended Period Ended Year Ended
-------------------------- September 30, September 30, September 30, December 31,
2000 1999 1998 1997 1997(1) 1996 1996
-------- ------- ------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Revenues......................... $109,424 $91,976 $57,725 $26,885 $22,479 $11,790 $16,197
Cost of revenues................. 66,712 56,236 37,273 17,864 14,917 8,669 11,616
-------- ------- ------- ------- ------- ------- -------
Gross profit..................... 42,712 35,740 20,452 9,021 7,562 3,121 4,581
Costs and expenses:
Selling and marketing........... 7,378 6,095 3,009 2,234 1,836 577 975
General and administrative...... 22,337 18,988 9,743 5,197 4,397 1,774 2,574
Other nonrecurring charges...... 2,195 -- -- -- -- -- --
Compensation charge related
to business combinations....... 586 608 737 469 470 -- --
Purchased in-process
technology..................... -- 4,000 -- -- -- -- --
Reserve for contract dispute.... -- 1,856 -- -- -- -- --
Depreciation and amortization... 6,100 3,864 1,169 283 259 56 80
-------- ------- ------- ------- ------- ------- -------
Income from operations........... 4,116 329 5,794 838 600 714 952
Interest (income) and
expense, net.................... (899) (1,321) (980) 123 99 50 74
-------- ------- ------- ------- ------- ------- -------
Income before income taxes....... 5,015 1,650 6,774 715 501 664 878
Provision for income taxes....... 2,696 644 2,642 287 201 266 351
-------- ------- ------- ------- ------- ------- -------
Net income....................... $ 2,319 $ 1,006 $ 4,132 $ 428 $ 300 $ 398 $ 527
======== ======= ======= ======= ======= ======= =======
Basic net income per share(2).... $ 0.19 $ 0.08 $ 0.45 $ 0.11 $ 0.06 $ 0.08 $ 0.11
======== ======= ======= ======= ======= ======= =======
Shares used in computing basic
net income per share(2)......... 12,344 12,056 9,231 4,037 5,400 5,220 4,988
======== ======= ======= ======= ======= ======= =======
Diluted net income per share(2).. $ 0.18 $ 0.08 $ 0.39 $ 0.10 $ 0.05 $ 0.07 $ 0.10
======== ======= ======= ======= ======= ======= =======
Shares used in computing diluted
net income per share(2)......... 12,740 12,869 10,624 4,265 5,794 5,478 5,246
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30,
-------------------------------- December 31,
2000 1999 1998 1997 1996
-------- ------- ------- ------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments......... $ 19,913 $19,092 $39,301 $ 106 $ 306
Working capital................. 21,345 35,840 49,695 2,361 1,191
Total assets.................... 101,162 83,944 74,503 10,496 4,133
Long-term debt, net of current
obligations.................... 1,385 454 202 1,608 576
Total shareholders' equity...... 69,277 70,268 64,172 3,892 1,028
</TABLE>
--------
(1) In September 1997, the Company changed its fiscal year end to September
30.
(2) See Notes 1 and 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing net income
per share.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Tier is a vertically focused global consulting firm that delivers end-to-end
business solutions to its national and multinational clients. The Company
provides business solutions utilizing a variety of delivery offerings that are
tailored to specific client industries and governmental agencies, and include
solutions that link systems and technology improvements to increased operating
efficiencies. 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 strategies that allow
it to rapidly channel emerging technologies into business operations. The
Company's revenues increased to $109.4 million in the fiscal year ended
September 30, 2000 from $92.0 million in the fiscal year ended September 30,
1999. For the fiscal year ended September 30, 2000, approximately 59.3% of the
Company's revenues were derived from sales to government agencies. The
Company's workforce, composed of employees, independent contractors and
subcontractors, has grown from 780 on September 30, 1999 to 918 on September
30, 2000.
The Company's revenues are derived primarily from professional fees billed
to clients on either a time and materials basis, a fixed price basis or a per-
transaction basis. Time and materials revenues are recognized as services are
performed and expenses are incurred. Fixed price revenues are recognized using
the percentage-of-completion method, based upon the ratio of costs incurred to
total estimated project costs. Revenues from performance-based contracts are
recognized based on fees charged on a per-transaction basis. During the fiscal
year ended September 30, 2000, 28.4% of the Company's revenues were generated
on a fixed price basis and 17.6% of the Company's revenues were generated on a
per-transaction basis. The Company believes that the percentage of total
revenues attributable to fixed price and per-transaction based contracts will
continue to be significant. 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, fixed price and per-transaction based
contracts that may involve an adjustment to the scope or nature of the
project, billing rates, percent complete or gross profit margins. 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. If the Company significantly
overestimates the volume for transaction-based contracts or underestimates the
resources or time required for fixed price and per-transaction based
contracts, its financial condition and results of operations would be
materially and adversely affected.
The Company has derived a significant portion of its revenues from a small
number of large clients. For some of these clients, the Company performs a
number of different projects pursuant to multiple contracts or purchase
orders. For the fiscal year ended September 30, 2000, no clients accounted for
more than 10% of the Company's revenues. 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.
Personnel and rent expenses represent a significant percentage of the
Company's operating expenses and are relatively fixed in advance of any
particular quarter. The Company manages its personnel utilization rates by
carefully monitoring its needs and anticipating personnel increases based on
specific project requirements. To the extent revenues do not increase at a
rate commensurate with these additional expenses, the Company's results of
operations could be materially and adversely affected. In addition, to the
extent that the Company is unable to hire and retain salaried employees to
staff new or existing client engagements or retain hourly employees or
contractors, the Company's business, financial condition and results of
operations would be materially and adversely affected.
From December 1996 through September 30, 2000, the Company made fifteen
acquisitions for a total cost of approximately $53.5 million in cash and
shares of Class B Common Stock, excluding future contingent
14
<PAGE>
payments. The Company also incurred $2.4 million in compensation charges
related to business combinations resulting from these acquisitions. 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. 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, delivery offerings
and technical expertise and to supplement its human resources. In fiscal year
2000, the Company acquired all the issued and outstanding capital stock of
Simsion Bowles & Associates ("SBA"), an Australian entity, which provides
business process reengineering and e-commerce consulting services, and certain
assets and liabilities of The SCA Group, Inc. and Harris Chapman, United
States entities, which provided business process reengineering and management
consulting services. In March 2000, the Company sold its United Kingdom
subsidiary, Midas Computer Software Limited ("Midas"), for approximately $3.7
million (based on an exchange rate on the closing date of GBP 0.64 to US
$1.00), net of estimated selling expenses and including repayment of
intercompany debt of approximately $1.4 million. Approximately $2.6 million
was paid in cash upon closing and approximately $1.3 million was attributable
to a release of approximately 51,000 shares of the Company's Class B Common
Stock and a share guarantee on the original Midas acquisition. The decision to
sell this subsidiary was based in part on the continued lower than expected
results achieved by the subsidiary and the desire to focus the Company's U.K.
efforts on the alliance with Siemens Business Services.
For the fiscal year ended September 30, 2000, international operations
accounted for 36.6% of the Company's total revenues. The Company believes that
the percentage of total revenues attributable to international operations will
continue to be significant. International operations 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>
Twelve Months
Ended September
30,
-------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues...................................... 61.0 61.1 64.6
----- ----- -----
Gross profit.......................................... 39.0 38.9 35.4
Costs and expenses:
Selling and marketing............................... 6.7 6.6 5.2
General and administrative.......................... 20.4 20.6 16.9
Other nonrecurring charges.......................... 2.0 -- --
Compensation charge related to business
combinations....................................... 0.5 0.7 1.3
Purchased in-process technology..................... -- 4.4 --
Reserve for contract dispute........................ -- 2.0 --
Depreciation and amortization....................... 5.6 4.2 2.0
----- ----- -----
Income from operations................................ 3.8 0.4 10.0
Interest (income) and expense, net.................... (0.8) (1.4) (1.7)
----- ----- -----
Income before income taxes............................ 4.6 1.8 11.7
Provision for income taxes............................ 2.5 0.7 4.5
----- ----- -----
Net income............................................ 2.1% 1.1% 7.2%
===== ===== =====
</TABLE>
15
<PAGE>
Fiscal Years Ended September 30, 2000 and 1999
Revenues. Revenues are generated primarily by providing professional
consulting and processing services on client engagements. Revenues increased
19.0% to $109.4 million for the fiscal year ended September 30, 2000 from
$92.0 million for the fiscal year ended September 30, 1999. This increase
resulted primarily from multiple acquisitions and internal growth in revenues
from U.S. Government Operations, Australian Operations and United Kingdom
Operations, partially offset by a decrease in revenues from U.S. Commercial
Operations. The increase in revenues from U.S. Government Operations resulted
primarily from new contracts for several Vertical Application Service Provider
operations, a full year of performance under a significant systems contract
won in fiscal year 1999 and a full year of revenues from acquisitions in
fiscal year 1999. The increase in revenues from Australian Operations resulted
primarily from acquisitions. The increase in revenues from United Kingdom
Operations resulted primarily from a full year of revenues under the Alliance
Agreement with Siemens Business Services Limited. The offsetting decrease in
U.S. Commercial Operations resulted primarily from the completion of a large
project with a healthcare client, partially offset by increased revenues from
acquisitions.
Gross Profit. Cost of revenues consists primarily of those costs directly
attributable to providing service to a client, including employee salaries and
incentive compensation, independent contractor and subcontractor costs,
employee benefits, payroll taxes, travel-related expenditures and any project-
related equipment, hardware or software purchases. For payment processing
center operations, cost of revenues also include facility, equipment and
direct overhead costs. Gross profit margin was 39.0% for the fiscal year ended
September 30, 2000 and 38.9% for the fiscal year ended September 30, 1999.
Selling and Marketing. Selling and marketing expense consists primarily of
personnel costs, sales commissions, advertising and marketing expenditures,
and travel-related expenditures. Selling and marketing expenses increased
21.1% to $7.4 million for the fiscal year ended September 30, 2000 from $6.1
million for the fiscal year ended September 30, 1999. As a percentage of
revenues, selling and marketing expenses increased to 6.7% for the fiscal year
ended September 30, 2000 from 6.6% for the fiscal year ended September 30,
1999. The increase in selling and marketing expenses in total dollars was
primarily attributable to the addition of sales and marketing personnel
through acquisitions and increased sales commissions due to an increase in
sales. The Company expects that selling and marketing expenses will continue
to increase in future periods as the Company continues to make investments in
its marketing and branding initiatives and its business development efforts.
General and Administrative. General and administrative expense consists
primarily of personnel costs related to general management and administrative
functions, human resources, resource management, staffing, accounting and
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 17.6% to
$22.3 million for the fiscal year ended September 30, 2000 from $19.0 million
for the fiscal year ended September 30, 1999. As a percentage of revenues,
general and administrative expenses decreased to 20.4% for the fiscal year
ended September 30, 2000 from 20.6% for the fiscal year ended September 30,
1999. The increase in total general and administrative expense in absolute
dollars was primarily attributable to building the infrastructure to support,
manage and control the Company's growth, as well as the costs of integrating
and operating acquired businesses. The Company expects that future general and
administrative expense will decline as a percentage of revenues.
Other Nonrecurring Charges. Other nonrecurring charges of $2.2 million for
the fiscal year ended September 30, 2000 consist of the net charge for the
disposition of Midas and severance costs for two former officers.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations consists primarily of certain contingent
performance payments made in connection with prior acquisitions. Compensation
charge related to business combinations decreased 3.6% to $586,000 for the
fiscal year ended September 30, 2000 from $608,000 for the fiscal year ended
September 30, 1999. As a percentage of revenues, compensation charge related
to business combinations decreased to 0.5% for the fiscal year ended September
30, 2000 from 0.7% for the fiscal year ended September 30, 1999. The Company
expects future
16
<PAGE>
compensation charges related to business combinations to decrease as a result
of the finalization of the contingent payments for the acquisition of Infact
Pty Limited in fiscal year 2000. A future compensation charge related to
business combinations may result from the final year of contingent payments
from the acquisition of Simpson Fewster & Co. Pty Limited, when and if
achieved. See Note 8 to the Consolidated Financial Statements for the
compensation charges related to specific business combinations.
Depreciation and Amortization. Depreciation and amortization consists
primarily of expenses associated with depreciation of equipment and
improvements and amortization of intangible assets resulting from acquisitions
and purchases of certain intellectual property. Depreciation and amortization
increased 57.9% to $6.1 million for the fiscal year ended September 30, 2000
from $3.9 million for the fiscal year ended September 30, 1999. As a
percentage of revenues, depreciation and amortization increased to 5.6% for
the fiscal year ended September 30, 2000 from 4.2% for the fiscal year ended
September 30, 1999. The increase in total depreciation and amortization
expense was primarily attributable to the amortization of increased intangible
assets from business combinations, the amortization of the costs associated
with the purchase of a project management system and depreciation associated
with increased capital expenditures. For the fiscal year ended September 30,
2000, 53.7% of depreciation and amortization was related to acquired
intangible amortization as a result of business combinations using the
purchase method of accounting, an increase from 52.1% for the fiscal year
ended September 30, 1999. The Company expects that depreciation and
amortization will continue to increase in future periods in absolute dollars,
although they may vary as a percentage of revenues.
Interest Income and Interest Expense, Net. The Company had net interest
income of $899,000 for the fiscal year ended September 30, 2000 compared to
net interest income of $1.3 million for the fiscal year ended September 30,
1999. This decrease was primarily attributable to interest expense incurred on
bank borrowings in Australia and lower interest income generated on a smaller
average investment balance.
Provision for Income Taxes. The provision for income taxes was $2.7 million
for the fiscal year ended September 30, 2000 as compared to $644,000 for the
fiscal year ended September 30, 1999. The effective tax rate for the fiscal
year ended September 30, 2000 was 53.8% and was impacted by other nonrecurring
charges for which no tax benefit can be recorded. Excluding these nonrecurring
charges, the Company's effective tax rate for the fiscal year ended September
30, 2000 would have been 41.5%. The effective tax rate for the fiscal year
ended September 30, 1999 was 39.0%. These rates differ from the federal
statutory rate due to state and foreign income taxes and tax-exempt interest
income. The future tax rate may vary due to a variety of factors, including,
but not limited to, the relative income contribution by domestic and foreign
operations, changes in statutory tax rates, the amount of tax exempt interest
income generated during the year, the ability to utilize foreign tax credits
and any non-deductible items related to acquisitions or other nonrecurring
charges.
Fiscal Years Ended September 30, 1999 and 1998
Revenues. Revenues increased 59.3% to $92.0 million for the fiscal year
ended September 30, 1999 from $57.7 million for the fiscal year ended
September 30, 1998. This increase resulted from internal growth, including an
expanded client base and several significant new contracts, and from multiple
acquisitions.
Gross Profit. Gross margin increased to 38.9% for the fiscal year ended
September 30, 1999 from 35.4% in 1998. The increase in gross margin was
primarily attributable to higher margins on certain large contracts and an
increased use of salaried as opposed to hourly employees.
Selling and Marketing. Selling and marketing expense increased 102.6% to
$6.1 million for the fiscal year ended September 30, 1999 from $3.0 million
for the fiscal year ended September 30, 1998. As a percentage of revenues,
selling and marketing expenses increased to 6.6% for the fiscal year ended
September 30, 1999 from 5.2% in 1998. The increase in selling and marketing
expense was primarily attributable to the addition of sales and marketing
personnel, both internally and through acquisitions, to support the higher
revenue base and increased selling and marketing efforts.
17
<PAGE>
General and Administrative. General and administrative expense increased
94.9% to $19.0 million for the fiscal year ended September 30, 1999 from $9.7
million for the fiscal year ended September 30, 1998. As a percentage of
revenues, general and administrative expenses increased to 20.6% for the
fiscal year ended September 30, 1999 from 16.9% in 1998. The increase in total
general and administrative expense was primarily attributable to building the
infrastructure to support, manage and control the Company's growth, as well as
the costs of integrating and operating acquired businesses.
Compensation Charge Related to Business Combinations. Compensation charge
related to business combinations decreased 17.5% to $608,000 for the fiscal
year ended September 30, 1999 from $737,000 for the fiscal year ended
September 30, 1998. As a percentage of revenues, compensation charge related
to business combinations decreased to 0.7% for the fiscal year ended September
30, 1999 from 1.3% for the fiscal year ended September 30, 1998. The decrease
in total compensation charge related to business combinations was attributable
to the timing of the contingent performance payment periods. See Note 8 to the
Consolidated Financial Statements for the compensation charges related to each
business combination.
Purchased In-Process Technology. Purchased in-process technology charge of
$4 million resulted from the purchase of exclusive worldwide licensing rights
to components of a large scale, enterprise-wide commercial billing system
currently under development by the Company for a client which had not yet
reached technological feasibility and had no alternative future use. The
software was completed during fiscal year 2000. The software would require
significant customization prior to a sale to a customer.
Reserve for Contract Dispute. Reserve for contract dispute charge of $1.9
million for the fiscal year ended September 30, 1999 relates to a contract
dispute with a prime contractor to which the Company was a subcontractor.
After a series of discussions with the prime contractor, the Company
determined that collection of the outstanding accounts receivable balance was
unlikely. This matter was settled in August 2000.
Depreciation and Amortization. Depreciation and amortization increased
230.5% to $3.9 million for the fiscal year ended September 30, 1999 from $1.2
million for the fiscal year ended September 30, 1998. As a percentage of
revenues, depreciation and amortization increased to 4.2% for the fiscal year
ended September 30, 1999 from 2.0% in 1998. The increase in total depreciation
and amortization expense was primarily attributable to the amortization of
increased intangible assets from business combinations, the amortization of
the costs associated with the purchase of a project management system and
depreciation associated with increased capital expenditures.
Interest Income and Interest Expense, Net. The Company had net interest
income of $1.3 million for the fiscal year ended September 30, 1999 compared
to net interest income of $980,000 for the fiscal year ended September 30,
1998. This increase was primarily attributable to the interest income
generated from the investment of proceeds from the Company's initial and
secondary public offerings.
Provision for Income Taxes. The provision for income taxes was $644,000 for
the fiscal year ended September 30, 1999 as compared to $2.6 million for the
fiscal year ended September 30, 1998. The effective tax rate for the fiscal
years ended September 30, 1999 and 1998 was 39.0%. This rate differs from the
federal statutory rate due to state and foreign income taxes and tax-exempt
interest income.
18
<PAGE>
Selected Quarterly Statements of Operations
The following tables set forth certain unaudited consolidated quarterly
statement of operations data for each of the eight fiscal quarters ending
September 30, 2000. In the opinion of management, this information has been
prepared on the same basis as the audited Consolidated Financial Statements
contained herein and includes all necessary adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary to present
fairly this information in accordance with generally accepted accounting
principles. This information should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto appearing
elsewhere in this Form 10-K. The Company's operating results for any one
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
2000 2000 2000 1999 1999 1999 1999 1998
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues.................................. $29,664 $27,657 $27,490 $24,613 $26,579 $23,798 $20,243 $21,356
Cost of revenues.......................... 17,794 16,976 17,095 14,847 16,503 13,913 12,664 13,156
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 11,870 10,681 10,395 9,766 10,076 9,885 7,579 8,200
Costs and expenses:
Selling and marketing.................... 2,009 2,003 1,878 1,488 1,622 1,716 1,470 1,287
General and administrative............... 5,501 5,192 6,035 5,609 5,338 5,598 4,593 3,459
Other nonrecurring charges............... -- 644 (199) 1,750 -- -- -- --
Compensation charge related to business
combinations............................ 60 407 58 60 131 355 60 61
Purchased in-process technology.......... -- -- -- -- -- 4,000 -- --
Reserve for contract dispute............. -- -- -- -- -- 1,856 -- --
Depreciation and amortization............ 1,750 1,665 1,427 1,258 1,287 1,219 831 527
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 2,550 770 1,196 (399) 1,698 (4,859) 625 2,866
Interest (income) and expense, net........ (259) (206) (197) (237) (230) (266) (368) (456)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......... 2,809 976 1,393 (162) 1,928 (4,593) 993 3,322
Provision (benefit) for income taxes...... 1,165 405 578 548 752 (1,791) 387 1,296
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 1,644 $ 571 $ 815 $ (710) $ 1,176 $(2,802) $ 606 $ 2,026
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per share......... $ 0.13 $ 0.05 $ 0.07 $ (0.06) $ 0.10 $ (0.23) $ 0.05 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income (loss) per share....... $ 0.13 $ 0.05 $ 0.06 $ (0.06) $ 0.09 $ (0.23) $ 0.05 $ 0.16
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
2000 2000 2000 1999 1999 1999 1999 1998
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 60.0 61.4 62.2 60.3 62.1 58.5 62.6 61.6
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 40.0 38.6 37.8 39.7 37.9 41.5 37.4 38.4
Costs and expenses:
Selling and marketing.................... 6.8 7.2 6.8 6.0 6.1 7.2 7.2 6.0
General and administrative............... 18.5 18.8 21.9 22.8 20.1 23.5 22.7 16.2
Other nonrecurring charges............... -- 2.3 (0.7) 7.1 -- -- -- --
Compensation charge related to business
combinations............................ 0.2 1.5 0.2 0.3 0.5 1.5 0.3 0.3
Purchased in-process technology.......... -- -- -- -- -- 16.8 -- --
Reserve for contract dispute............. -- -- -- -- -- 7.8 -- --
Depreciation and amortization............ 5.9 6.0 5.2 5.1 4.8 5.1 4.1 2.5
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 8.6 2.8 4.4 (1.6) 6.4 (20.4) 3.1 13.4
Interest (income) and expense, net........ (0.9) (0.7) (0.7) (0.9) (0.9) (1.1) (1.8) (2.1)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......... 9.5 3.5 5.1 (0.7) 7.3 (19.3) 4.9 15.5
Provision (benefit) for income taxes...... 3.9 1.4 2.1 2.2 2.9 (7.5) 1.9 6.0
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... 5.6% 2.1% 3.0% (2.9)% 4.4% (11.8)% 3.0% 9.5%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
Liquidity and Capital Resources
Prior to its initial public offering, the Company financed its operations
principally through cash flows from operating activities, the private
placement of equity securities and proceeds from borrowings under asset-based
lines of credit. The Company closed its initial and secondary public offerings
of Class B Common Stock in December 1997 and June 1998, respectively. The
Company received net proceeds totaling approximately $55 million.
The Company's principal capital requirement is to fund working capital to
support its growth, including potential future acquisitions and potential
contingent payments related to prior acquisitions. The Company maintains a $10
million revolving credit facility (the "Credit Facility") that expires on
August 26, 2002. The Credit Facility allows the Company to borrow the lesser
of $10 million or an amount equal to 85% of eligible accounts receivable plus
50% of up to $6 million of eligible unbilled receivables. The Credit Facility
bears interest at the adjusted LIBOR rate plus 2.5% or the lender's announced
prime rate plus 0.25%, at the Company's option. The Credit Facility is secured
by first priority liens and security interests in the Company's assets
(excluding assets owned by Tier Technologies (Australia) Pty Ltd., Simsion
Bowles & Associates ("SBA") and ADC Consultants Pty Ltd.), including a pledge
of 65% of the stock of the Company's subsidiaries excluding SBA. The Credit
Facility contains certain restrictive covenants, including, but not limited
to, limitations on the amount of loans the Company may extend to officers and
employees and the incurrence of additional debt. The Credit Facility requires
the maintenance of certain financial covenants, including a minimum quarterly
net income requirement, minimum tangible net worth, a minimum ratio of debt to
tangible net worth and a minimum quick ratio. As of September 30, 2000, there
were no borrowings outstanding under the Credit Facility and the Company was
in compliance with the covenants of the Credit Facility.
The Company (through one of its Australian subsidiaries) also maintains a
credit facility that includes a $1.3 million revolving line of credit with St.
George Bank Limited of Australia (based on a September 30, 2000 exchange rate
of AU $1.83 to US $1.00). Under the terms of the credit facility, the
principal balance of the credit line will reduce by approximately $129,000 per
quarter to a maximum line of approximately $1.1 million. The line of credit
bears interest at fixed rates that are set at the time of each drawdown on the
line. In December 1999, the balance of the line of credit was converted to a
variable rate loan ("Loan"). The variable rate is based upon the bank's prime
rate less 1.25% (9% per annum as of September 30, 2000) and interest is
payable monthly. As of September 30, 2000, the outstanding balance of the Loan
was approximately $1.3 million. The credit facility also provides for the
issuance of letters of credit up to $106,000. Letters of credit totaling
$93,000 were outstanding as of September 30, 2000. Among other provisions, the
credit facility requires the Company to maintain certain minimum financial
ratios. As of September 30, 2000, the Company was in compliance with the
provisions of this credit facility.
Net cash provided by operating activities was $9.7 million in the fiscal
year ended September 30, 2000 compared to net cash used in operating
activities of $1.6 million in each of the years ending September 30, 1999 and
1998. Cash provided by operating activities for the year ended September 30,
2000 resulted primarily from net income adjusted for depreciation and
amortization and increased cash collections on accounts receivable balances.
For the years ended September 30, 1999 and 1998, in addition to the net income
for the period, the Company experienced increases in receivables as a result
of increases in the Company's sales volume. During the year ended September
30, 1999, the Company expensed the $4.0 million paid to acquire the exclusive
worldwide licensing rights to components of a large scale, enterprise-wide
commercial billing system that was under development.
Net cash used in investing activities was $10.2 million in fiscal year 2000,
$11.5 million in fiscal year 1999, and $28.9 million in fiscal year 1998. Cash
used in investing activities in fiscal year 2000 resulted primarily from
investments in the acquisitions of Simsion Bowles & Associates, The SCA Group,
Inc. and Harris Chapman and the purchase of equipment, partially offset by the
disposal of Midas. The decrease in cash used in investing activities in fiscal
year 1999 as compared to fiscal year 1998 is largely attributable to a
decreased investment balance, offset by investments in the acquisition of
Midas, ADC Consultants Pty Limited, the acquisition of
20
<PAGE>
certain assets and liabilities of Service Design Associates, Inc. and
Technology Training Services, a division of Automated Concepts, Inc. Capital
expenditures, including equipment acquired under capital lease but excluding
assets acquired or leased through business combinations, were approximately
$2.7 million in fiscal year 2000, $5.8 million in fiscal year 1999, and $2.0
million in fiscal year 1998. Capital expenditures were primarily attributable
to an increased workforce, geographic expansion, establishment of child
support payment processing centers, other project-related capital expenditures
and development of the Company's technology infrastructure. Future capital
expenditures may continue to fluctuate. The Company anticipates that it will
continue to have significant capital expenditures in the near-term related to,
among other things, purchases of computer equipment to enhance the Company's
global operations and support its growth, as well as potential expenditures
related to new office leases and the establishment of child support payment
processing and other vertical ASP centers.
Net cash provided by financing activities totaled $1.1 million in fiscal
year 2000, $769,000 in fiscal year 1999, and $53.4 million in fiscal year
1998. In fiscal year 2000, the cash provided by financing activities was
primarily the result of borrowings on the line of credit with St. George Bank
and proceeds from the exercise of stock options, partially offset by
repurchases of common stock. In fiscal year 1999, the cash provided by
financing activities was primarily the result of stock option exercises. In
fiscal year 1998, the Company raised approximately $55 million in its public
offerings of Class B Common Stock and made net payments of $2.8 million under
its line of credit.
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 and capital resources depend on numerous factors, including
potential acquisitions, contingent payments earned, new and existing contract
requirements, the timing of the receipt of accounts receivable, the Company's
ability to draw on its bank facility 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.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") which was amended in June 2000 by FAS 138. The new
standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives will be reported in the statement
of operations or as a deferred item, depending on the use of the derivatives
and whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. In 1999, the FASB issued FAS 137, which requires the
Company to adopt FAS 133 in the first quarter of fiscal year 2001. The Company
does not expect the adoption of FAS 133 to have a significant impact on the
consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. SAB 101 is effective no later than the fourth quarter of fiscal year
2001. The Company does not believe that the adoption of SAB 101 will have a
significant impact on the consolidated financial statements.
21
<PAGE>
Factors That May Affect Future Results
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Form 10-
K. Tier is also referred to in this section as "we" or "us".
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 accuracy of estimates of resources required to complete ongoing
projects,
. 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 contractors 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 estimated transaction volume in computing transaction
rates for payment processing center operations,
. 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.
The timing and realization of opportunities in our sales pipeline make the
timing and variability of revenue 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
significantly from quarter to quarter during the fiscal year and will
generally be higher at the beginning of each calendar year. Revenues are
impacted by the amount of holidays and vacations taken both within our
consultant base and by our clients. As a result, revenues will vary from
quarter to quarter during the fiscal 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 Class B Common Stock. In addition, our operating results may from
time to time be below the expectations of analysts and investors.
Potential Adverse Effect on Operating Results from Dependence on Large
Projects, Limited Clients or Certain Market Sectors. The completion,
cancellation, significant reduction in the scope or imposition of significant
penalties for the Company's failure to meet scheduled requirements of a large
project or a project with certain clients would have a material adverse effect
on our business, financial condition and results of operations. Most of our
contracts are terminable by the client following limited notice and without
significant penalty to the client. We have derived, and believe that we will
continue to derive, a significant portion of our revenues from a limited
number of clients. For the twelve months ended September 30, 2000, no client
accounted for more than 10% of the Company's revenues. 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. 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.
22
<PAGE>
In addition, under a contract with Siemens Business Services Limited
("SBS"), the Company is marketing the services of SBS's Application Services
Center ("ASC") in exchange for success fees based on the utilization of ASC
resources. The Company has committed to utilizing a minimum number of full-
time resources from the ASC. The Company's payment obligations to SBS, to the
extent there is a shortfall in the utilization of these resources, shall not
exceed $15.8 million (based on the September 30, 2000 exchange rate of GBP
0.68 to US $1.00) over the life of the five-year contract.
Dependence on Contracts with Government Agencies. For the fiscal year ended
September 30, 2000, approximately 59.3% of our revenues were derived from
sales to government agencies. Such government agencies may be subject to
budget cuts or budgetary constraints or a reduction or discontinuation of
funding. A significant reduction in funds available for government agencies to
purchase professional 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.
Inability to Attract and Retain Professional Staff Necessary to Existing and
Future Projects. If we are unable to attract, retain and train skilled
employees, such inability 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 operations. 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.
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.
Failure to Estimate Accurately Fixed Price and Transaction-Based
Contracts. Our failure to estimate accurately the resources or time required
for a fixed price project or the expected volume of transactions under a
transaction-based contract could have a material adverse effect on our
business, financial condition and results of operations. Under fixed price
contracts, we receive our fee if we meet specified objectives such as
completing certain components of a system installation. For transaction-based
contracts, we receive our fee on a per-transaction basis, such as the number
of child support payments processed. To earn a profit on these contracts, we
rely upon accurately estimating costs involved and assessing the probability
of meeting the specified objectives or realizing the expected number of
transactions within the contracted time period. If we fail to estimate
accurately the factors upon which we base our contract pricing, we may incur
losses on these contracts. During the fiscal year ended September 30, 2000,
28.4% of our revenues were generated on a fixed price basis and 17.6% of our
revenues were generated from transaction-based contracts. We believe that the
percentage of revenues attributable to fixed price and transaction-based
contracts will continue to be significant.
23
<PAGE>
Potential Failure to Identify, Acquire or Integrate New Acquisitions. A
component of our business strategy is to expand our presence in new or
existing markets by acquiring additional businesses. From December 1996
through September 30, 2000, we acquired fifteen businesses. There can be no
assurance that we will be able to identify, acquire or profitably manage
additional businesses or 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,
. increased general and administrative expenses,
. 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.
Substantial Competition in the IT and Consulting Services Markets. The IT
and consulting services markets are highly competitive and are served by
numerous international, national and local firms. There can be no assurance
that we will be able to compete effectively in these markets. 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 and consulting services
markets, and we have faced, and expect to continue to face, additional
competition from new entrants into the IT and consulting services markets.
We believe that the principal competitive factors in the IT and consulting
services markets 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 and transaction basis 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.
24
<PAGE>
Dependence on Key Personnel. Our success depends in large part upon the
continued services of a number of key employees. Although we have entered into
employment agreements with certain key employees, these employees and other
key employees who have not entered into employment agreements may terminate
their employment at any time. The loss of the services of any key employee
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 52.4% of the total common stock voting power at September 30,
2000. All power to vote shares held in the Voting Trust has been vested in the
Voting Trust's trustee, Mr. Bildner. As a result, Mr. Bildner 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.
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 penalties or 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.
Delay or Failure to Develop New Solutions. Our success will depend in part
on our ability to develop 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 solutions in
a timely manner or that if developed we will be successful in the marketplace.
Delay in developing or failure to develop new solutions would have a material
adverse effect on our business, financial condition and results of operations.
Failure to Manage and Expand International Operations. For the fiscal year
ended September 30, 2000, international operations accounted for 36.6% of our
total revenues. We believe that the percentage of total revenues attributable
to international operations will continue to be significant. In addition, a
significant portion of our sales are to large multinational companies. To meet
the needs of such companies, both domestically and internationally, we must
provide worldwide services, either directly or indirectly. As a result, we may
expand our existing international operations and may enter additional
international markets, which would require significant management attention
and financial resources and could adversely affect our operating margins and
earnings. In order to expand international operations, we would 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:
. fluctuations in the value of foreign currencies,
. difficulties in building and managing foreign operations,
25
<PAGE>
. difficulties in enforcing agreements and collecting receivables through
foreign legal systems,
. longer payment cycles, 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 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, including:
. 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.
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.
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.
Dependence on Third Parties in Performing Certain Client Engagements. We
sometimes perform client engagements using third parties. We often join with
other organizations to bid and perform an engagement. In these engagements, we
may engage subcontractors or we may act as a subcontractor to the prime
contractor of the engagement. We also use third party software or technology
providers to jointly bid and perform engagements. In these situations, we
depend on the software, resources and technology of these third parties in
order to perform the engagement. There can be no assurance that actions or
failures attributable to these third parties or to the prime contractor or
subcontractor will not also negatively affect our business, financial
condition or results of operations. In addition, the refusal or inability of
these third parties to permit continued use of their software, resources or
technology by us, or the discontinuance or termination by the prime contractor
of our services or the services of a key subcontractor, 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 enter into confidentiality
agreements with our employees, generally require that our consultants and
clients enter into such agreements and limit access to our proprietary
information.
26
<PAGE>
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 specifically for them or for
certain periods of time or to certain 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. The loss or misappropriation of our
intellectual property or the unsuccessful defense of any claim of infringement
could have a material adverse effect on our business, financial condition and
results of operations.
Facilities, Systems and Operations Interruption or Failure. Any system
failure, including network, software or hardware failure, whether caused by
us, a third party service provider, unauthorized intruders and hackers,
computer viruses or natural disasters, could cause interruptions or delays in
our business or loss of data. Although we maintain property insurance and
business interruption insurance, we cannot guarantee that our insurance will
be adequate to compensate us for all losses that may occur as a result of any
system failure.
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 Class B
Common Stock.
No Current Intention to Declare or Pay Dividends. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in market prices and rates. The Company is exposed to market risk
because of changes in foreign currency exchange rates as measured against the
U.S. dollar and currencies of the Company's subsidiaries and operations in
Australia and the United Kingdom.
Foreign Currency Exchange Rate Risk. The Company has wholly owned
subsidiaries in Australia and conducts operations in the United Kingdom
through a U.S.-incorporated 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. Near-term
changes in exchange rates may have a material impact on future revenues,
earnings, fair values or cash flows of the Company. The Company has not
engaged in foreign currency hedging transactions for the fiscal year ending
September 30, 2000. 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.
Interest Rate Sensitivity. The Company maintains a portfolio of cash
equivalents and investments in a variety of securities including: certificates
of deposit, money market funds and government and non-government
27
<PAGE>
debt securities. These available-for-sale securities are subject to interest
rate risk and may fall in value if market interest rates increase. If market
interest rates increase immediately and uniformly by 10 percent from levels at
September 30, 2000, the fair value of the portfolio would decline by $389,000.
We anticipate having the ability to hold our fixed income investments until
maturity, and therefore do not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in
market interest rates on our securities portfolio.
Item 8. Financial Statements and Supplementary Data
See "Index to Consolidated Financial Statements" for a listing of the
financial statements filed with this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
NONE.
28
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers. See "Executive Officers of the Registrant" in Part
I of this report.
(b) Directors. The information required by this item is incorporated herein
by reference to the Company's definitive proxy statement to be filed
pursuant to Regulation 14A (the "2000 Proxy Statement"), under the
headings "Election of Directors," "Section 16(a) Beneficial Ownership
Reporting Compliance" and "Executive Officers," which the Company
intends to file with the Securities and Exchange Commission within 120
days of the Company's fiscal year ended September 30, 2000.
Item 11. Executive Compensation
The information required under this item may be found under the section
captioned "Compensation of Executive Officers" in the 2000 Proxy Statement and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item may be found under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
the 2000 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required under this item may be found under the section
captioned "Certain Transactions" in the 2000 Proxy Statement and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements. See "Index to Consolidated
Financial Statements" on Page F-1.
(2) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not
applicable, not required, were filed subsequent to the filing of
the Form 10-K or because the information required to be set forth
therein is included in the consolidated financial statements or in
notes thereto.
(3) Exhibits. See "Exhibit Index."
(b) Reports on Form 8-K
Current Report on Form 8-K/A, filed on July 19, 2000, pursuant to Item
7 attaching financial statements and pro forma information related to
the acquisition of certain assets and liabilities of The SCA Group,
Inc. and Harris Chapman.
(c) Exhibits. See "Exhibit Index."
(d) Financial Statement Schedules. See "Index to Consolidated Financial
Statements" on page F-1.
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TIER TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Financial Statement Schedule II............................................ F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Tier Technologies, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Tier Technologies, Inc. and its subsidiaries at September 30, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
October 26, 2000
F-2
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------
2000 1999
-------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 10,256 $10,121
Restricted cash................................................ -- 819
Short-term investments......................................... 9,657 8,971
Accounts receivable, net of allowance for doubtful accounts of
$221 in 2000 and $2,285 in 1999............................... 24,718 26,151
Prepaid expenses and other current assets...................... 3,322 2,653
-------- -------
Total current assets......................................... 47,953 48,715
Equipment and improvements, net.................................. 5,914 7,012
Notes and accrued interest receivable from related parties....... 1,924 1,486
Intangible assets, net........................................... 40,126 23,913
Other assets..................................................... 5,245 2,818
-------- -------
Total assets................................................. $101,162 $83,944
======== =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable............................................... $ 4,314 $ 2,759
Accrued liabilities............................................ 2,389 2,520
Accrued subcontractor expenses................................. 1,597 1,113
Accrued compensation and related liabilities................... 4,321 3,476
Purchase price payable......................................... 12,345 98
Income taxes payable........................................... -- 995
Deferred income................................................ 1,175 1,506
Other current liabilities...................................... 467 408
-------- -------
Total current liabilities.................................... 26,608 12,875
Borrowings and capital lease obligations, less current portion... 1,385 443
Purchase price payable........................................... 3,892 98
Other liabilities................................................ -- 260
-------- -------
Total liabilities............................................ 31,885 13,676
-------- -------
Commitments and contingent liabilities (Notes 5 and 8)
Shareholders' equity:
Preferred stock, no par value; authorized shares--4,579; no
shares issued and outstanding................................. -- --
Common stock, no par value; authorized shares--43,864; issued
and outstanding shares--12,498 in 2000 and 12,260 in 1999..... 65,937 66,012
Notes receivable from shareholders............................. (1,773) (1,773)
Deferred compensation.......................................... (117) (352)
Accumulated other comprehensive loss........................... (3,571) (101)
Retained earnings.............................................. 8,801 6,482
-------- -------
Total shareholders' equity................................... 69,277 70,268
-------- -------
Total liabilities and shareholders' equity................. $101,162 $83,944
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Revenues.............................................. $109,424 $91,976 $57,725
Cost of revenues...................................... 66,712 56,236 37,273
-------- ------- -------
Gross profit.......................................... 42,712 35,740 20,452
Costs and expenses:
Selling and marketing............................... 7,378 6,095 3,009
General and administrative.......................... 22,337 18,988 9,743
Other nonrecurring charges.......................... 2,195 -- --
Compensation charge related to business
combinations....................................... 586 608 737
Purchased in-process technology..................... -- 4,000 --
Reserve for contract dispute........................ -- 1,856 --
Depreciation and amortization....................... 6,100 3,864 1,169
-------- ------- -------
Income from operations................................ 4,116 329 5,794
Interest income....................................... 1,061 1,398 1,136
Interest expense...................................... 162 77 156
-------- ------- -------
Income before income taxes............................ 5,015 1,650 6,774
Provision for income taxes............................ 2,696 644 2,642
-------- ------- -------
Net income............................................ $ 2,319 $ 1,006 $ 4,132
======== ======= =======
Basic net income per share............................ $ 0.19 $ 0.08 $ 0.45
======== ======= =======
Shares used in computing basic net income per share... 12,344 12,056 9,231
======== ======= =======
Diluted net income per share.......................... $ 0.18 $ 0.08 $ 0.39
======== ======= =======
Shares used in computing diluted net income per
share................................................ 12,740 12,869 10,624
======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Notes Accumulated
-------------- -------------------------------- Receivable Other
Class A Class B From Deferred Comprehensive Retained
Shares Amount Shares Amount Shares Amount Shareholders Compensation Income Earnings
------ ------- ------- ------ ------- ------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1997............. 421 $ 1,892 2,285 $1,650 3,335 $ 1,299 $(2,254) $ -- $ (40) $1,344
Exercise of
stock options... -- -- -- -- 249 933 -- -- -- --
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan
(ESPP).......... -- -- -- -- 11 116 -- -- -- --
Tax benefit of
stock options
exercised....... -- -- -- -- -- 544 -- -- -- --
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock.... (421) (1,892) (645) (12) 1,066 1,904 -- -- -- --
Issuance of
Class B common
stock, net of
issuance costs
of $2,258....... -- -- -- -- 5,460 54,856 -- -- -- --
Payments on
notes
receivable...... -- -- -- -- -- -- 95 -- -- --
Issuance of
Class B common
stock in
business
combinations.... -- -- -- -- 100 1,366 -- (701) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 110 -- --
Net income...... -- -- -- -- -- -- -- -- -- 4,132
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- (1,170) --
---- ------- ----- ------ ------ ------- ------- ----- ------- ------
Balance at
September 30,
1998............. -- -- 1,640 1,638 10,221 61,018 (2,159) (591) (1,210) 5,476
Exercise of
stock options... -- -- -- -- 377 1,244 -- -- -- --
Issuance of
Class B common
stock through
ESPP............ -- -- -- -- 46 388 -- -- -- --
Tax benefit of
stock options
exercised....... -- -- -- -- -- 611 -- -- -- --
Payments on
notes
receivable...... -- -- -- -- -- -- 386 -- -- --
Issuance of
Class B common
stock and
options in
business
combinations.... -- -- -- -- 51 1,527 -- -- -- --
Repurchase of
common stock.... -- -- -- -- (75) (414) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 239 -- --
Net income...... -- -- -- -- -- -- -- -- -- 1,006
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 1,109 --
---- ------- ----- ------ ------ ------- ------- ----- ------- ------
Balance at
September 30,
1999............. -- -- 1,640 1,638 10,620 64,374 (1,773) (352) (101) 6,482
Exercise of
stock options... -- -- 10 36 334 1,222 -- -- -- --
Issuance of
Class B common
stock through
ESPP............ -- -- -- -- 38 208 -- -- -- --
Tax benefit of
stock options
exercised....... -- -- -- -- -- 332 -- -- -- --
Conversion of
Class A common
stock into Class
B common stock.. -- -- (396) (396) 396 396 -- -- -- --
Issuance of
Class B common
stock in
business
combinations.... -- -- -- -- 148 1,061 -- -- -- --
Repurchase of
common stock.... -- -- -- -- (241) (1,606) -- -- -- --
Class B common
stock returned
upon sale of
subsidiary...... -- -- -- -- (51) (1,328) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 235 -- --
Net income...... -- -- -- -- -- -- -- -- -- 2,319
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- (3,470) --
---- ------- ----- ------ ------ ------- ------- ----- ------- ------
Balance at
September 30,
2000............. -- $ -- 1,254 $1,278 11,244 $64,659 $(1,773) $(117) $(3,571) $8,801
==== ======= ===== ====== ====== ======= ======= ===== ======= ======
<CAPTION>
Total
Shareholders' Comprehensive
Equity Income (Loss)
------------- -------------
<S> <C> <C>
Balance at
September 30,
1997............. $ 3,891
Exercise of
stock options... 933
Issuance of
Class B common
stock through
Employee Stock
Purchase Plan
(ESPP).......... 116
Tax benefit of
stock options
exercised....... 544
Conversion of
Series A
convertible
preferred stock
and Class A
common stock
into Class B
common stock.... --
Issuance of
Class B common
stock, net of
issuance costs
of $2,258....... 54,856
Payments on
notes
receivable...... 95
Issuance of
Class B common
stock in
business
combinations.... 665
Amortization of
deferred
compensation.... 110
Net income...... 4,132 $ 4,132
Foreign currency
translation
adjustment...... (1,170) (1,170)
------------- -------------
Balance at
September 30,
1998............. 64,172 $ 2,962
=============
Exercise of
stock options... 1,244
Issuance of
Class B common
stock through
ESPP............ 388
Tax benefit of
stock options
exercised....... 611
Payments on
notes
receivable...... 386
Issuance of
Class B common
stock and
options in
business
combinations.... 1,527
Repurchase of
common stock.... (414)
Amortization of
deferred
compensation.... 239
Net income...... 1,006 $ 1,006
Foreign currency
translation
adjustment...... 1,109 1,109
------------- -------------
Balance at
September 30,
1999............. 70,268 $ 2,115
=============
Exercise of
stock options... 1,258
Issuance of
Class B common
stock through
ESPP............ 208
Tax benefit of
stock options
exercised....... 332
Conversion of
Class A common
stock into Class
B common stock.. --
Issuance of
Class B common
stock in
business
combinations.... 1,061
Repurchase of
common stock.... (1,606)
Class B common
stock returned
upon sale of
subsidiary...... (1,328)
Amortization of
deferred
compensation.... 235
Net income...... 2,319 $ 2,319
Foreign currency
translation
adjustment...... (3,470) (3,470)
------------- -------------
Balance at
September 30,
2000............. $69,277 $(1,151)
============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income....................................... $ 2,319 $ 1,006 $ 4,132
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 7,308 4,229 1,169
Amortization of deferred compensation........... 235 239 109
Loss from disposal of subsidiary................ 1,288 -- --
Provision for doubtful accounts................. (2,122) 2,025 210
Deferred income taxes........................... 867 (3,231) (721)
Tax benefit of stock options exercised.......... 332 611 544
Forgiveness of notes receivable from employees.. 244 621 275
Change in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable............................. (829) (8,291) (12,680)
Income taxes payable............................ (1,680) 544 1,271
Prepaid expenses and other current assets....... (1,272) 34 (611)
Other assets.................................... (486) 101 (545)
Accounts payable and accrued liabilities........ 4,214 (411) 4,796
Deferred income................................. (757) 965 466
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 9,661 (1,558) (1,585)
-------- -------- --------
Investing activities
Purchase of equipment and improvements........... (2,368) (5,749) (1,759)
Notes and accrued interest receivable from
related parties................................. (1,071) (740) (1,228)
Repayment on notes and accrued interest
receivable from related parties................. 439 454 --
Business combinations, net of cash acquired...... (10,899) (13,168) (8,271)
Disposal of subsidiary, net of cash.............. 3,497 -- --
Restricted cash.................................. 758 (39) (712)
Purchases of available-for-sale securities....... (7,489) (28,463) (30,204)
Sales of available-for-sale securities........... 2,879 19,328 13,370
Maturities of available-for-sale securities...... 3,924 16,999 --
Other assets..................................... 122 (104) (108)
-------- -------- --------
Net cash used in investing activities............ (10,208) (11,482) (28,912)
-------- -------- --------
Financing activities
Borrowings under bank lines of credit............ 1,848 909 6,912
Payment of borrowings on bank lines of credit.... (271) (1,466) (9,671)
Repurchase of common stock....................... (1,606) (414) --
Net proceeds from issuance of common stock....... 1,466 1,632 55,905
Repayment by shareholder on note receivable...... -- 386 95
Deferred financing costs......................... -- -- 224
Payments on capital lease obligations............ (364) (252) (45)
Payments on notes payable to shareholders........ (20) (26) (47)
-------- -------- --------
Net cash provided by financing activities........ 1,053 769 53,373
-------- -------- --------
Effect of exchange rate changes on cash.......... (371) (74) (516)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... 135 (12,345) 22,360
Cash and cash equivalents at beginning of
period.......................................... 10,121 22,466 106
-------- -------- --------
Cash and cash equivalents at end of period....... $ 10,256 $ 10,121 $ 22,466
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest paid................................... $ 347 $ 77 $ 96
======== ======== ========
Income taxes paid (refunded), net............... $ 3,304 $ 2,724 $ 1,548
======== ======== ========
Equipment acquired under capital lease
obligations..................................... $ 282 $ 72 $ 219
======== ======== ========
Accrued purchase price and assumed liabilities
related to business combinations................ $ 17,629 $ 3,670 $ 397
======== ======== ========
Conversion of preferred stock into common stock.. $ -- $ -- $ 1,892
======== ======== ========
Common stock issued in business combinations..... $ 1,061 $ 1,328 $ 666
======== ======== ========
Restricted stock held in escrow for employees.... $ -- $ -- $ 701
======== ======== ========
Conversion of Class A common stock to Class B
common stock.................................... $ 396 $ -- $ --
======== ======== ========
Class B common stock returned upon sale of
subsidiary...................................... $ 1,328 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
Tier Technologies, Inc. (the "Company") is a vertically focused global
consulting firm that delivers business and information technology consulting,
application development including e-commerce, software engineering services,
systems and technology training, business process outsourcing and vertical
application service centers for enterprise-wide systems. The Company brings to
its client relationships specific industry knowledge, proven delivery
capability and proprietary applications. The combination of expertise and
capability allow the Company to deliver new business models and operating
processes that result in business improvements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The Company
translates the accounts of its foreign subsidiaries using the local foreign
currency as the functional currency. The assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars using exchange rates in effect
at the balance sheet date, revenues and expenses are translated using the
average exchange rate for the period, and gains and losses from this
translation process are included in shareholders' equity.
Accounting for Business Combinations
Contingent payments are generally recorded as additional purchase price at
the time the payment can be determined beyond a reasonable doubt and the
amounts are amortized over the estimated remaining useful life of the acquired
assets. If a contingent payment is based, in part, on a seller's continuing
employment with the Company, the payments are recorded as a compensation
charge related to business combinations over the vesting period when the
amount is deemed probable to be made.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although management believes that the estimates and
assumptions used in preparing the accompanying consolidated financial
statements and related notes are reasonable in light of known facts and
circumstances, actual results could differ from those estimates.
Revenue Recognition
The majority of the Company's revenues are derived from professional fees
billed to clients on either a time and materials basis, a fixed price basis or
a per-transaction basis. Time and materials revenues 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. Revenues from transaction-
based contracts are recognized based on fees charged on a per-transaction
basis. 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 represent revenue recognized in excess of amounts
billed in accordance with contractual billing terms. Unbilled receivables were
$9,567,000 and $8,390,000 at September 30, 2000 and 1999,
F-7
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
respectively. Unbilled receivables at September 30, 2000 include $2,145,000
that is not billable for more than one year under the terms of the contracts.
Worldwide revenues derived from sales to governmental agencies were
approximately $64,865,000, $34,846,000 and $20,862,000 for the years ended
September 30, 2000, 1999 and 1998, respectively.
Credit Risk and Significant Clients
Financial instruments that potentially subject the Company to significant
levels of credit risk are accounts receivable.
The Company extends credit based on an evaluation of its client's financial
condition and does not require collateral. The Company's historical credit
losses have not been significant, except for the write-off due to a contract
dispute. See Note 14, "Contract Dispute."
For the year ended September 30, 2000, no client comprised more than 10% of
total revenue. For the year ended September 30, 1999, revenues from two
clients totaled approximately $25,200,000 and $11,986,000 which represented
27.4% and 13.0% of total revenues, respectively. Accounts receivable balances
at September 30, 1999 relating to these two clients amounted to approximately
$6,530,000. For the year ended September 30, 1998, revenues from three clients
totaled approximately $15,271,000, $11,525,000 and $6,471,000, which
represented 26.5%, 20.0% and 11.2% of total revenues, respectively.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at amounts that approximate fair value,
based on quoted market prices. Cash equivalents consist principally of
investments in interest-bearing demand deposit accounts with financial
institutions and highly liquid debt securities of corporations, state
governments, municipalities and the U.S. Government.
In the course of operating a payment processing center for a client, the
Company maintains bank accounts for the deposit and disbursement of monies on
behalf of the client. The cash balance of the accounts and the related
liability of the same amount are netted in the accompanying consolidated
balance sheets.
Restricted Cash
In accordance with an acquisition agreement, the Company deposited cash in
an escrow account which was released to the sellers of the acquired business
upon the satisfaction of certain contingencies. The Company classified this
deposit as restricted cash.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, notes receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities.
Short-Term Investments
The Company has classified all short-term investments as available-for-sale.
Available-for-sale securities are recorded at amounts that approximate fair
market value based on quoted market prices and have included
F-8
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
investment-grade municipal securities and commercial paper. Realized gains and
losses and declines in value judged to be other-than-temporary on available-
for-sale securities are included in income. Unrealized and realized gains and
losses have not been material to the Consolidated Statements of Income for the
years ended September 30, 2000, 1999 and 1998.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and amortization
are computed using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term, which range from three to five
years. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in operations in the period realized.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations, such as equipment and improvements, and intangible assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of the
assets.
Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, (SFAS 86) "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Under the standard, capitalization of software development costs begins upon
the establishment of technological feasibility. To date, software development
costs incurred prior to technological feasibility have not been material and
have been charged to expenses.
Internal Use Software Costs
Internal use software costs have been accounted for in accordance with
Statement of Position No. 98-1, (SOP 98-1) "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Under SOP 98-1,
computer software costs related to internal software that are incurred in the
preliminary project stage should be expensed as incurred. Once the
capitalization criteria of SOP 98-1 have been met, external direct costs of
materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project);
and interest costs incurred when developing computer software for internal use
should be capitalized.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provides the disclosure required in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Stock options issued to non-employees are accounted
for in accordance with EITF 96-18.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in
F-9
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
accounting for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rules and laws that are expected to be in effect when the differences are
expected to reverse.
Net Income Per Share
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") and
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98"). Under FAS 128, basic net income per share is computed by dividing the
net income for the period by the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed by
dividing the net income for the period by the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of unvested restricted common stock, incremental
common shares issuable upon the exercise of stock options and warrants and
upon conversion of preferred stock, are included in diluted net income per
share to the extent such shares are dilutive.
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.
Segment Reporting
The Company is managed through four reportable segments: U.S. Commercial
Services, U.S. Government Services, Australian Operations and United Kingdom
Operations. The U.S. Commercial Services segment provides Business Process
Reengineering ("BPR"), Systems Design and Integration ("Systems"), Business
Process Outsourcing ("BPO") and Systems and Technology Training ("Training")
services to Fortune 1000 clients in the United States. The U.S. Government
Services segment provides BPR, Systems, Vertical Application Service Provider
("Vertical ASP"), BPO and Training services to state and local government
entities in the United States. The Australian Operations segment provides BPR,
Systems, BPO and Training services to clients in the public and private
sectors in Australia. The United Kingdom Operations segment provides BPR,
Systems and BPO services to clients in the public and private sectors in the
United Kingdom. The Company follows the requirements of Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131").
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements and related notes to conform to the current year
presentation.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") which was amended in
F-10
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(continued)
June 2000 by FAS 138. In 1999, the FASB issued FAS 137, which requires the
Company to adopt FAS 133 in the first quarter of fiscal year 2001. The new
standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives will be reported in the statement
of operations or as a deferred item, depending on the use of the derivatives
and whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The Company does not expect that the adoption of FAS 133
will have a significant impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 is effective no later than the fourth quarter of fiscal
year 2001. The Company does not expect that the adoption of SAB 101 will have
a significant impact on the consolidated financial statements.
2. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------
2000 1999 1998
------ ------ ------
(in thousands,
except per share
data)
<S> <C> <C> <C>
Numerator:
Net income........................................... $2,319 $1,006 $4,132
====== ====== ======
Denominator for basic income per share-weighted average
common shares outstanding............................. 12,344 12,056 9,231
Effects of dilutive securities:
Common stock options................................. 251 684 1,274
Convertible preferred stock.......................... -- -- 90
Common stock held in escrow.......................... 145 129 29
------ ------ ------
Denominator for diluted net income per share-adjusted
weighted average common shares and assumed
conversions........................................... 12,740 12,869 10,624
====== ====== ======
Basic net income per share............................. $ 0.19 $ 0.08 $ 0.45
====== ====== ======
Diluted net income per share........................... $ 0.18 $ 0.08 $ 0.39
====== ====== ======
</TABLE>
Options to purchase approximately 2.3 million shares of Class B common stock
at a price ranging from $6.56 to $17.81 per share were outstanding at
September 30, 2000, but were not included in the computation of diluted net
income per share because the options' exercise prices were greater than the
average market price of the shares.
F-11
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Balance Sheet Components
The components of equipment and improvements are as follows:
<TABLE>
<CAPTION>
September 30,
----------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Computer equipment and software............................ $ 9,114 $ 7,455
Furniture, equipment and leasehold improvements............ 2,669 2,317
------- -------
11,783 9,772
Less: Accumulated depreciation and amortization............ (5,869) (2,760)
------- -------
$ 5,914 $ 7,012
======= =======
</TABLE>
Depreciation and amortization expense related to equipment and improvements
for the years ended September 30, 2000, 1999 and 1998, was $2,131,000,
$1,928,000 and $600,000, respectively. The cost of assets acquired under
capital leases is $997,000 and $1,195,000 and the related accumulated
amortization is $538,000 and $407,000 at September 30, 2000 and 1999,
respectively.
The components of acquired intangible assets are as follows:
<TABLE>
<CAPTION>
September 30,
----------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Intangible assets:
Goodwill................................................. $44,723 $25,863
Acquired workforce....................................... 1,273 990
------- -------
45,996 26,853
Less: Accumulated amortization............................. (5,870) (2,940)
------- -------
$40,126 $23,913
======= =======
</TABLE>
4. Bank Lines of Credit
At September 30, 2000, the Company had a $10 million revolving credit
facility which has a maturity date of August 26, 2002. The total commitment
amount is limited to 85% of eligible accounts receivable plus 50% of up to $6
million of eligible unbilled receivables. The credit facility is secured by
first priority liens and security interests in the Company's assets (excluding
assets owned by Tier Technologies (Australia) Pty Ltd., Simsion Bowles &
Associates ("SBA") and ADC Consultants Pty Ltd.), including a pledge of 65% of
the stock of the Company's subsidiaries excluding SBA. Interest is based on
either the adjusted LIBOR rate plus 2.5% or the lender's announced prime rate
plus 0.25%, at the Company's option. Among other provisions, the credit
facility requires the Company to maintain certain minimum financial ratios. As
of September 30, 2000, the Company was in compliance with all financial ratios
and had no outstanding borrowings under this credit facility.
At September 30, 2000, the Company (through one of its Australian
subsidiaries) had a credit facility that included a $1.3 million revolving
line of credit with St. George Bank Limited of Australia (based on a current
exchange rate of AU $1.83 to US $1.00). Under the terms of the credit
facility, the principal balance of the credit line will reduce by
approximately $129,000 per quarter to a maximum line of approximately $1.1
million. The line of credit bears interest at fixed rates that are set at the
time of each drawdown on the line. In December 1999, the balance of the line
of credit was converted to a variable rate loan ("Loan"). The variable rate is
based upon the bank's prime rate less 1.25% (9% per annum as of September 30,
2000) and interest is payable monthly.
F-12
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Bank Lines of Credit--(continued)
As of September 30, 2000, the outstanding balance of the Loan was
approximately $1.3 million. The credit facility also provides for the issuance
of letters of credit up to $106,000. Letters of credit totaling $93,000 were
outstanding as of September 30, 2000. Among other provisions, the credit
facility requires the Company's subsidiary to maintain certain minimum
financial ratios. As of September 30, 2000, the Company was in compliance with
the provisions of this credit facility.
Prior to August 28, 2000, the Company had an $8 million revolving credit
facility. The total commitment amount was limited to the lesser of 85% of
eligible accounts receivable or $8 million and was secured by first priority
liens and security interests in substantially all of the Company's assets,
including a pledge of all stock of its domestic subsidiaries and approximately
65% of the stock of the Company's foreign subsidiaries. Interest was based on
either the adjusted LIBOR rate plus 2.5% or an alternate base rate plus 0.5%,
at the Company's option.
5. Commitments
The Company leases its principal facilities and certain equipment under
noncancellable operating and capital leases which expire at various dates
through 2006. Future minimum lease payments for noncancellable leases with
terms of one year or more are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Years ending September 30,
2001..................................................... $1,724 $ 233
2002..................................................... 1,335 122
2003..................................................... 896 80
2004..................................................... 643 61
2005..................................................... 205 59
Thereafter............................................... -- 41
------ -----
Total minimum lease payments............................. $4,803 596
======
Less amounts representing interest....................... (111)
-----
Present value of capital lease obligations............... 485
Less amounts due within one year......................... (191)
-----
$ 294
=====
</TABLE>
Rent expense for the years ended September 30, 2000, 1999 and 1998, was
approximately $2,117,000, $1,277,000 and $530,000, respectively.
6. Shareholders' Equity
Common Stock
In February 1997, the Company's Board of Directors authorized two classes of
common stock, Class A common stock and Class B common stock. Each then
outstanding share of common stock was converted into 40 shares of Class A
common stock and 60 shares of Class B common stock. All share and per share
information in the accompanying financial statements has been retroactively
adjusted to reflect this conversion. In October 1997, the Board of Directors
increased the authorized shares of Class B common stock to 42,600,000.
F-13
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
The holders of Class A common stock and Class B common stock have 10 votes
per share and 1 vote per share, respectively. Each share of Class A common
stock will automatically convert into one share of Class B common stock upon
transfer, except in limited circumstances, or at the election of the holder of
such Class A common stock.
Upon conversion of shares of Class A common stock into shares of Class B
common stock, such Class A common stock shares are retired from the authorized
shares and are not reissuable by the Company. During the year ended September
30, 2000, approximately 396,000 shares of Class A common stock were converted
to Class B common stock. The number of authorized shares of Class A common
stock was approximately 1,264,000 at September 30, 2000.
Voting Trust
In November 1997, all Class A shareholders (the "Beneficiaries") transferred
their Class A common stock into a voting trust. The Company's Chief Executive
Officer is the trustee of the voting trust (the "Trustee") and has the
exclusive right to vote all shares of Class A common stock held in the voting
trust. The voting trust has a term of 10 years and is renewable by consent of
the Beneficiaries and the Trustee during the last two years of the original or
an extended term. The voting trust terminates upon the earlier of the
expiration of the term or in the event of (i) an agreement of the Trustee to
terminate or (ii) the death of the sole remaining Trustee, leaving no
incumbent or identified successor.
Initial Public Offering
In December 1997, the Company completed an initial public offering of
3,400,000 shares of its Class B common stock at $8.50 per share. Of those
shares, 2,725,000 shares were sold by the Company and 675,000 shares were sold
by certain selling shareholders. In January 1998, the underwriters from the
Company's initial public offering exercised their over-allotment option to
purchase an additional 510,000 shares of Class B common stock from the Company
at the initial public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $23,900,000 after deducting the
underwriters' discount, commissions and related issuance costs. The Company
did not receive any net proceeds from the sale of shares by the selling
shareholders in the offering.
Secondary Public Offering
In June 1998, the Company completed a secondary public offering of 3,000,000
shares of its Class B common stock at $15.00 per share. Of those shares,
1,775,000 shares were sold by the Company and 1,225,000 shares were sold by
certain selling shareholders. In June 1998, the underwriters from the
Company's secondary public offering exercised their over-allotment option to
purchase an additional 450,000 shares of Class B common stock from the Company
at the secondary public offering price. Net proceeds to the Company, including
the over-allotment option, were approximately $31,000,000 after deducting the
underwriters' discount, commissions and related issuance costs. The Company
did not receive any net proceeds from the sale of shares by the selling
shareholders in the offering.
Common Stock Repurchase Program
In October 1998, the Board of Directors authorized the repurchase of up to
one million shares of common stock. The purchases were to be made in the open
market or in privately negotiated transactions at the discretion of the
Company's management, depending on financial and market conditions or as
otherwise provided by the Securities and Exchange Commission and the Nasdaq
rules and regulations. Approximately 316,000 shares have been repurchased for
a total cost of approximately $2,020,000 as of September 30, 2000.
F-14
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
Preferred Stock
In July 1997, the Company issued approximately 421,000 shares of Series A
preferred stock at $5.25 per share resulting in net proceeds of approximately
$1,900,000. The Series A preferred stock had the same voting rights as the
Class B common stock. Series A preferred stock was initially convertible into
one share of the Class B common stock, subject to certain antidilution
provisions. On December 17, 1997, as a result of the Company's initial public
offering, approximately 421,000 shares of Series A preferred stock
automatically converted into approximately 421,000 shares of Class B common
stock. At September 30, 2000, approximately 4,579,000 shares of preferred
stock were authorized.
Stock Options
For the year ended December 31, 1996, the Company issued to employees
options to purchase 440,000 shares of Class A common stock and 660,000 shares
of Class B common stock at exercise prices ranging from $0.12 to $1.82 per
share. Options for 200,000 shares of Class A common stock and 300,000 shares
of Class B common stock vested upon grant. The remaining options vested one-
third upon the completion of the Company's initial public offering in December
1997, one-third on December 31, 1997, and the final one-third on December 31,
1998. In February 1997, the Company issued options to purchase an additional
240,000 shares of Class A common stock at an exercise price of $3.58 per
share. As of September 30, 2000, options for 670,000 shares of Class A common
stock and 660,000 shares of Class B common stock had been exercised at prices
ranging from $0.12 to $3.58 per share (weighted average exercise price of
$1.66 per share) and options for 10,000 shares of Class A common stock at an
exercise price of $3.58 per share remain outstanding. These outstanding
options will expire in 2002. The weighted average fair value of these options
granted during the nine months ended September 30, 1997 was $0.48 per share.
At September 30, 2000, all of these options were vested.
F-15
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
1996 Equity Incentive Plan
In February 1997, the Company adopted the 1996 Equity Incentive Plan (the
"Plan"), under which the Board of Directors may issue incentive stock options
for Class B common stock to employees and nonstatutory stock options, stock
bonuses or the right to purchase restricted stock to employees, consultants
and outside directors. The Board of Directors or a committee designated by the
Board determines who shall receive awards, the number of shares and the
exercise price (which cannot be less than the fair market value at date of
grant for incentive stock options and other awards). Options granted under the
Plan expire no more than 10 years from the date of grant and must vest at a
rate of at least 20% per year over five years from date of grant. Incentive
stock options granted to employees deemed to own more than 10% of the combined
voting power of all classes of stock of the Company must have an exercise
price of at least 110% of the market price of the stock at the date of grant
and the options may not be exercisable after the expiration of five years from
the date of grant. Through September 30, 2000, no compensation expense had
been recorded in connection with stock based employee incentive awards under
the Plan. At September 30, 2000 and 1999, the number of shares authorized for
issuance under the Plan was approximately 5,989,000. A summary of activity
under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
-------------- --------------
(in thousands)
<S> <C> <C>
Options outstanding at September 30, 1997.... 1,743 $ 3.93
Options granted............................ 1,201 13.76
Options cancelled.......................... (136) 9.23
Options exercised.......................... (249) 3.71
------
Options outstanding at September 30, 1998.... 2,559 8.28
Options granted............................ 1,936 10.31
Options cancelled.......................... (543) 11.13
Options exercised.......................... (377) 3.30
------
Options outstanding at September 30, 1999.... 3,575 9.47
Options granted............................ 1,934 6.61
Options cancelled.......................... (1,189) 9.50
Options exercised.......................... (334) 3.66
------
Options outstanding at September 30, 2000.... 3,986 8.56
======
</TABLE>
The weighted average fair value of options granted to employees under the
Plan during the years ended September 30, 2000, 1999, and 1998 was $4.06,
$5.43 and $5.51 per share, respectively. At September 30, 2000, 1999 and 1998,
there were 1,693,000, 1,505,000 and 845,000 options exercisable at a weighted
average exercise price of $9.90, $10.07 and $6.83, respectively. At September
30, 2000, options to purchase approximately 1,043,000 shares of Class B common
stock were available for grant. The weighted average remaining life of
outstanding options under the Plan at September 30, 2000 was 8.43 years.
F-16
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
The following table summarizes information about stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- -------------- ---------------- -------------- ------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$2.45--$5.25 342 6.88 $ 3.81 294 $ 3.59
$5.50--$5.50 531 9.76 $ 5.50 -- $ --
$5.78--$5.88 459 7.84 $ 5.85 75 $ 5.78
$6.00--$6.50 552 8.88 $ 6.29 92 $ 6.00
$6.56--$7.31 428 8.89 $ 6.92 194 $ 6.79
$7.78--$8.63 408 9.18 $ 8.43 154 $ 8.37
$9.00--$14.00 398 7.73 $10.64 305 $10.92
$14.06--$14.63 503 8.11 $14.37 293 $14.31
$15.19--$16.38 301 7.83 $15.81 250 $15.81
$17.00--$17.81 64 8.12 $17.50 36 $17.65
----- -----
$2.45--$17.81 3,986 8.43 $ 8.56 1,693 $ 9.90
===== =====
</TABLE>
Employee Stock Purchase Plan
In October 1997, the Company adopted the Employee Stock Purchase Plan. The
Company reserved a total of 100,000 shares of Class B common stock for
issuance under the plan. On January 11, 2000, the Company's Stockholders
authorized an increase in the number of shares of Class B common stock
reserved for issuance under the plan to 300,000. The plan has consecutive six-
month purchase periods and eligible employees may purchase Class B common
stock at 85% of the lesser of the fair market value of the Company's Class B
common stock on the first day or the last day of the applicable purchase
period. The two purchase periods ending in the year ended September 30, 2000
resulted in proceeds of approximately $208,000 from the sale of 38,000 shares.
The two purchase periods ending in the year ended September 30, 1999 resulted
in proceeds of approximately $388,000 from the sale of 46,000 shares. The
first purchase period ended in May 1998 and resulted in proceeds of
approximately $116,000 from the sale of approximately 11,000 shares.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The effect of applying the FAS 123 fair value method to the Company's stock-
based awards results in net income (loss) and net income (loss) per share as
follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
-----------------------
2000 1999 1998
------ ------- ------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net income, as reported............................. $2,319 $ 1,006 $4,132
Net income (loss), pro forma........................ (734) (2,062) 2,616
Basic net income per share, as reported............. 0.19 0.08 0.45
Basic net income (loss) per share, pro forma........ (0.06) (0.17) 0.28
Diluted net income per share, as reported........... 0.18 0.08 0.39
Diluted net income (loss) per share, pro forma...... (0.06) (0.17) 0.25
</TABLE>
F-17
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Shareholders' Equity--(continued)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Expected dividend yield.................. 0% 0% 0%
Expected volatility...................... 77.6% 82.3% 65%
Risk-free interest rate.................. 6.05%-6.74% 4.18%-5.77% 4.79%-5.60%
Expected life of the option.............. 1.5-6 years 0.5-5 years 0.5-4 years
</TABLE>
7. Alliance Agreement
In September 1999, the Company entered into a long-term strategic alliance
("Alliance Agreement"), with Siemens Business Services Limited ("SBS"). Under
this Alliance Agreement, the Company has two existing contracts--the
Application Service Center ("ASC") contract and the Consulting contract.
Beginning January 1, 2001, under the amended ASC contract, the Company has
committed to utilizing a minimum amount of resources from the ASC. The Company
will market the ASC's services worldwide in exchange for fees based on the
utilization of resources. To the extent there is a shortfall in minimum
utilization, the Company's obligation under the ASC contract shall not exceed
$15.8 million (based on the September 30, 2000 exchange rate of GBP 0.68 to US
$1.00) over the five-year life of the contract. Through September 30, 2000,
there were no minimum utilization requirements under the ASC contract. Under
the consulting contract, the Company bills for its professional services on a
time and materials basis. Pursuant to the Consulting contract, SBS has
guaranteed that it will engage the Company to provide a minimum of $10.2
million (based on the September 30, 2000 exchange rate of GBP 0.68 to US
$1.00) for consultancy services provided over the life of the consulting
contract of which approximately $1.8 million has not been recognized as of
September 30, 2000.
8. Acquisitions
All acquisitions have been accounted for using the purchase method of
accounting and intangible assets are being amortized using the straight-line
method. Initial purchase price includes cash paid and stock issued at the date
of acquisition, estimated acquisition costs and any guaranteed future
consideration.
On July 11, 1997, the Company acquired certain assets and liabilities of
Albanycrest, Limited ("Albanycrest"), a United Kingdom private limited
company, which provided information and management consulting services on the
design of software and computer systems. The initial purchase price was
approximately $335,000, tangible assets acquired were approximately $300,000
and liabilities assumed were approximately $243,000 (all converted into U.S.
dollars as of the date of the acquisition). As of September 30, 2000,
intangible assets of approximately $299,000 (converted into U.S. dollars using
the September 30, 2000 exchange rate) are being amortized over a six-year
period. During the year ended September 30, 1998, approximately $477,000 of
compensation charge related to business combinations was recorded with respect
to certain payments made to former shareholders based on performance criteria
and continued employment. There are no further contingent payments associated
with this acquisition.
Effective March 1, 1998, the Company acquired certain assets and liabilities
of Sancha Computer Services Pty Limited and Sancha Software Development Pty
Limited ("Sancha Group"), Australian entities which provided computer systems
consulting services. The initial purchase price was approximately $5,219,000,
of which $4,554,000 was paid in cash and $666,000 in Class B common stock (all
converted into U.S. dollars as of the date of the acquisition). In addition,
liabilities assumed were approximately $66,000. Tangible assets of
F-18
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
approximately $40,000 were acquired. Additional acquisition costs of
approximately $397,000 were incurred. As of September 30, 2000, intangible
assets of approximately $6,013,000 (converted into U.S. dollars using the
September 30, 2000 exchange rate) are being amortized over a period of 8 to 15
years. Contingent payments totaling approximately $651,000, $696,000 and
$312,000 were paid during the years ended September 30, 2000, 1999 and 1998,
respectively. The performance targets specified the achievement of certain
revenue levels of the continuing business measured annually over a two-year
period. There are no further contingent payments associated with this
acquisition.
Effective April 1, 1998, the Company acquired certain assets and liabilities
of Simpson Fewster & Co. Pty Limited ("SFC"), an Australian entity which
provided information technology consulting services to develop and implement
call center applications. The initial purchase price was approximately
$788,000 and liabilities assumed were approximately $165,000 (both converted
into U.S. dollars as of the date of the acquisition). Additional acquisition
costs of approximately of $211,000 were incurred. Total tangible assets and
accounts receivable acquired were approximately $214,000. Contingent payments
of approximately $120,000 and $124,000 were paid during the years ended
September 30, 2000 and 1999, respectively. Additional contingent payments may
be paid based on the achievement of future performance targets through June
2001 and the continued employment of certain key employee/sellers with the
Company. These payments will be recorded as compensation charge related to
business combinations at the time it is deemed probable that such payments
will be made. In addition, 48,768 shares of the Company's Class B common
stock, valued as of the date of the acquisition at approximately $701,000,
were deposited in an escrow account and are being released over a three-year
period provided that the key employee/sellers are employed by the Company on
the release dates. The value of these shares is reflected as deferred
compensation on the balance sheet and is being amortized over the three-year
vesting period. Approximately 16,000 of these shares were released from escrow
in both March 2000 and March 1999. As of September 30, 2000, approximately
$584,000 of compensation expense has been amortized and intangible assets of
approximately $769,000 (converted into U.S. dollars using the September 30,
2000 exchange rate) are being amortized over a six-year period.
Effective August 1, 1998, the Company acquired certain assets and
liabilities of Infact Pty Limited as trustee of the Infact Unit Trust
("Infact"), an Australian entity which provided information technology
consulting services. The initial purchase price was approximately $3,242,000,
tangible assets acquired were approximately $23,000 and liabilities assumed
were approximately $156,000 (all converted into U.S. dollars as of the date of
the acquisition). Additional acquisition costs of $57,000 were incurred. As of
September 30, 2000, intangible assets of approximately $4,283,000 (converted
into U.S. dollars using the September 30, 2000 exchange rate) are being
amortized over a period of 8 to 15 years. Contingent payments of approximately
$794,000 and $1,008,000 in cash and stock were earned during the years ended
September 30, 2000 and 1999, respectively. Approximately $233,000 and $246,000
of these contingent payments were contingent upon employment and were expensed
during the periods as a compensation charge related to business combination
and the remaining $561,000 and $762,000 was recorded as additional purchase
price. The performance targets specified the achievement of certain levels of
profit before taxes and revenues of the continuing business measured annually.
Approximately 71% of such payments were accounted for as additional purchase
price and the remaining payments were treated as business combination
compensation expense at the time the payments were deemed probable to be made
because such payments were contingent, in part, on the continuing employment
of a key employee/seller. There are no further contingent payments associated
with this acquisition.
Effective November 30, 1998, the Company acquired all the issued and
outstanding capital stock of Midas Computer Software Limited ("Midas"), a
United Kingdom entity which provided data warehouse migration services. The
initial purchase price totaled approximately $3,907,000 (converted into U.S.
dollars as of the date
F-19
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
of the acquisition), of which approximately $2,579,000 was paid in cash and
acquisition costs and approximately $1,328,000 was recorded as a result of the
issuance of the Company's Class B common stock with a guaranteed minimum value
of approximately $1,317,000 (converted into U.S. dollars using the September
30, 1999 exchange rates) three years from the effective date of the
acquisition. Additional acquisition costs of $374,000 were incurred. Tangible
assets acquired were approximately $1,813,000 and liabilities assumed were
approximately $1,692,000. In March 2000, the Company sold Midas for
approximately $3.7 million (based on an exchange rate of GBP 0.64 to US
$1.00), net of estimated selling expenses. See Note 9.
Effective January 1, 1999, the Company acquired all the issued and
outstanding capital stock of ADC Consultants Pty Limited ("ADC"), an
Australian entity that provided data management services. The initial purchase
price was approximately $2,565,000 in cash (converted into U.S. dollars as of
the date of the acquisition). Total liabilities assumed were $310,000 and
tangible assets acquired were $365,000. During fiscal year 2000, the Company
made contingent payments of approximately $873,000 in cash and shares of the
Company's Class B common stock, and accrued additional contingent payments of
approximately $436,000 which will be paid in the second quarter of fiscal year
2001. Additional contingent payments of up to approximately $436,000 (based on
September 30, 2000 exchange rate of AU $1.83 to US $1.00) may be accrued and
paid in cash and shares of the Company's Class B common stock based on the
acquired business achieving certain levels of revenues and profits before
taxes for the twelve months ended December 31, 2001. Contingent payments will
be accrued when earned and recorded as additional purchase price. As of
September 30, 2000, intangible assets of approximately $3,550,000 (converted
into U.S. dollars using the September 30, 2000 exchange rate) are being
amortized over a period of 8 years.
Effective March 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Service Design Associates, Inc. ("SDA"), an Indiana
corporation that provided payment processing, policy and IT systems services
for state and local government child support agencies. The initial purchase
price was approximately $4,351,000. Total liabilities assumed were
approximately $1,087,000. Total tangible assets acquired were approximately
$415,000. As of September 30, 2000, intangible assets of approximately
$7,516,000 are being amortized over a period of 8 years. Contingent payments
of approximately $2,493,000 were accrued during the year ended September 30,
2000. Additional contingent payments of up to approximately $1,416,000 in cash
or shares of the Company's Class B common stock, at the Company's election,
may be paid based upon the acquired business achieving certain performance
targets for the twelve months ended February 28, 2002. Contingent payments
will be accrued when earned and recorded as additional purchase price. In
connection with the acquisition, Tier caused a stand by letter of credit of up
to $800,000 to be issued as additional security for an obligation of the
surviving company. During the year ended September 30, 2000, $500,000 of the
contingent payments earned were paid to reduce this obligation. In lieu of a
$300,000 standby letter of credit, the Company pledged a certificate of
deposit to secure the remaining $300,000.
Effective May 1, 1999, the Company acquired certain assets and assumed
certain liabilities of the Technology Training Services division ("TTS") of
Automated Concepts, Inc., a leading provider of training services to the IT
professionals of Fortune 1000 companies and other major corporations. The
initial purchase price was $1,713,000 in cash. Additional acquisition costs of
$95,000 were incurred. Total liabilities assumed were $71,000 and tangible
assets acquired were $131,000. Additional contingent payments of up to
$750,000 may be paid in shares of the Company's Class B common stock and cash
based on the acquired business achieving certain levels of gross profit and
revenues for the twelve months ended April 30, 2001. Shares of the Company's
Class B common stock equal to $1.5 million based on the average closing price
of the Company's Class B common stock for the five trading days preceding the
agreement date of April 6, 1999, are currently in an escrow account. If
contingent performance requirements are met, the number of shares released
will be
F-20
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
determined utilizing the average closing price of the Company's Class B common
stock for the five trading days preceding the performance anniversary. In the
event the value of the shares in the escrow account is not sufficient to
satisfy the additional contingent payments, such shortfall shall be paid in
cash. Any shares not released at the end of the two-year performance period
will be returned to the Company. Contingent payments will be accrued when
earned and recorded as additional purchase price. As of September 30, 2000,
intangible assets of approximately $1,754,000 are being amortized over a
period of 8 years.
Effective October 1, 1999, the Company acquired all the issued and
outstanding stock of Simsion Bowles & Associates ("SBA"), an Australian entity
that provided business process reengineering and integration of e-commerce
consulting services. The initial purchase price was approximately $2,567,000
(converted into U. S. dollars as of the date of the acquisition) in cash,
including $441,000 in estimated acquisition costs. Contingent payments of
approximately $821,000 were earned during the year ended September 30, 2000.
Additional contingent payments of up to approximately $1,789,000 (based on the
September 30, 2000 exchange rate of AU $1.83 to US $1.00) may be paid in cash
and shares of the Company's Class B common stock over the next two fiscal
years based on the acquired business achieving certain performance targets.
Contingent payments will be accrued when earned and recorded as additional
purchase price. Intangible assets of approximately $2,813,000 (converted to
U.S. dollars using the September 30, 2000 exchange rate) are being amortized
over an eight to ten-year period.
Effective March 1, 2000, the Company acquired certain assets and assumed
certain liabilities of The SCA Group, Inc., an Illinois corporation, and
Harris Chapman, a Florida corporation (The SCA Group, Inc. and Harris Chapman,
collectively referred to as "SCA"), for approximately $16,196,000 in cash,
including $200,000 in estimated acquisition costs. Approximately $5,321,000 of
the initial purchase price had been paid as of September 30, 2000 and the
remainder will be paid on specified dates in the future. SCA was a business
process reengineering and management consulting firm with expertise in health
care, financial services, insurance and utilities sectors. Total tangible
assets acquired were approximately $747,000 and liabilities assumed were
approximately $581,000. As of September 30, 2000, intangible assets of
approximately $18,007,000 are being amortized over a period of six to ten
years. Contingent payments of $1,833,000 were accrued during the year ended
September 30, 2000. Additional contingent payments of up to approximately
$6,165,000 in cash may be paid to SCA upon the achievement of certain revenue
and earnings performance targets over the period ended February 2003.
Contingent payments will be accrued when earned and recorded as additional
purchase price.
For the year ended September 30, 1999, the Company recorded a charge to
earnings for the $4 million purchase of the exclusive worldwide licensing
rights to components of a large scale, enterprise-wide commercial billing
system the Company was developing for a client, which had not reached
technological feasibility and had no alternative future use. The license,
which was effective May 19, 1999, includes all additions, enhancements, and
improvements to the software to the extent that the Company is employed by the
licensor to make such changes in the future. The software was completed during
fiscal year 2000. This software would require significant customization prior
to sale to a customer.
The accompanying consolidated financial statements include the results of
operations of these acquired businesses for periods subsequent to the
respective acquisition dates.
F-21
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Acquisitions--(continued)
Pro Forma Disclosure of Significant Acquisitions (Unaudited)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if SCA had been purchased
by the Company as of October 1, 1998, 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>
Year Ended
September 30,
----------------
2000 1999
-------- -------
(in thousands,
except per share
data)
<S> <C> <C>
Revenues................................................... $116,210 $84,118
Net income (loss).......................................... 1,649 (1,512)
Net income (loss) per share................................ 0.13 (0.13)
Diluted net income (loss) per share........................ 0.13 (0.13)
</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.
9. Other Nonrecurring Charges
In March 2000, the Company completed the sale of its subsidiary, Midas
Computer Software Limited ("Midas") for approximately $3.7 million (based on
an exchange rate on the closing date of GBP 0.64 to US $1.00), net of
estimated selling expenses. The gross proceeds, including repayment of
intercompany debt of approximately $1.4 million, amounted to approximately
$2.6 million in cash and $1.3 million attributable to a release of 51,074
shares of the Company's Class B common stock and a share guarantee on the
original acquisition. The Company recorded a nonrecurring loss of
approximately $1.3 million as a result of the sale of Midas.
In April 2000 and December 1999, the Company recorded severance expense
related to former officers totaling approximately $907,000.
10. Related Party Transactions
Notes Receivable
The Company has outstanding notes receivable from certain officers and
employees of the Company as of September 30, 2000 and 1999, which total
approximately $1,280,000 and $975,000, respectively. These notes bear interest
at rates ranging from 4.33% to 7.18% and have due dates ranging from one to
ten years. Certain of these notes are being forgiven in accordance with the
terms of the officers' and employees' agreements and have an aggregate balance
of approximately $152,000 at September 30, 2000.
Notes receivable from a shareholder issued in connection with the exercise
of options to purchase Class B common stock are due in February 2007, bear
interest at 6.99%, are secured and full recourse, and have a balance of
approximately $1,773,000 as of September 30, 2000. The shareholder has pledged
a total of approximately 301,000 shares of the Company's common stock as
security for these notes and other notes of the shareholder with a combined
balance as of September 30, 2000 of approximately $2,192,000. As of September
30, 2000, the pledged stock had a market value of approximately $2,209,000.
F-22
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions--(continued)
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 his
California residence (the "Guaranty"). The Company's liability under the
Guaranty is capped at $1,000,000. In connection with the Guaranty, Mr. Bildner
had previously pledged to the Company shares of the Company's common stock
owned by him with a fair market value of at least 110% of the Guaranty amount
and agreed to indemnify the Company for any loss, liability or expense
incurred in connection with the Guaranty. Effective June 30, 1999, the Company
amended the pledge agreement with Mr. Bildner such that his pledge to the
Company is set at 126,619 shares of the Company's common stock, which as of
September 30, 2000 had a market value of $930,000. Mr. Bildner continues to
indemnify the Company for any loss, liability or expense incurred in
connection with the Guaranty.
11. Segment and Geographic Areas
Financial information by geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues:
United States................................... $ 69,366 $60,989 $45,286
Australia....................................... 26,452 20,091 7,575
United Kingdom.................................. 13,606 10,896 4,864
-------- ------- -------
Total............................................. $109,424 $91,976 $57,725
======== ======= =======
Income (loss) from operations:
United States................................... $ 2,911 $ 224 $ 4,115
Australia....................................... 371 1,279 852
United Kingdom.................................. 834 (1,174) 827
-------- ------- -------
Total............................................. $ 4,116 $ 329 $ 5,794
======== ======= =======
<CAPTION>
September 30,
-------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Identifiable assets:
United States................................... $ 73,985 $55,629 $60,442
Australia....................................... 21,502 20,772 12,983
United Kingdom.................................. 5,675 7,543 1,078
-------- ------- -------
Total............................................. $101,162 $83,944 $74,503
======== ======= =======
</TABLE>
The United States revenues for the years ended September 30, 1999 and 1998
include revenues from one project with a U.S. company performed in Australia
of approximately $110,000, and $4,165,000, respectively.
F-23
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Segment and Geographic Areas--(continued)
The Company offers its services to clients across all strategic business
units under five broad delivery offering categories: Business Process
Reengineering ("BPR"), Systems Design and Integration ("Systems"), Vertical
Application Service Provider ("Vertical ASP"), Business Process Outsourcing
("BPO") and Systems and Technology Training ("Training"). Revenue contributed
by delivery offering is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
BPR............................................... $ 17,082 $ 2,027 $ 4,864
Systems........................................... 39,761 65,208 43,140
Vertical ASP...................................... 22,415 4,928 --
BPO............................................... 17,826 7,577 8,738
Training.......................................... 9,764 6,309 801
Other............................................. 2,576 5,927 182
-------- ------- -------
Total........................................... $109,424 $91,976 $57,725
======== ======= =======
</TABLE>
Segment Reporting
The Company is managed through four reportable segments: U. S. Commercial
Services, U. S. Government Services, Australian Operations and United Kingdom
Operations. The U. S. Commercial Services segment provides BPR, Systems, BPO
and Training services to Fortune 1000 clients in the United States. The U.S.
Government Services segment provides BPR, Systems, Vertical ASP, BPO and
Training services to federal, state and local government entities in the
United States. The Australian Operations segment provides BPR, Systems, BPO
and Training services to clients in the public and private sectors in
Australia. The United Kingdom Operations segment provides BPR, Systems and BPO
services to clients in the public and private sector in the United Kingdom.
The Company evaluates the performance of its operating segments based on
revenue and gross profit (net revenue less direct costs), while other
operating costs are evaluated on a geographical basis. Accordingly, the
Company does not include selling and marketing expenses, general and
administrative expenses, depreciation and amortization expense not
attributable to payment processing centers, interest income (expense), other
income (expense) and income tax expense in segment profitability. The
accounting policies of the reportable segments are the same as those described
in Note 1. The table below presents financial information for the four
reportable segments:
<TABLE>
<CAPTION>
U.S. U.S. United
Commercial Government Australian Kingdom
Services Services Operations Operations Total
---------- ---------- ---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended September 30,
2000:
Revenues................ $20,031 $49,335 $26,452 $13,606 $109,424
Gross profit............ 8,015 20,366 9,822 4,509 42,712
Year ended September 30,
1999:
Revenues................ 31,515 29,474 20,091 10,896 91,976
Gross profit............ 14,241 10,222 7,923 3,354 35,740
Year ended September 30,
1998:
Revenues................ 25,383 19,903 7,575 4,864 57,725
Gross profit............ 9,225 7,048 2,758 1,421 20,452
</TABLE>
F-24
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Income Taxes
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------
2000 1999 1998
------ ------ ------
(in thousands)
<S> <C> <C> <C>
United States.......................................... $4,864 $1,771 $5,127
Foreign................................................ 151 (121) 1,647
------ ------ ------
Total................................................ $5,015 $1,650 $6,774
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------
2000 1999
------ ------
(in
thousands)
<S> <C> <C>
Deferred tax liabilities..................................... $ 244 $ 222
Deferred tax assets:
Accrued expenses........................................... 700 458
Accrued revenue............................................ 288 423
Depreciation............................................... 143 18
Intangibles................................................ 718 645
Accounts receivable allowance.............................. 80 866
Purchased in-process technology............................ 1,068 1,432
Foreign tax credit carryforward............................ 274 572
Valuation allowance........................................ (274) (572)
------ ------
Total deferred tax assets.................................... 2,997 3,842
------ ------
Net deferred tax assets...................................... $2,753 $3,620
====== ======
</TABLE>
Effective January 1, 1996, the Company changed from the cash to the accrual
method of accounting for income tax purposes. Differences in income tax basis
existing at that date were amortized to taxable income over a four-year
period.
At September 30, 2000, the Company had approximately $274,000 of excess
foreign tax carryforwards for the purpose of offsetting future U.S. Federal
Income Tax. Such foreign tax carryforwards will begin to expire in 2004. The
benefit from the foreign tax carryforwards may be limited in certain
circumstances. The Company believes sufficient uncertainty exists regarding
the realizability of the foreign tax carryforwards such that a full valuation
allowance is required.
F-25
<PAGE>
TIER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Income Taxes--(continued)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................................. $ 686 $3,112 $2,527
State............................................... 156 378 362
Foreign............................................. 988 385 474
------ ------ ------
1,830 3,875 3,363
------ ------ ------
Deferred (benefit):
Federal............................................. 775 (2,891) (645)
State............................................... 91 (340) (76)
------ ------ ------
866 (3,231) (721)
------ ------ ------
Total provision for income taxes...................... $2,696 $ 644 $2,642
====== ====== ======
</TABLE>
The effective tax rate differs from the applicable U.S. statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
U.S statutory federal tax rate....................... 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit.............. 5.0% 4.0% 4.0%
Tax exempt interest income........................... (3.7)% (20.5)% (3.2)%
Tax effect of foreign operations..................... 6.2% 19.6% --
Disposition of foreign subsidiary.................... 9.8% -- --
Other................................................ 2.5% 1.9% 4.2%
------ ------ ------
Effective tax rate................................. 53.8% 39.0% 39.0%
====== ====== ======
</TABLE>
13. Retirement Plan
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating
employees may defer a portion of their pretax earnings up to the Internal
Revenue Service annual contribution limit. The Company's contributions to the
401(k) Plan are discretionary. The Company has not contributed any amounts to
the 401(k) Plan to date.
14. 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 was not proper under the terms of the sub-
contract and that it did not breach the agreement. On June 28, 1999, after a
series of discussions with the prime contractor, the Company filed a federal
civil action against the prime contractor for the amounts the Company was due.
At that time, the Company established a reserve for the entire net receivable
balance of $1,856,000. On August 11, 1999, the Company received the prime
contractor's answer and counterclaim in response to the Company's complaint.
The prime contractor denied the Company's claim and counterclaimed alleging
breach of contract and seeking declaratory relief and damages in excess of $8
million and indemnification for damages, claims, penalties, fines and/or other
sanctions which may be levied in the future by the client of the prime
contractor. On August 18, 2000, the Company and the prime contractor settled
this dispute. The agreed upon terms of this settlement did not have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
F-26
<PAGE>
Page 1 of 1
TIER TECHNOLOGIES, INC.
SCHEDULE II
(in thousands)
<TABLE>
<CAPTION>
Foreign
Balance at Currency Balance at
Beginning Translation End of
of Period Additions Write-offs Adjustment Period
--------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 2000
Allowance for doubtful receivables......... $ 2,285 $ 104 $ (2,162) $ (6) $ 221
Year Ended September 30, 1999
Allowance for doubtful receivables......... 260 2,243 (218) - 2,285
Year Ended September 30, 1998
Allowance for doubtful receivables......... 50 320 (110) - 260
</TABLE>
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Tier Technologies, Inc.
Dated: December 6, 2000 By: /s/ James L. Bildner
-------------------------------------
James L. Bildner
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Bildner and Laura B. DePole, and each
of them, their attorneys-in-fact and agents, each with the power of
substitution, for them in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James L. Bildner Chairman of the Board, Chief December 6, 2000
____________________________________ Executive Officer and
James L. Bildner President (principal
executive officer)
/s/ Laura B. DePole Chief Financial Officer December 6, 2000
____________________________________ (principal financial
Laura B. DePole officer and principal
accounting officer)
/s/ William G. Barton Director December 6, 2000
____________________________________
William G. Barton
/s/ Ronald L. Rossetti Director December 6, 2000
____________________________________
Ronald L. Rossetti
/s/ Samuel Cabot III Director December 6, 2000
____________________________________
Samuel Cabot III
/s/ William Van Faasen Director December 6, 2000
____________________________________
William Van Faasen
/s/ Morgan Guenther Director December 6, 2000
____________________________________
Morgan Guenther
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------- ------------------- ----
<C> <S> <C>
2.1 Business Purchase Agreement dated as of August 1, 1998 by and
between Infact Pty Limited as trustee of the Infact Unit Trust
and Tier Technologies (Australia) Pty Limited (the schedules
and annexures to the Business Purchase Agreement have been
omitted as permitted by the rules and regulations of the
Securities and Exchange Commission (SEC) but will be provided
supplementally to the SEC upon request) (1)....................
2.2 First Amendment to Business Purchase Agreement dated as of
September 30, 1998 by and between Infact Pty Limited, as
trustee of the Infact Unit Trust and Tier Technologies
(Australia) Pty Limited (14)...................................
3.1 Amended and Restated Articles of Incorporation (14)............
3.2 Amended and Restated Bylaws (2)................................
4.1 Form of Class B Common Stock Certificate (3)...................
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Class B Common Stock of the Registrant.........................
10.1 Amended and Restated 1996 Equity Incentive Plan, dated January
28, 1999 (11)*.................................................
10.2 Second Amended and Restated Employment Agreement by and between
the Registrant and James L. Bildner, dated as of February 16,
1998 (4)*
10.3 Second Amended and Restated Employment Agreement by and between
the Registrant and William G. Barton, dated as of February 16,
1998 (4)*......................................................
10.4 Investors' Rights Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*..........................
10.5 Stock Purchase Agreement by and among the Registrant and
holders of the Registrant's Series A Convertible Preferred
Stock, dated as of July 28, 1997 (3)*..........................
10.6 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of December 31, 1996 (3)............
10.7 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of January 2, 1997 (3)..............
10.8 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of May 31, 1997 (3).................
10.9 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of May 31, 1997 (3).................
10.10 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of July 15, 1997 (3)................
10.11 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4).......................................
10.12 Amended and Restated Full Recourse Secured Promissory Note,
dated as of April 1, 1998, and Amended and Restated Pledge
Agreement dated April 1, 1998, by and between the Registrant
and James L. Bildner (4).......................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------- ------------------- ----
<C> <S> <C>
10.15 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of February 28, 1997 (3)...........
10.16 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of July 15, 1997 (3)...............
10.17 Full Recourse Promissory Note by and between the Registrant and
F. Thomas Latham, dated as of July 15, 1997 (3)................
10.18 Amended and Restated Employment Agreement by and between the
Registrant and George K. Ross, dated as of February 16, 1998
(4)*...........................................................
10.19 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 3, 1997 (3)...............
10.20 Office Lease by and between Urban West Business Park, Colony MB
Partners, L.P., as Landlord, and Tier Corporation, a California
Corporation, as Tenant, as amended July 29, 1997 (3)...........
10.21 Form of Indemnification Agreement (3)..........................
10.22 Tier Corporation 401(k) Plan, Summary Plan Description (18)....
10.23 Asset Purchase Agreement by and among the Registrant, Encore
Consulting LLC, David M. Beman, Thomas E. McLeod and Robert
Myers, dated as of December 31, 1996 (3).......................
10.24 Asset Purchase Agreement by and among the Registrant,
Albanycrest Limited, a Limited Liability Company Incorporated
in England, and Andrew David Armstrong, Thomas Thomson and
Howard Moore, dated as of July 11, 1997 (3)....................
10.25 Agreement for provision of consulting services by and between
the Registrant and Kaiser Foundation Health Plan, Inc. (3).....
10.26 Agreement for provision of consulting services by and between
the Registrant and the State of Missouri (3)...................
10.27 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Arizona) (3)............
10.28 Agreement for provision of consulting services by and between
the Registrant and Unisys Corporation (Australia) (3)..........
10.29 Employee Stock Purchase Plan (2)*..............................
10.30 Voting Trust Agreement (3).....................................
10.31 Form of Buy-Sell Agreement between James L. Bildner and William
G. Barton (2)..................................................
10.32 Business Purchase Agreement by and among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited, dated as of
February 26, 1998 (5)..........................................
10.33 Amendment of Business Purchase Agreement, among Sancha Computer
Services Pty Limited, Sancha Software Development Pty Limited
and Tier Technologies (Australia) Pty Limited, dated as of
March 20, 1998 (5).............................................
10.34 Revolving Credit Agreement by and between the Registrant, Tier
Technologies (United Kingdom) Inc. and BankBoston, N.A. (4)....
10.35 Agreement for provision of consulting services by and between
the Registrant and Humana, Inc. (4)............................
10.36 Full Recourse Promissory Note by and between the Registrant and
George K. Ross, dated as of February 10, 1998 (4)..............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------- ------------------- ----
<C> <S> <C>
10.37 Full Recourse Promissory Note by and between the Registrant and
James R. Weaver, dated as of May 22, 1998 (6)..................
10.38 Full Recourse Promissory Note by and between the Registrant and
James R. Weaver, dated as of May 22, 1998 (6)..................
10.39 Amended Agreement by and between the Registrant and the State
of Missouri, dated August 3, 1998 (14).........................
10.40 Amended and Restated Pledge Agreement and Promissory Note by
and between Registrant and William G. Barton (14)..............
10.41 Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (14)..........................................
10.42 Second Amendment to Revolving Credit Agreement by and among the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (14)..........................................
10.43 Guaranty Agreement by the Registrant in favor of NationsBank,
N.A. with respect to a promissory note made by James L. and
Nancy J. Bildner, dated as of December 22, 1998 (9)............
10.44 Indemnification Agreement, dated December 22, 1998, by and
between the Registrant and James L. and Nancy J. Bildner (9)...
10.45 Pledge Agreement dated as of December 22, 1998, by and between
the Registrant and James L. Bildner (9)........................
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 (10)..................
10.48 Agreement for provision of consulting services by and between
the Registrant and the State of New Jersey, division of Family
Development (11)...............................................
10.49 Asset Purchase Agreement dated as of May 17, 1999 by and
between the Registrant and Humana, Inc. (12)...................
10.50 End User Agreement dated as of May 17, 1999 between the
Registrant and Humana, Inc. (12)...............................
10.51 End User Agreement dated as of May 19, 1999 between the
Registrant and Humana, Inc. (12)...............................
10.52 Amended and Restated Pledge Agreement, dated as of June 30,
1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
10.53 Second Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
10.54 Third Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and James L. Bildner.
(13)...........................................................
10.55 Third Amended and Restated Pledge Agreement, dated as of June
30, 1999, by and between the Registrant and William G. Barton.
(13)...........................................................
10.56 Amended and Restated Revolving Credit Agreement, dated as of
May 28, 1999, by and between the Registrant, Tier Technologies
(United Kingdom) and BankBoston, N.A. (13).....................
10.57 First Amendment to Amended and Restated Revolving Credit
Agreement, dated as of June 30, 1999, by and between the
Registrant, Tier Technologies (United Kingdom), Inc. and
BankBoston, N.A. (13)..........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------- ------------------- ----
<C> <S> <C>
10.58 Standard Services Contract Agreement, dated as of June 1, 1999,
by and between the Registrant and the Maryland Department of
Human Resources. (13)............................................
10.59 Contract, dated as of May 27, 1999, by and between the Registrant
and the State of Tennessee Department of Human Services. (13)....
10.60 Contract for Goods and/or Services, dated August 10, 1999, by and
between the Registrant and the Government of the District of
Columbia. (15)...................................................
10.61 Alliance Agreement in Support of Project Uxbridge dated September
1, 1999, by and between Tier Technologies (United Kingdom) Inc.
and Siemens Business Services Limited. (15)......................
10.62 Second Amendment to Amended and Restated Revolving Credit
Agreement, dated as of September 30, 1999, by and between the
Registrant, Tier Technologies (United Kingdom) Inc. and
BankBoston, N.A. (15)............................................
10.63 Employment Agreement by and between the Registrant and James R.
Weaver, dated April 19, 1999. (15)*..............................
10.64 Separation Agreement by and between the Registrant and George K.
Ross, dated as of January 21, 2000. (16)*........................
10.65 Full Recourse Promissory Note by and between the Registrant and
William G. Barton, dated as of January 24, 2000. (16)............
10.66 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.17 to Form S-1). (16).............
10.67 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.18 to Form S-1). (16).............
10.68 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of March 27, 2000. (Assignment of the
Note by and between the Registrant and William G. Barton,
previously filed as Exhibit 10.19 to Form S-1). (16).............
10.69 Pledge Agreement by and between the Registrant and James L.
Bildner, dated as of March 27, 2000. (16)........................
10.70 Third Amendment to Amended and Restated Revolving Credit
Agreement, dated as of March 31, 2000, by and between the
Registrant, Tier Technologies (United Kingdom) Inc. and
BankBoston, NA. (16).............................................
10.71 Separation Agreement by and between the Registrant and William G.
Barton, dated as of April 14, 2000. (17)*........................
10.72 Fourth Amendment to Amended and Restated Revolving Credit
Agreement, dated as of May 15, 2000, by and between the
Registrant, Tier Technologies (United Kingdom) Inc. and Bank
Boston, N.A. (17)................................................
10.73 Full Recourse Promissory Note by and between the Registrant and
James L. Bildner, dated as of July 26, 2000......................
10.74 Credit Agreement dated as of August 25, 2000 by and between the
Registrant and Imperial Bank.....................................
10.75 Full Recourse Promissory Note by and between the Registrant and
James Weaver, dated as of September 18, 2000.....................
16.1 Letter re: change in certifying accountant (7)...................
21.1 Subsidiaries of the Registrant...................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------- ------------------- ----
<C> <S> <C>
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants....................................................
27.1 Financial Data Schedule........................................
</TABLE>
--------
* Management contract or compensatory plan required to be filed as an
exhibit to this report.
(1) Filed as an exhibit to the Current Report on Form 8-K, filed August 21,
1998, and incorporated herein by reference.
(2) Filed as an exhibit to Form S-1/A No. 333-37661), filed on November 17,
1997, and incorporated herein by reference.
(3) Filed as an exhibit to Form S-1 (No. 333-37661), filed on October 10,
1997, and incorporated herein by reference.
(4) Filed as an exhibit to Form S-1/A (No. 333-52065), filed on May 7, 1998,
and incorporated herein by reference.
(5) Filed as an exhibit to the Current Report on Form 8-K, filed March 27,
1998, and incorporated herein by reference.
(6) Filed as an exhibit to Form 10-Q, filed August 14, 1998, and incorporated
herein by reference.
(7) Filed as an exhibit to the Current Report on Form 8-K, filed July 27,
1998, and incorporated herein by reference.
(8) Filed as Schedule A to Schedule 14C Information, filed November 6, 1998,
and incorporated herein by reference.
(9) Filed as an exhibit to Form 10-Q, filed February 12, 1999, and
incorporated herein by reference.
(10) Filed as an exhibit to the Current Report on Form 8-K, filed December 17,
1998, and incorporated herein by reference.
(11) Filed as an exhibit to Form 10-Q, filed May 13, 1999, and incorporated
herein by reference.
(12) Filed as an exhibit to the Current Report on Form 8-K, filed June 16,
1999, and incorporated herein by reference.
(13) Filed as an exhibit to Form 10-Q, filed August 13, 1999, and incorporated
herein by reference.
(14) Filed as an exhibit to Form 10-K, filed December 21, 1998, and
incorporated herein by reference.
(15) Filed as an exhibit to Form 10-K, filed December 10, 1999, and
incorporated herein by reference.
(16) Filed as an exhibit to Form 10-Q, filed May 15, 2000, and incorporated
herein by reference.
(17) Filed as an exhibit to Form 10-Q, filed August 11, 2000, and incorporated
herein by reference.
(18) Filed as an exhibit to Form S-8 (No. 333-42082), filed on July 24, 2000,
and incorporated herein by reference.
