-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MgwC60xMji3Du0gBbUUvxB9j2tngXhp33zbugrAU8Vx4Ng85FBiUI65KkLBSJRgZ hJLKY6Q9FepGWbgNBnS9gA== 0000929624-99-002085.txt : 19991213 0000929624-99-002085.hdr.sgml : 19991213 ACCESSION NUMBER: 0000929624-99-002085 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIER TECHNOLOGIES INC CENTRAL INDEX KEY: 0001045150 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 943145844 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23195 FILM NUMBER: 99772890 BUSINESS ADDRESS: STREET 1: 1350 TREAT BLVD STREET 2: SUITE 250 CITY: WALNUT CREEK STATE: CA ZIP: 94596 BUSINESS PHONE: 9259373950 MAIL ADDRESS: STREET 1: 1350 TREAT BLVD STREET 2: STE 250 CITY: WALNUT CREEK STATE: CA ZIP: 94596 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- (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, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- Commission file number 000-23195 TIER TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) ---------------- California 94-3145844 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 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. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $78,036,091 on December 3, 1999 based on the last reported sale price of the registrant's Class B Common Stock on the Nasdaq National Market on such date. As of December 3, 1999, the number of shares outstanding of the registrant's Class A Common Stock was 1,639,762 and the number of shares outstanding of the registrant's Class B Common Stock was 10,845,173. ---------------- 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, 1999. Portions of such proxy statement are incorporated by reference into Part III of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TIER TECHNOLOGIES, INC. FORM 10-K TABLE OF CONTENTS
PART I Page ------ ---- 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 PART II ------- 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.... 28 Item 8. Financial Statements and Supplementary Data................... 29 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................................... 29 PART III -------- Item 10. Directors and Executive Officers of the Registrant............ 30 Item 11. Executive Compensation........................................ 30 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................... 30 Item 13. Certain Relationships and Related Transactions................ 30 PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................... 30 SIGNATURES
Private Securities Litigation Reform Act Safe Harbor Statement Certain statements contained in this report, including statements regarding the development of the Company's services, markets and future demand for the Company's services, and other statements regarding matters that are not historical facts, are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). When used in this report, the words "believes", "expects", "anticipates", "intends", "estimates", "shows", "will likely" and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include risks and uncertainties; consequently, actual results may differ materially from those expressed or implied thereby. Factors that could cause actual results to differ materially include, but are not limited to, those factors listed in the "Factors That May Affect Future Results" section, as set forth beginning on page 22 of this report. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements or factors to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. 2 PART I Item 1. Business General Tier Technologies, Inc. ("Tier" or the "Company") provides information technology ("IT") consulting, application development, software engineering, training and business process outsourcing services that facilitate the transformation of clients' enterprise-wide legacy systems and applications to leading edge technologies. Tier provides IT migration solutions by applying the Tier Migration SolutionSM, a methodology by which the Company evaluates or "scores" the efficacy of a client's existing imbedded IT capital against its business goals. Tier has branded its Migration Solution around such themes as: "How do you fix the machine without turning it off?"SM and "Taking the risk out of change."SM Through offices located in the United States, Australia and the United Kingdom, the Company works closely with its Fortune 1000, government and other clients to determine, evaluate and implement an IT strategy that allows it to rapidly adopt, deploy and transfer emerging technologies while preserving viable elements of the client's legacy systems. Tier combines significant understanding of enterprise-wide IT systems with expertise in vertical industries such as healthcare, financial services and government services to provide clients with rapid and flexible migration solutions. By helping clients maintain their core IT systems, Tier believes that it provides high value, cost-effective, flexible solutions that minimize the risks associated with migration to new technologies. Tier was incorporated in the State of California in 1991. From December 1996 through September 30, 1999, the Company made twelve acquisitions for a total purchase price of approximately $26.7 million in cash and shares of Class B Common Stock, excluding future contingent payments. The Company also incurred $1.8 million in compensation charges related to business combinations resulting from these acquisitions. 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, service offerings and technical expertise and to supplement its human resources. See Note 8 to Notes to Consolidated Financial Statements. Background Today, large corporations and government agencies often face a number of challenges, including a rapidly changing operating environment, intense competitive pressures and accelerating technological change. To adapt to change and remain competitive, these organizations have sought to harness their intellectual and informational capital by investing in advanced IT systems. As these organizations have become increasingly dependent on more complex IT systems, their ability to integrate advanced technologies in a rapid, reliable and cost-effective manner has become critical to their success. The migration of enterprise-wide IT systems, which is the process of incrementally supplementing and replacing legacy IT system components to integrate advanced technologies, has become a key competitive strategy. This process enables an organization to preserve the imbedded capital in its installed base of IT systems, to obtain the benefits of technological innovations and to mitigate some of the risks, costs and delays inherent in full system replacements. Migration provides organizations with an important alternative to the traditional limits of a "buy versus build" analysis. Several forces are driving the increased use of rapid migration strategies. As a result of the increasing pace of technological change along with rapid changes in competitive and business environments, the useful lives of new technologies have tended to shorten dramatically. To capture more of the benefits of these technologies, IT projects must be designed and completed relatively quickly or they risk being out of date upon completion. Organizations are re-using existing IT components both to preserve the significant imbedded capital represented by those systems and to achieve new functionality. For example, mainframe computers are now being used as high volume servers in distributed computing environments because of their data storage capacity and transaction processing speeds. As the length and scope of an IT project expands, so too does the likelihood that the project will fail to satisfy time, cost or functionality expectations. Consequently, organizations seek high-impact IT solutions that can be implemented quickly. 3 Given the complex and mission-critical nature of IT systems, many organizations choose to outsource the development and eventual migration of these systems to new technologies. The Company believes that successful IT service providers will be characterized by: . significant experience in the migration of enterprise-wide IT systems; . an ability to adopt, deploy and transfer relevant, emerging technologies rapidly and reliably; . an understanding of the client's industry, business and existing IT environments; . successful management of the risks inherent in large system projects; and . the ability to deliver services on a global basis. The Tier Migration Solution The Tier Migration Solution is generally applied to all of the Company's projects. Initially, the Company assesses a client's existing business processes and clearly defines the scope of the project, including a determination of the client's expectations for quantifiable business improvement. The Company then analyzes the client's existing IT system to determine which areas would benefit the most from the application of new technologies. When this assessment is completed, Tier develops a specific IT strategy that uses a system architecture consistent with the client's existing environment and takes advantage of new technologies. Tier then implements the recommended IT strategy. Throughout all phases, the Company evaluates the risks inherent in the project. If the Company detects areas of concern, it investigates the matter at an early stage and takes appropriate corrective action to mitigate potential costs and delays. The Tier Migration Solution seeks to "take the risk out of change."SM Strategy The Company seeks to become the leading provider of comprehensive IT migration solutions to Fortune 1000 companies and large government entities. The Company's strategy includes the following elements: Expertise in Key Vertical Markets. The Company intends to increase its client base and leverage its expertise by focusing its sales, marketing and development efforts on high-value opportunities in certain vertical markets, such as government services, healthcare, financial services and insurance services. Within those markets, Tier has developed expertise in areas such as child welfare services, child support services and procurement processes. The Company believes that large organizations with intensive information processing needs provide the best near-term market opportunities for the Company's services. Concentrate on Migration Opportunities. The Company focuses on the migration of enterprise-wide IT systems to leading edge technologies for Fortune 1000 companies and large government entities. The Company maintains proficiency in relevant mainstream and legacy technologies, while also developing expertise in high demand, emerging technologies that are expected to facilitate the Company's development and deployment of IT solutions. This strategy allows Tier to function effectively in open architecture IT environments and to rapidly adopt, deploy and transfer emerging technologies within existing IT systems. Pursue Strategic Acquisitions. Tier considers potential acquisitions which may expand the Company's presence in key geographic or vertical marketplaces, supplement the Company's technical scope or industry expertise or allow it to acquire additional human resources or strategic client relationships. Given the highly fragmented nature of the IT services marketplace, the Company believes significant acquisition opportunities exist. From December 1996 through September 30, 1999, Tier has acquired twelve IT service providers in order to add domestic and international locations, broaden the Company's technical expertise and expand its professional resources. Expand Geographic Presence. The Company intends to expand its operations by opening additional offices in targeted domestic and international locations to augment its current operations in the United States, 4 Australia and the United Kingdom. Tier integrates domestic and multi-national resources to deliver timely, cost-effective IT solutions on a local level. By expanding its geographic presence, the Company has increased its access to international labor markets and is able to compete more effectively for highly skilled employees who have particular geographic preferences. The Company believes that the local delivery of services is a significant differentiating factor among IT service providers. Actively Brand the Tier Migration Solution. The Company intends to continue to develop market recognition and acceptance of the Company's services by branding the Tier Migration Solution. Tier believes it has differentiated and sold the Company's Migration Solution with the Tier logo and themes such as "How do you fix the machine without turning it off?"SM and "Taking the risk out of change."SM Company believes that significant opportunity exists to develop brand recognition and loyalty. Attract and Retain Highly Skilled Employees. The Company maintains programs and personnel to identify, hire, train and retain highly skilled IT professionals because it believes these professionals are a critical element in its ability to deliver high quality services to clients. The Company (1) offers competitive compensation and benefits including stock option and other stock-based awards; (2) has developed a career advancement program that offers employees career enrichment opportunities, technical training opportunities, and on-the-job learning opportunities; and (3) has developed centralized work sites or "application development centers" where consultants work on projects for clients located throughout the country, thus reducing the need for travel by consultants. Develop Strategic Partnerships. The Company develops strategic partnerships with service and technology providers pursuant to which Tier jointly bids and performs certain engagements. The Company believes these relationships provide a number of competitive advantages, including (i) enabling the Company to broaden its client base; (ii) allowing the Company to project its staffing needs and more fully maximize employee utilization; and (iii) maintaining the Company's technological leadership through the deployment of leading edge applications. Services and Methodology The Company provides IT consulting, application development and software engineering services that facilitate the migration of its clients' existing IT systems to leading edge technologies. These services are typically provided on an enterprise-wide basis. Tier's methodology for providing migration services combines the ability to evaluate or "score" the efficacy of the client's imbedded IT capital in comparison to its stated business goals, with a risk assessment process to manage and benchmark projects on an on-going basis. Tier maintains a high level of vertical market and industry expertise. As a result, the Company is able to understand the environment and business rules in which its clients operate. This approach allows Tier to retain, reuse, repeat and distribute its experiential knowledge throughout the Company and to achieve significant improvements in cost, quality and time to deployment on client projects. Services The Company seeks to rapidly implement cost-effective IT solutions through a flexible combination of one or more of the following services: Repeatable Transfer Solution. In some situations, the Company identifies existing, transferable IT applications or components that satisfy a portion of the client's needs. Tier addresses the client's remaining functional elements through either custom built applications or packaged software. Transfer solutions greatly shorten the development cycle by providing a working system as the starting point for the IT solution. For example, between government agencies, the Company has successfully transferred components of IT systems that it has built to solve complex child support and welfare requirements. Custom Build. The Company often custom builds an IT solution or component for the client. Even in a custom build solution, the Company's consultants strive to re-use components of a client's legacy environment 5 and to extract, update, and forward engineer business rules from legacy programs. The Company has developed custom applications in several vertical markets, including healthcare, financial services, government services and telecommunications, using advanced languages such as Java, Forte, PowerBuilder and COOL:Gen. The Company's technical professionals have implemented custom applications on a variety of platforms and working environments, such as mainframe, Windows NT, UNIX and other distributed platforms, using a number of databases, including Oracle, Sybase, DB2, SQL Server and Informix. Tier has also developed Internet/intranet, data warehouse, web-enabled legacy and e- commerce applications, as well as applications in the more established mainframe and client/server environments. Packaged Software. When the most appropriate solution for a client includes a commercially available application package, the Company evaluates, recommends, implements and integrates applications software. The Company has developed expertise with commercial applications in areas such as operations resource management, e-commerce and procurement. Methodology The Company has developed the Tier Migration Solution over numerous client engagements and relies on this methodology to provide services in various industries and technical environments. The four-phase scaleable, repeatable and leverageable methodology is modular in design and the various phases can be tailored depending on the scope of a client's needs. Phase I--Business Assessment and Scoping. The Company establishes the scope of each project and determines expectations for quantifiable business improvement. The Company assesses the client's current business processes, identifies improvement opportunities and inventories the existing IT applications and systems. Tier consultants bring industry and technical expertise to each engagement and employ current business engineering techniques, such as workflow analysis, process mapping, use-case analysis and business rules definition. Typically, Tier consultants interview key management personnel, lead group discussions, conduct workshops, review existing business process documentation and inventory the existing application portfolio. The work product is usually a business requirements and scope document that provides a clear charter for the project and a risk management assessment map to measure project performance throughout the project's life cycle. Phase II--Application Effectiveness Scoring. The Company develops a technology portfolio analysis to determine how best to leverage the client's capital investment in its existing IT system. Generally, Tier conducts an in- depth analysis of the existing IT application portfolio using a qualitative method of "scoring" to determine which areas would benefit most from the application of new technologies. The resulting matrix correlates the client's business functions with the most suitable IT solution. Once agreed to by the client, the application scoring matrix becomes a roadmap to assist in determining whether to replace or re-use components of the client's existing IT system. Phase III--IT Strategy, Architecture and Prototyping. The Company develops a specific IT migration strategy to address the development, transfer or acquisition of new IT solutions and their integration into the client's existing business environment. Tier may model critical business rules to test the underlying assumptions of the IT migration solution and often prepares an early look-and-feel prototype to allow the user to visualize the resulting integrated IT environment. Ultimately, Tier provides clients with a defined IT architecture designed to meet the client's expectations specified at the beginning of the engagement. Phase IV--Information Technology Implementation. Tier implements the IT solution. The Company employs rapid IT processes and incorporates the Company's collective experience in managing enterprise-wide IT projects in areas such as packaged software implementation, custom software development, quality assurance and testing, systems integration, client testing and acceptance, implementation and help desk support. The output of this final phase is an implemented IT solution set. Following installation, the Company and the client may conduct a post-project assessment to evaluate the effectiveness of the new IT solution against the business improvement goals established in Phase I. In addition, the Company often provides post- implementation services, 6 such as on-going software maintenance and enhancements, help desk support and training of end users and in-house IT staff. Across all four phases of its methodology, Tier employs a comprehensive risk management process. The Company believes that its emphasis on risk management is a critical component of its methodology, particularly in a market that increasingly demands service providers to undertake large scale projects while maintaining a high success rate. Using the risk management assessment map developed in Phase I of Tier's Migration Solution, the Company evaluates projects on a periodic basis against a checklist of risk factors which determines the frequency of intervention and review required. The Company typically focuses on the following risk factors: size of revenue and credit exposure to the Company, number of resources employed, progress against defined project milestones, clarity of user expectations, definition of project scope, use of new technology, effectiveness of project management personnel and other quantitative and qualitative measures as may be appropriate to a particular project. If the Company detects areas of concern, it investigates the matter at an early stage and takes appropriate corrective action to mitigate potential costs and delays. Sales and Marketing The Company markets and sells its services through a direct sales force. As of September 30, 1999, Tier had a sales and marketing staff of 49. In addition, the Company's senior management is closely involved in a significant portion of the Company's sales and marketing activities. Most of the Company's sales professionals have extensive work experience in the IT industry, often as strategic IT consultants or managers. In order to more clearly define the delivery of its services and to reflect the needs of its clients, the Company has organized its sales and marketing effort into three strategic business units ("SBUs"): Commercial Services, which targets healthcare, financial services, insurance services, telecommunications and other commercial markets; Government Services, which targets the fast-growing health and human services and state strategic IT markets; and International Services, which targets the country specific needs of Australia and the United Kingdom. The Company's focus on the vertical markets defined by these SBUs broadens its knowledge and expertise in these selected industries and generates additional client engagements. As a result of its focused sales channel approach, the Company believes that it is able to penetrate markets quickly and with lower sales acquisition costs. The sales team derives leads through (i) industry networking and referrals from existing clients; (ii) government requests for proposals; (iii) strategic partnerships with third parties under which the Company jointly bids and performs certain engagements; (iv) directed sales activities identified by other strategic business units within the Company; and (v) a national marketing program. The Company believes that its use of these multiple sales and marketing activities results in a shorter sales cycle than generally experienced by other providers. The Company's marketing program includes targeted software industry trade shows; joint marketing through strategic partnership arrangements; participation in user groups; provision of speakers to technology conferences; publication of white papers, articles and direct client newsletters; and distribution of marketing materials and public relations announcements. Clients The Company's clients consist primarily of Fortune 1000 companies with information-intensive businesses and government entities with large volume information and technology needs. Tier's sales and marketing objective is to develop relationships with clients that result in both repeat and long-term engagements. Tier has derived, and believes that it will continue to derive, a significant portion of its revenues from a small number of large clients, many of which engage the Company on a number of projects. For the twelve months ended September 30, 1999, Humana Inc. and the State of Missouri accounted for 27.4% and 13.0% of the Company's revenues, respectively. Most of our contracts can be terminated by the client with little or no 7 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. In its Government Services SBU, the Company sometimes obtains project engagements through prime contractors. The Company believes that it has been able to secure large, complex government projects with low acquisition costs by capitalizing on the reputation, marketing infrastructure and government relationships of these prime contractors, while at the same time allowing the prime contractors to leverage Tier's IT competency in their bid proposals. For the fiscal year ended September 30, 1999, approximately 37.9% 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 available for government agencies to purchase IT services could have a material adverse effect on Tier's business, financial condition and results of operations. Until fiscal 1997, Company revenues were generated primarily through Tier's domestic operations. For the fiscal year ended September 30, 1999, international operations accounted for 33.7% of the Company's total revenues. See Note 10 to Notes to Consolidated Financial Statements. The Company believes that the percentage of total revenues attributable to international operations will continue to be significant and may continue to grow. Human Resources Tier's approach to managing human resources has allowed the Company to meet its staffing needs while also achieving what the Company believes to be a low level of employee turnover. As of September 30, 1999, the Company had a workforce of 780, including 509 IT consultants of which 316 were salaried employees, 37 were hourly employees and 156 were independent or sub- contractors. The workforce also includes 116 payment processors, 49 sales and marketing employees and 106 general and administrative employees. Of the Company's total workforce as of September 30, 1999, 65.0%, 27.6% and 7.4% were located in the United States, Australia and the United Kingdom, respectively. The Company employs a Senior Vice President of Human Resources Management and several recruiters who pursue a three level employee-sourcing strategy. The primary sources include employee referrals, job fairs, Internet job postings and direct recruiting. Tier also has established national and international sources through preferred-rate partnerships with recruiting suppliers. If peak staffing demand exceeds these resources, the Company engages recruiting agencies on a contingent basis at market rates. Given the rapid pace of technological evolution, Tier recognizes that skill obsolescence is a fundamental concern for IT professionals. Tier attracts and retains employees by offering technical training opportunities including an intensive training program for new entry-level employees, a stock option award program and a competitive benefits and compensation package. 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 his or her compensation. In addition, the Company has developed centralized work sites or "application development centers" where consultants work on projects for clients located throughout the country, thus reducing the need for travel by consultants. The Company believes that there is a shortage of, and significant competition for, IT professionals and that its future success is highly dependent upon its ability to attract, train, motivate and retain skilled IT consultants with the advanced technical skills necessary to perform the services offered by the Company. Competition The IT services market is highly competitive and is served by numerous international, national and local firms. Market participants include systems consulting and integration firms, including national accounting firms and related entities, the internal information systems groups of its prospective clients, professional services companies, hardware and application software vendors, and divisions of large integrated technology companies 8 and outsourcing companies. Many of these competitors have significantly greater financial, technical and marketing resources, generate greater revenues and have greater name recognition than the Company. In addition, there are relatively low barriers to entry into the IT services market, and the Company has faced, and expects to continue to face, additional competition from new entrants into the IT services market. The Company believes that the principal competitive factors in the IT services market include reputation, project management expertise, industry expertise, speed of development and implementation, technical expertise, competitive pricing and the ability to deliver results on a fixed price as well as a time and materials basis. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its clients or competitors to hire, retain and motivate project managers and other senior technical staff; the ownership by competitors of software used by potential clients; the price at which others offer comparable services; the ability of its clients to perform the services themselves; and the extent of its competitors' responsiveness to client needs. There can be no assurance that the Company will be able to compete effectively on pricing or other requirements with current and future competitors or that competitive pressures will not cause the Company's revenues or income to decline or otherwise materially adversely affect its business, financial condition and results of operations. Intellectual Property Rights Tier's success has resulted, in part, from its methodologies and other intellectual property rights. The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company enters into confidentiality agreements with its employees and with many of its consultants and clients, and limits distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter the misappropriation of proprietary information or that the Company will be able to detect unauthorized use of this information and take appropriate steps to enforce its intellectual property rights. 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. Executive Officers of the Registrant The following persons were executive officers of the Company as of December 3, 1999:
Name Age Position with the Company ---- --- ----------------------------------------- James L. Bildner............... 45 Chairman of the Board and Chief Executive Officer William G. Barton.............. 43 President, Chief Technology Officer and Director George K. Ross................. 58 Executive Vice President, Chief Financial Officer, Secretary, Treasurer and Director James Weaver................... 42 President, Government Services Division Stephen McCarty................ 46 Senior Vice President, Human Resources Management Laura B. DePole................ 35 Senior Vice President, Finance and Chief Accounting Officer David Laidlaw.................. 58 President, International Operations
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 received an A.B. from Dartmouth College and a J.D. from Case Western Reserve School of Law. 9 Mr. Barton, one of the initial founders of the Company, has served as Chief Technology Officer since February 1998 and as President and a Director since 1991. From 1991 until February 1998, he also served as Chief Operating Officer of the Company. He received a B.S. in Business Administration and Management from the University of Phoenix and a Presidential/Key Executive MBA from Pepperdine University. Mr. Ross has been a Director of the Company since January 1996, has served as Executive Vice President since 1998, has served as Chief Financial Officer since February 1997 and has served as Secretary and Treasurer since July 1998. From February 1997 until April 1998, Mr. Ross also served as Senior Vice President. From September 1992 to January 1997, Mr. Ross was a partner at Capital Partners, a private equity investment firm. Mr. Ross received a B.A. from Ohio Wesleyan University and an MBA from Ohio State University. Mr. Ross is a Certified Public Accountant. Mr. Ross is not seeking re-election to the Company's Board of Directors at the Annual Meeting of Shareholders on January 11, 2000. In addition, effective as of the date of the Annual Meeting, Mr. Ross will resign as Chief Financial Officer, Secretary and Treasurer of the Company. Mr. Ross will retain the position of Executive Vice President of Business Affairs. Mr. Weaver joined Tier as President, Government Services Division in May 1998. From June 1997 until May 1998, Mr. Weaver served as Vice President, Government Solutions of BDM International, Inc., an information technology company, where he was responsible for SBU strategic planning, policy and procedure development, client base expansion and overall business planning and development. From March 1995 until June 1997, he served as National Program Director, Public Sector for Unisys Corporation, an 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, Finance since April 1999 and Chief Accounting Officer since August 1997. 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. Effective as of the Company's Annual Meeting of Shareholders to be held on January 11, 2000, the Board of Directors has elected Ms. DePole to serve as Chief Financial Officer, Secretary and Treasurer of the Company. 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. 10 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 . Arizona; . Missouri; . Georgia; . New Jersey; . Idaho; . New York; . Illinois; . Tennessee; . Indiana; . Australia; and . Kentucky; . United Kingdom
Tier anticipates that additional space will be required during fiscal 2000 as its business expands and believes that it will be able to obtain suitable space as needed. Item 3. Legal Proceedings 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 has not breached the agreement. On June 28, 1999, the Company filed a civil action (Tier Technologies, Inc. v. Unisys Corporation) in the United States District Court for the Northern District of California seeking money damages in excess of $2 million and a declaration that the Company has performed its duties and obligations under the agreement, that it has no further obligations under the agreement, and that the prime contractor is obligated to pay the Company all amounts outstanding under the agreement. 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. The prime contractor is also seeking 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. The Company denies the prime contractor's allegations and intends to vigorously pursue its own claim against the prime contractor. The parties to the action have commenced voluntary discovery. 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, 1999. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Class B Common Stock is traded on the Nasdaq National Market under the symbol "TIER." The following table sets forth for the quarterly periods indicated the range of high and low sales prices for the Company's Class B Common Stock since its initial public offering effective as of December 17, 1997:
Fiscal 1999 Fiscal 1998 ------------ ------------ High Low High Low ------ ----- ------ ----- First Quarter................................... $17.50 $5.56 $10.75 $8.50* Second Quarter.................................. 20.00 7.88 18.13 8.88 Third Quarter................................... 9.56 5.06 23.25 14.25 Fourth Quarter.................................. 8.59 6.41 20.50 12.13
-------- * Initial public offering price per share. The Company has never declared or paid cash dividends on its Common Stock. The Company's credit facility contains restrictions on the Company's ability to pay cash dividends. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. As of December 3, 1999, there were approximately 334 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 Item 6. Selected Financial Data The following table summarizes selected consolidated financial data of the Company:
Year Ended Twelve-Month Nine-Month Nine-Month Year Ended September 30, Period Ended Period Ended Period Ended December 31, ---------------- September 30, September 30, September 30, --------------- 1999 1998 1997 1997(1) 1996 1996 1995 ------- ------- ------------- ------------- ------------- ------- ------- (unaudited) (unaudited) (in thousands, except per share data) Consolidated Statement of Income Data: Revenues................ $91,976 $57,725 $26,885 $22,479 $11,790 $16,197 $12,373 Cost of revenues........ 56,236 37,273 17,864 14,917 8,669 11,616 9,066 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 35,740 20,452 9,021 7,562 3,121 4,581 3,307 Costs and expenses: Selling and marketing.. 6,095 3,009 2,234 1,836 577 975 627 General and administrative........ 18,988 9,743 5,197 4,397 1,774 2,574 1,560 Compensation charge related to business combinations.......... 608 737 469 470 -- -- -- Purchased in-process technology............ 4,000 -- -- -- -- -- -- Reserve for contract dispute............... 1,856 -- -- -- -- -- -- Depreciation and amortization.......... 3,864 1,169 283 259 56 80 45 ------- ------- ------- ------- ------- ------- ------- Income from operations.. 329 5,794 838 600 714 952 1,075 Interest (income) and expense, net........... (1,321) (980) 123 99 50 74 61 ------- ------- ------- ------- ------- ------- ------- Income before income taxes.................. 1,650 6,774 715 501 664 878 1,014 Provision for income taxes.................. 644 2,642 287 201 266 351 570 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 1,006 $ 4,132 $ 428 $ 300 $ 398 $ 527 $ 444 ======= ======= ======= ======= ======= ======= ======= Basic net income per share(2)............... $ 0.08 $ 0.45 $ 0.11 $ 0.06 $ 0.08 $ 0.11 $ 0.04 ======= ======= ======= ======= ======= ======= ======= Shares used in computing basic net income per share(2)............... 12,056 9,231 4,037 5,400 5,220 4,988 10,062 ======= ======= ======= ======= ======= ======= ======= Diluted net income per share(2)............... $ 0.08 $ 0.39 $ 0.10 $ 0.05 $ 0.07 $ 0.10 $ 0.04 ======= ======= ======= ======= ======= ======= ======= Shares used in computing diluted net income per share(2)............... 12,869 10,624 4,265 5,794 5,478 5,246 10,062 ======= ======= ======= ======= ======= ======= =======
September 30, December 31, ----------------------- ------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------ ------ (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments............................ $19,092 $39,301 $ 106 $ 306 $ -- Working capital......................... 35,840 49,695 2,361 1,191 920 Total assets............................ 83,944 74,503 10,496 4,133 2,316 Long-term debt, net of current obligations............................ 454 202 1,608 576 156 Total shareholders' equity.............. 70,268 64,172 3,892 1,028 686
- -------- (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 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Tier provides IT consulting, application development, software engineering, training and business process outsourcing services that facilitate the migration of clients' enterprise-wide systems and applications to leading edge technologies. Through offices located in the United States, Australia and the United Kingdom, the Company works closely with its Fortune 1000, government and other clients to determine, evaluate and implement an IT strategy that allows it to rapidly adopt, deploy and transfer emerging technologies while preserving viable elements of the client's legacy systems. The Company's revenues increased to $92.0 million in the fiscal year ended September 30, 1999 from $57.7 million in the fiscal year ended September 30, 1998. The Company's workforce has grown from 569 on September 30, 1998 to 780 on September 30, 1999. 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. 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, 1999, 20.9% of the Company's revenues were generated on a fixed price basis. The Company believes that the percentage of total revenues attributable to fixed price contracts will continue to be significant and may continue to grow. Substantially all of Tier's contracts are terminable by the client following limited notice and without significant penalty to the client. From time to time, in the regular course of its business, the Company negotiates the modification, termination, renewal or transition of time and materials and fixed price contracts that may involve an adjustment to the scope or nature of the project, billing rates or outstanding receivables. To date, the Company has generally been able to obtain an adjustment in its fees following a significant change in the assumptions upon which the original estimate was made, but there can be no assurance that the Company will be successful in obtaining adjustments in the future. The Company has derived a significant portion of its revenues from a small number of large clients. For many of these clients, the Company performs a number of different projects pursuant to multiple contracts or purchase orders. For the fiscal year ended September 30, 1999, Humana Inc. and the State of Missouri accounted for 27.4% and 13.0% of the Company's revenues, respectively. The Company anticipates that a substantial portion of its revenues will continue to be derived from a small number of large clients. The completion, cancellation or significant reduction in the scope of a large project would have a material adverse effect on the Company's business, financial condition and results of operations. A significant portion of the Company's revenues are derived from sales to government agencies. For the fiscal year ended September 30, 1999, approximately 37.9% of the Company's revenues were derived from sales to government agencies. Personnel and rent expenses represent a significant percentage of the Company's operating expenses and are relatively fixed in advance of any particular quarter. Senior executives manage the Company's personnel utilization rates by carefully monitoring its needs and basing most personnel increases on specific project requirements. To the extent revenues do not increase at a rate commensurate with these additional expenses, the Company's results of operations could be materially and adversely affected. In addition, to the extent that the Company is unable to hire and retain salaried employees to staff new or existing client engagements and retains hourly employees or independent contractors in their place, the Company's business, financial condition and results of operations would be materially and adversely affected. From December 1996 through September 30, 1999, the Company made twelve acquisitions for a total cost of approximately $26.7 million in cash and shares of Class B Common Stock, excluding future contingent payments. The Company also incurred $1.8 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 to be made. These acquisitions helped the Company to 14 expand its operations in the United States, 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. In fiscal year 1999, the Company acquired all the issued and outstanding capital stock of Midas Computer Software Limited, which added to the Company's software integration services; all the issued and outstanding capital stock of ADC Consultants Pty Limited, which added to the Company's data management services; certain assets and liabilities of Service Design Associates, Inc. which added to the Company's government services practice; and certain assets and liabilities of the Technology Training Services division of Automated Concepts, Inc. which added to the Company's training services. For the fiscal year ended September 30, 1999, international operations accounted for 33.7% of the Company's total revenues. The Company believes that the percentage of total revenues attributable to international operations will continue to be significant and may continue to grow. International operations subject the Company to foreign currency translation adjustments and transaction gains and losses for amounts denominated in foreign currencies. In September 1997, the Company changed its fiscal year end to September 30. Fiscal year 1997 comprises the nine months ended September 30, 1997. Results of Operations The following table summarizes the Company's operating results as a percentage of revenues for each of the periods indicated:
Twelve Months Ended Nine Months September 30, Ended ------------------------- September 30, 1999 1998 1997 1997 ----- ----- ----------- ------------- (unaudited) Revenue............................ 100.0% 100.0% 100.0% 100.0% Cost of revenues................... 61.1 64.6 66.5 66.4 ----- ----- ----- ----- Gross profit....................... 38.9 35.4 33.5 33.6 Costs and expenses: Selling and marketing............ 6.6 5.2 8.3 8.1 General and administrative....... 20.6 16.9 19.3 19.6 Compensation charge related to business combinations........... 0.7 1.3 1.7 2.1 Purchased in-process technology.. 4.4 -- -- -- Reserve for contract dispute..... 2.0 -- -- -- Depreciation and amortization.... 4.2 2.0 1.1 1.2 ----- ----- ----- ----- Income from operations............. 0.4 10.0 3.1 2.6 Interest (income) and expense, net............................... (1.4) (1.7) 0.4 0.4 ----- ----- ----- ----- Income before income taxes......... 1.8 11.7 2.7 2.2 Provision for income taxes......... 0.7 4.5 1.1 0.9 ----- ----- ----- ----- Net income......................... 1.1% 7.2% 1.6% 1.3% ===== ===== ===== =====
Fiscal Years Ended September 30, 1999 and 1998 Revenues. Revenues are generated primarily by providing professional consulting services on client engagements. 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. Cost of revenues consists primarily of those costs directly attributable to providing service to a client, including employee salaries, independent contractor and subcontractor costs, employee benefits, 15 payroll taxes, travel expenses and any equipment or software costs. For business process outsourcing projects, cost of revenues also include facility and overhead costs. 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 expenses consist primarily of personnel costs, sales commissions, travel costs and product literature. Selling and marketing expenses 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 expenses 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. The Company expects that selling and marketing expenses will continue to increase in future periods in absolute dollars, although such expenses may vary as a percentage of revenues. General and Administrative. General and administrative expenses consist primarily of personnel costs related to general management functions, human resources, recruiting, finance, legal, accounting and information systems, as well as professional fees related to legal, audit, tax, external financial reporting and investor relations matters. General and administrative expenses 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 expenses 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 general and administrative expenses will continue to increase in future periods in absolute dollars, although such expenses may vary as a percentage of revenues. Compensation Charge Related to Business Combinations. Compensation charge related to business combinations consists primarily of certain contingent performance payments made in connection with prior acquisitions. 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 completion of the software is expected to occur in the second quarter of fiscal year 2000. Once developed, this 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 an ongoing contract dispute with a prime contractor to which the Company is 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 is currently in litigation. See Item 3.-- "Legal Proceedings." Depreciation and Amortization. Depreciation and amortization consists primarily of expenses associated with depreciation of equipment and improvements and amortization of certain other intangible assets resulting from acquisitions and purchases of certain intellectual property. 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 16 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. 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 $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. The Company expects that its effective tax rate for the fiscal year ending September 30, 2000 will not be materially different from the effective tax rate for the fiscal year ending September 30, 1999. 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, and any non-deductible items related to acquisitions. Twelve-Month Fiscal Year Ended September 30, 1998 and the Twelve Months Ended September 30, 1997 Revenues. Revenues increased 114.7% to $57.7 million for the fiscal year ended September 30, 1998 from $26.9 million in the twelve months ended September 30, 1997. This increase resulted from internal growth, including an expanded client base and several significant new contracts, and from acquisitions. Gross Profit. Gross profit increased 126.7% to $20.5 million for the fiscal year ended September 30, 1998 from $9.0 million in the twelve months ended September 30, 1997. Gross margin increased to 35.4% for the fiscal year ended September 30, 1998 from 33.5% in the twelve months ended September 30, 1997. The increase in gross margin was primarily attributable to higher margins on certain large contracts and an increased use of salaried as opposed to hourly employees, offset in part by software sublicense fees and other start-up costs incurred in implementing a significant new contract in the first quarter of 1998. Selling and Marketing. Selling and marketing expenses increased 34.7% to $3.0 million for the fiscal year ended September 30, 1998 from $2.2 million in the twelve months ended September 30, 1997. As a percentage of revenues, selling and marketing expenses decreased to 5.2% for the fiscal year ended September 30, 1998 from 8.3% in the twelve months ended September 30, 1997. The increase in total selling and marketing expenses was primarily attributable to the addition of sales and marketing personnel and the Company's increased selling and marketing efforts and was partially offset by the use of sales and marketing personnel on client projects, which costs were included in cost of revenues. General and Administrative. General and administrative expenses increased 87.5% to $9.7 million for the fiscal year ended September 30, 1998 from $5.2 million in the twelve months ended September 30, 1997. As a percentage of revenues, general and administrative expenses decreased to 16.9% for the fiscal year ended September 30, 1998 from 19.3% in the twelve months ended September 30, 1997. The increase in total general and administrative expenses was primarily attributable to building the infrastructure to support, manage and control the Company's growth and the increased costs of being a public company. Compensation Charge Related to Business Combinations. Compensation charge related to business combinations increased 57.0% to $737,000 for the fiscal year ended September 30, 1998 from $469,000 in the 17 twelve months ended September 30, 1997. The increase in total compensation charge related to business combinations was primarily attributable to contingent payments earned during the current period by previous owners of the acquired businesses. Depreciation and Amortization. Depreciation and amortization increased 313.2% to $1.2 million for the fiscal year ended September 30, 1998 from $283,000 in the twelve months ended September 30, 1997. As a percentage of revenues, depreciation and amortization increased to 2.0% for the fiscal year ended September 30, 1998 from 1.1% in the twelve months ended September 30, 1997. The increase in total depreciation and amortization expenses was primarily attributable to the depreciation associated with increased capital expenditures and the amortization of increased intangible assets resulting from acquisitions. Interest Income and Interest Expense, Net. The Company had net interest income of $980,000 for the fiscal year ended September 30, 1998 compared to net interest expense of $123,000 for the twelve months ended September 30, 1997. This change was primarily attributable to the Company's repayment of all borrowings under its bank lines of credit and interest income generated from its investment of proceeds from its initial and secondary public offerings. Provision for Income Taxes. The effective tax rate for the fiscal year ended September 30, 1998 was 39.0%, compared to 40.1% for the twelve months ended September 30, 1997. The decrease in the effective tax rate was primarily attributable to the investment income earned on tax-exempt securities. 18 Selected Quarterly Statements of Income The following tables set forth certain unaudited consolidated quarterly statement of income data for each of the eight quarters ending September 30, 1999. 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.
Three Months Ended ------------------------------------------------------------------------------ Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1997 1998 1998 1998 1998 1999 1999 1999 -------- -------- -------- --------- -------- -------- -------- --------- (in thousands, except per share data) Consolidated Statement of Income Data: Revenues................ $9,150 $12,672 $14,890 $21,012 $21,356 $20,243 $23,798 $26,579 Cost of revenues........ 5,680 8,756 9,241 13,595 13,156 12,664 13,913 16,503 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit............ 3,470 3,916 5,649 7,417 8,200 7,579 9,885 10,076 Costs and expenses: Selling and marketing.. 815 601 800 792 1,287 1,470 1,716 1,622 General and administrative........ 1,800 1,903 2,725 3,316 3,459 4,593 5,598 5,338 Compensation charge related to business combinations.......... 198 354 94 90 61 60 355 131 Purchased in-process technology............ -- -- -- -- -- -- 4,000 -- Reserve for contract dispute............... -- -- -- -- -- -- 1,856 -- Depreciation and amortization.......... 150 219 337 463 527 831 1,219 1,287 ------ ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations............. 507 839 1,693 2,756 2,866 625 (4,859) 1,698 Interest (income) and expense, net........... (56) (269) (219) (436) (456) (368) (266) (230) ------ ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes........... 563 1,108 1,912 3,192 3,322 993 (4,593) 1,928 Provision (benefit) for income taxes........... 228 449 713 1,252 1,296 387 (1,791) 752 ------ ------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 335 $ 659 $ 1,199 $ 1,940 $ 2,026 $ 606 $(2,802) $ 1,176 ====== ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) per share.............. $ 0.05 $ 0.07 $ 0.12 $ 0.16 $ 0.17 $ 0.05 $ (0.23) $ 0.10 ====== ======= ======= ======= ======= ======= ======= ======= Diluted net income (loss) per share....... $ 0.04 $ 0.06 $ 0.11 $ 0.15 $ 0.16 $ 0.05 $ (0.23) $ 0.09 ====== ======= ======= ======= ======= ======= ======= =======
Three Months Ended -------------------------------------------------------------------------- Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1997 1998 1998 1998 1998 1999 1999 1999 -------- -------- -------- --------- -------- -------- -------- --------- 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........ 62.1 69.1 62.1 64.7 61.6 62.6 58.5 62.1 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ 37.9 30.9 37.9 35.3 38.4 37.4 41.5 37.9 Costs and expenses: Selling and marketing.. 8.9 4.7 5.4 3.8 6.0 7.2 7.2 6.1 General and administrative........ 19.7 15.0 18.3 15.8 16.2 22.7 23.5 20.1 Compensation charge related to business combinations.......... 2.1 2.8 0.6 0.4 0.3 0.3 1.5 0.5 Purchased in-process technology............ -- -- -- -- -- -- 16.8 -- Reserve for contract dispute............... -- -- -- -- -- -- 7.8 -- Depreciation and amortization.......... 1.6 1.8 2.3 2.2 2.5 4.1 5.1 4.8 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............. 5.6 6.6 11.3 13.1 13.4 3.1 (20.4) 6.4 Interest (income) and expense, net........... (0.6) (2.1) (1.5) (2.1) (2.1) (1.8) (1.1) (0.9) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes........... 6.2 8.7 12.8 15.2 15.5 4.9 (19.3) 7.3 Provision (benefit) for income taxes........... 2.5 3.5 4.8 6.0 6.0 1.9 (7.5) 2.9 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... 3.7% 5.2% 8.0% 9.2% 9.5% 3.0% (11.8)% 4.4% ===== ===== ===== ===== ===== ===== ===== =====
19 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. The Company maintains an $8 million revolving credit facility (the "Credit Facility"). The Credit Facility allows the Company to borrow the lesser of an amount equal to 85% of eligible accounts receivable or $8 million. The Credit Facility bears interest, at the Company's option, either at the adjusted LIBOR rate plus 2.5% or an alternate base rate plus 0.5%. The alternate base rate is the greater of the bank's prime rate or the federal funds effective rate plus 0.5%. The Credit Facility is secured by 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 a pledge of approximately 65% of the stock of its foreign subsidiaries. The Credit Facility contains certain restrictive covenants, including limitations on the total amount of loans the Company may extend to officers and employees, the incurrence of additional debt and a prohibition against the payment of dividends (other than dividends payable in its stock). The Credit Facility requires the maintenance of certain financial ratios, including a minimum quarterly net income requirement and a minimum ratio of total liabilities to earnings before interest, taxes, depreciation and amortization. As of September 30, 1999, there were no borrowings outstanding under the Credit Facility; however the availability of the total commitment amount to the Company has been reduced by an $800,000 letter of credit issued in connection with the acquisition of Service Design Associates, Inc. ("SDA") in March 1999. Net cash used in operating activities was $1.6 million in fiscal 1999, $1.6 million in fiscal 1998, and $1.4 million in the nine-month fiscal year ended September 30, 1997. Throughout these periods, in addition to the net income for the period, the Company experienced increases in receivables as a result of increases in the Company's sales volume. During the year ended September 30, 1999, the Company acquired the exclusive worldwide licensing rights to components of a large scale, enterprise-wide commercial billing system currently under development. Net cash used in investing activities was $11.5 million in fiscal 1999, $28.9 million in fiscal 1998 and $2.5 million in the nine-month fiscal year ended September 30, 1997. The decrease in cash used in investing activities in fiscal 1999 as compared to fiscal 1998 is largely attributable to a decreased investment balance, offset by investments in the acquisition of Midas Computer Software Limited, ADC Consultants Pty Limited, the acquisition of 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 $5.8 million in fiscal 1999, $2.0 million in fiscal 1998 and $554,000 in the nine-month fiscal year ended September 30, 1997. The increase in capital expenditures was primarily attributable to an increased workforce, geographic expansion, establishment of business process outsourcing centers and development of the Company's technology infrastructure. 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 business process outsourcing centers. Net cash provided by financing activities totaled $769,000 in fiscal 1999, $53.4 million in fiscal 1998, and $3.7 million in the nine-month fiscal year ended September 30, 1997. In fiscal 1999, the cash provided by financing activities was primarily the result of stock option exercises. In fiscal 1998, the Company raised approximately $55 million in its public offerings of Class B Common Stock and made net payments of $2.8 million under its line of credit. In the nine-month fiscal year ended September 30, 1997, the Company raised gross proceeds of $1.9 million through the issuance of 420,953 shares of Series A Preferred Stock and increased its net borrowing by $2.1 million under its former credit facility. 20 The Company anticipates that its existing capital resources, including cash provided by operating activities and available bank borrowings, will be adequate to fund the Company's operations for at least the next 12 months. There can be no assurance that changes will not occur that would consume available capital resources before such time. The Company's capital requirements depend on numerous factors, including potential acquisitions, new contracts, the timing of the receipt of accounts receivable and employee growth. The Company is involved in a contract dispute with a prime contractor. See Item 3. "Legal Proceedings." On June 28, 1999, the Company filed a federal civil action against the prime contractor for the amounts the Company is due under the contract. On August 11, 1999, the Company received the prime contractor's answer and counterclaim, in which the prime contractor denies the Company's claim, alleges breach of contract by the Company and seeks declaratory relief and damages in excess of $8 million. The Company denies the allegations and intends to vigorously pursue its own claim against the prime contractor. At this time, there can be no assurance as to the course of this dispute or its possible resolution. In the event the prime contractor prevails in its action, the Company's financial condition and results of operations would be materially and adversely affected. 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 On March 4, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that computer software costs related to internal software that are incurred in the preliminary project stage 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. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its consolidated financial statements for the year ending September 30, 2000. The adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements of the Company. On April 3, 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which provides guidance on the financial reporting of start-up costs and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 is not expected to have a material impact on the consolidated financial statements of the Company. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") which will be effective in fiscal 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 has not yet determined the impact, if any, that the adoption of FAS 133 will have on the consolidated financial statements. Year 2000 The "Year 2000 Issue" is typically the result of software being written using two digits rather than four to define the applicable year. The Company uses a significant number of computer software programs and operating 21 systems in its service offerings, financial business systems and administrative functions. To the extent these software applications are unable to appropriately interpret the upcoming calendar year "2000", remediation of such applications will be necessary. The Company is continuing to assess the preparedness of its internal IT and non-IT systems and has substantially completed the remediation, testing and certification of its critical internal systems. To date, no significant Year 2000 related problems have been identified. The Company's internal systems are largely PC-based and a majority were recently acquired or installed. As a result, the Company believes that a high percentage of its hardware and non-IT systems already address the Year 2000 Issue, as does a majority of its software. The remediation, testing and certification process of its remaining systems and software was substantially completed during the summer of 1999. The Company has not incurred material remediation costs to date and does not anticipate that the cost of such process will have a material adverse effect on the Company's business, result of operations or financial condition. In addition, the Company made an evaluation of the Year 2000 readiness of its key suppliers and other key third parties. The Company continues to work with these parties to address the Year 2000 Issue and to obtain appropriate assurances. The Company's operations could be materially adversely affected if these third parties or the products or services they supply to Tier are disrupted or impaired by the Year 2000 Issue. There can be no assurance that the remediation, testing and certification of the Company's systems will be successful or that the Company's key contractors will have successful conversion programs, and that such Year 2000 Issue compliance failures will not have a material adverse effect on the Company's business, results of operations or financial condition. As a result of the Company's assessment to date, the Company currently believes that a formal contingency plan to address Year 2000 non-compliance is unnecessary; however, the Company may develop such a plan if its on-going assessment indicates areas of significant exposure. Factors That May Affect Future Results The following factors, among others could cause actual results to differ materially from those contained in forward-looking statements in this Form 10- K. Tier is referred to in this section as "we" or "us". 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 business process outsourcing, . demand for our services generated by strategic partnerships and certain prime contractors, 22 . our ability to increase both the number and size of engagements from existing clients, and . economic conditions in the vertical and geographic markets we serve. Due to the relatively long sales cycles for our services in the government services market, the timing of revenue is difficult to forecast. In addition, the achievement of anticipated revenues is substantially dependent on our ability to attract, on a timely basis, and retain skilled personnel. A high percentage of our operating expenses, particularly personnel and rent, are fixed in advance. In addition, we typically reach the annual limitation on FICA contributions for many of our consultants before the end of the calendar year. As a result, payroll taxes as a component of cost of sales will vary from quarter to quarter during the fiscal year and will generally be higher at the beginning of the calendar year. Because of the variability of our quarterly operating results, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, should not be relied upon as indications of future performance and may result in volatility in the price of our common stock. In addition, our operating results will from time to time be below the expectations of analysts and investors. Potential Adverse Effect on Operating Results from Dependence on Large Projects, Limited Clients or Certain Market Sectors. The completion, cancellation or significant reduction in the scope of a large project or a project with certain clients would have a material adverse effect on our business, financial condition and results of operations. Most of our contracts are terminable by the client following limited notice and without significant penalty to the client. We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of clients. For the twelve months ended September 30, 1999, Humana Inc. and the State of Missouri accounted for 27.4% and 13.0% of our revenues, respectively. The volume of work performed for specific clients is likely to vary from period to period, and a major client in one period may not use our services in a subsequent period. 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. See Item 3 "Legal Proceedings." Inability to Attract and Retain Professional Staff Necessary to Existing and Future Projects. Our inability to attract, retain and train skilled employees could impair our ability to adequately manage and staff our existing projects and to bid for or obtain new projects, which would have a material adverse effect on our business, financial condition and results of operation. In addition, the failure of our employees to achieve expected levels of performance could adversely affect our business. Our success depends in large part upon our ability to attract, retain, train, manage and motivate skilled employees, particularly project managers and other senior technical personnel. There is significant competition for employees with the skills required to perform the services we offer. In particular, qualified project managers and senior technical and professional staff are in great demand worldwide and competition for such persons is likely to increase. In addition, we require that many of our employees travel to client sites to perform services on our behalf, which may make a position with us less attractive to potential employees. There can be no assurance that a sufficient number of skilled employees will continue to be available, or that we will be successful in training, retaining and motivating current or future employees. Dependence on Key Personnel. Our success depends in large part upon the continued services of a number of key employees. Although we have entered into employment agreements with certain key employees, these employees may terminate their employment agreements 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 60.2% of the total common stock voting power at 23 September 30, 1999. All power to vote shares held in the Voting Trust has been vested in the Voting Trust's trustees, Messrs. Bildner and Barton. As a result, Messrs. Bildner and Barton will be able to control the outcome of all corporate actions requiring shareholder approval, including changes in our equity incentive plan, the election of a majority of our directors, proxy contests, mergers, tender offers, open-market purchase programs or other purchases of common stock that could give holders of our Class B Common Stock the opportunity to realize a premium over the then-prevailing market price for their shares of Class B Common Stock. Potential Failure to Identify, Acquire or Integrate New Acquisitions. A principal component of our business strategy is to expand our presence in new or existing markets by acquiring additional businesses. From December 1996 through September 30, 1999, we acquired twelve businesses. There can be no assurance that we will be able to identify, acquire or profitably manage additional businesses or to integrate successfully any acquired businesses without substantial expense, delay or other operational or financial problems. Acquisitions involve a number of special risks, including: . diversion of management's attention, . failure to retain key personnel, . amortization of acquired intangible assets, . client dissatisfaction or performance problems with an acquired firm, . assumption of unknown liabilities, and . other unanticipated events or circumstances. Any of these risks could have a material adverse effect on our business, financial condition and results of operations. Inability to Manage Growth. If we are unable to manage our growth effectively, such inability would have a material adverse effect on the quality of our services, our ability to retain key personnel, and our business, financial condition and results of operations. Our growth has placed, and is expected to continue to place, significant demands on our management, financial, staffing and other resources. We have expanded geographically by opening new offices domestically and abroad, and intend to open additional offices. Our ability to manage growth effectively will require us to continue to develop and improve our operational, financial and other internal systems, as well as our business development capabilities, and to train, motivate and manage our employees. In addition, as the average size and number of our projects continues to increase, we must be able to manage such projects effectively. There can be no assurance that our rate of growth will continue or that we will be successful in managing any such growth. Dependence on Partnerships with Third Parties in Performing Certain Client Engagements. We sometimes perform client engagements in partnership with third parties. In the government services market, we often join with other organizations to bid and perform an engagement. In these engagements, we may engage subcontractors or we may act as a subcontractor to the prime contractor of the engagement. In the commercial services market, we sometimes partner with software or technology providers to jointly bid and perform engagements. In both markets, we often depend on the software, resources and technology of our partners in order to perform the engagement. There can be no assurance that actions or failures attributable to our partners or to the prime contractor or subcontractor will not also negatively affect our business, financial condition or results of operations. In addition, the refusal or inability of a partner to permit continued use of its software, resources or technology by us, or the discontinuance or termination by the prime contractor of our services or the services of a key subcontractor, would have a material adverse effect on our business, financial condition and results of operations. 24 Dependence on Contracts with Government Agencies. For the fiscal year ended September 30, 1999, approximately 37.9% of our revenues were derived from sales to government agencies. Such government agencies may be subject to budget cuts or budgetary constraints or a reduction or discontinuation of government funding. A significant reduction in funds available for government agencies to purchase IT services would have a material adverse effect on our business, financial condition and results of operations. In addition, the loss of a major government client, or any significant reduction or delay in orders by such client, would have a material adverse effect on our business, financial condition and results of operations. Failure to Estimate Accurately Fixed Price and Performance-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 performance-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 performance-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, 1999, 20.9% of our revenues were generated on a fixed price basis. We believe that the percentage of total revenues attributable to fixed price contracts will continue to be significant and may continue to grow. Potential Costs or Claims Resulting from Project Performance. Many of our engagements involve projects that are critical to the operations of our clients' businesses and provide benefits that may be difficult to quantify. The failure by us, or of the prime contractor on an engagement in which we are a subcontractor, to meet a client's expectations in the performance of the engagement could damage our reputation and adversely affect our ability to attract new business, and could have a material adverse effect upon our business, financial condition and results of operations. We have undertaken, and may in the future undertake, projects in which we guarantee performance based upon defined operating specifications or guaranteed delivery dates. Unsatisfactory performance or unanticipated difficulties or delays in completing such projects may result in client dissatisfaction and a reduction in payment to, or payment of damages (as a result of litigation or otherwise) by us, which could have a material adverse effect upon our business, financial condition and results of operations. In addition, unanticipated delays could necessitate the use of more resources than we initially budgeted for a particular project, which also could have a material adverse effect upon our business, financial condition and results of operations. Insufficient Insurance Coverage for Potential Claims. Any failure in a client's system could result in a claim against us for substantial damages, regardless of our responsibility for such failure. There can be no assurance that the limitations of liability set forth in our service contracts will be enforceable or will otherwise protect us from liability for damages. Although we maintain general liability insurance coverage, including coverage from errors or omissions, there can be no assurance that such coverage will continue to be available on reasonable terms, will be available in sufficient amounts to cover one or more claims or that the insurer will not disclaim coverage as to any future claim. The successful assertion for one or more claims against us that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, would adversely affect our business, financial condition and results of operations. Delay or Failure to Develop New IT Solutions. Our success will depend in part on our ability to develop IT solutions that keep pace with continuing changes in technology, evolving industry standards and changing client preferences. There can be no assurance that we will be successful in developing such IT solutions in a timely manner or that if developed we will be successful in the marketplace. Delay in developing or failure to develop new IT solutions would have a material adverse effect on our business, financial condition and results of operations. 25 Substantial Competition in the IT Services Market. The IT services market is highly competitive and is served by numerous international, national and local firms. There can be no assurance that we will be able to compete effectively in the market. Market participants include systems consulting and integration firms, including national accounting firms and related entities, the internal information systems groups of our prospective clients, professional services companies, hardware and application software vendors, and divisions of large integrated technology companies and outsourcing companies. Many of these competitors have significantly greater financial, technical and marketing resources, generate greater revenues and have greater name recognition than we do. In addition, there are relatively low barriers to entry into the IT services market, and we have faced, and expect to continue to face, additional competition from new entrants into the IT services market. We believe that the principal competitive factors in the IT services market include: . reputation, . project management expertise, . industry expertise, . speed of development and implementations, . technical expertise, . competitive pricing, and . the ability to deliver results on a fixed price as well as a time and materials basis. We believe that our ability to compete also depends in part on a number of competitive factors outside our control, including: . the ability of our clients or competitors to hire, retain and motivate project managers and other senior technical staff, . the ownership by competitors of software used by potential clients, . the price at which others offer comparable services, . the ability of our clients to perform the services themselves, and . the extent of our competitors' responsiveness to client needs. Our inability to compete effectively on these competitive factors would have a material adverse effect on our business, financial condition and results of operations. Inability to Protect Proprietary Intellectual Property. The steps we take to protect our intellectual property rights may be inadequate to avoid the loss or misappropriation of such information, or to detect unauthorized use of such information. We rely on a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our intellectual property rights. We also 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. Issues relating to the ownership of, and rights to use, software and application frameworks can be complicated, and there can be no assurance that disputes will not arise that affect our ability to resell or reuse such software and application frameworks. A portion of our business involves the development of software applications for specific client engagements. Ownership of such software is the subject of negotiation with each particular client and is typically assigned to the client. We also develop software application frameworks, and may retain ownership or marketing rights to these application frameworks, which may be adapted through further customization for future client projects. Certain clients have prohibited us from marketing the software and application frameworks developed for them entirely or for specified periods of time or to specified third parties, and there can be no assurance that clients will not demand similar or other restrictions in the future. 26 Although we believe that our services and products do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against us in the future, or that if asserted, any such claim will be successfully defended. Failure to Manage and Expand International Operations. For the fiscal year ended September 30, 1999, international operations accounted for 33.7% 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 intend to expand our existing international operations and may enter additional international markets, which will require significant management attention and financial resources and could adversely effect our operating margins and earnings. In order to expand international operations, we will need to hire additional personnel and develop relationships with potential international clients through acquisition or otherwise. To the extent that we are unable to do so on a timely basis, our growth in international markets would be limited, and our business, financial condition and results of operations would be materially and adversely affected. Our international business operations are subject to a number of risks, including: . difficulties in building and managing foreign operations, . difficulties in enforcing agreements and collecting receivables through foreign legal systems, . longer payment cycles, . fluctuations in the value of foreign currencies, and . unexpected regulatory, economic or political changes in foreign markets. There can be no assurance that these factors will not have a material adverse effect on our business, financial condition and results of operation. Potential Year 2000 Non-Compliance. The "Year 2000 Issue" is typically the result of software being written using two digits rather than four to define the applicable year. The Company uses a significant number of computer software programs and operating systems in its service offerings, financial business systems and administrative functions. To the extent these software applications are unable to appropriately interpret the upcoming calendar year "2000", remediation of such applications will be necessary. The Company is continuing to assess the preparedness of its internal IT and non-IT systems and has substantially completed the remediation, testing and certification of its critical internal systems. To date, no significant Year 2000 related problems have been identified. The Company's internal systems are largely PC-based and a majority were recently acquired or installed. As a result, the Company believes that a high percentage of its hardware and non-IT systems already address the Year 2000 Issue, as does a majority of its software. The remediation, testing and certification process of its remaining systems and software was substantially completed during the summer of 1999. The Company has not incurred material remediation costs to date and does not anticipate that the cost of such process will have a material adverse effect on the Company's business, result of operations or financial condition. In addition, the Company made an evaluation of the Year 2000 readiness of its key suppliers and other key third parties. The Company is working with these parties to address the Year 2000 Issue and to obtain appropriate assurances. The Company's operations could be materially adversely affected if these third parties or the products or services they supply to Tier are disrupted or impaired by the Year 2000 Issue. There can be no assurance that the remediation, testing and certification of the Company's systems will be successful or that the Company's key contractors will have successful conversion programs, and that such Year 2000 Issue compliance failures will not have a material adverse effect on the Company's business, results of operations or financial condition. 27 As a result of the Company's assessment to date, the Company currently believes that a formal contingency plan to address Year 2000 non-compliance is unnecessary; however, the Company may develop such a plan if its on-going assessment indicates areas of significant exposure. Potential Volatility of Stock Price. A public market for our Class B Common Stock has existed only since the initial public offering of the Class B Common Stock in December 1997. There can be no assurance that an active public market will be sustained. The market for securities of early stage companies has been highly volatile in recent years as a result of factors often unrelated to a company's operations, 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. Issuance of Preferred Stock May Prevent Change in Control and Adversely Affect Market Price for Class B Common Stock. The Board of Directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class B Common Stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for the Class B Common Stock at a premium over the market price and adversely affect the market price and the voting and other rights of the holders of our common stock. No Current Intention to Declare or Pay Dividends. We have never declared or paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in market prices and rates. The Company is exposed to market risk because of changes in foreign currency exchange rates as measured against the U.S. dollar and currencies of the Company's subsidiaries and operations in Australia and the United Kingdom. Foreign Currency Exchange Rate Risk. The Company has two wholly owned subsidiaries in Australia and conducts operations in the United Kingdom through a U.S.-incorporated subsidiary and a United Kingdom subsidiary. Revenues from these operations are typically denominated in Australian Dollars or British Pounds, respectively, thereby potentially affecting the Company's financial position, results of operations and cash flows due to fluctuations in exchange rates. The Company does not anticipate that near-term changes in exchange rates will have a material impact on future earnings, fair values or cash flows of the Company and has engaged in foreign currency hedging transactions on a limited basis in connection with certain acquisitions, and no contracts are outstanding as of September 30, 1999. 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. 28 Item 8. Financial Statements and Supplementary Data See "Index to Consolidated Financial Statements" for a listing of the financial statements filed with this report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure As previously reported on the Current Report on Form 8-K filed on July 27, 1998, effective as of July 25, 1998, the Company's Audit Committee approved, subject to ratification by its shareholders, the engagement of PricewaterhouseCoopers LLP as its independent accountants for the fiscal year ending September 30, 1998 and approved the resignation of the firm of Ernst & Young LLP, who resigned as auditors of the Company effective July 24, 1998. Ernst & Young LLP, under the rules of its profession, resigned solely due to a prospective independence issue. The reports of Ernst & Young LLP on the Company's financial statements for the two fiscal years ended September 30, 1997 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company's financial statements for each of the two fiscal years ended September 30, 1997, and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. The Company provided Ernst & Young LLP with a copy of the Form 8-K and requested Ernst & Young LLP furnish a letter addressed to the Commission stating whether it agreed with the above statements. A copy of that letter, dated July 27, 1998, was filed as Exhibit 16.1 to the Form 8-K. 29 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 "1999 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, 1999. Item 11. Executive Compensation The information required under this item may be found under the section captioned "Compensation of Executive Officers" in the 1999 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 1999 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required under this Item may be found under the section captioned "Election of Directors--Certain Related Transactions" in the 1999 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 The Company did not file any reports on Form 8-K during the three months ended September 30, 1999. (c) Exhibits. See "Exhibit Index." (d) Financial Statement Schedules. See "Index to Consolidated Financial Statements" on page F-1. 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TIER TECHNOLOGIES, INC. Report of Independent Accountants.......................................... F-2 Report of Independent Auditors............................................. F-3 Consolidated Balance Sheets................................................ F-4 Consolidated Statements of Income.......................................... F-5 Consolidated Statements of Shareholders' Equity............................ F-6 Consolidated Statements of Cash Flows...................................... F-7 Notes to Consolidated Financial Statements................................. F-8 Financial Statement Schedule II............................................ F-29
F-1 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, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. 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 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 the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California October 29, 1999 F-2 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Tier Technologies, Inc. We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows of Tier Technologies, Inc. for the nine month period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the result of operations and cash flows of Tier Technologies, Inc. for the nine month period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Walnut Creek, California October 6, 1997 F-3 TIER TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, ---------------- 1999 1998 ------- ------- ASSETS Current assets: Cash and cash equivalents.................................. $10,121 $22,466 Restricted cash............................................ 819 712 Short-term investments..................................... 8,971 16,834 Accounts receivable, net of allowance for doubtful accounts of $2,285 in 1999 and $260 in 1998........................ 26,151 18,335 Prepaid expenses and other current assets.................. 2,653 1,399 ------- ------- Total current assets..................................... 48,715 59,746 Equipment and improvements, net.............................. 7,012 2,371 Notes and accrued interest receivable from related parties... 1,486 1,871 Intangible assets, net....................................... 23,913 9,794 Other assets................................................. 2,818 721 ------- ------- Total assets............................................ $83,944 $74,503 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................... $ 2,759 $ 3,263 Accrued liabilities........................................ 2,618 934 Accrued subcontractor expenses............................. 1,113 2,503 Accrued compensation and related liabilities............... 3,476 2,310 Income taxes payable....................................... 995 450 Deferred income............................................ 1,506 500 Capital lease obligations due within one year.............. 381 67 Other current liabilities.................................. 27 24 ------- ------- Total current liabilities................................ 12,875 10,051 Capital lease obligations, less current portion.............. 443 163 Other liabilities............................................ 358 117 ------- ------- Total liabilities....................................... 13,676 10,331 ------- ------- Commitments and contingent liabilities Shareholders' equity: Preferred stock, no par value; authorized shares--4,579.... -- -- Common stock, no par value; authorized shares--44,260; issued and outstanding shares--12,260 in 1999 and 11,861 in 1998................................................... 66,012 62,656 Notes receivable from shareholders......................... (1,773) (2,159) Deferred compensation...................................... (352) (591) Accumulated other comprehensive income (loss).............. (101) (1,210) Retained earnings.......................................... 6,482 5,476 ------- ------- Total shareholders' equity............................... 70,268 64,172 ------- ------- Total liabilities and shareholders' equity.............. $83,944 $74,503 ======= =======
See accompanying notes. F-4 TIER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Year Ended Nine-Months September 30, Ended --------------- September 30, 1999 1998 1997 ------- ------- ------------- Revenues......................................... $91,976 $57,725 $22,479 Cost of revenues................................. 56,236 37,273 14,917 ------- ------- ------- Gross profit..................................... 35,740 20,452 7,562 Costs and expenses: Selling and marketing.......................... 6,095 3,009 1,836 General and administrative..................... 18,988 9,743 4,397 Compensation charge related to business combinations.................................. 608 737 470 Purchased in-process technology................ 4,000 -- -- Reserve for contract dispute................... 1,856 -- -- Depreciation and amortization.................. 3,864 1,169 259 ------- ------- ------- Income from operations........................... 329 5,794 600 Interest income.................................. 1,398 1,136 70 Interest expense................................. 77 156 169 ------- ------- ------- Income before income taxes....................... 1,650 6,774 501 Provision for income taxes....................... 644 2,642 201 ------- ------- ------- Net income....................................... $ 1,006 $ 4,132 $ 300 ======= ======= ======= Basic net income per share....................... $ 0.08 $ 0.45 $ 0.06 ======= ======= ======= Shares used in computing basic net income per share........................................... 12,056 9,231 5,400 ======= ======= ======= Diluted net income per share..................... $ 0.08 $ 0.39 $ 0.05 ======= ======= ======= Shares used in computing diluted net income per share........................................... 12,869 10,624 5,794 ======= ======= =======
See accompanying notes. F-5 TIER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Preferred Stock Common Stock Notes Accumulated ------------- -------------------------------- Receivable Other Total Class A Class B From Deferred Comprehensive Retained Shareholders' Shares Amount Shares Amount Shares Amount Shareholders Compensation Income (Loss) Earnings Equity ------ ------ ------- ------ ------- ------- ------------ ------------ ------------- -------- ------------- Balance at December 31, 1996............. -- $ -- 1,720 $ 32 2,580 $ 47 $ (95) $ -- $ -- $1,044 $ 1,028 Issuance of Series A convertible preferred stock for cash, net of issuance costs of $318......... 421 1,892 (95) (2) 95 2 -- -- -- -- 1,892 Exercise of stock options... -- -- 660 1,350 660 846 (2,196) -- -- -- -- Tax benefit of stock options exercised....... -- -- -- 270 -- 404 -- -- -- -- 674 Payment on notes receivable...... -- -- -- -- -- -- 37 -- -- -- 37 Net income...... -- -- -- -- -- -- -- -- -- 300 300 Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- (40) -- (40) ---- ------ ----- ------ ------ ------- ------- ----- ------- ------ ------- Balance at September 30, 1997............. 421 1,892 2,285 1,650 3,335 1,299 (2,254) -- (40) 1,344 3,891 Exercise of stock options... -- -- -- -- 249 933 -- -- -- -- 933 Issuance of Class B common stock through Employee Stock Purchase Plan... -- -- -- -- 11 116 -- -- -- -- 116 Tax benefit of stock options exercised....... -- -- -- -- -- 544 -- -- -- -- 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 -- -- -- -- 54,856 Payments on notes receivable...... -- -- -- -- -- -- 95 -- -- -- 95 Issuance of Class B common stock in business combinations.... -- -- -- -- 100 1,366 -- (701) -- -- 665 Amortization of deferred compensation.... -- -- -- -- -- -- -- 110 -- -- 110 Net income...... -- -- -- -- -- -- -- -- -- 4,132 4,132 Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- (1,170) -- (1,170) ---- ------ ----- ------ ------ ------- ------- ----- ------- ------ ------- Balance at September 30, 1998............. -- -- 1,640 1,638 10,221 61,018 (2,159) (591) (1,210) 5,476 64,172 Exercise of stock options... -- -- -- -- 377 1,244 -- -- -- -- 1,244 Issuance of Class B common stock through Employee Stock Purchase Plan... -- -- -- -- 46 388 -- -- -- -- 388 Tax benefit of stock options exercised....... -- -- -- -- -- 611 -- -- -- -- 611 Payments on notes receivable...... -- -- -- -- -- -- 386 -- -- -- 386 Issuance of Class B common stock and options in business combinations.... -- -- -- -- 51 1,527 -- -- -- -- 1,527 Repurchase of common stock.... -- -- -- -- (75) (414) -- -- -- -- (414) Amortization of deferred compensation.... -- -- -- -- -- -- -- 239 -- -- 239 Net income...... -- -- -- -- -- -- -- -- -- 1,006 1,006 Foreign currency translation adjustment...... -- -- -- -- -- -- -- -- 1,109 -- 1,109 ---- ------ ----- ------ ------ ------- ------- ----- ------- ------ ------- Balance at September 30, 1999............. -- $ -- 1,640 $1,638 10,620 $64,374 $(1,773) $(352) $ (101) $6,482 $70,268 ==== ====== ===== ====== ====== ======= ======= ===== ======= ====== ======= Comprehensive Income ------------- Balance at December 31, 1996............. Issuance of Series A convertible preferred stock for cash, net of issuance costs of $318......... Exercise of stock options... Tax benefit of stock options exercised....... Payment on notes receivable...... Net income...... $ 300 Foreign currency translation adjustment...... (40) ------------- Balance at September 30, 1997............. $ 260 ============= Exercise of stock options... Issuance of Class B common stock through Employee Stock Purchase Plan... Tax benefit of stock options exercised....... 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....... Payments on notes receivable...... Issuance of Class B common stock in business combinations.... Amortization of deferred compensation.... Net income...... $ 4,132 Foreign currency translation adjustment...... (1,170) ------------- Balance at September 30, 1998............. $ 2,962 ============= Exercise of stock options... Issuance of Class B common stock through Employee Stock Purchase Plan... Tax benefit of stock options exercised....... Payments on notes receivable...... Issuance of Class B common stock and options in business combinations.... Repurchase of common stock.... Amortization of deferred compensation.... Net income...... $ 1,006 Foreign currency translation adjustment...... 1,109 ------------- Balance at September 30, 1999............. $ 2,115 =============
See accompanying notes. F-6 TIER TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended Nine September 30, Months Ended ------------------ September 30, 1999 1998 1997 -------- -------- ------------- Operating activities Net income................................... $ 1,006 $ 4,132 $ 300 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization............... 4,229 1,169 259 Amortization of deferred compensation....... 239 109 -- Provision for doubtful accounts............. 2,025 210 50 Deferred income taxes....................... (3,231) (721) (144) Tax benefit of stock options exercised...... 611 544 674 Forgiveness of notes receivable from employees.................................. 621 275 -- Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable......................... (8,291) (12,680) (2,740) Income taxes payable........................ 544 1,271 (793) Prepaid expenses and other current assets... 34 (611) (214) Other assets................................ 101 (545) 13 Accounts payable and accrued liabilities.... (411) 4,796 1,234 Deferred income............................. 965 466 (21) -------- -------- ------- Net cash used in operating activities........ (1,558) (1,585) (1,382) -------- -------- ------- Investing activities Purchase of equipment and improvements....... (5,749) (1,759) (554) Notes and accrued interest receivable from related parties............................. (740) (1,228) (1,028) Repayment on notes and accrued interest receivable from related parties............. 454 -- -- Business combinations, net of cash acquired.. (13,168) (8,271) (915) Restricted cash.............................. (39) (712) -- Purchases of available-for-sale securities... (28,463) (30,204) -- Sales of available-for-sale securities....... 19,328 13,370 -- Maturities of available-for-sale securities.. 16,999 -- -- Other assets................................. (104) (108) -- -------- -------- ------- Net cash used in investing activities........ (11,482) (28,912) (2,497) -------- -------- ------- Financing activities Borrowings under bank lines of credit........ 909 6,912 10,356 Payment of borrowings on bank lines of credit...................................... (1,466) (9,671) (8,253) Repurchase of common stock................... (414) -- -- Net proceeds from issuance of common stock... 388 54,972 -- Net proceeds from issuance of preferred stock....................................... -- -- 1,892 Repayment by shareholder on note receivable.. 386 95 37 Deferred financing costs..................... -- 224 (224) Exercise of stock options.................... 1,244 933 -- Payments on capital lease obligations........ (252) (45) (33) Payments on notes payable to shareholders.... (26) (47) (56) -------- -------- ------- Net cash provided by financing activities.... 769 53,373 3,719 -------- -------- ------- Effect of exchange rate changes on cash...... (74) (516) (40) -------- -------- ------- Net (decrease) increase in cash and cash equivalents................................. (12,345) 22,360 (200) Cash and cash equivalents at beginning of period...................................... 22,466 106 306 -------- -------- ------- Cash and cash equivalents at end of period... $ 10,121 $ 22,466 $ 106 ======== ======== ======= Supplemental disclosures of cash flow information Cash paid during the year for: Interest paid............................... $ 77 $ 96 $ 170 ======== ======== ======= Income taxes paid (refunded), net........... $ 2,724 $ 1,548 $ 465 ======== ======== ======= Equipment acquired under capital lease obligations................................. $ 72 $ 219 $ -- ======== ======== ======= Common stock issued in exchange for notes receivable.................................. $ -- $ -- $ 2,196 ======== ======== ======= Accrued purchase price and assumed liabilities related to business combinations................................ $ 3,670 $ 397 $ 531 ======== ======== ======= Conversion of preferred stock into common stock....................................... $ -- $ 1,892 $ -- ======== ======== ======= Common stock issued in business combinations................................ $ 1,328 $ 666 $ -- ======== ======== ======= Restricted stock held in escrow for employees................................... $ -- $ 701 $ -- ======== ======== =======
See accompanying notes. F-7 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies The Company Tier Technologies, Inc. (the "Company") provides information technology consulting, application development, software engineering, training and business outsourcing services to large companies and government entities. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany 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. Foreign currency transaction gains and losses have not been material to the Consolidated Statements of Income for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997. In September 1997, the Company changed its fiscal year end to September 30. 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 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. 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 performance-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. F-8 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies--(continued) Unbilled receivables represent revenue recognized in excess of amounts billed in accordance with contractual billing terms. Unbilled receivables were $8,390,000 and $3,444,000 at September 30, 1999 and 1998, respectively. Revenues derived from sales to governmental agencies were approximately $34,846,000, $20,862,000 and $10,133,000 for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997, 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 reserve established due to a contract dispute. See Note 13, "Contract Dispute." 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. Accounts receivable balances at September 30, 1998 relating to these three clients amounted to approximately $11,372,000. During the nine months ended September 30, 1997, revenues from three clients totaled approximately $5,019,000, $4,734,000 and $4,437,000, which represented 22%, 21% and 20% of total revenues, respectively. Accounts receivable balances at September 30, 1997 relating to these three clients amounted to approximately $1,611,000. Cash and Cash Equivalents Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at amounts that approximate fair value, based on quoted market prices. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts with financial institutions and highly liquid debt securities of corporations, state governments, municipalities and the U.S. Government. Restricted Cash In accordance with an acquisition agreement, the Company deposited cash in an escrow account which will be released to the sellers of the acquired business upon the satisfaction of certain contingencies. The Company has classified this deposit as restricted cash. 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-9 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, 1999 and 1998 and the nine months ended September 30, 1997. 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, all such amounts have been charged to expenses. Stock-Based Compensation The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and provides the disclosure required in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"), which requires the use of the liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rules and laws that are expected to be in effect when the differences are expected to reverse. Net Income Per Share The Company computes net income per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under FAS 128, basic net income per share is computed by dividing the net income 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, F-10 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies--(continued) 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: commercial services, government services, Australian operations and United Kingdom operations. The commercial services segment provides information technology ("IT") consulting, application development and software engineering services to Fortune 1000 clients in the United States. The government services segment provides IT consulting, application development, legal and policy consulting, and business process outsourcing services to state and local government entities in the United States. The Australian operations segment provides IT consulting, application development, call center and software engineering services to clients in the public and private sectors in Australia. The United Kingdom operations segment provides IT consulting, business process reengineering, software engineering and application development 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 On March 4, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires 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. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its consolidated financial statements for the year ending September 30, 2000. The adoption of SOP 98-1 is not expected to have a material effect on the consolidated financial statements of the Company. On April 3, 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which provides guidance on the financial reporting of start-up costs and organization costs. SOP 98-5 requires costs of start-up activities and F-11 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Summary of Significant Accounting Policies--(continued) organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 is not expected to have a material impact on the consolidated financial statements of the Company. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The Company is required to adopt this statement in the fourth 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 has not yet determined the impact, if any, that the adoption of FAS 133 will have on the consolidated financial statements. 2. Net Income Per Share Net income per share is calculated as follows:
Year Ended Nine Months September 30, Ended ------------- September 30, 1999 1998 1997 ------ ------ ------------- (in thousands, except per share data) Numerator: Net income.................................... $1,006 $4,132 $ 300 ====== ====== ===== Denominator for basic income per share-weighted average common shares outstanding.............. 12,056 9,231 5,400 Effects of dilutive securities: Common stock options.......................... 684 1,274 274 Convertible preferred stock................... -- 90 120 Common stock held in escrow................... 129 29 -- ------ ------ ----- Denominator for diluted net income per share- adjusted weighted average common shares and assumed conversions............................ 12,869 10,624 5,794 ====== ====== ===== Basic net income per share...................... $ 0.08 $ 0.45 $0.06 ====== ====== ===== Diluted net income per share.................... $ 0.08 $ 0.39 $0.05 ====== ====== =====
Options to purchase approximately 1,519,000 million shares of Class B common stock at a price ranging from $10.88 to $17.81 per share were outstanding at September 30, 1999, 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-12 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Balance Sheet Components The components of equipment and improvements are as follows:
September 30, --------------- 1999 1998 ------- ------ (in thousands) Computer equipment and software............................. $ 7,455 $2,482 Furniture, equipment and leasehold improvements............. 2,317 723 ------- ------ 9,772 3,205 Less: Accumulated depreciation and amortization............. (2,760) (834) ------- ------ $7,012 $2,371 ======= ======
Depreciation and amortization expense related to equipment and improvements for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997, was $1,928,000, $600,000 and $104,000, respectively. The cost of assets acquired under capital leases is $1,195,000 and $296,000 and the related accumulated amortization is $407,000 and $107,000 at September 30, 1999 and 1998, respectively. The components of acquired intangible assets are as follows:
September 30, ---------------- 1999 1998 ------- ------- (in thousands) Intangible assets: Goodwill................................................. $25,863 $ 9,555 Acquired workforce....................................... 990 924 ------- ------- 26,853 10,479 Less: Accumulated amortization............................. (2,940) (685) ------- ------- $23,913 $ 9,794 ======= =======
4. Bank Lines of Credit At September 30, 1998, the Company had a $10 million revolving credit facility which had a maturity date of March 31, 2001. During the year ended September 30, 1999, the Company amended its credit facility and at September 30, 1999, the Company had an $8 million revolving credit facility which matures on May 27, 2000. The total commitment amount is limited to the lesser of 85% of eligible accounts receivable or $8 million and is 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 a pledge of approximately 65% of the stock of the Company's foreign subsidiaries. Interest is based on the adjusted LIBOR rate plus 2.5% or an alternate base rate plus 0.5%, at the Company's option. The alternate base rate is the greater of the bank's base rate or the federal funds effective rate plus 0.5%. Among other provisions, the credit facility requires the Company to maintain certain minimum financial ratios. As of September 30, 1999, the Company was in compliance with all financial ratios and had no outstanding borrowings under its credit facility; however, the availability of the total commitment amount to the Company has been reduced by an $800,000 letter of credit issued in connection with the acquisition of certain assets and liabilities of Service Design Associates, Inc. F-13 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Bank Lines of Credit--(continued) Prior to March 31, 1998, the Company had a credit agreement with a bank which provided for lines of credit of up to $2,250,000 for general corporate purposes and $1,500,000 for acquisition purposes (including up to $500,000 for stand-by letters of credit). The lines of credit bore interest at the bank's prime rate (8.5% at September 30, 1997) plus 1.5% and 1.75%, respectively. Total borrowings were limited to the lesser of $3,750,000 or 85% of eligible accounts receivable and were secured by the Company's assets. All borrowings under this credit facility were repaid in December 1997. 5. Commitments The Company leases its principal facilities and certain equipment under noncancellable operating and capital leases which expire at various dates through 2004. Future minimum lease payments for noncancellable leases with terms of one year or more are as follows:
Operating Capital Leases Leases --------- ------- Years ending September 30, 2000..................................................... $1,768 $ 439 2001..................................................... 1,305 308 2002..................................................... 1,008 142 2003..................................................... 485 22 2004..................................................... 442 -- ------ ----- Total minimum lease payments............................. $5,008 911 ====== Less amounts representing interest....................... (87) ----- Present value of capital lease obligations............... 824 Less amounts due within one year......................... (381) ----- $ 443 =====
Rent expense for the years ended September 30, 1999 and 1998, and the nine months ending September 30, 1997, was approximately $1,277,000, $530,000 and $184,000, 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. 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. F-14 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Shareholders' Equity--(continued) Upon conversion of shares of Class A common stock into shares of Class B common stock, such Class A common stock shares are retired from the authorized shares and are not reissuable by the Company. The number of authorized shares of Class A common stock was approximately 1,660,000 at September 30, 1999. Voting Trust In November 1997, all Class A shareholders (the "Beneficiaries") transferred their Class A common stock into a voting trust. The Company's Chief Executive Officer and President are the trustees of the voting trust (the "Trustees") and have the exclusive right to vote all shares of Class A common stock held in the voting trust. The voting trust has a term of 10 years and is renewable by consent of the Beneficiaries and the Trustees during the last 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 Trustees to terminate or (ii) the death of the sole remaining Trustee, leaving no incumbent or identified successor. Initial Public Offering In December 1997, the Company completed an initial public offering of 3,400,000 shares of its Class B common stock at $8.50 per share. Of those shares, 2,725,000 shares were sold by the Company and 675,000 shares were sold by certain selling shareholders. In January 1998, the underwriters from the Company's initial public offering exercised their over-allotment option to purchase an additional 510,000 shares of Class B common stock from the Company at the initial public offering price. Net proceeds to the Company, including the over-allotment option, were approximately $23,900,000 after deducting the underwriters' discount, commissions and related issuance costs. 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. As of September 30, 1999, 75,000 shares have been repurchased for a total cost of $414,000. 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 F-15 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Shareholders' Equity--(continued) 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, 1999, 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, 1999, options for 660,000 shares of Class A common stock and 660,000 shares of Class B common stock had been exercised at prices ranging from $0.12 to $3.58 per share (weighted average exercise price of $1.66 per share) and options for 20,000 shares of Class A common stock at an exercise price of $3.58 per share remain outstanding. These outstanding options will expire in 2002. The weighted average fair value of these options granted during the nine months ended September 30, 1997 was $0.48 per share. At September 30, 1999, all of these options were vested. F-16 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, 1999, no compensation expense had been recorded in connection with stock based employee incentive awards under the Plan. At September 30, 1999 and September 30, 1998, the number of shares authorized for issuance under the Plan was approximately 5,989,000 and 2,989,000, respectively. A summary of activity under the Plan is as follows:
Weighted Number of Average Shares Exercise Price -------------- -------------- (in thousands) Options outstanding at December 31, 1996...... -- $ -- Options granted.............................. 1,783 4.02 Options cancelled............................ (40) 3.33 ----- 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 =====
The weighted average fair value of options granted to employees under the Plan during the years ended September 30, 1999, 1998 and the nine months ended September 30, 1997 was $5.43, $5.51 and $0.85 per share, respectively. At September 30, 1999, 1998 and 1997, there were 1,505,000, 845,000 and 207,000 options exercisable at a weighted average exercise price of $10.07, $6.83 and $3.31, respectively. At September 30, 1999, options to purchase approximately 1,788,000 shares of Class B common stock were available for grant. The weighted average remaining life of outstanding options under the Plan at September 30, 1999 was 8.52 years. F-17 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, 1999:
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) $2.45--$3.25 451 7.40 $ 2.98 291 $ 2.95 $4.25--$5.78 410 5.35 $ 5.25 212 $ 5.18 $6.00--$6.00 433 9.59 $ 6.00 10 $ 6.00 $6.81--$7.03 391 9.74 $ 6.90 74 $ 6.85 $7.06--$10.88 635 8.91 $ 9.50 310 $10.61 $13.88--$14.25 385 9.02 $14.14 188 $14.17 $14.38--$15.19 473 8.99 $14.89 158 $15.19 $16.13--$17.00 343 9.00 $16.31 234 $16.17 $17.75--$17.75 20 9.33 $17.75 20 $17.75 $17.81--$17.81 34 8.75 $17.81 8 $17.81 ----- ----- $2.45--$17.81 3,575 8.52 $ 9.47 1,505 $10.07 ===== =====
Employee Stock Purchase Plan In October 1997, the Company adopted the Employee Stock Purchase Plan. The Company reserved a total of 100,000 shares of Class B common stock for issuance under the plan. The plan has consecutive six-month purchase periods and eligible employees may purchase Class B common stock at 85% of the lesser of the fair market value of the Company's Class B common stock on the first day or the last day of the applicable purchase period. The 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 and net income per share as follows:
Year Ended Nine Months September 30, Ended -------------- September 30, 1999 1998 1997 ------ ------ ------------- (in thousands, except per share data) Net income, as reported................... $1,006 $4,132 $300 Net income (loss), pro forma.............. (2,062) 2,616 165 Basic net income per share, as reported... 0.08 0.45 0.06 Basic net income (loss) per share, pro forma.................................... (0.17) 0.28 0.03 Diluted net income per share, as reported................................. 0.08 0.39 0.05 Diluted net income (loss) per share, pro forma.................................... (0.17) 0.25 0.03
F-18 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:
Year Ended Nine Months September 30, Ended ----------------------- September 30, 1999 1998 1997 ----------- ----------- ------------- Expected dividend yield................ 0% 0% 0% Expected volatility.................... 82.3% 65% 0% Risk-free interest rate................ 4.18%-5.77% 4.79%-5.60% 6.48% Expected life of the option............ 0.5-5 years 0.5-4 years 1-5 years
7. Alliance Agreement In September 1999, the Company entered into a long-term strategic alliance ("Alliance Agreement"), with Siemens Business Services Limited ("SBS"). Under the Alliance Agreement, the Company has committed to utilizing a minimum amount of resources from the SBS Application Services Center ("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 Alliance Agreement shall not exceed $17,400,000 over the five-year life of the agreement. The Company will also receive approximately $11,200,000 for consultancy services provided over the life of the Alliance Agreement. 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 December 16, 1996, the Company acquired the intangible assets of Chicago Consulting Alliance, LLC ("CCA"). CCA was based in Chicago, Illinois and provided consulting services for the custom design of software and computer systems for business applications. The initial purchase price was approximately $170,000. As of September 30, 1999, intangible assets of approximately $170,000 are being amortized over a six-year period. On December 31, 1996, the Company acquired certain assets and liabilities of Encore Consulting, Inc. ("Encore"), a Missouri-based corporation which provided consulting services for computer systems integration on a government contract. The initial purchase price was approximately $726,000 and liabilities assumed were approximately $59,000. Additional acquisition costs of approximately $20,000 were incurred. Tangible assets acquired were approximately $538,000. As of September 30, 1999, intangible assets of approximately $267,000 are being amortized over a six-year period. Contingent payments of up to $300,000 were to be made if renewals of a significant client contract occur and provided that the key employee/sellers continue to be employed by the Company. Based on the annual renewals of such contract, contingent payments to the former Encore shareholders of $150,000 were expensed during each of the year ended September 30, 1998 and the nine months ended September 30, 1997 as compensation charge related to business combinations. On January 2, 1997, the Company acquired the intangible assets of Five Points Consulting, LLC ("Five Points") which was based in Atlanta, Georgia. Five Points custom designed software and computer systems for special business applications. The initial purchase price was approximately $284,000. As of September 30, 1999, intangible assets of approximately $284,000 are being amortized over a six-year period. F-19 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Acquisitions--(continued) On March 10, 1997, the Company acquired the intangible assets of Tangent Group, Pty. Limited ("Tangent Group"), an Australian entity which provided computer systems consulting services. The initial purchase price was approximately $488,000 (converted to U.S. dollars as of the date of the acquisition). As of September 30, 1999, intangible assets recorded of approximately $421,000 (converted into U.S. dollars using the September 30, 1999 exchange rate) are being amortized over a six-year period. In addition, the Company recorded a liability to pay $120,000 in guaranteed minimum royalties. The royalty is based on 3% of the Company's gross revenues generated by its Australian operations. The maximum royalties to be paid over the first three-year period are approximately $240,000. The minimum royalty of $120,000 was included in the initial purchase price and any additional amounts will be included in the purchase price when accrued. 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, 1999, intangible assets of approximately $299,000 (converted into U.S. dollars using the September 30, 1999 exchange rate) are being amortized over a six-year period. During the year ended September 30, 1998 and nine months ended September 30, 1997, approximately $477,000 and $319,000, respectively, 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. The performance criteria included renewal of a specific contract and minimum levels of both the number of consultants and billing amounts. 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 approximately $40,000 were acquired. Additional acquisition costs of approximately $397,000 were incurred. As of September 30, 1999, intangible assets of approximately $6,472,000 (converted into U.S. dollars using the September 30, 1999 exchange rate) are being amortized over a period of 8 to 15 years. Contingent payments totaling approximately $696,000 and $312,000 were paid during the years ended September 30, 1999 and 1998, respectively. Additional contingent payments of up to approximately $650,000 (based on September 30, 1999 exchange rate of AU $1.54 to US $1.00) may be paid by May 15, 2000 if certain performance targets are met. The performance targets specify the achievement of certain revenue levels of the continuing business measured annually over a two-year period. 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 $124,000 were paid during the year ended September 30, 1999. Additional contingent payments may be paid based on the achievement of future performance targets and the continued employment of certain key employee/sellers with the Company. These payments will be 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 issued and are held in F-20 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Acquisitions--(continued) escrow and will be released over three years provided that the key employee/sellers are employed by the Company on the release dates. The value of these shares are reflected as deferred compensation on the balance sheet and are being amortized over the three year vesting period. In March 1999, approximately 16,000 of these shares were released from escrow. As of September 30, 1999, approximately $349,000 of compensation expense has been amortized and intangible assets of approximately $905,000 (converted into U.S. dollars using the September 30, 1999 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, 1999, intangible assets of approximately $4,483,000 (converted into U.S. dollars using the September 30, 1999 exchange rates) are being amortized over a period of 8 to 15 years. Contingent payments of approximately $1,008,000 in cash and stock were earned during the year ended September 30, 1999. Approximately $246,000 of this first year contingent payment was contingent upon employment and expensed during the year as a compensation charge related to business combination and the remaining $762,000 was recorded as additional purchase price. The remaining contingent payments of up to approximately $716,000 in cash (based on a current exchange rate of AU $1.54 to US $1.00) and approximately 25,000 shares of the Company's Class B common stock may be paid for the period ended August 1, 2000 if certain performance targets are met. Such amounts are held in escrow prior to the achievement of the performance targets. The performance targets specify the achievement of certain levels of profit before taxes and revenues of the continuing business measured annually. Approximately 71% of such payments will be accounted for as additional purchase price and the remaining payments will be treated as business combination compensation expense at the time the payments are deemed probable to be made because such payments are contingent, in part, on the continuing employment of a key employee/seller. 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 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. Additional contingent payments of up to approximately $12,300,000 (based on the exchange rate at the time of the agreement of GBP 0.61 to US $1.00), may be paid in cash and shares of the Company's Class B common stock over a three-year period based on achieving certain performance targets. Contingent payments will be accrued when earned and recorded as additional purchase price. As of September 30, 1999, intangible assets of approximately $4,113,000 (converted into U.S. dollars using the September 30, 1999 exchange rate) are being amortized over a period of 8 years. 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. Additional contingent payments of up to approximately $1,561,000 (based on September 30, 1999 exchange rate of AU $1.54 to US $1.00) may be paid in cash and shares of the Company's Class B common stock over a three year period F-21 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Acquisitions--(continued) based on the acquired business achieving certain levels of profits before taxes and revenues measured annually over the three-year period. Contingent payments will be accrued when earned and recorded as additional purchase price. As of September 30, 1999, intangible assets of approximately $2,664,000 (converted into U.S. dollars using the September 30, 1999 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, 1999, intangible assets of approximately $5,023,000 are being amortized over a period of 8 years. In addition to the initial purchase price of the acquisition, contingent payments of up to approximately $900,000 in cash and $3.2 million in shares of the Company's Class B common stock or cash, at the Company's election, will be paid to SDA upon the achievement of certain performance targets over a three-year period. Of the total contingent payments, SDA will be entitled to $500,000 cash upon the award of a certain client contract with a specified revenue and gross profit level and will be entitled to the remaining contingent payments on the second and third anniversaries of the acquisition based upon the acquired business achieving certain levels of profits before taxes and revenues over that three-year period. In connection with the acquisition, Tier caused a letter of credit of up to $800,000 to be issued as additional security for an obligation of the surviving company. Contingent payments will be accrued when earned and recorded as additional purchase price. 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 500 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 $1.5 million may be paid in shares of the Company's Class B common stock and cash over a two-year period based on the acquired business achieving certain levels of gross profit and revenues measured annually over the two-year period. 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 determined utilizing the average closing price of the Company's Class B common stock for the five trading days preceding each 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, 1999, intangible assets of approximately $1,748,000 are being amortized over a period of 8 years. 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 currently under development by the Company 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 completion of the software is expected to occur in the second quarter of fiscal year 2000. Once developed, this software would require significant customization prior to a sale to a customer. If the development of the software is not completed, the Company's cash flows and operations would not be materially adversely affected. The accompanying consolidated financial statements include the results of operations of these acquired businesses for periods subsequent to the respective acquisition dates. F-22 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 Sancha Group, Infact and Midas had been purchased by the Company as of October 1, 1997, after including the impact of certain adjustments, such as increased amortization expense due to recording of intangible assets:
Year Ended September 30, ----------------------- 1999 1998 ----------- ----------- (in thousands, except per share data) Revenues............................................ $ 92,692 $ 71,603 Net income.......................................... 830 4,779 Net income per share................................ 0.07 0.51 Diluted net income per share........................ 0.06 0.44
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. Related Party Transactions Notes Receivable The Company has outstanding notes receivable from certain officers and employees of the Company as of September 30, 1999 and 1998, which total approximately $975,000 and $1,557,000, respectively. These notes bear interest at rates ranging from 5.75% to 9.00% and have due dates ranging from three to ten years. Certain of these notes are being forgiven in accordance with the terms of the officers' and employees' agreements and have an aggregate balance of approximately $279,000 at September 30, 1999. Notes receivable from shareholders 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, 1999. The related parties have pledged a total of 241,902 shares of the Company's common stock as security for the notes. As of September 30, 1999, the pledged stock had a market value of approximately $1,663,000. 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, 1999 had a market value of $870,506. Mr. Bildner continues to indemnify the Company for any loss, liability or expense incurred in connection with the Guaranty. F-23 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Segment and Geographic Areas Financial information by geographic area is as follows:
Year Ended Nine Months September 30, Ended ---------------- September 30, 1999 1998 1997 ------- ------- ------------- (in thousands) Revenues: United States............................... $60,989 $45,286 $19,407 Australia................................... 20,091 7,575 2,049 United Kingdom.............................. 10,896 4,864 1,023 ------- ------- ------- Total......................................... $91,976 $57,725 $22,479 ======= ======= ======= Income (loss) from operations: United States............................... $ 224 $ 4,115 $ 456 Australia................................... 1,279 852 206 United Kingdom.............................. (1,174) 827 (62) ------- ------- ------- Total......................................... $ 329 $ 5,794 $ 600 ======= ======= ======= September 30, ------------------------------ 1999 1998 1997 ------- ------- ------------- (in thousands) Identifiable assets: United States............................... $55,629 $60,442 $ 8,129 Australia................................... 20,772 12,983 1,258 United Kingdom.............................. 7,543 1,078 1,109 ------- ------- ------- Total......................................... $83,944 $74,503 $10,496 ======= ======= =======
The United States revenues for the years ended September 30, 1999 and 1998, and the nine months ended September 30, 1997, include revenues from one project with a U.S. company performed in Australia of approximately $110,000, $4,165,000 and $2,111,000. Segment Reporting The Company is managed through four reportable segments, commercial services, government services, Australian operations and United Kingdom operations. The commercial services segment provides information technology ("IT") consulting, application development and software engineering services to Fortune 1000 clients in the United States. The government services segment provides IT consulting, application development, legal and policy consulting, and business process outsourcing services to state and local government entities in the United States. The Australian operations segment provides IT consulting, application development and software engineering services to clients in the public and private sectors in Australia. The United Kingdom operations segment provides IT consulting, business process reengineering, software engineering and application development services to clients in the public and private sector in the United Kingdom. The Company evaluates its segment performance and allocates resources 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, 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 F-24 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Segment and Geographic Areas--(continued) table below presents financial information for the four reportable segments and for items that cannot be allocated to the operating segments (in thousands):
United Commercial Government Australian Kingdom Services Services Operations Operations Other Total ---------- ---------- ---------- ---------- ------ ------- 1999 Revenues................ $29,477 $29,474 $20,091 $10,896 $2,038 $91,976 Gross profit............ 13,434 10,390 7,923 3,354 639 35,740 1998 Revenues................ 25,383 19,903 7,575 4,864 -- 57,725 Gross profit............ 9,225 7,048 2,758 1,421 -- 20,452 1997 (nine month period) Revenues................ 9,523 9,884 2,049 1,023 -- 22,479 Gross profit............ 3,260 3,511 438 353 -- 7,562
11. Income Taxes The domestic and foreign components of income before income taxes are as follows:
Year Ended Nine September 30, Months Ended -------------- September 30, 1999 1998 1997 ------ ------ ------------- (in thousands) United States................................... $1,771 $5,127 $356 Foreign......................................... (121) 1,647 145 ------ ------ ---- Total......................................... $1,650 $6,774 $501 ====== ====== ====
F-25 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Income Taxes--(continued)
September 30, --------------- 1999 1998 ------- ------ (in thousands) Deferred tax liabilities: Accrual basis to cash basis adjustments................... $ -- $ 158 Depreciation.............................................. -- 140 Other..................................................... 222 205 ------- ------ Total deferred tax liabilities.............................. 222 503 Deferred tax assets: Vacation accruals......................................... 175 229 Accrued expenses.......................................... 114 107 Accrued revenue........................................... 423 57 Accrued rent.............................................. 4 8 Accrued bonus............................................. 165 137 Depreciation.............................................. 18 -- Intangibles............................................... 645 122 Accounts receivable allowance............................. 866 99 Deferred miscellaneous revenue............................ -- 133 Purchased in-process technology........................... 1,432 -- Foreign tax credit carryforward........................... 572 156 Valuation allowance....................................... (572) (156) ------- ------ Total deferred tax assets................................... 3,842 892 ------- ------ Net deferred tax assets..................................... $ 3,620 $ 389 ======= ======
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, 1999, the Company had approximately $572,000 of foreign tax credit carryforward for tax reporting purposes available to offset future U.S. Federal Income Tax. Such foreign tax credit carryforward will expire in 2004. The benefit from the foreign tax credit carryforward may be limited in certain circumstances. The Company believes sufficient uncertainty exists regarding the realizability of the foreign tax credit such that a valuation allowance is required. F-26 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Income Taxes--(continued) Significant components of the provision for income taxes are as follows:
Nine Year Ended Months September 30, Ended --------------- September 1999 1998 30, 1997 ------- ------ --------- Current: Federal............................................ $ 3,112 $2,527 $ 144 State.............................................. 378 362 47 Foreign............................................ 385 474 154 ------- ------ ----- 3,875 3,363 345 ------- ------ ----- Deferred (benefit): Federal............................................ (2,891) (645) (123) State.............................................. (340) (76) (21) ------- ------ ----- (3,231) (721) (144) ------- ------ ----- Total provision for income taxes..................... $ 644 $2,642 $ 201 ======= ====== =====
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:
Nine Year Ended Year Ended Months Ended September 30, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- U.S statutory federal tax rate... 34.0% 34.0% 34.0% State taxes, net of federal tax benefit......................... 4.0% 4.0% 6.1% Tax exempt interest income....... (20.5)% (3.2)% -- Tax effect of foreign operations...................... 19.6% -- -- Other............................ 1.9% 4.2% -- ----- ---- ---- Effective tax rate............. 39.0% 39.0% 40.1% ===== ==== ====
12. 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. 13. 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 has not breached the agreement. On June 28, 1999, after a series of discussion with the prime contractor, the Company filed a federal civil action against the prime contractor for the amounts the Company is 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 F-27 TIER TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Contract Dispute--(continued) sanctions which may be levied in the future by the client of the prime contractor. The Company denies the allegations and intends to vigorously pursue its own claim against the prime contractor. The parties to the action have commenced voluntary discovery. In the event the prime contractor prevails in its action, the Company's financial condition, results of operations and cash flows would be materially and adversely affected. 14. Subsequent Events Effective October 1, 1999, the Company acquired all the issued and outstanding capital stock of Simsion Bowles & Associates ("SBA"), an Australian entity which provides business process reengineering and integration of e-commerce consulting services. The initial purchase price totaled approximately $2,567,000 (converted into U.S. dollars as of the date of the acquisition) in cash. The acquisition will be accounted for using the purchase method of accounting. Additional contingent payments of up to approximately $3,052,000 (based on a current exchange rate of AU $1.54 to US $1.00) may be paid in cash and shares of the Company's Class B common stock over a three year period based on achieving certain performance targets. Contingent payments will be accrued when earned and recorded as additional purchase price. Intangible assets of approximately $2,397,000 will be recorded and amortized using the straight-line method over an eight to ten-year period. In October 1999, the Company (through its Australian subsidiary) entered into a $2,100,000 revolving line of credit with St. George Bank Limited of Australia (based on a current exchange rate of AU $1.54 to $1.00). Under the terms of the agreement, the principal balance of the credit line will reduce by approximately $195,000 per quarter, beginning February 2000, to a maximum line of $1,300,000. The line of credit bears interest at fixed rates that are set at the time of each drawdown on the line. F-28 TIER TECHNOLOGIES, INC. SCHEDULE II (in thousands)
Balance at Balance at Beginning end of of Period Additions Write-offs period ---------- --------- ---------- ---------- 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 Nine Months Ended September 30, 1997 Allowance for doubtful receivables...... -- 113 (63) 50
F-29 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. /s/ James L. Bildner By: _________________________________ Dated: December 10, 1999 James L. Bildner Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James L. Bildner, William G. Barton and George K. Ross, and each of them, his attorneys-in-fact and agents, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ James L. Bildner Chairman of the Board and December 10, 1999 ____________________________________ Chief Executive Officer James L. Bildner (principal executive officer) /s/ William G. Barton President, Chief Technology December 10, 1999 ____________________________________ Officer and Director William G. Barton /s/ George K. Ross Executive Vice President and December 10, 1999 ____________________________________ Chief Financial Officer George K. Ross (principal financial officer and principal accounting officer) /s/ Ronald L. Rossetti Director December 10, 1999 ____________________________________ Ronald L. Rossetti /s/ Samuel Cabot III Director December 10, 1999 ____________________________________ Samuel Cabot III /s/ William Van Faasen Director December 10, 1999 ____________________________________ William Van Faasen /s/ Morgan Guenther Director December 10, 1999 ____________________________________ Morgan Guenther
EXHIBIT INDEX
Exhibit Number Exhibit Description Page ------- ------------------- ---- 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 (8)*........... 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).......................................
Exhibit Number Exhibit Description Page ------- ------------------- ---- 10.13 Full Recourse Promissory Note by and between the Registrant and William G. Barton, dated as of December 31, 1996 (3)........... 10.14 Full Recourse Secured Promissory Note, dated as of February 28, 1997, and Amended and Restated Pledge Agreement, dated as of August 1, 1997, by and between the Registrant and William G. Barton (3)..................................................... 10.15 Full Recourse Promissory Note by and between the Registrant and William G. Barton, dated as of February 28, 1997 (3)........... 10.16 Full Recourse Promissory Note by and between the Registrant and William G. Barton, dated as of July 15, 1997 (3)............... 10.17 Full Recourse Promissory Note by and between the Registrant and F. Thomas Latham, dated as of July 15, 1997 (3)................ 10.18 Amended and Restated Employment Agreement by and between the Registrant and George K. Ross, dated as of February 16, 1998 (4)*........................................................... 10.19 Full Recourse Promissory Note by and between the Registrant and George K. Ross, dated as of February 3, 1997 (3)............... 10.20 Office Lease by and between Urban West Business Park, Colony MB Partners, L.P., as Landlord, and Tier Corporation, a California Corporation, as Tenant, as amended July 29, 1997 (3)........... 10.21 Form of Indemnification Agreement (3).......................... 10.22 Tier Corporation 401(k) Plan, Summary Plan Description (3)..... 10.23 Asset Purchase Agreement by and among the Registrant, Encore Consulting LLC, 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 PtyLimited, Sancha Software Development Pty Limited and Tier Technologies (Australia) Pty Limited, dated as of March 20, 1998 (5).............................................
Exhibit Number Exhibit Description Page ------- ------------------- ---- 10.34 Revolving Credit Agreement by and between the Registrant, Tier Technologies (United Kingdom) Inc. and BankBoston, N.A. (4).... 10.35 Agreement for provision of consulting services by and between the Registrant and Humana, Inc. (4)............................ 10.36 Full Recourse Promissory Note by and between the Registrant and George K. Ross, dated as of February 10, 1998 (4).............. 10.37 Full Recourse Promissory Note by and between the Registrant and James Weaver, dated as of May 22, 1998 (6)..................... 10.38 Full Recourse Promissory Note by and between the Registrant and James Weaver, dated as of May 22, 1998 (6)..................... 10.39 Amended Agreement by and between the Registrant and the State of Missouri, dated August 3, 1998 (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).................. 10.47 Amended and Restated 1996 Equity Incentive Plan, dated January 28, 1999 (11)*................................................. 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)...........................................................
Exhibit Number Exhibit Description Page ------- ------------------- ---- 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).......................................... 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.................................................... 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............ 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................................................ 10.63 Employment Agreement by and between the Registrant and James R. Weaver, dated April 19, 1999.*................................. 16.1 Letter re: change in certifying accountant (7)................. 21.1 Subsidiaries of the Registrant................................. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.................................................... 23.2 Consent of Ernst & Young LLP, Independent Auditors............. 27.1 Financial Data Schedule........................................
- -------- * 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. EX-10.60 2 CONTRACT FOR GOODS & SERVICES, AS OF 8/10/99 EXHIBIT 10.60 1 Subject to the terms and conditions set forth herein, the Government of the District of Columbia, hereinafter referred to as the "District", and Tier Technologies, Inc. who will perform the contract through SDA a Division of Tier Technologies, Inc., hereinafter referred to as the "contractor", hereby enter into a contract in accordance with the following terms: ARTICLE 1 SCOPE OF WORK ------------- The Office of the Corporation Counsel, Child Support Enforcement Division (CSED) requires the contractor to provide, operate, install, design and develop enhancements, implement and maintain its automated District of Columbia Child Support Enforcement System (DCCSES). This complex system is required to perform all functions necessary to process child support cases, as well as collections for such cases, and must also be capable of interfacing with the various local referral and locate agencies, as well as federal agencies for interception of information and collection data. In addition, the automated system must have the capacity to facilitate access to the District Wide Area Network (WAN) and Local Area Network (LAN) to support the processing of child support cases at both the CSED and the D.C. Superior Court. 2 Specifically, the contractor shall provide all personnel, logistical support, management, equipment, materials and supplies necessary to perform the following: 1.1 Part 1 - New Equipment and Facility Management Operation -------------------------------------------------------- 1.1.1 Obtain and install new equipment at the contractor's site, install a new DCCSES network with new updated equipment, equipment testing; and provide logistical support, equipment capacity analysis, training, documentation, and monthly operational services, in accordance with the District's requirements. The equipment and network should be compatible with the DC WAN in its current and proposed structure. The District will approve all plans and provide written authorization in accordance with paragraph C.5 of the Request for Proposals. A corresponding adjustment in the deliverable schedule will be made for delays in the authorization in appropriate circumstances. 1.2.1 Provide Facility Management services which will not begin until the District approves in writing all tests (Section 1.1.1 above) and provides written authorization to the contractor to begin providing operational services. 1.1.3 Provide security plans and security safeguards for all programs and data, and work with the present Facility Manager during the transfer of responsibilities in installing new equipment. 1.1.4 Provide equipment maintenance services for all the contractor's equipment at the Facility Management site as well as District owned equipment in the CSED, Superior Court, Public Assistance office, and the Foster Care office. 1.1.5 Warrant the existing DCCSES and be responsible for identifying and successfully correcting all defects, deficiencies, errors, omissions, and other problems that occur in that software. 1.1.6 Within three (3) years from the date of the award of the definitized contract, the District and the contractor shall examine the leased equipment and related peripherals 3 at the contractor's facility management facility and determine if upgrades are necessary to meet minimum performance standards set forth in the Request for Proposals (RFP) Section C.8.1.14 and Amendment 1, item 7. If upgrades are necessary, the contractor shall provide a plan and if the District requires the upgrades it shall change order the contract. 1.2 Part 2 - Database Cleanup Services ------------------------------------ 1.2.1 Examine case folders at the CSED and Superior Court, comparing the data contained therein with the new DCCSES database, and with other sources such as the previously discussed CSED and Superior Court automated systems, determining the correctness of the data, and inputting the corrections to the DCCSES database. 1.2.2 Calculate and/or recalculate all financial balances associated with each obligation in each case in the child support case load up to the maximum of 100,000 cases in the Database cleanup and validate the accuracy of each balance using all relevant manual and automated forms, documents, records, and other materials and applying all relevant regulatory criteria. 1.2.3 Provide back-up materials in a form and content acceptable to the District showing the manner in which each balance was validated. If a balance is not accurate, the contractor shall provide a written statement of the correct balance and written documentation of the contractor's calculation supporting the corrected balance. The contractor shall obtain the District's written approval of all calculations and shall update the database with corrected balances only after receipt of such written approval. The contractor shall not warrant the accuracy of its calculations or any information upon which its calculation is based but shall meet all performance criteria incorporated into the Database Cleanup Quality Control Plan as approved by the District. 1.2.4 Database cleanup shall be no longer than 15 months after the District's approval of all database cleanup plans. 4 1.3 Part 3 - DCCSES and Software Changes and Changes required by the Personal ------------------------------------------------------------------------- Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) ----------------------------------------------------------------------- 1.3.1 Design, develop, test and implement all DCCSES and PRWORA software changes, the Balanced Budget Act and H.R. 3130 that may be identified in the Request for Proposals (RFP) by the District during the term of the contract. 1.3.2 The changes identified in the RFP and made under DCCSES, PRWORA, the Balanced Budget Act and H.R. 3130 shall be warranted as being defect free for a period of twelve (12) months after acceptance by the District of the changes. Any defect in any change shall be corrected by the contractor at no cost to the District within the warranty period. 1.3.3 Upon receipt of a timely written notice of any deficiencies in a change or deliverable, the contractor shall respond with a corrective action plan or written plan identifying how and when the deficiency will be corrected. 1.3.4 The task under Part 3 must be prioritized such that the software changes (DCCSES, PRWORA, Balanced Budget Act and H.R. 3130) shall be completed no later than April 30, 2001 based upon a definitized contract award date of July 30, 1999. 1.4 PERFORMANCE REQUIREMENTS The contractor shall perform the scope of work in accordance with the Contractor's Performance Requirements, Attachment D, which contains the performance requirement, performance standard, acceptable quality level and surveillance method and frequency. 1.5 CONTRACTOR PERFORMANCE RESPONSIBILITIES AND LIMITATIONS 1.5.1 The contractor shall be responsible for all costs related to the project. The District will provide only office space, desks, chairs, a copier and copying paper, a phone for local phone calls, and the use of a fax machine. 5 1.5.2 The contractor shall provide all of the leased equipment at the facility management site located in the District, required to process the DCCSES, meet all contractual performance standards, and handle communications and terminals. The contractor shall provide operating software, and supplies necessary for facilities management to support the DCCSES during the contract term. The contractor's software utility programs must be included as part of the facilities management for the purpose of providing magnetic tape dumps. 1.5.3 The contractor shall provide training to the District's staff designated by the contract administrator. The contractor shall provide all training related to the scope of work in this contract. This training shall be in accordance with a District approved training Plan submitted by the contractor according to the approved Work Plan. Such training shall include that which is necessary for coordination with the Facility Manager for operating various DCCSES programs, and training on how the software changes are used in DCCSES. 1.5.4 The contractor shall establish a full time office in the CSED on the date of contract award. All related costs for this office shall be the sole responsibility of the contractor. At a minimum, the contractor shall provide CSED and DC Superior Court the following personnel: a. A Project Manager or Assistant Project Manager solely dedicated to the project and is knowledgeable in all aspects of child support laws, rules, and regulations, who has at least three(3) years experience in managing comparable services, and who will be on-site at the CSED office for the duration. References shall be submitted by the contractor. b. The contractor shall provide on site one (1) full time technical person for each working day who is knowledgeable in the Connecticut Child Support System and the DCCSES each day through completion of Part 3, 6 Software Changes (see Section 1.3 above). This technical person must be capable of responding to system questions from District users for the existing and future DCCSES. c. In addition to the overall Contractor Project Manager, a minimum of one (1) full time person on site in the CSED and Superior Court, during Part 2, Database Cleanup, (see Section 1.2 above). The person assigned to this position must be knowledgeable in database cleanup operations as well as child support operations. 1.6 RESPONSIBILITIES OF THE CHILD SUPPORT ENFORCEMENT DIVISION The CSED shall be responsible for the following tasks: 1.6.1 Project management; 1.6.2 Provide oversight and assistance to the contractor; 1.6.3 Provide timely approval and payment of deliverables that meet the District's requirements in accordance with paragraph C.5 of the RFP; 1.6.4 Evaluate contract performance and general contract monitoring; and 1.6.5 Prepare written reports of system problems and deficiencies of the contractor. ARTICLE 2 TRANSITION PERIOD ----------------- The contractor shall have a 15 week overlap with Unisys Corporation in testing and installing new equipment and the conversion of the DCCSES database from the existing equipment to the new equipment. 7 ARTICLE 3 TYPE OF CONTRACT AND CONTRACT AMOUNT ------------------------------------ 3.1 This is a definite-quantity term contract with payment based on fixed prices as set forth in the contractor's best and final offer dated May 12, 1999, schedules B.1, B.1.1.1, B.1.1.2, B.1.1.3, B.1.1.4, B.1.2.1, B.1.2.2, B.1.3.1, B.1.4.1, B.1.5.1 and Schedule C, with a price redetermination element based on the amount of travel as set forth in Article 7 below. 3.2 The District shall pay the contractor a total of thirty-one million, seven hundred and eighty-three thousand, and three hundred and sixty-five dollars ($31,783,365.00), subject to price redetermination under Article 7 below. 3.3 In addition to the fixed prices, the District shall pay the contractor for accelerating to October 30, 1999 Year 2000 compliance on the application software for the DCCSES, an additional $72,000. If the contractor fails to complete by October 30, 1999, the Year 2000 compliance, the District shall not pay the contractor the additional amount of $72,000. ARTICLE 4 COMMENCEMENT OF OPERATIONS AND DELIVERABLES ------------------------------------------- The contractor shall commence performance of services (other than as provided in the scope of work in the letter contract, Attachment A) immediately upon notification of the definitized contract award. With respect to each task identified in Article 1, the contractor shall provide the deliverables outlined in Attachment C. ARTICLE 5 CONTRACT TERM ------------- This is a multi-year contract with a term beginning May 21, 1999 and extending five (5) years from the date that the contracting 8 officer awards the definitized contract. Except for the statement of work (Attachment A of the letter contract, dated May 21, 1999), due dates for contract performance including deliverables shall be from the date of award of the definitized contract. If funds are not appropriated or otherwise made available for the continued performance in the subsequent year of the multiyear contract, the contract for the subsequent year shall be terminated, either automatically or in accordance with the termination clause of the contract, if any. Unless otherwise provided for in the contract, the effect of termination is to discharge both the District government and the contractor from future performance of the contract, but not from their existing obligations. The contractor shall be reimbursed for the reasonable value of any nonrecurring costs incurred but not amortized in the price of the supplies or services delivered under the contract. ARTICLE 6 METHOD OF PAYMENT AND INVOICING ------------------------------- Prohibition against advanced payments: The District cannot make advanced payment to the contractor. Accordingly, payment to the contractor must be made by the District after deliverables are received and accepted by the District. For continuing services, the District will make payment to the contractor on a pro-rata basis for the period of service for the base term left after the contractor starts the service. For example, since the Help Desk will start twelve (12) weeks after award of the definitized contract, the fixed price of $390,687 will be spread over the nine (9) remaining months of the first year. 6.1 Part 1, New Computers and Printers: The District shall pay the contractor ---------------------------------- for new computers and printers 50% of the cost of the new computers and printers upon transfer of title and delivery to the District and the remaining 50% amount upon installation by the contractor and acceptance by the District. 6.2 Part 1, Facility Management Services: The District will calculate payments ------------------------------------ based on the fixed prices set forth in the applicable schedules for facility management services. The fixed prices for facility management services include the cost of leased equipment for the facility management. 9 6.3 Part 2, Database Cleanup: Upon receipt of a properly executed invoice, the ------------------------ District will pay the contractor on a fixed-price per month basis not to exceed the amount of $229,016 per month. This payment amount is based on 100,000 cases at $34.35 per case for a time period of 15 months. The contractor shall provide appropriate documentation of hours worked as well as computer generated list of cases completed. The District shall withhold 10% of the invoiced amount until the project is completed or until a satisfactory audit has been performed, whichever is later, as set forth in RFP C.8.2.4.7. 6.4 Part 3, Software Changes (Software Modifications): The District shall pay ------------------------------------------------- the contractor the fixed prices set forth in Schedules B.1.1.3, B.1.1.4 and B.1.1.2, 20% of the total price upon completion and acceptance of each task as set forth below: a. complete business specifications b. technical specifications c. conclude testing d. acceptance by the District e. installation and implementation The District shall withhold 10% of each invoiced amount until it has been notified in writing by the U.S. Department of Health and Human Services that the system has been certified as meeting the system requirements of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Balanced Budget Act and H.R. 3130. 6.5 Invoices shall be prepared in quadruplicate and submitted on the 10th of each month to the System Project Manager, Child Support Enforcement Division, 441 4th Street, NW, 5th Floor, Washington, D.C. 20001, telephone number (202) 724-1410. 6.6 Invoices shall, at a minimum, contain the following information: 6.6.1 contractor's name and address; 6.6.2 invoice, contract and purchase order numbers; 6.6.3 period of services; 6.6.4 location of delivery; 6.6.5 total dollar amount due; 6.6.6 description of services provided; 6.6.7 contractor's authorized signature; and 6.6.8 contractor's Federal I.D. number. 6.7 Payments under this contract are subject to the quick payment provisions of the D.C. Code Section 1-1171 et.seq. 10 ARTICLE 7 PRICE REDETERMINATION BASED ON THE AMOUNT OF TRAVEL --------------------------------------------------- 7.1 At the end of five (5) years from the date of the award of the definitized contract, if the contractor has made fewer than 276 trips to the greater Baltimore-Washington area in the performance of this contract, the District will redetermine the last payment due the contractor by deducting from the last payment $1,282 for each trip under 276 trips which the contractor failed to make. 7.2 Prior to the final payment, the contractor shall certify to the District the number of trips made to the greater Baltimore-Washington area in the performance of this contract. 7.3 For the purpose of this provision, the contractor has made a "trip" when one employee of the contractor travels to the greater Baltimore-Washington area in the performance of this contract, and stays at the greater Baltimore-Washington area at a minimum of one (1) night. Consistent with this definition, the contractor would be determined to have taken two (2) trips if two (2) employees of the contractor travel to the greater Baltimore-Washington area in the performance of this contract, and stay at the greater Baltimore-Washington area at a minimum of one (1) night. ARTICLE 8 CONTRACT ADMINISTRATION ----------------------- 8.1 Contracting Officer: The contracting officer is the only person authorized ------------------- to contractually bind the District. The contracting officer shall be the Chief Procurement Officer, Office of Contracting and Procurement, 441 4th Street, N.W., Suite 800 South, Washington, D.C. 20001, telephone number (202) 727-0252. 8.2 Contract Administrator: The contract administrator shall be responsible for ---------------------- overall administration of the contract. The contract administrator shall be the Director, Child Support Enforcement Division, Office of the Corporation Counsel, 441 4th Street, N.W., Suite 500 South, Washington, D.C. 20001, telephone number (202) 724-1548. 11 8.3 Technical Representative: The technical representative is responsible for ------------------------ the daily coordination of operating procedures between the District and the contractor, and for monitoring contract compliance. The technical representative shall be the System Project Manager, Child Support Enforcement Division, 441 4th Street, NW, 5th Floor, Washington, D.C., 20001, telephone number 202) 724-1410. ARTICLE 9 CANCELLATION CEILING -------------------- In accordance with Article 5, Contract Term, in the event of cancellation of the contract because of non-appropriation of funds for fiscal years 2000, 2001, 2002, 2003, and 2004, there shall be a cancellation ceiling of $11,496,229 for year 2000, $6,062,228 for year 2001, $4,178,572 for 2002, $4,532,094 for year 2003, and $5,514,242 for year 2004. ARTICLE 10 KEY PERSONNEL ------------- The following are considered to be key personnel: Irma Neal, Project Executive S. Diane Stokes, Project Manager John Raffauf, Deputy Project Manager The key personnel are considered to be essential to the work being performed hereunder. Prior to making any material changes in key personnel, the contractor shall notify the contract administrator one (1) week in advance and shall submit justification (including proposed substitutions in case of reassignments, promotions) in sufficient detail to permit evaluation of the impact on the program. No material changes in key personnel shall be made by the contractor without the written consent of the contract administrator. 12 ARTICLE 11 YEAR 2000 WARRANTY ------------------ 11.1 The contractor shall warrant that the DCCSES and all information technology (IT)(as defined in FAR 2.101), whether commercial or noncommercial, delivered under this contract or modified by the contractor, that will be required to perform date/time processing involving dates subsequent to 31 December 1999, shall be Year 2000 compliant if properly installed, operated, and maintained in accordance with the contract specifications and applicable documentation. If the contract requires that specific deliverables operate together as a system, this warranty shall apply to these deliverables as a system. 11.2 Year 2000 Compliant (as defined in FAR 39.002) means that the IT accurately possesses date/time data (including, but not limited to calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations, to the extent that other IT, used in combination with the IT being delivered, properly exchanges date/time data with it. The proper exchange of date/time data shall be in accordance with the interface requirements specification(s) of the contract. 11.3 For line item deliverables which are commercial items (as defined in FAR 2.101), and which include commercial IT, the terms and conditions of the standard commercial warranty covering such commercial IT shall apply in addition to, and to the extent such terms and conditions are consistent with, this warranty. Any applicable commercial warranty shall be incorporated into this contract by attachment. 11.4 Notwithstanding any provision to the contrary in other warranty requirement(s) of this contract, or in the absence of any such warranty requirement(s), the remedies available to the District under this warranty shall include those provided in the Inspection clause of this contract (Standard Contract Provisions, 13 Attachment B, section 7(l). Nothing in this warranty shall be construed to limit any rights or remedies the District may otherwise have under this contract. 11.5 Unless specified elsewhere in this contract, the contractor shall also deliver to the District a report summarizing any Year 2000 compliance testing that was performed, and the results thereof. 11.6 This warranty shall expire on January 21, 2001, or one hundred eighty (180) days after acceptance of the last deliverable IT item under this contract (including any options(s) exercised hereunder), which is later. ARTICLE 12 LOCATION OF THE CONTRACTOR'S ---------------------------- FACILITY MANAGEMENT AND MAINTENANCE OFFICE ------------------------------------------ The contractor's facility management and maintenance office (office) shall be located in the District of Columbia with a 24 hour security surveillance. The office shall be in operation by Decemeber 1, 1999. ARTICLE 13 LIQUIDATED DAMAGES FOR FAILURE TO MOVE THE ------------------------------------------ FACILITY MANAGEMENT AND MAINTENANCE OFFICE IN THE DISTRICT ---------------------------------------------------------- Failure of the contractor to move its facility into the District by December 1, 1999 shall result in the assessment of liquidated damages in the amount of $500.00 for each day that the facility remains outside of the District. ARTICLE 14 RIGHTS IN DATA -------------- 14.1 "Data," as used herein, means recorded information, regardless of the form or media on which it may be recorded. The term includes technical data and computer software. The term does not include information incidental to contract administration, such as 14 financial, administrative, cost or pricing, or management information. The term "technical data", as used herein, means recorded information, regardless of form or characteristic, of a scientific or technical nature. It may include, for example, document research, experimental, developmental or engineering work, or be usable or used to define a design or process or to procure, produce, support, maintain, or operate material. The data may be graphic or pictorial delineations in media such as drawings or photographs, text in specifications or related performance or design type documents, or computer printouts. Examples of technical data include research and engineering data, engineering drawings and associated lists, specifications, standards, process sheets, manuals, technical reports, catalog item identifications and related information, and computer software documentation. Technical data does not include computer software or financial, administrative, cost and pricing, and management data or other information incidental to contract administration. The term "computer software", as used herein, means computer programs and computer data bases. "Computer programs", as used herein means a series of instructions or statements in a form acceptable to a computer, designed to cause the computer to execute an operation or operations. "Computer programs" include operating systems, assemblers, compilers, interpreters, data management systems, utility programs, sort/merge programs, and automated data processing equipment, maintenance diagnostic programs, as well as applications programs such as payroll, inventory control and engineering analysis programs. Computer programs may be either machine-dependent or machine-independent, and may be general- purpose in nature or designed to satisfy the requirements of a particular user. The term "computer data bases", as used herein, means a collection of data in a form capable of being processed and operated on by a computer. 14.2 All data first produced in the performance of this contract shall be the sole property of the District. Contractor hereby acknowledges that all data including, without limitation, computer program codes produced by contractor for the District under this 15 contract are works made for hire and are the sole property of the District; but, to the extent any such data may not, by operation of law, be works made for hire, contractor hereby transfers and assigns to the District the ownership of copyright in such works, whether published or unpublished. The contractor agrees to give the District all assistance reasonably necessary to perfect such rights including, but not limited to, the works and supporting documentation and the execution of any instrument required to register copyrights. The contractor agrees not to assert any rights at common law or in equity in such data. The contractor shall not publish or reproduce such data in whole or in part or in any manner or form, or authorize others to do so, without written consent of the District until such time as the District may have released such data to the public. 14.3 The District shall have restricted rights in computer software and all accompanying documentation, manuals and instructional materials listed or described in a license or agreement made a part of the contract, which the parties have agreed will be furnished with restricted rights, provided however, notwithstanding any contrary provision in any such license or agreement, such restricted rights shall include, at a minimum, the right to: 14.3.1 Use the computer software and all accompanying documentation and manuals or instructional materials with the computer for which or with which it was required, including use at any Government installation to which the computer may be transferred by the District; 14.3.2 Use the computer software and all accompanying documentation and manuals or instructional materials with a backup computer if the computer for which or with which it was acquired is inoperative; 14.3.3 Copy computer programs for safekeeping (archives) or backup purposes; and 14.3.4 Modify the computer software and all accompanying documentation and manuals or instructional materials, or combine it with other software, subject to the provision that the modified portions shall remain subject to these restrictions. 16 14.4 The restricted rights set forth in paragraph 14.3 are of no effect unless (i) the computer software is marked by the contractor with the following legend: RESTRICTED RIGHTS LEGEND Use, duplication, or disclosure is subject to restrictions stated in Contract No. 8105-AA-NS-4-JJ with Service Design Associates a Division of Tier Technology and (ii) the related computer software documentation includes a prominent statement of the restrictions applicable to the computer software. The contractor may not place any legend on computer software indicating restrictions on the District's rights in such software unless the restrictions are set forth in a license or agreement made a part of the contract prior to the delivery date of the software. Failure of the contractor to apply a restricted rights legend to such computer software shall relieve the District of liability with respect to such unmarked software. 14.5 In addition to the rights granted in paragraph 14.3 above, the contractor hereby grants to the District a nonexclusive, paid-up license throughout the world, of the same scope as restricted rights set forth in paragraph 14.3 above, under any copyright owned by the contractor, in any work of authorship prepared for or acquired by the District under the contract. Unless written approval of the contracting officer is obtained, the contractor shall not include in technical data or computer software prepared for or acquired by the District under the contract any works of authorship in which copyright is not owned by the contractor without acquiring for the District any rights necessary to perfect a copyright license of the scope specified in the first sentence of this paragraph. 14.6 Whenever any data, including computer software, are to be obtained from a subcontractor under this contract, the contractor shall use this same clause in the subcontract, without alteration, and no other clause shall be used to enlarge or 17 diminish the District's or the contractor's rights in that subcontractor data or computer software which is required for the District. 14.7 For all computer software furnished to the District with the rights specified in paragraph 14.2, the contractor shall furnish to the District a copy of the source code with such rights of the scope specified in paragraph 14.2. For all computer software furnished to the District with the restricted rights specified in paragraph 14.3 the District, if the contractor, either directly or through a successor or affiliate shall cease to provide the maintenance or warranty services provided the District under this contract or any paid-up maintenance agreement, or if contractor should be declared bankrupt or insolvent by a court of competent jurisdiction, shall have the right to obtain, for its own and sole use only, a single copy of the then current version of the source code supplied under this contract, and a single copy of the documentation associated therewith, upon payment to the person in control of the source code the reasonable cost of making each copy. 14.8 The contractor shall indemnify and save and hold harmless the District, its officers, agents and employees acting within the scope of their official duties against any liability, including costs and expenses, (i) for violation of proprietary rights, copyrights, or rights of privacy, arising out of the publication, translation, reproduction, delivery, performance, use or disposition of any data furnished under this contract, or (ii) based upon any data furnished under this contract, or based upon libelous or other unlawful matter contained in such data. 14.9 Nothing contained in this clause shall imply a license to the District under any patent, or be construed as affecting the scope of any license or other right otherwise granted to the District under any patent. 14.10 Paragraphs 14.3, 14.4, 14.5, 14.7, and 14.8 above are not applicable to material furnished to the contractor by the District and incorporated in the work furnished under contract, provided that such incorporated material is identified by the contractor at the time of delivery of such work. 18 ARTICLE 15 DRUG-FREE WORKPLACE (July 1990) ------------------------------- 15.1 Definitions. As used in this clause: "Controlled substance" means a controlled substance in schedules I through V of section 202 of the Controlled Substances Act (21 U.S.C. 812) and as further defined in regulation at 21 CFR 1308.11 -1308.15. "Conviction" means a finding of guilt (including a plea of nolo contendere) or imposition of sentence, or both, by any judicial body charged with the responsibility to determine violations of the Federal or State criminal drug substance. "Criminal drug statute" means a Federal or non-Federal criminal statute involving the manufacturer, distribution, dispensing, possession or use of any controlled substance. "Drug-free workplace" means the site(s) for the performance of work done by the Contractor in connection with a specific contract at which employees of the Contractor are prohibited from engaging in the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance. "Employee" means an employee of a Contractor directly engaged in the performance of work under a Government contract. "Directly engaged" is defined to include all direct cost employees and any other Contractor employee who has other than a minimal impact or involvement in contract performance. "Individual" means an offeror/contractor that has no more than one employee including the offeror/contractor. 15.2 The contractor, if other than an individual, shall within 30 calendar days after contract award (unless a longer period is agreed to in writing), for contracts of 30 calendar days or more performance duration: or as soon as possible for contracts of less than 30 calendar days performance duration: 19 15.2.1 Publish a statement notifying such employees that the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance is prohibited in the Contractor's workplace and specifying the actions that will be taken against employees for violations of such prohibition; 15.2.2 Establish an ongoing drug-free awareness program to inform such employees about: A. The dangers of drug abuse in the workplace; B. The Contractor's policy of maintaining a drug-free workplace; C. Any available drug counseling, rehabilitation, and employee assistance program; and D. The penalties that may be imposed upon employees for drug abuse violations occurring in the workplace. 15.2.3 Provide all employees engaged in performance of the contract with a copy of the statement required by subparagraph 15.2.1 of this provision; 15.2.4 Notify such employees in writing in the statement required by subparagraph 15.2.1 of this provision that, as a condition of continued employment on the contract resulting from this solicitation, the employee will: A. Abide by the terms of the statement; and B. Notify the employer in writing of the employee's conviction under a criminal drug statute for a violation occurring in the workplace no later than 5 calendar days after such conviction; 15.2.5 Notify the Contracting Officer in writing within 10 calendar days after receiving notice under subdivision 15.2.4.B of this provision, from an employee or otherwise receiving actual notice of such conviction. The notice shall include the position title of the employee; and 15.2.6 Within 30 calendar days after receiving notice under subdivision 15.2.4.B of this clause of a conviction, take one of the following actions with respect to any employee who is convicted of a drug abuse violation occurring in the workplace: A. Take appropriate personnel action against such employee, up to and including termination; or B. Require such employee to satisfactorily participate in a drug abuse assistance or rehabilitation program approved for such purposes by a Federal, State, or local health, law enforcement, or other appropriate agency. 15.2.7 Make a good faith effort to maintain a drug-free workplace through implementation of subparagraphs 15.2.1 through 15.2.6 of this clause. 15.3 The contractor, if an individual, agrees by award of the contract or acceptance of a purchase order, not to engage in the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance in the performance of this contract. 15.4 In addition to other remedies available to the Government, the contractor's failure to comply with the requirements of paragraph 15.2 or 15.3 of this clause may, pursuant to FAR 23.506, render the contractor subject to suspension of contract payments, termination of the contract for default, and suspension or debarment. ARTICLE 16 SOFTWARE SUPPORT ---------------- The contractor shall provide for up to 120 hours per month of DCCSES application programming and analysis support and service per month to be used by the District as required. ARTICLE 17 SOFTWARE MAINTENANCE -------------------- The contractor shall perform software maintenance on the District of Columbia Child Support Enforcement System (DCCSES) as it exists on the date of definitized contract award, for a period of three (3) years from the award date of the definitized contract. The contractor shall be responsible for identifying and successfully correcting all defects, deficiencies, errors, omissions, and all other problems in the software during this period. The contractor is responsible for allocating sufficient resources to this task to ensure its successful completion and avoid delays in other deliverables. The contractor is at a minimum to perform 100 hours per month for software maintenance. The contractor shall be responsible for providing this maintenance without additional costs to the District. ARTICLE 18 ON-LINE POLICY AND PROCEDURES MANUAL ------------------------------------ The requirement for the contractor to produce an on-line policy and procedures manual has been eliminated from this contract. ARTICLE 19 HELP DESK PROGRAM POSITION -------------------------- The contractor shall provide one (1) technical person and one (1) program person to resolve problems, errors and corrections and to operate the help desk throughout the term of the contract. ARTICLE 20 EQUIPMENT PURCHASE ------------------ The District agrees that it is acquiring new equipment under this contract with the intent to use it within the District government in support of government operations and not for reselling, remarketing, leasing or transferring the machines (or components thereof) to a third party, unless the District is arranging lease-back financing for the machines or other circumstances agreeable to the contractor apply, provided that nothing in this provision will prevent the District from disposing of the equipment purchased under this clause through the surplus property program of the District. ARTICLE 21 DEFINITIONS ----------- When used in this contract, the following terms and phrases shall have the meanings ascribed: 21.1 AUTOMATED DOCUMENT TRACKING SYSTEM: An automated software process whereby documents and cases can be managed, tracked, and monitored throughout each step in the Database Cleanup process so that their location and status at any time can be determined. 21.2 BACKUP AND RECOVERY: The process of restoring the DCCSES to an operational status within a twenty-four (24) hour period after an event occurrs to make it inaccessible to users. 21.3 BACKUP AND RECOVERY TEST: A series of tests to ensure that the DCCSES can be made operational quickly after failure of one or more of its components. This test includes backup, recovery, restart, and transaction logging routines. 21.4 BACKUP SITE: A location separate from the Facility Management site with similar equipment on which the DCCSES can be loaded and run in the event of a prolonged equipment and/or communications failure at the Facility Management site. 21.5 CAPACITY ANALYSIS: A test conducted with the new Facility Management equipment, the DCCSES LAN and WAN, and the user terminals (PCs) and printers to ensure that they will be capable of processing the DCCSES and meet all required response times. 21.6 DATA ENTRY: The process of entering correct data into the DCCSES database using Personal Computers. 21.7 DCCSES: The District of Columbia Child Support Enforcement System. 21.8 EMERGENCY DISASTER CONTINGENCY PLAN: A Plan, upon the approval of the contract administrator, that can be used to recover from any unforeseen event or circumstance that might jeopardize the contractor's performance or level of quality during the Database Cleanup process. 21.9 EQUIPMENT DELIVERY AND INSTALLATION: The process of delivering all equipment pursuant to the Contractor's offer to the Facility Management site on or before the District's approved schedule. This includes delivery and installation of the latest version of the Unix operating software and Universe database management software that is year 2000 compliant. This process includes testing the equipment and the preparation and submission to the District's Project Manager of a report by serial number and testing results of all equipment that was installed. 21.10 EQUIPMENT INSTALLATION PLAN: A Plan which shows all the tasks required to successfully install the new equipment, and the successful transfer of the DCCSES from the existing equipment to the Contractor's new equipment. 21.11 EQUIPMENT MAINTENANCE: Contractor provided maintenance of all operating software, all equipment, including District of Columbia owned Personal Computers, printers and print servers, all DCCSES telecommunications equipment and software, and the interagency LAN to ensure continuous DCCSES efficient and timely processing. 21.12 EQUIPMENT PILOT OPERATIONS: A process whereby the equipment, communications, operating software, and the application software, are run together to ensure that all are operating correctly and efficiently. This Pilot Operation includes tests of daily, weekly, and monthly backup and recovery processes. 21.13 FACILITY MANAGER: The Contractor's computer organization that contains all the equipment and staff required to operate the DCCSES. The Facility manager is also responsible for courier service to the District Child Support Agencies, mass mailings, equipment Help Desk, and printing of large volume reports as required. 21.14 FEDERAL CERTIFICATION: A process whereby federal officials review the PRWORA and other required DCCSES changes to ensure they meet federal standards and requirements as specified in federal regulations. 21.15 HELP DESK: A contractor staffed office to which DCCSES users can telephone to receive a solution to any DCCSES problem. This office must be staffed from 8:00 AM through 5:00 PM Monday through Friday. 21.16 NEW EQUIPMENT: This is the latest, state-of-the-art computer equipment that will be used to operate DCCSES and meet all on- line and batch processing requirements and response times. 21.17 PROJECT COMPLETION PLAN: A Plan that will be used to ensure that the Database Cleanup process will be successfully completed on time and that all required activities, equipment, files, documents, and other pertinent items are turned over to the District. 21.18 PROJECT INITIATION: The process of beginning the project. This includes meeting with District personnel to review the requirements for the project, review Work Plans, answer questions, assign specific roles and tasks to the contractor and District personnel, develop reporting requirements, and ensure that all personnel, the contractor and District, are familiar with the requirements of the project. 21.19 PRWORA: The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. Also referred to as the Welfare Reform Act. 21.20 QUALITY CONTROL: A process of monitoring all project activities, including employee performance, changes to DCCSES, and document and case folder flow, to ensure that they conform to District approved standards. 21.21 RESEARCH: The process of examining data contained in case folders and/or automated systems for the purpose of obtaining and recording correct data for DCCSES. 21.22 SCHEDULED DOWNTIME: A preplanned block of time during which the equipment is not available to the District for online processing. 21.23 SECURITY PLAN: A Plan identifying how the confidentiality of DCCSES data, software, access to identified sensitive areas, and protection of theft of District equipment and supplies will be maintained. 21.24 SYSTEM LIVE OPERATIONS: The DCCSES successfully running in a full production mode on the new equipment. 21.25 TESTING: A series of activities that will exercise all parts of the DCCSES in an integrated fashion, including all equipment, all software (operating and application), all communications, and the District's LAN and WAN, to ensure that DCCSES processing can be accomplished in a timely and efficient manner and according to all required performance standards. 21.26 TRAINING: The process of instructing users in any new procedures or new equipment and communications requirements for DCCSES. 21.27 TRANSFER AND CONVERSION: The process of successfully transferring the existing DCCSES application software, to include the UniVerse Database Management software that is year 2000 compliant, to the new equipment at the Facility Management site, and testing the complete system to ensure DCCSES runs correctly and meets all performance standards on the new equipment. ARTICLE 22 DOCUMENTS INCORPORATED AND ORDER OF PRIORITY -------------------------------------------- A conflict in language shall be resolved by giving precedence to the document in the highest order or priority that contains language addressing the issue in question. The following documents are incorporated into the contract by reference in descending order of priority: 22.1 Articles 1 through 24 of this contract; 22.2 Letter Contract, dated May 21,1999 (Attachment A); 22.3 Standard Contract Provisions for use with District of Columbia Government Supply and Services Contract dated December 1984, as amended (Attachment B); 22.4 Contractor's Deliverables (Attachment C); 22.5 Contractor's Performance Requirements (Attachment D); 22.6 Letter dated June 7, 1999, including the technical and price proposal for the new network (Attachment E); 22.7 Letter dated May 19, 1999, including the price proposal and work plan for accelerating the Year 2000 compliance on the application software to October 30, 1999 (Attachment F); 22.8 Contractor's Best and Final Cost document, dated May 12, 1999 (Attachment G); 22.9 Letter dated May 5, 1999, regarding the contractor's agreement to move its facility management and maintenance office into the District (Attachment H); 22.10 Contractor's Best and Final technical proposal, dated February 16, 1999 (Attachment I); 22.11 Comments on the SDA Price Proposal Draft-January 6, 1999, Submitted by SDA, January 18, 1999 (Attachment J); 22.12 SDA Comments on Draft Statement of Work for New Equipment and Facility Management Services, Database Cleanup and Software Changes in Support of the Government of the District of Columbia (Attachment K); 22.13 Contractor's letter dated January 7, 1999 setting forth questions and answers regarding issues from the contract negotiations between the contractor and the District (Attachment L); 22.14 Contractor's technical proposal dated August 17, 1998 (Attachment M); and 22.15 Request for Proposals No. 8105-AA-NS-4-JJ, including Amendment No. 1, dated July 29, 1998, Addendum No. A, dated July 29, 1998, Amendment No. 2, dated August 12, 1998, and Addendum B, dated August 12, 1998 (Attachment N). ARTICLE 23 CONTRACT APPROVALS ------------------ This contract for over a million dollars for a multi-year term is subject to the approval of the D.C. City Council and the Federal Office of Child Support Enforcement. ARTICLE 24 TOTAL AGREEMENT --------------- This contract, including specifically incorporated documents, constitutes the total and entire agreement between the parties. All previous discussions, writings, and agreements are merged herein. EX-10.61 3 ALLIANCE AGREEMENT DATED 9/1/99 EXHIBIT 10.61 CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. (S)(S) 200.80(B)(4), 200.83 AND 240.24B-2 ALLIANCE AGREEMENT ------------------ IN SUPPORT OF PROJECT UXBRIDGE ------------------------------ BETWEEN ------- TIER TECHNOLOGIES (UNITED KINGDOM) INC. --------------------------------------- AND --- SIEMENS BUSINESS SERVICES LIMITED --------------------------------- Contract Reference Number : MIG/UXBR/CON/145 -------------------------------------------- CONTENTS --------
1 PURPOSE 6 2 TERM 6 3 PRECEDENCE 7 4 ALLIANCE STEERING GROUP 7 5 ALLIANCE MANAGERS 9 6 BUSINESS DEVELOPMENT METHODOLOGY 10 7 CONSULTATION AND CO-ORDINATION OF THE PARTIES 10 8 CONSULTANCY SERVICES 11 9 THE ASC SERVICES 12 10 SBS STAFF SERVICES 13 11 OTHER RESPONSIBILITIES OF THE PARTIES 13 12 PAYMENT 14 13 INTELLECTUAL PROPERTY RIGHTS 15 14 FORCE MAJEURE 18 15 INSURANCES 19 16 LIABILITY 19 17 EMPLOYMENT INDEMNITIES 23 18 RESPONSIBILITIES AND COSTS 24 19 NOTICES 25 20 DATA PRIVACY AND ACCESS TO INFORMATION 26 21 DISPUTE ESCALATION PROCEDURE 26 22 DISPUTE RESOLUTION PROCEDURE 27 23 DEFAULT IN PERFORMANCE 29 24 TERMINATION 33 25 CHANGE CONTROL 36 26 MILLENNIUM COMPLIANCE 36 27 CONFIDENTIALITY 37 28 PUBLICITY 39 29 ENGAGEMENT OF SENIOR EMPLOYEES 39 30 FAILURE TO ENFORCE AND WAIVER 40 31 VALIDITY 40 32 ASSIGNMENT 40 33 NOT A PARTNERSHIP OR AGENCY 41 34 ORIGINALITY OF AGREEMENT 41 35 ENTIRE AGREEMENT 41 SCHEDULE 1 1 Interpretations 43 2 Definitions 43 SCHEDULE 2 1 Introduction 50
2 2 Supply of Consultancy Services 51 3 Method of Obtaining Supply 53 4 Workpackage Leaders 54 5 Performance 54 6 Fees 55 7 Payment 56 8 Discharge of the Consultancy Services Minimum Total Commitment 57 ATTACHMENT 1 TO SCHEDULE 2 1 Consultancy Services Charge Rates 58 ATTACHMENT 2 TO SCHEDULE 2 1 Tier Consultancy Services Description 59 SCHEDULE 3 1 Introduction 60 2 Scope 61 3 Programme 62 4 Calculation of Fees 62 5 Payment 63 6 Discharge of the SBS Staff Services Minimum Total Commitment 64 7 Success Fees 65 ATTACHMENT 1 TO SCHEDULE 3 1 Introduction 67 2 Assumptions 67 3 Payment Profile 68 SCHEDULE 4 1 Introduction 71 2 Contractual Relationships 71 3 Master Services Supply Agreement Form 72 SCHEDULE 5 1 Introduction 73 2 Condition Precedent 73 3 Due Diligence 73 4 Programme 74 SCHEDULE 6 1 Introduction 75 ATTACHMENT 1 TO SCHEDULE 6 76 ATTACHMENT 2 TO SCHEDULE 6 1 Introduction 77 2 Contents 77 ATTACHMENT 3 TO SCHEDULE 6 78 SCHEDULE 7 1 Introduction 80 2 Location of the ASC Infrastructure 80
3 3 Establishment of the ASC Infrastructure 80 SCHEDULE 8 1 Introduction 83 ANNEX 1 84 ANNEX 2 1 Purpose 85 2 Term 86 3 The ASC Services 86 4 SBS Staff Services 87 5 Payment 87 6 Default in Performance 88 7 Termination 89 ANNEX 3 1 Purpose 90 2 Approach 90
4 THIS AGREEMENT is made the 1st day of September NINETEEN HUNDRED AND NINETY NINE BETWEEN ( 1 ) Tier Technologies (United Kingdom) (Inc). a company incorporated in Delaware whose Registered Address is situated at 1013 Centre Road, Wilmington, New Castle County, Delaware, USA ("Tier") and ( 2 ) Siemens Business Services Limited whose Registered Address is situated at Siemens House, Oldbury, Bracknell, Berkshire RG12 8FZ ("SBS") Hereinafter collectively referred to as "the Parties". RECITALS Recital ( A ) - SBS entered into an agreement with the Director of National Savings on 27 January 1999 for the outsourcing of the services directorate of National Savings ("the National Savings Agreement") for a period of 10 years. Recital ( B ) - SBS wishes to obtain Consultancy Services from Tier in relation to the National Savings Bank Agreement and other SBS projects generally and Tier wishes to supply Consultancy Services to SBS. Recital ( C ) - [***] Recital ( D ) - The Parties held discussions on the establishment of an alliance ("Alliance")between them for the mutual exchange of business opportunities and benefits in relation to the National Savings Bank Agreement and more generally in other SBS projects. As a consequence of those discussions the Parties agree to establish the Alliance on the terms, conditions and principles as detailed herein. * CONFIDENTIAL TREATMENT REQUEST(ED) 5 Recital (E) - Notwithstanding the creation of the Alliance the obligations in this Agreement relating specifically to the Consultancy Services on the one hand and the SBS Staff Services (including the ASC Services and the ASC Infrastructure) on the other are independent, free standing and severable of each other. IT IS NOW HEREBY AGREED AS FOLLOWS: 1 PURPOSE 1.1 The purpose of this Agreement is to stipulate the provisions, terms and conditions under which the Parties will co-operate in the fulfilment of their obligations hereunder and under which the Parties may share the risks and rewards expected to arise from it and to set out the Parties' responsibilities and liabilities. 1.2 In particular this Agreement is established for the following specific purposes: 1.2.1 To set out the contractual commitments of the Parties relating to the provision of: 1.2.1.1 Consultancy Services including an obligation on SBS to procure Consultancy Services up to the Consultancy Services Minimum Total Commitment; 1.2.1.2 SBS Staff Services including an obligation on Tier to meet the SBS Staff Services Minimum Total Commitment. 1.2.1.3 the ASC Services. [***] 2 TERM 2.1 The Parties agree that this Agreement shall have full force and legal effect for the Contract Period unless and until terminated in accordance with the provisions of Clauses 14 or 24. 2.2 At the Final Date Tier shall have an option to require SBS to enter into a new and separate agreement substantially in accordance with the terms set out in Annex 2. * CONFIDENTIAL TREATMENT REQUEST(ED) 6 3 PRECEDENCE 3.1 Where there is a conflict between the provisions of any Schedule, Appendix or Attachment of this Agreement and any of these General Terms and Conditions, then the latter shall take precedence. 3.2 Where there is a conflict between the provisions of any document referenced or referred to herein and the provisions of this Agreement, then the latter shall take precedence. 3.3 Where there is a conflict between the provisions of any document agreed by the Parties, and the provisions of this Agreement the provisions of this Agreement shall prevail unless this Agreement has been amended in accordance with Clause 25 of these General Terms and Conditions. 4 ALLIANCE STEERING GROUP 4.1 Within thirty (30) Calendar days of the Effective Date or as otherwise agreed by the Parties each Party shall nominate the representatives described in Clause 4.2 below to constitute an Alliance Steering Group (hereafter "ASG") and shall provide written details of the nominees to the other Party. 4.2 The representatives of the ASG shall comprise; Role Representative From ---- ------------------- Managing Directors x 2 SBS and Tier Finance Director x 1 SBS Sales and Marketing Director x 2 SBS and Tier Alliance Managers x 2 SBS and Tier Jim Bildner (or his designee) Tier 4.3 The first meeting of the ASG shall take place within sixty (60) Calendar days of the Effective Date or as agreed between the Parties to confirm the initial roles and responsibilities of the appointed representatives and to ratify the Business Development Methodology. The Parties shall have the right after having informed the other Party to replace any of its appointed representatives. 7 4.4 The ASG shall meet as agreed by the Parties and in any event not less than twice a year. Each meeting shall be chaired by one representative (the "Chairman") in rotation, the first such meeting to be chaired by SBS. Either Party may convene a meeting and shall give at least fifteen (15) Working days notice from the date of issue including the agenda for the said meeting to each representative. 4.5 A meeting of the ASG shall not take place unless a quorum is present. For the purposes of this Clause a quorum shall be when at least two representatives of the ASG are present from each Party. If such quorum is not present the meeting of the ASG shall be adjourned. 4.6 The ASG shall have the following functions; 4.6.1 To co-opt additional members. 4.6.2 To consider and make recommendations on; 4.6.2.1 marketing plans and strategies, account development (including account management plans) and identification of future business opportunities; 4.6.2.2 decisions of the VRB; 4.6.2.3 the Business Development Methodology and conformance, progress and the consideration of any necessary changes thereto; 4.6.2.4 any Intellectual Property to be introduced into the project; 4.6.2.5 agreement execution, programme plans, activities and resources; 4.6.2.6 progress on achieving the said programme objectives and any issues arising; 4.6.2.7 contractual issues and the ongoing relationship with each other and third parties; 4.6.2.8 financial performance and projections; 4.6.2.9 the register of risks; 4.6.2.10 internal and external communications; and 8 4.6.2.11 any other business required by either Party for the successful discharge of the Parties' obligations hereunder. 4.7 The Parties agree that the ASG shall meet in the Calendar month prior to each of the fourth and fifth anniversaries of the Effective Date to review inter alia the progress made by each Party in respect of its obligations under this Agreement and the ongoing and future Alliance between the Parties. 4.8 The Party which is hosting the meeting shall organise the facilities required for the meeting. Secretarial services and the drafting of the minutes arising from the meeting shall be provided by the Chairman. The minutes shall be circulated to the other Party by the Chairman. The minutes shall be deemed to have been accepted by the Parties if following a period of fourteen (14) Calendar days of circulation neither Party has raised any objections to the minutes with the Chairman. The Parties shall permit the presence of up to two (2) further attendees each at any meeting of the ASG for those parts of the meeting which directly relate to the activities in which those attendees are engaged. 4.9 The ASG may invite Third Parties to attend its meetings as observers if so required and agreed by the Parties. 5 ALLIANCE MANAGERS 5.1 Within thirty (30) Calendar days of the Effective Date or as otherwise agreed by the Parties each Party shall appoint a representative to be an Alliance Manager (hereinafter "Alliance Manager") to co-ordinate their operational activities. Each Party shall have the right to replace its Alliance Manager on giving notice to the other Party. 5.2 The Alliance Managers shall meet at least once a Calendar month to consider inter alia such matters as; 5.2.1 communications between the Parties; 5.2.2 co-ordination of plans and actions; 5.2.3 monitoring of progress; 5.2.4 resources; 5.2.5 any issues arising and the actions to be taken; 9 5.2.6 Workpackages; and 5.2.7 handing over of customers. 5.3 Each Alliance Manager shall submit to the other monthly reports in respect of current market prospects, monitoring current projects, co- ordination of approval process, progress of ASC Infrastructure, availability of SBS Staff Services, Consultancy Services and the forecasting of requirements for Consultancy Services as appropriate at least one week before each meeting of the Alliance Managers. 6 BUSINESS DEVELOPMENT METHODOLOGY 6.1 The Alliance Managers shall enter into good faith negotiations to jointly produce a draft Business Development Methodology for approval by the Alliance Steering Group, such Business Development Methodology as set out in Annex 3 which is to be binding on the Parties. 6.2 The Business Development Methodology will contain the following component parts: 6.2.1 customers and/or markets targeted by Tier in introducing Third Parties to SBS to take ASC Services; 6.2.2 detailed provisions as to the ASC Services which SBS shall provide; 6.2.3 agreed criteria and minimum requirements to be included in agreements with Third Parties for the provision of ASC Services and according to which the VRB will assess introductions made by Tier. 6.3 A representative of the ASG from each Party shall sign the Business Development Methodology and it shall then be reviewed by the ASG at its first meeting and at each subsequent meeting of the ASG as necessary. The Business Development Methodology shall only be varied by agreement in writing by the ASG . 7 CONSULTATION AND CO-ORDINATION OF THE PARTIES 7.1 The Parties agree that they will consult generally with each other in relation to their obligations under this Agreement, inform each other and keep each other informed of material and significant developments or matters arising under the Agreement, co-ordinate 10 their activities under this Agreement and provide reports as further set out in this Clause 7. 7.2 The Parties shall: 7.2.1 consult each other to ensure, so far as possible, that the activities to be carried out under this Agreement are conducted in a cost effective and efficient manner; 7.2.2 co-ordinate so far as necessary their respective responsibilities and activities under this Agreement to avoid duplication of effort and to assist in achieving the objectives of this Agreement; 7.2.3 inform each other as soon as possible of any facts which are known to either of them which may materially or significantly affect the responsibilities and activities of the other under this Agreement; 7.2.4 use all reasonable endeavours to devise and carry out the Consultancy Services and the ASC Services (as the case may be) efficiently and so as to ensure compatibility between them. 8 CONSULTANCY SERVICES 8.1 Tier shall: 8.1.1 perform the Consultancy Services in accordance with this Agreement; 8.1.2 promptly notify SBS of any delay in performance of the Consultancy Services; 8.1.3 provide the Consultancy Services in accordance with good consulting, engineering and computing practice; 8.1.4 ensure that the Consultancy Services carried out by them conform to any quality requirements and/or specifications stated in this Agreement or in any agreement with SBS or agreed Workpackages as agreed to by Tier; 8.1.5 comply with all laws and regulations including relevant health and safety legislation in the provision of the Consultancy Services; 11 8.1.6 have the right, power and authority to provide the Consultancy Services in accordance with the Agreement or any other arrangement or agreement with SBS and/or a Third Party. 9 THE ASC SERVICES 9.1 SBS shall: 9.1.1 make available at least the types of services identified in Schedule 4 and/or the Business Development Methodology using the ASC Infrastructure; 9.1.2 enter into agreements with Tier and/or Third Parties separate from this Agreement for the performance and delivery of such ASC Services, such agreements being substantially on the basis of the principles set out in SCHEDULE 4 unless expressly otherwise required by the Third Party; 9.1.3 promptly notify Tier of any delay in performance of the ASC Services under any contract with a Third Party where such delay may impact on Tier's performance of Consultancy Services being provided pursuant to such contract; 9.1.4 provide the ASC Services in accordance with service levels agreed with Third Parties; 9.1.5 ensure that the ASC Services conform to any quality requirements and/or specifications stated in this Agreement or as agreed by SBS in any agreement with a Third Party; 9.1.6 ensure that the ASC Services do not detract from the image and reputation of Tier; 9.1.7 charge such rates for use of the ASC Services which are competitive by reference to the benchmarking procedure described in SCHEDULE 8; 9.1.8 have the right, power, authority and capability to provide the ASC Services in accordance with the Agreement or any other arrangement or agreement with Tier and/or a Third Party; 9.1.9 comply with all laws and regulations including relevant health and safety legislation in the provision of the ASC Services. 12 9.1.10 use reasonable endeavours to construct the ASC Infrastructure in accordance with any timetables required by a Third Party or as agreed by SBS and Tier for the provision of the ASC Services. 9.2 The Parties may elect to incorporate the provision of the ASC Services as a subcontract to Tier in any agreement with a Third Party, in which case Tier and SBS shall enter into a separate agreement for that supply of ASC Services, the form of that agreement being substantially in accordance with the principles set out in SCHEDULE 4. 10 SBS STAFF SERVICES 10.1 SBS shall: 10.1.1 comply with its obligations during the Ramp-up Period and there-after to Mobilise sufficient FTE SBS Staff Services to enable Tier to comply at all times with its obligations under this Agreement; 10.1.2 procure the training of all SBS Staff Services during the Contract Period as set out in SCHEDULE 3; 10.1.3 ensure that appropriate instructions and directions are given to the SBS Staff Services to provide the ASC Services in accordance with agreements entered into with Third Parties and/or Tier. 11 OTHER RESPONSIBILITIES OF THE PARTIES 11.1 In respect of the supply of information to each other and/or a Third Party and in respect of the quality thereof the Parties shall: 11.1.1 use reasonable endeavours to ensure so far as reasonably practicable the accuracy of such supplied information; 11.1.2 in the event of any material or significant error being discovered in the supplied information and upon being notified by the party receiving the information of such error, the Party supplying the information shall, where possible immediately correct any such error. 11.2 In respect of the use of Intellectual Property Rights: 11.2.1 Tier shall ensure to the best of its knowledge and belief, that the provision of the Consultancy Services does not and will not 13 infringe any Third Party's Intellectual Property Rights or require any licence from a Third Party; 11.2.2 SBS shall ensure to the best of its knowledge and belief, that the provision of the ASC Services does not and will not infringe any Third Party's Intellectual Property Rights or require any licence from a Third Party. 12 PAYMENT 12.1 Tier shall invoice SBS on the first Working Day of every other Calendar month in respect of Consultancy Services rendered in the previous two Calendar Months. SBS shall pay such invoice within thirty (30) days of receipt thereof. 12.2 SBS shall invoice Tier on the first Working Day of every other Calendar month in respect of the Mobilised SBS Staff Services and/or the ASC Services provided to Tier in accordance with this Agreement in the previous two Calendar Months. Tier shall pay such invoice within thirty (30) days of receipt thereof. 12.3 Payments becoming due under this Agreement, shall be made by the Banks Automated Clearance System (BACS) or such other method as the Parties may agree. 12.4 Invoices paid in accordance with the provisions of this Clause 12 shall be deducted against any outstanding balance of the Consultancy Services Minimum Total Commitment or the SBS Staff Services Minimum Total Commitment, as the case may be. 12.5 Either Party may dispute an invoice within thirty (30) Calendar days of receipt of it by giving the other Party written notice setting out the basis of the dispute. 12.6 Where such a dispute arises or a Party fails to pay without disputing the invoice under Clause 12.5 the Parties shall use reasonable endeavours to settle the dispute amicably failing which the provisions of Clause 22 will apply. 12.7 All payments to be made under this Agreement shall be made in full without any set-off, restriction or condition and without any deduction for or on account of any counterclaim. 12.8 Each Party shall: 14 12.8.1 keep true and accurate accounts and records in sufficient detail to enable the amount of all sums payable under this Agreement to be determined; 12.8.2 at the reasonable request of the other Party from time to time allow that other Party or its agent at that Party's expense to inspect those accounts and records and, to the extent that they relate to the calculation of the sums payable under this Agreement, to take copies of them. 12.9 Any inspection pursuant to Clause 12.8.2 shall be carried out by an independent accountant reasonably acceptable to the Party whose accounts are being inspected who shall be instructed not to divulge to the Party carrying out the inspection any information obtained by reason of his inspection, other than information which is directly relevant to the determination of sums payable under this Agreement or to use for any unauthorised purpose any information so obtained, and who shall be required to give to the Party being inspected a direct and binding undertaking to this effect in such form as that Party may reasonably request. 12.10 The provisions of Clauses 12.8 and 12.9 shall remain in full force and effect after the termination of this Agreement for any reason until the settlement of all subsisting claims of either Party under this Agreement. 13 INTELLECTUAL PROPERTY RIGHTS 13.1 Each Party shall fully indemnify the other against all claims, demands, actions, costs, expenses (including but not limited to legal costs and disbursements on a solicitor and client basis), losses and damages arising from or incurred by reason of any infringement or alleged infringement (including but not limited to the defence of such infringement or alleged infringement) of any third party's Intellectual Property Right enforceable in the United Kingdom in connection with the provision or receipt of the Consultancy Services and/or the ASC Services (as the case may be). 13.2 A Party shall promptly notify the other if any claim or demand is made or action brought against them (or in their reasonable opinion is likely to made) for infringement or alleged infringement of any third party's Intellectual Property Right by reason of the use or possession of such Intellectual Property Right under this Agreement which may affect the provision and/or receipt of the Consultancy Services and/or the ASC Services (as the case may be). 15 13.3 The Party against whom the indemnity claim is made shall at its own expense conduct any litigation arising therefrom and all negotiations in connection therewith and the other Party hereby agrees to grant to them exclusive control of any such litigation and such negotiations. 13.4 The other Party shall, at the request of the Party against whom the claim is made, afford all reasonable assistance for the purpose of contesting any claim or demand made or action brought against them and shall be repaid all costs and expenses incurred in doing so. 13.5 The non-defending Party shall not make any admissions which may be prejudicial to the defence or settlement of any claim, demand or action for infringement or alleged infringement of any Intellectual Property Right. 13.6 If a claim or demand is made or action brought for the infringement or alleged infringement of any third party Intellectual Property Right, the Parties shall on the reasonable request of either Party, subject to Clause 25, either: 13.6.1 modify any or all of the Consultancy Services and or the ASC Services (as the case may be) without reducing the performance and functionality of the same, or substitute alternative services of equivalent performance and functionality for any or all of the Consultancy Services and or the ASC Services (as the case may be), so as to avoid the infringement or the alleged infringement, provided that the terms herein shall apply mutatis mutandis to such modified or substituted Consultancy Services and or the ASC Services (as the case may be) and such modified or substituted Consultancy Services and or the ASC Services (as the case may be) are acceptable to the Parties, such acceptance not to be unreasonably withheld; or 13.6.2 procure a licence for the Parties to provide the Consultancy Services and or the ASC Services (as the case may be) and/or to receive the full benefit of the Consultancy Services and or the ASC Services (as the case may be) on terms which are consistent with the requirements of this Agreement. 13.7 The foregoing provisions of this Clause 13 shall not apply insofar as and to the extent only that any such claim or demand or action is in respect of: 13.7.1 any use by or on behalf of one Party of the Consultancy Services and/or the ASC Services (as the case may be) in combination 16 with any item not supplied by the other Party where such combined use directly gives rise to the claim, demand or action; or 13.7.2 any modification carried out by or on behalf of one Party to any item supplied by the other Party under this Agreement if such modification is not authorised by that Party in writing; or 13.7.3 any use by one Party of software or documentation in a manner not reasonably to be inferred from this Agreement; or 13.7.4 any software or documentation produced by either Party pursuant to and in accordance with a technical specification given by the other Party. 13.8 If the Parties have availed themselves of their rights to modify the Consultancy Services and or the ASC Services (as the case may be) or supply substitute services pursuant to Clause 1361 or to procure a licence under Clause 1362 and such exercise of the said rights has avoided any claim, demand or action for infringement or alleged infringement, then there shall be no further liability thereafter under this Clause 13 in respect of the said claim, demand or action. 13.9 Each Party will retain ownership of its Intellectual Property Rights in existence at the date of this Agreement. Neither Party shall have any right title or interest in any Intellectual Property Rights created outside the Agreement. 13.10 Subject to the provisions of Clause 13.9 and the rights of Third Parties, SBS shall be the owner of any copyright and other Intellectual Property Rights (if any) arising from and subsisting in; 13.10.1 the Consultancy Services provided to SBS by Tier; 13.10.2 documents produced during the Business Development Activity, Proposal Development Activity and Proposal Submission Activity; 13.10.3 proposals; and 13.10.4 the ASC Services provided hereunder. 17 13.11 SBS shall at Tier's request grant Tier a worldwide royalty free non-exclusive licence to use any copyright or other Intellectual Property Rights arising from and subsisting in any or all of the items set out in Clauses 13.10.1, 13.10.2 and 13.10.3. 13.12 Subject to the rights of Third Parties, SBS shall be the co-owner with Tier of any trade marks (if any) subsisting in (or becoming or intended to be vested) in any or all of those things referred to in Clause 13.10 under which they will be marketed by SBS. 14 FORCE MAJEURE 14.1 Neither Party to this Agreement shall be deemed to be in breach of this Agreement or otherwise liable to the other Party for any failure or delay in the performance of its obligations hereunder which is due to Force Majeure. Notwithstanding the foregoing, each Party shall use all reasonable endeavours to mitigate the severity of the Force Majeure. 14.2 If either of the Parties' performance of its obligations under this Agreement is affected by Force Majeure then: 14.2.1 it shall give written notice to the other Party, specifying the nature and extent of the Force Majeure on becoming aware of the Force Majeure; 14.2.2 subject to the provisions of Clause 14.2.3, the date of performance of such obligations shall be deemed suspended only for a period equal to the delay caused by such event; 14.2.3 it shall not be entitled to payment from the other Party in respect of extra costs and expenses incurred by virtue of the Force Majeure event. 14.3 It is expressly agreed that any failure by a Party to perform or any delay in performing their obligations under this Agreement which results from any failure or delay in the performance of their obligations by any person, firm or company with which they shall have entered into any contract, supply arrangement or sub-contract or otherwise, shall be regarded as a failure or delay due to Force Majeure only in the event that such person, firm or company shall itself be prevented from or delayed in complying with its obligations under such contract, supply arrangement or sub-contract or otherwise as a result of circumstances of Force Majeure. 18 14.4 If the Force Majeure in question prevails for a continuous period in excess of six (6) months (such period to be measured from the date on which the Force Majeure begins) then the Party not subject to the Force Majeure shall be entitled to give written notice to the defaulting Party to terminate this Agreement. The notice to terminate must specify the termination date, which must not be less than thirty (30) Working Days after the date on which the notice is given. Once a notice to terminate has been validly given, the Agreement will terminate on the termination date set out in the notice. 14.5 For the avoidance of doubt, in the event that the Agreement is terminated in accordance with Clause 14.4 neither Party shall be liable to pay the reconciliation payments under SCHEDULE 2 paragraph 8.2 or SCHEDULE 3 paragraph 6.3. 15 INSURANCES 15.1 The Parties shall for the Contract Period procure and maintain with a reputable insurer insurance as required by law and such further insurance as set out in Annex 1 up to the limits specified therein for any event or series of events attributable to a single cause. 15.2 In respect of that insurance required under the provisions of Clause 151 no insurance of either Party shall be permitted to lapse, be cancelled or materially changed without fourteen (14) Working Days prior written notice to the other's insurers or brokers. 15.3 Pursuant to the provisions of Clause 151, the Parties shall maintain insurance policy's substantially the same as set out in Annex 1. 16 LIABILITY 16.1 Subject to the maximum extent permissible in law, all conditions and warranties which are to be implied by statutes or otherwise by general law into this Agreement or relating to the ASC Services or Consultancy Services are hereby excluded. 16.2 The Parties expressly agree that the exclusions and limitations of liability contained in this Agreement are reasonable because of (amongst other matters) the likelihood that the amount of damages awardable to either Party for a breach by the other Party of this Agreement may be disproportionately greater than the monies paid by the Parties under this Agreement in respect of the SBS Staff Services and Consultancy Services. 19 16.3 The following provisions set out the Parties' entire liability (including any liability for the acts and omissions of their representative, employees, agents or sub-contractors) to each other in respect of: 16.3.1 any breach of their respective contractual obligations under this Agreement; 16.3.2 a tortious act or omission, including negligence, arising under or in connection with this Agreement; 16.3.3 an action arising out of any misrepresentation by either Party. (save for the obligation to pay reconciliation payments under SCHEDULE 2 paragraph 8.2 and SCHEDULE 3 paragraph 6.3, and any special project agreements as referred to in SCHEDULE 2 paragraph 3.1.1 or Clause 9.2). 16.4 The total aggregate liability of either Party for all acts, omissions and defaults shall be subject to the financial limits set out in this Clause 16.4: 16.4.1 the total aggregate liability of either Party resulting in direct loss of or damage to the property of the other under this Agreement shall in no event exceed [***]; and 16.4.2 the total aggregate liability of either Party during each Year of this Agreement for all acts, omissions and defaults (other than a default governed by Clause 16.4.1) shall in no event exceed [***]. 16.5 In no event shall either Party be liable to the other for: 16.5.1 loss of profits, business, revenue, goodwill or anticipated savings; and/or 16.5.2 indirect or consequential loss or damage. 16.6 The provisions of Clause 16.5 shall not limit or restrict the right of one Party to claim from the other: 16.6.1 additional operational and administrative costs and expenses; and/or 16.6.2 expenditure or charges incurred by that Party rendered unnecessary, * CONFIDENT TREATMENT REQUEST(ED) 20 as a direct result of any default by the other. 16.7 Notwithstanding anything to the contrary herein contained the Parties' liability for death or personal injury which arises out of their negligence or the negligence of their servants, agents or sub- contractors shall not be limited. 16.8 The Parties expressly agree that any order for specific performance made in connection with this Agreement in respect of either Party shall be subject to the financial limitations set out in Clause 16.4. 16.9 Without prejudice to Clause 16.7 each Party agrees that it will have no remedy against the other in respect of any untrue statement (unless such statement was fraudulent) made to it upon which they relied in entering into this Agreement and that the only remedies (if any, and subject to Clause 24.10) can be for breach of contract, and/or in respect of any fraudulent misrepresentations made by that Party. 16.10 Without prejudice to the provisions of Clause 16.7, Tier shall indemnify SBS within the limits specified in this Clause 16.4 in respect of any claims and demands arising out of Tier's negligent misstatement or misrepresentation during the performance of the Business Development Activity. 16.11 Without prejudice to the provisions of Clause 16.7 if a Third Party in accordance with the provisions of a separate agreement or otherwise claims any reimbursement, indemnity or payment of damages from a Party (the "Claimant") and the other Party's (the "Indemnifier") negligent act or omission has caused or contributed to the claim being made the Indemnifier shall indemnify the Claimant against such claims to the extent that it has caused or contributed to the claim being made provided always that the total aggregate limit of liability of the Indemnifier in respect of any and all such claims shall not exceed that contained within the said separate agreement (if any) or in the absence of a specified sum, the total aggregate limit of liability in this Agreement. Where the limitations of liability in a separate agreement are higher than the limitations set out in Clause 16.4, the higher limitations on liability shall not apply unless they have been expressly agreed to in writing by Tier. 16.12 In the event that the Claimant seeks to rely on an indemnity given by the Indemnifier under this Agreement in respect of a claim made against the Claimant by a Third Party the Claimant shall: 21 16.12.1 provide the Indemnifier with prompt notice of such claim; 16.12.2 ensure at the request in writing of the Indemnifier that the Indemnifier is placed in a position to dispute the claim and shall render, or cause to be rendered, to the Indemnifier at the Indemnifier's expense all such assistance as the Indemnifier may reasonably require in disputing the claim. 16.13 The Indemnifier or its insurers shall be entitled to the exclusive conduct of any such action or claim. 16.14 In connection with the conduct of any dispute relating to the claim: 16.14.1 the Indemnifier shall keep the Claimant informed of its progress and at the negotiations relating to it; 16.14.2 the Claimant shall undertake no negotiations and make no settlement or compromise, not agree any matter in relation to its conduct which is likely to affect the amount involved in the future liability of the Indemnifier without the prior approval of the Indemnifier, such approval not to be unreasonably withheld, developed or refused. 16.15 The Claimant shall take all reasonable steps to mitigate its loss in respect of the claim being made against the Indemnifier. 16.16 Where in the performance of any obligations under this Agreement a Party subcontracts such performance to a third party the Party so subcontracting shall remain wholly liable for the performance of such obligations. 16.17 The exclusions from and limitations of liability set out in this Clause 16 shall be considered severably. The invalidity of unenforceability of any one clause or sub-clause of this Clause 16 shall not affect the validity or enforceability of any other part of this Clause 16. 16.18 The provisions of this Clause 16 shall survive the termination of the whole or a part of this Agreement. 22 17 EMPLOYMENT INDEMNITIES 17.1 It is the Parties' intention and understanding that the provisions of TUPE do not apply to this Agreement and none of the SBS Staff Services will transfer to Tier. The Parties shall take all reasonable steps to avoid circumstances which give rise to a situation where the provisions of TUPE are likely to apply by operation of this Agreement. The Parties have therefore agreed Clauses 17.2, 17.3, 17.4, 17.5 and 17.6 below. 17.2 If any contract of employment of an employee of SBS deemed to have been effected between Tier and such employee as a result of the provisions of Regulation 5 of TUPE, then:- 17.2.1 Tier shall within twenty () Working Days of becoming aware of the application of Regulation 5 to any such contract notify SBS of the fact in which case SBS shall have thirty (30) Calendar days in which to offer that employee employment with SBS, failing which, or if the employee does not accept the offer unconditionally within fifteen (15) days of the offer being made, Tier shall have the right to terminate such contract; 17.2.2 In respect of such an employee SBS will indemnify Tier in full against any actions, proceedings, costs, claims, demands, awards, fines, orders, expenses and liability whatsoever (including legal and other professional fees and expenses) in relation to that employee whether arising directly or indirectly out of or in connection with termination or otherwise, and against any sums payable to or in relation to that employee in respect of his employment with Tier; and 17.2.3 In respect of SBS Staff Services recruited externally by SBS at Tier's request SBS and Tier shall bear all costs and expenses equally arising directly or indirectly out of or in connection with termination or otherwise, and any sums payable to or in relation to such person in respect of his employment with Tier. 17.3 In the event of any employee of SBS bringing proceedings against Tier, whether or not that employee is claiming that he is employed by Tier, SBS will keep Tier indemnified in full against all costs of defending such proceedings (including legal and other professional fees and expenses) and any awards, fines, orders, expenses and liabilities whatsoever arising, directly or indirectly in connection with such proceedings. 23 17.4 In the event of any SBS Staff Services recruited externally by SBS at Tier's request bringing proceedings against Tier, whether or not that SBS Staff Services is claiming that he is employed by Tier, SBS and Tier shall bear all costs equally of defending such proceedings (including legal and other professional fees and expenses) and any awards, fines, orders, expenses and liabilities whatsoever arising, directly or indirectly in connection with such proceedings. 17.5 When reasonably required to do so by Tier, SBS will assist Tier in taking and/or defending any proceedings by and/or against Tier in connection with any of its employees or former employees. 17.6 If the right to terminate arises under Clause 17.2.1 and Tier does not ex ercise that right by terminating the employment or giving notice of termination within thirty (30) Calendar days of that right arising then Tier shall be deemed to have accepted the employees transferred to them and SBS shall have no obligation to indemnify Tier under any provisions of this Clause 17 arising out of employment after that thirty (30) Calendar day period. 18 RESPONSIBILITIES AND COSTS 18.1 In respect of costs each Party shall be responsible for and bear their own costs incurred in executing this Agreement and their obligations hereunder unless otherwise provided for under this Agreement. 18.2 Tier shall be responsible for carrying out the Business Development Activity, the Proposal Development Activity and the Proposal Submission Activity and SBS shall fully co-operate with Tier as further set out in the provisions of Schedule 3. In particular the VRB shall, at all times, act reasonably and within its own guidelines and give written reasons to Tier for any decision at any stage up to and including the Formal Commitment Stage not to proceed with an opportunity presented to it by Tier to Utilise the Mobilised SBS Staff Services. 18.3 Tier shall bear its own costs arising during the Business Development Activity, the Proposal Development Activity and the Proposal Submission Activity. 18.4 SBS shall bear all its own costs arising during and beyond the Formal Commitment Stage. 24 18.5 For the avoidance of doubt Tier shall not be entitled to any reimbursement of cost or have the right to claim any offset against the SBS Staff Services Minimum Total Commitment in respect of any opportunity which the VRB decides not to proceed with. 19 NOTICES 19.1 Any notice required to be given or made hereunder or in connection with this Agreement shall be in writing and shall be given or made by delivering the same by hand or by sending the same by prepaid first class post or other fast postal or courier service or facsimile to the address or relevant telecommunications number of the relevant Party set out in Clause 19.3 or such other address or number of the relevant Party or such other address or number as that Party may have notified to the other pursuant to the provisions of this Clause 19. 19.2 Any such notice given as aforesaid shall be deemed to have been duly given if delivered by hand or courier upon delivery at the address of the relevant Party, two (2) Working Days next following the day of sending if sent by post and if sent by facsimile at the time of transmission (provided a confirmatory letter is sent by prepaid first class post). In proving the fact of despatch by post it shall be sufficient to show that the envelope containing the notice was properly addressed, stamped and posted. 19.3 The Parties' Addresses; 19.3.1 For Tier Technologies Inc 1350 Treat Boulevard Suite 250, Walnut Creek CA 94596 USA Tel: 001 925 937 3950 Fax: 001 925 937 3902 For the Attention of: Mr J Bildner cc: Tier Technologies (United Kingdom) Inc. 19, Wellington Business Park, Dukes Ride, Crowthorne, Berkshire RG45 6LS Telephone: 01344 760700 Facsimile: 01344 760701 25 For the Attention of: Mr. A.D. Armstrong, Managing Director cc: Eversheds Senator House 85 Queen Victoria Street London EC4 4JL Tel: 0171 919 4500 Fax: 0171 919 4919 For the Attention of: Mr B Gripton 19.3.2 For SBS; Siemens House, Oldbury, Bracknell Berkshire RG12 8FZ Telephone: 01344 396104 Facsimile: 01344 396020 For the Attention of: Mr. M.I Gore, Head of Contract Management and Procurement Mr Gary Pusey and Mr J Loughrey 20 DATA PRIVACY AND ACCESS TO INFORMATION 20.1 Notwithstanding any obligations contained herein, the Parties shall ensure that they are and remain compliant with the Data Protection Act and shall not knowingly cause the other to be in breach of the provisions thereof. 21 DISPUTE ESCALATION PROCEDURE 21.1 All disputes between the Parties arising out of or relating to this Agreement which cannot be amicably settled between the Parties' Alliance Managers shall be referred, by either Party, to their respective Finance Directors or their nominated representatives for resolution. 26 21.2 If any dispute cannot be resolved by the Parties' respective Finance Directors or their nominated representatives within a maximum of fifteen (15) Calendar days after it has been referred under Clause 21.1 that dispute shall be referred to the Parties' Managing Directors for resolution. 21.3 If the dispute cannot be resolved by the Parties' representatives nominated under Clause 21.1 within a maximum of fifteen (15) Calendar days after it has been referred under Clause 21.2 the dispute may be referred by either Party in accordance with the provisions of Clause 22. 22 DISPUTE RESOLUTION PROCEDURES 22.1 In the event that a dispute is referred under Clause 21: 22.1.1 and if the dispute relates to whether or not the Consultancy Services and/or the ASC Services (as the case may be) are being provided in accordance with the technical provisions of this Agreement including whether or not the terms of this Agreement relating to quality, scope and fitness for purpose have been complied with or it relates to non-payment of an invoice under Clause 14 or a failure of the Parties to agree the Consultancy Services Charge Rates in Attachment 1 to SCHEDULE 2, a notice of the dispute shall be provided to a technical expert (the "Expert") who shall act as expert and not as arbitrator; or 22.1.2 if the dispute relates either to whether or not any term or condition of this Agreement is valid or enforceable and/or as to the proper interpretation or construction of this Agreement, or to any other matter relating to breach of this Agreement a notice of the dispute shall be provided to an arbitrator ("the Arbitrator") who shall act as an arbitrator and not an expert. 22.2 The Expert shall be selected by mutual agreement or, failing agreement, within ten (10) Calendar days after a request by one Party to the other, shall be chosen at the request of either Party by the President at the time being of the British Computer Society who shall be requested to choose a suitably qualified and experienced Expert for the dispute in question. 27 22.3 The Arbitrator shall be selected by mutual agreement or, failing agreement, within ten (10) Calendar Days after a request by one Party to the other, shall be chosen at the request of either Party by the President at the time being of the Chartered Institute of Arbitrators who shall be requested to choose a suitably qualified and experienced arbitrator for the dispute in question. 22.4 Thirty (30) Calendar Days after the Expert or Arbitrator (as the case may be) has accepted the appointment each Party shall submit a written report on the dispute setting out the issues of the dispute to the Expert or Arbitrator (as the case may be) and to each other and ten (10) Calendar Days thereafter shall submit any written replies they wish to make to the Expert or Arbitrator (as the case may be) and to each other. 22.5 Both Parties will then afford the Expert or Arbitrator (as the case may be) all necessary assistance which the Expert or Arbitrator requires to consider the dispute including but not limited to access to the Premises of the Parties and any documentation or correspondence relating thereto which it could be required to produce on disclosure. 22.6 The Expert or Arbitrator (as the case may be) shall be instructed to deliver his determination in writing to the Parties within thirty (30) Working Days after the submission of the written reports pursuant to Clause 22.4. 22.7 The Expert or Arbitrator (as the case may be) shall have the same powers to require any party to produce any documents or information to him and the other Party as an arbitrator and each Party shall supply to him such information when required to do so which it could be required to produce on disclosure. 22.8 Subject to the Arbitration Act 1996, decisions of the Expert and Arbitrator shall be final and binding and not subject to appeal. 22.9 Any decision by the Expert in relation to payment of an invoice shall be complied with within thirty (30) Calendar Days of the date on which the decision is published. If a Party has been ordered to pay the invoice and fails to do so within that thirty (30) Calendar Day period the Expert shall have the power to order that Party to pay interest on such sum from the first Working Day after the expiration of that thirty (30) Working Day period at the annual rate of 4 per cent above the base lending rate from time to time of National Westminster Bank PLC accruing on a daily basis until payment is made whether before or after any judgement. 28 22.10 The costs of the Arbitrator shall be borne by the Parties in the proportion as shall be determined by the Arbitrator having regard (amongst other things) to the conduct of the Parties. 22.11 The costs of the Expert shall be borne equally by the Parties save where the Expert's decision as to payment of an invoice has not been complied with within the time limit set out in Clause 22.9 in which case the Party that has failed to comply with the Expert's decision shall bear all the costs of the Expert. 22.12 The performance by the Parties of their respective obligations under this Agreement shall not cease or be delayed by this dispute resolution procedure and the Parties will give effect to the determination. 22.13 Each Party will bear its own legal or other costs in connection with dispute resolution procedure, whether determined by an Expert or an Arbitrator. 23 DEFAULT IN PERFORMANCE 23.1 Either Party may investigate any and each case where the other Party (the "Non-Performing Party") appears to have failed to perform any obligation conferred by and upon it in accordance with this Agreement. 23.2 Where the Party so investigating (the "Investigating Party") is satisfied that in any particular case the Non Performing Party has failed to perform an obligation in accordance with the provisions of this Agreement, the Investigating Party shall be entitled to instruct the Non Performing Party to remedy the failure within such reasonable period as the Investigating Party may determine and (subject to the limitations of liability expressed in Clause 16)at no additional cost to the Investigating Party. For the purpose of this Clause 23.2 only, "reasonable period" shall mean that period of time that is reasonably necessary to rectify the non performance, taking into consideration the nature, scale and impact of the non performance and the circumstances that gave rise to it which in any event shall be no less than 45 Calendar days. 23.3 Where the Investigating Party issues an instruction to the Non Performing Party under Clause 23.2 and the Non Performing Party fails to comply (either wholly or partially) with the instruction issued by the Investigating Party within the timescale permitted by the said instruction then the Investigating Party shall be entitled to issue a Default Notice in respect of each such failure 23.4 Upon the issue of a Default Notice under Clause 23.3: 23.4.1 where the breach detailed in the said instruction being the subject of the Default Notice is capable of remedy, the Non Performing Party shall remedy the said breach within forty- five (45) Calendar days (or as otherwise agreed between the Parties) after the Default Notice is served, and if the said breach is then not remedied within that forty-five (45) Calendar day period (or such other period as the Parties may otherwise agree, (as the case may be)) , the Investigating Party shall be entitled to issue a Major Default Notice; or 23.4.2 where the breach detailed in the said instruction being the subject of the Default Notice is not capable of remedy, the Investigating Party shall be entitled, having given the Non Performing Party ten (10) Calendar days (or such other period as the Parties may have otherwise agreed (as the case may be)) written notice of its intention to so do, issue a Major Default Notice. 23.5 Where the Major Default Notice relates to the performance of the Consultancy Services, save for a default governed by Clause 12 the Investigating Party shall specify in the Major Default Notice that in the event of: 23.5.1 a further Major Default Notice being issued to the Non- Performing Party within the next six (6) Calendar months; or 23.5.2 three Major Default Notices in total being served within any eighteen (18) Calendar month period during the Contract Period, then; the Investigating Party may either, without prejudice to any of its other rights and remedies hereunder; 23.5.3 extend the period for performance in relation to any outstanding Major Default Notices; or 23.5.4 terminate the provisions in the Agreement which relate to the Consultancy Services, in accordance with the provisions of Clause 24.1. 23.6 Where the Major Default Notice relates to the provision of the SBS Staff Services (including the ASC Services and the ASC Infrastructure) save for a default governed by Clause 12 the Investigating Party shall specify in the Major Default Notice that in the event that: 23.6.1 a further Major Default Notice being issued to the Non- Performing Party within the next twelve (12) Calendar months; or 23.6.2 three Major Default Notices in total being served within any thirty-six (36) Calendar month period during the Contract Period, then; the Investigating Party may either, without prejudice to any of its other rights and remedies hereunder; 23.6.3 extend the period for performance in relation to any outstanding Major Default Notices; or 23.6.4 terminate the provisions of the Agreement which relate to the SBS Staff Services (including the ASC Services and the ASC Infrastructure) in accordance with the provisions of Clause 24.4. 23.7 Where the Major Default Notice relates to a default governed by Clause 12 in respect of non-payment of an invoice by SBS for Consultancy Services provided by Tier where SBS has failed to comply with an Expert's decision pursuant to Clause 22.9 Tier shall specify in the Major Default Notice that in the event of: 23.7.1 a further Major Default Notice being issued to SBS relating to non-payment of an invoice pursuant to an Expert's decision under Clause 22.9 within the next twelve (12) Calendar months; Tier may either, without prejudice to its other rights and remedies hereunder; 23.7.2 extend the period for performance in relation to the outstanding Major Default Notices; or 23.7.3 terminate the whole Agreement in accordance with the provisions of Clause 24.7. 23.8 Where the Major Default Notice relates to a default governed by Clause 12 in respect of non-payment of an invoice by Tier in respect of Mobilised SBS Staff Services and Tier has failed to comply with an Expert's decision pursuant to Clause 22.9 SBS shall specify in the Major Default Notice that in the event of: 23.8.1 a further Major Default Notices relating to non-payment of an invoice being issued to Tier pursuant to an Expert's decision under Clause 22.9 within the next twelve (12) Calendar months; SBS may either, without prejudice to its other rights and remedies hereunder; 23.8.2 extend the period for performance in relation to the outstanding Major Default Notice; or 23.8.3 terminate the whole Agreement in accordance with the provisions of Clause 24.7. 23.9 Where the Major Default Notice relates to a default not governed by Clauses 23.5.4, 23.6.4, 23.7.3 or 23.8.4 the Investigating Party shall specify in the Major Default Notice that in the event of: 23.9.1 a further Major Default Notice being issued to the Non- Performing Party within the next twelve (12) Calendar months which does not relate to a default governed by Clauses 23.5.4, 23.6.4, 23.7.3 or 23.8.4; the Investigating Party may either, without prejudice to any of its other rights and remedies hereunder; 23.9.2 extend the period for performance in relation to any outstanding Major Default Notice; or 23.9.3 terminate the Agreement in accordance with the provisions of Clause 24.7. 23.10 To the extent that any failure by the Investigating Party to fulfil any of its obligations is caused by a default by the Non Performing Party, then: 23.10.1 the Investigating Party shall use all reasonable endeavours to arrange all such additional resources as are necessary to fulfil the said obligation as early as possible thereafter (at the cost of the Non Performing Party (subject to the limitations of liability expressed in Clause 16; and 23.10.2 the Investigating Party shall be entitled to an extension of time in respect of such obligation which shall reflect the delay actually caused by the Non Performing Party's default. 23.11 In the event of the default referred to in Clause 23.10 causing a delay in any Third Party contract, then the Parties shall use best endeavours to ensure that the effect on the said Third Party contract is kept to an absolute minimum and that the said Third Party is advised immediately about the consequential effects of such a delay. 24 TERMINATION 24.1 Where the right to terminate arises pursuant to Clause 23.5.4 SBS may terminate the provisions in the Agreement relating to the Consultancy Services by serving a written termination notice on Tier. The termination notice must specify the termination date, which must not be less than thirty (30) Working Days after the date on which the termination notice is given. 24.2 In the event that SBS exercises its right under Clause 24.1 to terminate the provisions in the Agreement relating to the Consultancy Services: 24.2.1 the provisions relating to the Consultancy Services in the Agreement will terminate on the termination date set out in the termination notice. For the avoidance of doubt SBS shall be immediately discharged from any further liability to pay the Consultancy Services Minimum Total Commitment; 24.2.2 SBS shall pay forthwith all monies due and owing to Tier in respect of the Consultancy Services provided up to the termination date. 24.3 Save as provided in Clause 24.2.1, all other provisions in this Agreement shall continue in full force and effect, including the performance by SBS of its obligations in respect of the SBS Staff Services (including the ASC Services and the ASC Infrastructure) and Tier shall remain liable to meet the SBS Staff Services Minimum Total Commitment. 24.4 Where the right to terminate arises pursuant to Clause 23.6.4 Tier may terminate the provisions of the Agreement relating to the SBS Staff Services (including the ASC Services and the ASC Infrastructure) by serving a written termination notice on SBS. The termination notice must specify the termination date which must not be less than thirty (30) Working Days after the date on which the termination notice is given. 24.5 In the event that Tier exercises its right under Clause 24.4 to terminate the provisions in the Agreement relating to the SBS Staff Services (including the ASC Services and the ASC Infrastructure: 24.5.1 the provisions relating to the SBS Staff Services (including the ASC Services and the ASC Infrastructure) in the Agreement will terminate on the termination date set out in the termination notice and for the avoidance of doubt Tier shall be immediately discharged from any further liability to pay the SBS Staff Services Minimum Total Commitment; 24.5.2 Tier shall pay forthwith all monies due and owing to SBS in respect of any Mobilised FTE SBS Staff Services up to the termination date. 24.6 Save as provided in Clause 24.5.1, all other provisions in this Agreement shall continue in full force and effect, including the obligation on SBS to continue to procure Consultancy Services from Tier up to the Consultancy Services Minimum Total Commitment. 24.7 Where the right to terminate arises pursuant to Clauses 23.7.3, 23.8.3 and 23.9.3 either Party may terminate this Agreement by serving a written termination notice on the other Party. The termination notice must specify the termination date, which must not be less than thirty (30) Working Days after the date on which the termination notice is given. 24.8 In the event that either Party exercises its right under Clause 24.7 to terminate the Agreement: 24.8.1 the Agreement will terminate on the termination date set out in the termination notice; 24.8.2 no further payments whatsoever shall be due from one Party to the other Party other than payments which have fallen due prior to the termination date, such payments to be made forthwith. 24.9 If a Receiver is appointed of the whole or part of one Party's (the "Insolvent Party") assets or an order is made or a resolution passed for winding up (unless such order or resolution is part of a voluntary scheme for the reconstruction or amalgamation of the Insolvent Party as a solvent corporation and the resulting corporation if a different legal entity undertakes with the other party to be bound by the terms of this Agreement) or the Insolvent Party otherwise becomes subject to or takes advantage of the bankruptcy or insolvency laws applicable to it then this Agreement shall immediately terminate without the need of any notice but the other Party may at its absolute discretion waive such termination by notice in writing given within twenty (20) Working Days after the event giving rise to such termination comes to the other Party's attention in which case this Agreement shall revive and shall be deemed never to have been terminated and the rights and obligations under the Agreement shall subsist for the successors and assigns of the Insolvent Party. 24.10 Save for the provisions under Clause 14 the provisions of Clause 24 shall be the sole provisions relating to termination of this Agreement in whole or in part and for the avoidance of doubt, the Parties waive irrevocably pursuant to Clause 30 any other right or remedy which may otherwise accrue to the other Party howsoever to terminate and/or rescind this Agreement and/or to cease or suspend the provision of the Consultancy Services and/or ASC Services (as the case may be) at any time during the Contract Period but nothing in this Clause 24.3 shall exclude or restrict the Parties' right (if any and subject to Clause 16) to claim any other remedy in equity or law from the other. 24.11 Termination in accordance with this Clause 24 shall not prejudice or affect any right of action or remedy which shall have accrued or shall thereafter accrue to either Party (including, without limitation, in respect of any damages suffered or incurred thereafter). 24.12 In the event of termination or expiry of this Agreement in whole or in part, the Parties will promptly return to each other any property belonging to them which they have no contractual right to retain. 24.13 Subject as otherwise provided in this Agreement, or subject to any rights or obligations which have accrued prior to termination neither Party shall have any further obligation to the other under this Agreement in respect of the part of the Agreement which is terminated. 25 CHANGE CONTROL 25.1 Either Party may from time to time request amendments to this Agreement. Amendments to this Agreement shall be effected only by way of Change Control Notes signed by the duly authorised representatives of the Parties, such approval not to be unreasonably withheld. 25.2 Change Control Notes shall be substantially in the form set out in ATTACHMENT 1 to SCHEDULE 6 and shall be numbered consecutively. 26 MILLENNIUM COMPLIANCE 26.1 The Parties hereby warrant that the performance and functionality of all software and hardware or other items in question (the "Relevant Item") owned or used by, or licensed to them in performing their obligations under this Agreement will not be affected by the advent of the year 2000 or by any leap year or by any use of or reference to a date beyond 31 December 1999. In particular the Relevant Item will: 26.1.1 handle date information before, during and after 1st January 2000, including but not limited to accepting date input, providing date output, and accurately performing calculations on dates or portions of dates in a manner that is unambiguous as to century; 26.1.2 function accurately and without interruption before, during and after 1st January 2000, without any changes in operation associated with the advent of that year or the end of the preceding year; and 26.1.3 respond to two-digit year date input in a way that resolves the ambiguity as to century in a disclosed, defined and predetermined manner without the need for human intervention; Provided that until 31st December 1999 the only remedy available to either Party in respect of any default by the other Party under this Clause 261 shall be to require that Party to correct the affected software and hardware or other item owned or used by, or licensed by that Party as soon as is practicable such that neither the provision nor the receipt of the Consultancy Services or the ASC Services will be affected by the advent of the Year 2000 or by any use of or reference to a date beyond 31st December 1999. 27 CONFIDENTIALITY 27.1 For the purpose of this Agreement it is contemplated that either or both of the Parties may disclose or allow access to certain information in the pursuance of the Agreement and the Parties wish to protect and regulate how such Confidential Information is to be treated in order to protect their interests in this information. 27.2 Each Party hereto possesses valuable information, including without limitation, ideas, business methods, finances, prices, customer lists or details, business, financial, marketing, development or manpower plans, computer systems and software, technical drawings, data, manuals, techniques, trade secrets, know-how, or other matters connected with services provided under this Agreement, information concerning relationships with actual or potential clients or customers and the needs and requirements of such persons, research and development data and specifications, and data of a secret and confidential nature relating to its present and future commercial activities any of which may be in whatever form, whether imparted orally or in writing or by other medium including all copies of the same all of which are regarded by it as commercial assets of considerable value. 27.3 For the purpose of this Clause 27, the following definitions shall apply; 27.3.1 "Confidential Information" shall mean those things described in Clause 272. 27.3.2 "Disclosing Party" shall mean the Party who discloses its Confidential Information to the other Party. 27.3.3 "Receiving Party" shall mean the Party who receives its Confidential Information from the Disclosing Party. 27.3.4 The Receiving Party shall: 27.3.4.1 hold all Confidential Information received from the Disclosing Party in strict confidence; 27.3.4.2 use the Confidential Information solely for the purpose intended by this Agreement; 27.3.4.3 permit access to such Confidential Information only to those of its personnel who need to know for carrying out their respective obligations under this Agreement. 37 27.3.5 Without prejudice to the generality of the provisions of this Clause 27, the Receiving Party shall exercise no less a degree of care in protecting the Confidential Information than which it uses to protect its own information of like sensitivity and importance. 27.3.6 The obligations of confidentiality herein shall not apply to any Confidential Information which: 27.3.6.1 was in the possession of the Receiving Party before such Confidential Information was imparted by the Disclosing Party or is independently developed by any servant, agent or employee of the Receiving Party without access to or use or knowledge of the Confidential Information imparted by the Receiving Party; or 27.3.6.2 was, is in or subsequently comes into the public domain other than by breach by the Receiving Party of its obligations hereunder or under any other agreement of confidentiality between the Parties; or 27.3.6.3 is received by the Receiving Party without restriction on disclosure or use from a Third Party, which Third Party has a lawful right to make such disclosure; or 27.3.6.4 is disclosed because of a legal requirement. 27.3.7 If any portion of any Confidential Information falls within any of the above exceptions, the remainder shall continue to be subject to the restrictions of this Agreement. 27.3.8 Any Confidential Information imparted hereunder shall remain the property of the Disclosing Party and must be used only for the purpose of this Agreement. No rights are granted to the Receiving Party hereunder and no rights shall be deemed to have arisen or be implied in any Confidential Information. 27.3.9 Upon expiration or termination in whole or in part of this Agreement, the Receiving Party shall return such Confidential Information as relates to the part of the Agreement which has terminated where part-termination has occurred or otherwise all Confidential Information received from the Disclosing Party to the Receiving Party, or, upon the consent of the Disclosing Party, shall destroy all such Confidential Information and provide to the Disclosing Party a certificate of such destruction signed by a responsible officer of the Receiving Party. 38 27.3.10 Unless otherwise agreed, in writing, these confidentiality provisions shall survive termination of this Agreement and shall remain in effect for a period of five (5) years after return or destruction by the Receiving Party of the other Party's Confidential Information provided in accordance with this Agreement. 27.4 The Parties accept and agree not to divulge the nature, existence and/or content of this Agreement to any other company, organisation or individual, without the consent of the other Party, save in cases where it is necessary by virtue of judicial review, legislation and/or financial regulations, in which cases the one Party shall receive due notice from the other Party so required to disclose the necessary information. 28 PUBLICITY 28.1 Neither Party shall publicise the existence of this Agreement nor make all or any necessary press announcements in respect thereof without the consent of the other Party. 29 ENGAGEMENT OF SENIOR EMPLOYEES 29.1 Neither Party shall during the Contract Period and for a period of twelve (12) Calendar months after its termination solicit, employ or engage or offer to employ or engage any of the other Party's senior employees or consultants without the prior written consent of the other Party. 29.2 In the event of breach of Clause 29.1 and only where the senior employee or consultant in question has actively sought employment with the defaulting Party, the defaulting Party shall pay to the other Party a sum equal to 30% of the first year's annual salary paid to the senior employee or consultant so recruited by the defaulting Party. Payment of such sum shall be the sole and exclusive liability of the defaulting Party. Payment shall be made with thirty (30) Working Days of commencement of employment. 39 30 FAILURE TO ENFORCE AND WAIVER 30.1 The failure or delay by either Party to exercise any right, power or remedy under this Agreement shall not constitute a waiver thereof and shall not in any circumstances impair such right, power or remedy nor operate as a waiver of it. The single or partial exercise by either Party of any right, power or remedy under Agreement shall not in any circumstances preclude any other or further exercise of it or the exercise of any right, power or remedy. 30.2 A waiver of any breach or default under any terms of this Agreement shall not be deemed a waiver of any subsequent breach or default and shall in no way affect the other terms of this Agreement. 31 VALIDITY 31.1 If any provision of this Agreement is held to be invalid, illegal or unenforceable for any reason (whether by an expert, by arbitration, or by a court of competent jurisdiction): 31.1.1 such provision will be severed and the remainder of the provisions will continue in full force and effect as if this Agreement had been executed with the invalid, illegal or unenforceable provisions eliminated; 31.1.2 the Parties shall in good faith amend the provision of the Agreement to reflect as nearly as possible the spirit and intention behind that invalid, illegal or unenforceable provision so as to place the Parties in substantially the same position, to the extent that such spirit and intention is consistent with the laws of England, and so that the amended clause complies with the laws of England. 32 ASSIGNMENT 32.1 Neither Party shall assign or purport to assign or transfer this Agreement or any part thereof without the prior consent in writing of the other. Any such assignment as aforesaid shall not excuse the assigning Party from liability for due performance and observance of any provision expressed herein on its part to be performed or observed. 40 33 NOT A PARTNERSHIP OR AGENCY 33.1 Nothing in this Agreement shall constitute or be deemed to constitute a partnership between the Parties hereto or constitute or be deemed to constitute SBS as agent of Tier or Tier as agent of SBS for any purpose whatsoever and SBS shall have no authority or power to bind Tier and Tier shall have no authority to bind SBS or to contract in the name of or create a liability against Tier or SBS (howsoever the case may be) in any way or for any purpose. 34 ORIGINALITY OF AGREEMENT 34.1 This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 35 ENTIRE AGREEMENT 35.1 This Agreement sets out the entire agreement between the Parties with respect to the subject matter covered by it and supersedes all prior communications, drafts, representations, agreements, warranties, statements and understandings of whatever nature, whether oral or in writing between the Parties, relating to the subject matter, provided that this shall not exclude any liability which a Party would otherwise have to the other Party in respect of a statement made fraudulently by that Party prior to the date of this Agreement. 35.2 This Agreement shall come into effect on the Effective Date and subsist for the Contract Period unless or until terminated in accordance with the provisions of Clauses 14 or 24. 35.3 Neither Party shall have any rights or licence save as specifically agreed herein. 35.4 This Agreement will be governed by and construed in accordance with English Law. The Parties hereby submit to the jurisdiction of the High Court of Justice in England. 41 AS WITNESS the hands of the Parties hereto the day and year first hereinbefore written: SIGNED AND AGREED for and on Behalf of Tier Technologies (United Kingdom) Inc. Signature: /s/ [ILLEGIBLE]^^ Date: 1 September 99 ------------------------- --------------------------- Name: James L. Bildner Status: CEO --------------------------- -------------------------- SIGNED AND AGREED for and on Behalf of Siemens Business Services Limited Signature: /s/ [ILLEGIBLE]^^ Date: 1 Sept 1999 ------------------------- --------------------------- Name: G. S. Posey Status: MD ------------------------- ------------------------- 42 SCHEDULE 1 INTERPRETATIONS AND DEFINITIONS ------------------------------- 1 INTERPRETATIONS 1.1 Clause headings in this Agreement are for ease of reference only and do not affect interpretation. 1.2 References to Paragraphs shall mean those paragraphs contained within those Schedules and/or Annexes in which they are contained unless expressly stated otherwise by references to other Schedules and/or Annexes. 1.3 The singular includes the plural and vice versa. 1.4 References to Clauses shall mean those clauses contained within the General Terms and Conditions of the main body of this Agreement unless expressly stated otherwise. 2 DEFINITIONS "ASC Infrastructure" means the infrastructure (as defined in SCHEDULE 7) to be put into place in accordance with the provisions of SCHEDULE 7 to facilitate the provision of the ASC Services by SBS. "ASC Infrastructure Specification" means the outline specification relating to the operational, functional and/or design characteristics of the ASC Infrastructure to be provided in accordance with the provisions of Paragraph 3.1 of SCHEDULE 7. "ASC Services" means those services to be provided by SBS to Tier and/or a Third Party, using the ASC Infrastructure as further described in SCHEDULE 4 and the Business Development Methodology. "Agreement" Means this agreement comprising the front/cover page, contents page(s), Clauses 1 to 35 inclusive and SCHEDULE 1 to SCHEDULE 8 inclusive and all or any Annexes, Appendices or Attachments forming part thereof and any Change Control Note issued, approved and authorised in accordance with the provisions of Clause 25 and the Business Development Methodology. "Bid Manager" means an individual appointed by SBS to coordinate the Proposal Development Activity and the production of the Proposal. "Bid Team" means a group of individuals appointed by the Bid Manager to assist Tier in discharging its duties. "Business Development Activity" means the development of Third Party relationships, covering inter alia initial Third Party contact, Third Party business needs identification, Third Party business process definition and service provision definition, to a standard agreed between the Parties on a case by case basis. "Business Development Methodology" means a contractually binding document identifying markets, targets, customers, the ASC Services and including a methodology for development of Third Party contacts by Tier to be agreed and signed by a representative of each Party from the ASG on or before the date of this Agreement. "Calendar" means the Gregorian calendar. "Change Control Note" means a change control note as referred to in Clause 25 and as amended by any subsequent Change Control Note. "Consultancy Services" means those activities to be conducted by Tier (as may be better described in paragraph 3.1 of SCHEDULE 2) which are provided to SBS and/or a Third Party under or pursuant to this Agreement. "Consultancy Services Charge Rates" means those rates chargeable for the provision of the Consultancy Services defined in ATTACHMENT 1 of SCHEDULE 2. "Consultancy Services Minimum Total Commitment" means the total sum of Consultancy Services to be procured by SBS and/or a Third Party from Tier during the Contract Period. The said sum shall be[***]. For the avoidance of doubt this sum excludes the supply of hardware or software or training or any other services sourced through a third party and arranged by Tier regardless of whether at margin or otherwise and Consultancy Services procured by customers that have been handed over to Tier by SBS where SBS requires no further involvement with that customer. "Consultancy Services Timesheets" means timesheets completed in accordance with the provisions of SCHEDULE 2 using the proforma timesheet provided for in ATTACHMENT 3 to SCHEDULE 6. "Contract Period" means the period commencing on the Effective Date of this Agreement and continuing until the Final Date or until it is terminated in accordance with Clause 14 or 24 whichever is the earlier date. "Data Protection Act" means the Data Protection Act 1984 and the Data Protection Act 1998 as applicable. "Effective Date" means the first Working Day following the date on which this Agreement receives its last signature from the Parties. [***] "FTE" means full time equivalent - that is an individual or series of individuals working collectively all Working Days in a Calendar month save for leave, absence or sickness. "Final Date" means the date occurring exactly sixty (60) Calendar months after the Effective Date unless and until extended by agreement between the Parties in accordance with the provisions of Clause 25. "Force Majeure" means any cause preventing the performance by either Party of any or all of its obligations arising from or attributable to acts, events or omissions * CONFIDENTIAL TREATMENT REQUEST(ED) beyond its reasonable control including (but without limiting the generality thereof) governmental regulations, fire, flood, act of God, strike, war, riot, breakdown of plant or machinery or any disaster or an industrial dispute affecting a third party for which a substitute third party is not reasonably available. "Formal Commitment Stage" means a point in time where a legal agreement (having full force and effect) between SBS and a Third Party is entered into directly between them, such agreement taking the form of either a letter of intent, letter to proceed or a full contract for the provision of ASC Services, where such agreement is established subsequent to the Proposal Submission Activity and as a direct consequence thereof. "General Terms and Conditions" means Clauses 1 to 35 inclusive and any Change Control Note issued, approved and authorised in accordance with the provisions of Clause 25. "Intellectual Property" means any and all patents, trade marks, service marks, copyright, moral rights, rights in design, know-how, confidential information and all or any other intellectual or industrial property rights whether or not registered or capable of registration and whether subsisting in the United Kingdom or any other party of the world together with all or any goodwill relating thereto. "Mobilise(d)" means the making available of FTE SBS Staff Services. SBS shall notify Tier in writing that a specified number of FTE Staff Services complete with their employment grade mix, are prepared in readiness for the provision of ASC Services, for "availability" in this context to be proved. "Mobilisation" means the activity associated with making Mobilised SBS Staff Services available. "Premises" means in respect of the Consultancy Services, the place of performance specified in any Workpackage or otherwise in respect of the ASC Services the place of performance for such ASC Services or the location where the ASC Infrastructure is established. "Proposal" means a document in a form to be agreed on a case by case basis between the Parties (taking into account any Third Party specified requirements) constituting a formal offer capable of acceptance by a Third Party, for the provision of ASC Services. "Proposal Development Activity" means those activities necessary (including the obtaining of any necessary consents and approvals of SBS' Directors and/or VRB) as a consequence of the Business Development Activity to ultimately produce a Proposal including but not limited to the development and production of specifications, service level definitions, risk registers, cost models, Third Party business plans or budgets and the like or any other documents including other financial data. "Proposal Submission Activity" means the activities rendered necessary by either the Third Party and/or the Parties after the submission of the Proposal to assist the Third Party in reaching the Formal Commitment Stage, including any necessary approvals of the Third Party or SBS' Directors and/or VRB. Such activities are likely to include, but not be limited to, offering clarifications on the Proposal content, negotiation of commercial and legal terms, presentations to the Third Party's representatives and the like. "Ramp-up Period" means the period commencing 1st July 2000 and ending on 30th June 2001 during which SBS will Mobilise a specified number of FTE SBS Staff Services. "SBS Accommodation Services" means the bundling of roof, heat, light etc. costs and the ASC Infrastructure capital payment recharge costs, ASC Infrastructure operational and maintenance costs (and the like) on a unit basis linked to the number of FTE SBS Staff Services supplied in accordance with this Agreement. The appropriate charge for the SBS Accommodation Services shall be determined upon the ASC Infrastructure being established. "SBS Staff Services" means people employed by SBS or recruited by SBS where appropriate who will be made available in accordance with the provisions of SCHEDULE 3 in readiness to support Tier in servicing Third Parties or Tier's own requirements for ASC Services. Those employed by SBS are likely be supplied from [***] "SBS Staff Services Minimum Total Commitment" means a maximum sum of [***]payable by Tier to SBS in respect of the Total Available Man Months for Mobilised FTE SBS Staff Services at the Average Mobilised Rate. "Success Fee" means a sum of money to be paid to Tier by SBS for Tier's costs and expenses incurred during the whole of the Business Development Activity, the Proposal Development Activity, the Proposal Submission Activity up to and through the Formal Commitment Stage. The method of calculating the Success Fee shall be as described in Paragraph 7 of SCHEDULE 3. "Third Party(ies)" means businesses, companies and/or organisations who may potentially have or will require the provision of or supply of ASC Services. "Total Available Man Months" means the total number of FTE SBS Staff Services available for Utilisation in accordance with the payment profile in Attachment 1 to Schedule 3. "TUPE" means the Transfer of Undertakings (Protection of Employment) Regulations 1981 and any subsequent re-enactment or amendments thereto. "Utilise/utilised" means the act of using Mobilised SBS Staff Services in the provision of the ASC Services to Tier and/or a Third Party under agreements separate from this Agreement and Utilisation shall be construed accordingly. "VRB" means the SBS Value Review Board constituted and operated in accordance with SBS' VRB Procedure, (as attached to the Business Development Methodology ) used to evaluate inter alia the business value of submitted opportunities and any risks (including financial, technical, delivery and resourcing availability) associated with the said opportunity. The said procedure is an iterative one, requiring reviews at certain identified stages of the project lifecycle. * CONFIDENTIAL TREATMENT REQUEST(ED) The output from the VRB meetings (which are convened on a weekly basis) is a decision to proceed to the next stage of the project lifecycle or not, as the case may be. All meetings of the VRB are minuted. "Working Day" means any day other than Saturday or Sunday or a bank holiday in the UK. "Workpackage" means those packages of work for Consultancy Services established in accordance with the procedures and provisions of SCHEDULE 2. "Year of this Agreement" means the period of twelve (12) Calendar months commencing on the Effective Date and expiring on the first anniversary thereof and each successive year thereafter during the Contract Period. SCHEDULE 2 Agreement Covering the Provision of Consultancy Services by Tier to SBS ----------------------------------------------------------------------- 1 INTRODUCTION 1.1 The Consultancy Services intended to be made available by Tier under this Agreement shall include; 1.1.1 Business Process Redesign/Strategic Consulting. 1.1.2 Web Enabled Customer Technology. 1.1.3 People/Change Management. 1.1.4 Data Management and Warehousing. 1.1.5 Call Centres. 1.1.6 Front & Back Office Design. 1.1.7 Major Systems Design. 1.1.8 Training. 1.1.9 Distance Learning Applications. 1.1.10 Application Development 1.1.11 Project Management and as may be better described in ATTACHMENT 2 to SCHEDULE 2. 1.2 SBS and/or a Third Party may take up the Consultancy Services. The supply of Consultancy Services directly to a Third Party shall be subject to an agreement separate from this Agreement, unless such supply is incorporated into a package of services by SBS to that Third Party. 1.3 Consultancy Services may be taken up by SBS in support of its obligations under this Agreement or for any other purpose it may so choose. 1.4 SBS and/or a Third Party will during the Contract Period procure the supply of Consultancy Services up to the Consultancy Services Minimum Total Commitment. Notwithstanding the foregoing obligation, there is no commitment by SBS and/or a Third Party as to the proportion or mix of the Consultancy Services which may be requested from time to time and no continuity of Workpackages is guaranteed. 2 SUPPLY OF CONSULTANCY SERVICES 2.1 Tier shall make available the Consultancy Services to SBS on a "most favoured customer" basis and SBS shall so request the Consultancy Services from Tier on a "Preferred Supplier" basis. For the purpose of this paragraph "most favoured customer" status shall require Tier to provide the Consultancy Services to SBS on a priority basis and at preferential commercial rates. For the avoidance of doubt the Consultancy Services Charge Rates reflect Tier's current preferential rates which may be adjusted in accordance with the provisions of Attachment 1 to Schedule 2. "Preferred supplier" status will require SBS to offer its requirements for Consultancy Services in respect of SBS projects to Tier in preference to any other supplier. In particular SBS shall develop a change management review programme to consider the options for increasing Tier's involvement in the provision of Consultancy Services in connection with SBS' obligations under the National Savings Bank Agreement to an agreed programme. 2.2 Tier shall provide the Consultancy Services to Third Parties in such a manner as will not detract from the image and reputation of SBS. 2.3 Subject to requirements under the Data Protection Act Tier shall on reasonable request provide employment status details of the persons providing the Consultancy Services. 2.4 Tier undertakes that at all times the Consultancy Services shall remain under the direction and control of Tier. Notwithstanding Tier's overall control, Tier recognises that the Consultancy Services may require Tier to perform work in relation to SBS' (and/or a Third Party's) managed activity and that, in this event, SBS (and/or a Third Party) shall be responsible for and shall supervise and manage such activity. 2.5 The Consultancy Services shall be provided in an efficient, effective and controlled manner and in accordance with the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected from a skilled and experienced consultancy company seeking in good faith to comply with its contractual obligations, complying with all applicable laws and engaged in the same type of undertaking and under the same or similar circumstances and conditions (including financial processing controls). 2.6 Any material issued by SBS (and/or a Third Party) to Tier "free of charge" for use in or associated with the Consultancy Services provided under this Agreement shall remain the property of SBS (and/or a Third Party). Any such material must be kept in good order and shall be returned to SBS (and/or a Third Party) on completion of the relevant Workpackage or otherwise as agreed in the same condition as received subject to wear and tear. Where consumables are supplied Tier shall return any unused portion of such consumables to SBS (and/or a Third Party). 2.7 SBS (and/or a Third Party) may require the removal of any member of Tier's personnel with immediate effect if such individual: 2.7.1 in the reasonable opinion of SBS (and/or a Third party) proves unable to perform the Consultancy Services at any time during his/her attendance at SBS (and/or the Third Party's) Premises; or is guilty of serious misconduct or of conduct which is contrary to standards of discipline reasonably expected by SBS (and/or a Third Party) of its own staff or does anything harmful to the reputation of SBS (and/or the Third Party); or 2.7.2 intentionally without the prior written authority of SBS (and/or the Third Party), removes (for whatever reason) any of SBS (and/or the Third Party) tapes, disks, documents, software, data or other materials or information from the Premises of SBS (and/or the Third Party); or 2.7.3 without the prior written authority of SBS (and/or the Third Party) makes (for whatever reason) any copies of documents or software or other materials which belong or are licensed to SBS (and/or the Third Party) for his/her own benefit or for the benefit of any person (other than SBS (and/or the Third Party); or 2.7.4 without the prior written authority of SBS (and/or the Third Party), bring any software, tapes or disks on to premises of SBS (and/or the Third Party), unless such software, tapes or disks are used solely on Tier's equipment used stand-alone and entirely separate from any of SBS (and/or the Third Party)'s systems; or 2.7.5 causes a computer to perform any function with intent to secure unauthorised access to the whole or any part of any program or data held in any computer or does or omits to do anything which may cause or facilitate any unauthorised access, modification, alteration or eradication of the whole or any part of any program or data held in any computer or on any storage medium or which may otherwise adversely affect the operation or reliability of any computer or program or the reliability or accessibility of any data; or 2.7.6 does or omits to do anything which may prejudice the security of the SBS (and/or the Third Party) Premises, computers or software. 3 METHOD OF OBTAINING SUPPLY 3.1 SBS shall request and Tier shall provide Consultancy Services under this Agreement by reference to: 3.1.1 a separate project agreement executed between the Parties; or 3.1.2 a Workpackage called off under this Agreement which shall be made in writing in accordance with this SCHEDULE 2; or 3.1.3 an oral request confirmed in writing within five (5) Working Days by Tier. 3.2 Workpackages will be agreed upon between SBS and Tier prior to the commencement thereof. Tier shall not commence any particular Workpackage prior to having received the written approval of SBS. 3.3 Workpackages will be initiated utilising the following generic process; 3.3.1 SBS shall provide to Tier a specification, describing inter alia such matters as operational, functional or design characteristics, major deliverables and timescales required. 3.3.2 Tier shall provide, in response to the said specification, within thirty (30) Working days (unless agreed otherwise) its response ("Response"). 3.3.3 Tier's Response shall include descriptions of the Consultancy Services to be provided, the criteria on which they are to be provided, any dependencies between tasks and external resources and requirements that may affect the timely and qualitative delivery of the Workpackage and the price (calculated using the Consultancy Services Charge Rates) for providing the required Consultancy Services. 3.3.4 SBS shall then evaluate the Response. If so requested by SBS Tier may, at no additional cost, make available that resource reasonably necessary to assist SBS in its evaluation of the Response, including presentations and the like. 3.3.5 Once agreement on the content of the Response has been agreed and approved by SBS the said Response shall be accommodated within a Workpackage either as a task or series of tasks as a complete Workpackage. 3.3.6 SBS shall authorise commencement of the said Workpackage in writing to Tier. 4 WORKPACKAGE LEADERS 4.1 SBS and Tier shall respectively (unless otherwise agreed) appoint a representative to be a Workpackage Leader (hereafter "WPL") for each and every Workpackage. 4.2 The WPL within their respective organisations shall be responsible for; 4.2.1 co-ordinating with internal party(ies) involved in the technical activities of the Workpackage; 4.2.2 the drafting, organisation and presentation of the necessary parts of the Workpackage descriptions and content; 4.2.3 maintaining efficient and effective communication amongst the said Party(ies) involved in the Workpackage and to ensure that timescales are maintained; 4.2.4 organising when necessary Workpackage meetings; 4.2.5 keeping the other informed on the current status and progress made in respect to the Workpackage activities and to help the other in suggesting any corrective action that may need to be taken. 5 PERFORMANCE 5.1 Tier undertakes to procure that each of its personnel carrying out the Consultancy Services shall:- 5.1.1 except as otherwise agreed, attend the Premises and provide such of the Consultancy Services as SBS requires for eight (8) hours each Working Day between 8.30am and 5.30pm (unless otherwise agreed in any particular Workpackage) and devote the whole of his/her time, attention and ability to SBS during such hours; 5.1.2 perform his/her work with the level of skill, care and technical ability expected of a person specialising in the type of work specified in this Agreement; 5.1.3 perform his/her work promptly and comply with all reasonable and lawful directions given by authorised personnel of SBS and on request promptly give a full account of all matters with which he/she is entrusted. 5.2 Tier undertakes that if any of its personnel is unable at any time to work for a period exceeding five (5) Calendar days or more continuous absence whether through ill health, injury or otherwise, it shall use all reasonable endeavours to procure, at the request of SBS, that another person of at least similar ability, experience and status be supplied to SBS in place of the person who is absent. 5.3 In the event of an increase in the scope of the Consultancy Services or the time required to provide the Consultancy Services such that SBS requires additional Consultancy Services from Tier as determined by SBS, SBS may notify Tier in writing of the need for such additional Consultancy Services. Upon receipt of a notice in writing from SBS, Tier shall use all reasonable endeavours to provide additional Consultancy Services to SBS upon the terms and conditions set out in this Agreement. 5.4 If the Consultancy Services do not substantially or materially comply as required in this Agreement or any Workpackage, SBS shall within a reasonable time give notice of rejection to Tier and without prejudice to any of SBS' other rights SBS may at its discretion require Tier to comply with this Agreement and the Workpackage by expeditiously re- performing or otherwise righting any rejected Consultancy Services. In such circumstances, Tier shall fully indemnify SBS for any direct costs, expenses and/or losses incurred by it. 6 FEES 6.1 In consideration of the Consultancy Services provided pursuant to this Agreement, SBS shall pay Tier the Consultancy Services Charge Rates in respect of every 8 hours per day worked by each person carrying out the Consultancy Services. For the avoidance of doubt, the Consultancy Services Charge Rates shall be applied pro-rata in respect of any period or periods of less than 8 hours. Periods in excess of eight (8) hours shall not be chargeable at any premium rate unless otherwise agreed in writing by the Parties. Any replacement shall (subject to their being of at least equal ability, experience and status) be chargeable at the same rate as the person who is thereby replaced. 6.2 Except as provided for in Paragraph 6.5, the Consultancy Services Charge Rates shall be inclusive of all secretarial, office accommodation and other overheads including telephone, facsimile and postage costs incurred by Tier in the course of its administrative functions, unless otherwise agreed between the Parties. Such Consultancy Services Charge Rates will be exclusive of value added tax but will be deemed to be inclusive of any other forms of tax levies, imposts, charges, fees and/or duties applicable from time to time. 6.3 The daily Consultancy Services Charge Rates for each person carrying out the Consultancy Services shall be as detailed in ATTACHMENT 1 to SCHEDULE 2. 6.4 Any materials or products supplied to SBS by Tier will be charged at cost unless otherwise agreed by the Parties and in any event in accordance with SBS' current expenses reimbursement policy for use with contractors. 6.5 All expenses incurred by Tier in the provision of the Consultancy Services will, provided SBS agrees in advance where reasonably practicable to such expenses, be passed on at cost unless otherwise agreed by the Parties and in any event in accordance with SBS' current expenses reimbursement policy for use with contractors and included in appropriate invoices, with associated receipts when requested. Such expenses shall include, but not be limited to, car travel expenses, parking, rail fares, air fares, taxis, hotels, subsistence, computer time, photocopying, slide and report production. 6.6 If the supply of the Consultancy Services or any part of such Consultancy Services is cancelled, SBS shall only be obliged to pay any fees due up to the end of the cancellation period. For the avoidance of doubt this shall not affect SBS' obligation to procure Consultancy Services up to at least the Consultancy Services Minimum Total Commitment. 7 PAYMENT 7.1 Except as provided in any particular Workpackage, an invoice with supporting documentation shall be rendered every other Calendar month in arrears and payment of the fees shall be made in accordance with the provisions of Clause 12. 7.2 Invoices shall be based on authorised hours worked by each individual involved in providing the Consultancy Services as certified by SBS on the Consultancy Services Timesheets. 7.3 Invoices raised in accordance with the provisions of Paragraphs 7.1 and 7.2 above shall be deducted against any outstanding balance of the Consultancy Services Minimum Total Commitment. 8 DISCHARGE OF THE CONSULTANCY SERVICES MINIMUM TOTAL COMMITMENT 8.1 SBS' commitment to procure a defined volume of the Consultancy Services defined in Paragraph 1.4 of this SCHEDULE 2 shall be fully discharged immediately upon SBS and/or a Third Party (either individually or as a sum total) paying invoices for the provision of Consultancy Services by Tier equal to or in excess of the Consultancy Services Minimum Total Commitment . 8.2 At the end of the Contract Period (save for early termination in accordance with Clauses 14 or 24) if SBS and/or the Third Parties (either individually or as a sum total) has/have not procured Consultancy Services equal to or in excess of the Consultancy Services Minimum Total Commitment then Tier shall raise an invoice for the outstanding sum (if any) of the Consultancy Services Minimum Total Commitment, calculated by deducting from the Consultancy Services Minimum Total Commitment any and all invoices raised by Tier and/or the Third Parties (either individually or as a sum total) for the provision of the Consultancy Services during the Contract Period. 8.3 SBS shall pay any invoice raised by Tier in accordance with paragraph 8.2 within sixty (60) Working Days from the date of receipt. ATTACHMENT 1 to SCHEDULE 2 Consultancy Services Charge Rates --------------------------------- Charge Rate ------------ Consultant Type ((Pounds)'s per day) --------------- -------------------- Manager [***] Senior Consultant [***] Consultant [***] Team Leader [***] Technologist [***] 1 CONSULTANCY SERVICES CHARGE RATES 1.1 Any of the above Consultancy Services Charge Rates may be decreased at any time by agreement between the Parties and implemented in accordance with Clause 25. 1.2 Consultancy Services Charge Rates shall be fixed for the first twelve Calendar Months of this Agreement and thereafter subject to review on each anniversary of the Effective Date and agreed by the Parties. In the event the Parties fail to agree on the Consultancy Services Charge Rates the Parties shall refer to the benchmarking procedure in SCHEDULE 8. Where the Parties fail to agree pursuant to the procedure in SCHEDULE 8 either Party may refer the dispute to an Expert under Clause 22. 1.3 The Consultancy Services Charge Rates specified in this ATTACHMENT 1 to SCHEDULE 2 shall only be amended in accordance with Clause 25 of this Agreement and shall only take effect upon the equivalent amendment being agreed between SBS and Tier. * CONFIDENTIAL TREATMENT REQUEST(ED) ATTACHMENT 2 to SCHEDULE 2 Tier Consultancy Services Descriptions -------------------------------------- 1 TIER CONSULTANCY SERVICES DESCRIPTION 1.1 Tier shall provide and continue to maintain the capability to provide the following Consultancy Services to SBS (and/or a Third Party) throughout the duration of this Agreement.
QUALIFICATIONS AND EXPECTATION OF CAPABILITY CONSULTANT TYPE EXPERIENCE - ---------------------------------------------------------------------------------------------------------------------- Manager Degree and five years relevant Project manage a medium/large project experience including management of to customer requirements on cost and similar project time to CIS ISO 9001 QMS. - ---------------------------------------------------------------------------------------------------------------------- Senior Consultant 7 years experience in relevant field. High level tactical or technical Member of an appropriate professional advice to departments or programmes. body or educationally qualified for membership - ---------------------------------------------------------------------------------------------------------------------- Consultant 5 years experience in relevant field. Provision of technical advice to Member of an appropriate professional department or to a specific programme. body or educationally qualified for membership - ---------------------------------------------------------------------------------------------------------------------- Team Leader Honours degree and four years Provide leadership, technical advice relevant experience. or analysis on major portion of a programme to assignment manager. - ---------------------------------------------------------------------------------------------------------------------- Technologist City and Guilds or Equivalent and To act as a member of a technical five years relevant experience. design and development team. - ----------------------------------------------------------------------------------------------------------------------
59 SCHEDULE 3 Agreement Covering the Provision of SBS Staff Services from SBS to Tier ----------------------------------------------------------------------- 1 INTRODUCTION 1.1 SBS shall make available the SBS Staff Services for Tier's immediate Utilisation (or otherwise) in accordance with the provisions of this SCHEDULE 3. 1.2 Tier shall use all reasonable endeavours to identify and create opportunities using the agreed Business Development Methodology for SBS to Utilise the Mobilised FTE SBS Staff Services either indirectly to Third Parties through Tier or directly to Third Parties, via agreements created through the following processes; 1.2.1 Business Development Activity; 1.2.2 Proposal Development Activity; 1.2.3 Proposal Submission Activity leading up to and including; 1.2.4 Formal Commitment Stage. 1.3 Without prejudice to the other provisions of this Agreement in relation to this matter, Tier shall submit each process to the VRB for approval (or otherwise) to continue to the next activity or stage such approval to be given in accordance with the VRB guidelines, and not to be unreasonably withheld. 1.4 During the Proposal Development Activity, SBS shall, subject to the approval of the VRB, make available at least a Bid Manager, who may appoint a Bid Team to support Tier during the Proposal Development Activity. 1.5 During the Proposal Submission Activity, SBS shall, subject to the continuing approval of the VRB, continue to make available a Bid Manager, and (if any) the Bid Team appointed to support Tier during the Proposal Development Activity. 1.6 Tier shall at all times during the aforementioned activities and process work within the VRB guidelines and the Business Development Methodology. 1.7 In the event that Tier are unable to Utilise the SBS Staff Services in accordance with the provisions of this Agreement, Tier shall during the Contract Period and in accordance with the Programme and Payment Profile hereinafter defined, procure the Mobilisation of the SBS Staff Services up to the SBS Staff Services Minimum Total Commitment. 2 SCOPE 2.1 The SBS Staff Services shall be provided (unless otherwise agreed by the Parties) from various SBS [***] Premises. 2.2 Where additional skills are required to supplement the Utilised SBS Staff Services (including but not limited to the areas of management, team leadership, technical and programme management) SBS shall recruit up to a maximum of 20% of the Mobilised SBS Staff Services at SBS' discretion in consultation with Tier and the costs of recruitment for such additional skills shall be borne equally by SBS and Tier. For the avoidance of doubt any Mobilised SBS Staff Services recruited shall count towards the SBS Staff Services Minimum Total Commitment. 2.3 The Mobilisation of such SBS Staff Services in accordance with the payment profile in ATTACHMENT 1 of this SCHEDULE 3 shall be the sole trigger for payment by Tier of the SBS Staff Services. 2.4 The capability or otherwise for Tier to Utilise (in whole or in part) the SBS Staff Services (or not as the case may be) shall not discharge Tier's obligations under this Agreement and in particular, the provisions of Paragraph 5 of this SCHEDULE 3. 2.5 SBS will commit to supply Utilised SBS Staff Services to Tier at appropriate service levels, where such service levels include accommodation factors. 2.6 SBS will provide human resources support (including recruitment and selection, if necessary) during the Mobilisation of the SBS Staff Services. 2.7 For the avoidance of doubt, SBS shall give Tier priority allocation to its IT personnel being Mobilised and not required by SBS. 2.8 SBS shall provide basic competency skills training to the SBS Staff Services such as keyboard skills, basic IT operation, basic telephone skills at SBS' cost. 2.9 For the avoidance of doubt where a Third Party requires additional training SBS shall provide such training at its own or at the Third Party's cost. * CONFIDENTIAL TREATMENT REQUEST(ED) 2.10 In the event that Tier enters into any agreement with SBS for the provision of the ASC Services the Parties will agree on any additional training requirements and the costs shall be borne by SBS save that SBS' liability for basic and additional training shall not exceed [***]in aggregate per FTE SBS Staff Services. Tier may provide such additional training to SBS at cost unless otherwise agreed between the Parties. 2.11 In respect of training to be provided under Clause 2.9 SBS shall request the provision of such training from Tier in preference to any other supplier where Tier has the capability to provide such training. 2.12 SBS shall establish the ASC Infrastructure in accordance with the provisions of Schedule 7. 3 PROGRAMME 3.1 SBS shall Mobilise the SBS Staff Services in accordance with the payment profile in ATTACHMENT 1 to SCHEDULE 3 so as to reach a total of [***] SBS Staff Services at the end of the Ramp-Up Period. 4 CALCULATION OF FEES 4.1 In consideration of the Mobilisation of the SBS Staff Services by SBS pursuant to the payment profile in ATTACHMENT 1 to this SCHEDULE, Tier (and/or Third Party) shall become liable for payment to SBS at the relevant rate for such provision, in accordance with the Payment Profile defined in Paragraph 5 below. 4.2 At the end of the first Calendar month of the Ramp-Up Period SBS shall calculate a sum equivalent to [***] of those SBS Staff Services Mobilised in that Calendar month (the "FTE SBS Staff Services Rate"). 4.3 At the end of each subsequent Calendar month during the Ramp-Up Period SBS shall calculate the FTE SBS Staff Services Rate in respect of the preceding month. Having calculated such sum SBS shall aggregate the FTE SBS Staff Services Rates from the date of commencement of the Ramp-Up Period to the date on which the calculation is made in order to calculate a further sum equivalent to the average of the FTE SBS Staff Services Rates (the "Average Mobilised Rate"). For the avoidance of doubt in no event shall the Average Mobilised Rate be more than [***]. * CONFIDENTIAL TREATMENT REQUEST(ED) 4.4 At the end of the Calendar month immediately following the end of the Ramp-Up Period, the Average Mobilised Rate shall become fixed for the remainder of the Contract Period. 4.5 SBS Staff Services shall be charged to Tier (and/or a Third Party) at the following rates: 4.5.1 for Mobilised FTE SBS Staff Services directly Utilised by Tier (and/or a Third Party) at a commercial rate agreed between the Parties taking into account the then current market conditions for such services on a like for like comparison (the "Utilised Rate"); 4.5.2 for Mobilised FTE SBS Staff Services NOT directly Utilised by Tier and/or a Third Party at the Average Mobilised Rate per Mobilised FTE; 4.5.3 for the avoidance of doubt, where the Utilised Rate is to be charged to Tier, SBS Accommodation Services shall be additionally charged. 4.6 The rates set out in this Paragraph 4 will be exclusive of value added tax but will be deemed to be inclusive of any other forms of tax levies, imposts, charges, fees and/or duties applicable from time to time. 5 PAYMENT 5.1 In accordance with the payment profile given in ATTACHMENT 1 to SCHEDULE 3 SBS shall invoice Tier as follows; 5.1.1 for the fees due for the Mobilised FTE SBS Staff Services supplied to Tier in the period from the last invoice to the then current date calculated using the Average Mobilised Rate; and 5.1.2 for the fees due for the Utilised FTE SBS Staff Services supplied to Tier in the period from the last invoice to the then current date calculated using the Utilised Rate; less 5.1.3 any deductions for FTE Utilised SBS Staff Services supplied to a Third Party in the period from the last invoice to the then current date calculated by deducting the equivalent number of the so Utilised FTE SBS Staff Services from the number of Mobilised FTE SBS Staff Services provided by SBS in the same period; save and unless the total sum becoming payable under an invoice raised in accordance with the provisions of Paragraph 5.1 above, is a sum of less than one hundred pounds ((Pounds)100), in which case no invoice will be raised for the period in question, and any sums due will be carried over to the next period. 5.2 Invoices raised in accordance with this paragraph 5 shall be deducted against any outstanding balance of the SBS Staff Services Minimum Total Commitment. 6 DISCHARGE OF THE SBS STAFF SERVICES MINIMUM TOTAL COMMITMENT 6.1 The SBS Staff Services Minimum Total Commitment shall be fully discharged immediately upon; 6.1.1 Tier having paid invoices in respect of the Mobilised FTE SBS Staff Services in an amount equal to the SBS Staff Services Minimum Total Commitment; or 6.1.2 Tier and/or a Third Party Utilising the Mobilised FTE SBS Staff Services in an amount equal to or greater than the Total Available Man Months for Utilisation. For the avoidance of doubt: [***] 6.1.2.2 if a Third Party introduced to SBS by Tier terminates its contract with SBS in respect of the ASC Services on the basis of SBS' default, the Utilisation of SBS Staff Services under that Third Party contract shall continue to count against the SBS Staff Services Minimum Total Commitment for the whole committed period that the contract would have run but for SBS' default; or 6.1.3 Failing that Tier being invoiced for the Mobilised FTE SBS Staff Services that are not Utilised up to an amount equal to the SBS Staff Services Minimum Total Commitment. 6.2 Tier may request at any time that some or all of SBS Staff Services be transferred to Tier in accordance with the TUPE Regulations. In the event that such a transfer takes place Tier's liability to SBS in respect of the SBS Staff Services so transferred shall be extinguished. * CONFIDENTIAL TREATMENT REQUEST(ED) 6.3 At the end of the Contract Period (save for early termination in accordance with Clauses 14 or 24) if Tier has not discharged its SBS Staff Services Minimum Total Commitment in accordance with the provisions of Paragraph 6 above then SBS shall raise an invoice for the remaining amount in respect of the Total Available Man Months for Utilisation not Utilised by Tier or a Third Party. For the avoidance of doubt the rate to be used in any such calculation of the invoice sum shall be the Average Mobilised Rate. In no event shall Tier have to pay in excess of the SBS Staff Services Minimum Total Commitment. 6.4 Tier shall pay any invoice raised by SBS in accordance with paragraph 6.3 within sixty (60) Working Days from the date of receipt. 7 SUCCESS FEES 7.1 During the Contract Period Tier's Success Fees shall be calculated in accordance with the following; 7.1.1 For any Third Party opportunity comprising of Business Development Activity, Proposal Development Activity and Proposal Submission Activity or any parts thereof that does not reach the Formal Commitment Stage, the Success Fee payable by SBS to Tier shall be [***]. 7.1.2 For any Third Party opportunity comprising of a complete end- to-end process of Business Development Activity, Proposal Development Activity and Proposal Submission Activity that concludes by reaching the Formal Commitment Stage and where the said Third Party opportunity Utilises less than fifty (50) Mobilised FTE SBS Staff Services for the remainder of the Contract Period, the Success Fee shall be [***]. 7.1.3 For any individual Third Party opportunity comprising of a complete end-to-end process of Business Development Activity, Proposal Development Activity and Proposal Submission Activity that concludes by reaching the Formal Commitment Stage and where the said Third Party opportunity Utilises fifty (50) or more Mobilised FTE SBS Staff Services for the remainder of the Contract Period, the Success Fee shall be [***]. 7.1.4 For any Third Party opportunity comprising of a complete end- to-end process of Business Development Activity, Proposal Development Activity and Proposal Submission Activity that concludes by reaching the Formal Commitment Stage after Tier has Utilised [***] SBS Staff Services and the said Third Party opportunity Utilises any number of Mobilished FTE * CONFIDENTIAL TREATMENT REQUEST(ED) SBS Staff Services in excess of those [***] the Success Fee shall be [***]. 7.2 Success Fees falling due under the provisions of this Paragraph 7 shall be invoiced to SBS on the effective date of the agreement with the Third Party unless otherwise agreed by the Parties. * CONFIDENTIAL TREATMENT REQUEST(ED) ATTACHMENT 1 to SCHEDULE 3 Mobilisation Programme and Payment Profile for the SBS Staff Services --------------------------------------------------------------------- 1 INTRODUCTION 1.1 SBS shall Mobilise the SBS Staff Services in accordance with the Programme identified in the following table. 1.2 Tier shall pay SBS for Mobilised SBS Staff Services in accordance with the Payment Profile identified in the following table. 1.3 Deductions to the following payments shall be made in respect of all Utilised SBS Staff Services. 2 ASSUMPTIONS 2.1 Mobilised Rate for Calculations is [***]. This figure shall be substituted by the Average Mobilisation Rate, on a bi-monthly basis, until the end of the Ramp-Up Period. 2.2 No allowances have been made for Utilised SBS Staff Services. Adjustments to the Payment Profile will be made on a bi-monthly basis to reflect any Utilisation of the SBS Staff Services. * CONFIDENTIAL TREATMENT REQUEST(ED) [***] 68 *CONFIDENTIAL TREATMENT REQUEST(ED) [***] 69 *CONFIDENTIAL TREATMENT REQUEST(ED) [***] 70 *CONFIDENTIAL TREATMENT REQUEST(ED) SCHEDULE 4 Agreement Covering the Provision of ASC Services from SBS to Tier and/or a Third - -------------------------------------------------------------------------------- Party ----- 1 INTRODUCTION 1.1 The provisions of this SCHEDULE 4 shall determine the way in which the Parties shall contract with Third Parties and will establish the terms upon which they will so do. 2 CONTRACTUAL RELATIONSHIPS 2.1 SBS shall, in the provision of ASC Services either to Tier and/or a Third Party, enter into agreements separate from this Agreement with those Parties. The said agreements will, wherever possible, contain minimum twelve (12) month termination and/or exit provisions. 2.2 Where the ASC Services are to be provided to a Third Party, SBS and Tier shall use reasonable endeavours to ensure that the agreement for the provision of those ASC Services is established on substantially the same terms and conditions as those intended by the provisions of this SCHEDULE 4, taking into consideration always, the requirements of any Third Party. 2.3 In any such agreement with Tier and/or a Third Party the scope of the ASC Services to be provided by SBS shall cover the following generic areas: [***] [***] [***] [***] [***] [***] * CONFIDENTIAL TREATMENT REQUEST(ED) 71 [***] [***] [***] [***] [***] 3 MASTER SERVICES SUPPLY AGREEMENT FORM 3.1 Within six (6) Calendar months from the Effective Date, SBS shall prepare a Master Services Supply Agreement for review by Tier. Tier shall review the Master Services Supply Agreement within thirty (30) Calendar Days of receipt from SBS and shall notify SBS of any suggested revisions to the Master Services Supply Agreement, which shall be either incorporated into the Master Services Supply Agreement by SBS or discussed and resolved at a specially convened meeting of the representatives of the Parties. The agreed Master Services Supply Agreement shall be incorporated into this Agreement and, in particular this SCHEDULE 4, by way of a Change Control Note. 3.2 From the date of that Change Control Note referred to in Paragraph 3.1 of this SCHEDULE 4, the said Master Services Supply Agreement, shall become the de facto proforma agreement for the supply of ASC Services. * CONFIDENTIAL TREATMENT REQUEST(ED) 72 SCHEDULE 5 Commercial Principles Concerning the Assignment of [***] --------------------------------------------------------------------- 1 INTRODUCTION 1.1 This Schedule is intended to define the principles relating to the possible assignment of [***] subject to the terms of the yet to be defined Deed of Assignment to be established on the principles as herein described. 1.2 For the avoidance of doubt, any agreed assignment of [***] shall take the form of a Deed of Assignment, an agreement separate from this Agreement (and having full force and effect) between [***], on terms and conditions to be agreed. 2 CONDITION PRECEDENT 2.1 It shall be a condition precedent to the provisions of this SCHEDULE 5 taking effect that [***] shall obtain unequivocal and irrevocable agreement from [***] to assign the benefits and burdens (subject to any terms and conditions that they require) of [***]. In the event that such permission as aforesaid is not obtained the provisions of this SCHEDULE 5 shall become null and void on both Parties without liability of any kind accruing to them. 2.2 For the avoidance of doubt, the failure by [***] to obtain any necessary consents from [***] to assign [***] shall not constitute a default hereunder and all other obligations, save for those relating to this SCHEDULE 5, shall remain unchanged. 3 DUE DILLEGENCE 3.1 Without prejudice to the provisions of Paragraphs 1 and 2 of this SCHEDULE 5, the Parties may wish to carry out comprehensive technical and commercial due diligence exercises and the other Party agrees to offer such opportunity and such assistance as necessary to conclude such exercises. * CONFIDENTIAL TREATMENT REQUEST(ED) 3.2 In the event that the Parties do not proceed to a Deed of Assignment or information was discovered during due diligence that prevented either of them proceeding to further agreement, then the full costs incurred by the Parties during the due diligence exercise shall be borne by the Party incurring such costs, unless agreement to the contrary in certain individual cases are otherwise agreed in writing between the Parties. 4 PROGRAMME 4.1 Without prejudice to the provisions of Paragraphs 1 and 2 of this SCHEDULE 5, upon [***] obtaining that permission required by virtue of the provisions of Paragraphs 1 and 2 of this SCHEDULE 5, the Parties shall commence discussions for the establishment of the detailed plans for carrying out any necessary due diligence, any necessary contractual preparation for continued uninterrupted delivery of [***], including transition arrangements and the like, which will cover [***] and the like. 4.2 Without prejudice to any other provisions of this SCHEDULE 5, the Parties are cognisant of the fact that the Parties have agreed a price [***]at the time of entering into this Agreement. The Parties also acknowledge and accept that the said price is calculated using a cost model agreed between the Parties for such purpose and that the said price is subject to revision as a consequence of inter alia the effluxion of time from the Effective Date and incoming cashflow effects and/or all or any of those matters identified in Paragraph 3 above. Accordingly, the foregoing provisions of this Paragraph 4.2 shall be considered in any such discussions contemplated by virtue of the provisions of Paragraph 4.1. * CONFIDENTIAL TREATMENT REQUEST(ED) SCHEDULE 6 PROFORMAS --------- 1 INTRODUCTION 1.1 This SCHEDULE 6 contains Proformas to be used pursuant to the provisions of this Agreement during the Contract Period. 1.2 Only properly executed documents constructed in accordance with the principles contained in this Agreement using the proformas contained in this SCHEDULE 6 shall be accepted by the Parties under this Agreement. ATTACHMENT 1 TO SCHEDULE 6 Form of Change Control Note --------------------------- - -------------------------------------------------------------------------------- CHANGE CONTROL NOTE NO: Ref : This CHANGE CONTROL NOTE is issued pursuant to Clause 24 of the Agreement dated [date of the Agreement] between Tier Technologies (United Kingdom) Inc. and Siemens Business Services Limited. It is now hereby agreed by the signatories below, acting as authorised representatives of their respective companies, that the above referenced contract shall be amended as detailed below; - -------------------------------------------------------------------------------- DESCRIPTION OF CHANGES TO THE ABOVE REFERENCED CONTRACT: - -------------------------------------------------------------------------------- Issued by: Agreed by: Signature ....................... Signature: .............................. Printed Name: ................... Printed Name: ........................... Title: .......................... Title: .................................. Date: ........................... Date: ................................... - -------------------------------------------------------------------------------- ATTACHMENT 2 TO SCHEDULE 6 Form of Workpackage ------------------- 1 INTRODUCTION 1.1 The specific format of each Workpackage shall be agreed between the Parties on a case by case basis. Considerations in determining such format should include, but not be limited to, Third Party requirements, complexity and size, scope of the Consultancy Services and duration of the task. 2 CONTENTS 2.1 Each Workpackage is likely to include as a minimum; 2.1.1 A reference to this Agreement. 2.1.2 Appropriate approvals from SBS, Tier and the Third Party (if applicable). 2.1.3 Contents page. 2.1.4 A project definition. 2.1.5 Stated terms of reference and objectives. 2.1.6 Responsibilities of the parties involved in the Workpackage activity. 2.1.7 Workpackage breakdown, complete with a description of the Consultancy Services to be provided. 2.1.8 Clearly identified deliverables, resource requirements expressed in man days per consultant type and indicative costs and time to complete. ATTACHMENT 3 TO SCHEDULE 6 Form of Timesheet ----------------- 78
- --------------------------------------------------------------------------------------------------------------------------------- TIER TECHNOLOGIES (UNITED KINGDOM) INC. CONSULTANCY SERVICES PROVISION TO SBS - --------------------------------------------------------------------------------------------------------------------------------- CHARGEABLE HOURS - --------------------------------------------------------------------------------------------------------------------------------- Name Activity Expenses Materials Description or to be to be Mon Tues Weds Thurs Fri Sat Sun Role/Position Workpackage Claimed Claimed Number (Y/N) (Y/N) - --------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CHARGEABLE - - -------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Total Total Total Daily Rate Overtime Standard Chargeable Pound's Total Pound's Hours Hours Hours - ---------------------------------------------------------------------------------------------------------- - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - - - (Pounds) - - ------------------------------------------------------------------------------------------------------------ Hours - Pound (Pounds) - ------------------------------------------------------------------------------------------------------------ TIMESHEET AUTHORISED BY: SIEMENS BUSINESS SER TIMESHEET ISSUED BY: TIER TECHNOLOGIES (UNITED KINGDOM) INC. - ------------------------------------------------------------------------------------------------------------
79 SCHEDULE 7 ASC Infrastructure ------------------ 1 INTRODUCTION 1.1 This SCHEDULE 7 describes the infrastructure to be established by SBS and at SBS? cost, to facilitate the provision of the ASC Services to a Third Party or to Tier. 1.2 It shall be a condition precedent to forward capital and/or resource investment other than the facilities and resources currently in place into the ASC Infrastructure that at least one Third Party agreement or an agreement with Tier is entered into (which shall be determined by the reaching of the Formal Commitment Stage) by SBS for the provision of ASC Services. SBS shall not be required to perform any obligations contained in this SCHEDULE 7 until and unless the said condition precedent is met. 2 LOCATION OF THE ASC INFRASTRUCTURE [***] 3 ESTABLISHMENT OF THE ASC INFRASTRUCTURE 3.1 Without prejudice to the Paragraph 1.2 above, within three (3) Calendar months from the Effective Date, SBS shall prepare a ASC Infrastructure Specification for review by Tier. Tier shall review the ASC Infrastructure Specification within ()thirty (30) Working Days of receipt of the ASC Infrastructure Specification from SBS and shall notify SBS of any suggested revisions to the ASC Infrastructure Specification, which shall be either incorporated into the ASC Infrastructure Specification by SBS or discussed and resolved at a specially convened meeting of the ASG. The agreed ASC Infrastructure Specification shall be signed as approved by each Party. [***] [***] [***] * CONFIDENTIAL TREATMENT REQUEST(ED) [***] [***] 3.4 SBS agrees to submit to Tier at Calendar monthly intervals during the implementation of the ASC Infrastructure progress reports. 3.5 SBS and Tier agree to hold management review meetings to discuss and review progress on the implementation of the ASC Infrastructure. Such meetings shall be held at such intervals as the Parties shall agree. * CONFIDENTIAL TREATMENT REQUEST(ED) 3.6 The Parties recognise that during the implementation of the ASC Infrastructure the requirements relating to it may change. If either Party identifies the need for any such change, such Party shall first advise the other Party in writing of such proposed change and the reasons therefor. The Parties shall meet to discuss such proposed change and in the event that they jointly agree that such change is necessary, the Parties shall execute a Contract Change Note. SCHEDULE 8 Benchmarking ------------ 1 INTRODUCTION 1.1 The Parties agree to the principle of benchmarking and market testing to ensure the costs of the Consultancy Services and/or the ASC Services provided to each other under this Agreement are competitive in respect of those provided to their other customers of a similar size and nature and that overall they respectively remain competitive within the market at large providing the subject Consultancy Services and/or the ASC Services during the period of this Agreement. The Parties agree, to ensure that there are no ambiguities in relation to the Parties? understanding of how this is measured, it will be necessary to agree a structure around which these benchmark measurements are to be taken. The principles of such structures shall include, but not be limited to: 1.1.1 each service offered shall be capable of being benchmarked; 1.1.2 in such benchmarking systems, where a benchmark reveals a variance, the said systems shall define the mechanisms for making any necessary adjustments such as inter alia immediate adjustment, future adjustment, price variation etc; 1.1.3 each benchmarking system will contain a requirement for a regular review to ensure that the costs of providing the services one to the other will at all times be competitive in relation to then current equivalent service offerings available to each Party in the market place as a whole. 1.2 For the purposes of benchmarking under this Schedule 8 companies that are considered at the date of this Agreement to provide similar Consultancy Services include Arthur Anderson, PriceWaterhouse Coopers, Deloitte & Touche and KPMG, and companies considered at the date of this Agreement to provide similar services to the ASC Services include Arthur Anderson, Capita and EDS. ANNEX 1 Insurance Policies of Tier and SBS ---------------------------------- ANNEX 2 AGREEMENT FOR THE PROVISION OF SBS STAFF SERVICES FROM SBS TO TIER ------------------------------------------------------------------ THIS AGREEMENT is made on day of BETWEEN: (1) Tier Technologies (United Kingdom) (Inc) a company incorporated in Delaware whose Registered Address is situated at 1013 Centre Road, Wilmington, New Castle County, Delaware, USA (?Tier?); and (2) Siemens Business Services Limited whose Registered Address is situated at Siemens House, Oldbury, Bracknell, Berkshire RG12 8FZ (?SBS?) hereinafter collectively referred to as ?the Parties?. RECITALS Recital (A) Tier and SBS entered into an Alliance Agreement on 1999. Under the Alliance Agreement Tier agreed to provide Consultancy Services to SBS and SBS agreed to provide SBS Staff Services for Utilisation in the ASC Services. Recital (B) Tier had an option under the Alliance Agreement to require SBS to enter into a new and separate agreement under which Tier would create opportunities for SBS to Utilise the SBS Staff Services. Pursuant to this option, Tier and SBS agree to enter into this Agreement on the terms and conditions contained herein. Recital (C) All the defined terms used in this Agreement shall have the same meaning as in the Alliance Agreement unless otherwise specified. IT IS NOW HEREBY AGREED AS FOLLOWS: 1 PURPOSE 1.1 The Parties shall enter into this Agreement on terms identical to Clauses 4, 5, 6, 11, 13 ? 22, 25 ? 35 and Schedule 1 in the Alliance Agreement and otherwise agree the terms and conditions set out herein. 1.2 The purpose of this Agreement is stipulate the provisions, terms and conditions used which SBS will provide SBS Staff Services and the ASC Services [***] * CONFIDENTIAL TREATMENT REQUEST(ED) 1.3 For the avoidance of doubt SBS is under no obligations to procure Consultancy Services from Tier under this Agreement and Tier is under no obligation to provide any such Consultancy Services to SBS. 2 TERM The Parties agree that this Agreement shall have full force and effect for a period of two and a half years from the date of this Agreement. 3 THE ASC SERVICES 3.1 SBS shall: 3.1.1 make available the same types of services currently existing in the ASC Services or any additional services agreed between the Parties and set out in the Business Development Methodology or otherwise agreed; 3.1.2 enter into Agreements with Tier and/or Third Parties separate from this Agreement for the performance and delivery of such ASC Services, such Agreement to be based on the Master Services Supply Agreement unless expressly otherwise required by the Third Party; 3.1.3 promptly notify Tier of any delay in performance of the ASC Services; 3.1.4 provide the ASC Services in accordance with service levels agreed with Third Parties; 3.1.5 ensure that the ASC Services conform to any quality requirements and/or specifications stated in this Agreement or as agreed by SBS in any agreement with a Third Party; 3.1.6 charge such rates for use of the ASC Services which are competitive by reference to the benchmarking procedure described in SCHEDULE 8 of the Alliance Agreement; 3.1.7 have the right, power, authority and capability to provide the ASC Services in accordance with this Agreement or any other arrangement or Agreement with Tier and/or a Third Party; 3.1.8 comply will all laws and regulations including relevant health and safety legislation I the provision of the ASC Services; 3.1.9 use reasonable endeavours to maintain the ASC Infrastructure in order to provide the ASC Services in accordance with this Agreement. 3.2 The Parties may elect to incorporate the provision of the ASC Services as a sub-contract to Tier in any Agreement with a Third Party, in which case Tier and SBS shall enter into a separate Agreement for that supply of ASC Services the form of that Agreement being the Master Services Supply Agreement unless otherwise agreed between the Parties. 4 SBS STAFF SERVICES 4.1 SBS shall: 4.1.1 Mobilise sufficient FTE SBS Staff Services for Utilisation by Tier and/or a Third Party in order to meet all requests for the ASC Services made by Tier and/or Third Parties introduced by Tier to SBS during the term of this Agreement. In the event that SBS are unable to Mobilise SBS Staff Services SBS shall recruit sufficient SBS Staff Services externally such recruitment costs to be at SBS? cost. 4.1.2 continue to procure the training of all SBS Staff Services during this Agreement as set out in SCHEDULE 3 of the Alliance Agreement; 4.1.3 ensure that appropriate instructions and directions are given to the SBS Staff Services to provide the ASC Services in accordance with Agreements entered into with Third Parties and/or Tier. 5 PAYMENT 5.1 Tier shall be entitled to [***]of any Net Margin (as defined below) made on any Third Party contract entered into with SBS for the provision of the ASC Services pursuant to Tier?s introduction of that Third Party to SBS. 5.2 In respect of each such Third Party contract SBS shall pay Tier [***]of any Net Margin (as defined below) calculated at the end of each six month period payable in arrears for the duration of each Third Party contract. 5.3 At the end of the period of any such Third Party contract the Net Margin for the whole of that Third Party contract period shall be calculated and reconciliation payments made to Tier as necessary. *CONFIDENTIAL TREATMENT REQUEST(ED) 5.4 For the purposes of this Clause 5 ?Net Margin? means all profit arising out of a Third Party contract before the deduction of any tax less any direct costs incurred in relation to such Third Party contract, including a proportionate element of costs of assets shared between SBS projects provided that such shared assets are directly used in the delivery of that Third Party Contract. 5.5 Tier may dispute the amount of any monies paid to it in accordance with Clause 5.1 within thirty (30) Calendar days of payment being made to it by giving SBS written notice setting out the basis of the dispute. Where such a dispute arises or SBS fails to pay Tier its [***]of any Net Margin due under Clause 5.1 the Parties shall use reasonable endeavours to settle the dispute amicably failing which the provisions of Clause 21 of the Alliance Agreement will apply. 5.6 All payments to be made under this Agreement shall be made in full without any set off, restriction or condition and without deduction for or on account of any counterclaim. 5.7 Tier shall have access to SBS? accounts in accordance with the provisions of Clauses 12.8 and 12.9 of the Alliance Agreement. 5.8 For the avoidance of doubt there shall be no additional payments in respect of a Success Fee. 6 DEFAULT IN PERFORMANCE 6.1 In the event that SBS are unable to provide any SBS Staff Services in order to perform the ASC Services for Tier and/or a Third Party SBS shall be in default of this Agreement and Tier shall be entitled to serve a default notice requiring SBS to remedy the default within thirty (30) Working Days. 6.2 In the event that SBS fail to pay Tier any sums due to Tier in respect of Net Margin made as a result of any Third Party contract for the ASC Services SBS shall be in default of this Agreement and Tier shall be entitled to serve a default notice requiring SBS to pay within thirty (30) Working Days. 6.3 In the event that SBS commits three defaults under either Clause 6.1 or 6.2 within a period of six (6) Calendar months Tier shall be entitled to terminate this Agreement in accordance with the provisions of Clause 7 below. *CONFIDENTIAL TREATMENT REQUEST(ED) 7 TERMINATION 7.1 This Agreement may be terminated for default as set out in Clause 6 above or for insolvency as set out in Clause 23 of the Alliance Agreement. 7.2 In the event of termination pursuant to Clause 6 SBS shall pay Tier forthwith any sums due and owing in respect of Third Party contracts for the ASC Services at the date of termination. SIGNED AND AGREED for and on behalf of Tier Technologies (United Kingdom) Inc. Signature: Date: Name: Status: SIGNED AND AGREED for and on behalf of Siemens Business Services Limited Signature: Date: Name: Status: ANNEX 3 THE BUSINESS DEVELOPMENT METHODOLOGY ------------------------------------ 1 PURPOSE 1.1 The purpose of this document is to describe the processes to be followed by the Parties to support the Business Development Activity contemplated under this Agreement. 1.2 In particular this document is established for the specific purposes set out in Clause 6.2 of the Agreement. 2 APPROACH 2.1 The Alliance Managers shall review, document and agree, at each Calendar monthly meeting; 2.1.1 In respect of new, anticipated or emerging Third Parties; 2.1.1.1 sales opportunities for the forthcoming six Calendar month period and those Third Parties to be approached in the forthcoming Calendar month; 2.1.1.2 the qualification criteria to be used in respect of each new, anticipated or emerging Third Party identified in Paragraph 2.1.1.1 above; 2.1.1.3 the sales campaign, action plan and resourcing requirements to be deployed in respect of each new, anticipated or emerging Third Party identified in Paragraph 2.1.1.1 above; 2.1.1.4 any activities required by the VRB; 2.1.1.5 which Party is to be responsible for the activities arising from Paragraphs 2.1.1.3 and 2.1.1.4 above; 2.1.1.6 to agree on the allocation of resources to support those activities required by Paragraph 2.1.1.5. 2.1.2 In respect of those anticipated or emerging Third Parties previously identified by the Parties pursuant to Paragraph 2.1.1.1. above: 2.1.2.1 Business Development Activity planned and undertaken in the previous Calendar month and that anticipated in the forthcoming Calendar month; 2.1.2.2 Proposal Development Activity planned and/or undertaken in the previous Calendar month and that anticipated in the forthcoming Calendar month; 2.1.2.3 Proposal Submission Activity planned and/or undertaken in the previous Calendar month and that anticipated in the forthcoming Calendar month; 2.1.2.4 qualification criteria, sales campaign, action plan and resourcing requirements and their ongoing applicability, and whether or not to discontinue any identified Third Party opportunity identified pursuant to Paragraph 2.1.1.1 above; 2.1.2.5 any activities required by, the progress thereof, and any decisions made by, the VRB and the reasons for any such decisions; 2.1.2.6 to review the ongoing allocation of resources to support those activities required by Paragraph 2.1.2.5. 2.2 The documents referred to in this paragraph 2 shall be updated as necessary and reviewed as agreed between the Parties. AS WITNESS the hands of the Parties hereto the day and year first hereinbefore written: SIGNED AND AGREED for and on Behalf of Tier Technologies (United Kingdom) Inc. Signature:____________________________ Date:__________________________ Name:____________________________ Status:__________________________ SIGNED AND AGREED for and on Behalf of Siemens Business Services Limited Signature:____________________________ Date:________________________ Name:____________________________ Status:________________________ EX-10.62 4 SECOND AMEND. TO AMENDED & RESTATED CREDIT AGREE. EXHIBIT 10.62 SECOND AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Second Amendment dated as of September 30, 1999 to Amended and Restated Revolving Credit Agreement (the "Second Amendment"), by and among TIER TECHNOLOGIES, INC., a California corporation (the "Company"), TIER TECHNOLOGIES (UNITED KINGDOM), INC., a Delaware corporation ("Tier UK" and, collectively with the Company, the "Borrowers" and each individually, a "Borrower") and BANKBOSTON, N.A. (the "Bank"), amending certain provisions of the Amended and Restated Revolving Credit Agreement dated as of May 28, 1999 (as amended and in effect from time to time, the "Credit Agreement") by and among the Borrowers and the Bank. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers and the Bank have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Second Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: (S)1. Amendment to (S)1 of the Credit Agreement. Section 1.1 of the ----------------------------------------- Credit Agreement is hereby amended by inserting the following definition in the appropriate alphabetical order: St. George Facility. That certain loan facility in the ------------------- aggregate principal amount of not more than $3,300,000 Australian Dollars provided from St. George Bank Limited to Tier Australia, such facility to be on substantially the terms set forth in the October 19, 1999 letter from St. George Bank Limited to Tier Australia, a copy of which has been provided to the Bank. Tier Australia. As defined in Section 6.1(h). -------------- (S)2. Amendment to (S)5 of the Credit Agreement. Section 5.8 of the ----------------------------------------- Credit Agreement is hereby amended by deleting the amount "$3,400,000" which appears in subparagraph (b) of Section 5.8 and substituting in place thereof the amount "$2,900,000". (S)3. Amendment to Section 6 of the Credit Agreement. Section 6 of the ---------------------------------------------- Credit Agreement is hereby amended as follows: -2- (a) Section 6.1(g) of the Credit Agreement is hereby amended by (i) deleting the words "Indebtedness of a Foreign Subsidiary to the Company in the form of" which appear in Section 6.1(g) and substituting in place thereof the words "Indebtedness of a Foreign Subsidiary, other than Tier Australia, to the Company in the form of"; (ii) deleting the words "the Foreign Subsidiary" which appear in Section 6.1(g)(iv) and substituting in place thereof the words "such Foreign Subsidiary"; and (iii) deleting the amount "$3,000,000" which appears in Section 6.1(g)(v) and substituting in place thereof the amount "$2,000,000". (b) Section 6.1(h) of the Credit Agreement is hereby amended by (i) deleting the text of Section 6.1(h)(ii) in its entirety and substituting in place thereof the words "(ii) the aggregate principal amount of such loan does not exceed the lesser of (1) $1,000,000 and (2) an amount equal to (A) the aggregate purchase price for the assets of Simsion & Bowles Pty Ltd. to be acquired by Tier Australia on or prior to December 31, 1999 (the "S&B Acquisition") less (B) the aggregate principal amount of the St. George ---- Facility used to finance the S&B Acquisition"; and (ii) deleting the date "September 28, 1999" which appears in Section 6.1(h)(iii) and substituting in place thereof the date "November 30, 1999". (c) Section 6.1(i) of the Credit Agreement is hereby amended by deleting the word "and" which appears at the end of Section 6.1(i). (d) Section 6.1(j) of the Credit Agreement is hereby amended by deleting the period which appears at the end of Section 6.1(j) and substituting in place thereof a semicolon and the word "and". (e) Section 6.1 of the Credit Agreement is amended by inserting immediately after the text of Section 6.1(j) the following: (k) Indebtedness of Tier Australia to St. George Bank Limited pursuant to the St. George Facility. (f) Section 6.5 of the Credit Agreement is hereby amended by (i) deleting the word "and" which appears at the end of Section 6.5(e); (ii) deleting the period which appears at the end of Section 6.5(f) and substituting in place thereof a semicolon and the word "and"; and (iii) inserting immediately at the end of Section 6.5(f) the following: (g) liens in favor of St. George Bank Limited on the assets of Tier Australia to secure the Indebtedness permitted by Section 6.1(k). (g) Section 6.10 of the Credit Agreement is hereby amended by (i) inserting immediately after the words "Foreign Subsidiaries" which appears in Section 6.10(ii) the words "other than Tier Australia"; and (ii) deleting the text of Section 6.10(iii) in its entirety and restating it as follows: -3- (iii) Investments by the Company in Tier Australia with respect to Indebtedness permitted by Section 6.1(h) hereof so long as (1) Tier Australia remains a Subsidiary of the Company; (2) no Default or Event of Default has occurred and is continuing; (3) the aggregate amount of the Investment does not exceed the amount set forth in Section 6.1(h)(ii); (4) such Investment is made not later than November 30, 1999; (5) the proceeds of such Investment are used by Tier Australia to consummate the S&B Acquisition; and (6) such Investment is not made prior to the date of consummating the S&B Acquisition; (S)4. Conditions to Effectiveness. This Second Amendment shall not become --------------------------- effective until the Bank receives the following: (a) a counterpart of this Second Amendment, executed by the Borrowers and the Banks; and (b) payment in cash of an amendment fee of $8,000 for the account of the Bank. (S)5. Representations and Warranties. The Borrowers hereby repeat, on and ------------------------------ as of the date hereof, each of the representations and warranties made by them in (S)4 of the Credit Agreement, and such representations and warranties remain true as of the date hereof (except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date), provided, that all references therein to the Credit Agreement shall refer to - -------- such Credit Agreement as amended hereby. In addition, each Borrower hereby represents and warrants that the execution and delivery by each Borrower and its Subsidiaries of this Second Amendment and the performance by such Borrower and its Subsidiaries of all of its agreements and obligations under the Credit Agreement as amended hereby and the other Loan Documents are within the corporate authority of each such Borrower and its Subsidiaries and has been duly authorized by all necessary corporate action on the part of such Borrower and its Subsidiaries. (S)6. Ratification, Etc. Except as expressly amended hereby, the Credit ----------------- Agreement, the Security Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Second Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. (S)7. No Waiver. Nothing contained herein shall constitute a waiver of, --------- impair or otherwise affect any Obligations, any other obligation of the Borrowers or any rights of the Bank consequent thereon. -4- (S)8. Counterparts. This Second Amendment may be executed in one or more ------------ counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. (S)9. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS). -5- IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as a document under seal as of the date first above written. TIER TECHNOLOGIES, INC. By: /s/ G.K. Ross ------------- Title: EVP & CFO TIER TECHNOLOGIES (UNITED KINGDOM), INC. By: /s/ G.K. Ross ------------- Title: Director BANKBOSTON, N.A. By: /s/ illegible ------------- Title: Vice President EX-10.63 5 EMPLOYMENT AGREEMENT OF JAMES R. WEAVER EXHIBIT 10.63 MEMORANDUM To: Jim Weaver From: Jim Bildner Date: April 19, 1998 Re: Revised Employment Offer - -------------------------------------------------------------------------------- Jim, I am delighted to offer you employment as Tier Technologies' President of Government Systems, a position of vital importance to Tier. As you and I discussed, you will work directly with me in this position as we develop the government market and expand our offerings, clients and delivery in this critical market space. Given the importance of this role, you will report directly to Bill and me as we manage Tier Technologies global expansion and activities. Of equal significance, this position has full and complete accountability for all of Tier's activity in the Government space and as President of this Group, you will be a member of our Company's core management and operating committee. You will be an officer of the Corporation. Key components of your compensation package would be as follows: . Base salary - $200,000 . Annual bonus target range (based on agreed to performance criteria) -- $100,000. First year bonus would be guaranteed at minimum of 50% or $50,000, advanced quarterly against your annual bonus. . Stock Option Plan - You will be granted options to purchase 50,000 shares at FMV as of the date of your employment. You will be eligible to receive an additional grant in an amount no less than 37,500 shares annually, at FMV as of the date of the grant, upon achievement of your annual performance targets and the company's achievement of its performance targets - on a basis similar to other Senior Executives of the Company. . Relocation and Assistance Loan - $50,000 advanced within 30 days of signing, and forgiven, ratably, over 3 years unless you are terminated for cause or you leave Tier Technologies' employment voluntarily. We have agreed to add to this loan - on the same terms and conditions as above - any sums you may be required to repay BDM/TRW for termination of your employment prior to your one year of service, up to but not to exceed $100,000. Should funds be advanced to you to repay BDM/TRW these funds, subject to the $100,000 cap, shall be forgiven over 1 year from the date those funds are advanced to BDM by you. Should you waive your right to seek an advance of funds to repay any 1. obligations you may have to BDM/TRW for termination of your employment, we agree to add to your relocation and assistance loan an additional $50,000 governed by the same terms and conditions as the first $50,000 advance. Notwithstanding your notification to us of your waiver of funds advanced to repay BDM/TRW we agree to provide you up to $25,000 in funds to repay BDM/TRW for repayment obligations should a claim be made within the first 90 days of your employment by BDM/TRW. In no event shall the total of all advances to you exceed $125,000 in any combination. . Medical, dental, vision, 401K/retirement, vacation, etc. - benefits consistent with other executive packages at Tier Technologies. In addition, we will include in your employment package, a severance provision that provides should your employment with Tier be terminated by the Company for reasons other than cause - as it is defined for other senior executives - Tier will pay your base salary and benefits for a period of 18 months from the date of termination; and all outstanding non-vested options held by you will immediately vest. The Company, at its option, may elect to make a lump sum payment equal to the present value of your 18 months of base salary plus benefits. In the event of a change in control of the Company - as defined for other Senior Executives - Tier will pay your base salary and benefits for a period of 18 months from the date of termination; and all outstanding non-vested options held by you will immediately vest. The Company, at its option, may elect to make a lump sum payment equal to the present value of your 18 months of base salary plus benefits. You will be expected to sign comprehensive non-compete, non-disclosure and other related documents prior to joining. You will be expected to work extensively and for very long periods, and we both expect that your position will require you to travel throughout the course of your employment. Finally, while we do not currently contemplate requiring you to relocate, should we reasonably and mutually determine that it is necessary for you to relocate you agree to relocate to our Walnut Creek/San Francisco headquarters. We agree to give you reasonable notice and a full, comprehensive relocation package. In addition, you agree to relocate to another location, under the same terms as stated above, should you and I mutually agree that such a move makes sense. I trust this letter meets your approval. Kindly so indicate your acceptance to these terms and I will begin to draft final documents for your execution. I can't tell you how excited I am to have you join us. Best personal regards, /s/ Jim Bildner Jim Bildner Chairman and CEO I accept this employment offer from Tier Technologies. /s/ James R. Weaver - ---------------------------- 2. EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 1. "Tier Technologies (Australia) PTY Limited", an Australian corporation. 2. "Tier Technologies (United Kingdom), Inc.", a Delaware corporation. 3. "Tsource, Inc.", a Delaware corporation. 4. "Midas Computer Software Limited", a United Kingdom entity. 5. "ADC Consultants PTY Limited", an Australian corporation. EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-47259, 333-68255, 333-77051) of Tier Technologies, Inc. of our report dated October 29, 1999, relating to the financial statements and financial statement schedules, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California December 8, 1999 EX-23.2 8 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the Amended and Restated 1996 Equity Incentive Plan of Tier Technologies, Inc. of our report dated October 6, 1997 with respect to the consolidated financial statements of Tier Technologies, Inc. included in the Annual Report (Form 10-K) for the year ended September 30, 1999. Walnut Creek, California December 8, 1999 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 10,940 8,971 28,436 2,285 0 48,715 9,772 2,760 83,944 12,875 0 0 0 66,012 4,256 83,944 91,976 91,976 0 56,236 35,411 0 77 1,650 644 1,006 0 0 0 1,006 0.08 0.08
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