form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31,
2008
OR
o
|
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)
Delaware
|
94-3145844
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
10780
Parkridge Boulevard, Suite 400
Reston,
Virginia 20191
(Address
of principal executive offices)
(571)
382-1000
(Registrant's
telephone number, including area code)
Not
applicable
(Former
name, former address, and former fiscal year, if changed since last
report)
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "accelerated filer," "large accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o Accelerated filer x
Non-accelerated filer o Smaller reporting
company o
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the
Exchange
Act). Yes o No
x
At
April 30, 2008 there were 19,561,955 shares of the Registrant's Common Stock
outstanding.
TIER TECHNOLOGIES,
INC.
TABLE
OF CONTENTS
Certain
statements contained in this report, including statements regarding the future
development of and demand for our services and our markets, anticipated trends
in various expenses, expected costs of legal proceedings, expectations for the
divestitures of certain assets, and other statements that are not historical
facts, are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements relate to future
events or our future financial and/or operating performance and generally can be
identified as such because the context of the statement includes words such as
"may," "will," "intends," "plans," "believes," "anticipates," "expects,"
"estimates," "shows," "predicts," "potential," "continue," or "opportunity," the
negative of these words or words of similar import. These
forward-looking statements are subject to risks and uncertainties, including the
risks and uncertainties described and referred to under Item 1A. Risk Factors
beginning on page 40, which could cause actual
results to differ materially from those anticipated as of the date of this
report. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
TIER
TECHNOLOGIES, INC.
(in
thousands)
|
|
March 31,
2008
|
|
|
September 30,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
40,635 |
|
|
$ |
16,516 |
|
Investments
in marketable securities
|
|
|
— |
|
|
|
57,815 |
|
Accounts
receivable, net
|
|
|
3,881 |
|
|
|
4,909 |
|
Unbilled
receivables
|
|
|
443 |
|
|
|
545 |
|
Prepaid
expenses and other current assets
|
|
|
1,821 |
|
|
|
2,169 |
|
Assets
of discontinued operations
|
|
|
39 |
|
|
|
672 |
|
Current
assets—held-for-sale
|
|
|
35,500 |
|
|
|
36,196 |
|
Total
current assets
|
|
|
82,319 |
|
|
|
118,822 |
|
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net
|
|
|
4,082 |
|
|
|
3,743 |
|
Goodwill
|
|
|
14,526 |
|
|
|
14,526 |
|
Other
intangible assets, net
|
|
|
15,548 |
|
|
|
17,640 |
|
Investments
in marketable securities
|
|
|
31,111 |
|
|
|
— |
|
Restricted
investments
|
|
|
11,526 |
|
|
|
11,526 |
|
Other
assets
|
|
|
362 |
|
|
|
167 |
|
Total
assets
|
|
$ |
159,474 |
|
|
$ |
166,424 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
850 |
|
|
$ |
877 |
|
Accrued
compensation liabilities
|
|
|
3,188 |
|
|
|
4,653 |
|
Accrued
subcontractor expenses
|
|
|
339 |
|
|
|
504 |
|
Accrued
discount fees
|
|
|
4,974 |
|
|
|
4,529 |
|
Other
accrued liabilities
|
|
|
4,161 |
|
|
|
4,213 |
|
Deferred
income
|
|
|
2,105 |
|
|
|
2,649 |
|
Liabilities
of discontinued operations
|
|
|
41 |
|
|
|
421 |
|
Current
liabilities—held-for-sale
|
|
|
10,993 |
|
|
|
10,864 |
|
Total
current liabilities
|
|
|
26,651 |
|
|
|
28,710 |
|
Other
liabilities
|
|
|
180 |
|
|
|
200 |
|
Total
liabilities
|
|
|
26,831 |
|
|
|
28,910 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value; authorized shares: 4,579;
no
shares issued and outstanding
|
|
|
— |
|
|
|
— |
|
Common
stock and paid-in capital; shares authorized: 44,260;
shares
issued: 20,439 and 20,425; shares outstanding: 19,555 and
19,541
|
|
|
187,928 |
|
|
|
186,417 |
|
Treasury
stock—at cost, 884 shares
|
|
|
(8,684 |
) |
|
|
(8,684 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,414 |
) |
|
|
— |
|
Accumulated
deficit
|
|
|
(45,187 |
) |
|
|
(40,219 |
) |
Total
shareholders’ equity
|
|
|
132,643 |
|
|
|
137,514 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
159,474 |
|
|
$ |
166,424 |
|
See Notes to Consolidated Financial
Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
25,961 |
|
|
$ |
22,797 |
|
|
$ |
54,916 |
|
|
$ |
47,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
19,518 |
|
|
|
17,147 |
|
|
|
41,752 |
|
|
|
35,291 |
|
General
and administrative
|
|
|
6,873 |
|
|
|
8,528 |
|
|
|
13,982 |
|
|
|
13,910 |
|
Selling
and marketing
|
|
|
2,005 |
|
|
|
1,964 |
|
|
|
4,119 |
|
|
|
3,753 |
|
Depreciation
and amortization
|
|
|
1,330 |
|
|
|
1,334 |
|
|
|
2,625 |
|
|
|
2,666 |
|
Total
costs and expenses
|
|
|
29,726 |
|
|
|
28,973 |
|
|
|
62,478 |
|
|
|
55,620 |
|
Loss
from continuing operations before other income and income
taxes
|
|
|
(3,765 |
) |
|
|
(6,176 |
) |
|
|
(7,562 |
) |
|
|
(8,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
177 |
|
|
|
— |
|
|
|
986 |
|
Interest
income, net
|
|
|
824 |
|
|
|
607 |
|
|
|
1,790 |
|
|
|
1,484 |
|
Total
other income
|
|
|
824 |
|
|
|
784 |
|
|
|
1,790 |
|
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from continuing operations before income taxes
|
|
|
(2,941 |
) |
|
|
(5,392 |
) |
|
|
(5,772 |
) |
|
|
(5,552 |
) |
Income
tax provision
|
|
|
12 |
|
|
|
7 |
|
|
|
28 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,953 |
) |
|
|
(5,399 |
) |
|
|
(5,800 |
) |
|
|
(5,619 |
) |
(Loss)
income from discontinued operations, net
|
|
|
(584 |
) |
|
|
9,137 |
|
|
|
832 |
|
|
|
11,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(3,537 |
) |
|
$ |
3,738 |
|
|
$ |
(4,968 |
) |
|
$ |
5,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share—Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.15 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
From
discontinued operations
|
|
|
(0.03 |
) |
|
|
0.47 |
|
|
|
0.04 |
|
|
|
0.59 |
|
(Loss)
earnings per share—Basic and diluted
|
|
$ |
(0.18 |
) |
|
$ |
0.19 |
|
|
$ |
(0.25 |
) |
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) earnings per share
|
|
|
19,551 |
|
|
|
19,501 |
|
|
|
19,547 |
|
|
|
19,500 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
(loss) income
|
|
$ |
(3,537 |
) |
|
$ |
3,738 |
|
|
$ |
(4,968 |
) |
|
$ |
5,952 |
|
Other
comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on investments in marketable securities
|
|
|
(1,414 |
) |
|
|
— |
|
|
|
(1,414 |
) |
|
|
(1 |
) |
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
(29 |
) |
Other
comprehensive (loss) income
|
|
|
(1,414 |
) |
|
|
10 |
|
|
|
(1,414 |
) |
|
|
(30 |
) |
Comprehensive
(loss) income
|
|
$ |
(4,951 |
) |
|
$ |
3,748 |
|
|
$ |
(6,382 |
) |
|
$ |
5,922 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(4,968 |
) |
|
$ |
5,952 |
|
Less:
Income from discontinued operations, net
|
|
|
832 |
|
|
|
11,571 |
|
Loss
from continuing operations, net
|
|
|
(5,800 |
) |
|
|
(5,619 |
) |
Non-cash
items included in net income (loss):
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,697 |
|
|
|
2,745 |
|
Provision
for doubtful accounts
|
|
|
31 |
|
|
|
(473 |
) |
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
(986 |
) |
Accrued
forward loss on contract
|
|
|
107 |
|
|
|
(13 |
) |
Pending
settlement of pension contract
|
|
|
— |
|
|
|
1,190 |
|
Share-based
compensation
|
|
|
1,415 |
|
|
|
1,180 |
|
Other
|
|
|
48 |
|
|
|
1 |
|
Net
effect of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
1,098 |
|
|
|
(179 |
) |
Prepaid
expenses and other assets
|
|
|
125 |
|
|
|
305 |
|
Accounts
payable and accrued liabilities
|
|
|
(1,434 |
) |
|
|
(281 |
) |
Income
taxes payable
|
|
|
28 |
|
|
|
26 |
|
Deferred
income
|
|
|
(544 |
) |
|
|
(429 |
) |
Cash
used in operating activities from continuing operations
|
|
|
(2,229 |
) |
|
|
(2,533 |
) |
Cash
provided by operating activities from discontinued
operations
|
|
|
4,628 |
|
|
|
7,354 |
|
Cash
provided by operating activities
|
|
|
2,399 |
|
|
|
4,821 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(7,325 |
) |
|
|
(3,108 |
) |
Sales
and maturities of marketable securities
|
|
|
32,615 |
|
|
|
1,000 |
|
Purchase
of restricted investments
|
|
|
— |
|
|
|
(9,260 |
) |
Sales
and maturities of restricted investments
|
|
|
— |
|
|
|
3,348 |
|
Purchase
of equipment and software
|
|
|
(921 |
) |
|
|
(462 |
) |
Repayment
of notes and accrued interest from related parties
|
|
|
— |
|
|
|
4,249 |
|
Other
investing activities
|
|
|
— |
|
|
|
(75 |
) |
Cash
provided by (used in) investing activities from continuing
operations
|
|
|
24,369 |
|
|
|
(4,308 |
) |
Cash
used in investing activities from discontinued operations
|
|
|
(2,716 |
) |
|
|
(1,593 |
) |
Cash
provided by (used in) investing activities
|
|
|
21,653 |
|
|
|
(5,901 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
96 |
|
|
|
32 |
|
Capital
lease obligations and other financing arrangements
|
|
|
(26 |
) |
|
|
(12 |
) |
Cash
provided by financing activities from continuing
operations
|
|
|
70 |
|
|
|
20 |
|
Cash
used in financing activities from discontinued operations
|
|
|
(3 |
) |
|
|
(3 |
) |
Cash
provided by financing activities
|
|
|
67 |
|
|
|
17 |
|
Effect
of exchange rate changes on cash
|
|
|
— |
|
|
|
(8 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
24,119 |
|
|
|
(1,071 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
16,516 |
|
|
|
18,468 |
|
Cash
and cash equivalents at end of period
|
|
$ |
40,635 |
|
|
$ |
17,397 |
|
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
7 |
|
|
$ |
6 |
|
Income
taxes paid, net
|
|
$ |
— |
|
|
$ |
50 |
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Interest
accrued on shareholder notes
|
|
$ |
— |
|
|
$ |
123 |
|
Equipment
acquired under capital lease obligations and other financing
arrangements
|
|
$ |
28 |
|
|
$ |
26 |
|
See
Notes to Consolidated Financial Statements
Tier
Technologies, Inc., or Tier or the Company, provides federal, state and local
government and other public and private sector clients with electronic payment
and other transaction processing services, as well as software and systems
integrations services. During fiscal 2007, we undertook a strategic
initiative that evaluated the risks, costs, benefits and growth potential of
each of our product lines and services. As a result of this process,
we concluded that our company's focus should be on our core business—Electronic
Payment Processing. As such, we began to seek buyers for certain
portions of our business in April 2007.
Our
Senior Management team allocates resources to and assesses the performance of
our operations in two major categories: Continuing Operations and Discontinued
Operations. As of March 31, 2008, our Continuing
Operations were composed of:
·
|
Electronic
Payment Processing, or EPP—provides electronic payment processing
options, including payment of taxes, fees and other obligations owed to
government entities, educational institutions, utilities and other public
sector clients. EPP services are provided by our two wholly
owned subsidiaries: Official Payments Corporation, or OPC, and
EPOS Corporation, or EPOS;
|
·
|
Wind-down
Operations—represent portions of our Government Business Process
Outsourcing, or GBPO and Packaged Software and System Integration, or PSSI
operations that we expect to wind down over a five-year period because
they are neither compatible with our long-term strategic direction nor
complementary with the other businesses that we are
divesting. These operations
include:
|
o
|
Voice
and Systems Automation (formerly part of GBPO)—provides call center
interactive voice response systems and support services, including
customization, installation and maintenance;
and
|
o
|
Public
Pension Administration Systems (formerly part of PSSI)—provides services to
support the design, development and implementation of pension applications
for state, county and city
governments.
|
·
|
Corporate
Operations—represent those functions that support our corporate
governance, as well as certain shared-services, including information
technology and business
development.
|
Our
Discontinued
Operations, or held-for sale businesses, represent those portions
of GBPO and PSSI for which we are seeking buyers, including the
following:
|
·
|
GBPO
Discontinued Operations—includes our child support payment
processing, child support financial institution data match services,
consulting services to state agencies, computer telephony and call centers
operations; and
|
·
|
PSSI
Discontinued Operations—includes our financial management systems,
unemployment insurance administration systems and systems integration
lines of business. In addition, the results reported for our
PSSI discontinued operations include our former Independent Validation and
Verification business, which was sold on December 31,
2007.
|
In
June 2007, we sold our 46.96% investment in the outstanding common stock of
CPAS Systems, Inc., or CPAS, a Canadian-based supplier of pension administration
software systems, back to CPAS for $4.8 million (USD). Prior to
this disposition, we used the equity method of accounting to report our
investment in CPAS.
We
reclassified historical financial information presented in our Consolidated
Financial Statements and our Notes to Consolidated Financial Statements to
conform to the current period’s presentation. For additional
information about our continuing operations, see Note
11—Segment Information. For
BASIS
OF PRESENTATION
Our
Consolidated Financial Statements were prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and in accordance with Regulation S-X, Article 10, under
the Securities Exchange Act of 1934, as amended. They are unaudited
and exclude some disclosures required for annual financial
statements. We believe we have made all necessary adjustments so that
our Consolidated Financial Statements are presented fairly and that all such
adjustments are of a normal recurring nature.
Preparing
financial statements requires us to make estimates and assumptions that affect
the amounts reported on our Consolidated Financial Statements and accompanying
notes. We believe that near-term changes could impact the following
estimates: project costs and percentage of completion; effective tax rates,
deferred taxes and associated valuation allowances; collectibility of
receivables; share-based compensation; and valuation of goodwill, intangibles
and investments. Although we believe the estimates and assumptions
used in preparing our Consolidated Financial Statements and related notes are
reasonable in light of known facts and circumstances, actual results could
differ materially.
SIGNIFICANT
ACCOUNTING POLICIES
Revenue
Recognition and Credit Risk. We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable. We assess
collectibility based upon our clients’ financial condition and prior payment
history, as well as our performance under the contract. When we enter
into certain arrangements where we are obligated to deliver multiple products
and/or services, we account for each unit of the contract separately when each
unit provides value to the customer on a standalone basis and there is objective
evidence of the fair value of the standalone unit.
We have
revised our disclosures about revenue recognition from our Annual Report on Form
10-K for period ended September 30, 2007 to provide more of a distinction
between our Continuing Operations revenue streams and our Discontinued
Operations revenue streams.
Continuing
Operations
Our
Electronic Payment Processing, or EPP, operations offer payment processing
services to our clients, which allow them to offer their constituents
(individuals or businesses) the ability to pay certain financial obligations
with their credit or debit cards or with an electronic check. Our
revenue is generated in the form of the convenience fee we are permitted to
charge the constituent for the electronic payment processing service
provided. Depending on the agreement with the client, the convenience
fee can be a fixed fee or a percentage of the payment processed. In
more than 90% of our arrangements, this fee is charged directly to the
constituent and is added to their payment obligation at the point the payment is
processed. We recognize the revenue the month in which the service is
provided.
We use
the percentage-of-completion method to recognize revenue associated with our Pension wind-down operations. This
method of revenue recognition is discussed in more detail in the following Discontinued Operations
section.
Our
remaining wind-down operations include software sales and maintenance and
support, as well as non-essential training and consulting. We
recognize the revenues on training and consulting projects in the month the
services are performed. The method or revenue recognition for
software sales and maintenance and support is discussed in more detail in the
following Discontinued
Operations section.
Discontinued
Operations
Typically,
our payment processing and call center operations earn revenues based upon a
specific fee per transaction or percentage of the dollar amount
processed. We recognize these revenues in the month that the service
is provided.
We use
the percentage-of-completion method to recognize revenues for software licenses
and related services for projects that require significant modification or
customization that is essential to the functionality of the
software. We record a provision in those instances in which we
believe it is probable that a contract will generate a net loss and we can
reasonably estimate this loss. If we cannot reasonably estimate the
loss, we limit the amount of revenue that we recognize to the costs we have
incurred, until we can estimate the total loss. Advance payments from
clients and amounts billed to clients in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in
advance of contractual billing are recorded as unbilled
receivables.
For the
sale of software that does not require significant modification, we recognize
revenues from license fees when persuasive evidence of an agreement exists,
delivery of the software has occurred, no significant implementation or
integration obligations exist, the fee is fixed or determinable and
collectibility is probable. If we do not believe it is probable that
we will collect a fee, we do not recognize the associated revenue until we
collect the payment.
For
software license arrangements with multiple obligations (for example,
undelivered maintenance and support), we allocate revenues to each component of
the arrangement using the residual value method of accounting based on the fair
value of the undelivered elements, which is specific to our
company. Fair value for the maintenance and support obligations for
software licenses is based upon the specific renewal rates.
Our
license agreements do not offer return rights or price protection; therefore, we
do not have provisions for sales returns on these types of
agreements. We do, however, offer routine, short-term warranties that
our proprietary software will operate free of material defects and in conformity
with written documentation. Under these agreements, if we have an
active maintenance agreement, we record a liability for our estimated future
warranty claims, based on historical experience. If there is no
maintenance contract, the warranty is considered implied maintenance and we
defer revenues consistent with other maintenance and support
obligations.
When we
provide ongoing maintenance and support services, the associated revenue is
deferred and recognized on a straight-line basis over the life of the related
contract—typically one year. Generally, we recognize the revenues
earned for non-essential training and consulting support when the services are
performed.
Finally,
under the terms of a number of our contracts, we are reimbursed for certain
costs that we incur to support the project, including travel, postage,
stationery and printing. We include the amounts that we are entitled
to be reimbursed and any associated mark-up on these expenses in Revenues and include the
expenses as a direct cost in (Loss) income from discontinued
operations, net on our Consolidated Statements of
Operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
SFAS
157—Fair Value Measurements. In October 2006, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards No. 157—Fair Value
Measurements, or SFAS 157. This standard establishes a
framework for measuring fair value and expands disclosures about fair value
measurement of a company’s assets and liabilities. This standard also
requires that the fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and, generally, must be
applied prospectively. We expect to adopt this standard beginning
October 1, 2008. We do not expect that the adoption of SFAS 157
will have a material effect on our financial position and results of
operations.
In
February 2008, FASB issued FASB Staff Position FAS 157-1—Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13. This FSP removes leasing transactions
accounted for under Statement of Financial Accounting Standards No.
13—Accounting for Leases and its related guidance from SFAS 157. In
February 2008, FASB also issued FASB Staff Position FAS 157-2—Effective Date of
FASB Statement No. 157. This FSP delays the effective date of
Statement 157 for all nonrecurring fair value measurements of nonfinancial
assets and nonfinancial liabilities until fiscal years beginning after
November 15, 2008. We do not expect that the adoption of these
FSPs will have a material effect on our financial position and results of
operations.
SFAS
159—The Fair Value Option for Financial Assets and Financial
Liabilities. In February 2007, FASB issued Statement of
Financial Accounting Standard No. 159—The Fair Value Option for Financial
Assets and Financial Liabilities, or SFAS 159, which allows companies to
choose to measure many financial instruments and certain other items at fair
value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date. The principle can be applied on an instrument by instrument
basis, is irrevocable and must be applied to the entire
instrument. SFAS 159 amends previous guidance to extend the use
of the fair value option to available-for-sale and held-to-maturity
securities. SFAS 159 also establishes presentation and disclosure
requirements to help financial statement users understand the effect of the
election. SFAS 159 is effective as of the beginning of each reporting
fiscal year beginning after November 15, 2007. We expect to
adopt this standard beginning October 1, 2008. We do not believe
that the adoption of SFAS 159 will have a material effect on our financial
position or results of operations.
SFAS
160—Noncontrolling Interests in Consolidated Financial
Statements. In December 2007, FASB issued Statement of
Financial Accounting Standard No. 160—Noncontrolling Interests in
Consolidated Financial Statements, or SFAS 160, which requires companies
to measure noncontrolling interests in subsidiaries at fair value and to
classify them as a separate component of equity. SFAS 160 is
effective as of each reporting fiscal year beginning after December 15,
2008, and applies only to transactions occurring after the effective
date. We will adopt SFAS 160 beginning October 1,
2009.
SFAS
141(R)—Business Combinations. In December 2007, FASB
issued Statement of Financial Accounting Standard No. 141(R)—Business Combinations, or
SFAS 141(R), which will require companies to measure assets acquired and
liabilities assumed in a business combination at fair value. In
addition, liabilities related to contingent consideration are to be re-measured
at fair value in each subsequent reporting period. SFAS 141(R) will
also require the acquirer in pre-acquisition periods to expense all
acquisition-related costs. SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008, and is applicable only to transactions
occurring after the effective date. We will adopt SFAS 141(R)
beginning October 1, 2009.
Investments
are composed of available-for-sale debt securities, as defined in SFAS 115—Accounting for Certain Investments
in Debt and Equity Securities, or SFAS 115. Restricted investments
totaling $5.5 million at March 31, 2008 and September 30, 2007, which
were pledged in connection with performance bonds and a real estate operating
lease, will be restricted for the terms of the project performance and lease
periods, the latest of which is estimated to end March 2010. At
March 31, 2008 and September 30, 2007, we also used a
$6.0 million money market investment as a compensating balance for a bank
account used for certain operations. These investments are reported
as Restricted
investments on our Consolidated Balance Sheets.
We
evaluate certain available-for-sale investments for other-than-temporary
impairment when the fair value of the investment is lower than its book
value. Factors that management considers when evaluating for
other-than-temporary impairment include: the length of time and the
extent to which market value has been less than cost; the financial condition
and near-term prospects of the issuer; interest rates; credit risk; the value of
any underlying portfolios or investments; and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in the market. We do not adjust the recorded book value for declines
in fair value that we believe are temporary, if we
have
the intent and ability to hold the associated investments for the foreseeable
future and we have not made the decision to dispose of the securities as of the
reported date.
At
March 31, 2008 and September 30, 2007, our investment portfolio
included $31.1 million and $54.4 million, respectively, of municipal
bonds that were collateralized primarily with student loans. These
municipal bonds are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch Auction.” After the initial
issuance of the securities, the interest rate on the securities is reset at
prescribed intervals (typically every 28 days), based upon the market demand for
the securities on the reset date. Beginning in February 2008, some of
the auctions for these securities were unsuccessful. These
investments rated AAA (with the exception of one pension obligation rated BBB)
were current on all obligations and we continued to earn interest on our auction
rate security investments at the maximum contractual rate. However,
the uncertainty of the credit markets has resulted in negative impacts to
liquidity and fair value of these investments. During the three
months ended March 31, 2008, we liquidated as many of these securities as
possible and invested the funds in money market accounts. As a result
of the unsuccessful auctions and the uncertainty in the credit market, the
estimated fair value, as estimated by our investment banker, of the remaining
investments no longer approximated par value. During the three months
ended March 31, 2008, we recorded a temporary impairment charge of
$1.4 million, which is included in Accumulated other comprehensive
loss on our Consolidated Balance Sheets, to write down the book value of
the investments to fair market value.
The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, the
underlying security matures and is paid (all of our securities have maturities
in excess of ten years) or a buyer outside the auction process
emerges. We do not believe the unsuccessful auctions experienced to
date are the result of the deterioration of the underlying credit quality of
these securities. We have recorded the impairment as temporary as we
have the intent and ability to hold these investments until one of the
previously mentioned scenarios occurs. We believe that our cash and
cash equivalents balances of $40.6 million at March 31, 2008 are
sufficient and we do not anticipate the lack of liquidity in the credit and
capital markets will have a material impact on our cash flows or the ability to
conduct our business. Due to lack of liquidity in March 2008, we
reclassified our entire auction rate security portfolio from current to long
term Investments in marketable
securities on our Consolidated Balance Sheets.
If the
current market conditions continue or the anticipated recovery in market values
does not occur, we may be required to record other-than-temporary impairment
charges in the future. We intend to convert our investments in
auction rate securities to money market funds as liquidity returns and
conditions permit.
In
accordance with SFAS No. 95—Statement of Cash Flows,
unrestricted investments with remaining maturities of 90 days or less (as of the
date that we purchased the securities) are classified as cash
equivalents. Except for our restricted investments, all other
investments are categorized as available-for-sale under SFAS 115. As
such, our securities are recorded at estimated fair value, based on quoted
market prices or pricing methodologies provided by our investment
banker. Increases and decreases in fair value are recorded as
unrealized gains and losses in other comprehensive income.
If we
determine that impairment is other-than-temporary, we reduce the recorded book
value of the investment by the amount of the impairment and recognize a realized
loss on the investment. At March 31, 2008 and September 30,
2007, we did not believe any of our investments were other-than-temporarily
impaired.
The
following table shows the balance sheet classification, amortized cost and
estimated fair values of investments included in cash equivalents, investments
in marketable securities and restricted investments:
|
|
March
31, 2008
|
|
|
September
30, 2007
|
|
(in
thousands)
|
|
Amortized
cost
|
|
|
Unrealized
gain/(loss)
|
|
|
Estimated
fair
value
|
|
|
Amortized
cost
|
|
|
Unrealized
gain/(loss)
|
|
|
Estimated
fair value
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
25,652 |
|
|
$ |
— |
|
|
$ |
25,652 |
|
|
$ |
7,798 |
|
|
$ |
— |
|
|
$ |
7,798 |
|
Total
investments included
in
cash and
cash
equivalents
|
|
|
25,652 |
|
|
|
— |
|
|
|
25,652 |
|
|
|
7,798 |
|
|
|
— |
|
|
|
7,798 |
|
Investments
in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
54,400 |
|
|
|
— |
|
|
|
54,400 |
|
Certificates
of deposit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,415 |
|
|
|
— |
|
|
|
3,415 |
|
Total
marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
57,815 |
|
|
|
— |
|
|
|
57,815 |
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
32,525 |
|
|
|
(1,414 |
) |
|
|
31,111 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
long-term investments
|
|
|
32,525 |
|
|
|
(1,414 |
) |
|
|
31,111 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
Certificates
of deposit
|
|
|
5,526 |
|
|
|
— |
|
|
|
5,526 |
|
|
|
5,526 |
|
|
|
— |
|
|
|
5,526 |
|
Total
restricted investments
|
|
|
11,526 |
|
|
|
— |
|
|
|
11,526 |
|
|
|
11,526 |
|
|
|
— |
|
|
|
11,526 |
|
Total
investments
|
|
$ |
69,703 |
|
|
$ |
(1,414 |
) |
|
$ |
68,289 |
|
|
$ |
77,139 |
|
|
$ |
— |
|
|
$ |
77,139 |
|
NOTE
4—CUSTOMER CONCENTRATION AND RISK
We
derive a significant portion of our revenue from a limited number of
governmental customers. Typically, the contracts allow these
customers to terminate all or part of the contract for convenience or
cause. During the six months ended March 31, 2008, our contract
with the Internal Revenue Service contributed revenues of $10.5 million, or
19.0% of our revenues from continuing operations. During the six
months ended March 31, 2007, this same contract contributed revenues of
$8.8 million,
or 18.7% of our revenues from continuing operations.
Accounts
receivable, net. As of
March 31, 2008 and September 30, 2007, we reported $3.9 million
and $4.9 million, respectively, in Accounts receivable, net on
our Consolidated Balance Sheets. This item represents the short-term portion of
receivables from our customers and other parties and retainers that we expect to
receive. Approximately 54.3% and 63.2% of the balances reported at
March 31, 2008 and September 30, 2007, respectively, represent
accounts receivable, net that are attributable to operations that we intend to
wind down during the course of the next five years (See Note
11—Segment Information, for additional information about our wind-down
operations). The remainder of the Accounts receivable, net
balance is composed of receivables from certain of our EPP
customers. None of our customers have receivables that exceed 10% of
our total receivable balance. As of March 31, 2008 and
September 30, 2007, Accounts receivable, net,
included an allowance for uncollectible accounts of $1.0 million and
$1.2 million, respectively, which represents the balance of receivables
that we believe are likely to become uncollectible.
Certain
of our contracts allow customers to retain a portion of the amounts owed to us
until predetermined milestones are achieved or until the project is
completed. As of March 31, 2008, Accounts receivable, net
included $0.9 million of retainers that we expected to receive in
one year. As of September 30, 2007, Accounts receivable, net
included $0.8 million of retainers that we expected to receive in one
year.
Unbilled receivables
represent revenues that we have earned for the work that has been performed to
date that cannot be billed under the terms of the applicable contract until we
have completed specific project milestones or the customer has accepted our
work. As of March 31, 2008 and September 30,
2007,
total unbilled receivables, all of which are expected to become billable in one
year, were $0.4 million and $0.5 million, respectively.
All of
the retainers and unbilled receivable balances discussed above are associated
with businesses that we intend to wind down over the next five years (See Note 11—Segment Information).
GOODWILL
The
following table summarizes changes in the carrying amount of goodwill during the
six months ended March 31, 2008. The goodwill for our continuing
operations is reported on the line titled Goodwill on our Consolidated
Balance Sheets, while the goodwill for our discontinued operations is included
in the line titled Current
assets—held-for-sale.
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-down
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Total
|
|
|
Total
|
|
Balance
at
September
30, 2007
|
|
$ |
14,526 |
|
|
$ |
— |
|
|
$ |
14,526 |
|
|
$ |
3,219 |
|
|
$ |
8,907 |
|
|
$ |
12,126 |
|
|
$ |
26,652 |
|
Goodwill
impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(320 |
) |
|
|
(1,410 |
) |
|
|
(1,730 |
) |
|
|
(1,730 |
) |
Balance
at March 31, 2008
|
|
$ |
14,526 |
|
|
$ |
— |
|
|
$ |
14,526 |
|
|
$ |
2,899 |
|
|
$ |
7,497 |
|
|
$ |
10,396 |
|
|
$ |
24,922 |
|
As a
general practice, we test goodwill for impairment during the fourth quarter of
each fiscal year at the reporting unit level using a fair value approach in
accordance with SFAS 142—Goodwill and Other Intangible
Assets. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, we would evaluate goodwill for impairment between annual
tests. One such triggering event is when there is a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of. Hence, our
intention to divest the majority of our GBPO and PSSI assets and liabilities
triggered a requirement to review the goodwill associated with these asset
groups for impairment. Because we intend to divest portions of two
reporting units, each quarter we test each business within our former PSSI and
GBPO segments for impairment.
During
the six months ended March 31, 2008, we recorded a goodwill impairment loss
of $1.7 million for our held-for-sale businesses. For additional
information regarding these discontinued businesses, see Note
12—Discontinued Operations
OTHER
INTANGIBLE ASSETS, NET
Currently,
all of our other intangible assets are included in our continuing
operations. As such, we test impairment of these assets on an annual
basis during the fourth quarter of our fiscal year, unless an event occurs or
circumstances change that would more-likely-than-not reduce the fair value of
the assets below the carrying value. The following table summarizes
Other intangible assets,
net, for our continuing operations:
|
|
|
March
31, 2008
|
|
|
September
30, 2007
|
|
(in
thousands)
|
Amortization
period
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
Client
relationships
|
7-10
years
|
|
$ |
28,408 |
|
|
$ |
(15,335 |
) |
|
$ |
13,073 |
|
|
$ |
28,408 |
|
|
$ |
(13,840 |
) |
|
$ |
14,568 |
|
Technology
and
research
and
development
|
5
years
|
|
|
3,966 |
|
|
|
(2,880 |
) |
|
|
1,086 |
|
|
|
3,966 |
|
|
|
(2,444 |
) |
|
|
1,522 |
|
Trademarks
|
6-10
years
|
|
|
3,214 |
|
|
|
(1,825 |
) |
|
|
1,389 |
|
|
|
3,214 |
|
|
|
(1,664 |
) |
|
|
1,550 |
|
Other
intangible
assets,
net
|
|
|
$ |
35,588 |
|
|
$ |
(20,040 |
) |
|
$ |
15,548 |
|
|
$ |
35,588 |
|
|
$ |
(17,948 |
) |
|
$ |
17,640 |
|
During
the six months ended March 31, 2008, we recognized $2.1 million of
amortization expense on our other intangible assets.
On
October 1, 2007, we adopted FASB Interpretation No. 48—Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109, or FIN 48, which
provides a financial statement
recognition
threshold and measurement attribute for a tax position taken or expected to be
taken in a tax return. Under FIN 48, we may recognize the tax benefit
from an uncertain tax position only if it is more-likely-than-not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on derecognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, and income tax disclosures.
The
adoption of FIN 48 had no material impact on our Consolidated Balance Sheets or
our Consolidated Statements of Operations for the six months ended
March 31, 2008. After examining the current and past tax
positions taken, we concluded that it is more-likely-than-not these tax
positions will be sustained in the event of an examination and that there would
be no material impact to our effective tax rate. No interest or
penalties have been accrued associated with any tax positions
taken. In the event interest or penalties had been accrued, our
policy is to include these amounts related to unrecognized tax benefits in
income tax expense. However, as of March 31, 2008, we had no
accrued interest or penalties related to uncertain tax
positions. Currently, we are under audit by the IRS for tax year
ending September 30, 2005. We expect the audit to conclude in
the next 12 months. We are unaware of any material issues relating to
the audit.
We are
subject to income tax in many state and local jurisdictions in the United
States, none of which are individually material to our financial position,
Consolidated Balance Sheets, Consolidated Statement of Cash Flows, or
Consolidated Statement of Operations. With few exceptions, we are no
longer subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2001.
During
the six months ended March 31, 2008, we incurred $0.3 million in
restructuring liabilities for severance costs associated with the termination of
several employees within our Voice and Systems Automation wind-down operations
and facilities costs associated with the closure of our New Mexico
shared-service facility. During fiscal year 2004, we incurred
restructuring liabilities for facilities closure costs associated with the
relocation of our administrative functions from Walnut Creek, California to
Reston, Virginia, the balance of which will be paid during fiscal
2008.
The
following table summarizes the restructuring liabilities activity during the six
months ended March 31, 2008:
(in
thousands)
|
|
Facilities
closures
|
|
|
Severance
|
|
|
Total
|
|
Balance
at September 30, 2007
|
|
$ |
180 |
|
|
$ |
— |
|
|
$ |
180 |
|
Additions
|
|
|
6 |
|
|
|
273 |
|
|
|
279 |
|
Cash
payments
|
|
|
(122 |
) |
|
|
(153 |
) |
|
|
(275 |
) |
Balance
at March 31, 2008
|
|
$ |
64 |
|
|
$ |
120 |
|
|
$ |
184 |
|
As
shown in the preceding table, we had $0.2 million of restructuring
liabilities at March 31, 2008, which was included in Other accrued liabilities in
the Consolidated Balance Sheet. We expect to pay the remaining
$0.2 million liability during fiscal year 2008.
LEGAL
ISSUES
From
time to time during the normal course of business, we are a party to litigation
and/or other claims. At March 31, 2008, none of these matters
were expected to have a material impact on our financial position, results of
operations or cash flows. At both March 31, 2008 and
September 30, 2007, we had legal accruals of $1.1 million based upon
estimates of key legal matters.
In
November 2003, we were granted conditional amnesty in relation to a Department
of Justice Antitrust Division investigation involving the child support payment
processing industry. We fully cooperated with
the
investigation. In January 2008, we were advised by the DOJ that they
will no longer pursue this investigation.
On
May 31, 2006, we received a subpoena from the Philadelphia District Office
of the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues. We have cooperated, and
will continue to cooperate fully, in this investigation.
On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock. The suit alleged that
Tier and certain of its former officers issued false and misleading
statements. On July 24, 2007, the United States District Court
for the Eastern District of Virginia entered into an order denying the
plaintiff's motion for class certification for the purported class action
lawsuit. On December 3, 2007, the court granted our motion to
dismiss plaintiff's complaint, but permitted plaintiff an opportunity to file an
amended complaint. On January 29, 2008, we settled the matter
for a nominal sum and entered into a mutual settlement agreement and
release. On February 19, 2008, the United States District Court
for the Eastern District of Virginia dismissed the case with
prejudice.
BANK
LINES OF CREDIT
At
March 31, 2008, we had a credit facility that allowed us to obtain letters
of credit up to a total of $7.5 million. This credit facility,
which is scheduled to mature on September 30, 2008, grants the lender a
perfected security interest in cash collateral in an amount equal to all issued
and to be issued letters of credit. We pay 0.75% per annum for
outstanding letters of credit, but are not assessed any fees for the unused
portion of the line. As of March 31, 2008, $5.5 million of
letters of credit were outstanding under this credit facility. These
letters of credit were issued to secure performance bonds and a facility
lease.
CREDIT
RISK
We
maintain our cash in bank deposit accounts, certificates of deposit and money
market accounts. Typically, the balance in a number of these accounts
significantly exceeds federally insured limits. We have not
experienced any losses in such accounts and believe that any associated credit
risk is de
minimis.
Note 3—Investments discloses that at March 31,
2008, our investment portfolio included $31.1 million of primarily
AAA-rated auction rate municipal bonds that were collateralized with student
loans. These municipal bonds are bought and sold in the marketplace
through a bidding process sometimes referred to as a “Dutch
Auction.” After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities. In mid-February
2008, we began to experience unsuccessful auctions. An unsuccessful
auction happens when there are insufficient buyers for the securities at the
reset date. If there are no buyers in the market for a particular
auction rate security, the security holder is unable to sell the
security. Therefore, the security becomes illiquid until such time
that the market provides sufficient buyers for the security, the issuer
refinances the obligation, or the obligation reaches final
maturity. This was caused by concerns in the sub-prime mortgage
market and overall credit market issues. Because of the unsuccessful
auctions and lack of liquidity, the fair value of our auction rate securities
declined. All but one of our securities are collateralized with
student loans, the other security is a pension obligation. Securities
collateralized with student loans are guaranteed by the issuing state and the
Federal Family Education Loan Program. Under the Higher Education
Act, student loans cannot be cancelled (discharged) due to
bankruptcy. Because of this, we continue to believe the credit
quality of these securities is high and the principal
collectible. Until liquidity is restored, we may not be able to
liquidate these investments in a timely manner or at par value.
GUARANTEES
In
conjunction with our participation as a subcontractor in a three-year contract
for unemployment insurance-related services, we guaranteed the performance of
the prime contractor on the project. The contract does not establish
a limitation to the maximum potential future payments under the guarantee;
however, we estimate that the maximum potential undiscounted cost of the
guarantee is $4.5 million. In
accordance
with FASB Interpretation No. 45—Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we valued this guarantee based upon the sum of
probability-weighted present values of possible future cash flows. As
of March 31, 2008, the remaining liability was $70,000, which is being
amortized over the term of the contract. We believe the probability
is remote that the guarantee provision of this contract will be
invoked.
PERFORMANCE
BONDS
Under
certain contracts, we are required to obtain performance bonds from a licensed
surety and to post the performance bond with our customer. Fees for
obtaining the bonds are expensed over the life of each bond and are included as
a direct cost in (Loss) income
from discontinued operations, net on our Consolidated Statements of
Operations. At March 31, 2008, we had $16.9 million of
bonds posted with our customers. There were no claims pending against
any of these bonds as of March 31, 2008.
EMPLOYMENT
AGREEMENTS
As of
March 31, 2008, we had employment and change of control agreements with six
executives, a former executive and 21 other key managers. If certain
termination or change of control events were to occur under the 28 remaining
contracts as of March 31, 2008, we could be required to pay up to
$8.5 million. On March 26, 2008, we announced the
resignation of our Chief Financial Officer effective April 4, 2008, at
which time his employment agreement was terminated. Of the above
referenced amount, $3.4 million related to this employment agreement, and
effective April 4, 2008 was no longer a possible contingent
payment. See Note 14—Subsequent Event
for additional information regarding an employment agreement with our CEO that
was executed in April 2008.
As of
March 31, 2008, we had a separation agreement in place with one of our
executives, whose employment terminated March 31, 2008. Under
the terms of the agreement we are obligated to pay the executive
$0.3 million over the next six months, which consists of 12 months' base
salary, COBRA premiums for the shorter of 12 months or the period during which
she is eligible for COBRA, up to $7,500 for outplacement services and $18,333
per month for consulting services.
As of
March 31, 2008, we also had agreements with 14 key employees under which
these individuals would be entitled to receive three to twelve months of their
base salaries over a one- to three-year period, after completing defined
employment service periods. During the remainder of fiscal 2008, we
expect to recognize a maximum expense of $0.3 million for these
agreements. We expect to recognize a maximum expense of
$0.3 million during fiscal year 2009 and $39,250 during fiscal year 2010
for these agreements.
As of
March 31, 2008, we had change of control agreements with 29 key employees,
21 within our held-for-sale operations and 5 within our wind-down operations,
which we entered into beginning in February 2007. Under these
agreements, individuals are entitled to receive three to twelve months of their
base salaries plus three to twelve months of COBRA benefits should certain
change of control events occur. Under these agreements, we would be
required to pay up to $2.1 million if a defined change of control were to
occur as of March 31, 2008.
INDEMNIFICATION
AGREEMENTS
We have
indemnification agreements with each of our directors and a number of key
executives. These agreements provide such persons with indemnification to the
maximum extent permitted by our Articles of Incorporation, our Bylaws and the
General Corporation Law of the State of Delaware against all expenses, claims,
damages, judgments and other amounts (including amounts paid in settlement) for
which such persons become liable as a result of acting in any capacity on our
behalf, subject to certain limitations. We are not able to estimate
our maximum exposure under these agreements.
FORWARD
LOSSES
Throughout
the term of our customer contracts, we forecast revenues and expenses over the
total life of the contract. In accordance with generally accepted
accounting principles, if we determine that
forecasted
total expenses will probably exceed the total forecasted revenues over the term
of the contract, we record an accrual in the current period equal to the total
forecasted losses over the term of the contract, less losses recognized to date,
if any. As of both March 31, 2008 and September 30, 2007,
accruals totaling $0.9 million were included in Current
liabilities—held-for-sale on our Consolidated Balance
Sheets. As of March 31, 2008 and September 30, 2007,
accruals totaling $148,000 and $41,000, respectively, were included in Other liabilities on our
Consolidated Balance Sheets. Changes in the accrued forward loss for
Continuing Operations are reflected in Direct costs, and changes in
the accrued forward loss for Discontinued Operations are reflected as a direct
cost in (Loss) income from
discontinued operations, net, on our Consolidated Statements of
Operations. See Note 14—Subsequent
Event for additional information regarding the forward loss liability
included in Current
liabilities—held-for-sale.
During
the six months ended March 31, 2008, we purchased $321,000 of telecom
services from ITC Deltacom, Inc., a company affiliated with a member of our
Board of Directors.
Stock
options are issued under the Amended and Restated 2004 Stock Incentive Plan, or
the Plan. The Plan provides our Board of Directors discretion in
creating employee equity incentives, including incentive and non-statutory stock
options. Generally, these options vest as to 20% of the underlying
shares each year on the anniversary of the date granted and expire in ten
years. At March 31, 2008, there were 1,578,168 shares of common
stock reserved for future grants under the Plan.
Stock-based
compensation expense for all stock-based compensation awards granted was based
on the grant-date fair value using the Black-Scholes model. We
recognize compensation expense for stock option awards on a ratable basis over
the requisite service period of the award. Stock-based compensation
expense was $0.6 million and $1.4 million, respectively, for the three
and six months ended March 31, 2008, of which $0.5 million was
attributable to the December 10, 2007 acceleration of vesting in full of
options issued to our independent Board of Director members on August 24,
2006. During the three and six months ended March 31, 2007, we
recognized $0.8 million and $1.2 million, respectively, in stock based
compensation expense.
The
following table shows the weighted-average assumptions we used to calculate fair
value of share-based options using the Black-Scholes model, as well as the
weighted-average fair value of options granted and the weighted-average
intrinsic value of options exercised.
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
period that options will be outstanding (in
years)
|
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
|
|
2.76 |
% |
|
|
4.72 |
% |
|
|
3.56 |
% |
|
|
4.66 |
% |
Volatility
|
|
|
42.03 |
% |
|
|
46.67 |
% |
|
|
41.72 |
% |
|
|
47.54 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted-average
fair value of options granted
|
|
$ |
3.17 |
|
|
$ |
3.60 |
|
|
$ |
4.14 |
|
|
$ |
3.53 |
|
Weighted-average
intrinsic value of options exercised (in
thousands)
|
|
$ |
7 |
|
|
$ |
52 |
|
|
$ |
19 |
|
|
$ |
52 |
|
Expected
volatilities are based on both the implied and historical volatility of our
stock. In addition, we used historical data to estimate option
exercise and employee termination within the valuation model.
Stock
option activity for the six months ended March 31, 2008 is as
follows:
|
|
|
|
|
Weighted-average
|
|
|
|
(in
thousands, except per share data)
|
|
Shares
under option
|
|
|
Exercise
price
|
|
Remaining
contractual
term
|
|
Aggregate
intrinsic value
|
|
Options
outstanding at October 1, 2007
|
|
|
2,113 |
|
|
$ |
8.54 |
|
|
|
|
|
Granted
|
|
|
955 |
|
|
|
9.95 |
|
|
|
|
|
Exercised
|
|
|
(14 |
) |
|
|
6.87 |
|
|
|
|
|
Forfeitures
or expirations
|
|
|
(211 |
) |
|
|
8.56 |
|
|
|
|
|
Options
outstanding at March 31, 2008
|
|
|
2,843 |
|
|
$ |
9.02 |
|
6.91
years
|
|
$ |
1,945 |
|
Options
exercisable at March 31, 2008
|
|
|
1,621 |
|
|
$ |
8.91 |
|
5.68
years
|
|
$ |
1,511 |
|
As of
March 31, 2008, a total of $3.0 million of unrecognized compensation
cost related to stock options, net of estimated forfeitures, was expected to be
recognized over a 3.96 year weighted-average period.
As
described more fully in Note 12—Discontinued Operations,
in April 2007, we announced our intention to seek buyers for the divestiture of
the majority of our PSSI and GBPO operations. The assets and
liabilities associated with these disposal groups were classified as Current assets—held-for-sale
and Current
liabilities—held-for-sale on our Consolidated Balance
Sheets. The results of operations for these disposal groups were
reported as (Loss) income from
discontinued operations, net on our Consolidated Statements of
Operations.
Our
Senior Management team allocates resources to and assesses the performance of
our operations in three major categories: Electronic Payment Processing,
Wind-down Operations and Discontinued Operations. See Note 12—Discontinued Operations for additional information
regarding the discontinued operations of our PSSI and GBPO
segments. The Corporate & Eliminations column of the following
table includes corporate overhead and other costs that could not be assigned
directly to EPP or Discontinued Operations, as well as eliminations for
transactions between our continuing and discontinued
operations. Prior period results have been reclassified to conform to
the current presentation.
|
|
Continuing
Operations
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-
down
|
|
|
Corporate
&
Eliminations
|
|
|
Total
|
|
Three
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
24,575 |
|
|
$ |
1,529 |
|
|
$ |
(143 |
) |
|
$ |
25,961 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
18,736 |
|
|
|
782 |
|
|
|
— |
|
|
|
19,518 |
|
General
and administrative
|
|
|
2,465 |
|
|
|
393 |
|
|
|
4,015 |
|
|
|
6,873 |
|
Selling
and marketing
|
|
|
1,769 |
|
|
|
63 |
|
|
|
173 |
|
|
|
2,005 |
|
Depreciation
and amortization
|
|
|
892 |
|
|
|
355 |
|
|
|
83 |
|
|
|
1,330 |
|
Total
costs and expenses
|
|
|
23,862 |
|
|
|
1,593 |
|
|
|
4,271 |
|
|
|
29,726 |
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
713 |
|
|
|
(64 |
) |
|
|
(4,414 |
) |
|
|
(3,765 |
) |
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
— |
|
|
|
— |
|
|
|
824 |
|
|
|
824 |
|
Total
other income
|
|
|
— |
|
|
|
— |
|
|
|
824 |
|
|
|
824 |
|
(Loss)
income from continuing operations before taxes
|
|
|
713 |
|
|
|
(64 |
) |
|
|
(3,590 |
) |
|
|
(2,941 |
) |
Income
tax provision
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
(Loss)
income from continuing operations
|
|
$ |
701 |
|
|
$ |
(64 |
) |
|
$ |
(3,590 |
) |
|
$ |
(2,953 |
) |
|
|
Continuing
Operations
|
|
(in
thousands) |
|
|
EPP
|
|
|
|
Wind-
down
|
|
|
|
Corporate
&
Eliminations
|
|
|
|
Total
|
|
Three
months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
20,490 |
|
|
$ |
2,400 |
|
|
$ |
(93 |
) |
|
$ |
22,797 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
15,343 |
|
|
|
1,804 |
|
|
|
— |
|
|
|
17,147 |
|
General
and administrative
|
|
|
1,624 |
|
|
|
1,761 |
|
|
|
5,143 |
|
|
|
8,528 |
|
Selling
and marketing
|
|
|
1,692 |
|
|
|
279 |
|
|
|
(7 |
) |
|
|
1,964 |
|
Depreciation
and amortization
|
|
|
799 |
|
|
|
367 |
|
|
|
168 |
|
|
|
1,334 |
|
Total
costs and expenses
|
|
|
19,458 |
|
|
|
4,211 |
|
|
|
5,304 |
|
|
|
28,973 |
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
1,032 |
|
|
|
(1,811 |
) |
|
|
(5,397 |
) |
|
|
(6,176 |
) |
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
— |
|
|
|
177 |
|
|
|
177 |
|
Interest
income
|
|
|
— |
|
|
|
— |
|
|
|
607 |
|
|
|
607 |
|
Total
other income
|
|
|
— |
|
|
|
— |
|
|
|
784 |
|
|
|
784 |
|
(Loss)
income from continuing operations before taxes
|
|
|
1,032 |
|
|
|
(1,811 |
) |
|
|
(4,613 |
) |
|
|
(5,392 |
) |
Income
tax provision
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
(Loss)
income from continuing operations
|
|
$ |
1,025 |
|
|
$ |
(1,811 |
) |
|
$ |
(4,613 |
) |
|
$ |
(5,399 |
) |
|
|
Continuing
Operations
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-
down
|
|
|
Corporate
&
Eliminations
|
|
|
Total
|
|
Six
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
52,523 |
|
|
$ |
2,675 |
|
|
$ |
(282 |
) |
|
$ |
54,916 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
39,854 |
|
|
|
1,898 |
|
|
|
— |
|
|
|
41,752 |
|
General
and administrative
|
|
|
4,774 |
|
|
|
846 |
|
|
|
8,362 |
|
|
|
13,982 |
|
Selling
and marketing
|
|
|
3,656 |
|
|
|
182 |
|
|
|
281 |
|
|
|
4,119 |
|
Depreciation
and amortization
|
|
|
1,724 |
|
|
|
726 |
|
|
|
175 |
|
|
|
2,625 |
|
Total
costs and expenses
|
|
|
50,008 |
|
|
|
3,652 |
|
|
|
8,818 |
|
|
|
62,478 |
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
2,515 |
|
|
|
(977 |
) |
|
|
(9,100 |
) |
|
|
(7,562 |
) |
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense)
|
|
|
(2 |
) |
|
|
— |
|
|
|
1,792 |
|
|
|
1,790 |
|
Total
other income (expense)
|
|
|
(2 |
) |
|
|
— |
|
|
|
1,792 |
|
|
|
1,790 |
|
(Loss)
income from continuing operations before taxes
|
|
|
2,513 |
|
|
|
(977 |
) |
|
|
(7,308 |
) |
|
|
(5,772 |
) |
Income
tax provision
|
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
(Loss)
income from continuing operations
|
|
$ |
2,485 |
|
|
$ |
(977 |
) |
|
$ |
(7,308 |
) |
|
$ |
(5,800 |
) |
|
|
Continuing
Operations
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-
down
|
|
|
Corporate
&
Eliminations
|
|
|
Total
|
|
Six
months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
42,729 |
|
|
$ |
5,032 |
|
|
$ |
(163 |
) |
|
$ |
47,598 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
31,925 |
|
|
|
3,366 |
|
|
|
— |
|
|
|
35,291 |
|
General
and administrative
|
|
|
2,937 |
|
|
|
2,192 |
|
|
|
8,781 |
|
|
|
13,910 |
|
Selling
and marketing
|
|
|
3,248 |
|
|
|
481 |
|
|
|
24 |
|
|
|
3,753 |
|
Depreciation
and amortization
|
|
|
1,602 |
|
|
|
734 |
|
|
|
330 |
|
|
|
2,666 |
|
Total
costs and expenses
|
|
|
39,712 |
|
|
|
6,773 |
|
|
|
9,135 |
|
|
|
55,620 |
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
3,017 |
|
|
|
(1,741 |
) |
|
|
(9,298 |
) |
|
|
(8,022 |
) |
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
— |
|
|
|
986 |
|
|
|
986 |
|
Interest
income
|
|
|
— |
|
|
|
— |
|
|
|
1,484 |
|
|
|
1,484 |
|
Total
other income
|
|
|
— |
|
|
|
— |
|
|
|
2,470 |
|
|
|
2,470 |
|
(Loss)
income from continuing operations before taxes
|
|
|
3,017 |
|
|
|
(1,741 |
) |
|
|
(6,828 |
) |
|
|
(5,552 |
) |
Income
tax provision
|
|
|
67 |
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
(Loss)
income from continuing operations
|
|
$ |
2,950 |
|
|
$ |
(1,741 |
) |
|
$ |
(6,828 |
) |
|
$ |
(5,619 |
) |
Our
total assets for each of these businesses are shown in the following
table:
(in
thousands)
|
|
March
31, 2008
|
|
|
September
30, 2007
|
|
Continuing
operations:
|
|
|
|
|
|
|
EPP
|
|
$ |
98,207 |
|
|
$ |
96,527 |
|
Wind-down
|
|
|
6,666 |
|
|
|
8,508 |
|
Corporate
(1)
|
|
|
19,062 |
|
|
|
24,521 |
|
Assets
for continuing operations
|
|
|
123,935 |
|
|
|
129,556 |
|
Assets
of discontinued operations
|
|
|
39 |
|
|
|
672 |
|
Assets
held-for-sale
|
|
|
35,500 |
|
|
|
36,196 |
|
Total
assets
|
|
$ |
159,474 |
|
|
$ |
166,424 |
|
(1) Represents
assets for our continuing businesses that are not assignable to a specific
operation.
|
|
DIVESTITURES
On
December 31, 2007, we sold our rights to service a contract for Independent
Validation and Verification, or IV&V, services to a third party for $0.2
million in cash. Under the terms of the agreement, we assigned our
future rights and obligations under the contract to the third
party. However, we retained ownership of all assets and liabilities
for our IV&V business that were on our balance sheet as of December 31,
2007, including $0.1 million of deferred revenues. The reversal of
these deferred revenues, combined with the cash that the buyer paid for this
business, resulted in a $0.3 million gain, which we recorded as Income from discontinued operations,
net on our Consolidated Statements of Operations. On
March 1, 2008, we sold our rights to service a contract for Health and
Human Services, or HHS, to a third party, which resulted in a $25,000 gain,
which we recorded as Income
from discontinued operations, net on our Consolidated Statements of
Operations.
The
following schedule shows the current carrying value of the assets and
liabilities for the IV&V and HHS businesses included in Assets of discontinued
operations and Liabilities of discontinued
operations on our Consolidated Balance Sheets.
(in
thousands)
|
|
March
31, 2008
|
|
|
September
30, 2007
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
|
Current
assets
|
|
$ |
36 |
|
|
$ |
578 |
|
Goodwill
|
|
|
— |
|
|
|
91 |
|
Property
& equipment
|
|
|
3 |
|
|
|
2 |
|
Other
assets
|
|
|
— |
|
|
|
1 |
|
Total
assets
|
|
|
39 |
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
41 |
|
|
|
421 |
|
Total
liabilities
|
|
|
41 |
|
|
|
421 |
|
Net
assets and liabilities of disposal group
|
|
$ |
(2 |
) |
|
$ |
251 |
|
ASSET
GROUPS HELD-FOR-SALE
Early
in fiscal 2007, we undertook a strategic initiative to determine how we could
best utilize our financial and management resources. As a result of
that initiative, we concluded that shareholder value could be maximized if we
focused on our core business—Electronic Payment Processing. As a
result, in April 2007, we announced our intention to seek buyers for the
divestiture of the majority of our PSSI and GBPO segments. We
classified the assets and liabilities associated with these divestures as Current assets—held-for-sale
and Current
liabilities—held-for-sale in accordance with SFAS 144—Accounting for the Impairment or
Disposal of Long-Lived Assets. Because the practice areas that
comprise the GBPO and PSSI segments have widely divergent operations and
customer bases, each practice area, which represents a separate business, is
being marketed for divestiture separately. In total, we expect to
divest these practice areas through a series of at least six transactions to
separate buyers.
The
following schedule shows the current carrying value of the assets and
liabilities in the GBPO and PSSI segments that are in the disposal group as of
March 31, 2008 and September 30, 2007.
|
|
March
31, 2008
|
|
|
September
30, 2007
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
3,519 |
|
|
$ |
7,035 |
|
|
$ |
51 |
|
|
$ |
10,605 |
|
|
$ |
4,009 |
|
|
$ |
6,548 |
|
|
$ |
39 |
|
|
$ |
10,596 |
|
Property,
equipment and
software,
net
|
|
|
5,620 |
|
|
|
9,353 |
|
|
|
(476 |
) |
|
|
14,497 |
|
|
|
5,606 |
|
|
|
6,657 |
|
|
|
(476 |
) |
|
|
11,787 |
|
Goodwill
|
|
|
2,899 |
|
|
|
7,497 |
|
|
|
— |
|
|
|
10,396 |
|
|
|
3,219 |
|
|
|
8,816 |
|
|
|
— |
|
|
|
12,035 |
|
Other
assets
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
1,778 |
|
|
|
— |
|
|
|
1,778 |
|
Total
assets
|
|
|
12,038 |
|
|
|
23,887 |
|
|
|
(425 |
) |
|
|
35,500 |
|
|
|
12,834 |
|
|
|
23,799 |
|
|
|
(437 |
) |
|
|
36,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
2,037 |
|
|
|
8,776 |
|
|
|
— |
|
|
|
10,813 |
|
|
|
2,944 |
|
|
|
7,619 |
|
|
|
— |
|
|
|
10,563 |
|
Other
liabilities
|
|
|
173 |
|
|
|
7 |
|
|
|
— |
|
|
|
180 |
|
|
|
283 |
|
|
|
18 |
|
|
|
— |
|
|
|
301 |
|
Total
liabilities
|
|
|
2,210 |
|
|
|
8,783 |
|
|
|
— |
|
|
|
10,993 |
|
|
|
3,227 |
|
|
|
7,637 |
|
|
|
— |
|
|
|
10,864 |
|
Net
assets and liabilities of disposal group
|
|
$ |
9,828 |
|
|
$ |
15,104 |
|
|
$ |
(425 |
) |
|
$ |
24,507 |
|
|
$ |
9,607 |
|
|
$ |
16,162 |
|
|
$ |
(437 |
) |
|
$ |
25,332 |
|
We
performed impairment analyses of all held-for-sale assets in accordance with
SFAS 144 and SFAS 142. As a result of this analysis, we
determined that two businesses, one within the PSSI operations and one within
the GBPO operations, had carrying values that exceeded fair value. As
a result, during the three and six months ended March 31, 2008, we recorded
an impairment expense of $3.1 million and $3.5 million, respectively,
of which $1.3 million and $1.7 million, respectively, relates to
goodwill impairment under SFAS 142 and $1.7 million and $1.8 million,
respectively relates to long-lived asset impairment under SFAS
144. This impairment is included in (Loss) income from discontinued
operations.
SUMMARY
OF REVENUE AND NET (LOSS) INCOME—DISCONTINUED OPERATIONS
Except
for minor transitional activities, we do not believe that we will have any
ongoing involvement or cash flows in any businesses that we classified as
held-for-sale or from our former IV&V and HHS businesses. Thus,
we classified the results of operations for these businesses as (Loss) income from discontinued
operations, net on our Consolidated Statements of Operations in
accordance with SFAS 144. The following table summarizes our revenue
and net (loss) income generated by these operations during the three and six
months ended March 31, 2008 and 2007.
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
(Discontinued operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
7,074 |
|
|
$ |
10,519 |
|
|
$ |
14,207 |
|
|
$ |
21,074 |
|
PSSI
|
|
|
7,032 |
|
|
|
6,955 |
|
|
|
13,641 |
|
|
|
14,319 |
|
Other/eliminations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
revenues
|
|
$ |
14,106 |
|
|
$ |
17,474 |
|
|
$ |
27,848 |
|
|
$ |
35,393 |
|
Income
before gain (Discontinued operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
3,217 |
|
|
$ |
2,246 |
|
|
$ |
4,946 |
|
|
$ |
3,940 |
|
PSSI
|
|
|
(4,051 |
) |
|
|
(561 |
) |
|
|
(4,446 |
) |
|
|
28 |
|
Other/eliminations
|
|
|
239 |
|
|
|
(147 |
) |
|
|
321 |
|
|
|
4 |
|
Income
before gain on discontinued operations
|
|
|
(595 |
) |
|
|
1,538 |
|
|
|
821 |
|
|
|
3,972 |
|
Gain
on discontinued operations
|
|
|
11 |
|
|
|
7,599 |
|
|
|
11 |
|
|
|
7,599 |
|
Net
(loss) income
|
|
$ |
(584 |
) |
|
$ |
9,137 |
|
|
$ |
832 |
|
|
$ |
11,571 |
|
AUSTRALIAN
OPERATIONS
In
fiscal 2002, we disposed of most of our Australian operations, and in fiscal
2003 we requested and received $6.5 million of federal income tax refunds
associated with this disposal. Although we received the refund in
October 2003, we fully reserved the entire balance because of uncertainty about
the final review and resolution of this transaction by the Internal Revenue
Service. Since October 2003, we increased our reserve by
$1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.
In
March 2007, we were notified by the Internal Revenue Service that its Joint
Committee on Taxation had completed its review and had approved the
$6.5 million of refund. As a result, during the second quarter
of fiscal 2007, we reversed the $6.5 million of reserve for the refund and
the $1.1 million reserve for potential interest and
penalties. This $7.6 million reversal has been recorded on our
Consolidated Statements of Operations as (Loss) income from discontinued
operations in accordance with SFAS 144.
The
following table presents the computation of basic and diluted (loss) earnings
per share:
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations, net of income taxes
|
|
$ |
(2,953 |
) |
|
$ |
(5,399 |
) |
|
$ |
(5,800 |
) |
|
$ |
(5,619 |
) |
Discontinued
operations, net of income taxes
|
|
|
(584 |
) |
|
|
9,137 |
|
|
|
832 |
|
|
|
11,571 |
|
Net
(loss) income
|
|
$ |
(3,537 |
) |
|
$ |
3,738 |
|
|
$ |
(4,968 |
) |
|
$ |
5,952 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
19,551 |
|
|
|
19,501 |
|
|
|
19,547 |
|
|
|
19,500 |
|
Effects
of dilutive common stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adjusted
weighted-average shares
|
|
|
19,551 |
|
|
|
19,501 |
|
|
|
19,547 |
|
|
|
19,500 |
|
(Loss)
earnings per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.15 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
From
discontinued operations
|
|
|
(0.03 |
) |
|
|
0.47 |
|
|
|
0.04 |
|
|
|
0.59 |
|
(Loss)
earnings per basic and diluted share
|
|
$ |
(0.18 |
) |
|
$ |
0.19 |
|
|
$ |
(0.25 |
) |
|
$ |
0.31 |
|
The
following options were not included in the computation of diluted (loss)
earnings per share because the exercise price was greater than the average
market price of our common stock for the periods stated, and, therefore, the
effect would be anti-dilutive:
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
options excluded from computation of diluted (loss) earnings per
share
|
|
|
2,005 |
|
|
|
1,677 |
|
|
|
1,550 |
|
|
|
1,703 |
|
The
following common stock equivalents were excluded from the calculation of diluted
(loss) earnings per share, since their effect would have been
anti-dilutive:
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Common
stock equivalents excluded from computation of diluted (loss) earnings per
share
|
|
|
222 |
|
|
|
116 |
|
|
|
291 |
|
|
|
104 |
|
Discontinued
Operations
On
April 1, 2008, we sold our rights to service our Call Center project to a
third party for $1.00. Under the terms of the agreement, we assigned
our future rights and obligations under the contract to the third party,
including certain assets and liabilities for our call center project that were
on our balance sheet as of April 1, 2008. We have entered into
an extended warranty plan to provide transition and support services until
June 30, 2009. In addition, we have reserved $0.2 million
in escrow, which will be released back to us if the buyer is successful in
winning the June 2009 re-bid for the contract. As a result of this
sale, we are able to eliminate our accrued forward loss liability of
$0.9 million, thus resulting in a $0.1 million loss, which will be
recorded as (Loss) income from
discontinued operations, net on our Consolidated Statement of Operations
in future reporting periods.
Employment
Agreement
On
April 30, 2008, Tier Technologies, Inc. entered into an employment agreement
with Ronald L. Rossetti, providing for Mr. Rossetti’s employment as chief
executive officer of the registrant for a period of three years from the date of
the agreement. Mr. Rossetti’s previous employment agreement expired
in 2007. Mr. Rossetti is currently the chief executive officer of the
registrant and chairman of its board of directors.
The
employment agreement provides that on or after April 30, 2010 (or prior to such
time with the agreement of the compensation committee of the registrant’s board
of directors), Mr. Rossetti may relinquish his role as chief executive officer
and serve for the remainder of the term of the agreement as the non-executive
chairman of the registrant’s board of directors and as its lead
director.
Pursuant
to the employment agreement, Mr. Rossetti will receive a base salary of $400,000
per year for the first year, such salary to be subject to increase but not
decrease by the board thereafter, and, while serving as chief executive officer,
will be entitled to participate in all employee benefit programs for which he is
eligible. In addition, as long as Mr. Rossetti is serving as the
registrant’s chief executive officer, he will be entitled to participate in the
registrant’s incentive and equity compensation programs for senior-level
executives. Mr. Rossetti’s maximum annual incentive opportunity will
be at least 100% of his base salary for the applicable fiscal
year. The employment agreement also provides for Mr. Rossetti to
participate in an enterprise value award plan, subject to approval by the
compensation committee of the registrant’s board of directors (which has been
provided), which would provide grants of up to an aggregate of 550,000
restricted stock units (to be paid in shares of the registrant’s common stock to
the extent available under the registrant’s Amended and Restated 2004 Stock
Incentive Plan, with any
amount
that cannot be paid in shares thereunder to be paid in cash) to Mr. Rossetti if
the registrant’s common stock achieves the price targets set forth in the plan,
which is included as an exhibit to the employment agreement. Such
restricted stock units will vest in full on the earliest of (i) the expiration
of the term of the employment agreement, (ii) three years after the end of the
measurement period in which they are earned, (iii) termination of Mr. Rossetti’s
employment for death or disability, (iv) termination of Mr. Rossetti’s
employment by the registrant other than for cause (as defined in the employment
agreement, (v) termination of Mr. Rossetti’s employment by Mr. Rossetti for good
reason (as defined in the employment agreement), or (vi) a change in control of
the registrant while Mr. Rossetti remains employed by the
registrant. If Mr. Rossetti moves to the non-executive chairman
position and ceases to be chief executive officer, his compensation will decline
to the amount of his base salary (and the continued ability to vest in the
Enterprise Value Award).
The
registrant has also agreed to continue to provide Mr. Rossetti with a corporate
apartment located within a reasonable daily commuting distance of the
registrant’s corporate headquarters and to continue to reimburse his or his
spouse’s airfare for travel between the city of his residence and the
registrant’s corporate headquarters. The registrant will make a
gross-up payment to Mr. Rossetti for any taxes associated with this
benefit. These benefits apply while he is the chief executive
officer.
If Mr.
Rossetti’s employment terminates as a result of disability, all of Mr.
Rossetti’s options, restricted stock grants and restricted stock units will vest
in full upon such termination, and the registrant will pay Mr. Rossetti such
other amounts and provide such other benefits as set forth in the employment
agreement. In addition, if Mr. Rossetti’s employment terminates as a
result of his death, Mr. Rossetti terminates his employment for good reason or
the registrant terminates Mr. Rossetti’s employment without cause, the
registrant will pay to him (or his estate) an amount equal to his base salary in
effect on the date of the termination plus a bonus equal to the average bonus
paid to Mr. Rossetti for the past three years, provided that the payment on
death may be eliminated if the company obtains life insurance coverage for his
benefit as provided in the agreement. Further, if Mr. Rossetti
terminates his employment for good reason or the registrant terminates Mr.
Rossetti’s employment without cause while Mr. Rossetti is serving as the
registrant’s chief executive officer, the registrant will pay to Mr. Rossetti a
portion of the average bonus paid to Mr. Rossetti for the past three years,
prorated based on the number of months he worked in the fiscal year in which the
termination occurs. Payments described in this and the next paragraph
are generally subject to a requirement that Mr. Rossetti release all releaseable
claims against the company.
In the
event of a change in control of the registrant while Mr. Rossetti remains
employed by the registrant, in addition to the vesting of options, restricted
stock and restricted stock units described above, Mr. Rossetti may be entitled
to payments equal to up to two times his base salary plus the average bonus paid
to Mr. Rossetti for the past three years, depending on the length of his
employment after such change in control or the termination of his employment in
connection with such change in control, all as set forth in the employment
agreement.
In
addition, the registrant has agreed to make specified tax gross-up payments to
Mr. Rossetti if he becomes subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code upon a change of control of the registrant (commonly
referred to as a parachute tax gross-up).
This
summary of the employment agreement and the exhibits thereto is qualified by
reference to such agreements, which are filed herewith as Exhibit 10.1, and are
incorporated herein by reference.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report, as a result of the risks, uncertainties and
assumptions discussed under Item 1A—Risk Factors of this Quarterly Report on
Form 10-Q and other factors discussed in this section. For more
information regarding what constitutes a forward-looking statement, refer to
Private Securities Litigation Reform Act Safe Harbor Statement on page i.
The
following discussion and analysis is intended to help the reader understand the
results of operations and financial condition of Tier Technologies, Inc. This
discussion and analysis is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes to the
financial statements.
OVERVIEW
We
provide federal, state and local government and other public and private sector
clients with electronic payment and other transaction processing services, as
well as software and systems integration services. During fiscal 2007
we undertook a strategic initiative that evaluated the risks, costs, benefits
and growth potential of each of our product lines and services. In
addition, we assessed the degree to which incremental investments or managerial
changes were needed to maximize the profitability of each product
line. Based upon this rigorous review, we concluded that we could
best maximize our long-term profitability and stockholder value if we focused on
our core Electronic Payment Processing, or EPP, business. As a
result, in April 2007 we began to seek buyers for the divestiture of the
majority of our Government Business Process Outsourcing, or GBPO, operations and
our Packaged Systems and Software Integration, or PSSI, operations.
On our
Consolidated Balance Sheets, we classified the associated assets and liabilities
for each of these businesses as held-for-sale, in accordance with SFAS 144—Accounting for the Impairment or
Disposal of Long-Lived Assets, or SFAS 144. In our
Consolidated Statements of Operations, we have classified the operations of
these businesses as (Loss)
income from discontinued operations, net, because we do not expect to
have continuing involvement or cash flows from these businesses after the
divestitures. All assets and liabilities that are reported in these
financial statements as “held-for-sale” are reported at the lower of the
carrying cost or fair value less cost to sell. Although we report
these held-for-sale operations as “discontinued” on our Consolidated Statements
of Operations, we continue to operate these operations as efficiently and
effectively as possible in order to maximize the proceeds that we expect to
receive from the eventual disposition of these operations.
We also
have a number of businesses within GBPO and PSSI whose operations were neither
compatible with our long-term strategic direction nor complementary with other
businesses that we were divesting. We decided to complete, and in
some cases extend, the term of the existing contracts for these businesses for
the near-term. We believe that these businesses will be phased out
over the next five years. We continue to report the businesses as
continuing operations in our consolidated financial statements, in accordance
with SFAS 144.
SUMMARY
OF OPERATING RESULTS
For the
three months ended March 31, 2008, we reported a net loss of
$3.5 million, or $0.18 per fully diluted share, compared with net income of
$3.7 million, or $0.19 per fully diluted share, for the three months ended
March 31, 2007. Our continuing operations reported a loss of
$3.0 million, or $0.15 per fully diluted share, while our discontinued
operations reported a net loss of $0.6 million, or $0.03 per fully diluted
share, for the three months ended March 31, 2008.
For the
six months ended March 31, 2008, we reported a net loss of
$5.0 million, or $0.25 per fully diluted share, compared with net income of
$6.0 million, or $0.31 per fully diluted share, for the six months ended
March 31, 2007. Our continuing operations reported a loss of
$5.8 million, or $0.29 per fully diluted share, while our discontinued
operations reported net income of $0.8 million, or $0.04 per fully diluted
share, for the six months ended March 31, 2008.
Our
continuing operations are composed of our EPP business, certain businesses that
we are winding down and corporate costs. On a standalone basis, our
EPP business reported income of $0.7 million, or $0.04 per fully diluted
share, during the three months ended March 31, 2008, which is a
$0.3 million, or 32.1% decrease over the same period last
year. For the six months ended March 31, 2008, our EPP business
reported income of $2.5 million, or $0.13 per fully diluted share, which is
a $0.5 million, or 15.8% decrease over the same period last
year. The results for the six months ended March 31, 2007
included a one-time legal settlement resulting in a $0.2 million refund of
excess interchange fees. While the number of transactions and the total dollars
processed by our EPP business rose 30.2% and 29.5%, respectively, the size of
the average payment that we processed was 4.4% lower than the six months ended
March 31, 2007. Although EPP provides electronic payment
processing services to over 3,000 clients, approximately 19.9% of EPP’s revenues
generated during the six months ended March 31, 2008, resulted from
transactions processed for the Internal Revenue Service.
Our
wind-down operations reported a loss of $64,000 during the three months ended
March 31, 2008, which is a $1.7 million, or 96.5%, improvement over
the same period last year. For the six months ended March 31,
2008, we reported a loss of $1.0 million, or $0.05 per fully diluted share,
which is a $0.8 million, or 43.9% improvement over last
year. These improvements are primarily due to the absence of one-time
contract settlement costs that were reported during the three months ended
March 31, 2007. As we continue to wind down these operations, we
expect that the level of the losses will decline in future
quarters. During fiscal 2008, we expect to wind down our Pension
business that generated losses totaling $0.3 million during the six months
ended March 31, 2008. Our Voice and Systems Automation business,
which reported a $0.7 million loss during the six months ended
March 31, 2008 is expected to be wound down over a five-year
period. Our corporate overhead contributed $3.6 million to the
overall net loss from continuing operations, or $0.18 per fully diluted share
for the three months ended March 31, 2008, and $7.3 million, or $0.37
per fully diluted share for the six months ended March 31,
2008.. This includes a significant portion of costs for
shared-services that could not be assigned directly to any business
unit. We expect that the need for, and cost of, these shared-services
and other corporate costs will diminish after we divest and/or wind down our
GBPO and PSSI businesses.
For the
three months ended March 31, 2008, our discontinued operations from our
held-for-sale GBPO and PSSI operations reported a loss of $0.6 million, or
$0.03 per fully diluted share, a decrease of $9.7 million from the same
period last year. For the six months ended March 31, 2008, we
reported income of $0.8 million, or $0.04 per fully diluted share, a
decrease of $10.7 million, or 92.8% over the same period last
year. The primary reason for the decrease over the same periods last
year is the recording of an income tax reserve reversal relating to our
previously disposed Australian operations, which contributed $7.6 million
to income from discontinued operations for the three and six months ended
March 31, 2007. The expiration of two GBPO contracts and the
completion of a number of PSSI projects during fiscal 2007, as well as the
expiration of another GBPO contract in June 2008 are expected to result in lower
earnings in future years.
EXPECTATIONS
FOR 2008
We
expect that fiscal 2008 will be another transition year as we position our
company for the long-term growth of the EPP business. In fiscal 2008,
we expect to see continued significant revenue growth in our EPP business,
driven not only by revenue growth initiatives, but also by increasing consumer
demand for electronic payment processing alternatives. Furthermore,
we are undertaking two key initiatives designed to facilitate the growth of the
EPP business. First, we are analyzing our processing platforms and
infrastructure to determine what actions are needed to improve efficiency and
reduce costs, while providing the capacity for future growth. Based
on our current conclusions, we expect to make new investments to consolidate our
current EPP technology in fiscal 2008. Second, we expect to
move
EPP beyond focusing primarily on governmental clients into the commercial
biller-direct payment processing space. In addition to these two
EPP-specific initiatives, we also intend to right-size our corporate overhead
once the disposition of our non-core assets is complete. In calendar
year 2008, we also expect to finalize the divestiture of the held-for-sale
businesses and use the proceeds from these dispositions to fund future growth in
our EPP business.
While
we expect that certain of these initiatives will produce some cost savings
during fiscal 2008, we believe the cost of implementing these initiatives will
outweigh those savings during fiscal 2008 and we expect to incur a net loss in
fiscal 2008. However, once the implementation of these
initiatives is complete, we believe that our company will report long-term,
sustainable profitability.
RESULTS
OF OPERATIONS
The
following tables provide an overview of our results of operations for the three
and six months ended March 31, 2008 and 2007:
|
|
Three months
ended
|
|
|
Variance
|
|
|
|
March
31,
|
|
|
2008
vs. 2007
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$ |
25,961 |
|
|
$ |
22,797 |
|
|
$ |
3,164 |
|
|
|
13.9 |
% |
Costs
and expenses
|
|
|
29,726 |
|
|
|
28,973 |
|
|
|
753 |
|
|
|
2.6 |
% |
Loss
from continuing operations before other income and income
taxes
|
|
|
(3,765 |
) |
|
|
(6,176 |
) |
|
|
2,411 |
|
|
|
39.0 |
% |
Other
income
|
|
|
824 |
|
|
|
784 |
|
|
|
40 |
|
|
|
5.1 |
% |
Loss
from continuing operations before income taxes
|
|
|
(2,941 |
) |
|
|
(5,392 |
) |
|
|
2,451 |
|
|
|
45.5 |
% |
Income
tax provision
|
|
|
12 |
|
|
|
7 |
|
|
|
5 |
|
|
|
71.4 |
% |
Loss
from continuing operations
|
|
|
(2,953 |
) |
|
|
(5,399 |
) |
|
|
2,446 |
|
|
|
45.3 |
% |
(Loss)
income from discontinued operations, net
|
|
|
(584 |
) |
|
|
9,137 |
|
|
|
(9,721 |
) |
|
|
(106.4 |
)% |
Net
(loss) income
|
|
$ |
(3,537 |
) |
|
$ |
3,738 |
|
|
$ |
(7,275 |
) |
|
|
(194.6 |
)% |
|
|
Six months
ended
|
|
|
Variance
|
|
|
|
March
31,
|
|
|
2008
vs. 2007
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$ |
54,916 |
|
|
$ |
47,598 |
|
|
$ |
7,318 |
|
|
|
15.4 |
% |
Costs
and expenses
|
|
|
62,478 |
|
|
|
55,620 |
|
|
|
6,858 |
|
|
|
12.3 |
% |
Loss
from continuing operations before other income and income
taxes
|
|
|
(7,562 |
) |
|
|
(8,022 |
) |
|
|
460 |
|
|
|
5.7 |
% |
Other
income
|
|
|
1,790 |
|
|
|
2,470 |
|
|
|
(680 |
) |
|
|
(27.5 |
)% |
Loss
from continuing operations before income taxes
|
|
|
(5,772 |
) |
|
|
(5,552 |
) |
|
|
(220 |
) |
|
|
(4.0 |
)% |
Income
tax provision
|
|
|
28 |
|
|
|
67 |
|
|
|
(39 |
) |
|
|
(58.2 |
)% |
Loss
from continuing operations
|
|
|
(5,800 |
) |
|
|
(5,619 |
) |
|
|
(181 |
) |
|
|
(3.22 |
)% |
Income
from discontinued operations, net
|
|
|
832 |
|
|
|
11,571 |
|
|
|
(10,739 |
) |
|
|
(92.8 |
)% |
Net
(loss) income
|
|
$ |
(4,968 |
) |
|
$ |
5,952 |
|
|
$ |
(10,920 |
) |
|
|
(183.5 |
)% |
The
following sections describe the reasons for key variances in the results that we
are reporting for continuing and discontinued operations.
CONTINUING
OPERATIONS
The
continuing operations section of our Consolidated Statements of Operations
includes the results of operations of our core EPP business, certain businesses
that we expect to wind down over the next five years and general corporate
operations. The following table presents the revenues and expenses
for our continuing operations for the three and six months ended March 31,
2008 and 2007. This table is followed by a detailed analysis
summarizing reasons for variances in these financial results.
|
|
Three
months ended
March
31,
|
|
|
Six
months ended
March
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
25,961 |
|
|
$ |
22,797 |
|
|
$ |
54,916 |
|
|
$ |
47,598 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
19,518 |
|
|
|
17,147 |
|
|
|
41,752 |
|
|
|
35,291 |
|
General
and administrative
|
|
|
6,873 |
|
|
|
8,528 |
|
|
|
13,982 |
|
|
|
13,910 |
|
Selling
and marketing
|
|
|
2,005 |
|
|
|
1,964 |
|
|
|
4,119 |
|
|
|
3,753 |
|
Depreciation
and amortization
|
|
|
1,330 |
|
|
|
1,334 |
|
|
|
2,625 |
|
|
|
2,666 |
|
Total
costs and expenses
|
|
|
29,726 |
|
|
|
28,973 |
|
|
|
62,478 |
|
|
|
55,620 |
|
Loss
from continuing operations before other income and income
taxes
|
|
|
(3,765 |
) |
|
|
(6,176 |
) |
|
|
(7,562 |
) |
|
|
(8,022 |
) |
Other
income
|
|
|
824 |
|
|
|
784 |
|
|
|
1,790 |
|
|
|
2,470 |
|
Loss
from continuing operations before income taxes
|
|
|
(2,941 |
) |
|
|
(5,392 |
) |
|
|
(5,772 |
) |
|
|
(5,552 |
) |
Income
tax provision
|
|
|
12 |
|
|
|
7 |
|
|
|
28 |
|
|
|
67 |
|
Loss
from continuing operations
|
|
$ |
(2,953 |
) |
|
$ |
(5,399 |
) |
|
$ |
(5,800 |
) |
|
$ |
(5,619 |
) |
Revenues (Continuing
Operations)
The
following table compares the revenues generated by our continuing operations
during the three and six months ended March 31, 2008 and 2007:
|
|
Three
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
24,575 |
|
|
$ |
20,490 |
|
|
$ |
4,085 |
|
|
|
19.9 |
% |
Wind-down
|
|
|
1,529 |
|
|
|
2,400 |
|
|
|
(871 |
) |
|
|
(36.3 |
)% |
Corporate
|
|
|
(143 |
) |
|
|
(93 |
) |
|
|
(50 |
) |
|
|
(53.8 |
)% |
Total
|
|
$ |
25,961 |
|
|
$ |
22,797 |
|
|
$ |
3,164 |
|
|
|
13.9 |
% |
|
|
Six
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
52,523 |
|
|
$ |
42,729 |
|
|
$ |
9,794 |
|
|
|
22.9 |
% |
Wind-down
|
|
|
2,675 |
|
|
|
5,032 |
|
|
|
(2,357 |
) |
|
|
(46.8 |
)% |
Corporate
|
|
|
(282 |
) |
|
|
(163 |
) |
|
|
(119 |
) |
|
|
(73.0 |
)% |
Total
|
|
$ |
54,916 |
|
|
$ |
47,598 |
|
|
$ |
7,318 |
|
|
|
15.4 |
% |
The
following sections discuss the key drivers that caused these revenue changes
from our continuing operations.
EPP
Revenues: EPP provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients. EPP’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that we
charge for each transaction that we process. EPP generated
$24.6 million of revenues during the three months ended March 31,
2008, a $4.1 million, or 19.9%, increase over the three months ended
March 31, 2007. During the three months ended March 31,
2008, we processed 20.3% more transactions than we did in the same period last
year, representing 26.5% more dollars. All of our payment processing
verticals incurred a 20 to 30% growth rate, except our educational institution
vertical, which incurred a minimal decrease, due to the absence of one
contract. During the six months ended March 31, 2008, EPP
generated $52.5 million of revenues, a $9.8 million, or 22.9%,
increase over the same period last year. During the six months ended
March 31, 2008, we processed 30.2% more transactions than we did during the
six months ended March 31, 2007, representing 29.5% more
dollars.
As an
increasing number of public and private sector entities strive to meet rising
consumer demand for electronic payment alternatives, we believe our renewed
focus on our core EPP business will continue to produce significant revenue
growth for the foreseeable future.
Wind-down
Revenues: During the three months ended March 31, 2008,
our two wind-down operations generated $1.5 million in revenues, a
$0.9 million, or 36.3%, decrease from the three months ended March 31,
2007. The completion of maintenance contracts during fiscal 2007
within our Voice and Systems Automation, or VSA, business contributed
$0.8 million to the decline in revenues. During the six months
ended March 31, 2008, our wind-down operations generated $2.7 million,
a $2.4 million or 46.8%, decrease from the six months ended March 31,
2007. Our Pension business contributed $1.3 million to the
overall decline, in which one project contributed $0.7 million to the
decline and another contributed $0.6 million. The completion of
maintenance projects within our VSA business during fiscal 2007 contributed
$1.1 million to the decline. As we wind down these operations,
we will continue to see decreased revenues throughout fiscal 2008.
Corporate
Operations/Eliminations: During the three and six months ended
March 31, 2008, we eliminated $143,000 and $282,000, respectively, of
revenues for transactions processed by EPP for our GBPO business (which is
included in discontinued operations). These amounts are $50,000 and
$119,000, respectively, greater than the amounts eliminated during the three and
six months ended March 31, 2007, because of a rise in the number of
transactions that EPP processed for our GBPO business.
Direct Costs (Continuing
Operations)
Direct
costs, which represent costs directly attributable to providing services to
clients, include: payroll and payroll-related costs; credit card interchange
fees and assessments; travel-related expenditures; amortization of intellectual
property; amortization and depreciation of project-related equipment, hardware
and software purchases; and the cost of hardware, software and equipment sold to
clients. The following table provides a year-over-year comparison of
direct costs incurred by our continuing operations during the three and six
months ended March 31, 2008 and 2007:
|
|
Three
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
Direct
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
18,736 |
|
|
$ |
15,343 |
|
|
$ |
3,393 |
|
|
|
22.1 |
% |
Wind-down
|
|
|
782 |
|
|
|
1,804 |
|
|
|
(1,022 |
) |
|
|
(56.7 |
)% |
Total
|
|
$ |
19,518 |
|
|
$ |
17,147 |
|
|
$ |
2,371 |
|
|
|
13.8 |
% |
|
|
Six
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Direct
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
39,854 |
|
|
$ |
31,925 |
|
|
$ |
7,929 |
|
|
|
24.8 |
% |
Wind-down
|
|
|
1,898 |
|
|
|
3,366 |
|
|
|
(1,468 |
) |
|
|
(43.6 |
)% |
Total
|
|
$ |
41,752 |
|
|
$ |
35,291 |
|
|
$ |
6,461 |
|
|
|
18.3 |
% |
The
following sections discuss the key drivers that caused these changes in the
direct costs for continuing operations.
EPP Direct
Costs: Consistent with the growth of our EPP revenues, EPP’s
direct costs rose $3.4 million, or 22.1%, during the three months ended
March 31, 2008 and $7.9 million, or 24.8%, during the six months ended
March 31, 2008, over the same periods last year. This increase
directly reflects interchange fees charged to us to process the previously
described increase in the number and volume of electronic payments processed for
our electronic payment processing clients. In addition, the results
that we reported for the six months ended March 31, 2007 included the
one-time recovery of excess interchange fees. We expect to see
continued increases in our EPP direct costs as we strive to grow this business
and as more clients move toward electronic payment processing
options.
Wind-down Direct
Costs: Direct costs from our wind-down operations decreased
$1.0 million, or 56.7%, for the three months ended March 31, 2008 and
$1.5 million, or 43.6%, for the six months ended March 31, 2008, from
the same periods last year. The completion of maintenance contracts
within our VSA business resulted in $0.6 million for the three months ended
March 31, 2008 and $0.7 million for the
six
months ended March 31, 2008, primarily from reduced labor and labor-related
costs, as well as other costs required to service the contracts. The
completion of two Pension projects during fiscal 2007 contributed
$0.4 million for the three months ended March 31, 2008 and
$0.7 million for the six months ended March 31, 2008, to the decline,
primarily from the absence of labor and labor-related expenses. As we
wind down these operations, we expect that the direct costs of these operations
will continue to decrease during the remainder of fiscal 2008.
General and Administrative
(Continuing Operations)
General
and administrative expenses consist primarily of payroll and payroll-related
costs for general management, administrative, accounting, legal and information
systems, as well as fees paid to our directors and auditors. The
following table compares general and administrative costs incurred by our
continuing operations during the three and six months ended March 31, 2008
and 2007:
|
|
Three
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
2,465 |
|
|
$ |
1,624 |
|
|
$ |
841 |
|
|
|
51.8 |
% |
Wind-down
|
|
|
393 |
|
|
|
1,761 |
|
|
|
(1,368 |
) |
|
|
(77.7 |
)% |
Corporate
|
|
|
4,015 |
|
|
|
5,143 |
|
|
|
(1,128 |
) |
|
|
(21.9 |
)% |
Total
|
|
$ |
6,873 |
|
|
$ |
8,528 |
|
|
$ |
(1,655 |
) |
|
|
(19.4 |
)% |
|
|
Six
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
|
$ |
|
|
|
% |
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
4,774 |
|
|
$ |
2,937 |
|
|
$ |
1,837 |
|
|
|
62.6 |
% |
Wind-down
|
|
|
846 |
|
|
|
2,192 |
|
|
|
(1,346 |
) |
|
|
(61.4 |
)% |
Corporate
|
|
|
8,362 |
|
|
|
8,781 |
|
|
|
(419 |
) |
|
|
(4.8 |
)% |
Total
|
|
$ |
13,982 |
|
|
$ |
13,910 |
|
|
$ |
72 |
|
|
|
0.5 |
% |
EPP General and
Administrative: During the three months ended March 31,
2008, EPP incurred $2.5 million of general and administrative expenses, a
$0.8 million, or 51.8%, increase over the same period last year. These
increases are attributable primarily to a $0.3 million increase for labor
and labor-related expenses, which includes shared-service costs for resources
redeployed from discontinued operations and general corporate operations to EPP,
as well as the shift of staff from our wind-down VSA operations to our EPP
operation. We also incurred a $0.3 million increase for
consulting services to develop and implement key strategic
initiatives. The remaining $0.2 million increase is attributable
to an increase in legal costs in association with applying for money transmitter
licenses and other miscellaneous office expenses.
During
the six months ended March 31, 2008, EPP incurred $4.8 million of
general and administrative expenses, a $1.8 million, or 62.6%, increase
over the same period last year. These increases are attributable primarily to a
$0.8 million increase for labor and labor-related expenses, as previously
described, and a $0.6 million increase for consulting services to develop
and implement key strategic initiatives. The remaining
$0.4 million increase is attributable to an increase in legal costs in
association with applying for money transmitter licenses, increased bad debt
expense and other miscellaneous office and travel expenses.
During
the remainder of fiscal 2008, general and administrative expenses for our EPP
operations could increase as we move toward establishing a consolidated
electronic payment processing platform. We currently process payments
on multiple platforms at multiple locations creating redundant
cost. Combining our electronic processing platforms, we believe, will
improve the long-term efficiency and cost-effectiveness of our EPP operations
and will provide the capacity to process significantly more
transactions.
Wind-down General
and Administrative: During the three months ended
March 31, 2008, our wind-down operations incurred $0.4 million of
general and administrative expenses, a $1.4 million, or 77.7%, decrease
over the same period last year. During fiscal 2007, we recorded a
contract settlement for one of our Pension projects, which contributed
$1.2 million to the decrease of expenses in the current
period.
Labor
and labor-related expenses contributed $0.1 million to the
decrease. The remaining variance is attributable to miscellaneous
office and travel expenses.
During
the six months ended March 31, 2008, our wind-down operations incurred
$0.8 million of general and administrative expenses, a $1.3 million,
or 61.4%, decrease over the same period last year. During fiscal
2007, we recorded a contract settlement for one of our Pension projects, which
contributed $1.2 million to the decrease of expenses in the current
period. Decreases in labor and labor related expenses of
$0.3 million further contributed to the overall
decline. Offsetting these decreases is an increase in bad debt
expense of $0.2 million.
The
$0.2 million increase in bad debts expense resulted from the recognition of
bad debts expense during the six months ended March 31, 2008, combined with
the effects of a $203,000 reduction in the allowance for uncollectible accounts
receivable to reflect successful collection efforts in our VSA and Pension
businesses during the six months ended March 31, 2007. The
$0.3 million decrease in our labor and labor-related expenses reflects
$0.5 million in wages and fringe benefits, partially offset by
$0.2 million of additional severance costs, which both result from
decreases in the VSA and Pension workforces that we are making as we wind down
these operations.
Corporate General
and Administrative: Our corporate operations represent those
functions that support our corporate governance, including the costs associated
with our Board of Directors and executive management team, as well as
accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia. In addition, corporate costs
include functions that provide shared-services that support operations
throughout our organization, such as information technology and business
development.
During
the three months ended March 31, 2008, our corporate operations incurred
$4.0 million of general and administrative expenses, a $1.1 million,
or 21.9%, decrease over the same period last year. Legal costs during
the current period decreased $0.8 million over the same period last year as
a result of the absence of legal fees associated with the shareholder suit and
the ongoing investigation by the Securities and Exchange Commission, and the
reversal of a $0.2 million legal reserve associated with an investigation
previously conducted by the US Department of Justice, or DOJ, which was
dismissed in February 2008. Labor and labor-related expenses
decreased $0.8 million over the same period last year primarily due to: a
reduction in staff, which contributed $0.5 million to the decline, a
reduction in share-based payment expense of $0.2 million, and a
$0.2 million reduction in bonus expense, offset by $0.2 million of
additional severance expense associated with the departure of one of our
executives. Accounting fees reflected a $0.2 million increase
over the same period last year, as a result of the reversal during the three
months ended March 31, 2007 of an overaccrual of accounting costs
associated with our restatement. The remaining $0.3 million
offset is attributable to increased recruitment costs associated with two
executive searches, as well as miscellaneous consulting and office-related
expenses.
During
the six months ended March 31, 2008, our corporate operations incurred
$8.4 million of general and administrative expenses, a $0.4 million,
or 4.8%, decrease over the same period last year. Labor and
labor-related expenses contributed $0.5 million to the overall decrease in
expenses, primarily due to the absence of $1.0 million in wages and
benefits costs as a result of decreased staff, offset by $0.3 million of
additional severance costs, primarily attributable to the departure of one of
our executives and $0.2 million of additional share-based payment expense,
due to the acceleration of vesting of options to purchase common stock
originally issued to several of our Board members in August 2006. In
addition, legal fees decreased $0.2 million as a result of the reversal of
a reserve accrual associated with the previously mentioned DOJ
investigation. We incurred $0.4 million of additional recruiting
and consulting services during the six months ended March 31, 2008, as a
result of two executive placement searches and additional support for our legal,
human resources and accounting functions.
We
believe the anticipated divestitures of the majority of our GBPO and PSSI
operations will reduce the need for corporate support. Therefore,
during calendar year 2008, we anticipate reductions in corporate general and
administrative expenses.
Selling and Marketing
(Continuing Operations)
Selling
and marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures, and travel-related
expenditures. We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April 15th
federal tax season. The following table provides a year-over-year
comparison of selling and marketing costs incurred by our continuing operations
during the three and six months ended March 31, 2008 and 2007:
|
|
Three
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
1,769 |
|
|
$ |
1,692 |
|
|
$ |
77 |
|
|
|
4.6 |
% |
Wind-down
|
|
|
63 |
|
|
|
279 |
|
|
|
(216 |
) |
|
|
(77.4 |
)% |
Corporate
|
|
|
173 |
|
|
|
(7 |
) |
|
|
180 |
|
|
|
* |
|
Total
|
|
$ |
2,005 |
|
|
$ |
1,964 |
|
|
$ |
41 |
|
|
|
2.1 |
% |
*
Not meaningful
|
|
|
|
Six
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
3,656 |
|
|
$ |
3,248 |
|
|
$ |
408 |
|
|
|
12.6 |
% |
Wind-down
|
|
|
182 |
|
|
|
481 |
|
|
|
(299 |
) |
|
|
(62.2 |
)% |
Corporate
|
|
|
281 |
|
|
|
24 |
|
|
|
257 |
|
|
|
* |
|
Total
|
|
$ |
4,119 |
|
|
$ |
3,753 |
|
|
$ |
366 |
|
|
|
9.8 |
% |
*
Not meaningful
|
|
EPP Selling and
Marketing: During the three months ended March 31, 2008,
EPP incurred $1.8 million of selling and marketing expenses, a
$0.1 million, or 4.6%, increase over the same period last
year. Of the overall increase, $0.3 million is attributable to
additional labor and labor-related expenses and additional travel
costs. Offsetting these increases is a decrease of $0.2 million
in strategic partnership costs. During the six months ended
March 31, 2008, EPP incurred $3.7 million of selling and marketing
expenses, a $0.4 million, or 12.6%, increase over the six months ended
March 31, 2007 primarily attributable to $0.3 million of additional
labor and labor-related expenses and $0.1 million of additional travel
costs. During fiscal 2008, we expect that EPP’s direct sales and
marketing expenses will increase as we strive to accelerate the growth of this
business.
Wind-down Selling
and Marketing: During the three months ended March 31,
2008, the selling and marketing expenses of our wind-down operations decreased
$0.2 million, or 77.4%, over the same period last year. During
the six months ended March 31, 20008, these expenses decreased
$0.3 million, or 62.2%, over the same period last year. The
primary factor is the absence of labor and labor-related expenses, as our
selling and marketing efforts are being redirected to our EPP
business. We expect to continue to see a decrease in expenses during
fiscal 2008 as we wind down specific businesses.
Corporate Selling
and Marketing: As a general rule, we assign labor and
labor-related costs incurred by our corporate selling and marketing function
directly to individual projects and businesses that benefited from the
service. The $0.2 million and $0.3 million, respectively,
increase in sales and marketing expenses during the three and six months ended
March 31, 2008 primarily reflects a higher proportion labor and
labor-related costs that could not be assigned directly to a specific
project.
Depreciation and
Amortization (Continuing Operations)
Depreciation
and amortization represents expenses associated with the depreciation of
equipment, software and leasehold improvements, as well as the amortization of
intangible assets from acquisitions and other intellectual property not directly
attributable to client projects.
|
|
Three
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
892 |
|
|
$ |
799 |
|
|
$ |
93 |
|
|
|
11.6 |
% |
Wind-down
|
|
|
355 |
|
|
|
367 |
|
|
|
(12 |
) |
|
|
(3.3 |
)% |
Corporate
|
|
|
83 |
|
|
|
168 |
|
|
|
(85 |
) |
|
|
(50.6 |
)% |
Total
|
|
$ |
1,330 |
|
|
$ |
1,334 |
|
|
$ |
(4 |
) |
|
|
(0.3 |
)% |
|
|
Six
months ended
March
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
1,724 |
|
|
$ |
1,602 |
|
|
$ |
122 |
|
|
|
7.6 |
% |
Wind-down
|
|
|
726 |
|
|
|
734 |
|
|
|
(8 |
) |
|
|
(1.1 |
)% |
Corporate
|
|
|
175 |
|
|
|
330 |
|
|
|
(155 |
) |
|
|
(47.0 |
)% |
Total
|
|
$ |
2,625 |
|
|
$ |
2,666 |
|
|
$ |
(41 |
) |
|
|
(1.5 |
)% |
Depreciation
and amortization during the three and six months ended March 31, 2008 and
2007 remained relatively consistent.
Other Income (Continuing
Operations)
Equity in net
income of unconsolidated affiliate: We had no equity in net
income of unconsolidated affiliate during the three or six months ended
March 31, 2008, compared with $0.2 million and $1.0 million in
the three and six months ended March 31, 2007, due to the divestiture in
our 46.96% ownership of CPAS, Inc., a former minority-owned investment, in the
third quarter of fiscal 2007.
Interest income,
net: Interest income during
the three and six months ended March 31, 2008 increased 35.7% and 20.6%,
respectively over the same periods last year. Although the average
daily balance of our investment portfolio increased significantly, the interest
rates we received on these investments has declined in recent months consistent
with interest rate changes in the marketplace. The interest rates on
our investment portfolio fluctuate with changes in the
marketplace. We expect to see continued fluctuations in interest
rates our investments earn until the market stabilizes.
Income Tax Provision
(Continuing Operations)
We
reported income tax provisions of $12,000 and $28,000, respectively, for the
three and six months ended March 31, 2008 and $7,000 and $67,000,
respectively for the three and six months ended March 31,
2007. The provision for income taxes primarily represents state tax
obligations incurred by our EPP operations. Our Consolidated Statements of
Operations for the three and six months ended March 31, 2008 and
2007 do not reflect a federal tax provision because of offsetting adjustments to
our valuation allowance. Our effective tax rates differ from the
federal statutory rate due to state and foreign income taxes, tax-exempt
interest income and the charge for establishing a valuation allowance on our net
deferred tax assets. Our future tax rate may vary due to a variety of
factors, including, but not limited to: the relative income
contribution by tax jurisdiction; changes in statutory tax rates; the amount of
tax exempt interest income generated during the year; changes in our valuation
allowance; our ability to utilize foreign tax credits and net operating losses,
and any non-deductible items related to acquisitions or other nonrecurring
charges.
DISCONTINUED
OPERATIONS
In
April 2007, we began to seek buyers for the majority of our GBPO and PSSI
segments. As of March 31, 2008, we continued to own and operate
these businesses. However, SFAS 144 requires that we report these
businesses as “discontinued” on our Consolidated Statements of Operations,
because we do not expect to have continuing involvement in, or cash flows from,
these operations after their divestiture. As such, we reclassified
revenues and costs associated with the portions of those segments held-for-sale
to discontinued operations for all periods presented.
The
following table summarizes our results of operations from discontinued
operations for the three and six months ended March 31, 2008 and
2007. Immediately following this table is a discussion of key
variances in these results.
|
|
Three
months ended
March
31, 2008
|
|
|
Three
months ended
March
31, 2007
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$ |
7,074 |
|
|
$ |
7,032 |
|
|
$ |
— |
|
|
$ |
14,106 |
|
|
$ |
10,519 |
|
|
$ |
6,955 |
|
|
$ |
— |
|
|
$ |
17,474 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
3,216 |
|
|
|
5,874 |
|
|
|
(144 |
) |
|
|
8,946 |
|
|
|
7,322 |
|
|
|
5,562 |
|
|
|
(93 |
) |
|
|
12,791 |
|
General
and
administrative
|
|
|
475 |
|
|
|
1,647 |
|
|
|
(70 |
) |
|
|
2,052 |
|
|
|
700 |
|
|
|
1,325 |
|
|
|
173 |
|
|
|
2,198 |
|
Selling
and marketing
|
|
|
134 |
|
|
|
557 |
|
|
|
(25 |
) |
|
|
666 |
|
|
|
250 |
|
|
|
601 |
|
|
|
67 |
|
|
|
918 |
|
Depreciation
and
amortization
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
20 |
|
|
|
1 |
|
|
|
28 |
|
|
|
— |
|
|
|
29 |
|
Write-down
of goodwill
and
intangibles
|
|
|
57 |
|
|
|
2,985 |
|
|
|
— |
|
|
|
3,042 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
costs and expenses
|
|
|
3,882 |
|
|
|
11,083 |
|
|
|
(239 |
) |
|
|
14,726 |
|
|
|
8,273 |
|
|
|
7,516 |
|
|
|
147 |
|
|
|
15,936 |
|
(Loss)
income before other income and income taxes
|
|
|
3,192 |
|
|
|
(4,051 |
) |
|
|
239 |
|
|
|
(620 |
) |
|
|
2,246 |
|
|
|
(561 |
) |
|
|
(147 |
) |
|
|
1,538 |
|
Other
income
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
(Loss)
income before
income
taxes
|
|
|
3,217 |
|
|
|
(4,051 |
) |
|
|
239 |
|
|
|
(595 |
) |
|
|
2,246 |
|
|
|
(561 |
) |
|
|
(147 |
) |
|
|
1,538 |
|
Income
tax provision
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
(Loss)
income before gain on discontinued operations
|
|
|
3,217 |
|
|
|
(4,051 |
) |
|
|
239 |
|
|
|
(595 |
) |
|
|
2,246 |
|
|
|
(561 |
) |
|
|
(147 |
) |
|
|
1,538 |
|
Gain
on discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
7,599 |
|
|
|
7,599 |
|
(Loss)
income from discontinued operations, net
|
|
$ |
3,217 |
|
|
$ |
(4,051 |
) |
|
$ |
250 |
|
|
$ |
(584 |
) |
|
$ |
2,246 |
|
|
$ |
(561 |
) |
|
$ |
7,452 |
|
|
$ |
9,137 |
|
|
|
Six
months ended
March
31, 2008
|
|
|
Six
months ended
March
31, 2007
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$ |
14,207 |
|
|
$ |
13,641 |
|
|
$ |
— |
|
|
$ |
27,848 |
|
|
$ |
21,074 |
|
|
$ |
14,319 |
|
|
$ |
— |
|
|
$ |
35,393 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
7,520 |
|
|
|
10,920 |
|
|
|
(282 |
) |
|
|
18,158 |
|
|
|
15,205 |
|
|
|
10,412 |
|
|
|
(163 |
) |
|
|
25,454 |
|
General
and
administrative
|
|
|
939 |
|
|
|
3,149 |
|
|
|
(29 |
) |
|
|
4,059 |
|
|
|
1,480 |
|
|
|
2,661 |
|
|
|
115 |
|
|
|
4,256 |
|
Selling
and marketing
|
|
|
684 |
|
|
|
925 |
|
|
|
(10 |
) |
|
|
1,599 |
|
|
|
447 |
|
|
|
1,164 |
|
|
|
44 |
|
|
|
1,655 |
|
Depreciation
and
amortization
|
|
|
— |
|
|
|
39 |
|
|
|
— |
|
|
|
39 |
|
|
|
2 |
|
|
|
54 |
|
|
|
— |
|
|
|
56 |
|
Write-down
of goodwill
and
intangibles
|
|
|
143 |
|
|
|
3,358 |
|
|
|
— |
|
|
|
3,501 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
costs and expenses
|
|
|
9,286 |
|
|
|
18,391 |
|
|
|
(321 |
) |
|
|
27,356 |
|
|
|
17,134 |
|
|
|
14,291 |
|
|
|
(4 |
) |
|
|
31,421 |
|
Income
(loss) before other income and income taxes
|
|
|
4,921 |
|
|
|
(4,750 |
) |
|
|
321 |
|
|
|
492 |
|
|
|
3,940 |
|
|
|
28 |
|
|
|
4 |
|
|
|
3,972 |
|
Other
income
|
|
|
25 |
|
|
|
304 |
|
|
|
— |
|
|
|
329 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income
(loss) before
income
taxes
|
|
|
4,946 |
|
|
|
(4,446 |
) |
|
|
321 |
|
|
|
821 |
|
|
|
3,940 |
|
|
|
28 |
|
|
|
4 |
|
|
|
3,972 |
|
Income
tax provision
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income
(loss) before gain on discontinued operations
|
|
|
4,946 |
|
|
|
(4,446 |
) |
|
|
321 |
|
|
|
821 |
|
|
|
3,940 |
|
|
|
28 |
|
|
|
4 |
|
|
|
3,972 |
|
Gain
on discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
7,599 |
|
|
|
7,599 |
|
Income
(loss) from discontinued operations, net
|
|
$ |
4,946 |
|
|
$ |
(4,446 |
) |
|
$ |
332 |
|
|
$ |
832 |
|
|
$ |
3,940 |
|
|
$ |
28 |
|
|
$ |
7,603 |
|
|
$ |
11,571 |
|
Revenues (Discontinued
Operations)
GBPO
Revenues: During the three months ended March 31, 2008,
revenues from discontinued GBPO operations decreased $3.4 million, or
32.8%, compared to the same period last year. The decrease is
attributable primarily to the absence of $2.1 million of revenue from one
payment processing center contract that expired at the end of the third quarter
of fiscal 2007. A shift to lower cost, state-mandated
electronic
payment alternatives at other payment processing centers reduced revenues by
$0.6 million. In addition, the absence of revenues due to
completion during fiscal 2007 of a state contract within our Health and Human
Services business contributed $0.8 million to the overall
decline. Offsetting these decreases was a $0.1 million increase
in revenues from a call center project as a result of two additional offices
assigned to our contract.
During
the six months ended March 31, 2008, revenues from discontinued GBPO
operations decreased $6.9 million, or 32.6%, compared to the same period
last year. The decrease is attributable primarily to the absence of
$4.0 million of revenue from one payment processing center contract that
expired at the end of the third quarter of fiscal 2007. A shift to
lower cost, state-mandated electronic payment alternatives at other payment
processing centers reduced revenues by $1.1 million. In
addition, the absence of revenues due to completion during fiscal 2007 of a
state contract within our Health and Human Services business contributed
$1.9 million to the overall decline. Offsetting these decreases
was a $0.2 million increase in revenues from a call center project as a
result of two additional offices assigned to our contract.
PSSI
Revenues: During the three months ended March 31, 2008,
revenues from discontinued PSSI operations increased $77,000 over the same
period last year. Our State Systems Integration, or SSI, business
reflected a $0.7 million increase in revenues because of additional revenue
for work performed for an existing customer. In addition, our
Unemployment Insurance, or UI, operation reflected a $0.3 million increase,
which consisted of $0.9 million of incremental revenues associated with a
new project in fiscal 2008, offset by the absence of $0.6 million of
revenues for contracts have completed or are nearing completion These
increases are offset by a decrease of $0.5 million in revenues from our
Independent Validation and Verification, or IV&V, business as a result of
the disposition of this business in the first quarter of fiscal year
2008. In addition, our Financial Management Systems, or FMS, business
reflected a $0.4 million decrease in revenues as a result of projects that
are complete or are nearing completion.
During
the six months ended March 31, 2008, revenues from discontinued PSSI
operations decreased $0.7 million, or 4.7%, over the same period last
year. The disposition of our IV&V business during fiscal 2008
contributed $0.6 million to the decline in revenues. In
addition, $0.6 million of the decrease is attributable to the completion or
near completion of several projects within our FMS business. Our UI
business contributed $0.5 million to the overall decline, of which
$1.9 million is due to the completion or near completion of several
projects, offset by $1.4 million in revenues from new projects added during
fiscal 2008. Offsetting these decreases is an increase of
$1.0 million in work performed for an existing client within our SSI
business.
Direct Costs (Discontinued
Operations)
GBPO Direct
Costs: During the three months ended March 31, 2008,
direct costs from discontinued GBPO operations decreased $4.1 million, or
56.1%, from the same period last year. Our payment processing centers
contributed $3.1 million to the overall decline in direct costs, of which
$2.0 million is attributable to one payment processing center that
benefited from a $1.1 million reversal of an accrued expense no longer
payable per a contract modification and $0.9 million reduction in costs
attributable to the shift to lower cost, state-mandated electronic payment
alternatives. The remaining $1.0 million decrease is
attributable to the completion of one project during fiscal 2007. The
completion of a project within our HHS business contributed $0.7 million to
the decrease. Our call center project benefited from a
$0.2 million decrease in direct costs for the three months ended
March 31, 2008 primarily from the absence of forward loss
accruals.
During
the six months ended March 31, 2008, direct costs from discontinued GBPO
operations decreased $7.7 million, or 50.5%, from the same period last
year. Our payment processing centers contributed $5.3 million to
the overall decline in direct costs, of which $3.0 million is attributable
to the shift to lower cost, state-mandated electronic payment alternatives at
other payment processing centers and $2.1 million is attributable to the
completion of one project during fiscal 2007. The completion of a
project within our HHS business contributed $1.7 million to the
decrease. Our call center project benefited from a $0.8 million
decrease in direct costs for the six months ended March 31, 2008 due to the
absence of forward loss accruals, a reduction in telephone expense and the
absence of depreciation.
PSSI Direct
Costs: During the three months ended March 31, 2008,
direct costs from discontinued PSSI operations increased $0.3 million, or
5.6%, from the same period last year. Additional work performed for
an existing client within our SSI business contributed $0.6 million to the
overall increase in direct costs, primarily due to labor and labor-related
expenses. In addition, new contracts in fiscal 2008 within our UI
business contributed $0.2 million to the increase. Partially
offsetting these increases is a decrease of $0.5 million from the absence
of costs associated with our IV&V business, which we sold during fiscal
2008.
During
the six months ended March 31, 2008, direct costs from discontinued PSSI
operations increased $0.5 million, or 4.9%, from the same period last
year. Additional work performed for an existing client within our SSI
business contributed $0.9 million to the overall increase in direct costs,
primarily due to labor and labor-related expenses. In addition, new
maintenance contracts within our FMS business contributed $0.6 million to
the increase. Partially offsetting these increases is a decrease of
$0.5 million from the absence of costs associated with our IV&V
business, which we sold during fiscal 2008. Our UI business incurred
a $0.4 million overall decrease in direct costs, as a result of projects
completed or nearing completion of $1.0 million, offset by additional costs
from new contracts of $0.6 million.
Other Expenses (Discontinued
Operations)
GBPO Other
Expenses: During the three months ended March 31, 2008,
general and administrative expenses for our GBPO discontinued operations
decreased $0.2 million, or 32.1%, due to a $0.2 million decrease in
labor and labor-related support services, primarily attributable to the closure
of one of our payment processing centers in the third fiscal quarter of fiscal
2007. Selling and marketing expenses decreased $0.1 million, or
46.4%, primarily from the absence of labor and labor-related
expenses. Finally, we recognized $57,000 of SFAS 142 and SFAS 144
impairment expense during the three months ended March 31, 2008 to write
down the carrying value of certain GBPO assets that are classified as
held-for-sale to fair value.
During
the six months ended March 31, 2008, general and administrative expenses
for our GBPO discontinued operations decreased $0.5 million, or 36.6%, due
to a $0.3 million decrease in labor and labor-related support services,
primarily attributable to the closure of one of our payment processing centers
in the third fiscal quarter of fiscal 2007, and $0.2 million decrease in
bad debt expense. Selling and marketing expenses increased
$0.2 million, or 53.0%, primarily attributable to consulting services
related to proposal writing. Finally, we recognized $143,000 of SFAS
142 and SFAS 144 impairment expense during the six months ended March 31,
2008 to write down the carrying value of certain GBPO assets that are classified
as held-for-sale to fair value.
PSSI Other
Expenses: During the three months ended March 31, 2008,
general and administrative expenses for discontinued PSSI operations increased
$0.3 million, or 24.3%, over the same period last year, primarily due to a
$0.4 million increase in labor and labor related expenses of administrative
support services, offset by $0.1 million decrease in rent and miscellaneous
office related expenses. Selling and marketing expenses decreased
$44,000 during the three months ended March 31, 2008, primarily from a
decrease in labor and labor-related expenses, including labor expenses allocated
from corporate overhead that can be directly assigned to specific
operations. During the three months ended March 31, 2008, we
recognized $3.0 million of SFAS 142 and SFAS 144 impairment to write
down the carrying value of certain PSSI operations that are classified as
held-for-sale to fair value.
During
the six months ended March 31, 2008, general and administrative expenses
for discontinued PSSI operations increased $0.5 million, or 18.3%, over the
same period last year, primarily due to a $1.1 million increase in labor
and labor related expenses of administrative support services, offset by a
$0.3 million decrease in bad debt expense and a $0.3 million decrease
in rent and miscellaneous office related expenses. Selling and
marketing expenses decreased $0.2 million, or 20.5%, during the six months
ended March 31, 2008, primarily from a $0.5 million decrease in labor
and labor-related expenses, including labor expenses allocated from corporate
overhead that can be directly assigned to specific
operations. Offsetting this decrease is an increase of
$0.3 million in advertising, consulting services associated with proposal
writing and travel related expenses. During the six months ended
March 31, 2008, we recognized $3.4 million of SFAS 142 and
SFAS 144 impairment to write down the carrying value of certain PSSI
operations that are classified as held-for-sale to fair value.
Corporate Other
Expenses: During the three and six months ended March 31,
2008, general and administrative expenses for discontinued corporate operations
decreased $0.2 million and $0.1 million, respectively, over the same
period last year, primarily due to a decrease in labor and labor-related
expenses that could not be assigned to specific operations.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal capital requirement is to fund working capital to support our organic
growth, including potential future acquisitions. Under our Amended
and Restated Credit and Security Agreement, as amended, with our lender, we may
obtain up to $7.5 million of letters of credit. The agreement
also grants the lender a perfected security interest in cash collateral in an
amount equal to all issued and to be issued letters of credit. At
March 31, 2008, we had $5.5 million of letters of credit outstanding
under this credit facility, which are fully collateralized. These
letters of credit were issued to secure performance bonds, a property lease and
satisfy customer contract requirements.
Note 3—Investments discloses that at March 31,
2008, our investment portfolio included $31.1 million of primarily
AAA-rated auction rate municipal bonds that were collateralized with student
loans. In mid-February 2008, we began to experience unsuccessful
auctions. An unsuccessful auction happens when there are insufficient
buyers for the securities at the reset date. If there are no buyers
in the market for a particular auction rate security, the security holder is
unable to sell the security. Therefore, the security becomes illiquid
until such time that the market provides sufficient buyers for the security, the
issuer refinances the obligation, or the obligation reaches final
maturity. This was caused by concerns in the sub-prime mortgage
market and overall credit market issues. All but one of our
securities are collateralized with student loans, the other security is a
pension obligation. Securities collateralized with student loans are
guaranteed by the issuing state and the Federal Family Education Loan
Program. Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy. Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible. Until liquidity is restored, we may not be
able to liquidate these investments in a timely manner or at par
value.
Net Cash
from Continuing Operations—Operating Activities. During the
six months ended March 31, 2008, our continuing operations used
$2.2 million of cash. This reflects a net loss of $5.8 million from
continuing operations and $4.3 million of non-cash items. During the six
months ended March 31, 2008, $1.2 million of cash was generated by a
decrease in receivables, prepaid expenses and other assets. A decrease in
accounts payable and accrued liabilities used $1.4 million of cash. A
decrease in deferred revenue used $0.5 million of cash.
During
the six months ended March 31, 2007, our operating activities from
continuing operations used $2.5 million of cash. This reflects a
net loss of $5.6 million from continuing operations and $3.6 million
of non-cash items. During the six months ended March 31, 2007,
$0.2 million of cash was used by an increase in accounts receivable and
unbilled receivables. A decrease in deferred revenue used
$0.4 million of cash. A decrease in accounts payable and accrued
liabilities used $0.3 million of cash and an increase in prepaid expenses
and other assets generated $0.3 million of cash.
Net Cash
from Continuing Operations—Investing Activities. Net cash
provided by our investing activities from continuing operations for the six
months ended March 31, 2008 was $24.4 million, including
$32.6 million of cash provided by sales and maturities of marketable
securities, offset by $7.3 million of cash used to purchase marketable
securities. In addition, $0.9 million of cash was used to
purchase equipment and software, primarily associated with our corporate
IT.
During
the six months ended March 31, 2007, our operations used $4.3 million
of cash for investing activities. Our operations used
$9.3 million of cash to purchase restricted investments, $3.1 million
of cash to purchase marketable securities, and $0.5 million of cash to
purchase equipment and software. This use of funds was partially offset by
$3.3 million of cash generated from the sale and maturities of restricted
investments and $1.0 million of cash generated from the sale and maturities
of marketable securities. In addition, $4.3 million of cash was generated
from the repayment of notes and accrued interest from a related
party.
Net Cash
from Continuing Operations—Financing Activities. Net cash
provided by our financing activities from continuing operations for the six
months ended March 31, 2008 was $70,000, including $96,000 generated from
the exercise of options to purchase our common stock, partially offset by the
use of $26,000 for capital lease obligations.
During
the six months ended March 31, 2007, $20,000 of cash was provided by our
financing activities from continuing operations, of which $32,000 was generated
from the exercise of options to purchase our common stock, partially offset by
the use of $12,000 for capital lease obligations.
Net Cash
from Discontinued Operations—Operating Activities. During the six
months ended March 31, 2008, our operating activities from discontinued
operations provided $4.6 million of cash. This reflects
$0.8 million of net income and $3.1 million of non-cash items, of
which $3.5 million relates to the write-down of goodwill and held-for-sale
assets and $0.4 million by the reduction in bad debt expense.
During
the six months ended March 31, 2007, our operating activities from
discontinued operations generated $7.4 million of cash, including
$11.6 million of net income and $2.2 million of non-cash items, offset
by a $7.6 million reversal of a federal income tax reserve, which had been
initially recorded in October 2003, pending an IRS review of a refund we
received associated with the disposal of our former Australian
operations.
Net Cash
from Discontinued Operations—Investing Activities. Net cash
used in our investing activities from discontinued operations for the six months
ended March 31, 2008 was $2.7 million, primarily used to purchase
equipment and software, and fund internally developed software. Net
cash used in our investment activities from discontinued operations for the six
months ended March 31, 2007 was $1.6 million, primarily used to
purchase equipment and software, and fund internally-developed
software.
Net Cash
from Discontinued Operations—Financing Activities. During the
six months ended March 31, 2008 and 2007, our discontinued operations used
$3,000 of cash for capital lease obligations.
We
expect to generate cash flows from operating activities over the long term;
however, we may experience significant fluctuations from quarter to quarter
resulting from the need to fund and expand our EPP platform to provide for
future growth and the timing of the billing and collection of large project
milestones. We anticipate that our existing capital resources,
including our cash balances, cash that we anticipate will be provided by
operating activities and cash generated by the divestiture of our businesses
held-for-sale will be adequate to fund our operations for at least fiscal
2008. There can be no assurance that changes will not occur that
would consume available capital resources before such time. Our
capital requirements and capital resources depend on numerous factors,
including: potential acquisitions or divestitures; contingent payments earned;
new and existing contract requirements; the timing of the receipt of accounts
receivable, including unbilled receivables; the timing and ability to sell
investment securities held in our portfolio without a loss of principal; and
employee growth. To the extent that our existing capital resources
are insufficient to meet our capital requirements, we 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. The
raising of additional capital may dilute our shareholders’ ownership in
us.
Due to
the current economic climate, the performance bond market has changed
significantly, resulting in reduced availability of bonds, increased cash
collateral requirements and increased premiums. Some of our
government contracts require a performance bond and future requests for proposal
may also require a performance bond. Our inability to obtain
performance bonds, increased costs to obtain such bonds or a requirement to
pledge significant cash collateral in order to obtain such bonds would adversely
affect our business and our capacity to obtain additional
contracts. Increased premiums or a claim made against a performance
bond could adversely affect our earnings and cash flow and impair our ability to
bid for future contracts.
CONTRACTUAL
OBLIGATIONS
Since
September 30, 2007, there have been no material changes outside the
ordinary course of business in the contractual obligations disclosed in our most
recent annual report.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial results of operations and financial position
requires us to make judgments and estimates that may have a significant impact
upon our financial results. We believe that of our accounting
policies, the following estimates and assumptions, which require complex
subjective judgments by management, could have a material impact on reported
results: estimates of project costs and percentage of completion;
estimates of effective tax rates, deferred taxes and associated valuation
allowances; valuation of goodwill and intangibles; and estimated share-based
compensation. Actual results could differ materially from
management’s estimates.
For a
full discussion of our critical accounting policies and estimates, see the Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2007.
We
maintain a portfolio of cash equivalents and investments in a variety of
securities including certificates of deposit, money market funds and government
debt securities. These available-for-sale securities are subject to
interest rate risk and may decline in value if market interest rates
increase. If market interest rates increase immediately and uniformly
by ten percentage points from levels at March 31, 2008, the fair value
of the portfolio would decline by about $13,000.
The
majority of our investment portfolio is composed of AAA-rated auction rate
municipal bonds, collateralized with student loans. These municipal
bonds, which typically have 20- to 30-year maturities, are bought and sold in
the marketplace through a bidding process sometimes referred to as a “Dutch
Auction.” After their initial issuance, the interest rate on these
securities is reset at prescribed intervals (typically every 28 days), based
upon the market demand for the securities. In mid-February 2008, we
began to experience unsuccessful auctions relating to our municipal
bonds. An auction is unsuccessful when the amount of securities
offered for sale exceeds the amount of bids. As a result, the
liquidity of our auction rate securities has diminished and has caused a decline
in the fair market value of the securities. We believe this decline
is temporary but it may affect our ability to liquidate our investment in these
securities on a timely basis.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of March 31, 2008. The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of March 31, 2008, our Chief
Executive Officer and our Chief Financial Officer concluded that as of that
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
There
was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
March 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock. The suit alleged that
Tier and certain of its former officers issued false and misleading
statements. On July 24, 2007, the United States District Court
for the Eastern District of Virginia entered into an order denying the
plaintiff's motion for class certification for the purported class action
lawsuit. On December 3, 2007, the court granted our motion to
dismiss plaintiff's complaint, but permitted plaintiff an opportunity to file an
amended complaint. On January 29, 2008, we settled the matter
for a nominal sum and entered into a mutual settlement agreement and
release. On February 19, 2008, the United States District Court
for the Eastern District of Virginia dismissed the case with
prejudice.
In May
2003, we received a subpoena from a grand jury in the Southern District of New
York to produce certain documents pursuant to an investigation by the Antitrust
Division of the U.S. Department of Justice, or the DOJ, involving the child
support payment processing industry. On November 23, 2003, the
DOJ granted us conditional amnesty pursuant to the Antitrust Division's
Corporate Leniency Policy. In January 2008, we were advised by
the DOJ that they will no longer pursue this investigation.
Investing
in our common stock involves a degree of risk. You should carefully
consider the risks and uncertainties described below in addition to the other
information included or incorporated by reference in this quarterly
report. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock could fall.
The
following factors and other risk factors could cause our actual results to
differ materially from those contained in forward-looking statements in this
Form 10-Q. We updated these risk factors from those included in our
annual report on Form 10-K to, among other things, update the risk factor
regarding claims and lawsuits.
We have incurred losses in the past
and may not be profitable in the future. We have incurred
losses in the past, and we may do so in the future. While we reported
net income in fiscal year 2005, we expect to report a loss for fiscal 2008 and
have reported net losses of $3.0 million during fiscal year 2007,
$9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
$5.4 million in fiscal year 2003.
Our revenues and operating margins
may decline and may be difficult to forecast, which could result in a decline in
our stock price. Our revenues, operating margins and cash
flows are subject to significant variation from quarter to quarter due to a
number of factors, many of which are outside our control. These
factors include:
·
|
economic
conditions in the marketplace;
|
·
|
our
customers’ budgets and demand for our
services;
|
·
|
seasonality
of business;
|
·
|
timing
of service and product
implementations;
|
·
|
unplanned
increases in costs;
|
·
|
delays
in completion of projects;
|
·
|
variability
of software license revenues; and
|
·
|
integration
and costs of acquisitions.
|
The
occurrence of any of these factors may cause the market price of our stock to
decline or fluctuate significantly, which may result in substantial losses to
investors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance. From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock. Price fluctuations and
trading volume of our stock may be rapid and severe and may leave investors
little time to react. Other factors that may affect the market price
of our stock include announcements of technological innovations or new products
or services by competitors and general economic or political conditions, such as
recession, acts of war or terrorism. Fluctuations in the price of our
stock could cause investors to lose all or part of their
investment.
We may not be successful in divesting
certain assets and liabilities, and our anticipated divestiture could disrupt
our operations. We may not be able to obtain reasonable offers
for the fair value of the portions of PSSI and GBPO assets and liabilities that
we are marketing. In that event, we may be required to recognize
additional impairment losses or to terminate our planned
divestiture. Furthermore, our announced divestiture plan has resulted
in additional turnover of employees and has had an adverse impact on our ability
to attract and retain customers, which, in turn, has had, and will continue to
have, an adverse impact on the revenues generated by these
businesses. In addition, if our estimates of the fair value of these
businesses are not accurate, we may incur additional impairment losses or other
losses on the divestiture of these businesses. Divestiture of certain
portions of these businesses has been delayed, and may be further delayed, or
may be unsuccessful, resulting in business disruption and increased costs of
running and completing certain projects.
We may not be successful in
identifying acquisition candidates and, if we undertake acquisitions, they could
be expensive, increase our costs or liabilities or disrupt our
business. One of our strategies is to pursue growth through
acquisitions. We may not be able to identify suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions at
favorable terms. If we do identify an appropriate acquisition
candidate, we may be unsuccessful in negotiating the terms of the acquisition,
financing the acquisition or, if the acquisition occurs, integrating the
acquired business into our existing business. Negotiations of
potential acquisitions and the integration of acquired business operations could
disrupt our business by diverting management attention away from day-to-day
operations. Acquisitions of businesses or other material operations
may require additional debt or equity financing, resulting in leverage or
dilution of ownership. We also may not realize cost efficiencies or
synergies that we anticipated when selecting our acquisition
candidates. In addition, we may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings. Acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition. Any costs, liabilities or
disruptions associated with any future acquisitions we may pursue could harm our
operating results.
Our current and future information
technology infrastructure may not meet our requirements for the sustainable and
economical growth of our EPP business. Our EPP business is
highly dependent upon having a safe and secure information technology platform
with sufficient capacity to meet the future growth of our
business. If our ability to develop and/or acquire upgrades or
replacements of our existing platform does not keep pace with the growth of our
business, we may not be able to meet our growth
expectations. Furthermore, if we are not able to acquire or develop
these systems on a timely and economical basis, the profitability of our EPP
business may be adversely affected.
While our continuing operations
provide services to over 3,000 clients, our revenues and cash flows could
decline significantly if we were unable to retain our largest
clients. Our electronic payment processing provides services
to over 3,000 clients. However, our contract with the U.S. Internal
Revenue Service has historically generated about 25% of our annual revenues from
electronic payment processing. This contract is scheduled to expire
at the end of 2008 if the IRS does not exercise its option to
renew. Our operating results and cash flows could decline
significantly if we were unable to retain this client, or replace it in the
event we were unable to renew this contract or are unsuccessful in future
re-bids of this contract.
We operate in highly competitive
markets. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market
share. Our business is focused on transaction processing and
software systems solutions, which are highly competitive markets and are served
by numerous international, national and local firms. Many competitors
have significantly greater financial, technical and marketing resources and name
recognition than we do. In addition, there are relatively low
barriers to entry into these markets and we expect to continue to face
additional competition from new entrants into our markets. Parts of
our business are subject to increasing pricing pressures from competitors, as
well as from clients facing pressure to control costs. Some
competitors are able to operate at significant losses for extended periods of
time, which increases pricing pressure on our products and
services. If we do not compete effectively, the demand for our
products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market
share.
Changes in laws and government and
regulatory compliance requirements may result in additional compliance costs and
may adversely impact our reported earnings. Our business is
subject to numerous federal, state and local laws, government regulations,
corporate governance standards, licensing and bonding requirements, industry
association rules and public disclosure requirements, which are subject to
change. Changing laws, regulations and standards relating to
corporate governance, accounting standards, and public disclosure, including the
Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq Stock Market rules, are
creating uncertainty for companies and increasing the cost of
compliance. To maintain high standards of corporate governance and
public disclosure, we intend to invest all reasonably necessary resources to
comply with evolving standards. This investment may result in
increased general and administrative expenses for outside services and a
diversion of management time and attention from revenue-generating
activities. New laws, regulations or industry standards may be
enacted, or existing ones changed, which could negatively impact our services
and revenues. Taxes or fees may be imposed or we could be subject to
additional requirements in regard to privacy, security or qualification for
doing business. A change in such laws, rules or regulations could
restrict or eliminate our ability to provide services and could increase costs,
impair growth and make our services unprofitable.
Violation of any existing or future
laws or regulations related to our EPP business, including laws governing money
transmitters, could expose us to substantial liability and fines, force us to
cease providing our services, or force us to change our business
practices. Our EPP segment is subject to numerous state laws
and regulations, some states’ money transmitter regulations, and related
licensing requirements. We currently have a number of applications
for licensure as a money transmitter pending in various states. In the future we
may be subject to additional states’ money transmitter regulations, federal
money laundering regulations and regulation of internet
transactions. We are also subject to the applicable rules of the
credit/debit card association and National Automated Clearing House Association
(NACHA). If we are found to be in violation of any such laws, rules
or regulations we could be exposed to significant financial liability,
substantial fines and penalties, cease and desist orders, and other sanctions
that could restrict or eliminate our ability to provide our services in one or
more states or accept certain types of transactions in one or more states, or
could force us to make costly changes to our business practices. Even
if we are not forced to change our business practices, the cost of obtaining
these licenses and regulatory approvals could be substantial.
The revenues generated by our
electronic payment processing operations may fluctuate and the ability to
maintain profitability is uncertain. EPP primarily provides
credit and debit card and electronic check payment options for the payment of
federal and state personal income taxes, real estate and personal property
taxes, business taxes, fines for traffic violations and parking citations and
educational and utility obligations. The revenues earned by EPP
depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective constituents. If
consumers are not receptive to paying a convenience fee; if card associations
change their rules or laws are passed that do not allow us to charge the
convenience fees; or if credit or debit card issuers or marketing partners
eliminate or reduce the value of rewards to consumers under their respective
rewards programs, demand for electronic payment processing services could
decline. The processing fees charged by credit/debit card
associations and financial institutions can be increased with little or no
notice, which could reduce margins and harm our
profitability. Demand
for electronic payment processing services could also be affected adversely by a
decline in the use of the Internet, economic factors such as a decline in
availability credit, increased unemployment, or consumer migration to a new or
different technology or payment method. The use of credit and debit
cards and electronic checks to make payments to government agencies is subject
to increasing competition and rapid technological change. If we are
not able to develop, market and deliver competitive technologies, our market
share will decline and our operating results and financial condition could
suffer.
Our ability to grow depends largely
on our ability to attract, integrate and retain qualified
personnel. The success of our business is based largely on our
ability to attract and retain talented and qualified employees and
contractors. The market for skilled workers in our industry is
extremely competitive. In particular, qualified project managers and
senior technical and professional staff are in great demand. If we
are not successful in our recruiting efforts or are unable to retain key
employees, our ability to staff projects and deliver products and services may
be adversely affected. We believe our success also depends upon the
continued services of senior management and a number of key employees whose
employment may terminate at any time. If one or more key employees
resigns to join a competitor, to form a competing company, or as a result of a
divestiture, the loss of such personnel and any resulting loss of existing or
potential clients could harm our competitive position.
We depend on third parties for our
products and services. Failure by these third parties to perform
their obligations satisfactorily could hurt our reputation, operating results
and competitiveness. Our business is highly dependent on
working with other companies and organizations to bid on and perform complex
multi-party projects. We may act as a prime contractor and engage
subcontractors, or we may act as a subcontractor to the prime
contractor. We use third-party software, hardware and support service
providers to perform joint engagements. We depend on licensed
software and other technology from a small number of primary vendors. We also
rely on a third-party co-location facility for our primary data center, use
third-party processors to complete payment transactions and use third-party
software providers for system solutions, security and
infrastructure. Our systems are dependent on integration and
implementation of complex third party products and services including software
and hardware. The failure of any of these third parties to meet their
contractual obligations, our inability to obtain favorable contract terms,
failures or defects attributable to these third parties or their products,
including in connection with system or software defects, implementation or
testing, or the discontinuation of the services of a key subcontractor or vendor
could result in degraded functionality or system failure, significant cost and
liability, diminished profitability and damage to our reputation and competitive
position.
Our fixed-price and transaction-based
contracts require accurate estimates of resources and transaction
volumes. Failure to estimate these factors accurately could cause us
to lose money on these contracts. Our business relies on
accurate estimates. If we underestimate the resources, cost or time
required for a project or overestimate the expected volume of transactions or
transaction dollars processed, our costs could be greater than expected or our
revenues could be less than expected. Under fixed-price contracts, we
generally receive our fee if we meet specified deliverables, such as completing
certain components of a system installation. For transaction-based
contracts, we receive our fee on a per-transaction basis or as a percentage of
dollars processed, such as the number of child support payments processed or tax
dollars processed. If we fail to prepare accurate estimates on
factors used to develop contract pricing, such as labor costs, technology
requirements or transaction volumes, we may incur losses on those contracts and
our operating margins could decline.
Our revenue is highly dependent on
government funding. The loss or decline of existing or future government funding
could cause our revenue and cash flows to decline. A
significant portion of our revenue is derived from federal and state mandated
projects. A large portion of these projects may be subject to a
reduction or discontinuation of funding, which may cause early termination of
projects, diversion of funds away from our projects or delays in
implementation. The occurrence of any of these conditions could have
an adverse effect on our projected revenue, cash flows and
profitability.
Unauthorized data access and other
security breaches could have an adverse impact on our business and our
reputation. Security breaches or improper access to confidential data
and personally identifiable information in our facilities, computer networks, or
databases, or those of our suppliers, may cause harm to our business and result
in liability and systems interruptions. Despite security
measures we have taken, our systems may be vulnerable to physical break-ins,
fraud, computer viruses, attacks by hackers and similar problems causing
interruption in service and loss or theft of confidential data and personally
identifiable information that we store and/or process, .It is possible that our
security controls over confidential information and personal data, our training
on data security, and other practices we follow may not prevent the improper
disclosure or unauthorized access to confidential data and personally
identifiable information. Our third-party suppliers also may
experience security breaches involving the unauthorized access of confidential
data and personally indentifiable information. A security breach
could result in theft, loss, publication, deletion or modification of such data
and information, and cause harm to our business and reputation and a loss of
clients and revenue.
We could suffer material losses if
our operations or systems or platforms fail to perform properly or
effectively. Integral to our performance is the continued
efficiency and proper functioning of our technical systems, platforms, and
operational infrastructure. Failure of any or all of these resources subjects us
to significant risks. This includes but is not limited to operational or
technical failures of our systems and platforms, failure of third-party support
and services, as well as the loss of key individuals or failure to perform on
the part of the key individuals. Our EPP segment processes a high
volume of time sensitive payment transactions. The majority of our
tax related transactions are processed in short periods of time, including
between April 1 and April 15 of each tax year for federal tax
payments. If there is a defect in our system software or hardware, an
interruption or failure due to loss of system functionality, a delay in our
system processing speed, a lack of system capacity, or loss of employees on
short notice, even if for a short period of time, our ability to process
transactions and provide services may be significantly limited, delayed or
eliminated resulting in lost business and revenue and harm to our
reputation. Our insurance may not be adequate to compensate us for
all losses that may occur as a result of any such event, or any system, security
or operational failure or disruption.
If we are not able to protect our
intellectual property, our business could suffer serious harm. Our
systems and operating platforms, scripts, software code and other intellectual
property are generally proprietary, confidential, and may be trade
secrets. We protect our intellectual property rights through a
variety of methods, such as use of nondisclosure and license agreements and use
of trade secret, copyright and trademark laws. Ownership of developed
software and customizations to software are the subject of negotiation and
license arrangements with individual clients. Despite our efforts to
safeguard and protect our intellectual property and proprietary rights, there is
no assurance that these steps will be adequate to avoid the loss or
misappropriation of our rights or that we will be able to detect unauthorized
use of our intellectual property rights. If we are unable to protect
our intellectual property, competitors could market services or products similar
to ours, and demand for our offerings could decline, resulting in an adverse
impact on revenues.
We may be subject to infringement
claims by third parties, resulting in increased costs and loss of
business. From time to time we receive notices from others
claiming we are infringing on their intellectual property
rights. Defending a claim of infringement against us could prevent or
delay our providing products and services, cause us to pay substantial costs and
damages, force us to redesign products or enter into royalty or licensing
agreements on less favorable terms. If we are required to enter into
such agreements or take such actions, our operating margins could
decline.
If we are not able to obtain adequate
or affordable insurance coverage or bonds, we could face significant liability
claims and increased premium costs and our ability to compete for business could
be compromised. We maintain insurance to cover various risks
in connection with our business. Additionally, our business includes
projects that require us to obtain performance, statutory and bid bonds from a
licensed surety. There is no guarantee that such insurance coverage
or bonds will continue to be available on reasonable terms, or at
all. If we are unable to obtain or maintain adequate insurance and
bonding coverage, potential liabilities associated with the risks discussed in
this report could exceed our
coverage,
and we may not be able to obtain new contracts or continue to provide existing
services, which could result in decreased business opportunities and declining
revenues.
Our markets are changing
rapidly. If we are not able to adapt to changing conditions, we may
lose market share and may not be able to compete
effectively. The markets for our products are characterized by
rapid changes in technology, client expectations and evolving industry
standards. Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market. If we
are unable to address these requirements, or if our products do not achieve
market acceptance, we may lose market share and our revenues could
decline.
Our business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability. Our
business involves projects that are critical to the operations of our clients'
businesses. The failure to meet client expectations could damage our
reputation and compromise our ability to attract new business. On
certain projects we make performance guarantees, based upon defined operating
specifications, service levels and delivery dates, which are sometimes backed by
contractual guarantees and performance, statutory or bid
bonds. Unsatisfactory performance or unanticipated difficulties or
delays in starting or completing such projects may result in termination of the
contract, a reduction in payment, liability for penalties and damages, or claims
against a bond. Client performance expectations or unanticipated
delays could necessitate the use of more resources than we initially budgeted
for a particular project, which could increase our project costs and make us
less profitable.
The
Annual Meeting of Shareholders of Tier Technologies, Inc. was held on February
28, 2008. The following matters were voted upon at this
meeting.
1.
|
Election
of six directors to serve for the ensuing year and until successors are
elected; and
|
2.
|
Ratification
of McGladrey & Pullen, LLP as our independent registered public
accounting firm for the fiscal year ending September 30,
2008.
|
The
number of shares of common stock entitled to vote at the annual meeting was
19,544,454. The number of shares of common stock present or
represented by proxy was 14,691,458. The results of the votes on each
of the matters presented to the shareholders at our annual meeting are set forth
below.
Matter
|
|
Votes
in favor
|
|
|
Votes
withheld
|
|
|
Abstentions
|
|
1. Election
of Directors
|
|
|
|
|
|
|
|
|
|
Charles
W. Berger
|
|
|
11,248,012 |
|
|
|
3,443,446 |
|
|
|
— |
|
Samuel
Cabot III
|
|
|
10,966,048 |
|
|
|
3,725,410 |
|
|
|
— |
|
John
J. Delucca
|
|
|
12,981,828 |
|
|
|
1,709,630 |
|
|
|
— |
|
Morgan
P. Guenther
|
|
|
11,202,991 |
|
|
|
3,488,467 |
|
|
|
— |
|
Ronald
L. Rossetti
|
|
|
10,939,457 |
|
|
|
3,752,001 |
|
|
|
— |
|
James
R. Stone
|
|
|
12,982,541 |
|
|
|
1,708,917 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. The
ratification of McGladrey & Pullen, LLP as our independent registered
public accounting firm for the fiscal year ending September 30,
2008
|
|
|
14,519,759 |
|
|
|
158,608 |
|
|
|
13,091 |
|
On
April 30, 2008, Tier Technologies, Inc. entered into an employment agreement
with Ronald L. Rossetti, providing for Mr. Rossetti’s employment as chief
executive officer of the registrant for a period of three years from the date of
the agreement. Mr. Rossetti’s previous employment agreement expired
in 2007. Mr. Rossetti is currently the chief executive officer of the
registrant and chairman of its board of directors.
The
employment agreement provides that on or after April 30, 2010 (or prior to such
time with the agreement of the compensation committee of the registrant’s board
of directors), Mr. Rossetti may relinquish his role as chief executive officer
and serve for the remainder of the term of the agreement as the non-executive
chairman of the registrant’s board of directors and as its lead
director.
Pursuant
to the employment agreement, Mr. Rossetti will receive a base salary of $400,000
per year for the first year, such salary to be subject to increase but not
decrease by the board thereafter, and, while serving as chief executive officer,
will be entitled to participate in all employee benefit programs for which he is
eligible. In addition, as long as Mr. Rossetti is serving as the
registrant’s chief executive officer, he will be entitled to participate in the
registrant’s incentive and equity compensation programs for senior-level
executives. Mr. Rossetti’s maximum annual incentive opportunity will
be at least 100% of his base salary for the applicable fiscal
year. The employment agreement also provides for Mr. Rossetti to
participate in an enterprise value award plan, subject to approval by the
compensation committee of the registrant’s board of directors (which has been
provided), which would provide grants of up to an aggregate of 550,000
restricted stock units (to be paid in shares of the registrant’s common stock to
the extent available under the registrant’s Amended and Restated 2004 Stock
Incentive Plan, with any amount that cannot be paid in shares thereunder to be
paid in cash) to Mr. Rossetti if the registrant’s common stock achieves the
price targets set forth in the plan, which is included as an exhibit to the
employment agreement. Such restricted stock units will vest in full
on the earliest of (i) the expiration of the term of the employment agreement,
(ii) three years after the end of the measurement period in which they are
earned, (iii) termination of Mr. Rossetti’s employment for death or disability,
(iv) termination of Mr. Rossetti’s employment by the registrant other than for
cause (as defined in the employment agreement, (v) termination of Mr. Rossetti’s
employment by Mr. Rossetti for good reason (as defined in the employment
agreement), or (vi) a change in control of the registrant while Mr. Rossetti
remains employed by the registrant. If Mr. Rossetti moves to the
non-executive chairman position and ceases to be chief executive officer, his
compensation will decline to the amount of his base salary (and the continued
ability to vest in the Enterprise Value Award).
The
registrant has also agreed to continue to provide Mr. Rossetti with a corporate
apartment located within a reasonable daily commuting distance of the
registrant’s corporate headquarters and to continue to reimburse his or his
spouse’s airfare for travel between the city of his residence and the
registrant’s corporate headquarters. The registrant will make a
gross-up payment to Mr. Rossetti for any taxes associated with this
benefit. These benefits apply while he is the chief executive
officer.
If Mr.
Rossetti’s employment terminates as a result of disability, all of Mr.
Rossetti’s options, restricted stock grants and restricted stock units will vest
in full upon such termination, and the registrant will pay Mr. Rossetti such
other amounts and provide such other benefits as set forth in the employment
agreement. In addition, if Mr. Rossetti’s employment terminates as a
result of his death, Mr. Rossetti terminates his employment for good reason or
the registrant terminates Mr. Rossetti’s employment without cause, the
registrant will pay to him (or his estate) an amount equal to his base salary in
effect on the date of the termination plus a bonus equal to the average bonus
paid to Mr. Rossetti for the past three years, provided that the payment on
death may be eliminated if the company obtains life insurance coverage for his
benefit as provided in the agreement. Further, if Mr. Rossetti
terminates his employment for good reason or the registrant terminates Mr.
Rossetti’s employment without cause while Mr. Rossetti is serving as the
registrant’s chief executive officer, the registrant will pay to Mr. Rossetti a
portion of the average bonus paid to Mr. Rossetti for the past three years,
prorated based on the number of months he worked in the fiscal year in which the
termination occurs. Payments described in this and the next paragraph
are generally subject to a requirement that Mr. Rossetti release all releaseable
claims against the company.
In the
event of a change in control of the registrant while Mr. Rossetti remains
employed by the registrant, in addition to the vesting of options, restricted
stock and restricted stock units described above, Mr. Rossetti may be entitled
to payments equal to up to two times his base salary plus the average bonus paid
to Mr. Rossetti for the past three years, depending on the length of his
employment after such
change
in control or the termination of his employment in connection with such change
in control, all as set forth in the employment agreement.
In
addition, the registrant has agreed to make specified tax gross-up payments to
Mr. Rossetti if he becomes subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code upon a change of control of the registrant (commonly
referred to as a parachute tax gross-up).
This
summary of the employment agreement and the exhibits thereto is qualified by
reference to such agreements, which are filed herewith as Exhibit 10.1, and are
incorporated herein by reference.
Exhibit
Number
|
Description
|
10.1
|
Employment
Agreement between Tier Technologies, Inc. and Ronald L. Rossetti, dated
April 30, 2008. †
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.†
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.†
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
|
|
|
†Filed
herewith.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May
6, 2008
Ronald
Johnston
Chief Financial
Officer
(Principal Financial and Accounting
Officer
and a Duly Authorized
Officer)