form10-q.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 December 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 “large
accelerated filer," "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
January 30, 2009 there were 19,734,863 shares of the Registrant's Common Stock
outstanding.
TIER TECHNOLOGIES,
INC.
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
1
|
Item
1. Consolidated Financial Statements
(unaudited)
|
1
|
Consolidated
Balance Sheets
|
1
|
Consolidated
Statements of Operations
|
2
|
Consolidated
Statements of Comprehensive Loss
|
3
|
Consolidated
Statements of Cash Flows
|
4
|
Consolidated
Supplemental Cash Flow Information
|
5
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
Note
1—Nature of Operations and Basis of Presentation
|
6
|
Note
2—Recent Accounting Pronouncements
|
7
|
Note
3—Investments
|
7
|
Note
4—Fair Value Measurements
|
10
|
Note
5—Customer Concentration and Risk
|
11
|
Note
6—Goodwill and Other Intangible Assets
|
12
|
Note
7—Income Taxes
|
12
|
Note
8—Contingencies and Commitments
|
13
|
Note
9—Related Party Transactions
|
15
|
Note
10—Restructuring
|
15
|
Note
11—Segment Information
|
16
|
Note
12—Share-based Payment
|
17
|
Note
13—Discontinued Operations
|
18
|
Note
14—(Loss)/Earnings per Share
|
20
|
Note
15—Subsequent Event
|
21
|
Item
2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
|
22
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
31
|
Item
4. Controls and Procedures
|
32
|
Item
5. Other Information
|
32
|
PART
II. OTHER INFORMATION
|
34
|
Item
1. Legal Proceedings
|
34
|
Item
1A. Risk Factors
|
34
|
Item
6. Exhibits
|
40
|
SIGNATURE
|
41
|
Private Securities Litigation Reform Act Safe Harbor
Statement
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 34, 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.
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TIER
TECHNOLOGIES, INC.
(in
thousands)
|
|
December 31,
2008
|
|
|
September 30,
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
34,393 |
|
|
$ |
47,735 |
|
Investments
in marketable securities
|
|
|
11,485 |
|
|
|
2,415 |
|
Accounts
receivable, net
|
|
|
5,897 |
|
|
|
4,209 |
|
Prepaid
expenses and other current assets
|
|
|
3,108 |
|
|
|
1,863 |
|
Current
assets—held-for-sale
|
|
|
10,293 |
|
|
|
11,704 |
|
Total
current assets
|
|
|
65,176 |
|
|
|
67,926 |
|
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net
|
|
|
4,618 |
|
|
|
4,479 |
|
Goodwill
|
|
|
14,526 |
|
|
|
14,526 |
|
Other
intangible assets, net
|
|
|
12,276 |
|
|
|
13,455 |
|
Investments
in marketable securities
|
|
|
31,213 |
|
|
|
28,821 |
|
Restricted
investments
|
|
|
7,361 |
|
|
|
7,861 |
|
Other
assets
|
|
|
272 |
|
|
|
283 |
|
Total
assets
|
|
$ |
135,442 |
|
|
$ |
137,351 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
676 |
|
|
$ |
918 |
|
Accrued
compensation liabilities
|
|
|
3,690 |
|
|
|
4,289 |
|
Accrued
discount fees
|
|
|
7,497 |
|
|
|
5,243 |
|
Other
accrued liabilities
|
|
|
4,608 |
|
|
|
4,667 |
|
Deferred
income
|
|
|
1,790 |
|
|
|
1,790 |
|
Current
liabilities—held-for-sale
|
|
|
7,988 |
|
|
|
9,061 |
|
Total
current liabilities
|
|
|
26,249 |
|
|
|
25,968 |
|
Other
liabilities
|
|
|
106 |
|
|
|
136 |
|
Total
liabilities
|
|
|
26,355 |
|
|
|
26,104 |
|
|
|
|
|
|
|
|
|
|
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: 20,619 and 20,619; shares outstanding: 19,735 and
19,735
|
|
|
190,588 |
|
|
|
190,099 |
|
Treasury
stock—at cost, 884 shares
|
|
|
(8,684 |
) |
|
|
(8,684 |
) |
Accumulated
other comprehensive income/(loss)
|
|
|
1 |
|
|
|
(2,504 |
) |
Accumulated
deficit
|
|
|
(72,818 |
) |
|
|
(67,664 |
) |
Total
shareholders’ equity
|
|
|
109,087 |
|
|
|
111,247 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
135,442 |
|
|
$ |
137,351 |
|
See Notes to Consolidated Financial
Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
29,740 |
|
|
$ |
28,955 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
22,418 |
|
|
|
22,234 |
|
General
and administrative
|
|
|
6,630 |
|
|
|
7,109 |
|
Selling
and marketing
|
|
|
1,316 |
|
|
|
2,114 |
|
Depreciation
and amortization
|
|
|
1,459 |
|
|
|
1,296 |
|
Total
costs and expenses
|
|
|
31,823 |
|
|
|
32,753 |
|
Loss
from continuing operations before other income/(loss) and income
taxes
|
|
|
(2,083 |
) |
|
|
(3,798 |
) |
|
|
|
|
|
|
|
|
|
Other
income/(loss):
|
|
|
|
|
|
|
|
|
Loss
on investment
|
|
|
(112 |
) |
|
|
— |
|
Interest
income, net
|
|
|
304 |
|
|
|
967 |
|
Total
other income
|
|
|
192 |
|
|
|
967 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,891 |
) |
|
|
(2,831 |
) |
Income
tax provision
|
|
|
1 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,892 |
) |
|
|
(2,847 |
) |
(Loss)/income
from discontinued operations, net
|
|
|
(3,262 |
) |
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,154 |
) |
|
$ |
(1,431 |
) |
|
|
|
|
|
|
|
|
|
(Loss)/earnings
per share—Basic and diluted:
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.10 |
) |
|
$ |
(0.14 |
) |
From
discontinued operations
|
|
|
(0.16 |
) |
|
|
0.07 |
|
(Loss)/earnings
per share—Basic and diluted
|
|
$ |
(0.26 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing:
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss)/earnings per share
|
|
|
19,735 |
|
|
|
19,543 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Net
loss
|
|
$ |
(5,154 |
) |
|
$ |
(1,431 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Impact
of unrealized loss transferred from AOCI into net loss
|
|
|
2,505 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
2,505 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(2,649 |
) |
|
$ |
(1,431 |
) |
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,154 |
) |
|
$ |
(1,431 |
) |
Less:
(Loss)/income from discontinued operations, net
|
|
|
(3,262 |
) |
|
|
1,416 |
|
Loss
from continuing operations, net
|
|
|
(1,892 |
) |
|
|
(2,847 |
) |
Non-cash
items included in net loss:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,483 |
|
|
|
1,314 |
|
Provision
for doubtful accounts
|
|
|
39 |
|
|
|
35 |
|
Accrued
forward loss on contract
|
|
|
25 |
|
|
|
125 |
|
Share-based
compensation
|
|
|
468 |
|
|
|
789 |
|
Loss
on trading securities
|
|
|
112 |
|
|
|
— |
|
Other
|
|
|
— |
|
|
|
37 |
|
Net
effect of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(1,727 |
) |
|
|
(392 |
) |
Prepaid
expenses and other assets
|
|
|
(602 |
) |
|
|
308 |
|
Accounts
payable and accrued liabilities
|
|
|
1,308 |
|
|
|
2,484 |
|
Income
taxes receivable
|
|
|
(61 |
) |
|
|
15 |
|
Deferred
income
|
|
|
— |
|
|
|
(247 |
) |
Cash
(used in) provided by operating activities from continuing
operations
|
|
|
(847 |
) |
|
|
1,621 |
|
Cash
(used in) provided by operating activities from discontinued
operations
|
|
|
(3,209 |
) |
|
|
3,254 |
|
Cash
(used in) provided by operating activities
|
|
|
(4,056 |
) |
|
|
4,875 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale securities
|
|
|
(11,470 |
) |
|
|
(3,925 |
) |
Maturities
of available-for-sale securities
|
|
|
2,401 |
|
|
|
5,600 |
|
Maturities
of restricted investments
|
|
|
500 |
|
|
|
— |
|
Purchase
of equipment and software
|
|
|
(480 |
) |
|
|
(778 |
) |
Proceeds
from sale of discontinued operations
|
|
|
205 |
|
|
|
— |
|
Cash
(used in) provided by investing activities from continuing
operations
|
|
|
(8,844 |
) |
|
|
897 |
|
Cash
used in investing activities from discontinued operations
|
|
|
(437 |
) |
|
|
(1,269 |
) |
Cash
used in investing activities
|
|
|
(9,281 |
) |
|
|
(372 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
— |
|
|
|
29 |
|
Capital
lease obligations and other financing arrangements
|
|
|
(5 |
) |
|
|
(36 |
) |
Cash
used in financing activities from continuing operations
|
|
|
(5 |
) |
|
|
(7 |
) |
Cash
used in financing activities from discontinued operations
|
|
|
— |
|
|
|
(2 |
) |
Cash
used in financing activities
|
|
|
(5 |
) |
|
|
(9 |
) |
Net
(decrease)/increase in cash and cash equivalents
|
|
|
(13,342 |
) |
|
|
4,494 |
|
Cash
and cash equivalents at beginning of period
|
|
|
47,735 |
|
|
|
16,516 |
|
Cash
and cash equivalents at end of period
|
|
$ |
34,393 |
|
|
$ |
21,010 |
|
TIER
TECHNOLOGIES, INC.
CONSOLIDATED
SUPPLEMENTAL CASH FLOW INFORMATION
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
3 |
|
|
$ |
6 |
|
Income
taxes paid, net
|
|
$ |
60 |
|
|
$ |
— |
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital lease obligations and other financing
arrangements
|
|
$ |
— |
|
|
$ |
28 |
|
Fair
value of ARS Rights
|
|
$ |
4,834 |
|
|
$ |
— |
|
Notes
receivable from third parties
|
|
$ |
571 |
|
|
$ |
— |
|
Transfer
from available-for-sale to trading securities, at par
value
|
|
$ |
31,325 |
|
|
$ |
— |
|
Decrease
in fair value of trading securities
|
|
$ |
2,442 |
|
|
$ |
— |
|
See
Notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NATURE OF
OPERATIONS
Tier
Technologies, Inc., or Tier or the Company, provides federal, state and local
government and other public sector clients with electronic payment and other
transaction processing services, as well as software and systems integrations
services. Our core business is Electronic Payment Processing, or
EPP. EPP services are provided by our wholly owned subsidiary
Official Payments Corporation, or OPC. We operate in the following
biller direct markets:
·
|
Federal,
state and local governments;
|
·
|
Property
tax—real and personal;
|
·
|
Education—higher
and K-12;
|
·
|
Court
fees and fines; and
|
We also
operate in several other business areas which we are winding down or which are
currently reported as held-for-sale as we are seeking buyers for these
areas. These operations include:
·
|
Wind-down
Operations—represents portions of our former Government Business
Process Outsourcing, or GBPO, and Packaged Software Systems Integration,
or PSSI, operations that we expect to wind-down over a four-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.
|
·
|
Held-for-sale
Operations—represents
the remaining former PSSI operation for which we are still seeking a
buyer:
|
o
|
Unemployment
Insurance Systems—provides software application, development and
integration services to state governments that are reforming unemployment
insurance systems.
|
All
historical financial information presented in our Consolidated Financial
Statements and Notes to our Consolidated Financial Statements has been
reclassified to conform to the current year’s presentation. For
additional information about our EPP and Wind-down Operations, see Note
11—Segment Information. For additional
information about the businesses that we have classified as held-for-sale, see
Note
13—Discontinued Operations.
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.
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. We do not believe that the adoption of SFAS 160 will have a
material effect on our financial position or results of operations.
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. We are currently evaluating the
effect the adoption of SFAS 141(R) will have on our financial position and
results of operations.
FSP FAS
142-3—Determination of the Useful Life of Intangible
Assets. In April 2008, FASB issued FASB Staff Position FAS
142-3—Determination of the
Useful Life of Intangible Assets, or FSP 142-3. This FSP
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142. FSP 142-3 improves the consistency between the useful
life of a recognized intangible asset under FAS 142 and the period of expected
cash flows used to measure the fair value of the asset under other applicable
accounting literature. We will adopt FSP 142-3 beginning on October 1,
2009. We are currently evaluating the impact FSP 142-3 will have on
our financial position and results of operations.
We own
investments in marketable securities designated as available-for-sale or trading
securities as defined in Statement of Financial Accounting Standards No
115—Accounting for Certain
Investments in Debt and Equity Securities, or SFAS
115. Restricted investments totaling $1.4 million at
December 31, 2008, and $1.9 million at September 30, 2008 were
pledged in connection with performance bonds and real estate operating leases
and will be restricted for the terms of the project performance periods and
lease periods, the latest of which is estimated to end in March
2010. At both December 31, 2008 and September 30, 2008, we
used a $6 million money market investment as a compensating balance for
bank accounts
used for certain operations. These investments are reported as Restricted investments on the
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
December 31, 2008 and September 30, 2008, our investment portfolio
included $31.3 million par value of 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 prescribed intervals (typically
every 28 days), based upon the market demand for the securities on the reset
date. We refer to these securities as auction rate securities, or
ARS. Beginning in February 2008, some of the auctions for these
securities were unsuccessful. Our investments are rated AAA, the
issuers are current on all of their payment obligations, and we continue to earn
interest on our auction rate security investments at the pre-determined
contractual rate. As a result of the unsuccessful auctions and the
uncertainty in the credit market, the estimated fair value of the investments no
longer approximates par value. During the fiscal year ended
September 30, 2008, we recorded an unrealized loss of $2.5 million,
which is included in Accumulated other comprehensive
income/(loss) on our Consolidated Balance Sheets, to write down the book
value of the investments to fair market value. We determined fair
market value of our investments using a discounted cash flow
approach. During fiscal 2008 we reclassified these securities from
current Investments in
marketable securities to long-term Investments in marketable
securities on our Consolidated Balance Sheets as a result of the lack of
liquidity due to current market conditions.
On
November 11, 2008, we accepted an offer from our investment manager, UBS
AG, or UBS, providing us with rights related to our ARS, or ARS
Rights. The ARS Rights (which have features that operate like put
options) were covered in a prospectus dated October 7, 2008. The
ARS Rights entitle us to sell our existing ARS to UBS for a price equal to the
par value plus accrued but unpaid interest, at any time during the period
June 30, 2010 through July 2, 2012. The ARS Rights also
grant to UBS the sole discretion and right to sell or otherwise dispose of our
eligible ARS at any time until July 2, 2012, without prior notification, so
long as we receive a payment of par value. We expect to sell our ARS
under the Rights offering. If the ARS Rights are not exercised before
July 2, 2012, they will expire and UBS will have no further rights or
obligation to buy our ARS. So long as we hold our ARS, they will
continue to accrue and pay interest as determined by the auction process or the
terms of the ARS if the auction process fails.
The ARS
Rights represent a firm agreement in accordance with Statement of Financial
Accounting Standards No. 133—Accounting for
Derivative Instruments and Hedging Activities, which defines a firm
agreement as an agreement with an unrelated party, binding on both parties and
usually legally enforceable, with the following characteristics: (a) the
agreement specifies all significant terms, including the quantity to be
exchanged, the fixed price, and the timing of the transaction, and (b) the
agreement includes a disincentive for nonperformance that is sufficiently large
to make performance probable.
The
issuance of a prospectus and the settlements UBS executed with the Securities
and Exchange Commission and other state regulatory authorities provide the
assurance that the settlement agreement is legally enforceable. The
terms of the settlement agreement have been communicated to the public and our
rights under the settlement are spelled out in the prospectus.
The ARS
Rights between Tier and UBS relates to the ARS held by us, but is not embedded
in or attached to the ARS. Rather, the ARS Rights are freestanding
instruments that must be accounted for separately from the
ARS. Statement of Financial Accounting Standards No. 150—Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity defines a freestanding
financial instrument as a “financial instrument that is entered into separately
and apart from any of the entity’s other financial instruments or equity
transactions, or that is entered into in conjunction with some other transaction
that is legally detachable and separately exercisable.” The ARS
Rights are contractual arrangements entered into between UBS and Tier; are
legally separate from the ARS; and can be exercised independently of any other
instrument or event.
We have
elected to measure the ARS Rights at fair value under Statement of Financial
Accounting Standards No. 159—The Fair Value
Option for Financial Assets and Financial Liabilities, which permits an
entity to elect the fair value option for recognized financial assets, in order
to match the changes in the fair value of the ARS. As a result,
unrealized gains and losses will be included in earnings in future
periods. At December 31, 2008 we recorded the fair value of the
Rights as $4.8 million with a credit to Other income/(loss) in our Consolidated
Statements of Operations. We expect that future changes in the fair
value of the Rights will approximate fair value movements in the related
ARS.
Prior
to accepting the UBS offer, we recorded our ARS as investments
available-for-sale. We recorded unrealized gains and losses on our
available-for-sale debt securities in Accumulated other comprehensive
income(loss) in the shareholders’ equity section of our Consolidated
Balance Sheets. Such an unrealized loss did not reduce net income for
the applicable accounting period. In connection with our acceptance
of the UBS offer in November, we transferred our ARS from investments
available-for-sale to trading securities in accordance with SFAS
115. The transfer to trading securities reflects management’s intent
to exercise our ARS Rights during the period June 30, 2010 through
July 2, 2012. Prior to our agreement with UBS, our intent was to
hold the ARS until the market recovered. The transfer to trading
securities resulted in recognizing a loss of $4.9 million in Other income/(loss) in our
Consolidated Statements of Operations.
The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, we
exercise our ARS Rights, 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, since our securities are municipal bonds
collateralized with student loans. 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. UBS has also
decided to participate in the US Treasury's Temporary Guarantee
Program. Even with these assurances, we intend to convert our
investments in auction rate securities to other investments 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, ARS, and ARS
Rights, all other investments are categorized as available-for-sale under SFAS
115. These securities are recorded at estimated fair value, based on
quoted market prices or pricing methodologies. Increases and
decreases in fair value are recorded as unrealized gains and losses in other
comprehensive income. As explained above ARS and ARS Rights are
classified as trading securities with changes in fair value recorded in current
earnings.
The
following table shows the balance sheet classification, amortized cost and
estimated fair value of investments included in cash equivalents, investments in
marketable securities and restricted investments:
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
(in
thousands)
|
|
Amortized
cost
|
|
|
Unrealized
gain/(loss)
|
|
|
Net
loss
impact
|
|
|
Estimated
fair value
|
|
|
Amortized
cost
|
|
|
Unrealized
loss
|
|
|
Estimated
fair value
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
10,808 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,808 |
|
|
$ |
30,308 |
|
|
$ |
— |
|
|
$ |
30,308 |
|
Treasury
bills
|
|
|
4,999 |
|
|
|
1 |
|
|
|
— |
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
investments
included
in
cash
and
cash
equivalents
|
|
|
15,807 |
|
|
|
1 |
|
|
|
— |
|
|
|
15,808 |
|
|
|
30,308 |
|
|
|
— |
|
|
|
30,308 |
|
Investments
in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,415 |
|
|
|
— |
|
|
|
2,415 |
|
Commercial
paper
|
|
|
11,485 |
|
|
|
— |
|
|
|
— |
|
|
|
11,485 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
marketable securities
|
|
|
11,485 |
|
|
|
— |
|
|
|
— |
|
|
|
11,485 |
|
|
|
2,415 |
|
|
|
— |
|
|
|
2,415 |
|
Long-term
investments
in
marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
31,325 |
|
|
|
— |
|
|
|
(4,946 |
) |
|
|
26,379 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Auction
rate securities Rights Series
|
|
|
— |
|
|
|
— |
|
|
|
4,834 |
|
|
|
4,834 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
trading investments
|
|
|
31,325 |
|
|
|
— |
|
|
|
(112 |
) |
|
|
31,213 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Available-for-sale
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,325 |
|
|
|
(2,504 |
) |
|
|
28,821 |
|
Total
long-term investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,325 |
|
|
|
(2,504 |
) |
|
|
28,821 |
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
Certificates
of deposit
|
|
|
1,361 |
|
|
|
— |
|
|
|
— |
|
|
|
1,361 |
|
|
|
1,861 |
|
|
|
— |
|
|
|
1,861 |
|
Total
restricted
investments
|
|
|
7,361 |
|
|
|
— |
|
|
|
— |
|
|
|
7,361 |
|
|
|
7,861 |
|
|
|
— |
|
|
|
7,861 |
|
Total
investments
|
|
$ |
65,978 |
|
|
$ |
1 |
|
|
$ |
(112 |
) |
|
$ |
65,867 |
|
|
$ |
71,909 |
|
|
$ |
(2,504 |
) |
|
$ |
69,405 |
|
As of
December 31, 2008, all of the debt securities that were included in
marketable securities had remaining maturities within one year. As of
December 31, 2008, all the debt securities included as trading investments
have maturities in excess of ten years. While all of these debt
securities have long-term maturities, they are all auction rate securities with
interest rates that typically reset every 28 days.
We
adopted Statement of Financial Accounting Standards No. 157—Fair Value Measurements, or
SFAS 157, on October 1, 2008. SFAS 157 defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles, and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value
under SFAS 157 must maximize the use of observable inputs and minimize the use
of unobservable inputs. The standard describes a fair value hierarchy
based on three levels of inputs that may be used to measure fair value as
follows:
· Level
1—Quoted prices in active markets for identical assets or
liabilities.
·
|
Level
2—Inputs other than quoted prices in active markets, that are observable,
either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
·
|
Level
3—Unobservable inputs, for which there is little or no market data for the
assets or liabilities.
|
In accordance with SFAS 157, the
following table represents the fair value hierarchy for our financial assets,
comprised of cash equivalents and investments, measured at fair value on a
recurring basis as of December 31, 2008.
Fair
value measurements as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
10,808 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,808 |
|
U.S. Treasury
bills
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in
marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
11,485 |
|
|
|
— |
|
|
|
— |
|
|
|
11,485 |
|
Debt
securities
|
|
|
— |
|
|
|
— |
|
|
|
26,379 |
|
|
|
26,379 |
|
Auction Rate
Securities Rights
|
|
|
— |
|
|
|
— |
|
|
|
4,834 |
|
|
|
4,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
Certificates
of deposit
|
|
|
— |
|
|
|
1,361 |
|
|
|
— |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
33,293 |
|
|
$ |
1,361 |
|
|
$ |
31,213 |
|
|
$ |
65,867 |
|
We
value ARS using a discounted cash flow approach. The assumptions used
in preparing the discounted cash flow model included estimates of the amount and
timing of future interest and principal payments, projections of interest rate
benchmarks, probability of full repayment of the principal considering the
credit quality of the issuers, and the rate of return required by investors to
own ARS given the current liquidity risk. The ARS Rights are a free
standing asset separate from the ARS. In order to value the ARS
Rights, we considered the intrinsic value, time value of money, and the
creditworthiness of UBS.
Changes
in fair value measurements of our securities are included in Loss on investment on our
Consolidated Statements of Operations. The following table presents a
reconciliation of all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):
(in
thousands)
|
|
Significant unobservable inputs
(Level 3)
|
|
Balance
at October 1, 2008
|
|
$ |
28,821 |
|
Change in
temporary valuation adjustment included in Accumulated other
comprehensive
income/(loss)
|
|
|
2,504 |
|
Loss included
in earnings
|
|
|
(4,946 |
) |
Recognition of
ARS rights
|
|
|
4,834 |
|
Balance at
December 31, 2008
|
|
$ |
31,213 |
|
NOTE
5—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 three months ended December 31, 2008, our
contract with the Internal Revenue Service contributed revenues of
$4.4 million, or 14.6% of our revenues from Continuing
Operations. During the three months ended December 31, 2007,
this same contract contributed revenues of $4.5 million,
or 15.4% of our revenues from Continuing Operations.
Accounts
receivable, net. As of
December 31, 2008 and September 30, 2008, we reported
$5.9 million and $4.2 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 23.3% and 32.7% of the balances
reported at December 31, 2008 and September 30, 2008, respectively,
represent Accounts receivable,
net that are attributable to operations that we intend to wind-down
during the course of the next four 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 both December 31, 2008 and
September 30, 2008, Accounts receivable net,
included an allowance for uncollectible accounts of $0.3 million, 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 December 31, 2008 and September 30, 2008,
Accounts receivable, net
included $0.4 million of retainers that we expected to receive in
one year.
GOODWILL
We did
not incur any changes to the carrying amount of goodwill during the three months
ended December 31, 2008. The balance of goodwill at
December 31, 2008 and September 30, 2008 was
$14.5 million.
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. During
fiscal 2008 we tested each business within our former PSSI and GBPO segments,
which were classified as held-for-sale, for impairment. As of
September 30, 2008, the remaining business units classified as
held-for-sale were deemed to have no remaining goodwill.
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:
|
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
(in
thousands)
|
Amortization
period
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
Client
relationships
|
8-10
years
|
|
$ |
28,408 |
|
|
$ |
(17,710 |
) |
|
$ |
10,698 |
|
|
$ |
28,408 |
|
|
$ |
(16,829 |
) |
|
$ |
11,579 |
|
Technology
and research and development
|
5
years
|
|
|
3,966 |
|
|
|
(3,535 |
) |
|
|
431 |
|
|
|
3,966 |
|
|
|
(3,317 |
) |
|
|
649 |
|
Trademarks
|
6-10
years
|
|
|
3,200 |
|
|
|
(2,053 |
) |
|
|
1,147 |
|
|
|
3,200 |
|
|
|
(1,973 |
) |
|
|
1,227 |
|
Other
intangible
assets,
net
|
|
|
$ |
35,574 |
|
|
$ |
(23,298 |
) |
|
$ |
12,276 |
|
|
$ |
35,574 |
|
|
$ |
(22,119 |
) |
|
$ |
13,455 |
|
During
the three months ended December 31, 2008, we recognized $1.2 million
of amortization expense on our other intangible assets.
We
reported income tax provisions of $1,000 for the three months ended
December 31, 2008 and $16,000 for the three months ended December 31,
2007. The provision for income taxes represents state tax obligations
incurred by our EPP operations. Our Consolidated Statements of
Operations for the three months ended December 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.
FIN 48
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.
As of
December 31, 2008, we had approximately $42,000 of unrecognized tax
benefits. Our policy is to include interest and penalties related to
unrecognized tax benefits in income tax expense. Interest totaled
$8,000 at December 31, 2008. There were no additional
unrecognized tax benefits for the three months ended December 31,
2008. We do not believe within the next twelve months there will be a
significant change in the total amount of unrecognized tax benefits as of
December 31, 2008. The following table summarizes our
unrecognized tax benefits.
(in
thousands)
|
|
Balance
at September 30, 2008
|
|
$ |
42 |
|
Increases
for tax positions related to prior years
|
|
|
— |
|
Balance
at December 31, 2008
|
|
$ |
42 |
|
We file
tax returns with the IRS and in various states in which the statute of
limitations may go back to the tax year ended September 30,
2004. As of December 31, 2008, we were not engaged in any
federal or state audits.
LEGAL
ISSUES
From
time to time during the normal course of business, we are a party to litigation
and/or other claims. At December 31, 2008, none of these matters
was expected to have a material impact on our financial position, results of
operations or cash flows. At December 31, 2008 and
September 30, 2008, we had legal accruals of $1.0 million and
$0.8 million, respectively, based upon estimates of key legal
matters.
On
May 31, 2006, we received a subpoena, and in January 2009 one current
employee and several former employees received additional subpoenas 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.
BANK LINES OF
CREDIT
At
December 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, 2009, 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 December 31, 2008, $1.4 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.
At
December 31, 2008, our investment portfolio included $26.4 million,
fair value, of 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, which we refer to as auction
rate securities. As a result of concerns in the sub-prime mortgage
market and overall credit market issues, we continue to experience unsuccessful
auctions, as there are insufficient buyers for the securities at the reset date
for our auction rate securities. The unsuccessful auctions and lack
of liquidity has caused a decrease in the fair value of these
securities. All of our securities are collateralized with student
loans. 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.
In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager. This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest. Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer. Until liquidity in the market returns, or
our investment banker sells or disposes of securities, we may be unable to
liquidate these investments in a timely manner at par value.
PERFORMANCE AND GUARANTEE
PAYMENT BONDS
Under
certain contracts, we are required to obtain performance bonds from a licensed
surety and to post the performance bonds with our customers. Fees for
obtaining the bonds are expensed over the life of each bond. At
December 31, 2008, we had $17.6 million of bonds posted with
clients. There were no claims pending against any of these
bonds.
Pursuant
to the terms of money transmitter licenses we obtain with individual states, we
are required to provide guarantee payment bonds from a licensed
surety. At December 31, 2008, we had $4.0 million of bonds
posted with 15 states. There were no claims pending against any of
these bonds.
EMPLOYMENT
AGREEMENTS
As of
December 31, 2008, we had employment and change of control agreements with
six executives and 16 other key managers. If certain termination or
change of control events were to occur under the 22 contracts as of
December 31, 2008, we could be required to pay up to
$6.5 million.
As of
December 31, 2008, we also had agreements with 18 key employees under which
these individuals would be entitled to receive three to twelve months of their
base salaries over a one- to two-year period, after completing defined
employment service periods. We expect to recognize a maximum expense
of $0.2 million during fiscal year 2009 and $39,000 during fiscal year 2010
for these agreements.
As of
December 31, 2008, we had change of control agreements with 5 key employees
within our held-for-sale and 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
$0.5 million if a defined change of control were to occur as of
December 31, 2008.
In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan. Executives nominated and approved by our Chief Executive
Officer are eligible to participate. Under the PSU Plan, up to
800,000 Performance Stock Units, or PSUs, have been approved for
issuance. The PSUs will be awarded upon the achievement and
maintenance for a period of 60 days of specific share performance targets of
$8.00, $9.50, $11.00, and $13.00 per share. We intend to pay the PSUs
in cash in the pay period in which the PSUs become fully vested. As
of December 31, 2008, no PSUs had been granted under the PSU
Plan. See Note
15—Subsequent Event for information about PSU grants
which occurred in January 2009.
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.
EDGAR, DUNN &
COMPANY
During
the three months ended December 31, 2008, we purchased $128,000 of
consultancy services relating to our EPP operations from Edgar, Dunn &
Company, a company affiliated with a member of our Board of
Directors.
ITC DELTACOM,
INC.
During
the three months ended December 31, 2008, we purchased $70,000 of telecom
services from ITC Deltacom, Inc., a company affiliated with a member of our
Board of Directors.
During
the three months ended December 31, 2008, we recorded $0.5 million of
restructuring liabilities relating to severance and facility closing costs as
part of our consolidation of certain operational functions within our EPP
operations and the wind down of our VSA operations.
The
following table summarizes restructuring liabilities activity associated with
Continuing Operations for the three months ended December 31,
2008:
(in
thousands)
|
|
Severance
|
|
|
Facilities
closures
|
|
|
Total
|
|
Balance
at September 30, 2008
|
|
$ |
596 |
|
|
$ |
— |
|
|
$ |
596 |
|
Additions
|
|
|
289 |
|
|
|
226 |
|
|
|
515 |
|
Cash
payments
|
|
|
(402 |
) |
|
|
(45 |
) |
|
|
(447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
483 |
|
|
$ |
181 |
|
|
$ |
664 |
|
At
December 31, 2008, we had $0.6 million of restructuring liabilities
associated with our Continuing Operations which is included in Other current liabilities on
our Consolidated Balance Sheets and $0.1 million of liabilities included in
Other liabilities on
our Consolidated Balance Sheets. At September 30, 2008, we had
$0.6 million of restructuring liabilities associated with our Continuing
Operations which is included in Other current liabilities on
our Consolidated Balance Sheets. We expect to pay $0.6 million
of the liability during fiscal year 2009, and the remaining $0.1 million
during fiscal year 2010.
Our
business consists of two reportable segments: Continuing Operations and
Discontinued Operations. Within our Continuing Operations segment, we
allocate resources to and assess the performance of ourEPP Operations and
Wind-down Operations. Our Discontinued Operations includes portions
of our operations that have been sold or for which we are seeking buyers and
includes portions of our former GBPO and PSSI operations. Information
regarding our Discontinued Operations can be found in
Note
13—Discontinued Operations.
The
following table presents the results of operations for our EPP Operations and
our Wind-down Operations for the three months ended December 31, 2008 and
2007.
(in
thousands)
|
|
EPP
|
|
|
Wind-
down
|
|
|
Total
|
|
Three
months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
28,241 |
|
|
$ |
1,499 |
|
|
$ |
29,740 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
21,838 |
|
|
|
580 |
|
|
|
22,418 |
|
General
and administrative
|
|
|
6,568 |
|
|
|
62 |
|
|
|
6,630 |
|
Selling
and marketing
|
|
|
1,313 |
|
|
|
3 |
|
|
|
1,316 |
|
Depreciation
and amortization
|
|
|
979 |
|
|
|
480 |
|
|
|
1,459 |
|
Total
costs and expenses
|
|
|
30,698 |
|
|
|
1,125 |
|
|
|
31,823 |
|
(Loss)/income
from continuing operations before other income/(loss) and income
taxes
|
|
|
(2,457 |
) |
|
|
374 |
|
|
|
(2,083 |
) |
Other
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on investment
|
|
|
(112 |
) |
|
|
— |
|
|
|
(112 |
) |
Interest
income, net
|
|
|
304 |
|
|
|
— |
|
|
|
304 |
|
Total
other income
|
|
|
192 |
|
|
|
— |
|
|
|
192 |
|
(Loss)/income
from continuing operations before taxes
|
|
|
(2,265 |
) |
|
|
374 |
|
|
|
(1,891 |
) |
Income
tax provision
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
(Loss)/income
from continuing operations
|
|
$ |
(2,266 |
) |
|
$ |
374 |
|
|
$ |
(1,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
27,809 |
|
|
$ |
1,146 |
|
|
$ |
28,955 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
21,118 |
|
|
|
1,116 |
|
|
|
22,234 |
|
General
and administrative
|
|
|
6,656 |
|
|
|
453 |
|
|
|
7,109 |
|
Selling
and marketing
|
|
|
1,996 |
|
|
|
118 |
|
|
|
2,114 |
|
Depreciation
and amortization
|
|
|
924 |
|
|
|
372 |
|
|
|
1,296 |
|
Total
costs and expenses
|
|
|
30,694 |
|
|
|
2,059 |
|
|
|
32,753 |
|
Loss
from continuing operations before other income and income
taxes
|
|
|
(2,885 |
) |
|
|
(913 |
) |
|
|
(3,798 |
) |
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
967 |
|
|
|
— |
|
|
|
967 |
|
Total
other income
|
|
|
967 |
|
|
|
— |
|
|
|
967 |
|
Loss
from continuing operations before taxes
|
|
|
(1,918 |
) |
|
|
(913 |
) |
|
|
(2,831 |
) |
Income
tax provision
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
Loss
from continuing operations
|
|
$ |
(1,934 |
) |
|
$ |
(913 |
) |
|
$ |
(2,847 |
) |
Our
total assets for each of these businesses are shown in the following
table:
(in
thousands)
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
Continuing
operations:
|
|
|
|
|
|
|
EPP
|
|
$ |
120,656 |
|
|
$ |
120,715 |
|
Wind-down
|
|
|
4,493 |
|
|
|
4,932 |
|
Assets
for continuing operations
|
|
|
125,149 |
|
|
|
125,647 |
|
Assets
held-for-sale
|
|
|
10,293 |
|
|
|
11,704 |
|
Total
assets
|
|
$ |
135,442 |
|
|
$ |
137,351 |
|
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 December 31, 2008, there were 810,199 shares of common
stock reserved for future grants under the Plan.
STOCK
OPTIONS
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 $0.3 million for the three months ended December 31,
2008. During the three months ended December 31, 2007, we
recognized $0.8 million 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
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
Expected
period that options will be outstanding (in
years)
|
|
|
5.00 |
|
|
|
5.00 |
|
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
|
|
2.03 |
% |
|
|
3.65 |
% |
Volatility
|
|
|
45.30 |
% |
|
|
41.68 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
Weighted-average
fair value of options granted
|
|
$ |
1.81 |
|
|
$ |
4.26 |
|
Weighted-average
intrinsic value of options exercised (in
thousands)
|
|
$ |
— |
|
|
$ |
12 |
|
Expected
volatilities are based on 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 three months ended December 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, 2008
|
|
|
2,702 |
|
|
$ |
9.07 |
|
|
|
|
|
Granted
|
|
|
375 |
|
|
|
4.31 |
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Forfeitures
or expirations
|
|
|
(147 |
) |
|
|
8.67 |
|
|
|
|
|
Options
outstanding at December 31, 2008
|
|
|
2,930 |
|
|
$ |
8.48 |
|
7.74
years
|
|
$ |
231 |
|
Options
vested and expected to vest at December 31, 2008
|
|
|
2,774 |
|
|
$ |
8.53 |
|
7.66
years
|
|
$ |
200 |
|
Options
exercisable at December 31, 2008
|
|
|
1,475 |
|
|
$ |
9.08 |
|
6.37
years
|
|
$ |
— |
|
As of
December 31, 2008, a total of $3.8 million of unrecognized
compensation cost related to stock options, net of estimated forfeitures, was
expected to be recognized over a 3.77 year weighted-average
period.
RESTRICTED STOCK
UNITS
On
April 30, 2008, we granted 550,000 restricted stock units which vest when
both the price target is achieved and the required service period is
met. Pursuant to the Plan, 500,000 shares can be payable in shares of
our common stock. The remaining 50,000 shares may be payable in cash
and are recorded at their fair value as Other liabilities on our
Consolidated Balance Sheets. We used a Monte Carlo simulation option
pricing model to estimate the grant-date fair value using the following
assumptions:
|
|
December
31, 2008
|
|
|
|
Payable
in shares
|
|
|
Payable
in cash
|
|
Weighted-average
assumptions used in Monte Carlo simulation:
|
|
|
|
|
|
|
Expected
period that units will be outstanding (in
years)
|
|
|
3.00 |
|
|
|
2.33 |
|
Interest
rate (based on U.S.
Treasury yield)
|
|
|
2.48 |
% |
|
|
0.84 |
% |
Volatility
|
|
|
39.07 |
% |
|
|
39.93 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
Weighted-average
fair value of options granted
|
|
$ |
3.63 |
|
|
$ |
0.44 |
|
Restricted
stock unit activity for the equity portion of the awards for the three months
ended December 31, 2008 is as follows:
Restricted
shares (in thousands,
except per share data)
|
|
Shares
|
|
Restricted
at October 1, 2008
|
|
|
500 |
|
Granted
(1)
|
|
|
— |
|
Vested
|
|
|
— |
|
Forfeited
|
|
|
— |
|
Restricted
at December 31, 2008
|
|
|
500 |
|
(1) Of
the 550,000 restricted stock units awarded, 500,000 are payable in
shares.
|
|
For the
three months ended December 31, 2008 we recorded $0.1 million in
expense related to the award. As of December 31, 2008, we have
$1.4 million in unrecognized compensation cost, expected to be recognized
through April 2011.
PERFORMANCE STOCK
UNITS
In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan. Executives nominated and approved by our Chief Executive
Officer are eligible to participate. Under the PSU Plan, up to
800,000 Performance Stock Units, or PSUs, have been approved for
issuance. The PSUs will be awarded upon the achievement and
maintenance for a period of 60 days of specific share performance targets of
$8.00, $9.50, $11.00, and $13.00 per share. We intend to pay the PSUs
in cash in the pay period in which the PSUs become fully vested. The
executives will receive a cash payment equal to (x) the price of a share of our
common stock as of the close of market on the date of vesting, but not more than
$15.00, multiplied by (y) the number of PSUs that have been awarded to the
executive.
As of
December 31, 2008, no PSUs had been granted to any executive under the PSU
Plan. See Note
15—Subsequent Event for information about PSU grants
which occurred in January 2009.
DIVESTITURES
On
November 30, 2008, we completed the sale of the assets, operations and
certain liabilities of our Financial Management Systems, or FMS,
business. The sale was completed pursuant to an Asset Purchase
Agreement dated November 4, 2008 for a purchase price of $0.8 million,
subject to a working capital
adjustment,
of which $0.2 million was payable in cash and the remaining
$0.6 million is secured with an interest bearing note payable over 18
months.
ASSET GROUPS
HELD-FOR-SALE
During
fiscal 2008 we completed the divestiture of the majority of the operations which
we deemed incompatible with our core business—Electronic Payment
Processing. As of September 30, 2008, we had two remaining
operations, formerly part of our PSSI segment for which we were seeking
buyers. In November 2008, we completed the sale of the Financial
Management Systems operations. As of December 31, 2008, we were
still seeking a buyer for our Unemployment Insurance, or UI,
operations. We classified the assets and liabilities associated
with these held-for-sale operations 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.
The
following schedule shows the current carrying value of the assets and
liabilities in the PSSI segment that are in the disposal group as of
December 31, 2008 and September 30, 2008.
(in
thousands)
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
Assets:
|
|
|
|
|
|
|
Current
assets
|
|
$ |
6,551 |
|
|
$ |
6,190 |
|
Property,
equipment and software, net
|
|
|
3,740 |
|
|
|
5,512 |
|
Other
assets
|
|
|
2 |
|
|
|
2 |
|
Total
assets
|
|
|
10,293 |
|
|
|
11,704 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
7,988 |
|
|
|
9,061 |
|
Total
liabilities
|
|
|
7,988 |
|
|
|
9,061 |
|
Net
assets and liabilities of disposal group
|
|
$ |
2,305 |
|
|
$ |
2,643 |
|
We
performed an impairment analysis of our UI operation in accordance with SFAS
144. As a result of this analysis, we determined our UI operation had
a carrying value that exceeded fair value. During the three months
ended December 31, 2008, we recorded an impairment expense of
$2.6 million related to long-lived asset impairment under SFAS
144. This impairment is included in (Loss)/income from discontinued
operations, net on our Consolidated Statements of
Operations.
SUMMARY OF REVENUE AND
INCOME BEFORE TAXES—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. 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. We do not have any ongoing involvement or cash flows from former
GBPO and PSSI businesses that we divested during fiscal 2008. The
following table summarizes our revenue and pre-tax income generated by these
operations during the three months ended December 31, 2008 and
2007.
|
|
Three
months ended
December 31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Revenues
(Discontinued operations):
|
|
|
|
|
|
|
GBPO
|
|
$ |
— |
|
|
$ |
7,133 |
|
PSSI
|
|
|
4,469 |
|
|
|
6,610 |
|
Total
revenues
|
|
$ |
4,469 |
|
|
$ |
13,743 |
|
(Loss)/income
before taxes (Discontinued operations):
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
(69 |
) |
|
$ |
1,729 |
|
PSSI
|
|
|
(3,193 |
) |
|
|
(396 |
) |
Other/eliminations
|
|
|
— |
|
|
|
83 |
|
Total
(loss)/income before taxes
|
|
$ |
(3,262 |
) |
|
$ |
1,416 |
|
The
following table sets forth the computation of basic and diluted (loss)/earnings
per share:
|
|
Three
months ended December 31,
|
|
(in
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
Numerator:
(Loss)/income
from:
|
|
|
|
|
|
|
Continuing
operations, net of income taxes
|
|
$ |
(1,892 |
) |
|
$ |
(2,847 |
) |
Discontinued
operations, net of income taxes
|
|
|
(3,262 |
) |
|
|
1,416 |
|
Net
loss
|
|
$ |
(5,154 |
) |
|
$ |
(1,431 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
19,735 |
|
|
|
19,543 |
|
Effects
of dilutive common stock options
|
|
|
— |
|
|
|
— |
|
Adjusted
weighted-average shares
|
|
|
19,735 |
|
|
|
19,543 |
|
(Loss)/earnings
per basic and diluted share
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.10 |
) |
|
$ |
(0.14 |
) |
From
discontinued operations
|
|
|
(0.16 |
) |
|
|
0.07 |
|
(Loss)/earnings
per basic and diluted share
|
|
$ |
(0.26 |
) |
|
$ |
(0.07 |
) |
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
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Weighted-average
options excluded from computation of diluted (loss)/earnings per
share
|
|
|
2,759 |
|
|
|
1,400 |
|
Due to
net losses from Continuing Operations, we have excluded an additional 351,000
shares at December 31, 2007 of common stock equivalents from the
calculation of diluted loss per share since their effect would have been
anti-dilutive. At December 31, 2008, we have also excluded
500,000 shares of restricted stock from the computation of diluted
(loss)/earnings per share since their effect would have been
anti-dilutive.
CHOICEPAY, INC.
ACQUISITION
In
January 2009 we acquired substantially all of the assets of ChoicePay, Inc., a
leading ePayments solution provider for $7.5 million, with additional
payments of up to $2.0 million possible based on the revenue from specified
customer contracts.
TIER TECHNOLOGIES, INC.
EXECUTIVE PERFORMANCE STOCK UNIT PLAN
In
January 2009, we granted, and the executives have accepted, 730,000 Performance
Stock Units, or PSUs to seven executives. These PSUs were granted
pursuant to the terms of the Tier Technologies, Inc. Executive Performance Stock
Unit Plan and vest on December 4, 2011.
STOCK
REPURCHASE
In
January 2009, we announced a stock repurchase program, which authorizes the
repurchase of up to $15 million of our common stock from time to time in
the open market. We inted to use funds from the
proceeds from the liquidation of or borrowing against our auction rate
securities, if and when available.
DIVESTITURE
On February 6, 2009
we entered into an asset purchase agreement for the sale of our Unemployment
Insurance business for a purchase price of $1.5 million. The
closing of the transaction is subject to customary closing conditions and is
expected to take place in February 2009.
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 governments, educational institutions, utility
companies and other public sector clients with biller direct electronic payment
and other transaction processing services, as well as software and systems
integration services. As explained more fully in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations, we are
in the process of divesting a number of incompatible businesses and dedicating
an increasing amount of effort toward expanding our core business—Electronic
Payment Processing, or EPP.
Key
Events in Fiscal 2009
In
November 2008, we completed the divestiture of our Financial Management Systems,
or FMS, operations, which was part of our former Packaged Software Systems
Integration, or PSSI, segment. In January 2009 we completed the
acquisition of ChoicePay, Inc., a leading ePayments solution
provider. We believe the acquisition of ChoicePay, Inc. will enhance
our technology platform.
SUMMARY
OF OPERATING RESULTS
The
following table provides a summary of our operating results for the three months
ended December 31, 2008 for our Continuing and Discontinued
Operations:
(in
thousands, except per share)
|
|
Net
(loss)/income
|
|
|
(Loss)/earnings
per share
|
|
Continuing
Operations:
|
|
|
|
|
|
|
EPP
|
|
$ |
(2,266 |
) |
|
$ |
(0.11 |
) |
Wind-down
|
|
|
374 |
|
|
|
0.01 |
|
Total
Continuing Operations
|
|
$ |
(1,892 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
(69 |
) |
|
$ |
— |
|
PSSI
|
|
|
(3,193 |
) |
|
|
(0.16 |
) |
Total
Discontinued Operations
|
|
$ |
(3,262 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,154 |
) |
|
$ |
(0.26 |
) |
Our
Continuing Operations consists of our Electronic Payment Processing, or EPP,
Operations, and certain operations we intend to wind down over the next four
years. Revenues from our EPP Operations were $28.2 million for
the period ended December 31, 2008. Transaction volume increased
1.9% and total dollars processed increased 10.0%. Our EPP Operations
reported a net loss of $3.2 million for the three months ended
December 31, 2008. Contributing to the net loss were
restructuring and severance payments as we continue to implement our strategic
initiative to focus on EPP Operations and streamline our general and
administrative expenses. Our Wind-down operations reported net income
of $0.4 million for the three months ended December 31,
2008. We have reported an increase in revenues, primarily due to the
timing of billing of maintenance contracts and we have decreased our costs
associated with supporting Wind-down projects, primarily through reductions in
labor. These factors have resulted in a reported net
income.
Our
Discontinued Operations consists of businesses we have divested through
December 31, 2008, as well as one business operation, Unemployment
Insurance, or UI, for which we continued to seek a buyer as of December 31,
2008. Our Discontinued Operations reported a net loss of
$3.3 million for the three months ended December 31,
2008. Contributing to the net loss was an impairment charge of
$2.6 million related to our UI business and $0.4 million on the
disposal of our Financial Management Systems business in
November.
EXPECTATIONS
AND STRATEGY FOR 2009
During
fiscal 2009 we expect to complete our transition from a diversified government
outsourcing provider to a company focused exclusively on providing electronic
payment solutions to merchants who provide services directly to customers, which
we refer to as the biller-direct space. We anticipate minimal revenue
growth during fiscal 2009 as we believe the current macroeconomic climate will
reduce the average payment size in key vertical categories including federal tax
and real property tax payments. Nevertheless for the remainder of
fiscal 2009 we expect to see continued transaction growth in our EPP business
driven by increasing consumer demand for electronic payment options, and we
intend to pursue key strategic initiatives that leverage our lead position in
the biller-direct space and are designed to facilitate growth and maximize
efficiencies. These initiatives include the following:
·
|
Analyze
and consolidate our processing platforms and infrastructure to improve
efficiency and reduce costs, while providing the capacity for future
growth. Based on our current plan, we expect to complete the
consolidation of our current EPP technology platforms in calendar year
2009.
|
·
|
Expand
our biller direct services beyond our government, education and utility
clients to begin focusing on other commercial, non-government
biller-direct payment categories. We expect to increase client
acquisitions by increasing sales and marketing programs and expanded
channel selling.
|
·
|
Increase
customer adoption and utilization through increased marketing and
promotions, expanded cross-selling capabilities and enhanced My Account
functionality. My Account is a personal registration function
offered through our subsidiary, Official Payments
Corporation.
|
·
|
Develop
and launch new e-commerce products and payment services for partners and
direct biller channels.
|
·
|
Enter
new biller-direct markets.
|
·
|
Offer
additional payment channels including: mobile, walk-up payment, and
kiosks.
|
In
addition, we have completed the consolidation of some of our EPP operations,
facilities, departments and positions in San Ramon, California with our
operations in Auburn, Alabama. We expect this operations
consolidation to increase efficiencies, reduce costs, reduce overhead, and
eliminate duplicative operations and functions. We also intend to
reduce general and administrative expenses once the disposition of our non-core
assets is complete. During the early part of fiscal 2009, 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.
RESULTS
OF OPERATIONS
The
following table provides an overview of our results of operations for the three
months ended December 31, 2008 and 2007:
|
|
Three months
ended
|
|
|
Variance
|
|
|
|
December
31,
|
|
|
2008
vs. 2007
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$ |
29,740 |
|
|
$ |
28,955 |
|
|
$ |
785 |
|
|
|
2.7 |
% |
Costs
and expenses
|
|
|
31,823 |
|
|
|
32,753 |
|
|
|
(930 |
) |
|
|
(2.84 |
)% |
Loss
from continuing operations before other income and income
taxes
|
|
|
(2,083 |
) |
|
|
(3,798 |
) |
|
|
1,715 |
|
|
|
45.2 |
% |
Other
income
|
|
|
192 |
|
|
|
967 |
|
|
|
(775 |
) |
|
|
(80.1 |
)% |
Loss
from continuing operations before income taxes
|
|
|
(1,891 |
) |
|
|
(2,831 |
) |
|
|
940 |
|
|
|
(33.2 |
)% |
Income
tax provision
|
|
|
1 |
|
|
|
16 |
|
|
|
(15 |
) |
|
|
(93.8 |
)% |
Loss
from continuing operations
|
|
|
(1,892 |
) |
|
|
(2,847 |
) |
|
|
955 |
|
|
|
(33.5 |
)% |
(Loss)/income
from discontinued operations, net
|
|
|
(3,262 |
) |
|
|
1,416 |
|
|
|
(4,678 |
) |
|
|
(330.4 |
)% |
Net
loss
|
|
$ |
(5,154 |
) |
|
$ |
(1,431 |
) |
|
$ |
(3,723 |
) |
|
|
(260.2 |
)% |
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 and certain
businesses that we expect to wind-down over the next four years. The
following table presents the revenues and expenses for our Continuing Operations
for the three months ended December 31, 2008 and 2007. This
table is followed by a detailed analysis summarizing reasons for variances in
these financial results.
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
29,740 |
|
|
$ |
28,955 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
22,418 |
|
|
|
22,234 |
|
General
and administrative
|
|
|
6,630 |
|
|
|
7,109 |
|
Selling
and marketing
|
|
|
1,316 |
|
|
|
2,114 |
|
Depreciation
and amortization
|
|
|
1,459 |
|
|
|
1,296 |
|
Total
costs and expenses
|
|
|
31,823 |
|
|
|
32,753 |
|
Loss
from continuing operations before other income and income
taxes
|
|
|
(2,083 |
) |
|
|
(3,798 |
) |
Other
income
|
|
|
192 |
|
|
|
967 |
|
Loss
from continuing operations before income taxes
|
|
|
(1,891 |
) |
|
|
(2,831 |
) |
Income
tax provision
|
|
|
1 |
|
|
|
16 |
|
Loss
from continuing operations
|
|
$ |
(1,892 |
) |
|
$ |
(2,847 |
) |
Revenues (Continuing
Operations)
The
following table compares the revenues generated by our Continuing Operations
during the three months ended December 31, 2008 and 2007:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
28,241 |
|
|
$ |
27,809 |
|
|
$ |
432 |
|
|
|
1.6 |
% |
Wind-down
|
|
|
1,499 |
|
|
|
1,146 |
|
|
|
353 |
|
|
|
30.8 |
% |
Total
|
|
$ |
29,740 |
|
|
$ |
28,955 |
|
|
$ |
785 |
|
|
|
2.7 |
% |
The
following sections discuss the key factors 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 $28.2 million of revenues during the three months ended
December 31, 2008, a $0.4 million, or 1.6%, increase over the three
months ended December 31, 2007. During the three months ended
December 31, 2008, we processed 1.9% more transactions than we did in the
same period last year, representing 10.0% more dollars. Most of the
markets that we serve, which we call verticals, experienced an increase in
transactions processed during the three months ended December 31, 2008
compared to the same period last year, ranging from 18.4% to
46.1%. However, our Federal Income Tax, Education, and Court fees and
fines verticals, experienced decreases in transactions processed, ranging from
2.3% to 55.2%. During the three months ended December 31, 2008,
we added 114 new clients, which contributed to the increase in
revenues.
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 revenue growth
for the foreseeable future.
Wind-down
Revenues: During the three months ended December 31,
2008, our Wind-down Operations generated $1.5 million in revenues, a
$0.4 million, or 30.8%, increase from the three months ended
December 31, 2007. Our Voice and Systems Automation, or VSA,
business reported $1.4 million in revenues during the three months ended
December 31, 2008, which is a $0.3 million or 23.7% increase over the
same period last year. The increase in revenues is primarily due to
completion of several projects during the three months ended December 31,
2008. We expect to continue to support and renew existing maintenance
contracts; however, we do not expect we will actively pursue new contracts for
the VSA business. Our Pension business generated $50,000 in revenues
for the three months ended December 31, 2008. This is a $76,000
increase over the same period last year due to a negative revenue adjustment
recorded during the three months ended December 31, 2007. We
expect to wind down our Pension business during fiscal 2009.
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 months ended
December 31, 2008 and 2007:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
%
|
|
Direct
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
21,838 |
|
|
$ |
21,118 |
|
|
$ |
720 |
|
|
|
3.4 |
% |
Wind-down
|
|
|
580 |
|
|
|
1,116 |
|
|
|
(536 |
) |
|
|
(48.0 |
)% |
Total
|
|
$ |
22,418 |
|
|
$ |
22,234 |
|
|
$ |
184 |
|
|
|
0.8 |
% |
The
following sections discuss the key factors 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 $0.7 million, or 3.4%, during the three months ended
December 31, 2008 compared to the same period last
year. Approximately half of the increase is related to increased
interchange fees charged to us to process our transactions, consistent with the
increase in dollars processed. The remaining increase is due to a
shift in card payment type. 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: During the three months ended December 31, 2008,
direct costs from our wind-down operations decreased $0.5 million, or
48.0%, from the same period last year. Despite an increase in
revenues, we have decreased labor and labor-related expenses, including
subcontractor costs required to service our various projects by
$0.3 million. We have also experienced a decrease in product and
material cost of $0.1 million as VSA maintenance projects complete and are
not renewed. In addition, we have decreased our reserve balance by
$0.1 million as a result of fewer client billings and the absence of new
clients, consistent with our wind down plan. As we wind down these
operations, we expect that the direct costs of these operations will continue to
decrease during the remainder of fiscal 2009.
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 for outside services. The following
table compares general and administrative costs incurred by our Continuing
Operations during the three months ended December 31, 2008 and
2007:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
6,568 |
|
|
$ |
6,656 |
|
|
$ |
(88 |
) |
|
|
(1.3 |
)% |
Wind-down
|
|
|
62 |
|
|
|
453 |
|
|
|
(391 |
) |
|
|
(86.3 |
)% |
Total
|
|
$ |
6,630 |
|
|
$ |
7,109 |
|
|
$ |
(479 |
) |
|
|
(6.7 |
)% |
EPP General and
Administrative: During the three months ended
December 31, 2008, EPP incurred $6.6 million of general and
administrative expenses, a $0.1 million, or 1.3%, decrease over the same
period last year. The most significant contributor to the decrease in
expenses is the reduction of stock-based compensation expense, which contributed
$0.3 million to the overall decrease. During the three months
ended December 31, 2007, we accelerated the vesting of options to purchase
shares of our common stock awarded to our Board of Directors in August 2006,
which resulted in a one-time expense of $0.5 million. This
decrease in stock-based compensation expense is offset by an additional
$0.2 million in expense relating to option and restricted stock unit awards
made to our key executives during the second half of fiscal 2008. We
experienced reductions in general and administrative expenses related to support
services in our Reston, Virginia headquarters as a result of our efforts to
streamline our business functions. Labor and labor-related expenses
and outside services, including accounting and legal services decreased
$0.7 million during the three months ended December 31, 2008 compared
to the same period last year.
Partially
offsetting these decreases is an increase of $0.4 million of labor and
labor-related expenses, including bonus expense, primarily due to the addition
of executive staff and the shift of resources to our EPP
Operations. Severance
expense increased $0.3 million and restructuring expense increased
$0.2 million during the three months ended December 31, 2008 over the
same period last year as a result of the consolidation of our San Ramon,
California office with our Auburn, Alabama facility.
During
fiscal 2009, we expect to see decreases in general and administrative support
expense, primarily through reductions in our labor-force and outside services,
as we complete our strategic initiatives and continue to consolidate and
streamline our EPP operations.
Wind-down General
and Administrative: During the three months ended
December 31, 2008, our wind-down operations incurred $0.1 million of
general and administrative expenses, a $0.4 million, or 86.3%, decrease
over the same period last year. This decrease is primarily
attributable to the absence of labor and labor-related costs as contracts
completed or are nearing completion.
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 months ended December 31, 2008 and 2007:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
%
|
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
1,313 |
|
|
$ |
1,996 |
|
|
$ |
(683 |
) |
|
|
(34.2 |
)% |
Wind-down
|
|
|
3 |
|
|
|
118 |
|
|
|
(115 |
) |
|
|
(97.5 |
)% |
Total
|
|
$ |
1,316 |
|
|
$ |
2,114 |
|
|
$ |
(798 |
) |
|
|
(37.8 |
)% |
EPP Selling and
Marketing: During the three months ended December 31,
2008, EPP incurred $1.3 million of selling and marketing expenses, a
$0.7 million, or 34.2%, decrease over the same period last
year. Labor and labor-related expenses contributed $0.3 million
to the overall decline, consisting of a $0.5 million decrease in
commissions paid during the current period, offset by additional labor costs of
$0.2 million as we focus our sales force on our EPP
operations. A reduction in advertising and partnership-related costs
contributed $0.3 million to the overall decrease, primarily due to the
timing of our tax season advertising efforts, which we expect to incur during
the coming months. The remaining $0.1 million decrease is
attributable to reductions in travel and office-related expenses as a result of
streamlining our sales and marketing efforts.
Wind-down Selling
and Marketing: During the three months ended December 31,
2008, the selling and marketing expenses of our wind-down operation decreased by
$0.1 million, or 97.5% from the three months ended December 31,
2007. The variance is attributable to our strategic decision to focus
on our EPP Operations, in which all selling and marketing efforts have been
directed. We expect to incur minimal expenses relating to Wind-down
Operations during fiscal 2009.
We
expect to see a continued decrease in selling and marketing expenses during
fiscal 2009 as we continue to streamline our sales and marketing
force.
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
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2008
|
|
|
2007
|
|
|
$ |
|
|
|
% |
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
979 |
|
|
$ |
924 |
|
|
$ |
55 |
|
|
|
6.0 |
% |
Wind-down
|
|
|
480 |
|
|
|
372 |
|
|
|
108 |
|
|
|
29.0 |
% |
Total
|
|
$ |
1,459 |
|
|
$ |
1,296 |
|
|
$ |
163 |
|
|
|
12.6 |
% |
Depreciation
and amortization relating to our EPP Operations remained relatively consistent
during the three months ended December 31, 2008 and 2007. We
incurred an additional $0.1 million in amortization expense for our
Wind-down Operations as a result of the decision at the end of fiscal 2008 to
decrease the remaining useful life of intangible assets from four to two
years.
Other Income/(Loss)
(Continuing Operations)
Loss on
investment: During the three months
ended December 31, 2008, we recognized a $0.1 million loss related to
the decrease in fair value of our auction rate securities.
Interest income,
net: Interest income during
the three months ended December 31, 2008 decreased $0.7 million
compared to the three months ended December 31, 2007, attributable to both
a decrease in the amount within our investment portfolio and decreases in
interest rates. Due to current market conditions, we have elected to
sell as many debt securities as possible and invest the funds in money market
accounts, treasury bills and commercial paper – often at lower interest rates
than our debt securities. Our interest rates fluctuate with changes
in the marketplace.
Income Tax Provision
(Continuing Operations)
We
reported income tax provisions of $1,000 for the three months ended
December 31, 2008 and $16,000 for the three months ended December 31,
2007. The provision for income taxes represents state tax obligations
incurred by our EPP operations. Our Consolidated Statements of
Operations for the three months ended December 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
Our
Discontinued Operations consists of portions of our former Government Business
Process Outsourcing, or GBPO, business and our Packaged Software Systems
Integration, or PSSI, business we have divested through December 31,
2008. It also consists of one remaining PSSI operation that we
continue to own and operate, for which we continue to seek a
buyer. Statement of Financial Accounting Standards No. 144—Impairment
or Disposal of Long-Lived Assets, or SFAS 144, requires that we report that
business as "discontinued" on our Consolidated Statements of Operations, because
we do not expect to have a continuing involvement in, or cash flows from, that
operation after its divestiture. As such, we have reclassified
revenues and costs associated with the portions of those segments held-for-sale
to Discontinued Operations for all periods represented.
The
following table summarizes our results of operations from Discontinued
Operations for the three months ended December 31, 2008 and
2007. Immediately following this table is a discussion of key
variances in these results.
|
|
Three
months ended
December
31, 2008
|
|
|
Three
months ended
December
31, 2007
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$ |
— |
|
|
$ |
4,469 |
|
|
$ |
4,469 |
|
|
$ |
7,133 |
|
|
$ |
6,610 |
|
|
$ |
— |
|
|
$ |
13,743 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
3 |
|
|
|
3,851 |
|
|
|
3,854 |
|
|
|
4,303 |
|
|
|
5,047 |
|
|
|
(138 |
) |
|
|
9,212 |
|
General
and
administrative
|
|
|
49 |
|
|
|
675 |
|
|
|
724 |
|
|
|
550 |
|
|
|
1,502 |
|
|
|
41 |
|
|
|
2,093 |
|
Selling
and marketing
|
|
|
— |
|
|
|
103 |
|
|
|
103 |
|
|
|
551 |
|
|
|
368 |
|
|
|
14 |
|
|
|
933 |
|
Depreciation
and
amortization
|
|
|
— |
|
|
|
12 |
|
|
|
12 |
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
20 |
|
Write-down
of
goodwill
and
intangibles
|
|
|
— |
|
|
|
2,594 |
|
|
|
2,594 |
|
|
|
— |
|
|
|
373 |
|
|
|
— |
|
|
|
373 |
|
Total
costs and
expenses
|
|
|
52 |
|
|
|
7,235 |
|
|
|
7,287 |
|
|
|
5,404 |
|
|
|
7,310 |
|
|
|
(83 |
) |
|
|
12,631 |
|
(Loss)/income
before
loss
on disposal of
discontinued
operations
|
|
|
(52 |
) |
|
|
(2,766 |
) |
|
|
(2,818 |
) |
|
|
1,729 |
|
|
|
(700 |
) |
|
|
83 |
|
|
|
1,112 |
|
(Loss)/income
on
disposal
of
discontinued
operations
|
|
|
(17 |
) |
|
|
(427 |
) |
|
|
(444 |
) |
|
|
— |
|
|
|
304 |
|
|
|
— |
|
|
|
304 |
|
(Loss)/income
from
discontinued
operations,
net
|
|
$ |
(69 |
) |
|
$ |
(3,193 |
) |
|
$ |
(3,262 |
) |
|
$ |
1,729 |
|
|
$ |
(396 |
) |
|
$ |
83 |
|
|
$ |
1,416 |
|
GBPO (Discontinued
Operations)
On
June 30, 2008 we completed the sale of the assets, operations and certain
liabilities of our GBPO business. During the three months ended
December 31, 2008, we incurred minimal expenses relating to our former
operations, primarily attributable to consulting costs associated with the
transition of the GBPO businesses to their respective buyers.
PSSI (Discontinued
Operations)
Revenues: During
the three months ended December 31, 2008, revenues from discontinued PSSI
operations decreased $2.1 million, or 32.4%, from the same period last
year. A reduction in revenues from operations divested through
November 30, 2008 contributed $3.4 million to the decrease, of which
our State Systems Integration, or SSI, business contributed $2.2 million,
our Financial Management Systems, or FMS, business contributed $0.7 million
and our Independent Validation and Verification, or IV&V business
contributed $0.5 million. Partially offsetting these decreases
is an increase in revenues of $1.3 million from our Unemployment Insurance,
or UI, operations, which we continue to operate as of December 31,
2008. The revenues from one contract which commenced after
December 31, 2007 contributed $1.7 million to the period-over-period
increase and an increase in deliverables from another contract contributed
$0.2 million to the overall increase. Partially offsetting these
increases is a decrease of $0.4 million in revenues from two contracts
which completed during fiscal 2008. In addition, a reduction in
deliverables from another contract contributed $0.2 million to the
decline.
Costs and
expenses: During the three months ended December 31,
2008, direct costs and other expense from discontinued PSSI operations decreased
$75,000, or 1.0%, from the same period last year. Direct costs for
the three months ended December 31, 2008 decreased $1.2 million over
the same period last year, in which the absence of costs due to the divestiture
of the SSI, FMS and IV&V businesses contributed $2.7 million to the
decline. Partially offsetting the decease in direct costs due to the
divestitures was an increase in costs from our UI operations of
$1.5 million primarily attributable to costs associated with projects
commencing during fiscal 2008 and additional work for one existing
contract. Our general and administrative, selling and marketing, and
depreciation and amortization expenses contributed $1.1 million to the
decrease due to the absence of support expenses as a result of the divestiture
of the majority of our former PSSI operations. We incurred
$2.6 million in impairment expense relating to our UI operations, in
accordance with Statement of Financial Accounting Standards No. 144—Accounting for the Impairment or
Disposal of Long-Lived Assets since we determined the carrying value
exceeded the fair value of the business, compared to $0.4 million recorded
in the three months ended December 31, 2007.
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
December 31, 2008, we had $1.4 million of letters of credit
outstanding under this credit facility, which are fully
collateralized. These letters of credit were issued to secure
performance bonds, insurance and a property lease.
Net Cash
from Continuing Operations—Operating Activities. During the
three months ended December 31, 2008, our operating activities from
Continuing Operations used $0.8 million of cash. This reflects a
net loss of $1.9 million from Continuing Operations and $2.1 million
of non-cash items. During the three months ended December 31,
2008, $1.3 million of cash was generated by an increase in accounts payable
and accrued liabilities. An increase in accounts receivable used
$1.7 million of cash. An increase in prepaid expenses and other
assets used $0.6 million of cash.
Net Cash
from Continuing Operations—Investing Activities. Net cash used
in our investing activities from Continuing Operations for the three months
ended December 31, 2008 was $8.8 million, including $11.5 million
of cash used to purchase marketable securities, offset by $2.4 million of
cash provided by maturities of marketable securities. During the
three months ended December 31, 2008, the proceeds from the sale of our
Discontinued Operations provided $0.2 million of cash. In
addition, the release and maturity of restricted investments provided
$0.5 million of cash, offset by $0.5 million of cash used to purchase
equipment and software and fund internal development of software primarily
associated with our EPP business.
Net Cash
from Continuing Operations—Financing Activities. Net cash used
in our financing activities from Continuing Operations for the three months
ended December 31, 2008 was $5,000 for capital lease
obligations.
Net Cash
from Discontinued Operations—Operating Activities. During the three
months ended December 31, 2008, our operating activities from Discontinued
Operations used $3.2 million of cash. This reflects a net loss
of $3.3 million and $2.8 million of non-cash items, of which
$2.6 million relates to the write-down of held-for-sale assets,
$0.2 million relates to a reduction in bad debt expense and
$0.4 million relates to a loss recognized on the sale and disposal of our
discontinued operations. In addition, the net effect of changes in
discontinued assets and liabilities used $2.8 million of cash.
Net Cash
from Discontinued Operations—Investing Activities. Net cash
used in our investing activities from Discontinued Operations for the three
months ended December 31, 2008 was $0.4 million, primarily used to
fund internal development of software.
In our
Note
3—Investments we
disclosed that at December 31, 2008, our investment portfolio included
$31.3 million par value of 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. As a
result of concerns in the sub-prime mortgage market and overall credit market
issues, we continue to experience unsuccessful auctions, as there are
insufficient buyers for the securities at the reset date for our auction rate
securities. The unsuccessful auctions and lack of liquidity has
caused a decrease in the fair value of these securities. All of our
securities are collateralized with student loans. 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.
In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager. This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest. Our investment banker has the right to
sell or dispose of
our
auction rate securities at par, at any time until the expiration of the
offer. Until liquidity in the market returns, or our investment
banker sells or disposes of securities, we may be unable to liquidate these
investments in a timely manner at par value.
In
January 2009, we announced a stock repurchase program, which authorizes the
repurchase of up to $15 million of our common stock in the open
market. We intend to fund this program using the proceeds from the
liquidation of or borrowing against our auction rate securities, if and when
they are available.
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 timing of billing and collections. We anticipate that our
existing capital resources, including our cash balances, cash that we anticipate
will be provided by operating activities and our available credit facilities
will be adequate to fund our operations for at least fiscal year
2009. 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; capital expenditures supporting
continued growth of our EPP business; 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; our
ability to draw on our bank facility; 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, 2008, there has been no material change 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, 2008.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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 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 December 31, 2008, the fair value of the portfolio would
decline by about $36,000.
A
significant portion of our investment portfolio consists of 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. As a result of
concerns in the sub-prime mortgage market and overall credit market issues, we
continue to experience unsuccessful auctions, as there are insufficient buyers
for the securities at the reset date for our auction rate
securities. The unsuccessful auctions and lack of liquidity has
caused a decrease in the fair value of these securities. All of our
securities are collateralized with student loans. 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.
In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager. This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest. Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer. Until liquidity in the market returns, or
our investment banker sells or disposes of securities, we may be unable to
liquidate these investments in a timely manner at par value.
ITEM
4. CONTROLS AND PROCEDURES
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 December 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 December 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
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM
5. OTHER INFORMATION
On
November 11, 2008, we accepted an offer from our investment manager, UBS
AG, or UBS, providing us with rights related to our ARS, or ARS
Rights. The ARS Rights (which have features that operate like put
options) were covered in a prospectus dated October 7, 2008. The
ARS Rights entitle us to sell our existing ARS to UBS for a price equal to the
par value plus accrued but unpaid interest, at any time during the period
June 30, 2010 through July 2, 2012. The ARS Rights also
grant to UBS the sole discretion and right to sell or otherwise dispose of our
eligible ARS at any time until July 2, 2012, without prior notification, so
long as we receive a payment of par value. So long as we hold our
ARS, they will continue to accrue and pay interest as determined by the auction
process or the terms of the ARS if the auction process fails. The par value of
the ARS held in our accounts at UBS is
$31.3 million
If the
ARS Rights are not exercised before July 2, 2012, they will expire and UBS
will have no further obligation to buy our ARS. Under the terms of the ARS
Rights, UBS will have the right, in its discretion, to purchase or sell our ARS
at any time until July 2, 2012, without prior notice so long as we receive a
payment at par value upon any sale or disposition.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
ITEM
1A. RISK FACTORS
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 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 have reported net losses of
$27.4 million in fiscal 2008, $3.0 million in fiscal 2007,
$9.5 million in fiscal 2006, $63,000 in fiscal 2004 and $5.4 million
in fiscal 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 including
recession;
|
·
|
loss
of significant clients;
|
·
|
demand
for our services;
|
·
|
seasonality
of business, resulting from timing of property tax payments and federal
and state income tax payments;
|
·
|
timing
of service and product
implementations;
|
·
|
unplanned
increases in costs;
|
·
|
delays
in completion of projects;
|
·
|
costs
of compliance with laws and government regulations;
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. Fluctuations in the price
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.
Our income tax and property tax
processing revenue has been negatively impacted by recent economic conditions
and may continue to decline. As a result of the current global
and U.S. economic conditions, including unemployment and real estate
foreclosures, we have suffered a downturn in revenue, especially in our property
tax and income tax segments, due to decreased payments of federal income tax and
property tax payments owed by taxpayers who pay taxes on our website and
Interactive Voice Response System (IVR) payment processing
systems. If current conditions do not improve, additional declines in
revenue may occur, especially in the property tax and federal income tax
segments, negatively impacting use of our services, our overall revenues and
causing a decline in profits.
We may not be successful in divesting
certain assets and liabilities, and our anticipated divestiture could disrupt
our operations. We have completed divestment of certain
operations and portions of the business inclusive of BPO, FIDM, SSI, FMS and
other operations, and we are in the process of divestment of our UI business
unit. We may not be able to obtain reasonable offers for the fair value of the
remaining assets and liabilities that we are divesting. In that
event, we may be required to recognize additional impairment losses or to
terminate the planned divestiture of the remaining
operations. Further, current economic conditions may reduce interest
in the remaining business subject to divestiture, which may make it more
difficult for us to dispose of these business operations. Also,
negotiations of potential dispositions could disrupt our business by diverting
management attention away from day-to-day operations. 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 the remaining businesses subject to
divestiture. 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 receive the
expected benefits from the divestitures, or they may take longer to be realized
than we expect.
We could suffer material losses as a
result of our transition to, and primary focus on, the payment processing
business. As a result of our divestiture plan, we have sold,
and are in the process of selling, a number of our business units and operations
that provided diversified sources of revenue and services, including our
software licensing and government system integration businesses. We
continue to divest additional historical business operations, as we become
increasingly primarily focused on the electronic payment processing
business. Our focus on payment processing and our divestiture of the
majority of our legacy business units that are unrelated to payment processing
has resulted in, and will continue to result in, loss of clients, loss of
historical revenue sources, and a decrease in diversification of services and
markets. These changes could negatively impact revenues in the event
of a business downturn in the payment processing business, or in the event of
unexpected costs, disruption in services, a change in laws, or other changes
related to our payment processing business which may have a disproportionate
negative impact on our revenues.
We could suffer material losses or
significant disruption of operations and business if we are not successful in
consolidation of our EPP operations. We are consolidating and
moving certain EPP operations, facilities, departments, and positions as part of
our strategic plan to save costs and eliminate duplicative operations and
functions. We completed consolidation of the customer service/call
center, client services and implementation services from San Ramon, California,
to our existing facility in Auburn, Alabama, and we are in the process of
consolidation of additional operations and positions. If this consolidation
is not successful we could suffer disruption of our operations, systems or
services; incur a significant increase in costs; or suffer a loss of valuable
staff and historical knowledge, which could have a material adverse impact on
our business, significantly increase operating costs and result in operational
weaknesses and compliance deficiencies.
We may not be successful in
integrating our acquisition of ChoicePay, Inc.. On
January 27, 2009, we purchased substantially all of the assets of
ChoicePay, Inc., an ePayments solution provider based in Tulsa,
Oklahoma. The acquisition included intellectual property, the
ChoicePay processing platform, systems, operations, services, products, clients,
employees, and other resources. We may not be successful in
integrating the acquired assets into our existing business which could result in
disruption of operations, inefficiencies, excess costs, legal and financial
liability, additional outsourcing of services and consulting charges, failure to
provide services and products as contracted with clients and vendors, and
impairment of earnings and operating results.
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 other
appropriate acquisition candidates, we may be unsuccessful in negotiating the
terms of the acquisition, financing the acquisition or, if an additional
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 and platform may not meet our requirements for the
sustainable and economical growth of our EPP business, and consolidation of our
payment processing platforms involves significant risk. 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. We currently maintain three
processing platforms, one in San Ramon, California, one in Auburn, Alabama, and
another in Tulsa, Oklahoma, which we recently acquired in the ChoicePay
acquisition. We are in the process of integrating and consolidating
our technology platforms. Failure to timely, effectively, and
efficiently consolidate our payment processing platforms could result in
significant risks including restricted and limited transaction volume,
operational inefficiencies, inability to add new products or services, inability
to expand existing products and services, significant development
costs, increased hardware and software costs, inability to provide
certain functionality, or system and service disruption or
failure. If we are unable to successfully integrate and
consolidate these payment processing platforms it could result in a significant
loss of clients and revenues and risk of liability.
Our revenues and cash flows could
decline significantly if we were unable to retain our largest client, or a
number of significant clients. The majority of our client
contracts, including our contract with the U.S. Internal Revenue Service, allow
clients to terminate all or part of their contracts on short notice, or provide
notice of non-renewal with little prior notification. Our contract
with the IRS has historically generated about 33% of our annual revenues from
electronic payment processing. In November 2008 this contract was
extended for an additional year by the IRS, and is scheduled to expire November
30, 2009 if the IRS does not exercise another 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 it is terminated, or if we
were unable to renew this contract, or are unsuccessful in future re-bids of
this contract. Termination or non-renewal of a number of client
contracts, or certain significant client contracts, including the IRS contract,
could result in significant loss of revenues and reduction in
profitability.
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. Our business requires us to obtain, process,
use, and destroy confidential and personally identifiable data and
information. 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 vendors or suppliers also may experience
security breaches, fraud, computer viruses, attacks by hackers or other similar
incidents involving the unauthorized access and theft of confidential data and
personally identifiable information. In January 2009, Heartland
Payment Systems reported a breach of security of its systems resulting in the
loss or theft of personally identifiable information. Our EPP segment contracts
with Heartland for certain payment processing services for credit and debit
transactions in the education market. Although no security breach occurred
within our systems, and there is no specific information to date that our
clients or their related consumers information or data was compromised, if such
client or consumer data and information was lost or stolen, such an incident
could potentially result in compliance costs, loss of clients and revenues,
liability and fines. Any security breach within our systems, software
or hardware or our vendors or suppliers systems, software or hardware could
result in theft, loss, publication, deletion or modification of such data and
information, and could cause harm to our business and reputation, liability for
fines and damages, 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. The continued efficiency and proper functioning
of our technical systems, platforms, and operational infrastructure is integral
to our performance. 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, human error, 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 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.
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, compliance controls, accounting standards,
licensing and bonding requirements, industry/association rules, and public
disclosure requirements including under the Sarbanes Oxley Act of 2002, SEC
regulations, and Nasdaq Stock Market rules. Changes in these laws,
regulations, standards and requirements and compliance with these laws,
regulations, standards and requirements may result in increased general and
administrative expenses for outside services, increased risks associated with
compliance, and a diversion of management time and attention from
revenue-generating activities and curtailing growth of the
business.
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 federal and
state laws and regulations, some states’ money transmitter regulations, and
related licensing requirements. Compliance with federal and state
laws and government regulations regarding money transmitters, money laundering,
privacy, data security, fraud, and other laws and
regulations
associated with financial transaction processing is critical to our
business. New laws and regulations in these areas may be enacted, or
existing ones changed, which could negatively impact services, restrict or
eliminate our ability to provide services, make our services unprofitable, or
create significant liability. We have applications for licensure as a
money transmitter pending in several states. We have been notified by
one state that we are subject to payment of penalties for unlicensed activity
prior to our submission of the money transmitter application, and additional
states could impose such fines and fees. 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,
the National Automated Clearing House Association (NACHA), and other industry
standards. If we are found to be in violation of any such laws,
rules, regulations or standards, 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 compliance, and obtaining necessary licenses and
regulatory approvals, could be substantial.
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 electronic payment
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.
The revenues generated by our
electronic payment processing operations may fluctuate, and our ability to
maintain profitability is uncertain. Our EPP business
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, utility and rent obligations. The
revenues earned by our EPP business 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. Demand for electronic payment processing
services could decline 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. The processing fees charged by
credit/debit card associations and financial institutions can be increased with
little or no notice, which could reduce our 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 of 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.
Change in interchange rates could
have a significant impact on our cost of revenue
generation. Interchange rates charged by credit and debit card
companies are a major factor in our delivery costs for the services we
perform. A change in such rates either favorable or unfavorable could
have a significant impact on our financial performance.
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 termination or 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.
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 or 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 or services 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. 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 of services, disruption of
services, or unanticipated difficulties or delays in processing payments or
providing contracted services may result in termination of the contract, a
reduction in revenues, liability for penalties and damages, or claims against a
bond.
ITEM
6. EXHIBITS
Exhibit
Number
|
Description
|
10.1
|
UBS
Offering Letter dated October 8, 2008, together with Acceptance Form of
Tier Technologies, Inc. dated November 11, 2008. †
|
|
10.2
|
UBS
Offering Letter dated October 8, 2008, together with Acceptance Form of
Official Payments Corporation, dated November 11, 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.
|
SIGNATURE
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.
|
Tier Technologies,
Inc. |
|
|
Dated: February 9, 2009 |
|
|
|
|
By: /s/
Ronald W. Johnston |
|
Ronald W.
Johnston
|
|
Chief Financial
Officer
|
|
(Principal Financial and
Accounting Officer)
|