Tier Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Tier Technologies, Inc. provides transaction processing services and software and systems
integration services to federal, state, and local governments and other public sector clients. We
provide our services through three segments:
|
|
|
Electronic Payment Processing, or EPPprovides electronic payment processing
options, including payment of taxes, fees and other obligations owed to government
entities, educational institutions and other public sector clients; |
|
|
|
|
Government Business Process Outsourcing, or GBPOfocuses on child support
payment processing, child support financial institution data match services, health and
human services consulting and other related systems integration services; and |
|
|
|
|
Packaged Software and Systems Integration, or PSSIprovides software and
systems implementation services through practice areas in financial management systems,
public pension administration systems, unemployment insurance administration systems,
electronic government services, computer telephony and call centers and systems integration
services for the State of Missouri. |
Our two principal subsidiaries, which are accounted for as part of our EPP and PSSI segments,
include:
|
|
|
Official Payments Corporation, or OPCprovides proprietary telephone and
Internet systems, as well as transaction processing and settlement for electronic payment
options to federal, state, and municipal government agencies, educational institutions and
other public sector clients; and |
|
|
|
|
EPOS Corporation, or EPOSprovides interactive communications and transaction
processing technologies to federal, state and municipal government agencies, educational
institutions and other public sector clients. |
We also own 47.37% of the outstanding common stock of CPAS Systems, Inc., or CPAS, a global
supplier of pension administration software systems.
BASIS OF PRESENTATION
These consolidated financial statements have been 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 the financial statements are presented
fairly and that all such adjustments are of a normal recurring nature.
The financial statements include the accounts of Tier Technologies, Inc. and its subsidiaries.
Intercompany transactions and balances have been eliminated. We account for our 47.37% investment
in CPAS (an investment in which we exercise significant influence, but do not control and are not
the primary beneficiary) using the equity method, under which our share of CPAS net income (loss)
is recognized in the period in which it is earned by CPAS. We purchased CPAS on October 1, 2004
for $3.6 million. As of March 31, 2006, our Consolidated Balance Sheet reflects a $4.1 million in
Investment in unconsolidated affiliate which represents our $1.4 million equity in the underlying
assets of CPAS and $2.7 million of goodwill.
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 reasonably impact the following estimates: project costs and percentage of
completion;
5
Tier Technologies, Inc.
effective tax rates, deferred taxes and associated valuation allowances; collectibility of
receivables; 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.
Our financial results for the three and six month periods ended March 31, 2005 have been restated.
See our Annual Report on Form 10-K filed on October 27, 2006 and Note 13Restatement of Prior
Period Financial Results, for additional information regarding this restatement.
NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 154Accounting Changes and Error Corrections. In May 2005, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 154Accounting
Changes and Error Corrections, or SFAS 154. This statement changes the requirements for the
accounting for and reporting of a change in accounting principle. It also carries forward earlier
guidance for the correction of errors in previously issued financial statements, as well as the
guidance for changes in accounting estimate.
SFAS 154 applies to all voluntary changes in accounting principles, as well as changes mandated by
a standard-setting authority that do not include specific transition provisions. For such changes
in accounting principles, SFAS 154 requires retrospective application to prior periods financial
statements, unless it is impracticable to determine either period specific or cumulative effects of
the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. We will adopt this standard beginning in October 2006.
Since this standard applies to both voluntary changes in accounting principles, as well as those
that may be mandated by standard-setting authorities, it is not possible to estimate the impact
that the adoption of this standard will have on our financial position and results of operations.
SFAS 157Fair Value Measurements. In October 2006, FASB issued Statement of Financial
Accounting Standards No. 157Fair Value Measurements, or SFAS 157. This standard establishes a
framework for measuring fair value and expands disclosures about fair value measurement of a
companys assets and liabilities. This standard also requires that the fair value measurement
should be determined based on the assumptions that market participants would use in pricing the
asset or liability. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and, generally, must be applied prospectively. We expect to
adopt this standard beginning in October 2008. Currently, we are evaluating the impact that this
new standard will have on our financial position and results of operations.
FIN 47Accounting for Conditional Asset Retirement Obligations. In March 2005, FASB
Interpretation No. 47Accounting for Conditional Asset Retirement Obligations, or FIN 47, was
issued. FIN 47 provides interpretive guidance on the term conditional asset retirement
obligation, which is used in SFAS 143Accounting for Asset Retirement Obligations. A conditional
asset retirement obligation is a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that may or may not be in
control of the entity. FIN 47 requires that the fair value of a liability for the conditional
asset retirement obligation should be recognized when incurredgenerally upon acquisition,
construction or development and/or through the normal operation of the asset. FIN 47 is effective
no later than the end of fiscal years ending after December 15, 2005, but earlier adoption is
encouraged. We will implement FIN 47 beginning in the quarter ending September 30, 2006. We do
not believe that the adoption of FIN 47 will have a material impact on our financial position or
results of operations.
FIN 48Accounting for Uncertainty in Income Taxes. In July 2006, FASB Interpretation No.
48Accounting for Uncertainty in Income Taxes, or FIN 48, was issued. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FASB Statement No. 109Accounting for Income Taxes. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We expect to implement FIN 48 beginning on October
1, 2007. We are evaluating the impact that adopting FIN 48 will have on our financial position and
results of operations.
FSP 46R-6Determining the Variability to be Considered in Applying FASB Interpretation No.
46(R). In April 2006, FASB Staff Position FIN 46(R)-6
Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46(R), or FSP 46R-6 was issued. This standard
addresses how a reporting enterprise should determine the variability to be considered in applying
FASB Interpretation No. 46
Consolidation of
6
Tier Technologies, Inc.
Variable Interest Entities. Specifically, FSP 46(R)-6 prescribes the following two-step process
for determining variability: 1) analyze the nature of the risks in the entity being acquired; and
2) determine the purpose for which the entity was created and the variability the entity is
designed to create and pass along to its interest holders. Enterprises are required to apply this
FSP prospectively effective on the first day of the reporting period beginning after June 15, 2006.
Beginning on July 1, 2006, we will apply this FSP to any future ventures.
FSP 115-1 and 124-1Impairment of Investments . In November 2005, FASB Staff
Position 115-1 and 124-1The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, or FSP 115-1 and 124-1 was issued. This FSP provides clarification on when
companies should consider impairments of investments to be other-than-temporary. This FSP must be
applied to reporting periods beginning after December 15, 2004, but earlier application is
permitted. On October 1, 2005, we adopted this standard. The adoption of this standard has not
had a material impact on our financial position or results of operations.
FSP 123(R)-3Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards. In November 2005, FASB issued FASB Staff Position 123(R)-3Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, which provides a
practical transition election related to accounting for the tax effects of share-based payment
awards to employees. Beginning on October 1, 2005, we adopted SFAS 123R, as described in Note
12Share-Based Payment.
NOTE 3CUSTOMER 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. For the six months ended March 31, 2006, revenues from our two largest
customers were $8.6 million and $7.1 million, respectively, or 11.1% and 9.2%, respectively, of our
revenues. For the six months ended March 31, 2005, revenues from our two largest customers were
$6.5 million and $4.8 million, respectively, or 9.6% and 7.2%, respectively, of our total revenues.
As described in more detail below, we have several large accounts receivable and unbilled
receivable balances. A dispute, early contract termination or other collection issue with one of
these key customers could have a material adverse impact on our financial condition and results of
operations.
Accounts receivable, net. Accounts receivable, net, represents the short-term portion of
receivables from our customers and other parties and retainers that we expected to receive within
one year, less an allowance for accounts that we estimated would become uncollectible. Our
accounts receivable are comprised of the following three categories:
|
|
|
Customer receivablesreceivables from our clients; |
|
|
|
|
Mispost receivablesreceivables from individuals to whom our payment processing
centers made incorrect payments; and |
|
|
|
|
Not Sufficient Funds (NSF) receivablesreceivables from individuals who paid
their child support payment with a check that had insufficient funds. |
We maintain a separate allowance for uncollectible accounts for each category of receivables, which
we offset against the receivables on our Consolidated Balance Sheet. As shown in the following
table, at March 31, 2006 and September 30, 2005, the balance of our Accounts receivable, net was
$14.4 million and $19.4 million, respectively.
7
Tier Technologies, Inc.
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2006 |
|
|
September 30, 2005 |
|
Accounts receivable from: |
|
|
|
|
|
|
|
|
Customers |
|
$ |
14,820 |
|
|
$ |
18,017 |
|
Recipients of misposted payments |
|
|
1,749 |
|
|
|
1,843 |
|
Payers of NSF child support |
|
|
735 |
|
|
|
743 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
17,304 |
|
|
|
20,603 |
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts receivable: |
|
|
|
|
|
|
|
|
Customer |
|
|
(952 |
) |
|
|
(632 |
) |
Mispost |
|
|
(1,407 |
) |
|
|
(1,375 |
) |
NSF |
|
|
(736 |
) |
|
|
(632 |
) |
|
|
|
|
|
|
|
Total allowance for uncollectible accounts |
|
|
(3,095 |
) |
|
|
(2,639 |
) |
Short-term accounts receivable retainer |
|
|
1,518 |
|
|
|
3,045 |
|
Long-term accounts receivable |
|
|
(1,314 |
) |
|
|
(1,560 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
14,413 |
|
|
$ |
19,449 |
|
|
|
|
|
|
|
|
At March 31, 2006 and September 30, 2005, one customer accounted for 22.4% and 18.8%,
respectively, of total client accounts receivable. In addition, at March 31, 2006, we also had
$1.3 million of receivables from one customer that we expected to receive over one to three years,
which we classified as Long-term accounts receivable on our Consolidated Balance Sheets.
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. At March 31, 2006 and
September 30, 2005, Accounts receivable, net included $1.5 million and $3.0 million, respectively,
of retainers that we expected to receive in one year. In addition, there were $2.5 million and
$0.3 million, respectively, of retainers that we expected to be outstanding more than one year,
which are included in Other assets on our Consolidated Balance Sheets.
Unbilled Receivables. Unbilled receivables represent revenues that Tier has
earned for the work that has been performed to-date that cannot be billed under the terms of the
respective contract until we have completed specific project milestones or the client has accepted
our work. At March 31, 2006 and September 30, 2005, unbilled receivables, which are all expected
to become billable in one year, were $3.4 million and $3.1 million, respectively. At March 31,
2006, two clients accounted for 47.5% and 32.0%, of total unbilled receivables and at September 30,
2005, two clients accounted for 55.5% and 32.5% of unbilled receivables.
NOTE 4INVESTMENTS
Investments are comprised of available-for-sale debt and equity securities as defined in SFAS No.
115Accounting for Certain Investments in Debt and Equity Securities, or SFAS 115. Restricted
investments totaling $5.1 million at March 31, 2006 and $3.3 million at September 30, 2005 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 August 2007. These investments are reported as Restricted investments on the
Consolidated Balance Sheets.
In accordance with SFAS No. 95Statement of Cash Flows, unrestricted investments with remaining
maturities of 90 days or less (as of the date that Tier purchased the securities) are classified as
cash equivalents. We exclude from cash equivalents certain investments, such as mutual funds and
auction rate securities. Securities such as these, and all other securities that would not
otherwise be included in Restricted investments or Cash and cash equivalents, are classified on the
Consolidated Balance Sheets as Investments in marketable securities. Except for our investment in
CPAS and our restricted investments, all of our investments are categorized as available-for-sale
under SFAS 115. As such, our securities are recorded at estimated fair value, based on quoted
market prices. Increases and decreases in fair value are recorded as unrealized gains and losses
in other comprehensive income.
8
Tier Technologies, Inc.
The following table shows the balance sheet classification, amortized cost and estimated fair
values of investments included in cash equivalents, investments in marketable securities and
restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
September 30, 2005 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
(in thousands) |
|
cost |
|
|
loss |
|
|
fair value |
|
|
cost |
|
|
loss |
|
|
fair value |
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
5,221 |
|
|
$ |
|
|
|
$ |
5,221 |
|
|
$ |
11,272 |
|
|
$ |
|
|
|
$ |
11,272 |
|
|
Total investments included in cash
and cash equivalents |
|
|
5,221 |
|
|
|
|
|
|
|
5,221 |
|
|
|
11,272 |
|
|
|
|
|
|
|
11,272 |
|
|
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans |
|
|
44,200 |
|
|
|
|
|
|
|
44,200 |
|
|
|
30,888 |
|
|
|
(13 |
) |
|
|
30,875 |
|
U.S. government sponsored
enterprise obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,629 |
|
|
|
(7 |
) |
|
|
1,622 |
|
Equity securities |
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996 |
|
|
|
|
|
|
|
2,996 |
|
|
Total short-term investments |
|
|
45,200 |
|
|
|
|
|
|
|
45,200 |
|
|
|
36,513 |
|
|
|
(20 |
) |
|
|
36,493 |
|
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprise
obligations |
|
|
3,199 |
|
|
|
(1 |
) |
|
|
3,198 |
|
|
|
3,370 |
|
|
|
(35 |
) |
|
|
3,335 |
|
Certificate of deposit |
|
|
1,878 |
|
|
|
|
|
|
|
1,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available-for-sale |
|
|
5,077 |
|
|
|
(1 |
) |
|
|
5,076 |
|
|
|
3,370 |
|
|
|
(35 |
) |
|
|
3,335 |
|
|
Total investments available-for-sale |
|
$ |
55,498 |
|
|
$ |
(1 |
) |
|
$ |
55,497 |
|
|
$ |
51,155 |
|
|
$ |
(55 |
) |
|
$ |
51,100 |
|
|
The fair value of contractual maturities of debt securities classified Investments in
marketable securities at March 31, 2006 and September 30, 2005 are:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
March 31, 2006 |
|
|
September 30, 2005 |
|
|
Within one year |
|
$ |
|
|
|
$ |
5,647 |
|
Greater than ten years |
|
|
44,200 |
|
|
|
26,850 |
|
|
Total |
|
$ |
44,200 |
|
|
$ |
32,497 |
|
|
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.
If we determine impairment is other-than-temporary, we reduce the recorded book value of the
investment by the amount of the impairment and recognize a realized loss on the investment. At
March 31, 2006 and September 30, 2005, we do not believe that any of our investments are
other-than-temporarily impaired.
NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
We did not incur any changes to the carrying amount of goodwill during the six months ended March
31, 2006. The balance of goodwill at both March 31, 2006 and September 30, 2005 was $37.6 million.
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 No. 142Goodwill and Other Intangible
Assets. This annual testing identified no impairment to goodwill in fiscal year 2005. 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. No
such events occurred during the six months ended March 31, 2006.
9
Tier Technologies, Inc.
At March 31, 2006 and September 30, 2005, other intangible assets, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
September 30, 2005 |
|
|
|
Amortization |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
(in thousands) |
|
period |
|
|
Gross |
|
|
amortization |
|
|
Net |
|
|
Gross |
|
|
amortization |
|
|
Net |
|
|
Client relationships |
|
10 years |
|
$ |
28,749 |
|
|
$ |
(9,738 |
) |
|
$ |
19,011 |
|
|
$ |
28,749 |
|
|
$ |
(8,301 |
) |
|
$ |
20,448 |
|
Technology & research and
development |
|
3-10 years |
|
|
4,289 |
|
|
|
(1,558 |
) |
|
|
2,731 |
|
|
|
5,029 |
|
|
|
(1,870 |
) |
|
|
3,159 |
|
Trademarks |
|
6-10 years |
|
|
3,214 |
|
|
|
(1,181 |
) |
|
|
2,033 |
|
|
|
3,214 |
|
|
|
(1,019 |
) |
|
|
2,195 |
|
Non-compete agreements |
|
2-3 years |
|
|
615 |
|
|
|
(377 |
) |
|
|
238 |
|
|
|
615 |
|
|
|
(270 |
) |
|
|
345 |
|
|
Other intangible assets, net |
|
|
|
|
|
$ |
36,867 |
|
|
$ |
(12,854 |
) |
|
$ |
24,013 |
|
|
$ |
37,607 |
|
|
$ |
(11,460 |
) |
|
$ |
26,147 |
|
|
Amortization expense for other intangible assets was $2.1 million during the six months ended
March 31, 2006.
NOTE 6(LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
(in thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(5,001 |
) |
|
$ |
1,805 |
|
|
$ |
(3,192 |
) |
|
$ |
1,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
19,493 |
|
|
|
19,464 |
|
|
|
19,491 |
|
|
|
19,448 |
|
Effects of dilutive common stock options |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
125 |
|
|
Adjusted weighted-average shares |
|
|
19,493 |
|
|
|
19,539 |
|
|
|
19,491 |
|
|
|
19,573 |
|
|
Basic and diluted (loss) earnings per share |
|
$ |
(0.26 |
) |
|
$ |
0.09 |
|
|
$ |
(0.16 |
) |
|
$ |
0.06 |
|
|
The following options to purchase shares of common stock are not included in the computation
of diluted (loss) earnings per share because the exercise price is greater than the average market
price of the Companys common stock for the periods stated and therefore, the effect would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
March 31, |
|
|
March 31, |
|
(in thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average options excluded
from computation of diluted (loss)
earnings per share |
|
|
2,383 |
|
|
|
2,524 |
|
|
|
2,362 |
|
|
|
1,924 |
|
Range of exercise prices per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
20.70 |
|
|
$ |
20.70 |
|
|
$ |
20.70 |
|
|
$ |
20.70 |
|
Low |
|
$ |
7.61 |
|
|
$ |
7.81 |
|
|
$ |
7.61 |
|
|
$ |
8.53 |
|
In addition, 125,000 and 133,000, respectively, of common stock equivalents were excluded from
the calculation of diluted loss per share for the three and six months ended March 31, 2006, since
their effect would have been anti-dilutive.
NOTE 7SHAREHOLDERS EQUITY
On January 10, 2006, our Board of Directors adopted a Stockholder Rights Plan, pursuant to which
all of our shareholders received rights to purchase shares of a new series of preferred stock.
This plan was designed to enable all of our shareholders to realize the full value of their
investment in our company and to ensure that all of our shareholders receive fair and equal
treatment in the event that an unsolicited attempt is made to acquire Tier. This plan is intended
as a means to guard against abusive takeover tactics and was not adopted in response to any
proposal to acquire Tier. We believe this plan would discourage efforts to acquire more than 10%
of our common stock without first negotiating with the Board of Directors.
12
Tier Technologies, Inc.
PERFORMANCE BONDS
Under certain contracts, we are required to obtain performance bonds from a licensed surety and to
post the performance bond with our customer. We are required to pay fees to bond issuers in
advance of the term of the bond. At March 31, 2006 and September 30, 2005, we included $22,000 and
$110,000, respectively, of these fees in Prepaid expenses and other current assets on our
Consolidated Balance Sheets. These fees are expensed over the life of each bond and are included
in Direct costs on our Consolidated Statements of Operations. At March 31, 2006, we had $28.8
million of bonds posted with our customers. There were no claims pending against any of these
bonds.
EMPLOYMENT AGREEMENTS
During fiscal 2005, four executives had employment agreements with us which entitled them to
severance payments ranging from 1.2 to 1.5 years of base salary, if they are terminated without
cause or if certain events occur resulting from a change of control of Tier. At March 31, 2006 our
maximum obligation under these agreements was $1.9 million. In March 2006 we entered into
Employment and Security Agreements with four executive officers and certain other key managers.
Under the terms of these agreements, if certain pre-defined events were to occur as a result of a
change in control of our company, the individuals covered by these agreements would be entitled to
severance payments ranging in amounts equal to between six to twelve months of their current base
salary. If these events had occurred at March 31, 2006, we would have been obligated to have paid
as much as $3.8 million under these agreements. See Note 14Subsequent Events for subsequent
information regarding the cancellation of one of these agreements and an additional agreement that
we entered into after March 31, 2006.
INDEMNIFICATION AGREEMENTS
As of March 31, 2006, we had entered into 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 or Bylaws or by the Delaware General
Corporation Law, against all expenses, claims, damages, judgments and other amounts (including
amounts paid in settlement) for which such persons become liable as a result of acting in any
capacity on our behalf, subject to certain limitations. We are not able to estimate our maximum
exposure under these agreements.
FORWARD LOSSES
Throughout the term of our customer contracts, we forecast revenues and expenses over the total
life of the contract. In accordance with generally accepted accounting principles, if we determine
that the total expenses over the entire term of the contract will probably exceed the total
forecasted revenue over the term of the contract, we record an accrual in the current period equal
to the total forecasted losses over the term of the contract, less losses recognized to date, if
any. As of March 31, 2006 and September 30, 2005, accruals totaling $2.9 million and $0.3 million,
respectively, were included in Other accrued liabilities on our Consolidated Balance Sheets.
Changes in the accrued forward loss are reflected in Direct costs on our Consolidated Statements of
Operations.
CONSTRUCTION COMMITMENT
In January 2006, we entered into a contract to build and operate a facility. Under the terms of
this three-year contract, we built this facility at a cost of $1.2 million and after construction
we will operate this facility for the remaining term of the contract. Construction of this project
was completed in June 2006 and was fully financed out of our operating cash and cash equivalents.
No debt was issued to construct this facility.
NOTE 11RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
At March 31, 2006 and September 30, 2005, we had $4.1 million and $4.0 million, respectively, of
full-recourse notes and interest receivable from a former Chairman of the Board and Chief Executive
Officer. These notes mature in 2007 and bear interest rates ranging from 6.54% to 7.18%. The
former Chairman pledged 387,490 shares of Tier common stock, with a market value of $3.1 million at
March 31, 2006, as well
Tier Technologies, Inc.
as his residence, as collateral for these notes. Approximately $2.2 million of these full-recourse
notes were issued in connection with the exercise of options to purchase shares of Tiers common
stock.
These notes and the associated accrued interest are reported as Notes receivable from related
parties in the shareholders equity section of our Consolidated Balance Sheets. Interest earned on
these notes is included in Common stock and paid-in-capital in the shareholders equity section of
our Consolidated Balance Sheets.
OTHER RELATED-PARTY TRANSACTIONS
We own a 47.37% interest in CPAS Systems, Inc., or CPAS, a Canadian entity that we account for
using the equity method. During the three and six months ended March 31, 2006, we recognized
$52,000 in revenue for services rendered in connection with a pension project. In addition, during
the first quarter of fiscal 2006 we purchased $14,000 of software licenses from CPAS relating to
the same project.
During the six months ended March 31, 2006 and 2005, one of our subsidiaries purchased $0.5 million
and $0.1 million, respectively, of software licenses, maintenance and related services from Nuance
Communications, Inc., a company affiliated with one of the members of our Board of Directors.
NOTE 12SHARE-BASED PAYMENT
In June 2005 our shareholders approved the Amended and Restated 2004 Stock Incentive Plan or the
Plan, which provides our Board of Directors discretion in creating employee equity incentives,
which includes incentive and non-statutory stock options. Generally, these options vest as to 20%
of the underlying shares each year on the anniversary date granted and expire in ten years. At
March 31, 2006 there were 1,262,800 shares of common stock reserved for future issuance under the
Plan.
On October 1, 2005 we adopted the provisions of FASB Statement No. 123RShare-Based Payment, or
SFAS 123R, a revision of FASB Statement No. 123Accounting for Stock-Based Compensation. SFAS
123R requires companies to recognize the expense related to the fair value of its stock-based
compensation awards. We elected to use the modified prospective approach to transition to SFAS
123R, as allowed under the statement; therefore, we have not restated our financial results for
prior periods. Under this transition method, stock-based compensation expense for the three and
six months ended March 31, 2006 includes compensation expense for all stock-based compensation
awards granted prior to but not yet vested as of September 30, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation
expense for all stock-based compensation awards granted after October 1, 2005 was based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R using the
Black-Scholes methodology. We recognize compensation expense for stock option awards on a ratable
basis over the requisite service period of the award. For the three and six months ended March 31,
2006 we recognized $0.3 million and $0.7 million, respectively, in stock-based compensation expense
as required under SFAS 123R.
Prior to adopting SFAS 123R, we applied the recognition and measurement principles of Accounting
Principles Board Opinion No. 25Accounting for Stock-Based Compensation and provided the pro forma
disclosures previously required by SFAS 123. Prior to the adoption of SFAS 123R, we did not
include compensation expense for employee stock options in net income (loss), since all stock
options granted under those plans had an exercise price equal to the market value of the common
stock on the date of the grant. The following table illustrates the effects on net loss after tax
and net loss per common share, as if we had applied the fair value recognition provisions of SFAS
123 to stock-based compensation during the three and six months ended March 31, 2005:
17
Tier Technologies, Inc.
RELATED PARTY TRANSACTIONS
James R. Weaver. Effective May 31, 2006, we entered into a Separation Agreement and
Release, or the Separation Agreement, with James R. Weaver, who had served as our Chief Executive
Officer, President and Chairman. Pursuant to the Separation Agreement, we agreed to pay to Mr.
Weaver a total of $975,000 of severance, of which $700,000 was paid in a lump sum on June 8, 2006
and $275,000 is to be paid on November 30, 2006. We are also obligated to provide Mr. Weaver with
18 months of COBRA-covered benefits, as well as pay the premiums on other non-COBRA covered
insurance benefits up to $20,000. The Separation Agreement also includes a change of control
clause, whereby Mr. Weaver would receive $175,000 to $350,000 if a pre-defined reorganization event
occurs within two years. Finally, the Separation Agreement accelerated and immediately vested all
330,000 of Mr. Weavers unvested options. The Separation Agreement provided that these options and
Mr. Weavers 563,039 previously vested options would expire 30 days after termination. Under the
terms of the Separation Agreement, all of Mr. Weavers options expired as of June 30, 2006.
EMPLOYMENT AGREEMENT
Effective June 2006, the Company entered into a one-year employment agreement with Ronald Rossetti.
Pursuant to the agreement, Mr. Rossetti is entitled to receive a base salary of $50,000 per month
and a bonus of $50,000 per month. In the event that certain pre-defined events occur before the
end of this one-year agreement, we would be obligated to compensate Mr. Rossetti these amounts
through the remaining term of the one-year agreement. As of September 30, 2006, the maximum amount
that could be paid under these agreements was $0.8 million.
SYSTEM OUTAGE
Between October 2, 2006 and October 5, 2006, an outage occurred with one of the systems we use to
serve one of our large customers. Because of this outage, we may incur penalties under the
provisions of the related contract. We are not able to determine the amount of penalties, if any,
that will be assessed; however, preliminarily we estimate that the penalties could range from zero
to $0.8 million.
CHANGES TO 401(k) PLAN
We announced that effective January 1, 2007 we will adopt a Safe Harbor non-elective employer
contribution for our 401(k) Plan. The safe harbor contribution of three percent of plan-eligible
compensation will be made to all plan-eligible employees. Our contributions to the 401(k) Plan
will become vested at the time we make the contributions. We believe that our contribution to this
plan will total approximately $1.0 million in fiscal year 2007.
18
Tier Technologies, Inc.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements 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. In light of the risks, uncertainties and
assumptions discussed under Risk Factors of this Quarterly Report on Form 10-Q and other factors
discussed in this section, there are risks that our actual experience will differ materially from
the expectations and beliefs reflected in the forward-looking statements in this section and
throughout this report. For more information regarding what constitutes a forward-looking
statement refer to the Risk Factors section.
OVERVIEW
We provide transaction processing services and software and systems integration services primarily
to federal, state and local government and other public sector clients. We target industry sectors
where we believe that demand for our services is less discretionary and is likely to provide us
with recurring revenue streams through long-term contracts. The forces driving the need for our
services tend to involve federal- or state-mandated services, such as child support payments,
collections and disbursements, as well as a fundamental shift in consumer transaction preferences
toward electronic payment methods instead of cash or paper checks.
We have derived, and expect to continue to derive, a significant portion of our revenues from a
small number of large clients or their constituents. For example, during the six months ended
March 31, 2006 and 2005, contracts with our three largest clients and their constituents generated
27% and 22%, respectively, of our total revenues. Approximately 11% of our total revenues during
the six months ended March 31, 2006 were produced by our contract with the State of Michigan, while
10% of our total revenues during the six months ended March 31, 2005 was produced by our contract
with the State of Missouri. Substantially all of our contracts are terminable by the client
following limited notice and without significant penalty to the client. Thus, unsatisfactory
performance or unanticipated difficulties in completing projects may result in client
dissatisfaction, contractual or adjudicated monetary penalties or contract terminationsall of
which could have a material adverse effect upon our business, financial condition and results of
operations.
Our clients outsource portions of their business processes to us and rely on us for our
industry-specific information technology expertise and solutions. Approximately 66% of our
revenues are generated by our transaction-based services including: 1) child support payment
processing and related services for state government clients; and 2) electronic payment processing
services for federal, state and local government clients, which allow our clients to offer their
constituents the ability to use credit cards, debit cards or electronic checks to pay taxes and
other governmental obligations. We believe that we will continue to earn a significant portion of
our revenues from these transactional-based services for the foreseeable future. While many of
these transactions occur on a monthly basis, there are seasonal and annual fluctuations in the
volume of some transactions that we process, such as tax payments. For example, each year the IRS
rotates the order in which it lists the names of the two companies that provide payment processing
services, because taxpayers often opt to use the first listed payment processing provider more
frequently than the second listed payment processing provider. Since Tier is the second payment
provider listed by the IRS in fiscal 2006, we expect that the proportion of our total revenues
attributable to our IRS arrangement may be higher in fiscal 2007 than in 2006. We recognize
revenues for transaction-based services at the time the services are performed.
Our software and systems integration segment primarily integrates our proprietary software products
and licensed third-party software products into our clients business operations. During fiscal
year 2005, we shifted our systems integration strategy from custom-developed solutions toward
implementation and modification of packaged softwarea strategy that we believe could increase
profitability with a lower risk than building systems based on non-scalable functional
requirements. We recognize these revenues on a time and materials basis, percentage-of-completion
basis or at the time delivery is made, depending upon the terms of the contract and the
requirements of associated accounting standards.
19
Tier Technologies, Inc.
RECENT EVENTS
The following events occurred recently related to our previously announced restatement of our
financial statements for fiscal years 2002 through 2004 and for the first three quarters of fiscal
2005, as well as the resulting delay in the filing of our Annual Report on Form 10-K for fiscal
year 2005 and our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2005, March
31, 2006 and June 30, 2006. For additional information regarding this restatement, see Amendment 3
to our Annual Report on 10-K/A for the fiscal year ended September 30, 2004, which was filed on
October 25, 2006 and our Annual Report on Form 10-K for the fiscal year ended September 30, 2005,
which was filed on October 27, 2006. Subsequently, we also filed our Quarterly Report on Form
10-Q/A for the quarter ended December 31, 2005 on November 13, 2006.
Fiscal 2005 Filing Delay Announced. While preparing our financial statements for the
fiscal year ended September 30, 2005, senior management discovered a number of errors in our
historical financial statements, including the accounting for: 1) accounts receivable, net relating
to a payment processing operation; 2) certain accruals and reserves; and 3) certain notes
receivable. Because of these errors, senior management recommended to the Audit Committee that we
delay the filing of our Annual Report on Form 10-K and restate our previously issued financial
statements. On December 12, 2005, the Audit Committee of our Board of Directors agreed with senior
managements recommendations and concluded that our previously issued financial statements for
fiscal years 2002, 2003 and 2004 (and for the associated fiscal quarters) would likely be restated
and, accordingly, should no longer be relied upon. On December 14, 2005, we announced that our
Annual Report on Form 10-K for the fiscal year ended September 30, 2005 would not be timely filed.
Subsequently, we did not file timely reports on Form 10-Q for the quarters ended December 31, 2005,
March 31, 2006 and June 30, 2006. In December 2005, the Audit Committee also initiated an
independent investigation of the qualitative and quantitative financial reporting issues giving
rise to the restatement.
Stockholder Rights Plan. On January 10, 2006, our Board of Directors adopted a Stockholder
Rights Plan, pursuant to which all of our shareholders received rights to purchase shares of a new
series of preferred stock. This plan was designed to enable all of our shareholders to realize the
full value of their investment in our company and to ensure that all of our shareholders receive
fair and equal treatment in the event that an unsolicited attempt is made to acquire Tier. This
plan is intended as a means to guard against abusive takeover tactics and was not adopted in
response to any proposal to acquire Tier. We believe this plan would discourage efforts to acquire
more than 10% of our common stock without first negotiating with the Board of Directors.
Audit Committee Investigation. On May 12, 2006, we announced the completion of an
independent investigation conducted on behalf of the Audit Committee of our Board of Directors.
The scope of the independent investigation included an examination of the qualitative and financial
reporting issues giving rise to the restatement. Among other things, the investigation found
earnings management at Tier, particularly during the close of fiscal 2004.
Delisting by Nasdaq. On May 23, 2006, we received a notification from the Nasdaq Listing
Qualifications Hearings Panel, or the Panel, informing us of the Panels determination to delist
our securities, effective at the open of business on Thursday, May 25, 2006. In reaching its
determination, the Panel cited: 1) concerns about the quality and timing of our communications with
the Panel and the public regarding an independent investigation performed by the Audit Committee of
our Board of Directors; and 2) our failure to file our Annual Report on Form 10-K for fiscal year
2005 or our Quarterly Reports on Form 10-Q for the first two quarters of fiscal year 2006. We
appealed the Panels decision to the Nasdaq Listing and Hearing Review Council, or the Listing
Council. However, on July 26, 2006, the Listing Council affirmed the Panels decision to delist
our common stock. We intend to apply for re-listing once we have filed all required reports with
the Securities and Exchange Commission.
Management Changes. On May 31, 2006, we announced the resignation of James Weaver, our
Chief Executive Officer, President and Chairman following a recommendation by the Audit Committee
of our Board of Directors that his employment with Tier be terminated. Ronald Rossetti, a member
of our Board of Directors and the Audit Committee, agreed to serve as our Chief Executive Officer
and Chairman. Because
20
Tier Technologies, Inc.
he is no longer independent under SEC and Nasdaq rules, Mr. Rossetti was replaced on the Audit
Committee by Samuel Cabot III, another independent director.
Unasserted Claim. On November 10, 2006, a law firm issued a press release stating that a
class action suit had been filed on behalf of purchasers of our common stock from November 29, 2001
to October 25, 2006. According to the press release, the suit alleges that Tier and certain of our
former and/or current officers violated Sections 10(b) and 20(a) of the Securities Exchange Act,
but did not identify the level of damages being sought. The press release states that the case is
pending in the United States District Court for the Eastern District of Virginia. We have not been
served with the complaint and are not able to estimate the probability or level of exposure
associated with this purported complaint.
SEC Subpoena. On May 31, 2006, we received a subpoena from the Philadelphia District
Office of the Securities and Exchange Commission requesting documents relating to financial
reporting and personnel issues. We intend to cooperate fully in this investigation.
RESULTS OF OPERATIONS
During the three and six months ended March 31, 2006, our revenues grew 6% and 15%, respectively,
to $37.5 million and $77.4 million, respectively. However, due to an increase in costs and
expenses, as a result of our reconciliation project at one of our payment processing centers, as
well accounting and legal fees incurred in our restatement process, we incurred a net loss of $5.0
million and $3.2 million, respectively, for the three and six months ended March 31, 2006, a
decline of $6.8 million and $4.3 million, respectively, from the net income reported in the same
periods last year. Increased revenues resulted primarily from the contract with the State of
Michigan, signed in December 2004, and the State of Indiana, signed in August 2005. These two
contracts also resulted in an increase in direct costs as a direct correlation with increased
revenues. Increased volume of tax payment transactions also contributed to the revenue growth as
well as increased product and materials cost. The effect of this increase in revenues was offset
in part by costs that we incurred to reconcile certain accounts for one of our payment processing
centers; compensation costs associated with our implementation of Statement of Accounting Standards
No. 123RStock-Based Payment, or SFAS 123R; and costs associated with an independent investigation
initiated by the Audit Committee of our Board of Directors. In March 31, 2006, we also accrued
$2.8 million to reflect losses that we expect to incur on one of our long-term contracts over the
term of the contract, which ends in fiscal year 2009. A complete discussion of the variances in
revenues and costs and expenses follows the table below, which provides an overview of changes in
our results of operations for the three and six months ended March 31, 2006 from the same periods
last year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
March 31, |
|
Variance |
|
March 31, |
|
Variance |
(in thousands, except percentages) |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
Revenues |
|
$ |
37,474 |
|
|
$ |
35,396 |
|
|
$ |
2,078 |
|
|
|
6 |
% |
|
$ |
77,356 |
|
|
$ |
67,156 |
|
|
$ |
10,200 |
|
|
|
15 |
% |
Costs and expenses |
|
|
43,620 |
|
|
|
33,784 |
|
|
|
9,836 |
|
|
|
29 |
% |
|
|
82,338 |
|
|
|
66,464 |
|
|
|
15,874 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before other income,
income taxes |
|
|
(6,146 |
) |
|
|
1,612 |
|
|
|
(7,758 |
) |
|
|
* |
|
|
|
(4,982 |
) |
|
|
692 |
|
|
|
(5,674 |
) |
|
|
* |
|
Other income |
|
|
1,145 |
|
|
|
232 |
|
|
|
913 |
|
|
|
* |
|
|
|
1,795 |
|
|
|
432 |
|
|
|
1,363 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(5,001 |
) |
|
|
1,844 |
|
|
|
(6,845 |
) |
|
|
* |
|
|
|
(3,187 |
) |
|
|
1,124 |
|
|
|
(4,311 |
) |
|
|
* |
|
Provision for income taxes |
|
|
|
|
|
|
39 |
|
|
|
(39 |
) |
|
|
* |
|
|
|
5 |
|
|
|
39 |
|
|
|
(34 |
) |
|
|
(87 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(5,001 |
) |
|
$ |
1,805 |
|
|
$ |
(6,806 |
) |
|
|
* |
|
|
$ |
(3,192 |
) |
|
$ |
1,085 |
|
|
$ |
(4,277 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
*Not meaningful
Additional detail about our period-over-period changes in our revenues and expenses is
described in the following sections.
Revenues
During the three and six months ended March 31, 2006, revenues increased $2.1 million or 6% and
$10.2 million or 15%, respectively, over the same periods last year. These increases primarily
reflect period-over-period increases of 45% and 39%, respectively, earned by our Electronic Payment
Processing, or EPP,
21
Tier Technologies, Inc.
segment, which resulted from an increase in the volume of transactions processed under new and
pre-existing contracts. We believe the continued shift of consumer preference to paying government
obligations electronically will result in additional revenue-producing opportunities for the EPP
segment. The positive performance of the EPP segment during the three and six months ended March
31, 2006 was partially offset by period-over-period decreases of 22% and 4%, respectively, in the
revenues earned by our PSSI segment, which has completed or is nearing completion of a number of
contracts. The following table presents an analysis of the changes in the revenues earned by each
of our reportable segments for the three and six months ended March 31, 2006 and 2005. Immediately
following this table is a detailed discussion of the reasons for the increases and decreases in
revenues earned by each of these operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
March 31, |
|
Variance |
|
March 31, |
|
Variance |
(in thousands, except percentages) |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
Revenue, by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP |
|
$ |
15,464 |
|
|
$ |
10,631 |
|
|
$ |
4,833 |
|
|
|
45 |
% |
|
$ |
30,515 |
|
|
$ |
22,016 |
|
|
$ |
8,499 |
|
|
|
39 |
% |
GBPO |
|
|
11,778 |
|
|
|
11,636 |
|
|
|
142 |
|
|
|
1 |
% |
|
|
23,854 |
|
|
|
21,128 |
|
|
|
2,726 |
|
|
|
13 |
% |
PSSI* |
|
|
10,232 |
|
|
|
13,129 |
|
|
|
(2,897 |
) |
|
|
(22 |
)% |
|
|
22,987 |
|
|
|
24,012 |
|
|
|
(1,025 |
) |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
37,474 |
|
|
$ |
35,396 |
|
|
$ |
2,078 |
|
|
|
6 |
% |
|
$ |
77,356 |
|
|
$ |
67,156 |
|
|
$ |
10,200 |
|
|
|
15 |
% |
|
*Excludes revenues that are eliminated during the consolidation of our accounting results of $0.4 million and $4.5 million, respectively, for the three
and six months ended March 31, 2005. To date, there have been no intercompany revenues generated during fiscal 2006 which would require elimination.
Electronic Payment Processing Segment, or EPP. Our EPP segment provides electronic
payment processing options, including payment of taxes, fees and other obligations owed to
government entities, educational institutions and other public sector clients. The revenues
reported by our EPP segment reflect the number of contracts with clients, as well as the volume of
transactions processed under each contract and the rates that we charge for each transaction that
we process.
During the three and six months ended March 31, 2006, the revenues generated by our EPP segment
rose to $15.5 million and $30.5 million, respectively, which represents a $4.8 million or 45%
increase and a $8.5 million or 39% increase, respectively, over the same periods last year. New
contracts have contributed over $0.5 million and $1.3 million, respectively, of additional EPP
revenues for the three and six months ended March 31, 2006 over the same periods last year. A net
increase in the volume of transactions processed by our EPP segment has resulted in
period-over-period revenue increases of $4.4 million and $7.3 million, respectively, during the
three and six months ended March 31, 2006. We believe that these increases are largely
attributable to changing consumer preference toward using electronic methods to pay federal, state,
and local government obligations.
Government Business Processing Segment, or GBPO. Our GBPO segment provides governmental
clients child support payment processing, child support financial institution data match services,
health and human services consulting and other related systems integration services. Because of
the importance that these clients place on receiving consistent and reliable service, the contracts
with our GBPO customers are typically three to five years in duration and we may receive contract
extensions or renewals based on our clients past experiences with our company.
During the three and six months ended March 31, 2006, our GBPO segment generated $11.8 million and
$23.9 million, respectively, in revenues, which represents a $0.1 million or 1% increase and $2.7
million or 13% increase, respectively, over the same periods last year. The increase is primarily
attributable to $2.0 million and $6.3 million, respectively, of revenue generated during the three
and six months ended March 31, 2006 from a five-year contract for child support processing services
commenced in the second quarter of fiscal year 2005. This increase was offset by a $1.5 million
and $3.2 million revenue decrease, respectively, for the three and six months ended March 31, 2006,
due to the completion of several projects. In addition, lower rates and
transaction volume resulted in a $0.4 million decrease in revenues for the three and six months
ended March 31, 2006.
Packaged Software and Systems Integration Segment, or PSSI. Our PSSI segment provides
software and systems implementation services through practice areas in financial management
systems, public pension administration systems, unemployment insurance administration systems,
electronic government services, computer telephony and call centers and systems integration
services. Since the services provided by our
22
Tier Technologies, Inc.
PSSI segment are generally project-oriented, the contracts with our clients typically have a 1-3
year contract term, and may have subsequent maintenance and support phases. The revenue reported
by our PSSI segment in any given period reflect the size and volume of active contracts, as well as
our current phase in the project life cycle of individual contracts.
During the three and six months ended March 31, 2006, the revenues generated by our PSSI segment
declined to $10.2 million and $23.0 million, respectively, which represents decreases of $2.9
million or 22% and $1.0 million or 4%, respectively, over the same periods last year. These
decreases primarily resulted from $5.3 million and $5.5 million, respectively, of decreased
revenues from contracts that were completed, nearing completion or entering the maintenance phase
of the project during the three and six months ended March 31, 2006. In addition, decreases of
$0.6 million and $1.0 million, respectively, for the three and six months ended March 31, 2006, in
time and materials-based contracts also contributed to the overall decline in revenues. These
decreases were partially offset by revenue increases from new contracts of $3.0 million and $5.1
million, for the three and six month periods ended March 31, 2006.
Costs and Expenses
During the three and six months ended March 31, 2006, costs and expenses totaled $43.6 million and
$82.3 million, respectively, an increase of $9.8 million or 29% and $15.9 million or 24%,
respectively, from the same periods last year. These increases are due primarily to increased
direct costs as a result of the contract with the State of Michigan for a payment processing center
that was signed in December 2004. We also incurred additional costs associated with the
reconciliation of the accounts of one of our payment processing centers and additional costs
associated with the restatement of our historical financial statements, including a special
investigation undertaken by our Audit Committee. We will incur additional costs to complete these
reconciliation and restatement initiatives in 2006; however, we do not expect these costs to recur
in fiscal 2007. Finally, we also incurred first-time costs associated with our implementation of
SFAS 123R. The following table provides an overview of operating costs and expenses for the three
and six months ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
March 31, |
|
Variance |
|
March 31, |
|
Variance |
(in thousands, except percentages) |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
2006 |
|
2005 |
|
$ Amount |
|
% |
|
Direct costs |
|
$ |
30,696 |
|
|
$ |
22,888 |
|
|
$ |
7,808 |
|
|
|
34 |
% |
|
$ |
58,592 |
|
|
$ |
44,810 |
|
|
$ |
13,782 |
|
|
|
31 |
% |
General and administrative |
|
|
8,859 |
|
|
|
6,639 |
|
|
|
2,220 |
|
|
|
33 |
% |
|
|
15,782 |
|
|
|
13,181 |
|
|
|
2,601 |
|
|
|
20 |
% |
Selling and marketing |
|
|
2,740 |
|
|
|
2,689 |
|
|
|
51 |
|
|
|
2 |
% |
|
|
5,320 |
|
|
|
5,357 |
|
|
|
(37 |
) |
|
|
(1 |
)% |
Depreciation and amortization |
|
|
1,325 |
|
|
|
1,568 |
|
|
|
(243 |
) |
|
|
(15 |
)% |
|
|
2,644 |
|
|
|
3,116 |
|
|
|
(472 |
) |
|
|
(15 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
$ |
43,620 |
|
|
$ |
33,784 |
|
|
$ |
9,836 |
|
|
|
29 |
% |
|
$ |
82,338 |
|
|
$ |
66,464 |
|
|
$ |
15,874 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
Direct costs. Direct costs, which represent costs directly attributable to providing
services to clients, include: payroll and payroll-related costs; independent
contractor/subcontractor costs; travel-related expenditures; credit card interchange fees and
assessments; 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. Direct costs for the three and six months ended March 31, 2006
increased $7.8 million or 34% and $13.8 million or 31%, respectively, over the same period last
year. For the three and six months ended March 31, 2006, these increases reflect $0.8 million and
$2.6 million, respectively, of costs incurred to support a new contract in our GBPO segment; $0.3
million and $1.4 million, respectively, of consulting services related to the reconciliation of
accounts at one of our payment processing centers; and $1.1 million and $1.5 million, respectively,
of costs incurred to support a new contract in our PSSI segment. In addition, direct costs for the
three and six months ended March 31, 2006 include a $2.8 million accrual for expected losses on a
contract in our GBPO segment. The remaining increases for both periods resulted from an increase
in rates and the number of transactions processed.
General and administrative. General and administrative expenses consist primarily of
payroll and payroll-related costs for general management, administrative, accounting, investor
relations, compliance and legal functions, engineering, and information systems. General and
administrative expenses for the three and six months ended March 31, 2006 increased $2.2 million or
33% and $2.6 million or 20%, respectively, from the same periods last year. This increase reflects
$0.8 million and $1.5 million of additional employee-related expenses incurred during the three and
six months ended March 31, 2006, respectively, including
23
Tier Technologies, Inc.
$0.2 million and $0.5 million, respectively, of stock-based compensation expenses resulting from our
implementation of SFAS 123R on October 1, 2005. During the three and six months ended March 31,
2006 we also incurred $1.5 million and $1.7 million, respectively, of additional legal and
consulting services primarily related to the restatement of our financial statements. The
year-to-date increases were partially offset by $0.6 million in reduced outside services, primarily
attributable to reduced consulting cost relating to the implementation of the Sarbanes-Oxley Act of
2002 during fiscal year 2005.
Selling and marketing. 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. Selling and marketing expenses increased 2% and
decreased 1%, respectively, to $2.7 million and $5.3 million, respectively, for the three and six
months ended March 31, 2006, over the same periods last year. Selling and marketing expenses for
the three months ended March 31, 2006 increased $0.1 million over the same period last year
primarily due to the first-time inclusion of share-based payment compensation expense resulting
from the implementation of SFAS 123R.
Depreciation and amortization. Depreciation and amortization consists primarily of
expenses associated with depreciation of equipment, software and leasehold improvements and
amortization of intangible assets resulting from acquisitions and other intellectual property not
directly attributable to client projects. Project-related depreciation and amortization is
included in direct costs. During the three and six months ended March 31, 2006, depreciation and
amortization expenses decreased by $0.2 million or 15% and $0.5 million or 15%, respectively, from
prior year results. This decrease was due to the absence of depreciation on assets, not directly
attributed to projects, which became fully depreciated in previous periods.
Other Income (Loss)
Equity in net income (loss) of unconsolidated affiliate. During the three and six months
ended March 31, 2006 we reported income of $0.5 million and $0.5 million, respectively, and during
the three and six months ended March 31, 2005 we incurred losses of $0.1 million and $0.2 million,
respectively, which represents our 47.37% share in the net income and losses incurred by investment
in CPAS. The $0.6 million and $0.7 million improvement in CPAS performance for the three and six
months ended March 31, 2006, respectively, over the same periods last year resulted primarily from
CPAS successful contracting efforts in the current fiscal year.
Interest income, net. During the three and six months ended March 31, 2006, net interest
income rose $0.3 million and $0.6 million, respectively, over the same periods last year. This
increase reflects higher interest rates and an increase in the average daily balance of our
investment portfolio.
Provision for income taxes. During the six months ended March 31, 2006 we reported $5,000
income tax expense, which represented expected minimum state tax payments. No income tax expense
was recorded during the three months ended March 31, 2006. In accordance with Statement of
Financial Accounting Standards No. 109Accounting for Income Taxes, or SFAS 109, we established a
valuation allowance for the full amount of our deferred tax assets because of cumulative net losses
incurred in recent years. As a result, no net provisions for federal income taxes are reflected on
our Consolidated Statements of Operations at March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirement is to fund working capital to support our organic growth,
including potential future acquisitions and potential contingent payments due to prior
acquisitions. We maintain a $15.0 million revolving credit facility that expires on March 31,
2007, of which $15.0 million may be used for letters of credit and additional borrowing. The
credit facility bears interest at the adjusted LIBOR rate plus 2.25% or the lenders announced
prime rate at our option. At March 31, 2006, there was approximately $1.9 million of standby
letters of credit outstanding under this facility. The credit facility is collateralized by first
priority liens and security interests in our assets. The credit facility contained certain
restrictive covenants, including, but not limited to, limitations on the amount of loans we may
extend to officers and employees, the payment of dividends, the
24
Tier Technologies, Inc.
repurchase of common stock and the incurrence of additional debt. As of March 31, 2006, there were
no outstanding borrowings under this facility. However, the delayed availability of our financial
statements for the fiscal year ended September 30, 2005, and the loss for the quarter ended
September 30, 2005, constituted events of default under the revolving credit agreement between Tier
and our lender. In addition, we incurred similar events of default for the quarter ended December
31, 2005. To address these events of default, we entered into an Amended and Restated Credit and
Security Agreement with the lender on March 6, 2006. The agreement, which amends and restates the
original agreement signed by Tier and the lender on January 29, 2003, made a number of significant
changes, including the termination of the $15.0 million revolving credit facility, the reduction of
financial reporting covenants and the elimination of financial ratio covenants. The March 6, 2006
agreement, which expires on March 31, 2007, provides that Tier may obtain up to $15.0 million of
letters of credit and 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.
In addition to the letters of credit issued under the credit facility mentioned above, during the
six months ended March 31, 2006 we had a $3.0 million letter of credit outstanding that was issued
to secure performance bonds. This letter of credit was collateralized by certain securities in our
investment portfolio at March 31, 2006.
Net Cash from Operating Activities. During the six months ended March 31, 2006, our
operating activities provided $5.7 million of cash, including $3.2 million from net income and $8.1
million of non-cash items included in net income. During the six months ended March 31, 2006, $4.4
million of cash was also generated by a decrease in the balance of accounts receivable, due to
successful collection efforts. These increases were partially offset by our use of $1.2 million of
cash to support prepaid expenses and other assets and $2.1 million decrease in deferred revenues.
During the six months ended March 31, 2005, the operating activities of our continuing operations
provided $2.3 million of cash, including $1.1 million of cash from net income and $4.5 million of
non-cash items included in net income. In addition, during the six months ended March 31, 2005,
$2.3 million of cash was generated by an increase in accounts payable and other accrued
liabilities. These increases were partially offset by our use of $5.5 million of cash to support
higher accounts receivable levels from increased sales.
Net Cash from Investing Activities. During the six months ended March 31, 2006, our
investing activities used $12.8 million, of which $42.1 million was used to purchase
available-for-sale investments and $32.2 million was generated by sales and maturities of
available-for-sale investments. During the six months ended March 31, 2006, $2.4 million was
generated when restricted securities matured, while $2.9 million was used to purchase restricted
investments. In addition, $2.4 million was used to purchase equipment and software during the six
months ended March 31, 2006.
During the six months ended March 31, 2005, we generated $1.6 million for investing activities, of
which $17.0 million was provided by the sales and maturities of available-for-sale investments and
$3.7 million and $0.8 million, respectively, was used to purchase available-for-sale investments
and restricted investments. The overall increase in cash from investments was offset primarily by
$4.0 million used to purchase CPAS and $6.8 million used to purchase equipment and software, which
primarily was attributable to our Michigan operations.
Net Cash from Financing Activities. During the six months ended March 31, 2006, $38,000 of
cash was provided by our financing activities. The increase represents $69,000 from issuance of
our Class B common stock, partially offset by $31,000 of cash used in capital lease obligations.
During the six months ended March 31, 2005, our financing activities provided $388,000 of cash from
the issuance of our Class B common stock, offset by $44,000 cash used in capital lease obligations.
We expect to generate cash flows from operating activities over the long-term; however, we may
experience significant fluctuations from quarter to quarter resulting from the timing of the
billing and collection of large project milestones. We anticipate that our existing capital
resources, including our cash balances, cash that we anticipate will be provided by operating
activities and our available credit facilities will be adequate to fund our operations for at least
the next 12 months. There can be no assurance that changes will not occur that would consume
available capital resources before such time. Our capital requirements and capital resources
depend
25
Tier Technologies, Inc.
on numerous factors, including potential acquisitions; initiation of large child support
payment processing contracts that typically require large cash outlays for capital expenditures and staff-up costs;
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 principle; 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 substantially changed,
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 AND COMMERCIAL COMMITMENTS
We have contractual obligations to make future payments on lease agreements, none of which
currently have remaining terms that extend beyond five years. Additionally, in the normal course
of business, we enter into contractual arrangements whereby we commit to future purchases of
products or services from unaffiliated parties. Purchase obligations are legally binding
arrangements whereby we agree to purchase products or services with a specific minimum quantity
defined at a fixed minimum or variable price over a specified period of time. The most significant
purchase obligation is for contracts with our subcontractors. The following table presents our
expected payments for contractual obligations that were outstanding at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in |
|
Due after |
|
Due after |
|
|
|
|
|
|
1 year |
|
1 year through |
|
3 years through |
(in thousands) |
|
Total |
|
or less |
|
3 years |
|
5 years |
|
Capital leases (equipment) |
|
$ |
116 |
|
|
$ |
68 |
|
|
$ |
46 |
|
|
$ |
2 |
|
Operating lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities leases |
|
|
10,856 |
|
|
|
3,387 |
|
|
|
7,371 |
|
|
|
98 |
|
Equipment leases |
|
|
208 |
|
|
|
102 |
|
|
|
106 |
|
|
|
|
|
Purchase obligations(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subcontractor |
|
|
698 |
|
|
|
587 |
|
|
|
111 |
|
|
|
|
|
Purchase order |
|
|
298 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
12,176 |
|
|
$ |
4,442 |
|
|
$ |
7,634 |
|
|
$ |
100 |
|
|
|
|
(1) Obligations that are legally binding agreements whereby we agree to purchase products or
services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified
period of time are defined as purchase obligations. |
None of our purchase obligations extend beyond five years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 require estimates and assumptions that require
complex subjective judgments by management, which can materially impact 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 managements estimates.
For a full discussion of our critical accounting policies and estimates, see the Managements
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, 2005.
26
Tier Technologies, Inc.
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 and non-government debt securities.
These available-for-sale securities are subject to interest rate risk and may decline in value if
market interest rates increase. If market interest rates increase immediately and uniformly by ten
percentage points from levels at March 31, 2006, the fair value of the portfolio would decline by
about $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include controls and procedures designed to ensure that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding
requirements not limited to financial disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of March 31, 2006. Based
on the evaluation of our disclosure controls and procedures as of March 31, 2006, which included
consideration of certain material weaknesses disclosed in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2005 and our inability to file this Quarterly Report on Form 10-Q
within the required time period, our Chief Executive Officer and the Chief Financial Officer
concluded that, as of March 31, 2006, our disclosure controls and procedures were not effective. In
light of the material weaknesses, in fiscal 2005, we implemented additional analyses and procedures
we believe are necessary to ensure that financial statements we issue are prepared in accordance
with GAAP and are fairly presented in all material respects. We have performed these additional
analyses and procedures with respect to this Quarterly Report on Form 10-Q. Accordingly, we
believe that the Condensed Consolidated Financial Statements (unaudited) included in this Quarterly
Report on Form 10-Q fairly present, in all material respects, our financial position, results of
operations and cash flows for the periods presented.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the fiscal period
ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. The changes described below occurred subsequent to
the second quarter of fiscal 2006.
To address the material weaknesses in our internal control over financial reporting described
above, we instituted a number of measures after September 30, 2005 that are expected to continue to
improve the effectiveness of our internal controls, including the following:
|
|
|
The Board of Directors appointed a new Chairman and Chief Executive Officer during
the third quarter of fiscal 2006; |
|
|
|
|
We established and communicated an atmosphere of zero-tolerance for improper behavior; |
|
|
|
|
We increased the formality and rigor around the operation of key accounting and
financial disclosure controls, including the documentation and testing of key financial
accounting controls and the implementation of appropriate policies and procedures to
provide reasonable assurance of: |
|
|
|
timely account reconciliations; |
|
|
|
|
reasonable and accurate accounting estimates and accrued liabilities; |
|
|
|
|
accurate reporting of notes receivable and related interest receivable; |
|
|
|
|
accurate calculation and review of the revenues recognized using
percentage-of-completion models; |
27
Tier Technologies, Inc.
|
|
|
documentation of managements review and approval of transactions; and |
|
|
|
|
preparation and maintenance of appropriate support for accounting transactions. |
Many of these remediation efforts were underway during the quarter ended March 31, 2006, and all
were fully implemented after March 31, 2006. We believe that these remediation efforts remediated
the material weaknesses that existed at March 31, 2006.
While our internal control over financial reporting has improved significantly as a result of the
changes made during fiscal 2006, we have identified certain areas that we will continue to enhance,
including the following:
|
|
|
we will automate certain controls that are currently performed manually; |
|
|
|
we will complete our written documentation of all key financial procedures; and |
|
|
|
we will consolidate and simplify our back office operations. |
28
Tier Technologies, Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2003, we received a subpoena from a grand jury in the Southern District of New York to
produce certain documents pursuant to an investigation by the Antitrust Division of the DOJ,
involving the child support payment processing industry. We have fully cooperated, and intend to
continue to cooperate fully, with the subpoena and with the DOJs investigation. On November 20,
2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Divisions Corporate
Leniency Policy. Consequently, the DOJ will not bring any criminal charges against us or our
officers, directors and employees, as long as we continue to comply with the Corporate Leniency
Policy, which requires, among other things, our full cooperation in the investigation and
restitution payments if it is determined that parties were injured as a result of impermissible
anticompetitive conduct.
In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting
documents relating to financial reporting and personnel issues. If the SEC were to conclude that
further investigative activities are merited or to take formal action against us, our reputation
could be impaired. We intend to cooperate fully with this investigation.
On November 10, 2006, a law firm issued a press release stating that a class action suit had been
filed on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006.
According to the press release, the suit alleges that Tier and certain of our former and/or current
officers violated Sections 10(b) and 20(a) of the Securities Exchange Act, but did not identify the
level of damages being sought. The press release states that the case is pending in the United
States District Court for the Eastern District of Virginia. We have not been served with the
complaint and are not able to estimate the probability or level of exposure associated with this
purported complaint.
ITEM 1A. RISK FACTORS
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.
If we fail to regain our listing status on the Nasdaq, the value of our stock may continue to
be depressed, we may have difficulties attracting and retaining customers and employees and our
Company may be susceptible to takeover attempts. Effective at the open of business on May 25,
2006, our common stock was delisted from the Nasdaq National Market (now the Nasdaq Global Market).
Although we intend to reapply for re-listing at the appropriate time after we have filled all
required reports with the Securities and Exchange Commission, there is no assurance that we will be
successful in having our common stock listed on the Nasdaq Global Market.
We have incurred losses in the past and we cannot ensure that we will be profitable. We have
incurred losses in the past and we may do so in the future. While we reported net income from
continuing operations in fiscal year 2005, we reported losses from continuing operations of a
$63,000 (restated) in fiscal year 2004 and $5.4 million (restated) in fiscal year 2003.
Our revenues and operating margins may decline and may be difficult to forecast, which could
result in a decline in our stock price. Our revenues, operating margins and cash flows are subject
to significant variation from quarter to quarter due to a number of factors, many of which are
outside our control. These factors include:
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economic conditions in the marketplace; |
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our customers budgets and demand for our services; |
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seasonality of business; |
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timing of service and product implementations; |
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Tier Technologies, Inc.
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unplanned increase in costs; |
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delay in completion of projects; |
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intense competition; |
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variability of software license revenues; and |
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integration and costs of acquisitions. |
The occurrence of any of these factors may cause the market price of our stock to decline or
fluctuate significantly, which may result in substantial losses to investors. We believe that
period-to-period comparisons of our operating results are not necessarily meaningful and/or
indicative of future performance. From time-to-time our operating results may fail to meet
analysts and investors expectations, which could cause a significant decline in the market price
of our stock. Price fluctuations and trading volume of our stock may be rapid and severe and may
leave investors little time to react. Other factors that affect the market price of our stock
include announcements of technological innovations or new products or services by competitors, and
general economic or political conditions such as recession, acts of war or terrorism. Fluctuations
in the price of our stock could cause investors to lose all or part of their investment.
We rely on small numbers of projects, customers and target markets for significant portions of our
revenues and our cash flow may decline significantly if we are unable to retain or replace these
projects or clients. We depend on a small number of clients to generate a significant portion of
our revenues. The completion or cancellation of a large project or a significant reduction in
project scope could significantly reduce our revenues and cash flows. Many of our contracts allow
our clients to terminate the contract for convenience upon notice and without penalty. If any of
our large clients or prime contractors terminates its relationship with us, we will lose a
significant portion of our revenues and cash flows. Because of our specific market focus, adverse
economic conditions affecting government agencies in these markets could also result in a reduction
in our revenues and cash flows. During the six months ended March 31, 2006, our ten largest
clients represented approximately half of our total revenues, including one contract that generated
over 10% of our total revenues. Our operating results and cash flows could decline significantly
if we cannot keep these clients, or replace them if lost.
Our markets are highly competitive. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market share. Our business is focused on transaction
processing and software systems solutions, which are highly competitive markets and are served by
numerous international, national and local firms. Many competitors have significantly greater
financial, technical and marketing resources and name recognition than we do. In addition, there
are relatively low barriers to entry into these markets and we expect to continue to face
additional competition from new entrants into our markets. Parts of our business are subject to
increasing pricing pressures from competitors, as well as from clients facing pressure to control
costs. Some competitors are able to operate at significant losses for extended periods of time,
which increases pricing pressure on our products and services. If we do not compete effectively,
the demand for our products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market share.
Changes in accounting standards could significantly change our reported results. Our accounting
policies and methods are fundamental to how we record and report our financial condition and
results of operations. From time to time the Financial Accounting Standards Board changes the
financial accounting and reporting standards that govern the preparation of our financial
statements. These changes can be hard to predict and can materially impact how we record and report
our financial condition and results of operations. In some cases, we could be required to apply a
new or revised standard retroactively, resulting in our restating prior period financial
statements.
Material weaknesses in our internal controls over financial reporting may result in adverse impact
on our business. Our future success will depend in large part upon the timely remediation of the
material weaknesses described in Item 4Control and Procedures, beginning on page 27. Failure to
address these weaknesses could delay or prevent our company from being re-listed on the Nasdaq
Global Market and could impair our ability to retain and attract customers and employees.
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Tier Technologies, Inc.
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,
industry association rules and public disclosure requirements, which are subject to change.
Changing laws, regulations and standards relating to corporate governance, accounting standards,
and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and NASDAQ Stock
Market rules are creating uncertainty for companies and increasing the cost of compliance. To
maintain high standards of corporate governance and public disclosure, we intend to invest all
reasonably necessary resources to comply with evolving standards. This investment may result in
increased general and administrative expenses for outside services and a diversion of management
time and attention from revenue-generating activities. New laws, regulations or industry standards
may be enacted, or existing ones changed, which could negatively impact our services and revenues.
Taxes or fees may be imposed or we could be subject to additional requirements in regard to
privacy, security or qualification for doing business. For our transaction processing services, we
are subject to the rules of the National Automated Clearing House Association and the applicable
credit/debit card association rules. A change in such rules and regulations could restrict or
eliminate our ability to provide services or accept certain types of transactions, and could
increase costs, impair growth and make our services unprofitable.
The revenues provided by our EPP segment from electronic payment processing may fluctuate and the
ability to maintain profitability is uncertain. Our EPP segment primarily provides credit and
debit card and electronic check payment options for the payment of federal and state personal
income taxes, real estate and personal property taxes, business taxes, fines for traffic violations
and parking citations and educational and utility obligations. The revenues earned by our EPP
segment depend on consumers continued willingness to pay a convenience fee and our relationships
with clients such as government taxing authorities, educational institutions, public utilities and
their respective constituents. If consumers are not receptive to paying a convenience fee; if card
associations change their rules or if laws are passed which do not allow us to charge the
convenience fees; or if credit or debit card issuers or marketing partners eliminate or reduce the
value of rewards to consumers under their respective rewards programs, demand for electronic
payment processing services could decline. The processing fees charged by credit/debit card
associations and financial institutions can be increased with little or no notice, which could
reduce margins and harm our profitability. Demand for electronic payment processing services would
also be affected adversely by a decline in the use of the Internet 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 technology
change. If we are not able to develop, market and deliver competitive technologies, our market
share will decline and our operating results and financial condition could suffer.
Our ability to grow depends largely on our ability to attract, integrate and retain qualified
personnel. The success of our business is based largely on our ability to attract and retain
talented and qualified employees and contractors. The market for skilled workers in our industry
is extremely competitive. In particular, qualified project managers and senior technical and
professional staff are in great demand worldwide. 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 or to form a competing company,
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. 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, or the discontinuation of the services of a key
subcontractor or vendor could result in significant cost and liability, diminished profitability
and damage to our reputation and competitive position.
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Tier Technologies, Inc.
Our fixed-price and transaction-based contracts require accurate estimates of resources and
transaction volumes and failure to estimate these factors accurately could cause us to lose money
on these contracts. Our business relies on accurate estimates. If we underestimate the resources,
cost or time required for a project or overestimate the expected volume of transactions or
transaction dollars processed, our costs could be greater than expected or our revenues could be
less than expected. Under fixed-price contracts, we generally receive our fee if we meet specified
deliverables, such as completing certain components of a system installation. For
transaction-based contracts, we receive our fee on a per-transaction basis or as a percentage of
dollars processed, such as the number of child support payments processed or tax dollars processed.
If we fail to prepare accurate estimates on factors used to develop contract pricing, such as
labor costs, technology requirements or transaction volumes, we may incur losses on those contracts
and our operating margins could decline.
Our revenues are highly dependent on government funding and the loss or decline of existing or
future government funding could cause our revenues and cash flows to decline. A significant
portion of our revenues is derived from federal and state mandated projects. A large portion of
these projects may be subject to a reduction or discontinuation of funding which may cause early
termination of projects, diversion of funds away from our projects or delays in implementation.
The occurrence of any of these conditions could adversely affect our projected revenues, cash flows
and profitability.
Our business is subject to increasing performance requirements, which could result in reduced
revenues and increased liability. Our business involves projects that are critical to the
operations of our clients businesses. The failure to meet client expectations could damage our
reputation and compromise our ability to attract new business. On certain projects we make
performance guaranties, based upon defined operating specifications, service levels and delivery
dates, which are sometimes backed by contractual guarantees and performance bonds. Unsatisfactory
performance or unanticipated difficulties or delays in starting or completing such projects may
result in termination of the contract, a reduction in payment, liability for penalties and damages,
or claims against a performance bond. Client performance expectations or unanticipated delays
could necessitate the use of more resources than we initially budgeted for a particular project,
which could increase our project costs and make us less profitable.
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 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 successfully 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, which
could result in decreased business opportunities and declining revenues.
Unauthorized data access and other security breaches could have an adverse impact on our business
and our reputation. Security breaches or improper access to data in our facilities, computer
networks, or databases, or those of our suppliers, may cause harm to our business and result in
liability and systems interruptions. Despite security measures we have taken, our systems may be
vulnerable to physical break-ins, computer viruses, attacks by hackers and similar problems causing
interruption in service and loss or theft of data and information. Our third-party suppliers also
may experience security breaches involving the unauthorized access of proprietary information. A
security breach could result in theft, publication, deletion or modification of confidential
information, cause harm to our business and reputation and result in loss of clients and revenue.
We could suffer material losses if our operations fail to perform effectively. The potential for
operational risk exposure exists throughout our organization. Integral to our performance is the
continued efficacy of our technical systems, operational infrastructure, relationships with third
parties and key executives in our day-to-day and ongoing operations. Failure by any or all of these
resources subjects us to risks that may vary in size, scale and scope. This includes but is not
limited to operational or technical failures, ineffectiveness or exposure due to interruption in
third-party support as expected, as well as, the loss of key individuals or failure on the part of
the key individuals to perform properly. 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.
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Tier Technologies, Inc.
Our business may be harmed by claims, lawsuits or investigations which could result in adverse
outcomes. At any given time, we are subject to a variety of claims and lawsuits. Adverse outcomes
in any particular claim, lawsuit, government investigation, tax determination, or other liability
matter may result in significant monetary damages, substantial costs, or injunctive relief against
us that could adversely affect our ability to conduct our business. We cannot guarantee that the
disclaimers, limitations of warranty, limitations of liability and other provisions set forth in
our contracts will be enforceable or will otherwise protect us from liability for damages. The
successful assertion of one or more claims against us may not be covered by, or may exceed our
available insurance coverage.
In May 2003, we received a subpoena from a grand jury in the Southern District of New York to
produce certain documents pursuant to an investigation by the Antitrust Division of the U.S.
Department of Justice, or the DOJ, involving the child support payment processing industry. We
have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the
DOJs investigation. On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the
Antitrust Divisions Corporate Leniency Policy. Consequently, the DOJ will not bring any criminal
charges against us or our officers, directors and employees, as long as we continue to comply with
the Corporate Leniency Policy, which requires, among other things, our full cooperation in the
investigation and restitution payments if it is determined that parties were injured as a result of
impermissible anticompetitive conduct. We anticipate that we will incur additional expenses as we
continue to cooperate with the investigation. Such expenses and any restitution payments could
negatively impact our reputation, compromise our ability to compete and win new projects and result
in financial losses.
In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting
documents relating to financial reporting and personnel issues. If the SEC were to conclude that
further investigative activities are merited or to take formal action against Tier, our reputation
could be impaired. We intend to cooperate fully with this investigation. We anticipate that we
will incur additional legal and administrative expenses as we continue to cooperate with the SECs
investigation.
If we are not able to protect our intellectual property we could suffer serious harm to our
business. 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 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 of 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.
Our markets are rapidly changing and if we are not able to continue to adapt to changing
conditions, we may lose market share and be unable to compete effectively. The markets for our
products are characterized by rapid changes in technology, client expectations and evolving
industry standards. Our future success depends on our ability to innovate, develop, acquire and
introduce successful new products and services for our target markets and to respond quickly to
changes in the market. If we are unable to address these requirements, or if our products do not
achieve market acceptance, we may lose market share and our revenues could decline.
We may not be successful in identifying acquisition candidates and, if we undertake acquisitions,
they could be expensive, increase our costs or liabilities or disrupt our business. One of our
strategies is to pursue growth through acquisitions. We may not be able to identify suitable
acquisition candidates at prices that we consider appropriate or to finance acquisitions at
favorable terms. If we do identify an appropriate acquisition candidate, we may be unsuccessful in
negotiating the terms of the acquisition, finance the acquisition or, if the
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Tier Technologies, Inc.
acquisition occurs we may be unsuccessful in 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.
ITEM 6. EXHIBITS
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Exhibit |
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Description |
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3.1 |
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Certificate of Designations of Series A Junior Participating Preferred Stock(1) |
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3.2 |
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Amendment to the Companys Amended and Restated Bylaws(1) |
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4.1 |
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Rights Agreement, dated as of January 10, 2006, by and between Tier Technologies, Inc. and American Stock
Transfer & Trust Company, as Rights Agent(1) |
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4.2 |
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Form of Rights Certificate(1) |
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10.1 |
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Assumption Agreement as of January 6, 2006 by and between the Registrant, Official Payments Corporation,
EPOS Corporation and City National Bank(2) |
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10.2 |
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Security Agreement as of January 6, 2006 by and between EPOS Corporation and City National Bank(2) |
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10.3 |
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Amended and Restated Credit and Security Agreement dated March 6, 2006 between the Registrant, Official
Payments Corporation, EPOS Corporation and City National Bank(3) |
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31.1 |
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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. |
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31.2 |
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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. |
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32.1 |
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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. |
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32.2 |
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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.
(1)Filed as an exhibit to Form 8-K, filed on January 11, 2006, and incorporated herein by reference.
(2)Filed as an exhibit to Form 8-K, filed on January 11, 2006, and incorporated herein by reference.
(3)Filed as an exhibit to Form 8-K, filed on March 9, 2006, and incorporated herein by reference.
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Tier Technologies, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Tier
Technologies, Inc. |
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Dated: November 14, 2006 |
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By: |
/s/ David E. Fountain
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David E. Fountain |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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