form10q.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
__________________

Commission file number 000-23195

TIER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
94-3145844
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)

10780 Parkridge Boulevard, Suite 400
Reston, Virginia 20191
(Address of principal executive offices)

(571) 382-1000
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address, and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check one):
 
Large accelerated filer o            Accelerated filer x     Non-accelerated filer o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o     No x
 
At August 6, 2007, there were 20,402,356 shares of the Registrant's Common Stock outstanding.
 



TIER TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
1
1
1
2
3
4
6
6
7
7
8
10
10
12
13
13
15
15
               Note 12 - Held-for-Sale Assets
     16
  17
17
19
28
28
29
29
29
       Item 5. Other Information 34
36
37

Private Securities Litigation Reform Act Safe Harbor Statement
 
Certain statements contained in this report, including statements regarding the future development of and demand for our services and our markets, anticipated trends in various expenses, expected costs of legal proceedings and other statements that are not historical facts, are forward-looking statements within the meaning of the federal securities laws.  These forward-looking statements relate to future events or our future financial and/or operating performance and can generally be identified as such because the context of the statement will include words such as "may," "will," "intends," "plans," "believes," "anticipates," "expects," "estimates," "shows," "predicts," "potential," "continue," or "opportunity," the negative of these words or words of similar import.  These forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described and referred to under Item 1A—Risk Factors beginning on page 29, which could cause actual results to differ materially from those anticipated as of the date of this report.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 

i

PART I.  FINANCIAL INFORMATION
 
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
 
(in thousands)
  
June 30,
2007
    
September 30, 2006
  
   
(unaudited)
        
ASSETS:
            
Current assets:
            
Cash and cash equivalents
   $
29,235
     $
18,486
  
Investments in marketable securities
    
39,500
      
36,950
  
Accounts receivable, net
    
2,525
      
3,857
  
Unbilled receivables
    
560
      
1,916
  
Prepaid expenses and other current assets
    
1,641
      
1,623
  
Current assets—held-for-sale
    
29,668
      
29,775
  
Total current assets
    
103,129
      
92,607
  
Property, equipment and software, net
    
3,734
      
3,781
  
Goodwill
    
29,531
      
37,567
  
Other intangible assets, net
    
14,262
      
16,395
  
Restricted investments
    
18,361
      
12,287
  
Investment in unconsolidated affiliate
    
—
      
3,978
  
Other assets
    
874
      
2,934
  
Total assets
   $
169,891
     $
169,549
  
LIABILITIES AND SHAREHOLDERS’ EQUITY:
                
Current liabilities:
                
Accounts payable
   $
634
     $
626
  
Income taxes payable
    
—
      
7,326
  
Accrued compensation liabilities
    
4,313
      
3,389
  
Accrued subcontractor expenses
    
364
      
457
  
Accrued discount fees
    
4,738
      
3,631
  
Other accrued liabilities and deferred income
    
5,051
      
6,523
  
Current liabilities—held-for-sale
    
14,272
      
12,054
  
Total current liabilities
    
29,372
      
34,006
  
Other liabilities
    
213
      
1,333
  
Total liabilities
    
29,585
      
35,339
  
                 
Contingencies and commitments (Note 9)
                
Shareholders’ equity:
                
Preferred stock, no par value; authorized shares:  4,579;
no shares issued and outstanding
    
—
      
—
  
Common stock and paid-in capital; shares authorized: 44,260;
shares issued: 20,402 and 20,383; shares outstanding: 19,518 and 19,499
    
186,053
      
184,387
  
Treasury stock—at cost, 884 shares
     (8,684 )     (8,684 )
Notes receivable from related parties
     (106 )     (4,275 )
Accumulated other comprehensive loss
     (5 )     (33 )
Accumulated deficit
     (36,952 )     (37,185 )
Total shareholders’ equity
    
140,306
      
134,210
  
Total liabilities and shareholders’ equity
   $
169,891
     $
169,549
  
 
See Notes to Consolidated Financial Statements
1
 
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
Three months ended
June 30,
    
Nine months ended
June 30,
  
(in thousands, except per share data)
  
2007
    
2006
    
2007
    
2006
  
Revenues
   $
57,660
     $
56,269
     $
140,651
     $
133,625
  
Costs and expenses:
                                
Direct costs
    
42,246
      
42,033
      
102,584
      
100,625
  
General and administrative
    
8,953
      
11,748
      
27,508
      
27,530
  
Selling and marketing
    
3,737
      
3,623
      
9,163
      
8,943
  
Depreciation and amortization
    
971
      
1,306
      
3,693
      
3,950
  
Impairment of goodwill and assets held-for-sale
    
8,585
      
—
      
8,585
      
—
  
Total costs and expenses
    
64,492
      
58,710
      
151,533
      
141,048
  
Loss from continuing operations before other income and income taxes
     (6,832 )     (2,441 )     (10,882 )     (7,423 )
Other income:
                                
Income from investment:
                                
Equity in net (loss) income in unconsolidated affiliate
     (511 )    
35
      
475
      
556
  
Realized foreign currency gain
    
239
      
—
      
239
      
—
  
Gain on sale of unconsolidated affiliate
    
80
      
—
      
80
      
—
  
Interest income, net
    
820
      
859
      
2,304
      
2,133
  
Total other income
    
628
      
894
      
3,098
      
2,689
  
Loss from continuing operations before income taxes
     (6,204 )     (1,547 )     (7,784 )     (4,734 )
Income tax (benefit) provision
     (7 )    
40
      
60
      
45
  
Net loss from continuing operations
     (6,197 )     (1,587 )     (7,844 )     (4,779 )
Income from discontinued operations, net
    
478
      
—
      
8,077
      
—
  
Net (loss) income
   $ (5,719 )   $ (1,587 )   $
233
     $ (4,779 )
                                 
(Loss) earnings per share—Basic:
                                
From continuing operations
   $ (0.32 )   $ (0.08 )   $ (0.40 )   $ (0.25 )
From discontinued operations
   $
0.03
     $
—
     $
0.41
     $
—
  
(Loss) earnings per share—Basic
   $ (0.29 )   $ (0.08 )   $
0.01
     $ (0.25 )
(Loss) earnings per share—Diluted:
                                
From continuing operations
   $ (0.32 )   $ (0.08 )   $ (0.40 )   $ (0.25 )
From discontinued operations
   $
0.03
     $
—
     $
0.41
     $
—
  
(Loss) earnings per share—Diluted
   $ (0.29 )   $ (0.08 )   $
0.01
     $ (0.25 )
                                 
Weighted average common shares used in computing:
                                
Basic (loss) earnings per share
    
19,511
      
19,499
      
19,505
      
19,494
  
Diluted (loss) earnings per share
    
19,511
      
19,499
      
19,630
      
19,494
  
 
See Notes to Consolidated Financial Statements

2


TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)


   
Three months ended
June 30,
    
Nine months ended
June 30,
  
(in thousands)
  
2007
    
2006
    
2007
    
2006
  
Net (loss) income
   $ (5,719 )   $ (1,587 )   $
233
     $ (4,779 )
Other comprehensive income (loss), net of tax:
                                
Unrealized (loss) gain on investments in marketable securities
     (2 )    
1
       (3 )    
55
  
Foreign currency translation:
                                
Foreign currency translation adjustment
     (179 )    
56
       (208 )    
45
  
Less impact of realized gains (transferred from AOCI into net (loss) income)
    
239
      
—
      
239
      
—
  
Other comprehensive income
    
58
      
57
      
28
      
100
  
Comprehensive (loss) income
   $ (5,661 )   $ (1,530 )   $
261
     $ (4,679 )
 
See Notes to Consolidated Financial Statements

3

TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
Nine months ended June 30,
  
(in thousands)
  
2007
    
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income (loss)
   $
233
     $ (4,779 )
Less: Income from discontinued operations, net
    
8,077
      
—
  
Loss from continuing operations, net
     (7,844 )     (4,779 )
Non-cash items included in net income from continuing operations:
                
Depreciation and amortization
    
5,536
      
6,725
  
Loss on retirement of equipment and software
    
6
      
283
  
Provision for doubtful accounts
     (26 )    
957
  
Equity in net income of unconsolidated affiliate
     (475 )     (556 )
Gain on sale of unconsolidated affiliate
     (80 )    
—
  
Foreign currency translation gain realized on sale of unconsolidated affiliate
     (239 )    
—
  
Share-based compensation
    
1,451
      
1,123
  
Accrued forward loss on contracts
     (79 )    
1,478
  
Settlement of pension contract
    
1,254
      
—
  
Impairment of goodwill and held-for-sale assets
    
8,585
      
—
  
Net effect of changes in assets and liabilities:
                
Accounts receivable and unbilled receivables
    
4
      
4,819
  
Prepaid expenses and other assets
    
2,931
       (2,345 )
Accounts payable and accrued liabilities
    
2,658
      
1,996
  
Income taxes payable
    
311
       (213 )
Deferred income
    
148
       (2,750 )
Cash provided by operating activities from continuing operations
    
14,141
      
6,738
  
Cash provided by discontinued operations:
                
Income from discontinued operations, net
    
8,077
      
—
  
Non-cash items included in income from discontinued operations, net:
                
Reversal of income tax reserve
     (7,599 )    
—
  
Liquidation of Australian operations
     (478 )      
—
  
Cash provided by operating activities from discontinued operations
    
—
      
—
  
Cash provided by operating activities
    
14,141
      
6,738
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchases of marketable securities
     (6,108 )     (45,950 )
Sales and maturities of marketable securities
    
3,550
      
37,164
  
Purchase of restricted investments
     (19,272 )     (3,878 )
Sales and maturities of restricted investments
    
13,398
      
3,367
  
Purchase of equipment and software
     (3,888 )     (3,688 )
Repayment of notes and accrued interest from related parties
    
4,295
      
—
  
Proceeds from sale of unconsolidated affiliate
    
4,784
      
—
  
Other investing activities
     (232 )    
—
  
Cash used in investing activities
     (3,473 )     (12,985 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net proceeds from issuance of common stock
    
89
      
69
  
Capital lease obligations and other financing arrangements
    
3
       (80 )
Cash provided by (used in) financing activities
    
92
       (11 )
Effect of exchange rate changes on cash
     (11 )    
36
  
Net increase (decrease) in cash and cash equivalents
    
10,749
       (6,222 )
Cash and cash equivalents at beginning of period
    
18,486
      
27,843
  
Cash and cash equivalents at end of period
   $
29,235
     $
21,621
  

4

 
TIER TECHNOLOGIES, INC.
CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION
(unaudited)
 
 

 
   
    Nine months ended June 30,
  
 (in thousands)  
 2007
 
  
 2006
  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid during the period for:
            
Interest
   $
9
     $
13
  
Income taxes paid, net
   $
128
     $
189
  
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
                
Interest accrued on shareholder notes
   $
126
     $
206
  
   Equipment acquired under capital lease obligations and other financing arrangements
   $
26
     $
64
  
See Notes to Consolidated Financial Statements

5



 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1—OVERVIEW OF ORGANIZATION 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 EPP—provides electronic payment processing options, including payment of taxes, fees and other obligations owed to government entities, educational institutions, utilities, and other public sector clients;
 
·  
Government Business Process Outsourcing, or GBPO—focuses on child support payment processing, child support financial institution data match services, health and human services consulting, computer telephony and call centers, and other related systems integration services; and
 
·  
Packaged Software and Systems Integration, or PSSI—provides software and systems implementation services through practice areas in financial management systems, public pension administration systems, unemployment insurance administration systems, electronic government services, and systems integration services for the State of Missouri.
 
Our two principal subsidiaries, which are accounted for as part of our EPP and GBPO segments, include:
 
·  
Official Payments Corporation, or OPC—provides proprietary telephone and Internet systems, transaction processing and settlement for electronic payments to federal, state, and municipal government agencies, educational institutions and other public sector clients; and
 
·  
EPOS Corporation, or EPOS—provides interactive communications and payment processing technologies to federal, state, and municipal government agencies, educational institutions and other public sector clients.
 
On June 29, 2007 we sold our 46.96% investment in the outstanding common stock of CPAS Systems, Inc., or CPAS, a Canadian-based supplier of pension administration software systems, back to CPAS for $4.8 million (USD).  We had previously been reporting our investment in CPAS under the equity method of accounting.
 
BASIS OF PRESENTATION
 
Our Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with Regulation S-X, Article 10, under the Securities Exchange Act of 1934, as amended.  They are unaudited and exclude some disclosures required for annual financial statements.  We believe we have made all necessary adjustments so that our Consolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature.
 
These Consolidated Financial Statements include the accounts of Tier Technologies, Inc. and its subsidiaries.  Intercompany transactions and balances were eliminated.  In April 2007, we began to seek buyers for certain portions of our business, including the majority of our PSSI and GBPO segments.  In accordance with Statement of Financial Accounting Standard No. 144—Accounting for the Impairment of Long-Lived Assets, we have recorded the associated assets and liabilities as held-for-sale.  We have also reclassified previously reported assets and liabilities for these operations to held-for-sale to conform to the current year presentation on the Consolidated Balance Sheets.
 
Preparing financial statements requires us to make estimates and assumptions that affect the amounts reported on our Consolidated Financial Statements and accompanying notes.  We believe that near-term changes could impact the following estimates: project costs and percentage of completion; effective tax
6
 
rates, deferred taxes and associated valuation allowances; collectibility of receivables; stock-based compensation and valuation of goodwill, intangibles and investments.  Although we believe the estimates and assumptions used in preparing our Consolidated Financial Statements and related notes are reasonable in light of known facts and circumstances, actual results could differ materially.
 
 
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
 
SFAS 154—Accounting Changes and Error Corrections. In May 2005, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard No. 154—Accounting Changes and Error Corrections, or SFAS 154, which 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 adopted 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.
 
FIN 48—Accounting for Uncertainty in Income Taxes.  In July 2006, FASB Interpretation No. 48—Accounting for Uncertainty in Income Taxes, or FIN 48, was issued.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109—Accounting 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.
 
SFAS 159—The Fair Value Option for Financial Assets and Financial Liabilities.  In February 2007, FASB issued Statement of Financial Accounting Standard No. 159—The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, which allows companies to choose to measure many financial instruments and certain other items at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earning at each subsequent reporting date.  The principle can be applied on an instrument by instrument basis, is irrevocable and must be applied to the entire instrument.  SFAS 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities.  SFAS 159 also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election.  SFAS 159 is effective as of the beginning of each reporting fiscal year beginning after November 15, 2007.  Currently, we are evaluating the impact that this new standard will have on our financial position and results of operations.
 
NOTE 3—CUSTOMER CONCENTRATION AND RISK
 
We derive a significant portion of our revenue from a limited number of governmental customers.  Typically, the contracts allow these customers to terminate all or part of the contract for convenience or cause.  For the nine months ended June 30, 2007 and 2006, revenue from one customer totaled $30.2 million and $26.9 million, respectively, or 21.5% and 20.1%, respectively, of total revenue.
 
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 expect 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:
 
7
 
·  
Customer receivables—receivables from our clients;
 
·  
Mispost receivables—receivables from individuals to whom our payment processing centers made incorrect payments; and
 
·  
Not Sufficient Funds (“NSF”) receivables—receivables 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 Sheets.  As shown in the following table, at June 30, 2007 and September 30, 2006, the balance of our Accounts receivable, net was $2.5 million and $3.9 million, respectively.
 
(in thousands)
  
June 30, 2007
    
September 30, 2006
  
Accounts receivable from:
            
Customers
   $
2,668
     $
3,163
  
Recipients of misposted payments
    
349
      
1,290
  
Payers of NSF child support
    
430
      
769
  
Total accounts receivable
    
3,447
      
5,222
  
Allowance for uncollectible accounts receivable:
                
Customer
     (419 )     (580 )
Mispost
     (349 )     (1,023 )
NSF
     (429 )     (751 )
Total allowance for uncollectible accounts
     (1,197 )     (2,354 )
Short-term accounts receivable retainer
    
275
      
989
  
Accounts receivable, net
   $
2,525
     $
3,857
  
 
At June 30, 2007 and September 30, 2006, one customer accounted for 24.7% and 20.1%, respectively, of total customer accounts receivable.
 
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 June 30, 2007 and September 30, 2006, Accounts receivable, net included $0.3 million and $1.0 million, respectively, of retainers that we expected to receive in one year.  In addition, there were $0.7 million and $2.8 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 we have earned for the work that has been performed to date that cannot be billed under the terms of the applicable contract until we have completed specific project milestones or the customer has accepted our work.  At June 30, 2007 and September 30, 2006, unbilled receivables, which are all expected to become billable in one year, were $0.6 million and $1.9 million, respectively.  At June 30, 2007, two customers accounted for 51.3% and 47.6%, respectively, of total unbilled receivables and at September 30, 2006, three customers accounted for 50.0%, 32.2%, and 17.9%, respectively, of unbilled receivables.
 
NOTE 4—INVESTMENTS
 
Debt and Equity Securities
 
Investments are composed of available-for-sale debt securities as defined in SFAS No. 115—Accounting for Certain Investments in Debt and Equity Securities, or SFAS 115.  As of both June 30, 2007 and September 30, 2006 restricted investments totaling $12.3 million were pledged in connection with a security interest in cash collateral, performance bonds, insurance 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 March 2010.  At June 30, 2007, a $6.1 million money market investment was also used as a compensating balance for a bank account used for certain operations.  These investments are reported as Restricted investments on the Consolidated Balance Sheets.
8
 
In accordance with SFAS No. 95—Statement of Cash Flows, unrestricted investments with remaining maturities of 90 days or less (as of the date that we purchased the securities) are classified as cash equivalents.  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 former investment in CPAS and our restricted investments, all other investments are categorized as available-for-sale.  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.
 
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:
 
   
June 30, 2007
    
September 30, 2006
  
(in thousands)
  
Amortized cost
    
Unrealized loss
    
Estimated
 fair value
    
Amortized cost
    
Unrealized loss
    
Estimated fair value
  
Cash equivalents:
                                    
Money market
   $
4,916
     $
—
     $
4,916
     $
9,053
     $
—
     $
9,053
  
Commercial paper
    
4,472
       (3 )    
4,469
      
—
      
—
      
—
  
Total investments included in cash
      and cash equivalents
    
9,388
       (3 )    
9,385
      
9,053
      
—
      
9,053
  
Investments in marketable securities:
                                                
Debt securities(Primarily state and local bonds/notes)
    
39,500
      
—
      
39,500
      
36,950
      
—
      
36,950
  
Total investments in marketable securities
    
39,500
      
—
      
39,500
      
36,950
      
—
      
36,950
  
Restricted investments:
                                                
Certificates of deposit
    
8,941
      
—
      
8,941
      
8,941
      
—
      
8,941
  
Money market
    
6,079
      
—
      
6,079
      
—
      
—
      
—
  
U.S. government sponsored enterprise obligations
    
3,343
       (2 )    
3,341
      
3,348
       (2 )    
3,346
  
Total restricted investments
    
18,363
       (2 )    
18,361
      
12,289
       (2 )    
12,287
  
Total investments
   $
67,251
     $ (5 )   $
67,246
     $
58,292
     $ (2 )   $
58,290
  
 
At June 30, 2007 and September 30, 2006, all of the debt securities that were included in marketable securities had remaining maturities in excess of ten years.
 
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 that impairment is other-than-temporary, we reduce the recorded book value of the investment by the amount of the impairment and recognize a realized loss on the investment.  At June 30, 2007 and September 30, 2006, we did not believe any of our investments were other-than-temporarily impaired.
 
 
Equity Investments
 
In June 2007 we sold our 46.96% investment of the outstanding common stock of CPAS Systems, Inc., or CPAS, a Canadian-based supplier of pension administration software systems, back to CPAS for $4.8 million (USD).  The sale price was approximately equal to the US-dollar equivalent of our book value in the CPAS investment as of June 30, 2007, plus estimated taxes and other disposal costs.  In
9
 
June 2007, we recorded a gain of $80,000 on the sale of this investment and realized a foreign currency gain on the investment of $239,000.
 
 
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS
 
As of June 30, 2007, goodwill for our operating units consisted of the following:
 
 
  
Operating Segment
    
 
  
(in thousands)
  
EPP
    
GBPO
    
PSSI
    
Total
  
Balance of goodwill at September 30, 2006
   $
14,323
     $
5,711
     $
17,533
     $
37,567
  
Reclassification of goodwill due to restructuring in October 2006
    
203
      
8,036
       (8,239 )    
—
  
Goodwill written off related to classification of assets as held-for-sale
    
—
       (8,036 )    
—
       (8,036 )
Balance at June 30, 2007
   $
14,526
     $
5,711
     $
9,294
     $
29,531
  
 
The above table also reflects $8.0 million of goodwill associated with a corporate restructuring that occurred at October 1, 2006.  At that time, our Voice and System Automation, or VSA, business was reclassified from our PSSI segment to our GBPO segment, to better align complementary product lines in the GBPO segment.  Although the VSA business previously had been assigned to the PSSI segment, it was not integrated into the segment and benefits from the VSA segment were not realized by the rest of the reporting unit.
 
In April 2007, we began to seek buyers for the majority of our GBPO and PSSI segments.  In accordance with Statement of Financial Accounting Standard No. 144—Accounting for the Impairment of Long-Lived Assets, we have recorded the associated assets and liabilities as “held-for-sale” for all reported periods.  Our GBPO and PSSI segments are each composed of a number of businesses that we currently believe may be sold separately.  These businesses were never fully integrated into the segment after their acquisition and the benefits of the acquired goodwill were not realized by the rest of the reporting unit.  Therefore, the goodwill associated with these businesses was included in the carrying amount of the individual businesses.  We analyzed these businesses for impairment using a fair value approach as required by SFAS 144 and SFAS 142—Goodwill and Other Intangible Assets.  Of the $29.5 million of goodwill reported in the preceding table, $15.0 million relates to held-for-sale assets, of which $5.7 million related to goodwill for businesses in our GBPO segment and $9.3 million is related to goodwill for businesses in our PSSI segment.
 
As a general practice, we test goodwill for impairment during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach in accordance with SFAS No. 142—Goodwill and Other Intangible Assets.  If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, we would evaluate goodwill for impairment between annual tests.  Such an event occurred in April 2007 when we reclassified certain assets as held-for-sale.  At that time, we determined that the carrying value of certain business exceeded the fair value by $8.6 million, as a result of a change in the strategic direction of that business.  As a result, we recorded an impairment loss during the third quarter of fiscal 2007.  See Note 12-Held-for-sale assets for additional information on the goodwill and long-lived asset impairment for those portions of our business classified as held-for-sale on our Consolidated Balance Sheets.
 
At June 30, 2007 and September 30, 2006, we also reclassified certain intangible assets to Current assets—held-for-sale on our Consolidated Balance Sheet.  Subsequent to April 2007, we are not recognizing any additional amortization on these assets while they are classified as held-for-sale.  At June 30, 2007 and September 30, 2006, Other intangible assets, net, consisted of the following:
10
 
     
June 30, 2007
    
September 30, 2006
  
(in thousands)
Amortization period
  
Gross
    
Accumulated amortization
    
Net
    
Gross
    
Accumulated amortization
    
Net
  
Client relationships
10 years
   $
28,749
     $ (13,226 )   $
15,523
     $
28,749
     $ (11,176 )   $
17,573
  
Reclassed to held-for-sale
       (4,210 )    
1,192
       (3,018 )     (4,210 )    
983
       (3,227 )
       
24,539
       (12,034 )    
12,505
      
24,539
       (10,193 )    
14,346
  
                                                   
Technology & research and development
3-10 years
    
4,289
       (2,429 )    
1,860
      
4,289
       (1,986 )    
2,303
  
Reclassed to held-for-sale
       (3,990 )    
2,257
       (1,733 )     (3,990 )    
1,858
       (2,132 )
       
299
       (172 )    
127
      
299
       (128 )    
171
  
                                                   
Trademarks
7-10 years
    
3,214
       (1,584 )    
1,630
      
3,214
       (1,342 )    
1,872
  
                                                   
Non-compete agreements
2-3 years
    
615
       (584 )    
31
      
615
       (484 )    
131
  
Reclassed to held-for-sale
       (560 )    
529
       (31 )     (560 )    
435
       (125 )
       
55
       (55 )    
—
      
55
       (49 )    
6
  
Other intangible assets, net
     $
28,107
     $ (13,845 )   $
14,262
     $
28,107
     $ (11,712 )   $
16,395
  
 
As shown in the above table, a total of $4.8 million and $5.5 million, respectively, of Other intangible assets, net, was reclassified as held-for-sale as of June 30, 2007 and September 30, 2006.  The remaining $14.3 million and $16.4 million, respectively, of Other intangible assets, net shown on our Consolidated Balance Sheets continues to be held and used by Tier.  During the nine months ended June 30, 2007, amortization expense for other intangible assets totaled $2.8 million. 
 
 
NOTE 6—(LOSS) EARNINGS PER SHARE
 
The following table presents the computation of basic and diluted (loss) earnings per share:
 
   
Three months ended
June 30,
    
Nine months ended
June 30,
  
(in thousands, except per share amounts)
  
2007
    
2006
    
2007
    
2006
  
Numerator:
                        
Net (loss) income from:
                        
Continuing operations, net of income taxes
   $ (6,197 )   $ (1,587 )   $ (7,844 )   $ (4,779 )
Discontinued operations
    
478
      
—
      
8,077
      
—
  
Net (loss) income
   $ (5,719 )   $ (1,587 )   $
233
     $ (4,779 )
Denominator:
                                
Weighted-average common shares outstanding
    
19,511
      
19,499
      
19,505
      
19,494
  
Effects of dilutive common stock options
    
—
      
—
      
125
      
—
  
Adjusted weighted-average shares
    
19,511
      
19,499
      
19,630
      
19,494
  
(Loss) earnings per share—Basic:
                                
From continuing operations
   $ (0.32 )   $ (0.08 )   $ (0.40 )   $ (0.25 )
From discontinued operations
   $
0.03
     $
—
     $
0.41
     $
—
  
(Loss) earnings per share—Basic
   $ (0.29 )   $ (0.08 )   $
0.01
     $ (0.25 )
(Loss) earnings per share—Diluted:
                                
From continuing operations
   $ (0.32 )   $ (0.08 )   $ (0.40 )   $ (0.25 )
From discontinued operations
   $
0.03
     $
—
     $
0.41
     $
—
  
(Loss) earnings per share—Diluted
   $ (0.29 )   $ (0.08 )   $
0.01
     $ (0.25 )
 
11
The following shares attributable to outstanding stock options were excluded from the calculation of diluted (loss) earnings per share because their inclusion would have been anti-dilutive:
 
   
Three months ended
June 30,
    
Nine months ended
June 30,
  
(in thousands, except per share amounts)
  
2007
    
2006
    
2007
    
2006
  
Weighted-average options excluded from computation of diluted earnings per share
    
798
      
1,807
      
1,668
      
2,184
  
Range of exercise prices per share:
                                
High
   $
20.70
     $
20.70
     $
20.70
     $
20.70
  
Low
   $
6.85
     $
6.96
     $
5.91
     $
6.96
  
 
In addition, 273,000 for the three months ended June 30, 2007, and 95,000 and 118,000, respectively, for the three and nine months ended June 30, 2006, of common stock equivalents were excluded from the calculations of diluted (loss) earnings per share, since their effect would have been anti-dilutive.
 
 
NOTE 7—SEGMENT INFORMATION
 
We evaluate the performance of our EPP, GBPO and PSSI operating segments based on revenues and direct costs.  Accordingly, we do not include the cost of shared services in our segment analyses, such as selling and marketing, general and administrative, depreciation and amortization expenses, interest, and income taxes.
 
Beginning October 1, 2006, we reclassified our Voice and Systems Automation practice area revenues and direct costs from our PSSI segment to our GBPO segment to align complementary product lines with the same operating segment.  Accordingly, the prior period revenues and direct costs for these segments have been reclassified to conform to the current presentation.
 
The following table presents financial information for the three reportable segments, including the elimination of revenues and costs associated electronic payment processing services that our EPP segment performed for our GBPO segment, which are disclosed in the Eliminations column below:
 
   
Three months ended
    
Nine months ended
  
(in thousands)
  
EPP(1)
    
GBPO(2)
    
PSSI(3)
    
Eliminations
    
Total
    
EPP(1)
    
GBPO(2)
    
PSSI(3)
    
Eliminations
    
Total
  
June 30, 2007:
                                                            
Revenues
   $
38,380
     $
11,102
     $
8,284
     $ (106 )   $
57,660
     $
81,109
     $
35,718
     $
24,093
     $ (269 )   $
140,651
  
Direct costs
   $
30,021
     $
6,147
     $
6,184
     $ (106 )   $
42,246
     $
61,539
     $
23,424
     $
17,890
     $ (269 )   $
102,584
  
                                                                                 
June 30, 2006:
                                                                                
Revenues
   $
33,912
     $
12,613
     $
9,787
     $ (43 )   $
56,269
     $
64,485
     $
40,564
     $
28,677
     $ (101 )   $
133,625
  
Direct costs
   $
26,950
     $
8,049
     $
7,077
     $ (43 )   $
42,033
     $
49,487
     $
31,275
     $
19,964
     $ (101 )   $
100,625
  
(1) During the three and nine months ended June 30, 2007, the revenues from one customer produced 52.6% and 37.2%, respectively, of the revenues for the EPP segment. During the three and nine months ended June 30, 2006, the revenues from this customer produced 58.5% and 41.7%, respectively, of the revenues for the EPP segment.
(2) The revenues from one customer produced 31.2% and 31.0%, respectively, of the revenues for the GBPO segment during the three and nine months ended June 30, 2007, and produced 35.1% and 32.1%, respectively, of GBPO revenues during the three and nine months ended June 30, 2006.
The revenues from another customer produced 18.5% and 16.9%, respectively, of the GBPO revenues for the three and nine months ended June 30, 2007, while the revenues from this customer produced 15.2% and 14.0%, respectively, of GBPO revenues during the three and nine months ended June 30, 2006. The contract with this customer expired on June 29, 2007.
(3) During the three and nine months ended June 30, 2007, the revenues from one customer produced 33.0% and 27.9%, respectively, of the revenues for the PSSI segment. During the three and nine months ended June 30, 2006, the revenues from this customer produced 27.6% and 24.6%, respectively, of the revenues for the PSSI segment. The revenues from another customer produced 28.1% and 24.8%, respectively, of the PSSI revenues for the three and nine months ended June 30, 2007, while the revenues from this customer produced 19.3% and 16.1%, respectively, of the PSSI revenues during the three and nine months ended June 30, 2006.
  
 
Our total assets for each segment are shown in the following table:
 
(in thousands)
  
June 30, 2007
    
September 30, 2006
  
EPP
   $
95,523
     $
85,236
  
GBPO
    
24,100
      
39,795
  
PSSI
    
24,766
      
25,894
  
Corporate(1)
    
25,502
      
18,624
  
Total
   $
169,891
     $
169,549
  
(1)Represents assets that are not assignable to a specific segment
  
 
12
See Note 12—Held-for-sale assets for a breakdown of assets for each segment that are classified as held-for-sale.
 
NOTE 8—RESTRUCTURING
 
During fiscal year 2004, we incurred restructuring liabilities for facilities closure costs associated with the relocation of our administrative functions from Walnut Creek, California to Reston, Virginia.  We did not incur any restructuring expense during the nine months ended June 30, 2007.
 
The following table summarizes the restructuring liabilities activity from September 30, 2006 to June 30, 2007:
 
(in thousands)
  
Facilities closures
  
Balance at September 30, 2006
   $
401
  
Cash payments
     (163 )
Balance at June 30, 2007
   $
238
  
 
As shown in the preceding table, we had $0.2 million of restructuring liabilities at June 30, 2007, all of which was included in Other liabilities in the Consolidated Balance Sheet.  We expect to pay $58,000 and $180,000 of these liabilities during fiscal years 2007 and 2008, respectively.
 
NOTE 9—CONTINGENCIES AND COMMITMENTS
 
LEGAL ISSUES
 
From time to time during the normal course of business, we are a party to litigation and/or other claims.  At June 30, 2007, none of these matters were expected to have a material impact on our financial position, results of operations or cash flows.  At June 30, 2007 and September 30, 2006, we had legal accruals of $1.0 million and $1.4 million, respectively, based upon estimates of key legal matters.  In November 2003, we were granted conditional amnesty in relation to a Department of Justice Antitrust Division investigation involving the child support payment processing industry.  We have cooperated, and continue to cooperate, with the investigation and, therefore, will continue to incur legal costs.
 
On May 31, 2006, we received a subpoena from the Philadelphia District Office of the Securities and Exchange Commission requesting documents relating to financial reporting and personnel issues.  We have cooperated, and will continue to cooperate fully, in this investigation.
 
On November 20, 2006, we were served with a purported class action lawsuit on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006.  Subsequently, the complaint was amended to narrow the purported class period.  The suit alleges that Tier and certain of our former officers issued false and misleading statements from November 2001 to May 2006, but did not specify the damages being sought.  This case is pending in the United States District Court for the Eastern District of Virginia.  We believe we have minimal, if any, exposure associated with this complaint.  See Note 14—Subsequent Events for information on key recent events associated with this case.
 
BANK LINES OF CREDIT
 
Throughout the majority of fiscal 2006, the first quarter of fiscal 2007 and the majority of the second quarter of fiscal 2007, we had a credit facility that allowed us to obtain letters of credit up to a total of $15.0 million and also granted the lender a perfected security interest in cash collateral in an amount equal to all issued and to be issued letters of credit.  This credit facility was scheduled to mature on March 31, 2007.  On March 23, 2007, we elected to reduce the line of credit to $10.0 million and entered into an amendment to the credit facility.  The amendment continues to grant the lender a perfected security interest in cash and collateral in an amount equal to all issued and to be issued letters of credit.  The amended facility is scheduled to mature on September 30, 2007.  As of June 30, 2007, $8.9 million of letters of credit were outstanding under this credit facility.  These letters of credit were issued to secure performance bonds, insurance and a lease.  See Note 14—Subsequent Events for information about the release of certain of these letters of credit after June 30, 2007.
13
 
OTHER LETTERS OF CREDIT
 
At both June 30, 2007 and September 30, 2006, we also had a $3.0 million letter of credit outstanding that was collateralized by certain securities in our investment portfolio.  This letter of credit was issued to secure a performance bond which was scheduled to expire in October 2007.  We report the investments used to collateralize this letter of credit as Restricted investments on our Consolidated Balance Sheets.  This bond was released in June 2007 as a result of the early termination of the contract it supported.  The letter of credit securing this bond was released in July 2007.  See Note 14—Subsequent Events for information about the release of this letter of credit and the associated collateral thereto after June 30, 2007.
 
CREDIT RISK
 
We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits.  We have not experienced any losses in such accounts and believe that any associated credit risk is de minimis.
 
GUARANTEES
 
In conjunction with our participation as a subcontractor in a three-year contract for unemployment insurance-related services, we guaranteed the performance of the prime contractor on the project.  The contract does not establish a limitation to the maximum potential future payments under the guarantee; however, we estimate that the maximum potential undiscounted cost of the guarantee is $2.8 million.  In accordance with FASB Interpretation No. 45—Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we valued this guarantee based upon the sum of probability-weighted present values of possible future cash flows.  As of June 30, 2007, the remaining liability was $89,000, which is being amortized over the term of the contract.  We believe that the probability is remote that the guarantee provision of this contract will be invoked.
 
PERFORMANCE BONDS
 
Under certain contracts, we are required to obtain performance bonds from a licensed surety and to post the performance bond with our customer.  Fees for obtaining the bonds are expensed over the life of each bond and are included in Direct costs on our Consolidated Statements of Operations.  At June 30, 2007, we had $23.9 million of bonds posted with our customers.  There were no claims pending against any of these bonds as of June 30, 2007.
 
EMPLOYMENT AGREEMENTS
 
We have employment and change of control agreements with four executives, a former executive and certain other key managers.  If certain termination or change of control events were to occur under these contracts, we could be required to pay up to $4.9 million.  See Note 14—Subsequent Events for information regarding an employment agreement with a fifth executive that was executed August 2007. 
 
In February 2007, we entered into agreements with 31 key employees under which these individuals will be entitled to receive three to twelve months of their base salaries over a one to two year period, after completing defined employment service periods.  During the remainder of fiscal 2007, we expect to recognize a maximum expense of $0.3 million for these agreements.  During fiscal 2008 and 2009, we expect to recognize a maximum expense of $0.9 million and $0.2 million, respectively, for these agreements.  In addition, we have agreements with 37 other individuals under which they may receive compensation of up to $2.6 million if certain change of control events were to occur.
 
INDEMNIFICATION AGREEMENTS
 
We have indemnification agreements with each of our directors and a number of key executives.  These agreements provide such persons with indemnification to the maximum extent permitted by our Articles of Incorporation, Bylaws and the General Corporation Law of the State of Delaware, against all expenses, claims, damages, judgments and other amounts (including amounts paid in settlement) for which such persons become liable as a result of acting in any capacity on our behalf, subject to certain limitations.  We are not able to estimate our maximum exposure under these agreements.
14
 
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 revenues over the term of the contract, we record an accrual in the current period equal to the total forecasted losses over the term of the contract, less losses recognized to date, if any.  As of June 30, 2007 and September 30, 2006, accruals totaling $0.9 million and $1.0 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.
 
NOTE 10—RELATED PARTY TRANSACTIONS
 
NOTES AND ACCRUED INTEREST RECEIVABLE
 
At June 30, 2007 and September 30, 2006, we had $106,000 and $4.3 million, respectively, of full-recourse notes and interest receivable from a former Chairman of the Board and Chief Executive Officer.  During the nine months ended June 30, 2007, the former Chairman paid $4.3 million in principal and interest on notes that matured during that period.  Approximately $2.2 million of these full-recourse notes were issued in connection with the exercise of options to purchase shares of Tier’s common stock.  The two remaining notes mature in July 2007 and bear interest rates of 6.99%.  See Note 14—Subsequent Events for information about the subsequent repayment of the principal and interest on these two remaining notes in July 2007.
 
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
 
CPAS
 
Throughout the majority of the third quarter of fiscal 2007, we owned a 46.96% interest in CPAS, a Canadian-based supplier of pension administration software systems.  We accounted for this investment using the equity method.  We sold our interest back to CPAS on June 29, 2007 for $4.8 million (USD), which resulted in an $80,000 gain on the disposition of our equity interest in CPAS and the realization of a $0.2 million gain on foreign currency translation.
 
During the nine months ended June 30, 2007, we recognized $137,000 in revenue related to a pension project in which we are a subcontractor to CPAS.  In addition, CPAS is a subcontractor on a pension project for which we are the prime contractor.  
 
Nuance Communications, Inc.
 
During the nine months ended June 30, 2007, we purchased $116,000 of software licenses, maintenance and related services from Nuance Communications, Inc., a company affiliated with a member of our Board of Directors.
 
ITC Deltacom, Inc.
 
During the nine months ended June 30, 2007, we purchased $118,000 of telecom services from ITC Deltacom, Inc., a company affiliated with a member of our Board of Directors.
 
NOTE 11—SHARE-BASED PAYMENT
 
Stock options are issued under the Amended and Restated 2004 Stock Incentive Plan, or the Plan.  The Plan provides our Board of Directors with discretion in creating employee equity incentives, including incentive and non-statutory stock options.  Generally, these options vest as to 20% of the underlying
15
 
shares each year on the anniversary of the date granted and expire in ten years.  At June 30, 2007, there were 2,306,022 shares of common stock reserved for future issuance under the Plan.  Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value using the Black-Scholes model.  We recognize compensation expense for stock option awards on a ratable basis over the requisite service period of the award.  For the three and nine months ended June 30, 2007, we recognized $0.3 million and $1.5 million, respectively, in stock-based compensation expense, compared with $0.4 million and $1.1 million, respectively, for the same periods last year.
 
The following table shows the weighted-average assumptions we used to calculate the fair value of share-based options, as well as the weighted-average fair value of options granted and the weighted-average intrinsic value of options exercised.
 
   
Three months ended
June 30,
    
Nine months ended
June 30,
  
   
2007(1)
    
2006
    
2007
    
2006
  
Weighted-average assumptions used in Black-Scholes model:
                        
Expected period that options will be outstanding (in years)
    
—
      
5.00
      
5.00
      
5.00
  
Interest rate (based on U.S. Treasury yields at time of grant)
    
—
       4.88 %     4.66 %     4.71 %
Volatility
    
—
       46.99 %     47.54 %     47.64 %
Dividend yield
    
—
      
—
      
—
      
—
  
Weighted-average fair value of options granted
   $
—
     $
4.11
     $
3.53
     $
4.07
  
Weighted-average intrinsic value of options exercised (in thousands)
   $
19
     $
—
     $
71
     $
7
  
(1) No options were granted during the three months ended June 30, 2007.
  
 
We based expected volatilities on both the implied and historical volatility of our stock.  In addition, we used historical data to estimate employee forfeitures within the valuation model.
 
Stock option activity for the nine months ended June 30, 2007 is as follows:
 
         
Weighted-average
        
   
Shares under option
(000)
    
Exercise price per share
    
Remaining contractual term
    
Aggregate intrinsic value
($000)
  
Options outstanding at October 1, 2006
    
2,237
     $
8.45
              
Granted
    
240
      
7.48
              
Exercised
     (18 )    
4.81
              
Forfeitures or expirations
     (307 )    
7.60
              
Options outstanding at June 30, 2007
    
2,152
     $
8.49
      
7.36
     $
5,141
  
Options exercisable at June 30, 2007
    
1,294
     $
9.37
      
6.56
     $
2,638
  
 
As of June 30, 2007, we expect that $1.8 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options will be recognized over a weighted-average period of approximately 3.5 years.
 
NOTE 12—HELD-FOR-SALE ASSETS
 
In April 2007, we began to seek buyers for certain portions of our business, including the majority of our PSSI and GBPO segments.  The associated assets and liabilities of these businesses have been classified as held-for-sale in accordance with Statement of Financial Accounting Standard No. 144—Accounting for the Impairment of Long-Lived Assets, or SFAS 144.  The following table shows the carrying value of the assets and liabilities in the disposal group at June 30, 2007 and September 30, 2006.
16
 
   
June 30, 2007
    
September 30, 2006
  
(In thousands)
  
GBPO
    
PSSI
    
Total
    
GBPO
    
PSSI
    
Total
  
Assets:
                                    
Current assets
   $
5,840
     $
7,771
     $
13,611
     $
8,521
     $
5,104
     $
13,625
  
Property, equipment and software, net
    
5,194
      
5,747
      
10,941
      
5,863
      
3,821
      
9,684
  
Intangible assets, net
    
4,782
      
—
      
4,782
      
5,484
      
—
      
5,484
  
Other assets
    
20
      
314
      
334
      
23
      
959
      
982
  
Total assets
   $
15,836
     $
13,832
     $
29,668
     $
19,891
     $
9,884
     $
29,775
  
Liabilities:
                                                
Current liabilities
   $
6,065
     $
7,824
     $
13,889
     $
5,211
     $
6,254
     $
11,465
  
Other liabilities
    
359
      
24
      
383
      
513
      
76
      
589
  
Total liabilities
   $
6,424
     $
7,848
     $
14,272
     $
5,724
     $
6,330
     $
12,054
  
Net assets and liabilities of disposal group
   $
9,412
     $
5,984
     $
15,396
     $
14,167
     $
3,554
     $
17,721
  
 
We performed an impairment analysis as of June 30, 2007 of our held-for-sale assets in compliance with SFAS 144 and SFAS 142.  We determined that the carrying value of one of our operating units exceeded its determined fair value.  We recorded an impairment expense of $8.6 million in the current period for the impairment of the assets, of which $8.0 million relates to the goodwill impairment under SFAS 142 and $0.6 million relates to the long-lived asset impairment under SFAS 144.
 
NOTE 13—DISCONTINUED OPERATIONS
 
In fiscal 2002, we disposed of most of our Australian operations and in fiscal 2003 we requested and received $6.5 million of federal income tax refunds associated with this disposal.  Although we received the refund in October 2003, we fully reserved the entire balance because of uncertainty about the final review and resolution of this transaction by the Internal Revenue Service.  Since October 2003, we increased our reserve by $1.1 million to recognize the potential interest and penalties we could have incurred if the Internal Revenue Service made an unfavorable decision.
 
In March 2007, we were notified by the Internal Revenue Service that its Joint Committee on Taxation had completed its review and had approved the $6.5 million refund.  As a result, during the second quarter of fiscal 2007, we reversed the $6.5 million of reserve for the refund and the $1.1 million reserve for potential interest and penalties.  This $7.6 million reversal has been recorded on our Consolidated Statements of Operations as Income from discontinued operations in accordance with Statement of Financial Accounting Standards No. 144—Accounting for the Impairment or Disposal of Long-Lived Assets.
 
In May 2007 we were notified by the Australian government that our operations in Australia, which were primarily disposed of in fiscal 2002, were able to be fully liquidated.  During the quarter ended June 30, 2007, we recorded net income of $0.5 million associated with the reversal of certain accruals that had been recorded in anticipation of costs, which did not actualize, associated with the final close-out of the Australian operations.
 
NOTE 14—SUBSEQUENT EVENTS
 
NOTES AND ACCRUED INTEREST RECEIVABLE
 
On July 24, 2007, we received $107,000 as final payment from a former Chairman and Chief Executive Officer for two notes and the associated accrued interest that matured during July 2007.
 
BANK LINES OF CREDIT
 
In July 2007, $2.9 million of letters of credit were released under our current credit facility in connection with the release of several performance bonds that were fully collateralized by these letters of credit.
17
 
OTHER LETTERS OF CREDIT
 
In July 2007, a $3.0 million letter of credit that was collateralized by certain securities in our investment portfolio was released.  This letter of credit had been issued to secure a performance bond for a contract that expired in June 2007.
 
PURPORTED CLASS ACTION LAWSUIT
 
On July 24, 2007, the United States District Court for the Eastern District of Virgnia entered an order denying the plaintiff's motion for class certification for the purported class action lawsuit described in Note 9—Contingencies and Commitments.  The time to appeal the Court's order has expired without an appeal.  We believe that we have minimal, if any, exposure associated with this complaint.
 
STOCKHOLDER RIGHTS PLAN
 
On July 12, 2007, we amended our Stockholder Rights Plan, or the Rights Plan.  The amendment increased the beneficial ownership threshold for an acquiring person from 10% to 15%.  The adoption of the Rights Plan was approved by our Board of Directors on January 10, 2006.  On that date, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record on the close of business on January 23, 2006.  Upon the occurrence of certain events, each right entitles the registered holder to purchase from us one one-thousandth of a share of Series A Junior Participating Preferred Stock, $0.01 par value per share, at a purchase price of $50.00 in cash, subject to adjustment.  The rights are intended to protect our stockholders in the event of an unfair or coercive offer to acquire us and to provide our Board of Directors with adequate time to evaluate unsolicited offers.

EMPLOYMENT AGREEMENT
 
On August 9, 2007, we entered into an employment agreement with Kevin Connell, Senior Vice President Sales and Marketing.  Under the terms of this two-year agreement, Mr. Connell will be entitled to an initial base salary of $250,000 per annum and to participate in any Company incentive compensation plans, programs and/or arrangements applicable to senior-level executives up to 75% of his base pay, assuming satisfaction of applicable performance goals.  In addition, Mr. Connell is entitled to participate in any equity-based plans and any executive fringe benefit plans, programs or arrangements applicable to senior-level executives.  In the event that Mr. Connell’s employment is terminated as a result of death, certain instances of disability, resignation for prescribed events of “Good Reason,” or without cause Mr. Connell will be entitled to, among other things one year’s base salary, plus twelve months of COBRA health continuation benefits.  If Mr. Connell were to be terminated by the company within one year after a change in control or if Mr. Connell resigns for prescribed events of “Good Reason” within one year of a change of control, he is entitled to receive two times his base salary, plus the average annual bonus and sales commission paid to him during the past three years, plus 18 months of health insurance coverage.  In the event of a defined change of control and loss of employment, all options that would have vested within 18 months of the date of his termination will immediately vest.

 
18
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements.  We have based these forward-looking statements on our current plans, expectations and beliefs about future events.  Our actual performance could differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report, as a result of the risks, uncertainties and assumptions discussed under  Item 1A—Risk Factors of this Quarterly Report on Form 10-Q and other factors discussed in this section.
 
The following discussion and analysis is intended to help the reader understand the results of operations and financial condition of Tier Technologies, Inc. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.
 
OVERVIEW
 
We provide transaction processing services and software and systems integration services primarily to federal, state and local governments, as well as 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, requiring collections and disbursements of funds, as well as a fundamental shift in consumer transaction preferences toward electronic payment methods instead of cash or paper checks.  Since the markets we serve are highly competitive, changes in our competitors' strategies or service offerings could have a significant impact on our profitability, unless we quickly and effectively adapt our business model to meet the changes in the marketplace.
 
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 nine months ended June 30, 2007 and 2006, contracts with our three largest clients and their constituents generated 35.4% and 37.0%, respectively, of our total revenues.  During the nine months ended June 30, 2007 and 2006, approximately 21.5% and 20.1%, respectively, of our total revenues resulted from a contract with one customer.  Substantially all of our contracts are terminable by the client following limited notice and without significant penalty to the client.  As a result, unsatisfactory performance or unanticipated difficulties in completing projects may result in client dissatisfaction, contractual or adjudicated monetary penalties or contract terminations—all 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.  Nearly 77% of our revenues are generated by our transaction-based services including:  1) 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, fees and other obligations owed to government entities, educational institutions, utilities and other public sector clients; and 2) child support payment processing and related services for state government clients.  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 new consumers often opt to use the first listed payment processing provider more frequently than the second listed payment processing provider, the year in which we are listed second can result in reduced transaction volume.  We recognize revenues for transaction-based services at the time the services are performed.
 
Our packaged software and systems integration segment primarily integrates our proprietary software products and licensed third-party software products into our clients’ business operations.  We recognize these revenues on a time and material 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
 
RECENT EVENTS
 
During the quarter ended December 31, 2006, we commenced an initiative to evaluate our strategic direction and to identify how to best deploy our financial and management resources in order to better maximize shareholder value.  Because we have limited financial and management resources to fully optimize all of our business units, we intend to focus on our core competency in electronic payment processing and primarily explore growth opportunities within our Electronic Payment Processing, or EPP, segment and other synergistic electronic payment processing businesses.  As a result of this refocusing, we intend to redeploy assets from other business units that are not compatible with this direction.  In April 2007, we began to seek buyers for certain portions of our business, including the majority of our Packaged Software and Systems Integration, or PSSI, segment and Government Business Process Outsourcing, or GBPO, segment.  For all reported periods, the revenues and expenses for these operations continue to be reported as continuing operations on our Consolidated Statements of Operations.  However, we are reporting the associated assets and liabilities as held-for-sale on our Consolidated Balance Sheets for all reported periods.  See Note 12—Held-for-Sale Assets to our Consolidated Financial Statements for additional information.
 
RESULTS OF OPERATIONS
 
During the three and nine months ended June 30, 2007, we reported a net loss from continuing operations of $6.2 million and $7.8 million, respectively, which represents decreases of $4.6 million and $3.1 million, respectively, from the same periods last year.  For both periods, these losses were driven primarily by an $8.6 million impairment charge recorded in June 2007 to reflect a decrease in the fair value of one of the business units in our GBPO segment.  These losses were partially offset in both periods by the absence of $1.2 million of depreciation and amortization on held-for-sale assets.  In addition, during the three and nine months ended June 30, 2007, we also benefited from the absence of $3.0 million and $3.5 million, respectively, of one-time legal and accounting costs associated with an earlier restatement and investigation conducted by the Audit Committee of the Board of Directors.
 
In addition, during the three and nine months ended June 30, 2007, we recorded net income of $0.5 million and $8.1 million, associated with the final liquidation of our Australia operations and the reversal of a federal tax reserve and associated interest and penalty accruals.  As shown in the following table, we reported a $5.7 million net loss for the three months ended June 30, 2007 and net income of $0.2 million for the nine months ended June 30, 2007.
 
   
Three months ended
June 30,
    
Variance
    
Nine months ended June 30,
    
Variance
  
(in thousands, except percentages)
  
2007
    
2006
    
$ Amount
    
%
    
2007
    
2006
    
$ Amount
    
%
  
Revenues
   $
57,660
     $
56,269
     $
1,391
       2 %   $
140,651
     $
133,625
     $
7,026
       5 %
Costs and expenses
    
64,492
      
58,710
      
5,782
       10 %    
151,533
      
141,048
      
10,485
       7 %
(Loss) gain before other income, income taxes
     (6,832 )     (2,441 )     (4,391 )    
*
       (10,882 )     (7,423 )     (3,459 )     (47 )%
Other income
    
628
      
894
       (266 )     (30 )%    
3,098
      
2,689
      
409
       15 %
(Loss) gain before income taxes
     (6,204 )     (1,547 )     (4,657 )    
*
       (7,784 )     (4,734 )     (3,050 )     (64 )%
(Benefit) provision for income taxes
     (7 )    
40
       (47 )    
*
      
60
      
45
      
15
      
33
  %
Net (loss) income from continuing operations
     (6,197 )     (1,587 )     (4,610 )    
*
       (7,844 )     (4,779 )     (3,065 )     (64 )%
Net income from discontinued operations
    
478
      
—
      
478
      
*
      
8,077
      
—
      
8,077
      
*
  
Net (loss) income
   $ (5,719 )   $ (1,587 )   $ (4,132 )    
*
     $
233
     $ (4,779 )   $
5,012
      
*
  
*Not meaningful
                                                                
 
Revenues
 
During the three months ended June 30, 2007, our revenues were $57.7 million, which represents a $1.4 million, or 2%, increase over the same quarter last year.   The following table presents the revenues for each of our reportable segments for the three and nine months ended June 30, 2007 and 2006:
20
 
   
Three months ended
June 30,
    
Variance
    
Nine months ended
June 30,
    
Variance
  
(in thousands, except percentages)
  
2007
    
2006
    
$ Amount
    
%
    
2007
    
2006
    
$ Amount
    
%
  
Revenue, by segment:
                                                
EPP
   $
38,380
     $
33,912
     $
4,468
       13 %   $
81,109
     $
64,485
     $
16,624
       26 %
GBPO
    
11,102
      
12,613
       (1,511 )     (12 )%    
35,718
      
40,564
       (4,846 )     (12 )%
PSSI
    
8,284
      
9,787
       (1,503 )     (15 )%    
24,093
      
28,677
       (4,584 )     (16 )%
Eliminations(1)
     (106 )     (43 )     (63 )    
*
       (269 )     (101 )     (168 )    
*
  
Total revenues
   $
57,660
     $
56,269
     $
1,391
       2 %   $
140,651
     $
133,625
     $
7,026
       5 %
(1)Represents elimination entry for revenues earned by our EPP segment for electronic payment processing services it provides to our GBPO segment.
*Not meaningful
  
 
Electronic Payment Processing Segment Revenues—Our EPP segment provides electronic payment processing solutions, including payment of taxes, fees and other obligations owed to government entities, educational institutions, utilities and other public sector clients.  The revenues reported by our EPP segment reflect the number of contracts with clients, the volume of transactions processed under each contract and the rates that we charge for each transaction that we process.  We continue to benefit from increasing consumer preferences toward paying governmental obligations using electronic payment services.  This increasing consumer demand resulted in an increase in both the number of agencies that use our electronic payment processing alternatives and the volume of transactions processed through our pre-existing contracts during the fiscal periods reported herein.
 
During the three and nine months ended June 30, 2007, our EPP revenues grew to $38.4 million and $81.1 million, respectively.  This represents a $4.5 million, or 13%, increase for the three months ended June 30, 2007 and a $16.6 million, or 26%, increase for the nine months ended June 30, 2007 over the same periods last year.  The majority of these increases are attributable to a rise in revenue that we earned from processing property taxes, while increases in revenues we earned from processing federal and state income taxes and educational institutions further contributed to the rise in revenues.
 
We anticipate continued revenue increases in the EPP segment for the foreseeable future, as more clients move toward electronic payment processing options.
 
Government Business Process Outsourcing Segment Revenues—Our GBPO segment provides governmental clients with child support payment processing, child support financial institution data match services, health and human services consulting and other related systems integration services, including call center interactive voice response systems and support 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 experience with our company.
 
During the three months ended June 30, 2007, our GBPO segment generated $11.1 million of revenues, a $1.5 million, or 12%, decrease from the same quarter last year.  Contributing to this decrease was the absence of $1.1 million of revenue from a health and human services contract that expired earlier in fiscal 2007.  In addition, revenues in the three months ended June 30, 2007 declined $1.0 million from the same period last year because of the introduction of lower-cost, state-mandated electronic payment processing alternatives at another payment processing center.  These decreases were partially offset by a $0.7 million increase in revenues earned from a contract for a call center that we began to operate during the fourth quarter of fiscal 2006.
 
During the nine months ended June 30, 2007, our GBPO segment generated $35.7 million of revenues, a $4.8 million, or 12%, decrease from the same period last year.  Approximately $3.2 million of this decrease is attributable to the expiration of two payment processing center contracts in fiscal 2006 and early in fiscal 2007 and $1.4 million of the decrease is attributable to the expiration of the previously described health and human services contract.  Approximately $2.0 million of the decline was attributable to the previously described introduction of electronic payment processing alternatives at a payment processing center.  In addition, the completion and pending completion of a number of smaller projects in our GBPO segment resulted in a $0.8 million revenue reduction during the nine months ended June 30, 2007, compared with the same period last year.  These decreases were partially offset by a $2.2 million
21
 
increase in revenue earned from the previously described call center contract and a $0.4 million increase in revenue generated by a contract for a payment processing center that expired on June 29, 2007.  While the revenues from the payment processing center contract that expired in June 2007 produced higher revenues during the first nine months of fiscal 2007, we anticipate that the absence of revenues from this contract will result in a decline in revenues of approximately $2.0 million per quarter during the remainder of fiscal 2007 and the first three quarters of fiscal 2008.
 
Packaged Software and Systems Integration Segment Revenues—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, and systems integration services.  Since the services provided by our PSSI segment are generally project-oriented, the contracts with our clients typically have a one to three year contract term and may have subsequent maintenance and support phases.  The revenues 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 months ended June 30, 2007, our PSSI segment generated $8.3 million of revenue, which represents a $1.5 million, or 15%, decrease from the same quarter last year.  During the nine months ended June 30, 2007, our PSSI segment generated $24.1 million of revenue, which represents a $4.6 million, or 16%, decrease from the same period last year.  These decreases occurred primarily because the revenues earned during the three and nine months ended June 30, 2007 on new and ongoing contracts were less than those earned under contracts that have been completed or are nearing completion.
 
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.  The following table summarizes changes in direct costs by segment.
 
   
Three months ended
June 30,
    
Variance
    
Nine months ended
June 30,
    
Variance
  
(in thousands, except percentages)
  
2007
    
2006
    
$ Amount
    
%
    
2007
    
2006
    
$ Amount
    
%
  
Direct cost, by segment:
                                                
EPP
   $
30,021
     $
26,950
     $
3,071
       11 %   $
61,539
     $
49,487
     $
12,052
       24 %
GBPO
    
6,147
      
8,049
       (1,902 )     (24 )%    
23,424
      
31,275
       (7,851 )     (25 )%
PSSI
    
6,184
      
7,077
       (893 )     (13 )%    
17,890
      
19,964
       (2,074 )     (10 )%
Eliminations(1)
     (106 )     (43 )     (63 )    
*
       (269 )     (101 )     (168 )    
*
  
Total direct costs
   $
42,246
     $
42,033
     $
213
       1 %   $
102,584
     $
100,625
     $
1,959
       2 %
(1)Represents elimination entry for revenues earned by our EPP segment for electronic payment processing services it provides to our GBPO segment.
  
 
The following sections describe the key drivers that are causing the changes in direct costs for each of our segments.
 
EPP Segment Direct Costs—During the three months ended June 30, 2007, direct costs incurred by our EPP segment rose to $30.0 million, a $3.1 million or 11% increase over the same period last year.  This increase primarily reflects a $3.1 million increase in interchange fees that resulted from increases in the number of transactions and total dollars processed by our EPP segment.
 
During the nine months ended June 30, 2007, direct costs for our EPP segment rose to $61.5 million, which represents a $12.1 million, or 24%, increase over the same period last year.  This increase is attributable to an $11.7 million increse in interchange fees and a $0.4 million increase in other project related expenses that resulted from increases in the number of transactions and total dollars processed by our EPP segment.
 
GBPO Segment Direct Costs—During the quarter ended June 30, 2007, direct costs incurred by our GBPO segment declined to $6.1 million, which represents a $1.9 million, or 24%, decrease from the
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same period last year.  In part, this decrease is attributable to the absence of $0.9 million of expenses from a health and human services contract that expired during the second quarter of fiscal 2007.  In addition, during the three months ended June 30, 2007, we did not record depreciation or amortization on GBPO assets that are categorized as held-for-sale; therefore, approximately $0.9 million of depreciation and amortization that was recorded during the three months ended June 30, 2006 was absent from the three months ended June 30, 2007.  In addition, the introduction of electronic payment processing alternatives in one payment processing center resulted in a $0.6 million reduction in postage and printing expenses, partially offset by a $0.2 million increase in interchange expense.  These decreases were partially offset by a $0.3 million net increase in direct costs incurred by our Voice and System Automation unit.
 
During the nine months ended June 30, 2007, direct costs incurred by our GBPO segment declined to $23.4 million, which represents a $7.9 million, or 25%, decrease from a year ago.  Approximately $3.6 million of this decrease is attributable to the previously described expiration of a health and human services contract and two payment center contracts.  In addition, the introduction of electronic payment processing alternatives in one payment processing center resulted in a $1.3 million reduction in postage and printing expenses, partially offset by a $0.7 million increase in interchange fees.  Our direct costs were also lower during the nine months ended June 30, 2007 because of the absences of:  $1.4 million of one-time reconciliation expenses incurred during fiscal 2006; $1.5 million of forward losses accrued on a GBPO project; and $0.8 million of depreciation and amortization on held-for sale assets.
 
PSSI Segment Direct Costs—During the quarter ended June 30, 2007, direct costs incurred by our PSSI segment declined to $6.2 million, which represents a $0.9 million, or 13%, decrease from the same quarter in fiscal 2006.  The direct costs incurred by our Unemployment Insurance unit decreased by $0.5 million and the direct costs incurred by our State Systems Integration unit decreased by $0.3 million primarily because of the completion of a number of large contracts.  In addition, the receipt of a $0.2 million rebate from one of our vendors for the purchase of software also contributed to the quarter-over-quarter decrease in PSSI’s direct costs.
 
During the nine months ended June 30, 2007, direct costs incurred by our PSSI segment declined to $17.9 million, which represents a $2.1 million or 10% decrease from the same period last year. Decreases within our State Systems Integration unit of $1.2 million, our Financial Management Systems unit of $1.0 million, our Pension unit of $0.5 million, and our E-Gov unit of $0.3 million are attributable primarily to the completion or near completion of several large projects.  In addition, the previously described rebate from one of our software vendors reduced direct costs in the current period by $0.2 million.  These decreases were partially offset primarily by $1.1 million of direct costs associated with a new Information Verification and Validation unit project.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of payroll and payroll-related costs for general management, administrative, accounting, investor relations, compliance and legal functions and information systems. 
 
General and administrative expenses for the three months ended June 30, 2007 decreased $2.8 million or 24% from the same period last year.  This decrease is primarily attributable to the absence of $3.0 million of one-time legal and accounting expenses that we incurred during fiscal 2006 relating to the previous restatement of our financial statements and investigation by the Audit Committee of the Board of Directors, the absence of $0.8 million of severance-related costs primarily associated with the departure of a former executive and a $0.6 million decrease in other legal expenses.  These decreases are partially offset by a $0.7 million increase in labor and labor-related expenses following the initiation of a 401(k) matching program in January 2007; a $0.5 million increase in bonus expense associated with retention bonus plans implemented in February 2007; and a $0.5 million increase in consultant services attributable to our strategic growth initiatives.
 
General and administrative expenses for the nine months ended June 30, 2007 decreased $22,000 over the same period last year.  This decrease is primarily attributable to the absence of $3.5 million of one-time legal and accounting expenses that we incurred during fiscal 2006 relating to the previous
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restatement of our financial statements and investigation by the Audit Committee of the Board of Directors, the absence of $0.6 million of severance related costs primarily associated with the departure of a former executive, a $0.8 million decrease in bad debt expense resulting from successful collection efforts; and a $0.7 million decrease in other miscellaneous legal expenses.  These decreases are offset primarily by: a $2.1 million increase in labor and labor related expenses due to increased research and development labor and the adoption of a 401(k) match program in January 2007; a $1.4 million increase in costs associated with a contract settlement in our PSSI segment; a $1.2 million increase in bonus expense associated with retention bonus plans implemented in February 2007; a $0.6 million increase in consultant services attributable to our strategic growth initiatives; and a $0.3 million increase in stock-based compensation expense associated with immediate vesting of options awarded to our Board of Directors in February and March 2007.
 
During the remainder of fiscal 2007, we expect to see a year-over-year reduction in general and administration costs because of the absence of one-time legal and accounting expenses that we incurred during fiscal 2006 attributable to the restatement of our historical financial statements and an investigation conducted by the Audit Committee of the Board of Directors.  In February 2007, we entered into retention agreements with a number of key employees under which these individuals will be entitled to receive three to twelve months of their base salaries over a one to two year period, after completing defined employment service periods.  During the remainder of fiscal 2007, we expect to recognize a maximum expense of $0.3 million for these agreements.  In addition, we expect to recognize a maximum expense of $0.9 million during fiscal 2008, and $0.2 million during fiscal 2009 for these agreements.
 
Selling and Marketing Expense
 
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 3% and 2%, respectively, to $3.7 million and $9.2 million, respectively, for the three and nine months ended June 30, 2007.  This increase is primarily attributable to an increase in advertising expense incurred by our EPP segment during the current period.  We expect selling and marketing expenses to decline during the remainder of fiscal 2007, as a result of our decision not to pursue new contracts in certain practice areas in our GBPO and PSSI segments.
 
Depreciation and Amortization Expense
 
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 nine months ended June 30, 2007, depreciation and amortization expenses decreased by $0.3 million and $0.3 million, respectively, or 26% and 7%, respectively, from the same periods last year.  These decreases are primarily attributable to the classification of assets held-for sale beginning in April 2007.  Statement of Financial Accounting Standards No. 144—Impairment or Disposal of Long-Lived Assets requires assets in a held-for-sale status cease being depreciated or amortized while held for sale.
 
Impairment of Assets Held-for-Sale
 
In April 2007, we began to seek buyers for certain portions of our business, including the majority of our PSSI and GBPO segments.  In accordance with Statement of Financial Standard No. 144—Accounting for the Impairment of Disposal or Long-Lived Assets (SFAS 144), we classified all associated assets and liabilities as held-for-sale on our Consolidated Balance Sheets at the lower of carrying value or fair value less cost to sell.  Based upon the requisite fair value analyses under SFAS 144 and Statement of Financial Accounting Standard No. 142—Goodwill and Other Intangible Assets, we recognized a $8.6 million impairment loss on the carrying value of one of our businesses in our GBPO segment, of
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which $8.0 million represented a write off of goodwill for this business unit.  The remaining $0.6 million is included in Current assets—held-for-sale on our Consolidated Balance Sheets.
 
Other Income
 
Equity in net income of unconsolidated affiliate—During the three months ended June 30, 2007 and 2006, we reported a net loss of $0.5 million and net income of $35,000, respectively.  During the nine months ended June 30, 2007 and 2006, we reported net income of $0.5 million and $0.6 million, respectively, representing our 46.96% share in the net income and losses incurred by our investment in CPAS.  During the three months ended June 30, 2007, CPAS recorded a management incentive payout associated with its fiscal year end results, which contributed to the $0.5 million decrease over the same period last year.  The $0.1 million year-to-date decrease in CPAS’ performance resulted primarily from the recognition of our portion of the management incentive payout mentioned above offset by CPAS’ successful contracting efforts primarily during the first quarter of fiscal 2007.
 
On June 29, 2007 we sold our 46.96% equity interest in CPAS back to CPAS.  As a result of that transaction, we realized a $239,000 foreign currency gain, plus an $80,000 gain on the sale of this equity investment.
 
Interest income, net—Our interest income during the three and nine months ended June 30, 2007 was relatively unchanged because both interest rates and the daily balance of our investment portfolio have remained relatively constant during all reported periods.
 
Provision for income taxes—During the nine months ended June 30, 2007 and 2006, we recorded income tax expense of $60,000 and $45,000, respectively.  For both periods, this expense reflected expected minimum state tax payments.  We applied carryforward losses from earlier periods in the calculation of income taxes, which resulted in our tax expense in both periods being limited to expected state tax obligations.  In addition, in accordance with Statement of Financial Accounting Standards No. 109—Accounting for Income Taxes, we have continued to maintain a valuation allowance for the full amount of our deferred tax assets because of cumulative net losses incurred in recent years.
 
Discontinued Operations
 
Income from discontinued operations—In fiscal 2002, we disposed of most of our Australian operations and in fiscal 2003 requested and received $6.5 million of federal income tax refunds associated with this disposal.  Although we received the refund in October 2003, we fully reserved the entire balance because of uncertainty about the final review and resolution of this transaction by the Internal Revenue Service.  Since October 2003, we increased our reserve by $1.1 million to recognize the potential interest and penalties we could have incurred if the Internal Revenue Service made an unfavorable decision.
 
In March 2007, we were notified by the Internal Revenue Service that its Joint Committee on Taxation had completed its review and approved the $6.5 million refund.  As a result, during the second quarter of fiscal 2007, we reversed the $6.5 million of reserve for refunds and the $1.1 million reserved for potential interest and penalties.  This $7.6 million reversal has been recorded on our Consolidated Statements of Operations as Income from discontinued operations, net in accordance with Statement of Financial Accounting Standards No. 144—Accounting for the Impairment or Disposal of Long-Lived Assets.
 
In May 2007 we were notified by the Australian government that our operations in Australia, which were primarily disposed of in fiscal 2002, were able to be fully liquidated.  For the three and nine months ended June 30, 2007, we recorded $0.5 million of net income associated with the reversal of certain accruals that had been recorded in anticipation of costs, which did not actualize, associated with the final close-out of the Australian operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our principal capital requirement is to fund working capital and to support our growth, including potential future acquisitions.  Under our Amended and Restated Credit and Security Agreement, as amended, with
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our lender, we may obtain up to $10.0 million of letters of credit.  Furthermore, the agreement grants the lender a perfected security interest in cash collateral in an amount equal to all issued and to be issued letters of credit.  At June 30, 2007, we had $8.9 million of letters of credit outstanding under this credit facility, which are fully collateralized.  These letters of credit were issued to secure performance bonds, insurance and a lease.  During July 2007, $2.9 million of letters of credit were released that were used to secure performance bonds for several projects.
 
In addition to the letters of credit issued under the credit facility mentioned above, at June 30, 2007, we had a $3.0 million letter of credit outstanding, which was collateralized by certain securities in our investment portfolio.  This letter of credit was issued to secure a performance bond.
 
Net Cash from Continuing Operations—Operating Activities—During the nine months ended June 30, 2007, our operating activities provided $14.1 million of cash, including $7.8 million of net loss from continuing operations and $15.9 million of non-cash items.  During the nine months ended June 30, 2007, $2.9 million of cash was generated by a decrease in prepaid expenses and other assets, $2.6 million of cash was generated by an increase in accounts payable and accrued liabilities, primarily attributable to an increase in accrued compensation expenses, $0.3 million of cash was generated by an increase in estimated income tax liabilities and $0.2 million of cash was generated by an increase in deferred revenue.
 
During the nine months ended June 30, 2006, our operating activities provided $6.7 million of cash, including $4.8 million from net loss from continuing operations and $10.0 million of non-cash items.  During the nine months ended June 30, 2006, $4.8 million of cash was also generated by a decrease in the balance of accounts receivable, due to successful collection efforts, and $2.0 million of cash was generated by an increase in accounts payable and other accrued liabilities.  These increases were partially offset by our use of $2.3 million of cash to support prepaid expenses and other assets and a $2.8 million decrease of cash in deferred revenues.
 
Net Cash from Continuing Operations—Investing Activities.  During the nine months ended June 30, 2007, our operations used $3.5 million of cash for investing activities.  The purchase of equipment and software and funding of internally developed software used $3.9 million of cash.  In addition, $19.3 million of cash was used to purchase restricted investments and $6.1 million of cash was used to purchase marketable securities during the nine months ended June 30, 2007.  Another $0.2 million of cash was used for other investing activities.  This use of funds was partially offset by $13.4 million of cash generated from the sale and maturities of restricted investments and $3.6 million of cash generated from the sale and maturities of marketable securities.  In addition, $4.3 million of cash was generated from the repayment of notes and accrued interest from a related party and $4.8 million of cash was generated from the sale of our unconsolidated affiliate, CPAS.
 
During the nine months ended June 30, 2006, our investing activities used $13.0 million of cash, of which $46.0 million of cash was used to purchase marketable securities and $37.2 million of cash was generated by sales and maturities of marketable securities.  During the nine months ended June 30, 2006, $3.4 million of cash was generated when restricted securities matured, while $3.9 million of cash was used to purchase restricted investments.  In addition, $3.7 million of cash was used to purchase equipment and software during the nine months ended June 30, 2006.
 
Net Cash from Continuing Operations—Financing Activities—During the nine months ended June 30, 2007, $92,000 of cash was provided by our financing activities.  The increase represents $89,000 of cash from issuance of our common stock and $3,000 of cash provided by a new capital lease agreement.
 
During the nine months ended June 30, 2006, $11,000 of cash was used in our financing activities.  The decrease represents $80,000 of cash used in capital lease obligations offset by $69,000 of cash from issuance of our common stock.
 
Net Cash from Discontinued Operations—During the nine months ended June 30, 2007, we reversed a $7.6 million federal income tax reserve, which had initially been recorded in October 2003, pending an IRS review of a refund we received associated with the disposal of our former Australian operations.  This reversal represents a non-cash adjustment that was reported in income from discontinued operations.  In
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addition, we recorded a $0.5 million non-cash adjustment that was reported in income from discontinued operations associated with the liquidation of our Australian operations.
 
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 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 changed significantly, resulting in reduced availability of bonds, increased cash collateral requirements and increased premiums.  Some of our government contracts require a performance bond, and future requests for proposal may also require a performance bond.  Our inability to obtain performance bonds, increased costs to obtain such bonds or a requirement to pledge significant cash collateral in order to obtain such bonds would adversely affect our business and our capacity to obtain additional contracts.  Increased premiums or a claim made against a performance bond could adversely affect our earnings and cash flow and impair our ability to bid for future contracts.
 
CONTRACTUAL OBLIGATIONS
 
Since September 30, 2006, there has been no material change outside the ordinary course of business in the contractual obligations disclosed in our most recent annual report on Form 10-K.
 
CRITICAL ACCOUNTING POLICIES
 
The preparation of our 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; estimated share-based compensation; and valuation of assets and liabilities classified as held-for-sale.  Actual results could differ materially from management’s estimates.
 
For a full discussion of our critical accounting policies and estimates, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
 
In addition to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, we believe the following critical accounting policy affects our more significant judgments and estimates used in preparing our Consolidated Financial Statements.
 
Held-For-Sale Assets and Liabilities.  Held-for-sale assets and liabilities are presented on our Consolidated Balance Sheet at the lower of their carrying value or fair value less costs to sell, once the criteria for held-for-sale status has been met.  In accordance with Statement of Financial Accounting Standards No. 144—Impairment or Disposal of Long-Lived Assets, or SFAS 144, assets are not depreciated or amortized while they are classified as held-for-sale.  At that time the asset group is classified as held-for-sale, we also evaluate goodwill for impairment at the segment level whenever the businesses classified as held-for-sale have been
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fully integrated into the segment and the benefits of the acquired goodwill benefit the rest of the reporting unit.  Otherwise, the carrying value of the acquired goodwill is included in the carrying amount of the business to be disposed of in accordance with Statement of Accounting Standards No. 142—Goodwill and Other Intangibles.
 
 
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 June 30, 2007, the fair value of the portfolio would decline by about $21,000.
 
 
ITEM 4.  CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2007.  The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of June 30, 2007, our Chief Executive Officer and our Chief Financial Officer concluded that as of that date, our disclosure controls and procedures were effective at the reasonable assurance level.  There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 

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PART II.  OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
On May 31, 2006, we received a subpoena from the Philadelphia District Office of the Securities and Exchange Commission requesting documents relating to financial reporting and personnel issues.  We have cooperated, and will continue to cooperate fully, in this investigation.
 
On November 20, 2006, we were served with a purported class action lawsuit on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006.  Subsequently, the complaint was amended to narrow the purported class period.  The suit alleges that Tier and certain of our former officers issued false and misleading statements from November 2001 to May 2006, but did not specify the damages being sought.  This case is pending in the United States District Court for the Eastern District of Virginia.  On July 24, 2007, the Court entered an order denying plaintiff's motion for class certification.  The time within which to appeal the court's order has expired without an appeal.  We believe we have minimal, if any, exposure associated with this complaint. 
 
ITEM 1A.  RISK FACTORS
 
Investing in our common stock involves a degree of risk.  You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this quarterly report.  If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.  In that case, the trading price of our common stock could fall.

An updated description of the risk factors associated with our business is set forth below.  These risk factors have been updated from those included in our Annual Report on Form 10-K to, among other things, delete the risk factor regarding regaining listing status on NASDAQ and add a risk factor regarding divestiture of certain assets and liabilities.
 
We have incurred losses in the past and may not be profitable in the future. We have incurred losses in the past and we may do so in the future.  While we reported net income from continuing operations in fiscal year 2005, we reported losses from continuing operations of $9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and $5.4 million in fiscal year 2003.
 
Our revenues and operating margins may decline and may be difficult to forecast, which could result in a decline in our stock price.  Our revenues, operating margins and cash flows are subject to significant variation from quarter to quarter due to a number of factors, many of which are outside our control.  These factors include:
 
·  
economic conditions in the marketplace;
 
·  
our customers’ budgets and demand for our services;
 
·  
seasonality of business;
 
·  
timing of service and product implementations;
 
·  
unplanned increases in costs;
 
·  
delays in completion of projects;
 
·  
intense competition;
 
·  
variability of software license revenues; and
 
·  
integration and costs of acquisitions.
 
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The occurrence of any of these factors may cause the market price of our stock to decline or fluctuate significantly, which may result in substantial losses to investors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and/or indicative of future performance.  From time to time, our operating results may fail to meet analysts’ and investors’ expectations, which could cause a significant decline in the market price of our stock.  Price fluctuations and trading volume of our stock may be rapid and severe and may leave investors little time to react.  Other factors that may affect the market price of our stock include announcements of technological innovations or new products or services by competitors and general economic or political conditions, such as recession, acts of war or terrorism.  Fluctuations in the price of our stock could cause investors to lose all or part of their investment.
 
We may not be successful in divesting certain assets and liabilities and our anticipated divestiture could disrupt our operations.  We may not be able to obtain offers for the fair value of the portions of PSSI and GBPO assets and liabilities that we are marketing.  In that event, we may be required to recognize an impairment loss or to withdraw our planned divestiture.  Furthermore, our announced divestiture plan could result in a turnover of employees or could have an adverse impact on our ability to attract and retain customers, which, in turn, could have an adverse impact on the revenues generated by these businesses.  In addition, if our estimates of the fair value of these businesses are not accurate, we may incur additional impairment losses or other losses on the sale of these businesses.
 
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 nine months ended June 30, 2007, our ten largest clients represented approximately 54.2% of our total revenues, including one contract that generated over 21.5% of our total revenues.  Our operating results and cash flows could decline significantly if we cannot keep these clients, or replace them if lost.
 
We operate in highly competitive markets.  If we do not compete effectively, we could face price reductions, reduced profitability and loss of market share. Our business is focused on transaction processing and software systems solutions, which are highly competitive markets and are served by numerous international, national and local firms.  Many competitors have significantly greater financial, technical and marketing resources and name recognition than we do.  In addition, there are relatively low barriers to entry into these markets and we expect to continue to face additional competition from new entrants into our markets.  Parts of our business are subject to increasing pricing pressures from competitors, as well as from clients facing pressure to control costs.  Some competitors are able to operate at significant losses for extended periods of time, which increases pricing pressure on our products and services.  If we do not compete effectively, the demand for our products and services and our revenue growth and operating margins could decline, resulting in reduced profitability and loss of market share.
 
Changes in 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 have a material effect on 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.
 
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.  
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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 laws are passed that do not allow us to charge the convenience fees; or if credit or debit card issuers or marketing partners eliminate or reduce the value of rewards to consumers under their respective rewards programs, demand for electronic payment processing services could decline.  The processing fees charged by credit/debit card associations and financial institutions can be increased with little or no notice, which could reduce margins and harm our profitability.  Demand for electronic payment processing services could also be affected adversely by a decline in the use of the Internet or consumer migration to a new or different technology or payment method.  The use of credit and debit cards and electronic checks to make payments to government agencies is subject to increasing competition and rapid technological change.  If we are not able to develop, market and deliver competitive technologies, our market share will decline and our operating results and financial condition could suffer.
 
Our ability to grow depends largely on our ability to attract, integrate and retain qualified personnel.  The success of our business is based largely on our ability to attract and retain talented and qualified employees and contractors.The market for skilled workers in our industry is extremely competitive.  In particular, qualified project managers and senior technical and professional staff are in great demand.  If we are not successful in our recruiting efforts or are unable to retain key employees, our ability to staff projects and deliver products and services may be adversely affected.  We believe our success also depends upon the continued services of senior management and a number of key employees whose employment may terminate at any time.  If one or more key employees resigns to join a competitor 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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Our fixed-price and transaction-based contracts require accurate estimates of resources and transaction volumes.  Failure to estimate these factors accurately could cause us to lose money on these contracts. Our business relies on accurate estimates.  If we underestimate the resources, cost or time required for a project or overestimate the expected volume of transactions or transaction dollars processed, our costs could be greater than expected or our revenues could be less than expected.  Under fixed-price contracts, we generally receive our fee if we meet specified deliverables, such as completing certain components of a system installation.  For transaction-based contracts, we receive our fee on a per-transaction basis or as a percentage of dollars processed, such as the number of child support payments processed or tax dollars processed.  If we fail to prepare accurate estimates on factors used to develop contract pricing, such as labor costs, technology requirements or transaction volumes, we may incur losses on those contracts and our operating margins could decline.
 
Our revenue is highly dependent on government funding. The loss or decline of existing or future government funding could cause our revenue and cash flows to decline. A significant portion of our revenue is derived from federal and state mandated projects.  A large portion of these projects may be subject to a reduction or discontinuation of funding, which may cause early termination of projects, diversion of funds away from our projects or delays in implementation.  The occurrence of any of these conditions could have an adverse effect on our projected revenue, cash flows and profitability.
 
Unauthorized data access and other security breaches could have an adverse impact on our business and our reputation.  Security breaches or improper access to 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 efficiency 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.
 
At any given time, we are subject to a variety of claims and lawsuits. An adverse decision in any of these claims could have an adverse impact on our reputation and financial results.  Adverse outcomes in a claim, lawsuit, government investigation, tax determination, or other liability matter could 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 cooperated, and intend to continue to cooperate, fully with the subpoena and with the DOJ’s investigation.  On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Division’s 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
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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 have cooperated, and intend to continue to cooperate, fully with this investigation.  We anticipate that we will incur additional legal and administrative expenses as we continue to cooperate with the SEC’s investigation.
 
On November 20, 2006, we were served with a purported class action lawsuit on behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006.  Subsequently, the complaint was amended to narrow the purported class period.  The suit alleges that Tier and certain of our former officers issued false and misleading statements from November 2001 to May 2006, but did not specify the damages being sought.  This case is pending in the United States District Court for the Eastern District of Virginia.  We believe that we have minimal, if any, exposure associated with this complaint.
 
If we are not able to protect our intellectual property, our business could suffer serious harm.  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 by third parties, resulting in increased costs and loss of business. From time to time we receive notices from others claiming we are infringing on their intellectual property rights.  Defending a claim of infringement against us could prevent or delay our providing products and services, cause us to pay substantial costs and damages, force us to redesign products or enter into royalty or licensing agreements on less favorable terms.  If we are required to enter into such agreements or take such actions, our operating margins could decline.
 
If we are not able to obtain adequate or affordable insurance coverage or bonds, we could face significant liability claims and increased premium costs and our ability to compete for business could be compromised. We maintain insurance to cover various risks in connection with our business.  Additionally, our business includes projects that require us to obtain performance 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 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.
 
Our markets are changing rapidly.  If we are not able to adapt to changing conditions, we may lose market share and may not be able to compete effectively. The markets for our products are characterized by rapid changes in technology, client expectations and evolving industry standards.  Our future success depends on our ability to innovate, develop, acquire and introduce successful new products and services for our target markets and to respond quickly to changes in the market.  If we are unable to address these requirements, or if our products do not achieve market acceptance, we may lose market share and our revenues could decline.
 
We may not be successful in identifying acquisition candidates and, if we undertake acquisitions, they could be expensive, increase our costs or liabilities or disrupt our business.  One of our strategies is to pursue growth through acquisitions.  We may not be able to identify suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions at favorable terms.  If we do identify an appropriate acquisition candidate, we may be unsuccessful in negotiating the terms of the acquisition, financing the acquisition or, if the acquisition occurs, integrating the acquired business
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into our existing business.  Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management attention away from day-to-day operations.  Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in leverage or dilution of ownership.  We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates.  In addition, we may need to record write-downs from future impairments of identified intangible assets and goodwill, which could reduce our future reported earnings.  Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.  Any costs, liabilities or disruptions associated with any future acquisitions we may pursue could harm our operating results.
 
Our business is subject to increasing performance requirements, which could result in reduced revenues and increased liability. Our business involves projects that are critical to the operations of our clients' businesses.  The failure to meet client expectations could damage our reputation and compromise our ability to attract new business.  On certain projects we make performance guarantees, based upon defined operating specifications, service levels and delivery dates, which are sometimes backed by contractual guarantees and performance 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.
 
ITEM 5.  OTHER INFORMATION
 
Executive Compensation
 
At its June 12, 2007 meeting, the Compensation Committee of our Board of Directors set certain compensation and benefits for Ronald L. Rossetti, President and Chief Executive Officer in conjunction with the expiration of Mr. Rossetti’s employment agreement on May 25, 2007.  This action was taken as an interim step in anticipation of a formal agreement that is currently being negotiated.  The Compensation Committee set Mr. Rossetti’s salary at $400,000 per year, effective May 26, 2007.  In addition, Mr. Rossetti became eligible to participate in fringe benefit programs that are available to our employees.
 
Assets Held-For-Sale
 
In April 2007, we began to seek buyers for certain portions of our business, including portions of our Packaged Software and Systems Integration, or PSSI, segment and our Government Business Process Outsourcing, or GBPO, segment.  At this time, we estimate we will incur approximately $1.6 million in costs associated with the sale of these businesses.  However, we can not estimate costs such as one-time termination benefits, contract termination costs or other associated exit costs, with these disposal activities at this time.
 
Employment Agreement
 
On August 9, 2007, we entered into an employment agreement with Kevin Connell, Senior Vice President Sales and Marketing.  Under the terms of this two-year agreement, Mr. Connell will be entitled to an initial base salary of $250,000 per annum and to participate in any Company incentive compensation plans, programs and/or arrangements applicable to senior-level executives up to 75% of his base pay, assuming satisfaction of applicable performance goals.  In addition, Mr. Connell is entitled to participate in any equity-based plans and any executive fringe benefit plans, programs or arrangements applicable to senior-level executives.  In the event that Mr. Connell’s employment is terminated as a result of death, certain instances of disability, resignation for prescribed events of “Good Reason,” or without cause Mr. Connell will be entitled to, among other things one year’s base salary, plus twelve months of COBRA health continuation benefits.  If Mr. Connell were to be terminated by the company within one year after a change in control or if Mr. Connell resigns for prescribed events of “Good Reason” within one year of a
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change of control, he is entitled to receive two times his base salary, plus the average annual bonus and sales commission paid to him during the past three years, plus 18 months of health insurance coverage.  In the event of a defined change of control and loss of employment, all options that would have vested within 18 months of the date of his termination will immediately vest.

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ITEM 6.  EXHIBITS
 
Exhibit
Number
  
Description
 
 
3.1
  
Amended and Restated Bylaws of Tier Technologies, Inc., as amended. †
  
 
10.1
  
Share Repurchase Agreement between CPAS Systems, Inc., Tier Ventures Corporation and Tier Technologies, Inc. dated June 29, 2007(1)
  
 
10.2
   Employment Agreement between Tier Technologies, Inc. and Kevin Connell, dated August 9, 2007†  
 
31.1
  
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.†
  
 
31.2
  
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.†
  
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
  
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
  
     
†Filed herewith.
(1)  Filed as an exhibit on current report Form 8-K, filed on June 29, 2007, and incorporated herein by reference.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 




 
TIER TECHNOLOGIES, INC.
 
By:
/s/ David E. Fountain
 
Name:
David E. Fountain
 
Title:
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
Dated: August 9, 2007
    
 




 
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