UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2007
OR
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
___________
COMMISSION
FILE NUMBER 000-23195
TIER
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
(State
or other jurisdiction of
Incorporation
or organization)
|
94-3145844
(I.R.S.
Employer
Identification
No.)
|
10780
PARKRIDGE BOULEVARD—4th FLOOR,
RESTON,
VA 20191
(Address
of principal executive offices)
(571) 382-1000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act
|
Title
of each class
COMMON
STOCK, $0.01 PAR VALUE
|
Name
of each exchange on which registered
The
NASDAQ STOCK MARKET, LLC
|
Securities
registered pursuant to Section 12(g) of the Act
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
Filer x Non-accelerated
filer ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
As
of
March 31, 2007, the aggregate market value of common stock held by
non-affiliates of the registrant was $179,419,733, based on the closing sale
price of the common stock on March 31, 2007, as reported on The Pink
Sheets. As of December 7, 2007, there were 20,427,354 shares of
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Items
10, 11, 12, 13 and 14 of Part III (except for information required with respect
to our executive officers, which is set forth under “Part I—Executive Officers”)
have been omitted from this report, as we expect to file with the Securities
and
Exchange Commission, not later than 120 days after the close of our fiscal
year
ended September 30, 2007, a definitive proxy statement for our 2008 annual
meeting of stockholders. The information required by Items 10, 11,
12, 13 and 14 of Part III of this report, which will appear in our definitive
proxy statement, is incorporated by reference into this report.
TIER
TECHNOLOGIES, INC.
FORM
10-K
TABLE
OF CONTENTS
Private
Securities Litigation Reform Act Safe Harbor
Statement
Certain
statements
contained in this report, including statements regarding the future development
of and demand for our services and our markets, anticipated trends in various
expenses, expected costs of legal proceedings, expectations for the divestitures
of certain assets, and other statements that are not historical facts, are
forward-looking statements within the meaning of the federal securities
laws. These forward-looking statements relate to future events or our
future financial and/or operating performance and can generally be identified
as
such because the context of the statement includes words such as "may," "will,"
"intends," "plans," "believes," "anticipates," "expects," "estimates," "shows,"
"predicts," "potential," "continue," or "opportunity," the negative of these
words or words of similar import. These forward-looking statements
are subject to risks and uncertainties, including the risks and uncertainties
described and referred to under Item 1A—Risk Factors beginning on page
6, which could cause actual results to differ materially from those anticipated
as of the date of this report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART
I
ITEM
1—BUSINESS
GENERAL
Tier
Technologies,
Inc., or Tier, provides federal, state and local government and other public
sector clients with electronic payment and other transaction processing
services, as well as software and systems integration services. The
demand for our services has been driven by an increasing preference of consumers
and governmental agencies to make payments electronically, increased acceptance
of interactive voice response systems and contact management solutions, as
well
as by legislative mandates, such as child support and tax collections and
disbursements. Originally incorporated in 1991 in California, we
reincorporated in Delaware effective July 15, 2005. We are
headquartered in Reston, Virginia. As of September 30, 2007, our 816
employees and contractors provided services to nearly 3,500 clients nationwide,
including over 3,000 customers served by our core Electronic Payment Processing
business.
SEGMENT
INFORMATION
Fiscal
year 2007
was a transitional year for our company. At the beginning of fiscal
year 2007, we were organized into three primary segments: Electronic
Payment Processing, Government Business Process Outsourcing, and Packaged
Software and Systems Integration. While each segment primarily served
the government sector, the specific governmental agencies they served and
the
products and services they offered were extremely
diverse. Individually each segment offered strong growth
opportunities; however, financing, managing and operating these widely disparate
operations made it difficult to maximize our profitability and overall
shareholder value.
Recognizing
these
issues, we undertook a strategic initiative during the first quarter of fiscal
2007, which examined each of these segments. In part, this strategic
initiative evaluated the risks, costs, benefits, and growth potential of
these
segment’s product lines. In addition, the strategic initiative
assessed the degree to which incremental investments or managerial changes
were
needed to maximize the profitability of each product line. Based upon
this rigorous review, we concluded that we could best maximize our long-term
profitability and shareholder value if we focused on our core
business—Electronic Payment Processing, or EPP.
As
a result, in
April 2007, we announced our intention to seek buyers for the sale of the
majority of our Government Business Process Outsourcing segment, or GBPO,
and
our Packaged Software and Systems Integration segment, or
PSSI. Concurrent with that announcement, we classified the majority
of the assets and liabilities for these segments as held-for-sale. At
the same time, we gradually began to restructure our organization to facilitate
the timely and efficient transfer of these operations to potential
buyers. By September 30, 2007, our number of segments evolved
from three segments down to one operating segment, certain wind-down operations
and our discontinued operations.
1
The
following chart
illustrates our overall structure as of September 30, 2007:
Organizational
Structure of Tier Technologies, Inc.
As
of September 30, 2007
Although
the
majority of the GBPO and PSSI businesses are classified as held-for-sale,
we
continue to operate them as efficiently and effectively as possible in order
to
maximize the proceeds that we expect to receive from the eventual disposition
of
these operations. During the upcoming year, we intend to focus
increasing amounts of managerial attention and financial resources on
streamlining and growing our EPP operations. The following sections
describe our continuing and held-for-sale operations in more detail, as well
as
the major lines of business included in the EPP, GBPO and PSSI
operations.
All
financial
information presented in this report for historical periods has been
reclassified to conform to our new organizational structure.
CONTINUING
OPERATIONS
Our
continuing
operations are separated into three major categories: EPP, Wind-down
and Corporate. In addition to the discussion below, Note
12—Segment Information to our Consolidated Financial Statements
provides detailed information about the profitability of each of these three
major categories.
Electronic
Payment Processing, or EPP. EPP provides
government and public-sector clients with electronic payment processing
alternatives for collecting taxes, fees and other obligations. In
fiscal year 2007, our client base included the U.S. Internal Revenue Service,
26 states, the District of Columbia and over 3,000 local governments and
other public sector clients. EPP revenues represented 89.5% of
revenues from continuing operations. EPP has a large number of
clients; however, 25.3% of our revenues from continuing operations are generated
under a contract with the U.S. Internal Revenue Service.
Clients
who use our
electronic payment processing services can offer their customers the ability
to
make government obligation, tuition and utility payments with a credit or
debit
card or an electronic check. Our secure electronic payment processing
services help our clients reduce remittance-processing costs, increase
collection speed and provide convenient payment alternatives to their
constituents.
During
the last
decade, increased consumer acceptance of electronic media, such as interactive
voice response systems and the Internet, have led to greater reliance on
“cashless” payment methods, including credit and debit cards and electronic
checks. However, many government entities have neither the technical
expertise nor the personnel to develop, implement and maintain electronic
payment processes or to accept Internet or telephonic originated
payments. As a result, they rely on external service providers, such
as Tier, to perform this function.
During
fiscal year
2007, we processed 8.1 million transactions, representing nearly
$4.7 billion of payments collected for federal and state income taxes,
state sales and use taxes, property taxes, parking citations, traffic
violations, local licenses, educational institution fees and utility
bills. The revenues we receive for payment services are
transaction-based. Increases and decreases in these revenues
typically represent changes in the volume of transactions and associated
dollars
that we process. This volume, in turn, reflects
2
the
size of our
client base, the level of customer acceptance of electronic payment processing
alternatives, the number and type of complementary partnership relationships
and
the variety of payment alternatives offered. Typically, EPP revenues
are higher in the second and third quarters of our fiscal year as a result
of
the seasonal surge in income tax payments in March and April.
Wind-down
Operations. During fiscal 2007, we identified three
businesses in our then-current GBPO and PSSI segments whose operations were
neither compatible with our long-term strategic direction nor complementary
with
the other businesses that we were divesting. As a result, we have
decided to complete, and in some cases extend, the term of existing contracts
for these businesses. We believe that these three businesses will be
phased out over the next five years. The three businesses included in
our wind-down operations include: 1) our Voice and Systems Automation
business, or VSA, which provides interactive voice response systems and support
services, including customization, installation and maintenance; 2) our Health
and Human Services practice, which provides certain consulting services to
state
agencies; and 3) our Public Pension Administration Systems practice, which
provides services to support the design, development and implementation of
pension applications for state, county and city governments. Our
wind-down business units serve approximately 290 customers, including
approximately 275 customers served by our Voice and Systems Automation
business. In fiscal year 2007, VSA revenues represented 62.0% of our
revenues from wind-down operations.
Corporate
Operations. Our corporate operations represent those
functions in the company that support our corporate governance, including
the
costs associated with our Board of Directors and executive management team,
as
well as accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia. In addition, corporate costs
include functions that provide shared-services that have supported operations
throughout the company, such as information technology and business
development. As we divest the majority of our GBPO and PSSI segments,
we expect that the size and associated costs to operate our corporate functions
will decline significantly in the future. See Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations
for additional information associated with our corporate-level
operations.
HELD-FOR-SALE
OPERATIONS
As
discussed above,
the majority of our GBPO and PSSI operations comprise our held-for-sale
operations. In addition to the discussion below, Note
15—Discontinued Operations to our Consolidated Financial Statements
provides information about the profitability and total assets of these
held-for-sale operations.
Government
Business Process Outsourcing, or GBPO. Our GBPO operation
focuses on child support payment processing, child support financial institution
data match services, or FIDM, and call center support
services. Because of the nature of the services it provides, GBPO’s
customer contracts typically have a three- to five-year
duration. Typically, these contracts produce a relatively constant
revenue stream over the contract term, with little, if any, seasonal
variability. During fiscal 2007, GBPO’s held-for-sale operations
served approximately 30 customers. During fiscal year 2007, over 41%
of GBPO’s revenues were generated by one ongoing contract, and 17% of GBPO’s
revenues were generated by another contract that expired in June
2007.
Under
the U.S.
Personal Responsibility and Work Opportunity Reconciliation Act of 1996,
each state must have an automated and centralized process for collecting
and
distributing child support payments. Our payment processing
operations provide many services related to this Act on behalf of our state
clients, including: the receipt, disbursement and processing of manual and
electronic child support payments; check and document imaging; and maintenance
of payment and court order histories. Child support payment
processing revenue is based on a per-transaction fee applied to the number
of
transactions processed. During fiscal year 2007, we used internally
developed software to process approximately $3.4 billion of transactions
for eight state clients.
The
U.S.
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
also created the Financial Institution Data Match Program, which requires
states
to match delinquent obligations against records held by financial
institutions. When matches are identified, state child support
enforcement agencies can issue liens or levies on noncustodial parents’ bank
accounts to expedite the collection of past due child support
obligations.
3
We
provide these
services to a fifteen-state alliance formed to develop and oversee outsourced
financial institution match programs. We also provide these services
to two states that are not members of the alliance. Since 2002, we have located
more than $23.4 billion for our clients. We derive revenue under
this program by assessing a fee based on the number of financial institutions
matched.
Packaged
Software and System Integration, or PSSI. Our PSSI
held-for-sale operations provide software systems design, development and
integration, maintenance and support services primarily to state and local
government clients. The PSSI held-for-sale operations include the
following practice areas:
|
·
|
Financial
Management
Systems—develops,
implements and supports financial management and purchasing systems
for
state and local governments;
|
|
·
|
Unemployment
Insurance
Systems—provides
software application, development and integration services to state
governments that are reforming unemployment insurance
systems;
|
|
·
|
State
Systems
Integration—provides
information technology development, integration and maintenance
support
projects, primarily for the State of Missouri;
and
|
|
·
|
Independent
Validation and Verification—provides quality assurance reviews of
third-party software.
|
We
expect to sell
each of these practice areas to separate buyers by March 31, 2008.
The
revenues
generated by PSSI are driven primarily by the size of its customer base,
the
addition of new service offerings and new partner relationships with
complementary service and technology providers. During fiscal 2007,
PSSI’s held-for-sale operations provided services to nearly 100 clients
nationwide. During fiscal year 2007, two contracts generated 29.0%
and 27.4%, respectively, of PSSI’s revenues. Revenues recognized by
PSSI reflect the specific contract deliverables and are not influenced by
seasonal changes.
All
of the above
practice areas are reported as discontinued operations for all periods
presented.
SALES
AND
MARKETING
Our
sales and
marketing objective is to develop relationships with clients that result
in
repeat long-term and cross-sale engagements. Initially, in fiscal
2007, we had a shared-service sales and marketing function that worked
cooperatively on joint sales efforts involving a combination of our services
across different segments. However, as our organization began to
evolve because of the expected divestiture of most of the GBPO and PSSI
operations, we began to identify specific resources that are dedicated to
our
EPP, GBPO and PSSI operations, to facilitate the timely and efficient transfer
of these operations to potential buyers.
In
fiscal 2008, we
expect to focus our future sales efforts on growing our EPP
business. In addition to our sales force, we also rely on the
business development capabilities of our senior EPP executives as a supplemental
sales and delivery resource. Members of our executive team have a
wide range of industry contacts and established reputations in the electronic
payment processing industry. They play a key role in developing,
selling and managing major engagements. As a result of our
market-focused sales approach, we believe that we are able to identify and
qualify for opportunities quickly and cost effectively.
We
strive to
generate new business by increasing brand awareness and recognition of our
diverse solution offerings using a variety of media. Our most
significant marketing and advertising program involves the promotion of
electronic payment processing services offered by our subsidiary Official
Payments Corporation, or OPC. We work with our various clients to
publicize our services through advertisements in payment invoices, publications
and web sites, typically at little or no cost to us. We also enter into
cooperative advertising and marketing arrangements with our card processing
partners and major card-issuing banks, including print and online advertising
campaigns and promotions. In fiscal 2007, we used newspaper, radio,
internet and public relations campaigns to supplement these
efforts.
4
COMPETITION
The
transaction
processing and software and systems integration markets are highly competitive
and are served by numerous international, national and local
firms. Representative market participants in transaction processing
markets include Link2Gov and TouchNet Information Systems,
Inc. Competition in the software and systems integration market
includes U.S. and international consulting and integration firms, the internal
information systems groups of our prospective clients, professional services
companies, hardware and application software vendors, and divisions of large
integrated technology companies and outsourcing
companies. Representative market participants include: Accenture;
BearingPoint; CGI-AMS; Deloitte; IBM; Keane; Lawson; New World Systems; Oracle;
Rose International; SAP; Sungard; and Tyler Technologies. Competitors
of our GBPO business include: Systems and Methods, Inc.; Affiliated Computer
Systems, Inc.; JPMorgan Chase; and Bank of America. Competitors for
our VSA business include large technology companies such as CISCO, Gensys
and
Nortel. Finally, competition for our FIDM business includes:
Affiliated Computer Systems, Inc.; Maximus; and PSI.
We
believe that the
principal competitive factors in our markets include reputation, project
management expertise, industry expertise, speed of development and
implementation, technical expertise, competitive pricing and the ability
to
deliver results, whether on a transaction, fixed-price
or time-and-materials basis. We believe that our ability
to compete also depends in part on a number of competitive factors outside
our
control, including the ability of our clients or competitors to hire, retain
and
motivate project managers and other senior technical staff, the ownership
by
competitors of software used by potential clients, the price at which others
offer comparable services, the financial resources of our competitors, the
ability of our clients to perform the services themselves and the extent
of our
competitors’ responsiveness to client needs.
INTELLECTUAL
PROPERTY RIGHTS
Our
success
depends, in part, on our protection of our methodologies, solutions and
intellectual property rights. We rely upon a combination of nondisclosure,
licensing and other contractual arrangements, as well as trade secret, copyright
and trademark laws to protect our proprietary rights and the proprietary
rights
of third parties from whom we license intellectual property. The
remaining life of our trademarks is four-to-five years. We enter into
nondisclosure agreements with all our employees, subcontractors and parties
with
whom we team. In addition, we control and limit distribution of
proprietary information. We cannot assure that these steps will be
adequate to deter the misappropriation of proprietary information or that
we
will be able to detect unauthorized use of this information and take appropriate
steps to enforce our intellectual property rights.
We
have developed
and acquired proprietary software that is licensed to clients pursuant to
license agreements and other contractual arrangements. We use
intellectual property laws, including copyright and trademark laws, to protect
our proprietary rights. Part of our business also develops software
applications for specific client engagements and customizes existing software
products for specific clients. Ownership of developed software and
customizations to existing software is subject to negotiation with individual
clients and is typically assigned to the client. In some situations,
we may retain ownership or obtain a license from our client, which permits
us or
a third party to use and market the developed software or the customizations
for
the joint benefit of the client and us or for our sole benefit.
AVAILABLE
INFORMATION
Our
Internet
address is www.tier.com. There we make available, free of charge, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to these reports, as soon as reasonably
practicable after we electronically file such material with or furnish it
to the
Securities and Exchange Commission, or SEC. Our SEC reports can be
accessed through the Investor Relations section of our Web site. The
information found on our Web site is not part of this or any other report
we
file with or furnish to the SEC.
5
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 annual report. If any
of the following risks actually occur, our business, financial condition
or
results of operations would likely suffer. In that case, the trading
price of our common stock could fall.
The
following
factors and other risk factors could cause our actual results to differ
materially from those contained in forward-looking statements in this Form
10-K.
We
have
incurred losses in the past and may not be profitable in the
future. We have incurred losses in the past and we may do so
in the future. While we reported net income in fiscal year 2005, we
reported net losses of $3.0 million during fiscal year 2007,
$9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
$5.4 million in fiscal year 2003.
Our
revenues and operating margins may decline and may be difficult to forecast,
which could result in a decline in our stock price. Our
revenues, operating margins and cash flows are subject to significant variation
from quarter to quarter due to a number of factors, many of which are outside
our control. These factors include:
|
·
|
economic
conditions in the marketplace;
|
|
·
|
our
customers’ budgets and demand for our
services;
|
|
·
|
seasonality
of business;
|
|
·
|
timing
of
service and product
implementations;
|
|
·
|
unplanned
increases in costs;
|
|
·
|
delays
in
completion of projects;
|
|
·
|
intense
competition;
|
|
·
|
variability
of software license revenues; and
|
|
·
|
integration
and costs of acquisitions.
|
The
occurrence of
any of these factors may cause the market price of our stock to decline or
fluctuate significantly, which may result in substantial losses to
investors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance. From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock. Price fluctuations and
trading volume of our stock may be rapid and severe and may leave investors
little time to react. Other factors that may affect the market price
of our stock include announcements of technological innovations or new products
or services by competitors and general economic or political conditions,
such as
recession, acts of war or terrorism. Fluctuations in the price of our
stock could cause investors to lose all or part of their
investment.
We
may not
be successful in divesting certain assets and liabilities and our anticipated
divestiture could disrupt our operations. We may not be able
to obtain reasonable offers for the fair value of the portions of PSSI and
GBPO
assets and liabilities that we are marketing. In that event, we may
be required to recognize an impairment loss or to terminate our planned
divestiture. Furthermore, our announced divestiture plan has resulted
in, and could result in, additional 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. Divestiture of certain
portions of these businesses may be delayed, or may be unsuccessful, resulting
in business disruption and increased costs of running and completing certain
projects.
Our
current and future information technology infrastructure may not meet our
requirements for the
6
sustainable
and economical growth of our EPP business. Our
EPP business is
highly dependent upon having a safe and secure information technology platform
with sufficient capacity to meet the future growth of our business. If our
ability to develop and/or acquire upgrades or replacements of our existing
platform does not keep pace with the growth of our business, we may not
be able
to meet our growth expectations. Furthermore, if we are not able to
develop these systems on a timely and economical basis, the profitablility
of
our EPP business may be adversely affected.
While our continuing operations provide services to over 3,000 clients, our revenues and cash flows could decline significantly if we were unable to retain our largest clients. Our electronic payment processing provides services to over 3,000 clients. However, our contract with the U.S. Internal Revenue Service generates over 25.3% of our revenues from continuing operations. Our operating results and cash flows could decline significantly if we were unable to retain this client, or replace it in the event we were unable to renew this contract.
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,
licensing and bonding requirements, industry association rules and public
disclosure requirements, which are subject to change. Changing laws,
regulations and standards relating to corporate governance, accounting
standards, and public disclosure, including the Sarbanes-Oxley Act of 2002,
SEC
regulations and Nasdaq Stock Market rules, are creating uncertainty for
companies and increasing the cost of compliance. To maintain high
standards of corporate governance and public disclosure, we intend to invest
all
reasonably necessary resources to comply with evolving
standards. This investment may result in increased general and
administrative expenses for outside services and a diversion of management
time
and attention from revenue-generating activities. New laws,
regulations or industry standards may be enacted, or existing ones changed,
which could negatively impact our services and revenues. Taxes or
fees may be imposed or we could be subject to additional requirements in
regard
to privacy, security or qualification for doing business. For our
transaction processing services, we are subject to various federal and state
laws and regulations, the rules of the National Automated Clearing House
Association and the applicable credit/debit card association rules. A
change in such laws, rules or 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 generated by our electronic payment processing operations may fluctuate
and the ability to maintain profitability is uncertain. EPP
primarily provides credit and debit card and electronic check payment options
for the payment of federal and state personal income taxes, real estate and
personal property taxes, business taxes, fines for traffic violations and
parking citations and educational and utility obligations. The
7
revenues
earned by
EPP depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective constituents. If
consumers are not receptive to paying a convenience fee; if card associations
change their rules or laws are passed that do not allow us to charge the
convenience fees; or if credit or debit card issuers or marketing partners
eliminate or reduce the value of rewards to consumers under their respective
rewards programs, demand for electronic payment processing services could
decline. The processing fees charged by credit/debit card
associations and financial institutions can be increased with little or no
notice, which could reduce margins and harm our profitability. Demand
for electronic payment processing services could also be affected adversely
by a
decline in the use of the Internet 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.
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.
8
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, fraud, computer viruses,
attacks by hackers and similar problems causing interruption in service and
loss
or theft of data and information, inclusive of personally identifiable
data. 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 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. On July 24, 2007,
the United States District Court for the Eastern District of Virginia entered
an
order denying the plaintiff's motion for class certification for the purported
class action lawsuit. On December 5, 2007, the court granted our
motion to dismiss plaintiff's complaint but permitted plaintiff an opportunity
to file an amended complaint. Plaintiff's amended complaint must be
filed by December 28, 2007. We believe we have minimal, if any,
exposure associated with this complaint.
9
If
we are
not able to protect our intellectual property, our business could suffer
serious
harm. Our systems and operating platforms, scripts, software
code and other intellectual property are generally proprietary, confidential,
and may be trade secrets. We protect our intellectual property rights
through a variety of methods, such as use of nondisclosure and license
agreements and use of trade secret, copyright and trademark
laws. Ownership of developed software and customizations to software
are the subject of negotiation and license arrangements with individual
clients. Despite our efforts to safeguard and protect our
intellectual property and proprietary rights, there is no assurance that
these
steps will be adequate to avoid the loss or misappropriation of our rights
or
that we will be able to detect unauthorized use of our intellectual property
rights. If we are unable to protect our intellectual property,
competitors could market services or products similar to ours, and demand
for
our offerings could decline, resulting in an adverse impact on
revenues.
We
may be
subject to infringement claims by third parties, resulting in increased costs
and loss of business. From time to time we receive notices
from others claiming we are infringing on their intellectual property
rights. Defending a claim of infringement against us could prevent or
delay our providing products and services, cause us to pay substantial costs
and
damages, force us to redesign products or enter into royalty or licensing
agreements on less favorable terms. If we are required to enter into
such agreements or take such actions, our operating margins could
decline.
If
we are
not able to obtain adequate or affordable insurance coverage or bonds, we
could
face significant liability claims and increased premium costs and our ability
to
compete for business could be compromised. We maintain
insurance to cover various risks in connection with our
business. Additionally, our business includes projects that require
us to obtain performance and bid bonds from a licensed surety. There
is no guarantee that such insurance coverage or bonds will continue to be
available on reasonable terms, or at all. If we are unable to obtain
or maintain adequate insurance and bonding coverage, potential liabilities
associated with the risks discussed in this report could exceed our coverage,
and we may not be able to obtain new contracts or continue to provide existing
services, which could result in decreased business opportunities and declining
revenues.
Our
markets
are changing rapidly. If we are not able to adapt to changing
conditions, we may lose market share and may not be able to compete
effectively. The markets for our products are characterized
by rapid changes in technology, client expectations and evolving industry
standards. Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market. If we
are unable to address these requirements, or if our products do not achieve
market acceptance, we may lose market share and our revenues could
decline.
We
may not
be successful in identifying acquisition candidates and, if we undertake
acquisitions, they could be expensive, increase our costs or liabilities
or
disrupt our business. One of our strategies is to pursue
growth through acquisitions. We may not be able to identify suitable
acquisition candidates at prices that we consider appropriate or to finance
acquisitions at favorable terms. If we do identify an appropriate
acquisition candidate, we may be unsuccessful in negotiating the terms of
the
acquisition, financing the acquisition or, if the acquisition occurs,
integrating the acquired business into our existing
business. Negotiations of potential acquisitions and the integration
of acquired business operations could disrupt our business by diverting
management attention away from day-to-day operations. Acquisitions of
businesses or other material operations may require additional debt or equity
financing, resulting in leverage or dilution of ownership. We also
may not realize cost efficiencies or synergies that we anticipated when
selecting our acquisition candidates. In addition, we may need to
record write-downs from future impairments of identified intangible assets
and
goodwill, which could reduce our future reported
earnings. Acquisition candidates may have liabilities or adverse
operating issues that we fail to discover through due diligence prior to
the
acquisition. Any costs, liabilities or disruptions associated with
any future acquisitions we may pursue could harm our operating
results.
Our
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.
10
ITEM
1B—UNRESOLVED STAFF COMMENTS
There
are no
unresolved written comments that were received from the Securities and Exchange
Commission’s staff 180 days or more before the end of our fiscal year 2007
regarding our periodic or current reports under the Securities Exchange Act
of
1934.
ITEM
2—PROPERTIES
As
of September 30,
2007, we leased nearly 175,000 square feet of space throughout the
country. These leased facilities included our 41,000 square foot
corporate headquarters in Reston, Virginia. We also leased
59,000 square feet of space for our GBPO payment processing centers in
Michigan, Tennessee, Alabama and Kentucky. In addition, we leased
55,000 square feet of space in Georgia, Virginia, Connecticut, California,
Missouri and New Mexico to house our subsidiary operations for EPP and PSSI
and
the call centers for GBPO and to provide general office space to support
our
projects and our clients. We also leased 20,000 square feet in
California that we subleased to an unrelated third party. Finally, we
own a 28,060 square foot building in Alabama which houses certain
administrative, call center, warehouse and other operations.
ITEM
3—LEGAL PROCEEDINGS
In
May 2003, we
received a subpoena from a grand jury in the Southern District of New York
to
produce certain documents pursuant to an investigation by the Antitrust Division
of the Department of Justice, or 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.
In
May 2006,
we received a subpoena from the Philadelphia District Office of the SEC
requesting documents relating to financial reporting and personnel
issues. If the SEC were to conclude that further investigative
activities are merited or to take formal action against us, our reputation
could
be impaired. We have cooperated, and intend to continue to cooperate,
fully with this investigation.
On
November 20,
2006, we were served with a purported class action lawsuit filed in the United
States District Court for the Eastern District of Virginia 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. On
July 24, 2007, the United States District Court for the Eastern District of
Virginia entered an order denying the plaintiff's motion for class certification
for the purported class action lawsuit. The time to appeal the
Court's order has expired without an appeal. On December 3,
2007, the court granted our motion to dismiss plaintiff's complaint but
permitted plaintiff an opportunity to file an amended
complaint. Plaintiff's amended complaint must be filed by
December 28, 2007. We believe we have minimal, if any, exposure
associated with this complaint.
ITEM
4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were
submitted to a vote of our stockholders during the fourth quarter of fiscal
2007.
11
EXECUTIVE
OFFICERS
The
names, ages and
positions of our executive officers at September 30, 2007, are listed in
the
following table, together with their business experience during the past
five
years. Unless otherwise specified, all officers served continuously
since the date indicated. There is no family relationship among the
officers.
|
Name,
age and position with Registrant
|
Date
elected
or
appointed
|
|
Ronald
L. Rossetti, Age 64 (a)
|
|
|
Chairman
of the Board, Chief Executive Officer
|
May
2006
|
|
David
E. Fountain, Age 47 (b)
|
|
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
May
2005
|
|
Michael
A. Lawler, Age 44 (c)
|
|
|
Senior
Vice President, Electronic Payment Processing
|
June
2004
|
|
Deanne
M. Tully, Age 49
|
|
|
Vice
President, General Counsel and Corporate Secretary
|
July
2003
|
|
Vice
President, General Counsel
|
February
2001
|
|
Steven
M. Beckerman, Age 49 (d)
|
|
|
Senior
Vice President, Business Process Outsourcing
|
March
2006
|
|
Kevin
C. Connell, Age 40
|
|
|
Senior
Vice President, Sales & Marketing
|
November
2006
|
|
Senior
Vice President, Business Development (OPC)
|
July
2003
|
|
Vice
President, Business Development (OPC)
|
August
2002
|
|
(a)
Mr. Rossetti
served as President of Riverside Capital Partners, Inc., a venture
capital
investment firm since 1997. Since 1997, Mr. Rossetti has also
been a general partner in several real estate general partnerships,
all
commonly controlled by Riverside Capital Holdings.
|
|
|
(b)
Mr. Fountain
served as Chief Financial Officer and Treasurer of National Processing
Inc., a provider of payment processing services, from 1999 to October
2004.
|
|
|
(c)
Mr. Lawler
served as EPOS Corporation President and Chairman from 1991 to
June 2004
and became Senior Vice President at Tier upon the acquisition of
EPOS.
|
|
|
(d)
Mr.
Beckerman served as Senior Vice President, Product Management of
Certegy
Card Services, a company that provides debit, credit and merchant
card
processing, from January 2004 to February 2006. From July 2000
to December 2003, Mr. Beckerman served as Certegy's Vice President,
Sales
and Marketing.
|
|
PART
II
ITEM
5—MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is
quoted on the Nasdaq Global Market under the symbol TIER. From
May 26, 2006 to May 20, 2007, our common stock was quoted on the Pink
Sheets under the symbol TIER or TIER.PK.
On
December 7,
2007, there were 205 record holders of our common stock. The
quarterly high and low prices per share during fiscal 2007 and 2006 were
as
follows:
|
Year
ended September 30,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
quarter
|
$ |
7.30
|
$ |
6.35
|
$ |
8.50
|
$ |
6.93
|
||||||||
|
Second
quarter
|
$ |
8.90
|
$ |
5.85
|
$ |
8.08
|
$ |
7.34
|
||||||||
|
Third
quarter
|
$ |
10.05
|
$ |
8.25
|
$ |
8.70
|
$ |
5.67
|
||||||||
|
Fourth
quarter
|
$ |
10.26
|
$ |
8.33
|
$ |
7.05
|
$ |
5.25
|
||||||||
12
We
have never
declared or paid cash dividends on our common stock and do not anticipate
doing
so for the foreseeable future. Instead, we intend to retain our
current and future earnings to fund the development and growth of our
business. Our current credit facility prohibits us from declaring
dividends.
The
following graph
compares the percentage change in cumulative stockholder return on our common
stock for the period September 30, 2002 through September 30, 2007,
with the cumulative total return on the NASDAQ Composite Index and the Russell
2000 Index. The comparison assumes $100.00 was invested on
September 30, 2002 in our common stock and in each of the foregoing indices
and assumes reinvestment of all dividends, if any.
|
Measurement
Date
|
Tier
Technologies,
Inc.
|
NASDAQ
Composite
|
Russell
2000
|
|||||||||
|
9/30/02
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
|
9/30/03
|
47.09
|
150.59
|
136.50
|
|||||||||
|
9/30/04
|
51.00
|
162.89
|
162.12
|
|||||||||
|
9/30/05
|
45.72
|
185.48
|
191.23
|
|||||||||
|
9/30/06
|
35.94
|
196.37
|
210.20
|
|||||||||
|
9/30/07
|
53.91
|
236.60
|
236.14
|
|||||||||
The
information
included under the heading "Comparison of 5 Year Cumulative Total Return"
in
Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed"
and
shall not be deemed to be "soliciting material" or subject to Regulation
14A,
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject
to
the liabilities of that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as amended, or
the
Exchange Act.
13
ITEM
6—SELECTED FINANCIAL DATA
The
following table
summarizes selected consolidated financial data for the fiscal years ended
September 30, 2003 through 2007. You should read the following
selected consolidated financial data in conjunction with the financial
statements, including the related notes, and Item 7—Management’s Discussion
and Analysis of Financial Condition and Results of
Operations. Historical results are not necessarily indicative of
results to be expected for any future period. Certain historical
information in the following table has been reclassified to conform to the
current year presentation.
|
Fiscal
years ended September 30,
|
||||||||||||||||||||
|
(in
thousands, except per share data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Revenues
|
$ |
111,148
|
$ |
96,492
|
$ |
78,695
|
$ |
61,948
|
$ |
51,779
|
||||||||||
|
Costs
and expenses
|
133,425
|
118,825
|
98,936
|
83,503
|
81,343
|
|||||||||||||||
|
Loss
before discontinued and other income (loss)
|
(22,277 | ) | (22,333 | ) | (20,241 | ) | (21,555 | ) | (29,564 | ) | ||||||||||
|
Other
income
|
4,094
|
3,457
|
874
|
835
|
904
|
|||||||||||||||
|
Loss
before income taxes & discontinued operations
|
(18,183 | ) | (18,876 | ) | (19,367 | ) | (20,720 | ) | (28,660 | ) | ||||||||||
|
Income
tax provision (benefit)
|
76
|
45
|
127
|
—
|
(2,764 | ) | ||||||||||||||
|
Loss
from continuing operations
|
(18,259 | ) | (18,921 | ) | (19,494 | ) | (20,720 | ) | (25,896 | ) | ||||||||||
|
Income
from discontinued operations, net
|
15,225
|
9,470
|
20,620
|
20,657
|
20,460
|
|||||||||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
$ | (63 | ) | $ | (5,436 | ) | ||||||
|
Total
assets
|
$ |
166,424
|
$ |
169,860
|
$ |
176,742
|
$ |
171,980
|
$ |
161,374
|
||||||||||
|
Long-term
obligations, less current portion
|
$ |
—
|
$ |
—
|
$ |
—
|
$ |
89
|
$ |
195
|
||||||||||
|
(Loss)
earnings per share—Basic and diluted:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.94 | ) | $ | (0.97 | ) | $ | (1.00 | ) | $ | (1.09 | ) | $ | (1.38 | ) | |||||
|
Discontinued
operations
|
$ |
0.78
|
$ |
0.49
|
$ |
1.06
|
$ |
1.09
|
$ |
1.09
|
||||||||||
|
(Loss)
earnings per share—Basic and diluted
|
$ | (0.16 | ) | $ | (0.48 | ) | $ |
0.06
|
$ |
—
|
$ | (0.29 | ) | |||||||
|
Weighted
average common shares used in computing:
|
||||||||||||||||||||
|
Basic
and diluted (loss) earning per share
|
19,512
|
19,495
|
19,470
|
18,987
|
18,782
|
|||||||||||||||
14
ITEM
7—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 Annual
Report on Form 10-K and other factors discussed in this section. For
information regarding what constitutes a forward-looking statement refer
to
Private Securities Litigation Reform Act Safe Harbor Statement on
page 1.
OVERVIEW
We
provide federal,
state and local government and other public sector clients with electronic
payment and other transaction processing services, as well as software and
systems integration services. As explained more fully in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, we are in the process of divesting a number of incompatible
businesses and dedicating an increasing amount of effort toward expanding
our
core business—Electronic Payment Processing, or EPP.
Key
Events in Fiscal 2007
Fiscal
2007 was a
transitional year for our company. At the beginning of fiscal 2007,
we were organized into three segments: EPP, Government Business Process
Outsourcing, or GBPO, and Packaged Software and Systems Integration, or
PSSI. While each segment primarily served the government sector, the
specific governmental agencies they served and products and services they
offered were extremely diverse. Individually, each segment offered
strong growth opportunities; however, financing, managing and operating these
widely disparate operations made it difficult to maximize our profitability
and
overall stockholder value.
Recognizing
these
issues, we undertook a strategic initiative during the first quarter of fiscal
2007 that evaluated the risks, costs, benefits and growth potential of each
of
our product lines and services. In addition, we assessed the degree
to which incremental investments or managerial changes were needed to maximize
the profitability of each product line. Based upon this rigorous
review, we concluded that we could best maximize our long-term profitability
and
stockholder value if we focused on our core EPP business. As a
result, in April 2007 we began to seek buyers for the sale of the majority
of
our GBPO and PSSI operations. We expect to accomplish this divestiture by
selling separate businesses within the GBPO and PSSI operations to five or
six
individual buyers.
On
our Consolidated
Balance Sheets, we classified the associated assets and liabilities for each
of
these businesses as held-for-sale, in accordance with SFAS 144—Accounting
for the Impairment or Disposal of Long-Lived Assets, or SFAS
144. In our Consolidated Statements of Operations, we have classified
the operations of these businesses as Income from discontinued operations,
net, because we do not expect to have continuing involvement or cash flows
from these businesses after the divestitures. All assets and
liabilities that are reported in these financial statements as “held-for-sale”
are reported at the lower of the carrying cost or fair value less cost to
sell. Although we report these held-for-sale operations as
“discontinued” on our Consolidated Statements of Operations, we continue to
operate these operations as efficiently and effectively as possible in order
to
maximize the proceeds that we expect to receive from the eventual disposition
of
these operations.
We
also have a
number of businesses within GBPO and PSSI whose operations were neither
compatible with our long-term strategic direction nor complementary with
other
businesses that we were divesting. We decided to complete, and in
some cases extend the term of the existing contracts for these
businesses. We believe that these three businesses will be phased out
over the next five years. We continue to report the businesses as
continuing operations in our consolidated financial statements, in accordance
with SFAS 144.
15
Summary
of Fiscal 2007 Operating Results
For
fiscal 2007, we
reported a net loss of $3.0 million, or $0.16 per fully diluted share,
which represents a $6.4 million, or 67.9% decrease in net loss over fiscal
2006. Our continuing operations reported a loss of
$18.3 million, or $0.94 per fully diluted share, while our discontinued
operations reported net income of $15.2 million, or $0.78 per fully diluted
share.
Our
continuing
operations are composed of our EPP business, certain businesses that we are
winding down and corporate costs. On a standalone basis and excluding
any allocation of corporate costs, our EPP business reported income of
$8.4 million, or $0.43 per fully diluted share, during fiscal
2007. This represents a $2.8 million, or 50.5% increase over
fiscal 2006, resulting from a 36.7% increase in the number of transactions
and a
31.2% increase in dollars processed by EPP in fiscal 2007. We believe
that the positive performance of our EPP business reflects rising consumer
demand for electronic payment alternatives, as well as an increase in the
number
of client contracts for electronic payment services. Although EPP
provides electronic payment processing services to over 3,000 clients,
approximately 28.3% of EPP’s revenues are generated by transactions processed
for the Internal Revenue Service.
The
positive
performance of our EPP business was more than offset by a loss of
$11.2 million, or $0.58 per fully diluted share, from operations that we
are winding down, including a $9.2 million impairment charge to write down
the assets and liabilities of these operations to fair value. During
fiscal 2008, we expect to wind-down two businesses that generated
losses. Another business that reported positive earnings is expected
to be wound-down over a five-year period. Our income from continuing
operations also included corporate overhead of $15.4 million, or $0.79 per
fully diluted share, including a significant portion of costs for
shared-services that could not be directly assigned to any business
unit. We expect that the need for, and cost of, these shared-services
and other corporate costs will diminish after we sell and/or wind-down our
GBPO
and PSSI businesses.
For
fiscal 2007,
our discontinued operations reported income of $15.2 million, or $0.78 per
fully diluted share, an increase of $5.8 million from fiscal 2006
results. Approximately $8.1 million, or $0.41 per fully diluted
share, of the income reported for fiscal 2007 resulted from the reversal
of a
reserve for a 2003 tax refund for our former Australian operations, which
received final approval from the Internal Revenue Service in March
2007. The remaining $7.1 million, or $0.37 per fully diluted
share, of income reported in fiscal 2007 was generated by the GBPO and PSSI
operations that are held-for-sale. Although the GBPO and PSSI
operations generated income in fiscal 2007 on a standalone basis (excluding
an
allocation of general corporate costs), the expiration of two GBPO contracts
and
the completion of a number of PSSI projects in fiscal 2007 are expected to
result in lower earnings in future years.
Expectations
for 2008
We
expect that
fiscal 2008 will be another transition year as we position our company for
the
long-term growth of the EPP business. In fiscal 2008, we expect to
see continued strong revenue growth in our EPP business, driven not only
by
revenue growth initiatives, but also by increasing consumer demand for
electronic payment processing alternatives. Furthermore, we are
undertaking two key initiatives that will help build our EPP business into
an
industry leader. First, we are analyzing our back-office processing
platforms and infrastructure to determine what actions are needed to improve
efficiency and reduce costs, while providing the capacity for future
growth. Based on our preliminary conclusions, we expect to make a
significant investment in our current EPP technology in fiscal
2008. Second, we expect to move EPP beyond focusing primarily on
governmental clients into the commercial biller-direct payment processing
space. We believe that this second initiative will provide
significant revenue growth opportunities. In addition to these two
EPP-specific initiatives, we also intend to right-size our corporate overhead
once the sale of our non-core assets is complete. In fiscal 2008, we
also expect to finalize the divestiture of the held-for-sale businesses and
use
the proceeds from these dispositions to fund future growth in our EPP
business.
We
believe that the
actions we are taking will position our company for long-term
growth. While certain of these initiatives will produce some cost
savings during fiscal 2008, we believe that the cost of implementing these
initiatives will outweigh those savings during fiscal 2008 and that we expect
to
incur a net loss in
16`
fiscal 2008. However,
once the implementation of these initiatives is complete, we believe that
our
company will report long-term, sustainable profitability.
RESULTS
OF OPERATIONS
The
following table
provides an overview of our results of operations for fiscal years 2007,
2006
and 2005:
|
Variance
|
||||||||||||||||||||||||||||
|
Year
ended September 30,
|
2007
vs. 2006
|
2006
vs. 2005
|
||||||||||||||||||||||||||
|
(in
thousands, except percentages)
|
2007
|
2006
|
2005
|
$
Amount
|
%
|
$
Amount
|
%
|
|||||||||||||||||||||
|
Revenues
|
$ |
111,148
|
$ |
96,492
|
$ |
78,695
|
$ |
14,656
|
15.2 | % | $ |
17,797
|
22.6 | % | ||||||||||||||
|
Costs
and expenses
|
133,425
|
118,825
|
98,936
|
14,600
|
12.3 | % |
19,889
|
20.1 | % | |||||||||||||||||||
|
Loss
from continuing operations before other income and income
taxes
|
(22,277 | ) | (22,333 | ) | (20,241 | ) |
56
|
—
|
(2,092 | ) | 10.3 | % | ||||||||||||||||
|
Other
income
|
4,094
|
3,457
|
874
|
637
|
18.4 | % |
2,583
|
*
|
||||||||||||||||||||
|
Loss
from continuing operations before income taxes
|
(18,183 | ) | (18,876 | ) | (19,367 | ) |
693
|
3.7 | % |
491
|
2.5 | % | ||||||||||||||||
|
Income
tax provision
|
76
|
45
|
127
|
31
|
68.9 | % | (82 | ) | (64.6 | )% | ||||||||||||||||||
|
Loss
from continuing operations
|
(18,259 | ) | (18,921 | ) | (19,494 | ) |
662
|
3.5 | % |
573
|
2.9 | % | ||||||||||||||||
|
Income
from discontinued operations, net
|
15,225
|
9,470
|
20,620
|
5,755
|
60.8 | % | (11,150 | ) | (54.1 | )% | ||||||||||||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
$ |
6,417
|
67.9 | % | $ | (10,577 | ) |
*
|
||||||||||||
|
*
Not meaningful
|
||||||||||||||||||||||||||||
The
following
sections describe the reasons for key variances in the results that we are
reporting for continuing and discontinued operations.
Continuing
Operations
The
continuing
operations section of our Consolidated Statements of Operations includes
the
results of operations of our core EPP business, certain businesses that we
expect to wind-down over the next five years and general corporate
costs. The following table presents the revenues and expenses for our
continuing operations for fiscal years 2007, 2006 and 2005. This
table is followed by a detailed analysis summarizing reasons for variances
in
these financial results.
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Revenues
|
$ |
111,148
|
$ |
96,492
|
$ |
78,695
|
||||||
|
Costs
and expenses:
|
||||||||||||
|
Direct
costs
|
83,891
|
71,670
|
59,951
|
|||||||||
|
General
and administrative
|
27,486
|
32,860
|
24,176
|
|||||||||
|
Selling
and marketing
|
8,243
|
9,162
|
8,836
|
|||||||||
|
Depreciation
and amortization
|
4,573
|
5,133
|
5,973
|
|||||||||
|
Write-down
of goodwill and intangibles
|
9,232
|
—
|
—
|
|||||||||
|
Total
costs and expenses
|
133,425
|
118,825
|
98,936
|
|||||||||
|
Loss
from continuing operations before other income and income
taxes
|
(22,277 | ) | (22,333 | ) | (20,241 | ) | ||||||
|
Other
income
|
4,094
|
3,457
|
874
|
|||||||||
|
Loss
from continuing operations before income taxes
|
(18,183 | ) | (18,876 | ) | (19,367 | ) | ||||||
|
Income
tax provision
|
76
|
45
|
127
|
|||||||||
|
Loss
from continuing operations
|
$ | (18,259 | ) | $ | (18,921 | ) | $ | (19,494 | ) | |||
17
Revenues
(Continuing Operations)
The
following table provides a year-over-year comparison of revenues generated
by
our continuing operations during fiscal years 2007, 2006 and 2005.
|
Fiscal
2007 vs. 2006
|
Fiscal
2006 vs. 2005
|
|||||||||||||||||||||||||||||||
|
Year
ended September 30,
|
Variance
|
Year
ended September 30,
|
Variance
|
|||||||||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
$
|
%
|
2006
|
2005
|
$
|
%
|
||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||||||||||
|
EPP
|
$ |
99,433
|
$ |
78,578
|
$ |
20,855
|
26.5 | % | $ |
78,578
|
$ |
56,452
|
$ |
22,126
|
39.2 | % | ||||||||||||||||
|
Wind-down
|
12,100
|
18,065
|
(5,965 | ) | (33.0 | )% |
18,065
|
27,316
|
(9,251 | ) | (33.9 | )% | ||||||||||||||||||||
|
Eliminations
|
(385 | ) | (151 | ) | (234 | ) | (155.0 | )% | (151 | ) | (5,073 | ) |
4,922
|
97.0 | % | |||||||||||||||||
|
Total
|
$ |
111,148
|
$ |
96,492
|
$ |
14,656
|
15.2 | % | $ |
96,492
|
$ |
78,695
|
$ |
17,797
|
22.6 | % | ||||||||||||||||
The
following
sections discuss the key drivers that caused these revenue changes from our
continuing operations.
EPP
Revenues: EPP provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients. EPP’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that
we
charge for each transaction that we process. EPP generated
$99.4 million of revenues during fiscal 2007, a $20.9 million, or
26.5%, increase over fiscal 2006. In fiscal 2007, we processed 36.7%
more transactions than we processed in fiscal 2006, representing 31.2% more
total dollars. Nearly half of the year-over-year increase in fiscal
2007 was attributable to an increase in revenues from processing property
taxes,
25.8% was attributable to an increase in revenues from federal and state
income
taxes processing, and the remainder was due to increases in electronic payments
processed for other governmental agencies, utilities and educational
institutions.
During
fiscal 2006, EPP generated $78.6 million of revenues, an increase of
$22.1 million, or 39.2% over fiscal 2005 results. Slightly over
half of this year-over-year increase was attributable to a rise in the number
and volume of federal and state taxes processed in fiscal 2007, 26.6% was
attributable to revenues earned by processing property tax payments, and
the
remainder was due to increases in electronic payments processed for other
governmental agencies, utilities and educational institutions. During
fiscal 2006, we processed 40.2% more transactions than we processed in fiscal
2005, representing 53.9% more dollars processed.
As
an
increasing number of public and private sector entities strive to meet rising
consumer demand for electronic payment alternatives, we believe our renewed
focus on our core EPP business will continue to produce significant revenue
growth for the foreseeable future.
Wind-down
Revenues: During fiscal 2007, our three wind-down
operations generated $12.1 million in revenues, a $6.0 million, or
33.0%, decrease from fiscal 2006. The overall revenue decrease was
due primarily to the completion or near completion of several projects during
fiscal 2007. Approximately $7.5 million of the revenues reported
for fiscal 2007 were generated by our Voice and Systems Automation, or VSA,
business. We expect to continue to support and renew existing
maintenance contracts; however, we do not expect that we will actively pursue
new contracts for the VSA businesses. The remaining fiscal 2007
wind-down revenues were generated by our Pension and Health and Human Services
businesses, which we expect to wind-down during fiscal 2008.
During
fiscal year
ended September 30, 2006, these wind-down operations generated
$18.1 million of revenues, a $9.3 million, or 33.9%, decrease from
fiscal 2005. Approximately $9.2 million of this decrease
reflects the completion or near completion of several VSA contracts between
mid-year fiscal 2006 through 2007, including an intercompany contract with
our
GBPO operations to construct a call center at one of our payment processing
centers.
18
Corporate
Operations/Eliminations: During fiscal 2007, we
eliminated $385,000 of revenues for transactions processed by EPP for our
GBPO
business (which is included in discontinued operations). This amount
was $234,000 greater than the amount eliminated during 2006, because of a
rise
in the number of transactions that EPP processed for our GBPO
business. During fiscal 2005, we eliminated $5.1 million of
intercompany revenues, primarily associated with the construction of the
previously described GBPO call center by our VSA business.
Direct
Costs (Continuing Operations)
Direct
costs, which
represent costs directly attributable to providing services to clients, include:
payroll and payroll-related costs; credit card interchange fees and assessments;
travel-related expenditures; amortization of intellectual property; amortization
and depreciation of project-related equipment, hardware and software purchases;
and the cost of hardware, software and equipment sold to clients. The
following table provides a year-over-year comparison of direct costs incurred
by
our continuing operations during fiscal years 2007, 2006 and 2005:
|
Fiscal
2007 vs. 2006
|
Fiscal
2006 vs. 2005
|
|||||||||||||||||||||||||||||||
|
Year
ended September 30,
|
Variance
|
Year
ended September 30,
|
Variance
|
|||||||||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
$
|
%
|
2006
|
2005
|
$
|
%
|
||||||||||||||||||||||||
|
Direct
costs
|
||||||||||||||||||||||||||||||||
|
EPP
|
$ |
75,294
|
$ |
59,966
|
$ |
15,328
|
25.6 | % | $ |
59,966
|
$ |
42,199
|
$ |
17,767
|
42.1 | % | ||||||||||||||||
|
Wind-down
|
8,597
|
11,704
|
(3,107 | ) | (26.5 | )% |
11,704
|
17,752
|
(6,048 | ) | (34.1 | )% | ||||||||||||||||||||
|
Total
|
$ |
83,891
|
$ |
71,670
|
$ |
12,221
|
17.1 | % | $ |
71,670
|
$ |
59,951
|
$ |
11,719
|
19.6 | % | ||||||||||||||||
The
following
sections discuss the key drivers that caused these changes in the direct
costs
for continuing operations.
EPP
Direct Costs: Consistent with the year-over-year growth
in our EPP revenues, EPP’s direct costs rose $15.3 million, or 25.6%, in
fiscal 2007 and $17.8 million, or 42.1%, in fiscal 2006. These
increases directly reflect interchange fees charged to us to process the
previously described increase in the number and volume of electronic payments
processed for our electronic payment processing clients. We expect to see
continued increases in our EPP direct costs as we strive to grow this business
and as more clients move toward electronic payment processing
options.
Wind-down
Direct Costs: Direct costs from our wind-down
operations decreased $3.1 million, or 26.5%, during fiscal 2007 from fiscal
2006 results. The year-over-year reduction in direct costs during
fiscal 2007 reflects the completion and near-completion of a number of Pension
and Health and Human Services contracts, which, in turn, caused a reduction
in
the level of subcontractor and labor and labor-related costs that we
incurred. Similarly, during fiscal 2006, the direct costs from our
wind-down operations decreased $6.0 million, or 34.1%, from fiscal
2005. Approximately $4.9 million of the year-over-year decrease
in direct costs in fiscal 2006 was attributable to the completion and nearing
completion of a number of VSA contracts during mid-year fiscal 2006 and 2007.
The remaining decrease was primarily attributable to the completion of Pension
projects, which resulted in lower subcontractor, labor and labor-related
expenses. As we wind down these operations, we expect that the direct
costs of these operations will continue to decrease during fiscal
2008.
19
General
and Administrative (Continuing Operations)
General
and
administrative expenses consist primarily of payroll and payroll-related
costs
for general management, administrative, accounting, legal and information
systems, as well as fees paid to our directors and auditors. The
following table provides a year-over-year comparison of general and
administrative costs incurred by our continuing operations during fiscal
years
2007, 2006 and 2005:
|
Fiscal
2007 vs. 2006
|
Fiscal
2006 vs. 2005
|
|||||||||||||||||||||||||||||||
|
Year
ended September 30,
|
Variance
|
Year
ended September 30,
|
Variance
|
|||||||||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
$
|
%
|
2006
|
2005
|
$
|
%
|
||||||||||||||||||||||||
|
General
& administrative
|
||||||||||||||||||||||||||||||||
|
EPP
|
$ |
7,847
|
$ |
6,009
|
$ |
1,838
|
30.6 | % | $ |
6,009
|
$ |
4,591
|
$ |
1,418
|
30.9 | % | ||||||||||||||||
|
Wind-down
|
3,663
|
3,535
|
128
|
3.6 | % |
3,535
|
4,194
|
(659 | ) | (15.7 | )% | |||||||||||||||||||||
|
Corporate
|
15,976
|
23,316
|
(7,340 | ) | (31.5 | )% |
23,316
|
15,391
|
7,925
|
51.5 | % | |||||||||||||||||||||
|
Total
|
$ |
27,486
|
$ |
32,860
|
$ | (5,374 | ) | (16.4 | )% | $ |
32,860
|
$ |
24,176
|
$ |
8,684
|
35.9 | % | |||||||||||||||
EPP
General and Administrative: During fiscal 2007, EPP
incurred $7.8 million of general and administrative expenses, a
$1.8 million, or 30.6%, increase over fiscal 2006. These increases are
attributable primarily to: a $0.9 million increase for labor and labor
related expenses, including shared-service cost provided specifically for
EPP by
Corporate; a $0.7 million increase for consulting services relating to
our strategic initiative; and $0.2 million was primarily due to a rent
increase at an EPP facility. Partially offsetting these increases was
a $0.2 million decrease in bad debt expense, reflecting successful
collection efforts in fiscal 2007. During fiscal 2006, EPP incurred
$6.0 million of general and administrative expenses, a $1.4 million,
or 30.9%, increase over fiscal 2005, primarily as a result of higher labor
and
labor-related expenses in fiscal 2006.
During
fiscal 2008, we expect that general and administrative expenses for our EPP
operations will increase. Specifically, we are undertaking an initiative
that
will establish a common platform for processing electronic
payments. Currently, we process payments on multiple platforms at
multiple locations. By making this investment in a common platform in
fiscal 2008, we believe the long-term efficiency and cost-effectiveness of
our
EPP operations will improve and we will have the capacity to process
significantly more transactions.
Wind-down
General and Administrative: During fiscal 2007, our
wind-down operations incurred $3.7 million of general and administrative
expenses, a $0.1 million, or 3.6%, increase over fiscal
2006. Approximately $1.3 million of the increase is attributable
to a contract settlement associated with a pension-related
project. Partially offsetting these increases was a $0.6 million
decrease in bad debt expense attributable to successful collection efforts
and a
$0.6 million decrease in miscellaneous office-related
expenses. During fiscal 2006, our wind-down operations incurred
$3.5 million of general and administrative expenses, a $0.7 million,
or 15.7%, decrease from fiscal 2005. Approximately $1.1 million
of the decrease was attributable to reduced labor and labor-related expenses,
partially offset by a $0.3 million increase in bad debt
expense. We expect that the administrative and general costs
associated with these operations will decrease during fiscal 2008 as we continue
to wind down these operations.
Corporate
General and Administrative: Our corporate operations
represent those functions that support our corporate governance, including
the
costs associated with our Board of Directors and executive management team,
as
well as accounting, finance, legal and the costs of maintaining our corporate
headquarters in Reston, Virginia. In addition, corporate costs
include functions that provide shared-services that support operations
throughout our organization, such as information technology and business
development.
During
fiscal 2007,
our corporate operations incurred $16.0 million of general and
administrative expenses, a $7.3 million, or 31.5%, decrease from fiscal
2006. The largest driver of this decrease was associated with the
restatement of our financial statements that occurred during fiscal
2006. During fiscal 2006, we incurred $7.2 million of
non-recurring accounting, legal and Audit Committee investigation
costs. This is contrasted with fiscal 2007, during which we incurred
$1.0 million of accounting fees associated with the restatement and
$0.7 million of legal fees associated with our 2007 relisting on NASDAQ and
other legal matters associated
20
with
last year’s
restatement. In addition, labor and labor-related expenses decreased
$0.8 million, of which $1.1 million was related to the absence of
severance expense and share-based payment expense associated with the fiscal
2006 departure of our former Chief Executive Officer and $0.6 million was
related to a share-based payment award granted to our current Chief Executive
Officer in fiscal 2006, offset by increases in bonus expense of
$1.0 million. The remaining $1.0 million year-over-year
decrease resulted from a $0.7 million decrease in other legal and
accounting expenses and $0.3 million from lower miscellaneous office
expenses. During fiscal 2006, our corporate operations incurred
$23.3 million of general and administrative expenses, a $7.9 million,
or 51.5% increase over fiscal 2005. The primary drivers of this
increase were the previously described costs associated with the restatement
of
our historical financial statements in fiscal 2006 and the compensation
arrangements for our former and current Chief Executive Officers.
We
believe that the
anticipated sales of the majority of our GBPO and PSSI operations will reduce
the need for corporate support. Therefore, during 2008, we anticipate
reductions in corporate general and administrative expenses as these
divestitures occur.
Selling
and Marketing (Continuing Operations)
Selling
and
marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures and travel-related
expenditures. We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April
15th
federal tax season. The following table provides a year-over-year
comparison of selling and marketing costs incurred by our continuing operations
during fiscal years 2007, 2006 and 2005.
|
Year
ended September 30,
|
Variance
|
Year
ended September 30,
|
Variance
|
|||||||||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
$
|
%
|
2006
|
2005
|
$
|
%
|
||||||||||||||||||||||||
|
Selling
and marketing
|
||||||||||||||||||||||||||||||||
|
EPP
|
$ |
7,151
|
$ |
5,963
|
$ |
1,188
|
19.9 | % | $ |
5,963
|
$ |
4,921
|
$ |
1,042
|
21.2 | % | ||||||||||||||||
|
Wind-down
|
1,092
|
1,046
|
46
|
4.4 | % |
1,046
|
1,690
|
(644 | ) | (38.1 | )% | |||||||||||||||||||||
|
Corporate
|
—
|
2,153
|
(2,153 | ) | (100.0 | )% |
2,153
|
2,225
|
(72 | ) | (3.2 | )% | ||||||||||||||||||||
|
Total
|
$ |
8,243
|
$ |
9,162
|
$ | (919 | ) | (10.0 | )% | $ |
9,162
|
$ |
8,836
|
$ |
326
|
3.7 | % | |||||||||||||||
EPP
Selling and Marketing: During fiscal 2007, EPP incurred
$7.2 million of selling and marketing expenses, a $1.2 million, or
19.9%, increase over fiscal 2007. Of the overall increase,
$0.9 million is attributable to an increase in labor and labor-related
expenses, primarily due to an increase in marketing efforts as a result of
our
strategic initiative to grow our EPP operations, and $0.3 million is
attributable to an increase in advertising expense. During fiscal
2006, EPP incurred $6.0 million of selling and marketing expenses, a
$1.0 million, or 21.2%, increase over fiscal 2005, of which
$0.5 million is attributable to an increase in advertising expense and
$0.5 million is attributable to increased labor and labor-related expenses.
During fiscal 2008, we expect that EPP’s direct sales and marketing expenses
will increase as we strive to accelerate the growth of this
business.
Wind-down
Selling and Marketing: During fiscal 2007, the selling
and marketing expenses of our wind-down operation increased to
$1.1 million, a 4.4% increase over fiscal 2006 results. The
minor increase is attributable primarily to a slight increase in labor and
labor-related expenses, partially offset by a decrease in travel and travel
related expenses. During fiscal 2006, our wind-down operations
selling and marketing expenses incurred $1.0 million of selling and
marketing expenses, a $0.6 million, or 38.1% decrease from fiscal 2005,
primarily due to decreased labor and labor related expenses. We do
not expect to incur significant selling and marketing expenses for our wind-down
operations in fiscal 2008.
Corporate
Selling and Marketing: During fiscal 2007, we assigned
sales and marketing expenses to the specific businesses that benefited from
the
associated sales and marketing efforts. In previous years, a
significant portion of these costs were charged to
corporate. As such, we did not report any Corporate selling and
marketing expenses during fiscal 2007, as all costs were charged to the
applicable businesses. We are
21
reporting
a
$2.2 million year-over-year decrease in expense as a result of this
change. During fiscal 2006, our corporate operations incurred
$2.2 million in sales and marketing expenses, which are relatively
consistent with fiscal 2005 spending. During fiscal 2008, we expect
to continue to assign corporate sales and marketing function to individual
operations that directly benefit from these efforts, primarily EPP.
Depreciation
and Amortization (Continuing Operations)
Depreciation
and amortization represents expenses associated with the depreciation of
equipment, software and leasehold improvements, as well as the amortization
of
intangible assets from acquisitions and other intellectual property not directly
attributable to client projects.
|
Year
ended September 30,
|
Variance
|
Year
ended September 30,
|
Variance
|
|||||||||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
$
|
%
|
2006
|
2005
|
$
|
%
|
||||||||||||||||||||||||
|
Depreciation
& amortization
|
||||||||||||||||||||||||||||||||
|
EPP
|
$ |
3,205
|
$ |
3,170
|
$ |
35
|
1.1 | % | $ |
3,170
|
$ |
3,428
|
$ | (258 | ) | (7.5 | )% | |||||||||||||||
|
Wind-down
|
764
|
1,590
|
(826 | ) | (51.9 | )% |
1,590
|
1,987
|
(397 | ) | (20.0 | )% | ||||||||||||||||||||
|
Corporate
|
604
|
373
|
231
|
61.9 | % |
373
|
558
|
(185 | ) | (33.2 | )% | |||||||||||||||||||||
|
Total
|
$ |
4,573
|
$ |
5,133
|
$ | (560 | ) | (10.9 | )% | $ |
5,133
|
$ |
5,973
|
$ | (840 | ) | (14.1 | )% | ||||||||||||||
Depreciation
and amortization in fiscal 2007 and 2006 was $0.6 million and $0.8 million
lower than the results from the prior respective year. The
year-over-year results for both periods declined primarily because of the
absence of depreciation and amortization on assets as they became fully
depreciated.
Write-down
of Goodwill and Intangible Assets (Continuing Operations)
During
fiscal 2007, we reviewed our asset groups for impairment both in April 2007,
when we began seeking buyers for certain portions of our business, including
the
majority of our PSSI and GBPO segments, and in September 2007, as part of
our
annual goodwill impairment testing. As a result of those reviews we
identified the need to recognize impairments on assets included in our wind-down
operations totaling $9.2 million. This impairment reduced the
carrying value of goodwill and intangible assets reported on our Consolidated
Balance Sheets. Note 7—Goodwill and Intangible Assets to our
Consolidated Financial Statements, provides a detailed discussion about our
analysis and the need for this impairment.
Other
Income (Loss) (Continuing Operations)
Equity
in net income (loss) of unconsolidated
affiliate: Equity in net income (loss) of
unconsolidated affiliate represents our share of the net income and losses
from
CPAS, Inc. an entity in which we held 46.96% of the outstanding common stock
until June 2007. During fiscal 2007 and 2006, we recorded net
income of $0.5 million and $0.4 million, respectively, associated with
our equity interest in CPAS. The $0.1 million increase in CPAS’
performance resulted primarily from CPAS’ successful contracting efforts during
the first quarter of fiscal 2007, partially offset by the recognition of
an
incentive payout to CPAS’ managers. On June 29, 2007, we sold
our 46.96% equity interest in CPAS back to CPAS. As a result of that
transaction, we realized $239,000 foreign currency gain, plus an $80,000
gain on
the sale of this equity investment.
Interest
income, net: Interest income earned during fiscal
2007, 2006 and 2005 was relatively consistent. Although the average
daily balance of our investment portfolio increased significantly, the interest
rates we received on these investment has declined in recent months consistent
with interest rate changes in the marketplace. Although the interest
rates on our investment portfolio fluctuate with changes in the marketplace,
the
principal value of our portfolio is secure, since we have no investments
in the
types of financial instruments that have caused other financial institutions
to
write-down the value of their portfolios. Our interest income is
earned by our EPP operations and our Corporate operations.
Income
Tax Provision (Continuing Operations)
We
reported income
tax provisions of $76,000 for fiscal 2007, $45,000 for fiscal 2006 and $127,000
for fiscal 2005. The fiscal year 2007, 2006 and 2005 provision for
income taxes represents federal and state tax
22
obligations
incurred by our EPP operations. Our Consolidated Statements of
Operations for fiscal 2007, 2006 and 2005 do not reflect a federal tax
provision because of offsetting adjustments to our valuation
allowance. Our effective tax rates differ from the federal statutory
rate due to state and foreign income taxes, tax-exempt interest income and
the
charge for establishing a valuation allowance on our net deferred tax
assets. Our future tax rate may vary due to a variety of factors,
including, but not limited to: the relative income contribution by
tax jurisdiction; changes in statutory tax rates; the amount of tax exempt
interest income generated during the year; changes in our valuation allowance;
our ability to utilize foreign tax credits and net operating losses and any
non-deductible items related to acquisitions or other nonrecurring
charges.
Discontinued
Operations
In
April 2007 we
began to seek buyers for the majority of our GBPO and PSSI
segments. As of September 30, 2007, we continued to own and operate
these businesses. However, SFAS 144 requires that we report these
businesses as “discontinued” on our Consolidated Statements of Operations,
because we do not expect to have continuing involvement in, or cash flows
from,
these operations after their divestiture. As such, we reclassified
revenues and costs associated with the portions of those segments held-for-sale
to discontinued operations for all periods represented.
The
following table
summarizes our results of operations from discontinued operations for fiscal
2007, 2006 and 2005. Immediately following this table is a discussion
of key variances in these results:
|
Year
ended September 30, 2007
|
Year
ended September 30, 2006
|
Year
ended September 30, 2005
|
||||||||||||||||||||||||||||||||||||||||||||||
|
(in
thousands)
|
GBPO
|
PSSI
|
Other
and Eliminations
|
Total
|
GBPO
|
PSSI
|
Other
and Eliminations
|
Total
|
GBPO
|
PSSI
|
Other
and Eliminations
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Revenues
|
$ |
34,835
|
$ |
31,372
|
$ |
—
|
$ |
66,207
|
$ |
39,902
|
$ |
32,337
|
$ |
—
|
$ |
72,239
|
$ |
40,250
|
$ |
31,645
|
$ |
10
|
$ |
71,905
|
||||||||||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Direct
costs
|
22,378
|
21,557
|
(385 | ) |
43,550
|
32,041
|
22,779
|
(646 | ) |
54,174
|
27,761
|
20,053
|
(3,949 | ) |
43,865
|
|||||||||||||||||||||||||||||||||
|
General
and administrative
|
2,257
|
6,717
|
—
|
8,974
|
1,510
|
4,194
|
13
|
5,717
|
1,100
|
3,708
|
17
|
4,825
|
||||||||||||||||||||||||||||||||||||
|
Selling
and marketing
|
1,097
|
2,620
|
—
|
3,717
|
610
|
1,701
|
—
|
2,311
|
437
|
2,065
|
—
|
2,502
|
||||||||||||||||||||||||||||||||||||
|
Depreciation
and amortization
|
2
|
95
|
—
|
97
|
2
|
122
|
—
|
124
|
—
|
93
|
—
|
93
|
||||||||||||||||||||||||||||||||||||
|
Write-down
of goodwill and intangibles
|
2,601
|
120
|
—
|
2,721
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||||
|
Total
costs and expenses
|
28,335
|
31,109
|
(385 | ) |
59,059
|
34,163
|
28,796
|
(633 | ) |
62,326
|
29,298
|
25,919
|
(3,932 | ) |
51,285
|
|||||||||||||||||||||||||||||||||
|
Income
before other income and income taxes
|
6,500
|
263
|
385
|
7,148
|
5,739
|
3,541
|
633
|
9,913
|
10,952
|
5,726
|
3,942
|
20,620
|
||||||||||||||||||||||||||||||||||||
|
Other
income
|
—
|
—
|
478
|
478
|
—
|
—
|
13
|
13
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||||
|
Income
before income taxes
|
6,500
|
263
|
863
|
7,626
|
5,739
|
3,541
|
646
|
9,926
|
10,952
|
5,726
|
3,942
|
20,620
|
||||||||||||||||||||||||||||||||||||
|
Income
tax (benefit) provision
|
—
|
—
|
(7,599 | ) | (7,599 | ) |
—
|
—
|
456
|
456
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||||||
|
Income
from discontinued
operations,
net
|
$ |
6,500
|
$ |
263
|
$ |
8,462
|
$ |
15,225
|
$ |
5,739
|
$ |
3,541
|
$ |
190
|
$ |
9,470
|
$ |
10,952
|
$ |
5,726
|
$ |
3,942
|
$ |
20,620
|
||||||||||||||||||||||||
Revenues
(Discontinued Operations)
GBPO
Revenues: During fiscal 2007, revenues from
discontinued GBPO operations decreased $5.1 million, or 12.7%, from fiscal
2006 results. The decrease is attributable primarily to the absence
of $4.7 million of revenue from four payment processing center contracts
that expired during fiscal 2007 and mid-year in fiscal 2006. A shift
to lower cost, state-mandated electronic payment alternatives at another
payment
processing center reduced revenues by $2.7 million during fiscal 2007.
Offsetting these decreases was a $2.3 million increase in revenues from a
call center project that commenced during fiscal 2006. During fiscal
year 2006, revenues from these GBPO operations decreased $0.3 million, or
1.0%, from fiscal 2005 results. This decrease reflects the absence of
$7.8 million of revenues from three contracts that were completed or
nearing completion during fiscal 2006, partially offset by $7.5 million of
additional revenues contributed by a payment processing center that commenced
operations mid-year fiscal 2005.
PSSI
Revenues: During fiscal 2007, revenues from
discontinued PSSI operations decreased $1.0 million, or 3.0%, from fiscal
2006 results. The completion of one unemployment insurance project in
fiscal 2006
23
reduced
revenues by
$2.6 million and a reduction in revenues earned under a systems integration
contract in fiscal 2007 resulted in a $2.0 million decrease in revenues
from fiscal 2006. In addition, the completion of several smaller
projects, primarily within our E-Gov and our financial management systems
operations, contributed another $1.0 million to the overall
decline. These decreases were partially offset by $3.2 million
of revenues from several unemployment insurance contracts and $1.5 million
of revenues from an independent validation and verification, or IV&V,
contract, both of which commenced in fiscal 2006. During fiscal 2006,
revenues from these PSSI operations increased $0.7 million, or 2.2%,
because of the commencement of the previously mentioned unemployment insurance
and IV&V contracts, which contributed $7.1 million of additional
revenues during fiscal 2006. These increases were partially offset by
a $4.5 million reduction in revenue from the completion or nearing
completion of contracts in our financial management systems and E-Gov businesses
and a $1.9 million reduction in revenue under a long-term systems
integration contract.
Direct
Costs (Discontinued Operations)
GBPO
Direct Costs: During fiscal 2007, direct costs from
discontinued GBPO operations decreased $9.7 million, or 30.2%, from fiscal
2006. The decrease is attributable primarily to the absence of
$4.8 million of direct costs from four payment processing center contracts
that expired during fiscal 2007 and mid-year in fiscal 2006. A shift
to lower cost, state-mandated electronic payment alternatives at another
payment
processing center reduced direct costs by $2.4 million during fiscal
2007. In addition, SFAS 144 requires that we suspend depreciation on
all held-for-sale assets, and the absence of this depreciation and amortization
decreased our direct costs by $1.4 million in fiscal 2007. The
remaining $1.1 million decrease in direct costs is due to the completion or
nearing completion of several smaller projects. During fiscal 2006,
direct costs from these GBPO operations increased $4.3 million, or 15.4%,
over fiscal 2005, primarily because of the opening of a new payment processing
center in mid-2005 and the previously mentioned call center, which resulted
in
combined increase in direct costs during fiscal 2006 of
$7.4 million. This increase was partially offset by a
$3.0 million reduction in direct costs resulting from the expiration of
three payment processing center contracts during fiscal 2006.
PSSI
Direct Costs: During fiscal 2007, direct costs from
discontinued PSSI operations decreased $1.2 million, or 5.4%, from fiscal
2006 results. The completion or nearing completion of the previously
described employment insurance, financial management systems, and E-Gov
projects, as well as the reduction in work on the systems integration project,
resulted in a $3.8 million decrease in direct costs during fiscal
2007. These decreases were partially offset by $2.5 million of
additional expenses incurred on the new unemployment insurance and IV&V
contracts discussed above. During fiscal 2006, costs from our PSSI
operations increased $2.7 million, or 13.6%, over fiscal year
2005. Unemployment insurance and IV&V projects that commenced in
fiscal 2006 caused us to incur $4.8 million of additional direct costs in
fiscal 2006. This increase was partially offset by a
$2.1 million reduction in direct costs resulting from the completion of a
number of financial management systems and E-Gov projects, as well as reduced
work on a systems integration project.
Other
Expenses (Discontinued Operations)
GBPO
Other Expenses: During fiscal 2007, general and
administrative expenses for our GBPO discontinued operations increased
$0.7 million primarily because of increased labor and labor-related
expenses of administrative support services. Selling and marketing
expenses increased $0.5 million over the same period last year, primarily
due to the allocation of corporate sales and marketing expenses to the specific
operations they support. During fiscal 2007, we recognized a
$2.6 million impairment loss on our discontinued GBPO assets to write these
assets down to fair value. During fiscal 2006, general and
administrative expenses for our GBPO discontinued operations increased
$0.4 million over fiscal 2005 results. This increase is due
primarily to an increase in labor and labor-related expenses to support
operations within our GBPO operations. Selling and marketing expenses
during fiscal 2006 increased $0.2 million from fiscal 2005 results,
primarily due to an increase in commission paid to employees for successful
marketing efforts in obtaining new contracts.
PSSI
Other Expenses: During fiscal 2007, general and
administrative expenses for discontinued PSSI operations increased
$2.5 million over the same period last year, primarily because of the
recognition of
24
$1.8 million
of preliminary technical feasibility work on an internally developed software
project and a $0.7 million increase in the bad debt reserve for a specific
account. Selling and marketing expenses increased $0.9 million
over fiscal 2006, primarily from the allocation of corporate selling and
marketing expenses to the specific businesses they support. During
fiscal 2006, general and administrative expenses for our discontinued PSSI
operations increased $0.5 million over fiscal 2005, primarily because of
additional cost of labor and labor-related expenses of administrative support
services. Selling and marketing expenses during fiscal 2006 decreased
$0.4 million from fiscal 2005 results, primarily due to the absence of
labor and labor related expenses.
Income
Tax Provision (Discontinued Operations)
We
recorded income
tax provisions of $456,000 in fiscal 2006 relating to our discontinued
Australian 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 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 SFAS
144. 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. In fiscal year 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 to support our organic growth,
including potential future acquisitions. Under our Second Amendment
to Amended and Restated Credit and Security Agreement, as amended, with our
lender, we may obtain up to $7.5 million of letters of
credit. The agreement also grants the lender a perfected security
interest in cash collateral in an amount equal to all issued and to be issued
letters of credit. At September 30, 2007, we had
$5.5 million of letters of credit outstanding under this credit facility,
which are fully collateralized. These letters of credit were issued
to secure performance bonds, insurance and a property lease.
Net
Cash
from Continuing Operations—Operating Activities. During
fiscal 2007,
our operating activities from continuing operations provided $0.4 million
of
cash. This reflects $18.3 million from continuing operations and
$15.8
million of non-cash items. During fiscal 2007, $3.6 million of cash was
generated by a decrease in Prepaid expenses and other current assets,
primarily due to the reduction of long-term retainer receivable and $0.1
million
of cash was generated by an increase in deferred revenue, primarily due to
the
completion or near completion of several projects. An increase in accounts
receivable, net and unbilled receivables used $0.7 million of cash and $0.3
million was used by a decrease in accounts payable.
During
fiscal 2006,
our operating activities from continuing operations used $10.0 million of
cash, including $18.9 million net loss and $7.3 million of non-cash
items. During fiscal 2006, $1.3 million of cash was generated by
a decrease in the balance of accounts receivable, due to our successful
collection efforts and $1.0 million of cash was generated by an increase in
accounts payable and other accrued liabilities. These increases were
partially offset by: a $0.3 million of cash due to a reduction in income
tax receivable; $0.2 million reduction in prepaid expenses and other
assets; and $0.1 million reduction in deferred income.
During
fiscal 2005,
the operating activities of our continuing operations used $11.1 million of
cash, including $19.5 million of net losses from continuing operations and
$7.1 million of non-cash items. During fiscal 2005,
25
$1.6 million
of cash was generated by a decrease in prepaid expenses and other assets
and
$1.1 million was generated by an increase in deferred
income. These increases were offset primarily by $0.8 million of
cash used to support higher accounts receivable levels from increased sales;
$0.4 million of cash used by an increase in accounts receivable and
unbilled receivables; and $0.3 million of cash due to a reduction in income
tax receivable.
Net
Cash
from Continuing Operations—Investing Activities. Net cash
used in our investment activities from continuing operations for fiscal 2007
was
$11.9 million, including $21.0 million of cash used to purchase
marketable securities, offset by $3.6 million of cash provided by sales and
maturities. In addition, $22.6 million of cash was used to
purchase restricted investments required to collateralize performance bonds,
offset by $20.1 million of cash generated by sales and maturities of
restricted investments. In addition, we used $1.0 million of cash to
purchase equipment and software. The repayment of notes and accrued
interest from a former Chief Executive Officer and Chairman of the Board
provided $4.4 million of cash. Proceeds from the sale of an
unconsolidated affiliate provided $4.8 million. In addition,
$0.2 million of cash was used by other investing activities.
Net
cash used in
our investment activities from continuing operations for fiscal 2006 was
$10.7 million, including $46.0 million used to purchase marketable
securities, offset by $44.3 million of cash provided by sales and
maturities. In addition, $14.3 million of cash was used to
purchase restricted investments in the form of certificates of deposit required
to collateralize performance bonds, offset by $6.6 million of cash
generated by sales and maturities of restricted investments. In addition,
we
used $1.3 million of cash to purchase equipment and software.
During
fiscal 2005,
our continuing operations used $4.7 million of cash for investing
activities, including $75.7 million used to purchase available-for-sale
securities, offset by $72.7 million of cash generated by sales and
maturities. In addition, the maturities of restricted investments
generated $3.3 million of cash, the proceeds of which were invested in
securities. The purchase of our investment in CPAS and the assets of
MyLocalGov.com used $4.1 million of cash and the purchase of equipment and
software used $1.2 million of cash. Other investing activities
used $0.1 million of cash. Finally, the repayment of a note from
a former Chief Executive Officer and Chairman of the Board generated
$0.4 million in cash.
Net
Cash
from Continuing Operations—Financing Activities. Net cash
used in our financing activities from continuing operations for fiscal 2007
was
$187,000, including $213,000 provided by the exercise of options to purchase
our
common stock, partially offset by the use of $26,000 for capital lease
obligations.
Net
cash used in
our financing activities from continuing operations for fiscal 2006 was $31,000,
including $69,000 provided by the exercise of options to purchase our common
stock, partially offset by the use of $38,000 for capital lease
obligations.
During
fiscal 2005,
$225,000 was provided by the financing activities of our continuing
operations. The amount represents $302,000 of proceeds provided by
the exercise of options to purchase our common stock, partially offset by
$77,000 of cash used for capital lease obligations.
Net
Cash
from Discontinued Operations—Operating Activities. During fiscal
2007, our operating activities from discontinued operations provided $13.4
million of cash. This reflects $15.2 million of net income offset by $1.8
million used for non-cash items, of which $2.6 million relates to the write-down
of goodwill and held-for-sale assets, offset by the reversal of a $7.6 million
federal income tax reserve, which had been initially recorded in October
2003,
pending an IRS review of a refund we received associated with the disposal
of
our former Australian operations and $0.5 million associated with the
liquidation of our Australian operations.
During
fiscal 2006,
our operating activities from discontinued operations generated
$14.7 million of cash, including $9.5 million of net income and
$5.2 million of non-cash items. During fiscal 2005, the
operating activities of our discontinued operations generated $24.0 million
of cash, including $20.6 million of net income and $3.3 million of
non-cash items.
26
Net
Cash
from Discontinued Operations—Investing Activities. Net cash
used in our investment activities from discontinued operations for fiscal
2007
was $4.0 million, primarily used to purchase equipment and software, and
fund internally developed software. Net cash used in our investment
activities from discontinued operations for fiscal 2006 was $3.5 million,
primarily to purchase equipment and software for a payment processing center
project. During fiscal 2005, our discontinued operations used $8.9 million
of cash for investing activities, primarily used to purchase equipment and
software for a payment processing center.
Net
Cash
from Discontinued Operations—Financing Activities. Net cash
used in our financing activities from discontinued operations for fiscal
2007,
2006 and 2005 was for capital lease obligations. We used $6,000 in
cash in fiscal 2007, $45,000 in fiscal 2006 and $44,000 in fiscal
2005.
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 fiscal 2008. There can be no
assurance that changes will not occur that would consume available capital
resources before such time. Our capital requirements and capital
resources depend on numerous factors, including: potential
acquisitions; 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 principal; our ability to draw on our bank facility; and
employee growth. To the extent that our existing capital resources
are insufficient to meet our capital requirements, we will have to raise
additional funds. There can be no assurance that additional funding,
if necessary, will be available on favorable terms, if at all. The
raising of additional capital may dilute our shareholders’ ownership in
us.
Due
to the current
economic climate, the performance bond market has changed significantly,
resulting in reduced availability of bonds, increased cash collateral
requirements and increased premiums. Some of our government contracts
require a performance bond and future requests for proposal may also require
a
performance bond. Our inability to obtain performance bonds,
increased costs to obtain such bonds or a requirement to pledge significant
cash
collateral in order to obtain such bonds would adversely affect our business
and
our capacity to obtain additional contracts. Increased premiums or a
claim made against a performance bond could adversely affect our earnings
and
cash flow and impair our ability to bid for future contracts.
SIGNIFICANT
ACCOUNTING POLICIES
Our
discussion and
analysis of our financial condition and results of operations is based on
our
Consolidated Financial Statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. Note
2—Summary of Significant Accounting Policies of our Notes to
Consolidated Financial Statements contains a summary of our significant
accounting policies, many of which require the use of estimates and
assumptions. We believe that of our significant policies, the
following are the most noteworthy because they are based upon estimates and
assumptions that require complex subjective judgments by management, which
can
have a material effect on our reported results. Changes in these
estimates or assumptions could materially impact our financial condition
and
results of operations. Actual results could differ materially from
management’s estimates.
Revenue
Recognition. Certain judgments affect the application of our
revenue policy. We derive revenues primarily from transaction and
payment processing, systems design and integration and maintenance and support
services. We recognize revenues in accordance with accounting
principles generally accepted in the United States, which, in some cases,
require us to estimate costs and project status. The primary methods
that we use to recognize revenues are described below:
|
·
|
Transaction-based
contracts—revenues
are
recognized based on fees charged on a per-transaction basis or
fees
charged as a percentage of dollars
processed;
|
27
|
·
|
Fixed-price
contracts—revenues
are
recognized either on a percentage-of-completion basis or when our
customers accept the services we
provide;
|
|
·
|
Time
and materials
contracts—revenues
are
recognized when we perform services and incur
expenses;
|
|
·
|
Delivery-based
contracts—revenues
are
recognized when we have delivered, and the customer has accepted,
the
product or service;
|
|
·
|
Software
licenses—revenues are recognized for perpetual software
licenses upon delivery when the fees are fixed and determinable,
collection is probable and specific objective evidence exists
to determine
the value of any undeliverable elements of the
arrangement. Revenues for software licenses with a fixed term
are recognized on a straight-line period over the term of the
license;
and
|
|
·
|
Software
maintenance contracts—revenues are recognized on a straight-line
basis over the contract term, which is typically one
year.
|
Any
given contract
may contain one or more elements with attributes of more than one of the
contract types described above. In those cases, we account for each
element separately, using the applicable accounting standards. In
addition, we also establish an allowance for credit card reversals and
charge-backs as part of our revenue recognition practices. For all
our operations, the amount and timing of our revenue is difficult to
predict. Any shortfall in revenue or delay in recognizing revenue
could cause our operating results to vary significantly from quarter to quarter
and could result in future operating losses.
Collectibility
of Receivables. Accounts receivable includes funds that are due to
us to compensate us for the services we provide to our customers. In
addition, under certain GBPO contracts we are obligated to fund any payments
that we misapplied and checks that we received for insufficient
funds. We record the amounts that we fund for misapplied payments and
insufficient funds checks as receivables until the amounts can be collected,
or
we determine the amounts cannot be collected. We have established an
allowance for doubtful accounts, which represents our best estimate of probable
losses inherent in the accounts receivable balance. Each quarter we
adjust this allowance based upon management’s review and assessment of each
category of receivable. Factors that we consider to establish this
adjustment include the age of receivables, past payment history and the
demographics of the associated debtors. Our allowance for
uncollectible accounts is based both on the performance of specific debtors
and
upon general categories of debtors.
Goodwill
and
Other Intangible Assets. We review goodwill and
purchased intangible assets with indefinite lives for impairment annually
at the
reporting unit level (operating segment) and whenever events or changes indicate
that the carrying value of an asset may not be recoverable in accordance
with
the Financial Accounting Standards Board, or FASB, Statement of Financial
Accounting Standards, or SFAS, No. 142—Goodwill and Other Intangible
Assets, or SFAS 142. These events or circumstances could include
a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant
portion of a reporting unit. Application of the goodwill impairment
test requires judgment, including the identification of reporting units,
assignment of assets and liabilities to reporting units, assignment of goodwill
to reporting units and determination of the fair value of each reporting
unit. The fair value of each reporting unit is estimated using a
discounted cash flow methodology. This requires significant
judgments, including estimation of future cash flows, which is dependent
on
internal forecasts, estimation of the long-term rate of growth for our business,
the useful life over which cash flows will occur and determination of our
weighted-average cost of capital. Changes in these estimates and
assumptions could materially affect the determination of fair value and/or
goodwill impairment for each reporting unit.
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. When an asset group is classified as
held-for-sale and during subsequent interim periods, we also evaluate goodwill
for impairment at the segment level whenever the
28
businesses
classified as held-for-sale have been fully integrated into the segment and
the
acquired goodwill benefits 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 SFAS 142.
Investments. We
review our investments quarterly to identify other-than-temporary impairments
in
accordance with SFAS 115—Accounting for Certain Investments in Debt and
Equity Securities and SEC Staff Accounting Bulletin
No 59—Accounting for Noncurrent Marketable Equity
Securities. This determination requires us to use significant
judgment in evaluating a number of factors, including: the duration and extent
to which the fair value of an investment is less than its cost; the financial
health of and near-term business outlook for the investee, including factors
such as industry and sector performance, changes in technology and operational
and financing cash flow; and our intent and ability to hold the
investment. When investments exhibit unfavorable attributes in these
and other areas, we conduct additional analyses to determine whether the
fair
value of the investment is other-than-temporarily impaired.
Contingencies. The
outcomes of legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS 5—Accounting for
Contingencies, which requires that an estimated loss from a loss
contingency such as a legal proceeding or claim should be accrued by a charge
to
income if it is probable that an asset has been impaired or a liability has
been
incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued, we evaluate a number of factors including,
the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. Changes in these factors
could materially impact our financial position and our results of
operations.
Income
Taxes. SFAS 109—Accounting for Income Taxes, or SFAS 109,
establishes financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes are to
recognize the amount of taxes payable or refundable for the current year
and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity’s financial statements or tax
returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements
or
tax returns. Variations in the actual outcome of these future tax
consequences could materially impact our financial position, results of
operations or cash flows.
Discontinued
Operations. SFAS 144 provides guidance on the
presentation of discontinued operations from the disposal of a segment to
the
disposal of a component of the entity, as well as the timing of this
presentation. We must use our judgment to determine whether
particular operations are considered a component of the entity and when the
operations should no longer be classified as continuing operations.
Share-Based
Compensation. SFAS 123(R)—Share-Based Payment, or
SFAS 123R, requires public companies to expense employee share-based payments
based on fair value. We must use our judgment to determine key
factors in determining the fair value of the share-based payment, such as
volatility, forfeiture rates and the expected term in which the options will
be
outstanding.
RECENT
ACCOUNTING STANDARDS
SFAS
157—Fair Value
Measurements.In
October 2006, FASB issued Statement of Financial Accounting Standards No.
157—Fair Value
Measurements, or SFAS
157. This standard establishes a framework for measuring fair value
and expands disclosures about fair value measurement of a company’s assets and
liabilities. This standard also requires that the fair value
measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and, generally, must be applied prospectively. We
expect to adopt this standard beginning in October 2008. We do not
expect that the adoption of SFAS 157 will have a material impact on our
financial position or 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
29
income
taxes
recognized in an enterprise’s financial statements in accordance with SFAS
109. FIN 48 is effective for fiscal years beginning after December
15, 2006. We will implement FIN 48 beginning on October 1,
2007. We do not expect that the adoption of this standard will have a
material effect.
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. We do not believe
that the adoption of SFAS 159 will have a material effect on our financial
position or results of operations.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Indemnification
Agreements
We
have
indemnification agreements with each of our directors and executive officers
and
one non-executive officer. These agreements provide such persons with
indemnification, to the maximum extent permitted by our Articles of
Incorporation or Bylaws or by 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 behalf of Tier, subject to certain
limitations.
Employment
Agreement
As
of
September 30, 2007, five executives, one former executive and 24 other key
managers had employment and change of control agreements with us. If
certain termination or change of control events were to occur under these
contracts, we could be required to pay up to
$5.5 million. During October 2007, we entered into employment
agreements with two of our executives, which supersede the change of control
agreements referenced above for these executives. See Note
16—Subsequent Events for information regarding these employment
agreements and a key change to the status of two of our executive
officers.
As
of
September 30, 2007, we also had agreements with 32 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 fiscal 2008, we expect to
recognize $0.9 million in expense relating to these
agreements. During fiscal 2009, we expect to recognize
$0.3 million.
As
of
September 30, 2007, we also had change of control agreements with 38 key
GBPO and PSSI employees. Under these agreements, individuals are
entitled to receive three to twelve months of their base salaries plus three
to
twelve months COBRA benefits should certain change of control events
occur. Under these agreements we would be required to pay up to
$2.4 million.
We
believe it is
important to have these contracts in place in order to retain key individuals
and to ensure a continuity of operations, especially in fiscal 2008 when
we
expect to finalize the divestiture of certain business units and to restructure
our corporate operations.
Contractual
Obligations
We
have contractual
obligations to make future payments on lease agreements, none of which have
remaining terms that extend beyond five years. Additionally, in the
normal course of business, we enter into contractual arrangements whereby
we
commit to future purchases of products or services from unaffiliated
30
parties. Purchase
obligations are legally binding arrangements whereby we agree to purchase
products or services with a specific minimum quantity defined at a fixed
minimum
or variable price over a specified period of time. The most
significant purchase obligation is for contracts with our
subcontractors. The following table presents our expected payments
for contractual obligations that were outstanding at September 30,
2007. All of these obligations are due within five
years.
|
(in
thousands)
|
Total
|
Due
in 1 year or less
|
Due
after 1 year through 3 years
|
Due
after 3 years through 5 years
|
||||||||||||
|
Capital
lease
obligations (equipment)
|
$ |
108
|
$ |
47
|
$ |
58
|
$ |
3
|
||||||||
|
|
||||||||||||||||
|
Operating
lease obligations:
|
||||||||||||||||
|
Facilities
leases
|
6,360
|
3,339
|
3,021
|
—
|
||||||||||||
|
Equipment
leases
|
87
|
58
|
29
|
—
|
||||||||||||
|
|
||||||||||||||||
|
Purchase
obligations:
|
||||||||||||||||
|
Subcontractor
|
1,974
|
1,818
|
156
|
—
|
||||||||||||
|
Purchase
order
|
274
|
274
|
—
|
—
|
||||||||||||
|
Total
contractual obligations
|
$ |
8,803
|
$ |
5,536
|
$ |
3,264
|
$ |
3
|
||||||||
ITEM
7A—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 September 30, 2007,
the fair value of the portfolio would decline by about $23,000.
31
|
Report
of
Independent Registered Public Accounting Firm
|
33
|
|
Consolidated
Balance Sheets
|
34
|
|
Consolidated
Statements of Operations
|
35
|
|
Consolidated
Statements of Shareholders' Equity
|
36
|
|
Consolidated
Statements of Comprehensive (Loss) Income
|
37
|
|
Consolidated
Statements of Cash Flows
|
38
|
|
Notes
to
Consolidated Financial Statements
|
40
|
|
Schedule
II—Valuation and Qualifying Accounts
|
63
|
32
To
the
Board of Directors and Shareholders
Tier
Technologies, Inc.
Reston,
Virginia
We
have
audited the consolidated balance sheets of Tier Technologies, Inc. and
subsidiaries as of September 30, 2007 and 2006, and the related consolidated
statements of operations, shareholders’ equity, comprehensive (loss) income, and
cash flows for each of the three years in the period ended September 30,
2007. Our audits also included the financial statement schedule of
Tier Technologies, Inc. listed in Item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Tier Technologies, Inc.
and
subsidiaries as of September 30, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period
ended
September 30, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Tier
Technologies, Inc. and subsidiaries changed their method of accounting for
stock-based compensation in accordance with guidance provided in Statement
of
Financial Standards No. 123(R), “Share-Based Payment”, effective October 1,
2005.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Tier Technologies,
Inc.
and subsidiaries’ internal control over financial reporting as of September 30,
2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated December 13, 2007 expressed an unqualified
opinion on management’s assessment of the effectiveness of Tier Technologies,
Inc.’s internal control over financial reporting and an unqualified
opinion on the effectiveness of Tier Technologies, Inc.’s internal control over
financial reporting.
/s/
McGladrey & Pullen, LLP
Vienna,
Virginia
December
13, 2007
33
TIER
TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
September
30,
|
||||||||
|
(in
thousands)
|
2007
|
2006
|
||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
16,516
|
$ |
18,468
|
||||
|
Investments
in marketable securities
|
57,815
|
36,950
|
||||||
|
Accounts
receivable, net
|
5,083
|
5,274
|
||||||
|
Unbilled
receivables
|
546
|
1,916
|
||||||
|
Prepaid
expenses and other current assets
|
2,160
|
2,615
|
||||||
|
Current
assets—held-for-sale
|
36,705
|
36,612
|
||||||
|
Total
current assets
|
118,825
|
101,835
|
||||||
|
Property, equipment and software, net
|
3,745
|
3,954
|
||||||
|
Goodwill
|
14,526
|
22,980
|
||||||
|
Other intangible assets, net
|
17,640
|
21,879
|
||||||
|
Restricted investments
|
11,526
|
12,287
|
||||||
|
Investment in unconsolidated affiliate
|
—
|
3,978
|
||||||
|
Other assets
|
162
|
2,947
|
||||||
|
Total
assets
|
$ |
166,424
|
$ |
169,860
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts
payable
|
$ |
878
|
$ |
871
|
||||
|
Accrued
compensation liabilities
|
4,710
|
3,605
|
||||||
|
Accrued
subcontractor expense
|
522
|
426
|
||||||
|
Accrued
discount fees
|
4,529
|
3,631
|
||||||
|
Deferred
income
|
2,649
|
2,520
|
||||||
|
Other
accrued liabilities
|
4,160
|
6,459
|
||||||
|
Liabilities
of discontinued operations
|
—
|
7,599
|
||||||
|
Current
liabilities—held-for-sale
|
11,262
|
9,180
|
||||||
|
Total
current liabilities
|
28,710
|
34,291
|
||||||
|
Other liabilities
|
200
|
1,359
|
||||||
|
Total
liabilities
|
28,910
|
35,650
|
||||||
|
Commitments
and contingencies (Note 8)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, no par value; authorized shares: 4,579;
no
shares issued and outstanding
|
—
|
—
|
||||||
|
Common
stock and paid-in capital—Shares authorized: 44,260;
shares
issued: 20,425 and 20,383; and shares outstanding: 19,541 and
19,499
|
186,417
|
184,387
|
||||||
|
Treasury
stock—at cost, 884 shares
|
(8,684 | ) | (8,684 | ) | ||||
|
Notes
receivable from related parties
|
—
|
(4,275 | ) | |||||
|
Accumulated
other comprehensive loss
|
—
|
(33 | ) | |||||
|
Accumulated
deficit
|
(40,219 | ) | (37,185 | ) | ||||
|
Total
shareholders’ equity
|
137,514
|
134,210
|
||||||
|
Total
liabilities and shareholders’ equity
|
$ |
166,424
|
$ |
169,860
|
||||
34
TIER
TECHNOLOGIES, INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||||
|
Revenues
|
$ |
111,148
|
$ |
96,492
|
$ |
78,695
|
||||||
|
Costs
and expenses:
|
||||||||||||
|
Direct
costs
|
83,891
|
71,670
|
59,951
|
|||||||||
|
General
and administrative
|
27,486
|
32,860
|
24,176
|
|||||||||
|
Selling
and marketing
|
8,243
|
9,162
|
8,836
|
|||||||||
|
Depreciation
and amortization
|
4,573
|
5,133
|
5,973
|
|||||||||
|
Write-down
of goodwill and intangible assets
|
9,232
|
—
|
—
|
|||||||||
|
Total
costs and expenses
|
133,425
|
118,825
|
98,936
|
|||||||||
|
Loss
from continuing operations before other income and income
taxes
|
(22,277 | ) | (22,333 | ) | (20,241 | ) | ||||||
|
Other
income:
|
||||||||||||
|
Income
(loss) from investments:
|
||||||||||||
|
Equity
in net income (loss) of unconsolidated affiliate
|
475
|
445
|
(168 | ) | ||||||||
|
Realized
foreign currency gain
|
239
|
—
|
—
|
|||||||||
|
Gain
on sale of unconsolidated affiliate
|
80
|
—
|
—
|
|||||||||
|
Loss
on sale of investment
|
—
|
—
|
(501 | ) | ||||||||
|
Interest
income, net
|
3,300
|
2,938
|
1,543
|
|||||||||
|
Other
income
|
—
|
74
|
—
|
|||||||||
|
Total
other income
|
4,094
|
3,457
|
874
|
|||||||||
|
Loss
from continuing operations before income taxes
|
(18,183 | ) | (18,876 | ) | (19,367 | ) | ||||||
|
Income
tax provision
|
76
|
45
|
127
|
|||||||||
|
Loss
from continuing operations
|
(18,259 | ) | (18,921 | ) | (19,494 | ) | ||||||
|
Income
from discontinued operations, net
|
15,225
|
9,470
|
20,620
|
|||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
||||
|
(Loss)
earnings per share—Basic and diluted:
|
||||||||||||
|
From
continuing operations
|
$ | (0.94 | ) | $ | (0.97 | ) | $ | (1.00 | ) | |||
|
From
discontinued operations
|
0.78
|
0.49
|
1.06
|
|||||||||
|
(Loss)
earnings per share—Basic and diluted
|
$ | (0.16 | ) | $ | (0.48 | ) | $ |
0.06
|
||||
|
Weighted
average common shares used in computing:
|
||||||||||||
|
Basic
and diluted (loss) earning per share
|
19,512
|
19,495
|
19,470
|
|||||||||
See
Notes to Consolidated Financial Statements
35
TIER
TECHNOLOGIES, INC.
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’
EQUITY
|
|
Common
Stock Issued
|
Treasury
Stock
|
|||||||||||||||||||||||||||||||||||
|
(in
thousands)
|
Shares
|
Amount
|
Paid-in-
capital
|
Shares
|
Amount
|
Notes
receivable from related parties
|
Accumulated
other comprehensive (loss) income
|
Accumulated
deficit
|
Total
shareholders' equity
|
|||||||||||||||||||||||||||
|
Balance
at September 30, 2004
|
20,324
|
$ |
180,820
|
$ |
659
|
(884 | ) | $ | (8,684 | ) | $ | (4,113 | ) | $ | (128 | ) | $ | (28,860 | ) | $ |
139,694
|
|||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
1,126
|
1,126
|
|||||||||||||||||||||||||||
|
Exercise
of stock
options
|
10
|
54
|
6
|
—
|
—
|
—
|
—
|
—
|
60
|
|||||||||||||||||||||||||||
|
Common
stock issuance—business
combinations
|
7
|
79
|
—
|
—
|
—
|
—
|
—
|
—
|
79
|
|||||||||||||||||||||||||||
|
Common
stock
issuance—other
|
33
|
242
|
—
|
—
|
—
|
—
|
—
|
—
|
242
|
|||||||||||||||||||||||||||
|
Conversion
of Class B common
stock to $0.01 par
value common stock
|
—
|
(180,991 | ) |
180,991
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||||
|
Notes
and interest receivable
from
related parties
|
—
|
—
|
206
|
—
|
—
|
115
|
—
|
—
|
321
|
|||||||||||||||||||||||||||
|
Unrealized
gain on
investments
|
—
|
—
|
—
|
—
|
—
|
—
|
70
|
—
|
70
|
|||||||||||||||||||||||||||
|
Realized
gain on
investments
|
—
|
—
|
—
|
—
|
—
|
—
|
19
|
—
|
19
|
|||||||||||||||||||||||||||
|
Foreign
currency translation
adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
(72 | ) |
—
|
(72 | ) | |||||||||||||||||||||||||
|
Balance
at September 30, 2005
|
20,374
|
204
|
181,862
|
(884 | ) | (8,684 | ) | (3,998 | ) | (111 | ) | (27,734 | ) |
141,539
|
||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(9,451 | ) | (9,451 | ) | |||||||||||||||||||||||||
|
Exercise
of stock
options
|
9
|
—
|
69
|
—
|
—
|
—
|
—
|
—
|
69
|
|||||||||||||||||||||||||||
|
Interest
receivable from
related
parties
|
—
|
—
|
277
|
—
|
—
|
(277 | ) |
—
|
—
|
—
|
||||||||||||||||||||||||||
|
Share-based
payment
|
—
|
—
|
1,975
|
—
|
—
|
—
|
—
|
—
|
1,975
|
|||||||||||||||||||||||||||
|
Unrealized
gain on
investments
|
—
|
—
|
—
|
—
|
—
|
—
|
53
|
—
|
53
|
|||||||||||||||||||||||||||
|
Foreign
currency translation
adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
25
|
—
|
25
|
|||||||||||||||||||||||||||
|
Balance
at September 30, 2006
|
20,383
|
204
|
184,183
|
(884 | ) | (8,684 | ) | (4,275 | ) | (33 | ) | (37,185 | ) |
134,210
|
||||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(3,034 | ) | (3,034 | ) | |||||||||||||||||||||||||
|
Exercise
of stock
options
|
42
|
—
|
213
|
—
|
—
|
—
|
—
|
—
|
213
|
|||||||||||||||||||||||||||
|
Notes
and interest receivable
from
related parties
|
—
|
—
|
126
|
—
|
—
|
4,275
|
—
|
—
|
4,401
|
|||||||||||||||||||||||||||
|
Share-based
payment
|
—
|
—
|
1,691
|
—
|
—
|
—
|
—
|
—
|
1,691
|
|||||||||||||||||||||||||||
|
Unrealized
gain on
investments
|
—
|
—
|
—
|
—
|
—
|
—
|
2
|
—
|
2
|
|||||||||||||||||||||||||||
|
Impact
of realized foreign
currency
gains
|
—
|
—
|
—
|
—
|
—
|
—
|
(239 | ) |
—
|
(239 | ) | |||||||||||||||||||||||||
|
Foreign
currency translation
adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
270
|
—
|
270
|
|||||||||||||||||||||||||||
|
Balance
at September 30, 2007
|
20,425
|
$ |
204
|
$ |
186,213
|
(884 | ) | $ | (8,684 | ) | $ |
—
|
$ |
—
|
$ | (40,219 | ) | $ |
137,514
|
|||||||||||||||||
See
Notes to Consolidated Financial Statements
36
TIER
TECHNOLOGIES, INC.
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
||||
|
Other
comprehensive (loss) income, net of taxes:
|
||||||||||||
|
Investments
in marketable securities:
|
||||||||||||
|
Unrealized gain
|
2
|
53
|
19
|
|||||||||
|
Less
impact of realized
losses (transferred from accumulated other comprehensive income
and
included in net income)
|
—
|
—
|
70
|
|||||||||
|
Foreign
currency translation:
|
||||||||||||
|
Foreign currency translation adjustment
|
270
|
25
|
(72 | ) | ||||||||
|
Less
impact of
realized gains (transferred from accumulated other comprehensive
income
and included in net loss)
|
(239 | ) |
—
|
—
|
||||||||
|
Other
comprehensive income
|
33
|
78
|
17
|
|||||||||
|
Comprehensive
(loss) income
|
$ | (3,001 | ) | $ | (9,373 | ) | $ |
1,143
|
||||
See
Notes to Consolidated Financial Statements
37
TIER
TECHNOLOGIES, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended September 30,
|
||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
||||
|
Less:
Income from discontinued operations, net
|
15,225
|
9,470
|
20,620
|
|||||||||
|
Loss
from continuing operations, net
|
(18,259 | ) | (18,921 | ) | (19,494 | ) | ||||||
|
Non-cash
items included in net income from continuing operations:
|
||||||||||||
|
Depreciation
and amortization
|
4,664
|
5,343
|
6,106
|
|||||||||
|
(Gain)
loss on retirement of equipment and software
|
(8 | ) |
76
|
41
|
||||||||
|
Provision
for doubtful accounts
|
(49 | ) |
809
|
259
|
||||||||
|
Equity
in net income of unconsolidated affiliate
|
(475 | ) | (445 | ) |
168
|
|||||||
|
Gain
on sale of unconsolidated affiliate
|
(80 | ) |
—
|
—
|
||||||||
|
Foreign
currency translation gain realized on sale of unconsolidated
affiliate
|
(239 | ) |
—
|
—
|
||||||||
|
Share-based
compensation
|
1,520
|
1,768
|
—
|
|||||||||
|
Accrued
forward loss on contracts
|
3
|
(270 | ) |
—
|
||||||||
|
Settlement
of pension contract
|
1,254
|
—
|
—
|
|||||||||
|
Write-down
of goodwill and intangible assets
|
9,232
|
—
|
571
|
|||||||||
|
Other
non-cash items included in net income
|
8
|
37
|
(90 | ) | ||||||||
|
Net
effect of changes in assets and liabilities:
|
||||||||||||
|
Accounts
receivable and unbilled receivables
|
(667 | ) |
1,289
|
(359 | ) | |||||||
|
Prepaid
expenses and other assets
|
3,579
|
(229 | ) |
1,638
|
||||||||
|
Accounts
payable and accrued liabilities
|
(262 | ) |
961
|
(800 | ) | |||||||
|
Income
taxes receivable
|
3
|
(336 | ) | (262 | ) | |||||||
|
Deferred
income
|
129
|
(70 | ) |
1,112
|
||||||||
|
Cash
provided by (used in) operating activities from continuing
operations
|
353
|
(9,988 | ) | (11,110 | ) | |||||||
|
Cash
provided by operating activities from discontinued
operations
|
13,420
|
14,748
|
23,960
|
|||||||||
|
Cash
provided by operating activities
|
13,773
|
4,760
|
12,850
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchases
of marketable securities
|
(21,012 | ) | (45,950 | ) | (75,702 | ) | ||||||
|
Sales
and maturities of marketable securities
|
3,550
|
44,278
|
72,669
|
|||||||||
|
Purchases
of restricted investments
|
(22,611 | ) | (14,255 | ) |
—
|
|||||||
|
Sales
and maturities of restricted investments
|
20,098
|
6,570
|
3,328
|
|||||||||
|
Purchase
of equipment and software
|
(917 | ) | (1,312 | ) | (1,225 | ) | ||||||
|
Repayment
of notes and accrued interest from related parties
|
4,401
|
—
|
411
|
|||||||||
|
Proceeds
from sale of unconsolidated affiliate
|
4,784
|
—
|
—
|
|||||||||
|
Business
combinations, net of cash acquired
|
—
|
—
|
(4,135 | ) | ||||||||
|
Other
investing activities
|
(164 | ) |
—
|
(64 | ) | |||||||
|
Cash
used in investing activities for continuing operations
|
(11,871 | ) | (10,669 | ) | (4,718 | ) | ||||||
|
Cash
used in investing activities for discontinued operations
|
(4,024 | ) | (3,458 | ) | (8,916 | ) | ||||||
|
Cash
used in investing activities
|
(15,895 | ) | (14,127 | ) | (13,634 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Net
proceeds from issuance of common stock
|
213
|
69
|
302
|
|||||||||
|
Capital
lease obligations and other financing arrangements
|
(26 | ) | (38 | ) | (77 | ) | ||||||
|
Cash
provided by financing activities from continuing
operations
|
187
|
31
|
225
|
|||||||||
|
Cash
used in financing activities for discontinued operations
|
(6 | ) | (45 | ) | (44 | ) | ||||||
|
Cash
provided by (used in) financing activities
|
181
|
(14 | ) |
181
|
||||||||
|
Effect
of exchange rate changes on cash
|
(11 | ) |
17
|
(60 | ) | |||||||
|
Net
(decrease) in cash and cash equivalents
|
(1,952 | ) | (9,364 | ) | (663 | ) | ||||||
|
Cash
and cash equivalents at beginning of period
|
18,468
|
27,832
|
28,495
|
|||||||||
|
Cash
and cash equivalents at end of period
|
$ |
16,516
|
$ |
18,468
|
$ |
27,832
|
||||||
38
TIER
TECHNOLOGIES, INC.
|
|
CONSOLIDATED
SUPPLEMENTAL CASH FLOW
INFORMATION
|
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
|
$ |
13
|
$ |
13
|
$ |
23
|
||||||
|
Income
taxes paid, net
|
$ |
128
|
$ |
248
|
$ |
34
|
||||||
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||||||
|
Interest
accrued on shareholder notes
|
$ |
126
|
$ |
277
|
$ |
206
|
||||||
|
Equipment
acquired under capital lease obligations and other financing
arrangements
|
$ |
26
|
$ |
78
|
$ |
40
|
||||||
|
Class
B common stock issued in business combination and
acquisition
|
$ |
—
|
$ |
—
|
$ |
79
|
||||||
See
Notes to Consolidated Financial Statements
39
|
|
NOTE
1—ORGANIZATIONAL OVERVIEW
|
Tier
Technologies,
Inc., or Tier or the Company, provides federal, state and local government
and
other public sector clients with electronic payment and other transaction
processing services, as well as software and systems integrations
services. During fiscal 2007, we undertook a strategic initiative
that evaluated the risks, costs, benefits and growth potential of each of
our
product lines and services. As a result of this process, we concluded
that our company's focus should be on our core business—Electronic Payment
Processing, or EPP. As such, we began to seek buyers for certain
portions of our business in April 2007.
At
the beginning of
fiscal 2007 our company was organized into three segments: EPP,
Government Business Process Outsourcing, or GBPO, and Packaged Software and
Systems Integration, or PSSI. During fiscal 2007, we reorganized our
business to facilitate the growth of our electronic payment processing services,
as well as the timely and efficient transfer of the operations that we
held-for-sale to potential buyers. By September 30, 2007, our number
of segments evolved from three segments down to one operating segment, certain
wind-down operations and the operations of our discontinued, or held-for-sale
businesses.
As
of September 30,
2007, our Continuing Operations were composed
of:
|
·
|
Electronic
Payment Processing, or EPP—provides electronic payment processing
options, including payment of taxes, fees and other obligations
owed to
government entities, educational institutions, utilities and other
public
sector clients. EPP services are provided by our two wholly
owned subsidiaries: Official Payments Corporation, or OPC, and
EPOS Corporation, or EPOS;
|
|
·
|
Wind-down
operations—represents portions of our GBPO and PSSI operations
that we expect to wind-down over a five-year period because they
are
neither compatible with our long-term strategic direction nor
complementary with the other businesses that we are
divesting. These operations
include:
|
|
o
|
Voice
and Systems Automation (formerly part of GBPO)—provides call
center interactive voice response systems and support services,
including
customization, installation and
maintenance;
|
|
o
|
Health
and Human Services (formerly part of GBPO)—provides certain
consulting services to state agencies;
and
|
|
o
|
Public
Pension Administration Systems (formerly part of PSSI)—provides
services to support the design, development and implementation
of pension
applications for state, county and city
governments.
|
|
·
|
Corporate
Operations—represents those functions that support our corporate
governance, as well as certain shared-services, including information
technology and business
development.
|
|
Our
Discontinued Operations, or held-for sale
businesses, represent those portions of GBPO and PSSI for which
we are
seeking buyers, including the
following:
|
|
·
|
GBPO
Discontinued Operations—include our child support payment
processing, child support financial institution data match services,
and
computer telephony and call centers operations;
and
|
|
·
|
PSSI
Discontinued Operations—include our financial management systems,
unemployment insurance administration systems, systems integration
and
independent validation and verification lines of
business.
|
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). Previously, we reported our investment in CPAS under the
equity method of accounting.
All historical financial information presented in our Consolidated Financial Statements and Notes to Our Consolidated Financial Statements has been reclassified to conform to the current year’s presentation. For additional information about our continuing operations, see Note 12—Segments. For additional information about the businesses that we have classified as held-for-sale, see Note 15—Discontinued Operations.
40
|
|
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
SIGNIFICANT
ACCOUNTING POLICIES
Basis
of
Presentation. These financial statements and the
accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America and conform to Regulation
S-X
under the Securities Exchange Act of 1934, as amended. We believe we
have made all necessary adjustments so that the financial statements are
presented fairly and that all such adjustments are of a normal recurring
nature.
Principles
of Consolidation. The financial statements include the
accounts of Tier Technologies, Inc. and its
subsidiaries. Intercompany transactions and balances have been
eliminated. Prior to the sale of our investment in CPAS, Inc. (an
investment in which we exercised significant influence, but did not control
or
act as the primary beneficiary) in June 2007, we accounted for our 46.96%
interest in CPAS using the equity method, under which our share of CPAS’ net
income (loss) was recognized in the period in which it was earned by
CPAS.
Use
of
Estimates. Preparing financial statements requires
management to make estimates and assumptions that affect the amounts reported
on
our Consolidated Financial Statements and accompanying notes. We
believe that near-term changes could reasonably impact the following
estimates: project costs and percentage of completion; effective tax
rates; deferred taxes and associated valuation allowances; collectibility
of
receivables; share-based compensation; and valuation of goodwill, intangibles
and investments. Although we believe the estimates and assumptions
used in preparing our Consolidated Financial Statements and notes thereto
are
reasonable in light of known facts and circumstances, actual results could
differ materially.
Foreign
Currencies. We use the local foreign currency as the
functional currency to translate our investment in certain inactive operations
and our former investment in CPAS. The assets and liabilities of the
subsidiaries are translated into U.S. dollars using exchange rates in effect
at
the balance sheet date, revenues and expenses are translated using the average
exchange rate for the period and gains and losses from this translation process
are included in Other comprehensive income in the shareholders’ equity
section of our Consolidated Balance Sheets.
Cash
and
Cash Equivalents. Cash equivalents are highly liquid
investments with maturities of three months or less at the date of purchase
and
are stated at amounts that approximate fair value, based on quoted market
prices. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts with financial
institutions.
In
the course of
operating a payment processing center for a client, we have maintained one
or
more bank accounts to deposit and disburse funds for the client. The
cash balance of the accounts and the related liability of the same amount
was
netted in the accompanying Consolidated Balance Sheets, since we had the
right
to offset such amounts. Beginning on July 1, 2007 we no longer
had transactions which required the maintenance of a cash account with an
offsetting liability.
Revenue
Recognition and Credit Risk. We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the
fee is
fixed or determinable and collectibility is probable. We assess
collectibility based upon our clients’ financial condition and prior payment
history, as well as our performance under the contract. When we enter into
certain arrangements where we are obligated to deliver multiple products
and/or
services, we account for each unit of the contract separately when each unit
provides value to the customer on a standalone basis and there is objective
evidence of the fair value of the standalone unit.
Typically,
our
payment processing and call center operations earn revenues based upon a
specific fee per transaction or percentage of the dollar amount
processed. We recognize these revenues in the month that the service
is provided.
We
use the
percentage-of-completion method to recognize revenues for software licenses
and
related services for projects that require significant modification or
customization that is essential to the functionality of the
software. We record a provision in those instances in which we
believe a contract will probably generate a net loss and we can reasonably
estimate this loss. If we cannot reasonably estimate the loss, we
limit the amount of revenue that we recognize to the costs we have incurred,
until we can estimate the total loss. Advance
41
payments
from
clients and amounts billed to clients in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in
advance of contractual billing are recorded as unbilled
receivables.
For
the sale of
software that does not require significant modification, we recognize revenues
from license fees when persuasive evidence of an agreement exists, delivery
of
the software has occurred, no significant implementation or integration
obligations exist, the fee is fixed or determinable and collectibility is
probable. If we do not believe it is probable that we will collect a
fee, we do not recognize the associated revenue until we collect the
payment.
For
software
license arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenues to each component of the
arrangement using the residual value method of accounting based on the fair
value of the undelivered elements, which is specific to our
company. Fair value for the maintenance and support obligations for
software licenses is based upon the specific renewal rates.
Our
license
agreements do not offer return rights or price protection; therefore, we
do not
have provisions for sales returns on these types of agreements. We
do, however, offer routine, short-term warranties that our proprietary software
will operate free of material defects and in conformity with written
documentation. Under these agreements, if we have an active
maintenance agreement, we record a liability for our estimated future warranty
claims, based on historical experience. If there is no maintenance
contract, the warranty is considered implied maintenance and we defer revenues
consistent with other maintenance and support obligations.
When
we provide
ongoing maintenance and support services, the associated revenue is deferred
and
recognized on a straight-line basis over the life of the related
contract—typically one year. Generally, we recognize the revenues
earned for non-essential training and consulting support when the services
are
performed.
Finally,
under the
terms of a number of our contracts, we are reimbursed for certain costs that
we
incur to support the project, including postage, stationery and
printing. We include the amounts that we are entitled to be
reimbursed and any associated mark-up on these expenses in Revenues and
include the expenses in Direct costs in our Consolidated Statements of
Operations.
Allowance
for Doubtful Accounts. The allowance for doubtful accounts
reflects our best estimate of probable losses inherent in the accounts
receivable balance. We determine the allowance based on known
troubled accounts, historical experience and other currently available
evidence. In addition, our OPC subsidiary records a sales return
allowance, calculated monthly at 0.35% of gross revenues on the applicable
contracts, to establish an allowance for the reversal of convenience
fees. Convenience fees are charged to cardholders on a per
transaction basis and are reinstated to cardholders upon an approved payment
reversal. Additions to the provision for bad debts are included in
General and administrative on our Consolidated Statements of
Operations, while the provision for sales return allowance is included in
Revenues. The balance of our allowance for doubtful accounts
for continuing operations was $1.2 million at September 30, 2007 and
$0.9 million at September 30, 2006.
Fair
Value
of Financial Instruments. The carrying amounts of certain
financial instruments, including cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued liabilities, approximate fair value
due
to their short maturities.
Investments
in Marketable Securities. Investments in marketable
securities are composed of available-for-sale securities. Restricted investments
pledged in connection with performance bonds and real estate operating leases
are reported as Restricted investments on the Consolidated Balance
Sheets. Unrestricted investments with remaining maturities of
90 days or less (as of the date that we purchased the securities) are
classified as cash equivalents. 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. Our investments are
categorized as available-for-sale and 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. Realized gains and losses and declines in fair value
judged to be other-than-temporary are included in Loss on sale of
investment. Interest earned is included in Interest income,
net.
42
Advertising
Expense. We expense advertising costs, net of cooperative
advertising cash contributions received from partners, during the period
the
advertising takes place. We incurred $0.7 million during fiscal
year 2007, $0.4 million during fiscal 2006 and $0.4 million during
fiscal 2005, of net advertising expenses from continuing
operations.
Property,
Equipment and Software. Property, equipment and software are
stated at cost and depreciated using the straight-line method over the
shorter
of the estimated useful lives of the assets or the lease terms, ranging
from
three to seven years. When assets are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts
and any
resulting gain or loss is reflected in operations in the period
realized. We recognize the fair value of the liability for
conditional asset retirement obligations when incurred—generally upon
acquisition, construction or development and/or through the normal operation
of
the asset.
We expense the cost of software that we expect to sell, lease or market as research and development costs, prior to the time that technical feasibility is established. Once technical feasibility is established, we capitalize software development costs until the date that the software is available for sale. Similarly, we expense the costs incurred for software that we expect to use internally until the preliminary project stage has been completed. Subsequently, we capitalize direct service and material costs, as well as direct payroll and payroll-related costs and interest costs incurred during development. We amortize capitalized software costs at the greater of (a) the ratio of current revenues to total projected revenues or (b) the straight-line method over the estimated remaining economic life of the software.
Goodwill. Goodwill
is tested for impairment on an annual basis during the fourth fiscal quarter
and
between annual tests if indicators of potential impairment exist, using a
fair-value based approach. During the third quarter of fiscal 2007,
due to our intentions to sell the majority of our GBPO and PSSI operations
we
tested the goodwill associated with the assets of these operations for
impairment. We recorded goodwill impairment of $8.5 million for
continuing operations and $2.5 million for discontinued operations during
fiscal 2007, as a result of the reclassification of assets and liabilities
to a
held-for-sale status.
Intangible
Assets. We amortize intangible assets with finite lives
using the straight-line method over their estimated benefit period, ranging
from
one to ten years. We evaluate the recoverability of intangible assets
periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment
exists. Initially in April 2007, we classified our VSA operations as
held-for-sale. At that time we suspended all depreciation and
amortization of long-term VSA assets in accordance with SFAS
144. When we reclassified the VSA assets back to held and used in
September 2007, we determined that the carrying value at March 31, 2007,
adjusted for depreciation that would have been recognized through September
2007, was less than fair value at September 30, 2007. To comply
with this requirement, we reduced the fair value of our intangible assets
by
$0.7 million. In addition, we recognized an impairment loss of
$0.2 million on two of our other wind-down businesses during fiscal 2007,
which we recorded as a reduction of intangible assets.
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 and during each subsequent reporting period, we also evaluate
goodwill for impairment at the segment level, whenever the businesses classified
as held-for-sale have been fully integrated into the segment and the acquired
goodwill benefits the rest of the reporting unit. In the event that
the asset group being disposed of represents a business that is part of a
segment, we allocate goodwill to be included in the carrying amount of the
business based on the relative fair values of the business to be disposed
of in
relation to the remaining businesses in the segment, in accordance with
Statement of Accounting Standards No. 142—Goodwill and Other
Intangibles.
(Loss)
Earnings Per Share. Basic (loss) earnings per share are
computed by dividing net (loss) income by the weighted-average number of
shares
of common stock outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
43
Share-Based
Payment. Effective October 1, 2005, we adopted
Statement of Financial Accounting Standards No. 123(R)—Share-Based
Payment, or SFAS 123R, which requires companies to expense share-based
compensation based on fair value.
Income
Taxes. We account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109—Accounting for
Income Taxes, or SFAS 109, which requires the use of the liability method
in accounting for income taxes. Under this method, deferred income
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted
tax rules and laws that are expected to be in effect when the differences
are
expected to reverse. Valuation allowances are established against net
deferred tax assets when it is more likely than not that some portion or
all of
the deferred tax assets will not be realized.
Comprehensive
(Loss) Income. Our comprehensive income is composed of net
(loss) income, foreign currency translation adjustments and unrealized gains
(losses) on marketable investment securities, net of related taxes.
Guarantees. We
record guarantees at the fair value of the guarantee at its inception when
a
guarantor is required to make payments to the guaranteed party upon failure
of
the third party to perform under the obligations of the contract.
Accrued
Discount Fees. Our direct costs for our EPP operations
primarily consist of credit card interchange fees, in addition to assessments
and other costs passed onto us by our processors. Collectively, these
fees and costs are considered to be discount fees. Discount fees are
charged to us as a percentage of the dollar volume we transact, and for expense
purposes, are incurred during the month that the related transaction is
authorized for payment. Accrued discount fees represent the total
amount of discount fees which have been incurred by us on authorized
transactions, but have yet to be remitted by us as of the reporting
date. Discount fees are typically remitted by us in the calendar
month which follows the date of transaction authorization.
RECENT
ACCOUNTING PRONOUNCEMENTS
SFAS
157—Fair Value Measurements. In October 2006, FASB issued
Statement of Financial Accounting Standards No. 157—Fair Value
Measurements, or SFAS 157. This standard establishes a framework
for measuring fair value and expands disclosures about fair value measurement
of
a company’s assets and liabilities. This standard also requires that
the fair value measurement should be determined based on the assumptions
that
market participants would use in pricing the asset or liability. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and, generally, must be applied
prospectively. We expect to adopt this standard beginning in October
2008. We do not expect that the adoption of SFAS 157 will have a
material effect 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 implemented FIN 48 on October 1,
2007. We do not expect that FIN 48 will have a material effect on our
financial position or results of operation.
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. We do not believe
that the adoption of SFAS 159 will have a material effect on our financial
position or results of operations.
44
|
|
NOTE
3—(LOSS) EARNINGS PER
SHARE
|
The
following table
sets forth the computation of basic and diluted (loss) earnings per
share:
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||||
|
Numerator:
(Loss)
income from:
|
||||||||||||
|
Continuing
operations, net of income taxes
|
$ | (18,259 | ) | $ | (18,921 | ) | $ | (19,494 | ) | |||
|
Discontinued
operations, net of income taxes
|
15,225
|
9,470
|
20,620
|
|||||||||
|
Net
(loss) income
|
$ | (3,034 | ) | $ | (9,451 | ) | $ |
1,126
|
||||
|
Denominator:
|
||||||||||||
|
Weighted-average
common shares outstanding
|
19,512
|
19,495
|
19,470
|
|||||||||
|
Effects
of dilutive common stock options
|
—
|
—
|
—
|
|||||||||
|
Adjusted
weighted-average shares
|
19,512
|
19,495
|
19,470
|
|||||||||
|
(Loss)
earnings per basic and diluted share
|
||||||||||||
|
From
continuing operations
|
$ | (0.94 | ) | $ | (0.97 | ) | $ | (1.00 | ) | |||
|
From
discontinued operations
|
$ |
0.78
|
$ |
0.49
|
$ |
1.06
|
||||||
|
(Loss)
earnings per basic and diluted share
|
$ | (0.16 | ) | $ | (0.48 | ) | $ |
0.06
|
||||
The
following
options were not included in the computation of diluted (loss) earnings per
share because the exercise price was greater than the average market price
of
our common stock for the periods stated and, therefore, the effect would
be
anti-dilutive:
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Weighted-average
options excluded from computation of diluted (loss) earnings per
share
|
1,523
|
2,022
|
1,893
|
|||||||||
In
addition,
154,500 shares at September 30, 2007 and 91,000 shares at
September 30, 2006, of common stock equivalents were excluded from the
calculation of diluted loss per share since their effect would have been
anti-dilutive.
|
|
NOTE
4—CUSTOMER CONCENTRATION AND
RISK
|
We
derive a
significant portion of our revenue from a limited number of governmental
customers. Typically, the contracts allow these customers to
terminate all or part of the contract for convenience or
cause. During the fiscal year ended September 30, 2007, our
contract with the Internal Revenue Service contributed revenues of
$28.1 million, or 25.3%, of our revenues from continuing
operations. During fiscal year 2006, this contract generated
$25.0 million, or 25.9%, of our revenues from continuing
operations.
Accounts
receivable, net. As of September 30, 2007 and 2006,
we reported $5.1 million and $5.3 million, respectively, in
Accounts receivable, net on our Consolidated Balance
Sheets. This item represents the short-term portion of
receivables to our customers and other parties and retainers that we expect
to
receive. Approximately 64.4% and 74.8% of the balances reported at
September 30, 2007 and 2006, respectively, represent accounts receivable,
net
that are attributable to operations that we intend to wind-down during the
course of the next five years (See Note 12—Segment Information, for
additional information about our wind-down operations). The remainder
of the Accounts receivable, net balance is composed of receivables from
certain of our EPP customers. None of our customers have receivables
that exceed 10% of our total receivable balance. As of
September 30, 2007 and 2006, Accounts receivable net, included an
allowance for uncollectible accounts of $1.2 million and $0.9 million,
respectively, which represents the balance of receivables that we believe
are
likely to become uncollectible.
Certain
of our
contracts allow customers to retain a portion of the amounts owed to us until
predetermined milestones are achieved or until the project is
completed. At September 30, 2007, Accounts receivable, net
included $0.8 million of retainers that we expected to receive in one
year. At September 30, 2006, Accounts receivable, net
included $1.0 million of retainers that we expected to receive in one year
and Other assets on our
45
Consolidated
Balance Sheet included $2.8 million of retainers that we expected to be
outstanding for more than one year.
Unbilled
receivables represent revenues that we have earned for the work that has
been performed to date that cannot be billed under the terms of the applicable
contract until we have completed specific project milestones or the customer
has
accepted our work. At September 30, 2007, total unbilled
receivables, all of which are expected to become billable in one year, were
$0.5 million, of which one customer accounted for 56.2% of the total and
another customer accounted for the remaining 43.8% of the total. At
September 30, 2006, total unbilled receivables, all of which were expected
to become billable in one year, were $1.9 million, of which three customers
accounted for 50.0%, 32.2% and 17.9%, respectively, of the total.
All
of the
retainers and unbilled receivable balances discussed above are associated
with
businesses that we intend to wind-down over the next five years (See Note
12—Segment Information).
|
|
NOTE
5—INVESTMENTS
|
Debt
and Equity
Securities
Investments
are
composed of available-for-sale debt and equity securities as defined in SFAS
No. 115—Accounting for Certain Investments in Debt and
EquitySecurities, or SFAS 115. Restricted investments
totaling $5.5 million at September 30, 2007 and $12.3 million at
September 30, 2006 were pledged in connection with performance bonds and
real
estate operating leases and will be restricted for the terms of the project
performance periods and lease periods, the latest of which is estimated to
end
in March 2010. At September 30, 2007, a $6.0 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.
In
accordance with
SFAS No. 95—Statement of Cash Flows, unrestricted investments with
remaining maturities of 90 days or less, as of the date of purchase, are
classified as cash equivalents. We exclude from cash equivalents
certain investments such as mutual funds and auction rate
securities. Securities such as these, and all other securities that
would not otherwise be included in Restricted investments or Cash
and cash equivalents, are classified on the Consolidated Balance Sheets as
Investments in marketable securities. Except for our
investment in CPAS and our restricted investments, all of our investments
are
categorized as available-for-sale under SFAS 115. As such, our
securities are recorded at estimated fair value, based on quoted market
prices. Increases and decreases in fair value are recorded as
unrealized gains and losses in other comprehensive income.
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:
|
September
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
|
$ |
3,537
|
$ |
—
|
$ |
3,537
|
$ |
9,053
|
$ |
—
|
$ |
9,053
|
||||||||||||
|
Total
investments included in cash and cash equivalents
|
3,537
|
—
|
3,537
|
9,053
|
—
|
9,053
|
||||||||||||||||||
|
Investments
in marketable securities:
|
||||||||||||||||||||||||
|
Debt
securities (Primarily state and local bonds/notes)
|
54,400
|
—
|
54,400
|
36,950
|
—
|
36,950
|
||||||||||||||||||
|
Certificates
of deposit
|
3,415
|
—
|
3,415
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
investments in marketable securities
|
57,815
|
—
|
57,815
|
36,950
|
—
|
36,950
|
||||||||||||||||||
|
Restricted
investments:
|
||||||||||||||||||||||||
|
Certificates
of deposit
|
5,526
|
—
|
5,526
|
8,941
|
—
|
8,941
|
||||||||||||||||||
|
Money
market
|
6,000
|
—
|
6,000
|
—
|
—
|
—
|
||||||||||||||||||
|
U.S.
government sponsored enterprise obligations
|
—
|
—
|
—
|
3,348
|
(2 | ) |
3,346
|
|||||||||||||||||
|
Total
restricted investments
|
11,526
|
—
|
11,526
|
12,289
|
(2 | ) |
12,287
|
|||||||||||||||||
|
Total
investments
|
$ |
72,878
|
$ |
—
|
$ |
72,878
|
$ |
58,292
|
$ | (2 | ) | $ |
58,290
|
|||||||||||
46
As
of
September 30, 2007, all of the debt securities that were included in
marketable securities had remaining maturities in excess of ten
years. While all of these debt securities have long-term maturities,
all of our debt securities are auction rate securities with interest that
typically resets every 28 days.
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 we
consider when evaluating for other-than-temporary impairment include: the
length
of time and the extent to which market value has been less than cost; the
financial condition and near-term prospects of the issuer; interest rates,
credit risk, the value of any underlying portfolios or investments; and our
intent and ability to hold the investment for a period of time sufficient
to
allow for any anticipated recovery in the market. We do not adjust
the recorded book value for declines in fair value that we believe are temporary
if we have the intent and ability to hold the associated investments for
the
foreseeable future and we have not made the decision to dispose of the
securities as of the reported date.
If
we determine
impairment is other-than-temporary, we reduce the recorded book value of
the
investment by the amount of the impairment and recognize a realized loss
on the
investment. At September 30, 2007 and September 30, 2006,
we do not believe that 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, 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
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
6—PROPERTY, EQUIPMENT AND
SOFTWARE
|
Property,
equipment and software, net consist of the following:
|
September
30,
|
||||||||
|
(in
thousands)
|
2007
|
2006
|
||||||
|
Software
|
$ |
749
|
$ |
525
|
||||
|
Computer
equipment
|
5,056
|
4,996
|
||||||
|
Furniture
and equipment
|
3,328
|
2,788
|
||||||
|
Land
and building
|
2,452
|
2,452
|
||||||
|
Leasehold
improvements
|
508
|
503
|
||||||
|
Total
property, equipment and software, gross
|
12,093
|
11,264
|
||||||
|
Less:
Accumulated depreciation and amortization
|
(8,348 | ) | (7,310 | ) | ||||
|
Total
property, equipment and software, net
|
$ |
3,745
|
$ |
3,954
|
||||
We
depreciate fixed
assets on a straight-line basis over their estimated useful
lives. Leasehold improvements are amortized over the lesser of the
estimated remaining life of the leasehold or the remaining term of the lease.
Depreciation and amortization expense associated with property, equipment
and
software that we held and used for our continuing operations is reported
on the
following lines on our Consolidated Statements of Operations:
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Depreciation
and amortization expenses for property, equipment and
software:
|
||||||||||||
|
Included
in
Direct costs:
|
||||||||||||
|
Software
|
$ |
12
|
$ |
3
|
$ |
3
|
||||||
|
Equipment
|
78
|
184
|
130
|
|||||||||
|
Total
included
in Direct costs
|
90
|
187
|
133
|
|||||||||
|
Included
in
Depreciation and amortization:
|
||||||||||||
|
Software
|
171
|
95
|
122
|
|||||||||
|
Equipment
|
828
|
705
|
899
|
|||||||||
|
Total
included
in Depreciation and amortization
|
999
|
800
|
1,021
|
|||||||||
|
Total
depreciation and amortization expense for property, equipment
and
software
|
$ |
1,089
|
$ |
987
|
$ |
1,154
|
||||||
47
In addition to the depreciation and amortization reflected in the above table, the line titled Income from discontinued operation, net on our Consolidated Statements of Operations included depreciation and amortization expenses of $1.9 million for fiscal 2007, $3.6 million for fiscal 2006 and $2.6 million for fiscal 2005. These amounts represent depreciation and amortization expense that was recorded prior to April 2007 when these assets were classified as held for sale. Property, equipment, software and capitalized leases used by our operations that are held-for-sale are reported as Current assets—held-for-sale on our Consolidated Balance Sheets. See Note 15—Discontinued Operations for additional information.
The
cost of assets
acquired under capital leases for our continuing operations was approximately
$0.3 million at September 30, 2007 and $0.5 million at
September 30, 2006. The related accumulated depreciation and amortization
was $0.2 million at September 30, 2007 and $0.4 million at
September 30, 2006.
|
|
NOTE
7—GOODWILL AND OTHER INTANGIBLE
ASSETS
|
Goodwill
The
following table
summarizes changes in the carrying amount of goodwill during fiscal years
2007
and 2006 for our continuing and discontinued operations. The goodwill
for our continuing operations is reported on the line titled Goodwill
on our Consolidated Balance Sheets, while the goodwill for our
discontinued
operations is included in the line titled Current
assets—held-for-sale.
|
Continuing
Operations
|
Discontinued
Operations
|
|||||||||||||||||||||||||||
|
(in
thousands)
|
EPP
|
Wind-down
|
Total
|
GBPO
|
PSSI
|
Total
|
Total
|
|||||||||||||||||||||
|
Balance
at September 30, 2005
|
$ |
14,526
|
$ |
8,454
|
$ |
22,980
|
$ |
5,680
|
$ |
8,907
|
$ |
14,587
|
$ |
37,567
|
||||||||||||||
|
Balance
at September 30, 2006
|
14,526
|
8,454
|
22,980
|
5,680
|
8,907
|
14,587
|
37,567
|
|||||||||||||||||||||
|
Fiscal
year 2007 goodwill
impairment
|
—
|
(8,454 | ) | (8,454 | ) | (2,461 | ) |
—
|
(2,461 | ) | (10,915 | ) | ||||||||||||||||
|
Balance
at September 30, 2007
|
$ |
14,526
|
$ |
—
|
$ |
14,526
|
$ |
3,219
|
$ |
8,907
|
$ |
12,126
|
$ |
26,652
|
||||||||||||||
As
a general
practice, we test goodwill for impairment during the fourth quarter of each
fiscal year at the reporting unit level using a fair value approach in
accordance with SFAS 142. If an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit
below
its carrying value, we would evaluate goodwill for impairment between annual
tests. One such triggering event is when there is a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of. Hence, our
intention to sell the majority of our GBPO and PSSI assets and liabilities
triggered a requirement to review the goodwill associated with these asset
groups for impairment. Because we intend to divest portions of two
reporting units, we tested each business within our PSSI and GBPO segments
for
impairment.
We
reviewed the
goodwill for all asset groups classified as held-for-sale during the quarter
ended June 30, 2007. In September 30, 2007, we reviewed for impairment
the goodwill assets classified as held-for-sale, as well goodwill for our
assets
classified as held and used. As a result of the June and September
reviews, we identified the need to reduce goodwill by $8.5 million for our
wind-down operations and $2.5 million for our discontinued GBPO
operations.
Other
Intangible Assets, Net
Initially
in April
2007, we classified our VSA operations as held-for-sale. At that time
we suspended all depreciation and amortization of long-term VSA assets in
accordance with SFAS 144. As of September 30, 2007, we removed our
VSA business from the held-for-sale classification. We made this
decision because the VSA business supports a portion of our EPP segment and
because we believe the return for our stockholders would be greater if we
were
to continue to operate the VSA business for the near term. At that
time we reclassified the VSA assets back to held and used and we determined
that
the carrying value at April 2007, adjusted for depreciation and amortization
that would have been recognized through September 2007, was less than fair
value
at September 30, 2007. As a result, we were required to
recognize an impairment loss of $0.7 million. This impairment
loss was allocated to our intangible assets based upon the amortization we
would
48
have
accrued if VSA
had never been classified as held-for-sale. The following table
summarizes our Other intangible assets, net, for our continuing
operations:
|
September
30, 2007
|
September
30, 2006
|
||||||||||||||||||||||||
|
(in
thousands)
|
Amortization
period
|
Gross
|
Accumulated
amortization
|
Net
|
Gross
|
Accumulated
amortization
|
Net
|
||||||||||||||||||
|
Client
relationships
|
7-10
years
|
$ |
28,749
|
$ | (13,840 | ) | $ |
14,909
|
$ |
28,749
|
$ | (11,176 | ) | $ |
17,573
|
||||||||||
|
Impairment
write-down
|
(341 | ) |
—
|
(341 | ) |
—
|
—
|
—
|
|||||||||||||||||
|
28,408
|
(13,840 | ) |
14,568
|
28,749
|
(11,176 | ) |
17,573
|
||||||||||||||||||
|
Technology
and research and development
|
5
years
|
4,289
|
(2,444 | ) |
1,845
|
4,289
|
(1,986 | ) |
2,303
|
||||||||||||||||
|
Impairment
write-down
|
(323 | ) |
—
|
(323 | ) |
—
|
—
|
—
|
|||||||||||||||||
|
3,966
|
(2,444 | ) |
1,522
|
4,289
|
(1,986 | ) |
2,303
|
||||||||||||||||||
|
Trademarks
|
6
-10 years
|
3,214
|
(1,664 | ) |
1,550
|
3,214
|
(1,342 | ) |
1,872
|
||||||||||||||||
|
Non-compete
agreements
|
3
years
|
560
|
(529 | ) |
31
|
615
|
(484 | ) |
131
|
||||||||||||||||
|
Impairment
write-down
|
(31 | ) |
—
|
(31 | ) |
—
|
—
|
—
|
|||||||||||||||||
|
529
|
(529 | ) |
—
|
615
|
(484 | ) |
131
|
||||||||||||||||||
|
Other
intangible assets, net
|
$ |
36,117
|
$ | (18,477 | ) | $ |
17,640
|
$ |
36,867
|
$ | (14,988 | ) | $ |
21,879
|
|||||||||||
Amortization
expense for other intangible assets was $3.6 million for fiscal year 2007,
$4.3 million for fiscal year 2006 and $4.5 million for fiscal year
2005, all of which is related to continuing operations. As of
September 30, 2007, we expect to recognize the following amortization
expense on other intangible assets over the next five years:
|
(in
thousands)
|
Future
expense
|
|||
|
Years
ending September 30,
|
||||
|
2008
|
$ |
4,056
|
||
|
2009
|
3,820
|
|||
|
2010
|
3,190
|
|||
|
2011
|
3,184
|
|||
|
2012
|
2,721
|
|||
|
Thereafter
|
669
|
|||
|
Total
future amortization expense
|
$ |
17,640
|
||
|
|
NOTE
8—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 September 30, 2007, none of these matters were
expected to have a material impact on our financial position, results of
operations or cash flows. At September 30, 2007 and 2006, we had
legal accruals of $1.0 million and $1.4 million based upon estimates
of key legal matters.
In
November 2003,
we were granted conditional amnesty in relation to a Department of Justice
Antitrust Division investigation involving the child support payment processing
industry. We have cooperated, and will 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. On
July 24, 2007, the United States District Court for the Eastern District of
Virginia entered an order denying the plaintiff's motion for class certification
for the purported class action lawsuit. The time to appeal the
Court's order has expired without an appeal. We have a motion pending
before the court to dismiss the lawsuit in its entirety. We believe
we have minimal, if any, exposure associated with this complaint. See
Note 16—Subsequent Events for information on key recent events
associated with this case.
49
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 extend the term of the
credit facility for an additional six months. On September 26,
2007, we entered into a second amendment to this credit facility. We
elected to reduce the line of credit to $7.5 million. In
addition, this amendment eliminated the unused facility fee and reduced the
issuance fee from 1.0% to 0.75% per annum. Currently, this credit
facility is scheduled to mature on September 30, 2008. The
amendment grants the lender a perfected security interest in cash collateral
in
an amount equal to all issued and to be issued letters of credit. As
of September 30, 2007, $5.5 million of letters of credit were
outstanding under this credit facility.
OTHER
LETTERS
OF CREDIT
At
September 30,
2006, we 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. Effective July 2007, this letter of credit was
released. We reported the investments used to collateralize the
letters of credit as Restricted investments on our Consolidated Balance
Sheets.
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. As
can be seen in Note 5—Investments, we held $72.9 million of cash
equivalents, unrestricted marketable securities, and restricted investments
at
September 30, 2007. All of our investments are in highly liquid
AAA securities, most of which are government-guaranteed. Because we
have a stringent policy of investing only in securities that are essentially
risk-free, our investments are not exposed to significant write-downs in
fair
value that have plagued other financial institutions.
OPERATING
AND
CAPITAL LEASE OBLIGATIONS
We
lease our
principal facilities and certain equipment under non-cancelable operating
and
capital leases, which expire at various dates through fiscal year
2011. Future minimum lease payments for non-cancelable leases with
terms of one year or more are as follows:
|
(in
thousands)
|
Operating
leases
|
Capital
leases(1)
|
Total
|
|||||||||
|
Year
ending September 30,
|
||||||||||||
|
2008
|
$ |
3,397
|
$ |
47
|
$ |
3,444
|
||||||
|
2009
|
2,109
|
38
|
2,147
|
|||||||||
|
2010
|
941
|
20
|
961
|
|||||||||
|
2011
|
—
|
3
|
3
|
|||||||||
|
Total
minimum lease payments
|
$ |
6,447
|
$ |
108
|
$ |
6,555
|
||||||
|
(1)On
our
Consolidated Balance Sheets, the amount due in fiscal year 2008
is
included in Total current liabilities, while the liability for
capital
lease payments due in fiscal years 2009 through 2011 is included
in Other
liabilities.
|
||||||||||||
Certain
leases
contain provisions for rental options and rent escalations based on scheduled
increases, as well as increases resulting from a rise in certain costs incurred
by the lessor. We recorded rent expense of $2.8 million during
fiscal 2007, $2.8 million during fiscal 2006 and $3.1 million during
fiscal 2005.
GUARANTEES
In
conjunction with
our participation as a subcontractor in a three-year contract for unemployment
insurance-related services, we guaranteed the performance of the prime
contractor on the project. The contract does not establish a
limitation to the maximum potential future payments under the guarantee;
however, we estimate that the maximum potential undiscounted cost of the
guarantee is $4.5 million. In accordance with FASB
Interpretation No. 45—Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect
50
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 September 30, 2007, the remaining liability was $0.1 million, 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 bonds with our customers. Fees for
obtaining the bonds are expensed over the life of each bond and are included
in
Direct costs on our Consolidated Statement of Operations. At
September 30, 2007, we had $16.4 million of bonds posted with
clients. There were no claims pending against any of these
bonds.
EMPLOYMENT AGREEMENTS
As
of
September 30, 2007, we have employment and change of control agreements
with five executives, a former executive and 24 other key
managers. During October 2007, we entered into employment agreements
with two of our executives, which supersede the change of control agreements
referenced above. See Note 16—Subsequent Events for
information regarding these employment agreements. If certain termination
or
change of control events were to occur under the 30 remaining contracts,
we
could be required to pay up to $5.5 million. See Note
16—Subsequent Events for information regarding a key change to the
status of two of our executive officers.
As
of
September 30, 2007, we also had agreements with 32 key employees under
which these individuals would be entitled to receive three to twelve months
of
their base salaries over a one-to-two year period, after completing defined
employment service periods. We expect to recognize a maximum expense
of $0.9 million during fiscal year 2008 and $0.3 million during fiscal
year 2009 for these agreements.
As
of
September 30, 2007, we had change of control agreements with 38 key
employees within our held-for-sale operations, which we entered into in February
2007. Under these agreements, individuals are entitled to receive
three to twelve months of their base salaries plus three to twelve months
of
COBRA benefits should certain change of control events occur. Under
these agreements we would be required to pay up to $2.4 million if a change
of control occurred.
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 or Bylaws or by
the
General Corporation Law of the State of Delaware, against all expenses, claims,
damages, judgments and other amounts (including amounts paid in settlement)
for
which such persons become liable as a result of acting in any capacity on
our
behalf, subject to certain limitations. We are not able to estimate
our maximum exposure under these agreements.
FORWARD LOSSES
Throughout
the term
of our customer contracts, we forecast revenues and expenses over the total
life
of the contract. In accordance with generally accepted accounting
principles, if we determine that 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 September 30, 2007 and 2006, accruals totaling
$0.9 million and $1.0 million, respectively, were included in
Current liabilities—held-for-sale on our Consolidated Balance
Sheets. Changes in the accrued forward losses are reflected in
Income fromdiscontinued operations, net on our Consolidated
Statements of Operations.
|
|
NOTE
9—SHAREHOLDERS’ EQUITY
|
In
July 2005, we
changed our state of incorporation from California to Delaware and converted
all
shares of our Class B common stock to $0.01 par value common
stock. Accordingly, as of September 30, 2007 and 2006,
no
51
shares
of
Class B common stock were authorized or outstanding. As of September
30, 2007, a total of 44,259,762 shares of common stock were authorized, of
which
19,540,206 shares were outstanding, and a total of 4,579,047 shares of preferred
stock were authorized, of which none were outstanding. Under our
current credit facility, we are prohibited from declaring or paying any
dividends (see Note 8—Commitment and Contingencies)
COMMON
STOCK
REPURCHASE PROGRAM
In
October 1998, our Board of Directors authorized the repurchase of up to one
million shares of Class B common stock. The purchases were to be made in
the open market or in privately negotiated transactions at the discretion
of our
management, depending on financial and market conditions or as otherwise
provided by the Securities and Exchange Commission and the Nasdaq rules and
regulations. In April 2003, our Board increased the number of
shares authorized for repurchase to two million shares. As of
September 30, 2007, we had repurchased 884,400 shares of common stock for
$8.7
million. All such repurchases of our common stock were made prior to
fiscal 2004. All stock purchased under the common stock repurchase
program is reported as Treasury stock on our Consolidated Balance
Sheets.
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 originally
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.
EQUITY
INCENTIVE PLAN
Under
our
Amended and Restated 2004 Stock Incentive Plan, options for 2,113,091
shares of common stock were outstanding at
September 30, 2007.
|
|
NOTE
10—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
shares each year on the anniversary of the date granted and expire in ten
years. At September 30, 2007, there were 2,321,722 shares of
common stock reserved for future grant under the Plan. On
October 1, 2007 and October 29, 2007, we issued 775,000 and 60,000,
respectively, options to purchase stock to several key employees. See
Note 16—Subsequent Events for additional information.
Stock-based
compensation expense for all stock-based compensation awards granted was
based
on the grant-date fair value using the Black-Scholes model. We
recognize compensation expense for stock option awards on a ratable basis
over
the requisite service period of the award. Stock-based compensation
expense was $1.7 million for fiscal year ended September 30, 2007 and
$2.0 million for fiscal year ended September 30, 2006.
Prior
to adopting
SFAS 123R on October 1, 2005, we applied the recognition and measurement
principles of Accounting Principles Board Opinion No. 25—Accounting for
Stock-Based Compensation and provided the pro forma disclosures previously
required by SFAS 123. Prior to adopting SFAS 123R, we did not include
compensation expense for employee stock options in net income (loss), since
all
stock options granted under those plans had an exercise price equal to the
market value of the common stock on the date of the grant. The
following table illustrates the effects on net income (loss) after tax and
earnings per common share as if we had applied the fair value recognition
provisions of SFAS 123 to stock-based compensation during fiscal year ended
September 30, 2005:
52
|
(in
thousands, except per share data)
|
Fiscal
year ended
September
30, 2005
|
|||
|
Net
income
|
$ |
1,126
|
||
|
Less:
Total
stock-based compensation expense, determined under fair value-based
method
for all awards, net of tax effect
|
2,527
|
|||
|
Net
loss, pro
forma
|
$ | (1,401 | ) | |
|
Earnings
(loss) per basic and diluted share:
|
||||
|
As
reported
|
$ |
0.06
|
||
|
Pro
forma
|
$ | (0.07 | ) | |
The
following
tables shows the weighted average assumptions we used to calculate fair value
of
share-based options using the Black-Scholes model, as well as the
weighted-average fair value of options granted and the weighted-average
intrinsic value of options exercised.
|
September
30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Weighted-average
assumptions used in Black-Scholes Model:
|
||||||||||||
|
Expected
period that options will be outstanding (in
years)
|
5.00
|
5.00
|
4.55
|
|||||||||
|
Interest
rate
(based on 3-year U.S. Treasury Yields at time of
grant)
|
4.66 | % | 4.87 | % | 3.76 | % | ||||||
|
Volatility
|
47.54 | % | 48.21 | % | 54.63 | % | ||||||
|
Dividend
yield
|
—
|
—
|
—
|
|||||||||
|
Weighted-average
fair value of options granted
|
$ |
3.53
|
$ |
2.95
|
$ |
4.11
|
||||||
|
Weighted-average
intrinsic value of options exercised (in
thousands)
|
$ |
122
|
$ |
7
|
$ |
33
|
||||||
Expected volatilities are based on both the implied and historical volatility of our stock. In addition, we used historical data to estimate option exercise and employee termination within the valuation model.
Stock
option
activity for the fiscal year ended September 30, 2007 is as
follows:
|
Weighted-average
|
|||||||||||||
|
(in
thousands, except per share data)
|
Shares
under
option
|
Exercise
price
|
Remaining
contractual
term
|
Aggregate
intrinsic value
|
|||||||||
|
Options
outstanding at October 1, 2006
|
2,239
|
$ |
8.45
|
||||||||||
|
Granted
|
241
|
7.48
|
|||||||||||
|
Exercised
|
(42 | ) |
5.15
|
||||||||||
|
Forfeitures
or expirations
|
(325 | ) |
7.54
|
||||||||||
|
Options
outstanding at September 30, 2007
|
2,113
|
$ |
8.54
|
7.18
years
|
$ |
5,703
|
|||||||
|
Options
exercisable at September 30, 2007
|
1,396
|
$ |
9.18
|
6.59
years
|
$ |
3,399
|
|||||||
As of September 30, 2007, a total of $1.4 million of unrecognized compensation cost related to stock options, net of estimated forfeitures, was expected to be recognized over a 3.2 year weighted-average period.
|
|
NOTE
11—RELATED PARTY
TRANSACTIONS
|
NOTES
AND
INTEREST RECEIVABLE
At
September 30, 2006, we had $4.3 million of full-recourse notes and
interest receivable from a former Chairman of the Board and Chief Executive
Officer. These notes matured in 2007 and payment of principal and
accrued interest on all notes was received during fiscal year
2007. Approximately $2.2 million of these full-recourse notes
were issued in connection with the exercise of options to purchase shares
of our
common stock.
The
notes with the
former officer were entered into prior to the effective date of the
Sarbanes-Oxley Act of 2002. We have not entered into any notes with any
directors or officers following the effective date of that act.
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.
53
OTHER
RELATED-PARTY TRANSACTIONS
CPAS
Throughout
the
majority 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 fiscal
year ended September 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 fiscal
year ended September 30, 2007, we purchased $131,000 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 fiscal
year ended September 30, 2007, we purchased $268,000 of telecom services
from ITC Deltacom, Inc., a company affiliated with a member of our Board
of
Directors.
|
|
NOTE
12—SEGMENT INFORMATION
|
As
described more
fully in Note 15—Discontinued Operations, in April 2007, we announced
our intention to seek buyers for the sale of the majority of our PSSI and
GBPO
operations. The assets and liabilities associated with these disposal
groups were classified as Current assets—held-for-sale and Current
liabilities—held-for-sale on our consolidated Balance
Sheets. The results of operations for these disposal groups reported
as Income from discontinued operations, net on our Consolidated
Statements of Operations.
Because
of our
decision to sell the majority of PSSI and GBPO, we have only one reportable
segment as of September 30, 2007, comprised primarily of Electronic Payment
Processing, or EPP segment. In addition, we expect to retain and
wind-down three minor businesses from our former PSSI and GBPO
segments. The following table presents the results of operations for
our EPP segment and our wind-down operations for fiscal years 2007, 2006
and
2005. As of September 30, 2007, our Senior Management team
allocates resources to and assesses the performance of our operations in
three
major categories: EPP, Wind-down and Discontinued Operations. See
Note 15—Discontinued Operations for additional information
regarding the discontinued operations of our PSSI and GBPO
segments.
The
Corporate &
Eliminations column of the following table includes corporate overhead and
other
costs that could not be directly assigned either to our EPP operations or
to our
discontinued operations, as well as eliminations for transactions between
our
continuing and discontinued operations. The operations reported for
fiscal years 2006 and 2005 are consistent with those reported for the fiscal
year ended September 30, 2007.
54
|
Continuing
Operations
|
||||||||||||||||
|
(in
thousands)
|
EPP
|
Wind-
down
|
Corporate
&
Eliminations
|
Total
|
||||||||||||
|
Fiscal
Year Ended September 30, 2007:
|
||||||||||||||||
|
Revenues
|
$ |
99,433
|
$ |
12,100
|
$ | (385 | ) | $ |
111,148
|
|||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Direct
costs
|
75,294
|
8,597
|
—
|
83,891
|
||||||||||||
|
General
and administrative
|
7,847
|
3,663
|
15,976
|
27,486
|
||||||||||||
|
Selling
and marketing
|
7,151
|
1,092
|
—
|
8,243
|
||||||||||||
|
Depreciation
and amortization
|
3,205
|
764
|
604
|
4,573
|
||||||||||||
|
Write-down
of goodwill and intangible assets
|
—
|
9,232
|
—
|
9,232
|
||||||||||||
|
Total
costs and expenses
|
93,497
|
23,348
|
16,580
|
133,425
|
||||||||||||
|
(Loss)
income from continuing operations before
other
income and income taxes
|
5,936
|
(11,248 | ) | (16,965 | ) | (22,277 | ) | |||||||||
|
Other
income:
|
||||||||||||||||
|
Interest
income
|
2,507
|
—
|
793
|
3,300
|
||||||||||||
|
Income
from equity investments
|
—
|
—
|
794
|
794
|
||||||||||||
|
Total
other income
|
2,507
|
—
|
1,587
|
4,094
|
||||||||||||
|
(Loss)
income from continuing operations before taxes
|
8,443
|
(11,248 | ) | (15,378 | ) | (18,183 | ) | |||||||||
|
Income
tax provision
|
76
|
—
|
—
|
76
|
||||||||||||
|
(Loss)
income from continuing operations
|
$ |
8,367
|
$ | (11,248 | ) | $ | (15,378 | ) | $ | (18,259 | ) | |||||
|
Fiscal
Year Ended September 30, 2006:
|
||||||||||||||||
|
Revenues
|
$ |
78,578
|
$ |
18,065
|
$ | (151 | ) | $ |
96,492
|
|||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Direct
costs
|
59,966
|
11,704
|
—
|
71,670
|
||||||||||||
|
General
and administrative
|
6,009
|
3,535
|
23,316
|
32,860
|
||||||||||||
|
Selling
and marketing
|
5,963
|
1,046
|
2,153
|
9,162
|
||||||||||||
|
Depreciation
and amortization
|
3,170
|
1,590
|
373
|
5,133
|
||||||||||||
|
Total
costs and expenses
|
75,108
|
17,875
|
25,842
|
118,825
|
||||||||||||
|
(Loss)
income from continuing operations before
other
income and income taxes
|
3,470
|
190
|
(25,993 | ) | (22,333 | ) | ||||||||||
|
Other
income:
|
||||||||||||||||
|
Interest
income
|
2,136
|
—
|
802
|
2,938
|
||||||||||||
|
Income
from equity investments
|
—
|
—
|
519
|
519
|
||||||||||||
|
Other
income
|
2,136
|
—
|
1,321
|
3,457
|
||||||||||||
|
(Loss)
income from continuing operations before taxes
|
5,606
|
190
|
(24,672 | ) | (18,876 | ) | ||||||||||
|
Income
tax provision
|
45
|
—
|
—
|
45
|
||||||||||||
|
(Loss)
income from continuing operations
|
$ |
5,561
|
$ |
190
|
$ | (24,672 | ) | $ | (18,921 | ) | ||||||
55
|
Continuing
Operations
|
||||||||||||||||
| (in thousands) |
EPP
|
Wind-
down
|
Corporate
&
Eliminations
|
Total
|
||||||||||||
|
Fiscal
Year Ended September 30, 2005:
|
|
|
||||||||||||||
|
Revenues
|
$ |
56,452
|
$ |
27,316
|
$ | (5,073 | ) | $ |
78,695
|
|||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Direct
costs
|
42,199
|
17,752
|
—
|
59,951
|
||||||||||||
|
General
and administrative
|
4,591
|
4,194
|
15,391
|
24,176
|
||||||||||||
|
Selling
and marketing
|
4,921
|
1,690
|
2,225
|
8,836
|
||||||||||||
|
Depreciation
and amortization
|
3,428
|
1,987
|
558
|
5,973
|
||||||||||||
|
Total
costs and expenses
|
55,139
|
25,623
|
18,174
|
98,936
|
||||||||||||
|
(Loss)
income from continuing operations before
other income and income taxes
|
1,313
|
1,693
|
(23,247 | ) | (20,241 | ) | ||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
886
|
—
|
657
|
1,543
|
||||||||||||
|
Loss
from equity investments
|
—
|
—
|
(669 | ) | (669 | ) | ||||||||||
|
Total
other income (expense)
|
886
|
—
|
(12 | ) |
874
|
|||||||||||
|
(Loss)
income from continuing operations before taxes
|
2,199
|
1,693
|
(23,259 | ) | (19,367 | ) | ||||||||||
|
Income
tax provision
|
78
|
49
|
—
|
127
|
||||||||||||
|
(Loss)
income from continuing operations
|
$ |
2,121
|
$ |
1,644
|
$ | (23,259 | ) | $ | (19,494 | ) | ||||||
Our
total assets
for each of these businesses are shown in the following table:
|
As
of September 30,
|
||||||||
|
(in
thousands)
|
2007
|
2006
|
||||||
|
Continuing
Operations:
|
||||||||
|
EPP
|
$ |
96,527
|
$ |
85,296
|
||||
|
Wind-down
|
8,676
|
24,102
|
||||||
|
Corporate
(1)
|
24,516
|
23,850
|
||||||
|
Assets
for
continuing operations
|
129,719
|
133,248
|
||||||
|
Assets-held-for-sale
|
36,705
|
36,612
|
||||||
|
Total
assets
|
$ |
166,424
|
$ |
169,860
|
||||
|
(1) Represents
assets for our continuing businesses that are not assignable
to a specific
operation.
|
||||||||
See Note 15—Discontinued Operations for a breakdown of assets that are classified as held-for-sale.
56
|
|
NOTE
13—INCOME TAXES
|
The
components of
deferred tax liabilities and assets are as follows:
|
September 30,
|
||||||||
|
(in
thousands)
|
2007
|
2006
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Internally
developed software
|
$ |
2,088
|
$ |
1,650
|
||||
|
Intangibles
|
1,688
|
2,992
|
||||||
|
Other
deferred tax liabilities
|
581
|
569
|
||||||
|
Investment
in subsidiary
|
106
|
105
|
||||||
|
Total
deferred tax liabilities
|
4,463
|
5,316
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Accrued
expenses
|
2,842
|
3,309
|
||||||
|
Deferred
income
|
—
|
6
|
||||||
|
Depreciation
|
416
|
526
|
||||||
|
Accounts
receivable allowance
|
719
|
313
|
||||||
|
Other
deferred tax assets
|
847
|
924
|
||||||
|
Net
operating loss carryforward
|
27,948
|
27,669
|
||||||
|
Foreign
tax credit carryforward
|
566
|
566
|
||||||
|
Valuation
allowance
|
(28,875 | ) | (27,997 | ) | ||||
|
Total
deferred tax assets
|
4,463
|
5,316
|
||||||
|
Net
deferred tax assets (liabilities)
|
$ |
—
|
$ |
—
|
||||
At
September 30, 2007, we had $0.6 million of excess foreign tax
carryforwards for the purpose of offsetting future U.S. federal income
tax. Such foreign tax carryforwards will begin to expire in
2010. The benefit from the foreign tax carryforwards may be limited
in certain circumstances. We believe sufficient uncertainty exists
regarding the realizability of the foreign tax carryforwards such that a
full
valuation allowance is required.
At
September 30, 2007, we had $73.1 million of federal net operating loss
carryforwards, which expire beginning in fiscal 2018. At September
30, 2007, we had $62.6 million of state net operating loss carryforwards,
which begin to expire in fiscal 2008. Of these amounts,
$48.6 million of federal net operating loss carryforwards and
$29.6 million of state net operating loss carryforwards were acquired in
the acquisition of OPC during fiscal 2002. Our ability to utilize the
acquired federal net operating loss carryforward is limited to $3,350,000
per
year pursuant to Internal Revenue Code Section 382, which imposes an annual
limitation on the utilization of net operating loss carryforwards following
ownership changes.
At
September 30,
2007, we maintained a full valuation allowance against the net deferred tax
assets due to the uncertainty regarding their utilization. As of
September 30, 2007, a total of $20.6 million of the valuation allowance
related to deferred tax assets for which any subsequently recognized tax
benefits would reduce goodwill and $2.8 million of the valuation allowance
related to deferred tax assets for which any subsequently recognized tax
benefits would increase common stock.
Our
fiscal 2002 tax
return included a $22.5 million loss on disposal of Australian
operations. 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. From
October 2003 to February 2007, we increased our reserve by $1.1 million to
recognize the potential interest and penalties we could have incurred if
the
Internal Revenue Service had 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 Statement of
Operations as Income from discontinued operations.
57
Significant
components of the provision for income taxes are as follows:
|
Continuing
Operations
|
Discontinued
Operations
|
|||||||||||||||||||||||
|
Year
ended September 30,
|
Year
ended September 30,
|
|||||||||||||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Current
income tax provision:
|
||||||||||||||||||||||||
|
Federal
|
$ |
—
|
$ |
—
|
$ |
37
|
$ | (7,599 | ) | $ |
456
|
$ |
—
|
|||||||||||
|
State
|
76
|
45
|
90
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
provision for income taxes
|
$ |
76
|
$ |
45
|
$ |
127
|
$ | (7,599 | ) | $ |
456
|
$ |
—
|
|||||||||||
There
were no
deferred income tax provisions or benefits during the years ended September
30,
2007, 2006 or 2005.
The
effective tax
rate differs from the applicable U.S. statutory federal income tax rate as
follows:
|
Year
ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
U.S
statutory federal tax rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
State
taxes, net of federal tax benefit
|
3.9 | % | 3.5 | % | 12.6 | % | ||||||
|
Tax
exempt interest income
|
0.2 | % | 0.3 | % | (4.6 | )% | ||||||
|
Tax
effect of foreign operations
|
—
|
—
|
11.8 | % | ||||||||
|
Meals
and entertainment
|
(0.9 | )% | (1.5 | )% | 7.5 | % | ||||||
|
Goodwill
and intangible asset impairment
|
(27.7 | )% |
—
|
—
|
||||||||
|
Valuation
allowance
|
(7.0 | )% | (32.1 | )% | (59.3 | )% | ||||||
|
Stock-based
compensation
|
(3.2 | )% | (4.2 | )% |
—
|
|||||||
|
Other
|
—
|
(5.6 | )% | 8.1 | % | |||||||
|
Effective
tax
rate
|
(0.7 | )% | (5.6 | )% | 10.1 | % | ||||||
|
|
NOTE
14—RESTRUCTURING
|
During
2004, we
incurred facility closure and severance costs associated with the relocation
of
our administrative functions from Walnut Creek, California to Reston,
Virginia. During the fourth quarter of fiscal year 2005, we also
moved our Financial Institution Data Match Program offices from New Jersey
to
Michigan. The severance and office closure costs associated with both of
these
relocations are shown in General and administrative in our
Consolidated Statements of Operations.
The
following table
summarizes restructuring charges we incurred during fiscal years 2007, 2006
and
2005:
|
Year
ended September 30,
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Office
closure
costs (net of sublease income)
|
$ |
—
|
$ |
32
|
$ |
15
|
||||||
|
Severance
costs
|
—
|
3
|
31
|
|||||||||
|
Total
restructuring charges
|
$ |
—
|
$ |
35
|
$ |
46
|
||||||
The following table summarizes restructuring liabilities associated with continuing operations for fiscal years 2007 through 2005:
|
(in
thousands)
|
Severance
|
Facilities
closures
|
Total
|
|||||||||
|
Balance
at September 30, 2005
|
$ |
330
|
$ |
610
|
$ |
940
|
||||||
|
Additions
|
—
|
—
|
—
|
|||||||||
|
Cash
payments
|
(330 | ) | (209 | ) | (539 | ) | ||||||
|
Balance
at September 30, 2006
|
$ |
—
|
$ |
401
|
$ |
401
|
||||||
|
Additions
|
—
|
—
|
—
|
|||||||||
|
Cash
payments
|
—
|
(221 | ) | (221 | ) | |||||||
|
Balance
at September 30, 2007
|
$ |
—
|
$ |
180
|
$ |
180
|
||||||
58
$0.2 million
was included in Other current liabilities and $0.2 million was
included in Other accrued liabilities. We expect to pay the
remaining $0.2 million liability during fiscal year 2008.
|
|
NOTE
15—DISCONTINUED OPERATIONS
|
GBPO
and
PSSI Asset Groups
Early
in fiscal
2007, we undertook a strategic initiative to determine how we could best
utilize
our financial and management resources. As a result of that
initiative, we concluded that maximum value to our stockholders could be
achieved if we focused on our core business—Electronic Payment
Processing. As a result, in April 2007, we announced our intention to
seek buyers for the sale of the majority of our PSSI and GBPO
segments. Beginning in the quarter ended June 30, 2007, we classified
the assets and liabilities associated with these divestures as Current
assets—held-for-sale and Current liabilities—held-for-sale in
accordance with SFAS 144—Accounting for the Impairment or Disposal of
Long-Lived Assets.
Because
the
practice areas that comprise the GBPO and PSSI segments have widely divergent
operations and customer bases, each practice area, which represents a separate
business, is being marketed for sale separately. In total, we expect
to divest these practice areas through a series of at least five transactions
to
separate buyers. During the quarter ended September 30, 2007, we
removed our Voice and Systems Automation, or VSA, operation, which is a practice
area within the GBPO segment, from the held-for-sale
classification. We made this decision because the VSA business
supports a portion of our EPP segment and because we believe the returns
for our
stockholders would be greater if we were to continue to operate the VSA business
for the near-term. The decision to reclassify the VSA business to
continuing operations does not impact the classification of the remaining
assets
as held-for-sale on our Consolidated Balance Sheets.
The
following
schedule shows the current carrying value of the assets and liabilities in
the
GBPO and PSSI segments that are in the disposal group as of September 30,
2007
and 2006. Consistent with our other financial statements and
disclosures in this report, we have reclassified certain line items for
historical periods to conform to the current year’s
presentation:
|
September
30, 2007
|
September
30, 2006
|
|||||||||||||||||||||||||||||||
|
(in
thousands)
|
GBPO
|
PSSI
|
Eliminations
|
Total
|
GBPO
|
PSSI
|
Eliminations
|
Total
|
||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||
|
Current
assets
|
$ |
4,009
|
$ |
6,961
|
$ |
39
|
$ |
11,009
|
$ |
6,290
|
$ |
5,104
|
$ |
151
|
$ |
11,545
|
||||||||||||||||
|
Property,
equipment and software, net
|
5,606
|
6,657
|
(476 | ) |
11,787
|
6,409
|
3,821
|
(718 | ) |
9,512
|
||||||||||||||||||||||
|
Goodwill
|
3,219
|
8,907
|
—
|
12,126
|
5,680
|
8,907
|
—
|
14,587
|
||||||||||||||||||||||||
|
Other
assets
|
5
|
1,778
|
—
|
1,783
|
9
|
959
|
—
|
968
|
||||||||||||||||||||||||
|
Total
assets
|
$ |
12,839
|
$ |
24,303
|
$ | (437 | ) | $ |
36,705
|
$ |
18,388
|
$ |
18,791
|
$ | (567 | ) | $ |
36,612
|
||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||||||||||
|
Current
liabilities
|
$ |
3,037
|
$ |
7,923
|
$ |
—
|
$ |
10,960
|
$ |
2,384
|
$ |
6,233
|
$ |
—
|
$ |
8,617
|
||||||||||||||||
|
Other
liabilities
|
284
|
18
|
—
|
302
|
487
|
76
|
—
|
563
|
||||||||||||||||||||||||
|
Total
liabilities
|
$ |
3,321
|
$ |
7,941
|
$ |
—
|
$ |
11,262
|
$ |
2,871
|
$ |
6,309
|
$ |
—
|
$ |
9,180
|
||||||||||||||||
|
Net
assets and liabilities of disposal group
|
$ |
9,518
|
$ |
16,362
|
$ | (437 | ) | $ |
25,443
|
$ |
15,517
|
$ |
12,482
|
$ | (567 | ) | $ |
27,432
|
||||||||||||||
We
performed
impairment analyses of all of held-for-sale assets in accordance with SFAS
144
and SFAS 142. As a result of this analysis, we determined that two
businesses within the GBPO segment had a carrying value that exceeded fair
value. As a result, during fiscal 2007, we recorded an impairment
expense of $2.6 million, of which $2.5 million relates to goodwill impairment
under SFAS 142 and $0.1 million relates to long-lived asset impairment
under
SFAS 144 during fiscal 2007. This impairment is included in
Income from discontinued operations.
Except
for minor
transitional activities, we do not believe that we will have any ongoing
involvement or cash flows in these businesses. Thus, we classified
the results of operations for these businesses as Income from discontinued
operations, net on our Consolidated Statements of Operations in accordance
with SFAS 144. The following table summarizes our revenue and pre-tax
income generated by these operations in fiscal years 2007, 2006 and
2005.
59
|
Year
ended September 30, 2007
|
||||||||||||
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Revenues
(Discontinued operations):
|
||||||||||||
|
GBPO
|
$ |
34,835
|
$ |
39,902
|
$ |
40,250
|
||||||
|
PSSI
|
31,372
|
32,337
|
31,645
|
|||||||||
|
Other/eliminations
|
—
|
—
|
10
|
|||||||||
|
Total
Revenues
|
$ |
66,207
|
$ |
72,239
|
$ |
71,905
|
||||||
|
Income
before taxes (Discontinued operations):
|
||||||||||||
|
GBPO
|
$ |
6,500
|
$ |
5,739
|
$ |
10,952
|
||||||
|
PSSI
|
263
|
3,541
|
5,726
|
|||||||||
|
Other/eliminations
|
863
|
646
|
3,942
|
|||||||||
|
Total
income before taxes
|
$ |
7,626
|
$ |
9,926
|
$ |
20,620
|
||||||
Australian
operations
In
fiscal 2002, we
disposed of most of our Australian operations and in fiscal 2003 we requested
and received $6.5 million of federal income tax refunds associated with
this disposal. Although we received the refund in October 2003, we
fully reserved the entire balance because of uncertainty about the final
review
and resolution of this transaction by the Internal Revenue
Service. Since October 2003, we increased our reserve by
$1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.
In
March 2007, we
were notified by the Internal Revenue Service that its Joint Committee on
Taxation had completed its review and had approved the $6.5 million of
refund. As a result, during the second quarter of fiscal 2007, we
reversed the $6.5 million of reserve for the refund and the
$1.1 million reserve for potential interest and penalties. This
$7.6 million reversal has been recorded on our Consolidated Statements of
Operations as Income from discontinued operations in accordance with
SFAS 144.
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
16—SUBSEQUENT EVENTS
|
On
October 29,
2007, we entered into two-year employment agreements with Michael A. Lawler,
Senior Vice President, Electronic Payment Processing, and Steven M. Beckerman,
Senior Vice President, Government Business Process Outsourcing. Under
the terms of their individual agreements, Mr. Lawler is entitled to a base
salary of $237,000 per annum and Mr. Beckerman is entitled to a base salary
of
$220,000 per annum. The employment agreements entitle each executive
to participate in any Company incentive plans, programs and/or arrangements
applicable to senior-level executives, assuming satisfaction of applicable
performance goals. In addition, each executive 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 an executive's employment is terminated as a result of death,
certain instances of disability, resignation for prescribed events of "Good
Reason," or without cause he will be entitled to, among other things one
year's
base salary, plus twelve months of COBRA health continuation
benefits. If an executive were terminated by the company within one
year after a change in control or if the executive resigned for prescribed
events of "Good Reason" within one year after a change in control, the executive
would be entitled to receive two times his base salary, and a bonus equal
to two
times the average annual bonus paid to him during the past three years, plus
eighteen months of COBRA health continuation benefits. In the event
of a defined change of control and loss of employment, all options granted
on
August 24, 2006 would vest immediately and all other options that would
have vested within eighteen months of the date of termination would immediately
vest.
60
Stock
Option
Grants
On
October 1,
2007 and October 29, 2007, we awarded options to purchase 775,000 and
60,000, respectively, shares of common stock to several key corporate employees
and key employees in our EPP segment, none of which are executive
officers. These options were awarded to individuals as an incentive
to promote stability in our ongoing operations.
Purported
Class Action Lawsuit
On
December 5,
2007, the United States District Court for the Eastern District of Virginia
granted our motion to dismiss plaintiff's complaint but permitted plaintiff
an
opportunity to file an amended complaint. Plaintiff's amended
complaint must be filed by December 28, 2007.
Acceleration
of Director Grants
On
August 24, 2006, each of our independent directors was issued a stock
option under the Company’s 2004 Amended and Restated 2004 Stock Incentive Plan
to purchase 40,000 shares of our common stock at an exercise price of $5.95
per
share. When initially granted, the options vested at the rate of 20% on
each anniversary of the grant date that each recipient remained on the Board
of
Directors and vested 100% upon a change in control. On December 10,
2007, the Compensation Committee of the Board of Directors passed a resolution
that accelerated the vesting of these options in full as of December 7,
2007.
Executive
Officer Change of Employment Status
On
December 12, 2007, we agreed with Deanne M. Tully that she would cease to
serve as Vice President, General Counsel and Corporate Secretary of Tier,
effective March 31, 2008. We have entered into a Transition
Agreement, or the Agreement, with Ms. Tully dated December 12, 2007, which
provides that, if she does not resign and is not terminated for cause prior
to
March 31, 2008, and if she satisfies the conditions of the Executive
Severance and Change in Control Benefits Agreement, or the Severance Agreement,
dated July 30, 2003 between Ms. Tully and Tier, Ms. Tully will receive 12
months’ base salary, COBRA premiums for the shorter of 12 months or the period
during which she is eligible for COBRA, pursuant to the terms of the Severance
Agreement, and up to $7,500 for expenses related to outplacement incurred
in
2008. The Agreement also provides that Ms. Tully will serve as a
consultant to Tier, to ensure a smooth transition, for six months following
March 31, 2008, for a monthly retainer of $18,333.33.
On
February 12, 2007, we entered into a Separation Agreement and Release, or
the Separation Agreement, with Todd F. Vucovich, Senior Vice President, Packaged
Software and Systems Integration, in which Mr. Vucovich resigned his position
effective November 30, 2007. Under the terms of the Separation
Agreement, Mr. Vucovich is entitled to a lump sum severance payment equal
to 6
months' salary, 12 months' COBRA premiums, $75,000 for relocation
reimbursement, and up to $7,500 for expenses related to outplacement
incurred. On November 15, 2007, we entered into Amendment No. 1
to the Separation Agreement and Release, which revised the separation date
to
December 31, 2007 and provided Mr. Vucovich, in addition to the sums
described above, an additional $10,000.
61
|
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
The
following
tables set forth certain unaudited consolidated quarterly statements of
operations data for each of the eight fiscal quarters ended September 30,
2007. In our opinion, this information has been prepared on the same
basis as the audited Consolidated Financial Statements contained
herein. This information should be read in conjunction with our
Consolidated Financial Statements and the notes thereto appearing elsewhere
in
this report. Our operating results for any one quarter are not
necessarily indicative of results for any future period.
|
2007
fiscal quarters
|
2006
fiscal quarters
|
|||||||||||||||||||||||||||||||
|
(In
thousands, except per share data)
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
|
Consolidated
statement of operations data:
|
||||||||||||||||||||||||||||||||
|
Revenues
|
$ |
20,871
|
$ |
40,358
|
$ |
23,783
|
$ |
26,136
|
$ |
18,630
|
$ |
37,760
|
$ |
19,102
|
$ |
21,000
|
||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||||||||||
|
Direct
costs
|
15,270
|
31,795
|
17,727
|
19,099
|
13,593
|
29,466
|
14,368
|
14,243
|
||||||||||||||||||||||||
|
General
and administrative
|
5,759
|
6,821
|
9,165
|
5,741
|
9,026
|
10,600
|
7,585
|
5,649
|
||||||||||||||||||||||||
|
Selling
and marketing
|
1,756
|
2,821
|
2,075
|
1,591
|
1,971
|
2,929
|
2,193
|
2,069
|
||||||||||||||||||||||||
|
Depreciation
and amortization
|
895
|
971
|
1,355
|
1,352
|
1,204
|
1,298
|
1,318
|
1,313
|
||||||||||||||||||||||||
|
Impairment
of goodwill & held-for-sale assets
|
647
|
8,585
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Loss
from continuing operations
|
(3,456 | ) | (10,635 | ) | (6,539 | ) | (1,647 | ) | (7,164 | ) | (6,533 | ) | (6,362 | ) | (2,274 | ) | ||||||||||||||||
|
Total
other income
|
996
|
628
|
784
|
1,686
|
771
|
893
|
1,146
|
647
|
||||||||||||||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
(2,460 | ) | (10,007 | ) | (5,755 | ) |
39
|
(6,393 | ) | (5,640 | ) | (5,216 | ) | (1,627 | ) | |||||||||||||||||
|
Income
tax provision (benefit)
|
16
|
(7 | ) |
7
|
60
|
45
|
—
|
—
|
—
|
|||||||||||||||||||||||
|
Loss
from continuing operations
|
(2,476 | ) | (10,000 | ) | (5,762 | ) | (21 | ) | (6,438 | ) | (5,640 | ) | (5,216 | ) | (1,627 | ) | ||||||||||||||||
|
(Loss)
income from discontinued operations, net
|
(791 | ) |
4,281
|
9,500
|
2,235
|
1,766
|
4,053
|
215
|
3,436
|
|||||||||||||||||||||||
|
Net
(loss) income
|
$ | (3,267 | ) | $ | (5,719 | ) | $ |
3,738
|
$ |
2,214
|
$ | (4,672 | ) | $ | (1,587 | ) | $ | (5,001 | ) | $ |
1,809
|
|||||||||||
|
Average
shares issued and outstanding:
|
||||||||||||||||||||||||||||||||
|
Basic
|
19,512
|
19,511
|
19,501
|
19,499
|
19,495
|
19,499
|
19,493
|
19,490
|
||||||||||||||||||||||||
|
Diluted
|
19,512
|
19,511
|
19,617
|
19,591
|
19,495
|
19,499
|
19,493
|
19,627
|
||||||||||||||||||||||||
|
Performance
ratios:
|
||||||||||||||||||||||||||||||||
|
Return
on average assets
|
(1.94 | )% | (3.34 | )% | 2.16 | % | 1.29 | % | (2.72 | )% | (0.91 | )% | (2.82 | )% | 1.01 | % | ||||||||||||||||
|
Return
on average shareholders' equity
|
(2.35 | )% | (4.00 | )% | 2.65 | % | 1.63 | % | (3.43 | )% | (1.14 | )% | (3.53 | )% | 1.27 | % | ||||||||||||||||
|
Total
ending equity to total ending assets
|
82.63 | % | 82.59 | % | 84.35 | % | 79.06 | % | 79.01 | % | 79.45 | % | 79.64 | % | 79.71 | % | ||||||||||||||||
|
Total
average equity to total average
assets
|
82.61 | % | 83.47 | % | 81.70 | % | 79.04 | % | 79.23 | % | 79.55 | % | 79.68 | % | 79.89 | % | ||||||||||||||||
|
Per
share of common stock data:
|
||||||||||||||||||||||||||||||||
|
(Loss)
earnings per share—Basic:
|
||||||||||||||||||||||||||||||||
|
Continuing
operations(1)
|
$ | (0.13 | ) | $ | (0.51 | ) | $ | (0.29 | ) | $ |
—
|
$ | (0.33 | ) | $ | (0.29 | ) | $ | (0.27 | ) | $ | (0.08 | ) | |||||||||
|
Discontinued
operations(1)
|
$ | (0.04 | ) | $ |
0.22
|
$ |
0.48
|
$ |
0.11
|
$ |
0.09
|
$ |
0.21
|
$ |
0.01
|
$ |
0.17
|
|||||||||||||||
|
(Loss)
earnings per share—Basic
|
$ | (0.17 | ) | $ | (0.29 | ) | $ |
0.19
|
$ |
0.11
|
$ | (0.24 | ) | $ | (0.08 | ) | $ | (0.26 | ) | $ |
0.09
|
|||||||||||
|
(Loss)
earnings per share—Diluted:
|
||||||||||||||||||||||||||||||||
|
Continuing
operations(1)
|
$ | (0.13 | ) | $ | (0.51 | ) | $ | (0.29 | ) | $ |
—
|
$ | (0.33 | ) | $ | (0.29 | ) | $ | (0.27 | ) | $ | (0.08 | ) | |||||||||
|
Discontinued
operations(1)
|
$ | (0.04 | ) | $ |
0.22
|
$ |
0.48
|
$ |
0.11
|
$ |
0.09
|
$ |
0.21
|
$ |
0.01
|
$ |
0.17
|
|||||||||||||||
|
(Loss)
earnings per share—Diluted
|
$ | (0.17 | ) | $ | (0.29 | ) | $ |
0.19
|
$ |
0.11
|
$ | (0.24 | ) | $ | (0.08 | ) | $ | (0.26 | ) | $ |
0.09
|
|||||||||||
|
Book
value
|
$ |
7.05
|
$ |
7.19
|
$ |
7.42
|
$ |
6.98
|
$ |
6.88
|
$ |
7.08
|
$ |
7.14
|
$ |
7.33
|
||||||||||||||||
|
Average
balance sheet data:
|
||||||||||||||||||||||||||||||||
|
Total
assets
|
$ |
165,158
|
$ |
171,249
|
$ |
172,808
|
$ |
171,435
|
$ |
171,815
|
$ |
174,269
|
$ |
177,573
|
$ |
178,560
|
||||||||||||||||
|
Total
liabilities
|
$ |
29,248
|
$ |
28,299
|
$ |
31,620
|
$ |
35,938
|
$ |
35,684
|
$ |
35,646
|
$ |
36,089
|
$ |
35,903
|
||||||||||||||||
|
Total
shareholders' equity
|
$ |
138,910
|
$ |
142,950
|
$ |
141,188
|
$ |
135,497
|
$ |
136,131
|
$ |
138,623
|
$ |
141,484
|
$ |
142,657
|
||||||||||||||||
|
Market
price per share of common stock:
|
||||||||||||||||||||||||||||||||
|
High
|
$ |
10.26
|
$ |
10.05
|
$ |
8.90
|
$ |
7.30
|
$ |
7.05
|
$ |
8.70
|
$ |
8.08
|
$ |
8.50
|
||||||||||||||||
|
Low
|
$ |
8.33
|
$ |
8.25
|
$ |
5.85
|
$ |
6.35
|
$ |
5.25
|
$ |
5.67
|
$ |
7.34
|
$ |
6.93
|
||||||||||||||||
|
(1)The
sum of
quarterly per share amounts may not equal annual per share amounts
as the
quarterly calculations are based on varying numbers of shares of
common
stock.
|
||||||||||||||||||||||||||||||||
62
Valuation
and Qualifying Accounts
|
(in
thousands)
|
Balance
at beginning of period
|
Additions/
(reductions)
|
Write-offs
|
Balance
at
end
of period
|
||||||||||||
|
Year
ended September 30, 2007:
|
||||||||||||||||
|
Allowance
for receivables
|
$ |
935
|
$ |
444
|
$ | (183 | ) | $ |
1,196
|
|||||||
|
Deferred
tax asset valuation allowance
|
27,997
|
878
|
—
|
28,875
|
||||||||||||
|
Inventory
allowance
|
75
|
—
|
—
|
75
|
||||||||||||
|
Year
ended September 30, 2006:
|
||||||||||||||||
|
Allowance
for receivables
|
400
|
557
|
(22 | ) |
935
|
|||||||||||
|
Deferred
tax asset valuation allowance
|
25,754
|
2,243
|
—
|
27,997
|
||||||||||||
|
Inventory
allowance
|
75
|
—
|
—
|
75
|
||||||||||||
|
Year
ended September 30, 2005:
|
||||||||||||||||
|
Allowance
for receivables
|
493
|
(42 | ) | (51 | ) |
400
|
||||||||||
|
Deferred
tax asset valuation allowance
|
22,699
|
3,055
|
—
|
25,754
|
||||||||||||
|
Inventory
allowance
|
75
|
—
|
—
|
75
|
||||||||||||
63
ITEM
9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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
September 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 the 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 September 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.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is
responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
·
|
pertain
to
the maintenance of records that in reasonable detail accurately
and fairly
reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
company
are being made only in accordance with authorizations of management
and
directors of the company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management
assessed the effectiveness of our internal control over financial reporting
as
of September 30, 2007. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated
Framework.
Based
on our
assessment, management concluded that, as of September 30, 2007, our
internal control over financial reporting is effective based on those
criteria.
Our independent auditors have issued an audit report on our internal control over financial reporting. This report appears on page 65.
64
To
the
Board of Directors and Shareholders
Tier
Technologies, Inc.
Reston
Virginia
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting, that Tier Technologies,
Inc. and subsidiaries maintained effective internal control over financial
reporting as of September 30, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Tier
Technologies, Inc. and subsidiaries management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control,
and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls
may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Tier Technologies, Inc. maintained
effective internal control over financial reporting as of September 30, 2007,
is
fairly stated, in all material respects, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, Tier
Technologies, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of September
30, 2007 and the related consolidated statements of operations, shareholders’
equity, comprehensive income (loss) and cash flows for the year then ended
of
Tier Technologies, Inc. and our report dated December 13, 2007 expressed
an
unqualified opinion.
/s/
McGladrey & Pullen, LLP
Vienna,
Virginia
December
13, 2007
65
CHANGES
IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There
have been no
changes in our internal control over financial reporting during the quarter
ended September 30, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B—OTHER INFORMATION
On
December 12, 2007, we agreed with Deanne M. Tully that she would cease to
serve as Vice President, General Counsel and Corporate Secretary of Tier,
effective March 31, 2008. We have entered into a Transition
Agreement, or the Agreement, with Ms. Tully dated December 12, 2007, which
provides that, if she does not resign and is not terminated for cause prior
to
March 31, 2008, and if she satisfies the conditions of the Executive
Severance and Change in Control Benefits Agreement, or the Severance Agreement,
dated July 30, 2003 between Ms. Tully and Tier, Ms. Tully will receive 12
months’ base salary, COBRA premiums for the shorter of 12 months or the period
during which she is eligible for COBRA, pursuant to the terms of the Severance
Agreement, and up to $7,500 for expenses related to outplacement incurred
in
2008. The Agreement also provides that Ms. Tully will serve as a
consultant to Tier, to ensure a smooth transition, for six months following
March 31, 2008, for a monthly retainer of $18,333.33.
On
February 12, 2007, we entered into a Separation Agreement and Release, or
the Separation Agreement, with Todd F. Vucovich, in which Mr. Vucovich would
cease to serve as Senior Vice President, Packaged Software and Systems
Integration, effective November 30, 2007. Under the terms of the
Separation Agreement, Mr. Vucovich is entitled to a lump sum severance payment
equal to 6 months' salary, 12 months' COBRA premiums, $75,000 for
relocation reimbursement, and up to $7,500 for expenses related to outplacement
incurred. On November 15, 2007, we entered into Amendment No. 1
to the Separation Agreement and Release, which revised the separation date
to
December 31, 2007, and provided Mr. Vucovich, in addition to the sums
described above, an additional $10,000.
PART
III
ITEM
10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A
list of our
executive officers and their biographical information appears in Part I,
Item 1 of this report. Information about our Directors may be
found under the caption Election of Directors of our Proxy Statement
for the Annual Meeting of Stockholders to be held timely, or the Proxy
Statement. That information is incorporated herein by
reference.
The
information in
the Proxy Statement set forth under the captions Audit Committee Financial
Expert, Audit Committee and Section 16(a) Beneficial Ownership
Reporting Compliance is incorporated herein by
reference.
We
have adopted the
Tier Technology Code of Ethics, a code of ethics that applies to our
Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer,
Corporate Controller and other finance organization employees. The code of
ethics is available publicly on our website at www.Tier.com. If we make any
amendments to the Code of Ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, or the Corporate Controller,
we will disclose the nature of such amendment or waiver on our website or
in a
report on Form 8-K.
ITEM
11—EXECUTIVE COMPENSATION
The
information in
the Proxy Statement set forth under the captions Compensation and Analysis,
Executive Compensation, Director Compensation, Compensation Committee Interlocks
and Insider Participation and Compensation Committee Report is
incorporated herein by reference.
66
ITEM
12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information in
the Proxy Statement set forth under the captions Stock Ownership
and Equity Compensation Plan Information is
incorporated herein by reference.
ITEM
13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
The
information set
forth under the captions Certain Relationships and Related Transactions
and Director Independence of the Proxy Statement is incorporated
herein by reference.
ITEM
14—PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
concerning principal accountant fees and services appears in the Proxy Statement
under the heading Principal Accounting Fees and Services and is
incorporated herein by reference.
67
PART
IV
ITEM
15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The
following documents are filed as part of the report:
|
·
|
Financial
Statements – The financial statements are set forth under Item 8 of this
Annual Report on Form 10-K. See Financial Statements and
Supplementary Data on page 32.
|
|
·
|
Financial
Statement Schedules – Schedule II—Valuation and Qualifying
Accounts is set forth under Item 8 of this Annual Report on Form
10-K on page 63. All other schedules have been omitted because
they were either not required or not applicable or because the
information
is otherwise included.
|
|
·
|
Exhibits
|
|
Exhibit
number
|
Exhibit
description
|
|
3.1
|
Restated
Certificate of Incorporation (1)
|
|
3.2
|
Amended
and Restated Bylaws of Tier Technologies, Inc., as amended (2)
|
|
3.3
|
Certificate
of Designations of Series A Junior Participating Preferred Stock
(3)
|
|
4.1
|
Form
of common stock certificate (1)
|
|
4.2
|
See
Exhibits 3.1, 3.2 and 3.3, for provisions of the Restated Certificate
of
Incorporation and Amended and Restated Bylaws, as amended of the
Registrant defining rights of the holders of common stock of the
Registrant
|
|
4.3
|
Rights
Agreement, dated as of January 10, 2006, by and between Tier Technologies,
Inc. and American Stock Transfer & Trust Company, as Rights Agent
(3)
|
|
4.4
|
Form
of Rights Certificate (3)
|
|
4.5
|
First
Amendment to Rights Agreement, dated July 12, 2007, by and between
Tier
Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent (4)
|
|
10.1
|
Amended
and Restated 1996 Equity Incentive Plan, dated January 28, 1999 (5)*
|
|
10.2
|
Form
of Incentive Stock Option Agreement under the Registrant’s Amended and
Restated 1996 Equity Incentive Plan (6)*
|
|
10.3
|
Form
of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
Restated 1996 Equity Incentive Plan (6)*
|
|
10.4
|
Amended
and Restated 2004 Stock Incentive Plan (7)*
|
|
10.5
|
Form
of Incentive Stock Option Agreement under the Registrant’s Amended and
Restated 2004 Stock Incentive Plan (7)*
|
|
10.6
|
Form
of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
Restated 2004 Stock Incentive Plan (7)*
|
|
10.7
|
Form
of Restricted Stock Agreement under the Registrant’s Amended and Restated
2004 Stock Incentive Plan (7)*
|
|
10.8
|
Form
of California Indemnification Agreement (8)
|
|
10.9
|
Form
of Delaware Indemnification Agreement for officers *
|
|
10.10
|
Form
of Delaware Indemnification Agreement for directors *
|
|
10.11
|
Tier
Corporation 401(k) Plan, Summary Plan Description (8)*
|
|
10.12
|
Incentive
Compensation Plan, as amended (9)*
|
|
10.13
|
Management
Incentive Plan (10)*
|
|
10.14
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of January 2, 1997 (8)
|
|
10.15
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of May 31, 1997 (8)
|
68
|
Exhibit
number
|
Exhibit
description
|
|
10.16
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of July 15, 1997 (8)
|
|
10.17
|
Amended
and Restated Full Recourse Secured Promissory Note, dated as of
April 1,
1998, by and between the Registrant and James L. Bildner (11)
|
|
10.18
|
Amended
and Restated Full Recourse Secured Promissory Note, dated as of
April 1,
1998, by and between the Registrant and James L. Bildner(
11)
|
|
10.19
|
Amended
and Restated Pledge Agreement, dated as of June 30, 1999, by and
between
the Registrant and James L. Bildner (12)
|
|
10.20
|
Second
Amendment and Restated Pledge Agreement, dated as of June 30, 1999,
by and
between the Registrant and James L. Bildner (12)
|
|
10.21
|
Third
Amendment and Restated Pledge Agreement, dated as of June 30, 1999,
by and
between the Registrant and James L. Bildner (12)
|
|
10.22
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of March 27, 2000. (Assignment of the Note by
and between the Registrant and William G. Barton, previously filed
as
Exhibit 10.17 to Form S-1) (13)
|
|
10.23
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of March 27, 2000. (Assignment of the Note by
and between the Registrant and William G. Barton, previously filed
as
Exhibit 10.18 to Form S-1) (13)
|
|
10.24
|
Full
Recourse Promissory Note by and between the Registrant and James
L.
Bildner, dated as of March 27, 2000. (Assignment of the Note by
and between the Registrant and William G. Barton, previously filed
as
Exhibit 10.19 to Form S-1) (13)
|
|
10.25
|
Pledge
Agreement by and between the Registrant and James L. Bildner, dated
as of
March 27, 2000 (13)
|
|
10.26
|
Termination
Agreement dated October 14, 2003, by and between Tier and James
L. Bildner
(14)*
|
|
10.27
|
Pledge
Agreement between Tier and James L. Bildner, dated April 1, 2004
(15)
|
|
10.28
|
First
Amendment, dated June 14, 2004, to the Pledge Agreement between
Tier and
James L. Bildner, dated March 27, 2000 (15)
|
|
10.29
|
First
Amendment, dated June 14, 2004, to the Second Amended and Restated
Pledge
Agreement between Tier and James L. Bildner, dated June 30, 1999
(15)
|
|
10.30
|
First
Amendment, dated June 14, 2004, to the Third Amended and Restated
Pledge
Agreement between Tier and James L. Bildner, dated June 30, 1999
(15)
|
|
10.31
|
Cross-Collateralization
Agreement dated December 13, 2004, by and between the Registrant
and
James L. Bildner (16)
|
|
10.32
|
Severance
and Change in Control Benefits Agreement by and between the Registrant
and
James Weaver, dated September 1, 2001 (17)*
|
|
10.33
|
Executive
Employment Agreement, dated November 9, 2004, by and between Registrant
and James R. Weaver (6)*
|
|
10.34
|
Credit
and Security Agreement as of January 29, 2003, by and between the
Registrant, Official Payments Corporation and City National Bank
(18)
|
|
10.35
|
Amendment,
dated January 24, 2005, to the Credit and Security Agreement, dated
January 29, 2003, by and between the Registrant, Official Payments
Corporation and City National Bank (19)
|
|
10.36
|
Third
Amendment, dated June 28, 2005, to the Credit and Security Agreement,
dated January 29, 2003, by and between the Registrant, Official
Payments
Corporation and City National Bank (7)
|
|
10.37
|
Letter
Agreement, dated June 28, 2005, by and between Registrant and City
National Bank (7)
|
|
10.38
|
Employment
Agreement dated May 28, 2004, by and between EPOS Corporation and
Michael
A. Lawler (20)*
|
|
10.39
|
Supplemental
Indemnity Agreement by and between Registrant and Bruce R. Spector,
dated
September 2, 2004 (21)*
|
|
10.40
|
Summary
of Board Compensation (19)*
|
69
|
Exhibit
number
|
Exhibit
Description
|
|
10.41
|
Offer
Letter by and between Registrant and David Fountain, dated May
2, 2005
(21)*
|
|
10.42
|
Executive
Incentive Metrics for Chief Executive Officer and Chief Financial
Officer
for fiscal year ended September 30, 2005 (21)*
|
|
10.43
|
Senior
Vice President – Human Resources Compensation Summary (21)*
|
|
10.44
|
Separation
Agreement and Release between Registrant and Jeffrey McCandless,
dated
March 9, 2005 (22)*
|
|
10.45
|
Employment
Agreement dated July 2, 2003 by and between Tier and Mr. Jeffrey
A.
McCandless (23)*
|
|
10.46
|
Employment
Agreement dated July 1, 2004 between Tier and Ms. Deanne M. Tully
(39)*
|
|
10.47
|
Executive
Severance and Change in Control Benefits Agreement (39)*
|
|
10.48
|
Third
Amendment to Credit and Security Agreement with City National Bank,
dated
June 28, 2005 (24)
|
|
10.49
|
Shareholder
Rights Plan and Rights Agreement, dated January 10, 2006 (25)
|
|
10.50
|
Assumption
Agreement between Tier Technologies, Inc., Official Payments Corporation
and EPOS Corporation, dated January 6, 2006 (26)
|
|
10.51
|
Security
Agreement as of January 6, 2006 by and between the Registrant,
Official
Payments Corporation, EPOS Corporation and City National Bank (26)
|
|
10.52
|
Board
approval of two one-time bonuses to David E. Fountain, dated February
21,
2006 (27)*
|
|
10.53
|
Amended
and Restated Credit and Security Agreement between the Registrant,
Official Payments Corporation, EPOS Corporation and City National
Bank
(28)
|
|
10.54
|
Form
of Employment Security Agreements between Tier Technologies, Inc.,
and
each of Steven Beckerman, Todd Vucovich, and Michael Lawler, dated
March
28, 2006(29)*
|
|
10.55
|
Management
Incentive Plan for Steven Beckerman, Todd Vucovich, Steven Wade,
Michael
Lawler and Deanne Tully, dated March 28, 2006 (29)*
|
|
10.56
|
Separation
Agreement between Tier Technologies, Inc., and James R. Weaver,
dated May
31, 2006 (30)*
|
|
10.57
|
Employment
Agreement between Tier Technologies, Inc., and Ronald L. Rossetti,
dated
July 26, 2006 (31)*
|
|
10.58
|
Non-Statutory
Stock Option Agreement between Tier and Ronald L. Rossetti, dated
July 26,
2006 (31)*
|
|
10.59
|
Discretionary
Incentive Compensation Plan, dated August 22, 2006 (32)*
|
|
10.60
|
Option
Grants awarded to David E. Fountain, Steven M. Beckerman, Michael
Lawler,
Deanne Tully, Stephen Wade, Charles Berger, Samuel Cabot, Morgan
Guenther,
T. Michael Scott Bruce Spector, and fifteen other employees, dated
August
24, 2006 (33)*
|
|
10.61
|
Employment
Agreement between Tier Technologies, Inc. and David E. Fountain,
dated
December 11, 2006 (34)*
|
|
10.62
|
First
Amendment to Amended and Restated Credit and Security Agreement
dated
March 20, 2007 between the Registrant, Official Payments Corporation,
EPOS
Corporation and City National Bank (35)
|
|
10.63
|
Second
Amendment to Amended and Restated Credit and Security Agreement
dated
September 26, 2007 between the Registrant, Official Payments Corporation,
EPOS Corporation and City National Bank (36)
|
|
10.64
|
Share
Repurchase Agreement between CPAS Systems, Inc., Tier Ventures
Corporation
and Tier Technologies, Inc. dated June 29, 2007 (37)
|
|
10.65
|
Employment
Agreement between Tier Technologies, Inc., and Kevin Connell, dated
August
9, 2007 (38)*
|
|
10.66
|
Transition
Agreement between Tier Technologies, Inc., and Deanne M. Tully
dated
December 12, 2007 *
|
|
10.67
|
Separation
Agreement and Release between Tier Technologies, Inc., and Todd
F.
Vucovich, dated February 12, 2007 *
|
|
10.68
|
Amendment
to the Separation Agreement and Release between Tier Technologies,
Inc.,
and Todd F. Vucovich, dated November 15, 2007 *
|
|
21.1
|
Subsidiaries
of the Registrant
|
70
|
Exhibit
number
|
Exhibit
description
|
|
23.1
|
Consent
of McGladrey & Pullen, LLP, Independent Registered Public Accounting
Firm
|
|
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
|
|
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
|
|
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
|
|
*
Management
contract or compensatory plan required to be filed as an exhibit
to this
report
(1)
Filed
as an
exhibit to Form 8-K, filed on July 19, 2005, and incorporated herein
by
reference
(2)
Filed as an
exhibit to Form 10-Q, filed August 9, 2007, and incorporated herein
by
reference
(3)
Filed
as an
exhibit to Form 8-K, filed January 11, 2006, and incorporated herein
by
reference
(4)
Filed as an
exhibit to Form 8-K, filed July 12, 2007, and incorporated herein
by
reference
(5)
Filed
as an
exhibit to Form 10-Q, filed May 11, 2001, and incorporated herein by
reference
(6)
Filed
as an
exhibit to Form 8-K, filed November 12, 2004, and incorporated herein
by reference
(7)
Filed
as an
exhibit to Form 8-K, filed July 5, 2005 and incorporated herein by
reference
(8)
Filed
as an
exhibit to Form S-1 (No. 333-37661), filed on October 10, 1997,
and
incorporated herein by reference
(9)
Filed as an
exhibit to Form 8-K, filed on May 5, 2005, and incorporated herein
by
reference
(10)
Filed as an
exhibit to Form 8-K, filed on May 27, 2005, and incorporated herein
by reference
(11)
Filed as an
exhibit to Form S-1/A (No. 333-52065), filed on May 7, 1998, and
incorporated herein by reference
(12)
Filed as an
exhibit to Form 10-Q, filed August 16, 1999, and incorporated herein
by
reference
(13)
Filed as an
exhibit to Form 10-Q, filed May 15, 2000, and incorporated herein
by
reference
(14)
Filed as an
exhibit to Form 10-Q, filed February 13, 2004, and incorporated
herein by
reference
(15)
Filed as an
exhibit to Form 10-Q, filed August 15, 2004, and incorporated herein
by
reference
(16)
Filed as an
exhibit to Form 8-K, filed December 15, 2004, and incorporated
herein by
reference
(17)
Filed as an
exhibit to Form 10-K, filed November 29, 2001, and incorporated
herein by
reference
(18)
Filed as an
exhibit to Form 10-Q, filed May 12, 2003, and incorporated herein
by
reference
(19)
Filed as an
exhibit to Form 10-Q, filed February 9, 2005, and incorporated
herein by
reference
(20)
Filed as an
exhibit to Form 10-K filed December 28 2004, and incorporated herein
by
reference
(21).Filed
as an
exhibit to Form 10-Q, filed May 6, 2005, and incorporated herein
by
reference
(22)
Filed as an
exhibit to Form 8-K, filed March 14, 2005, and incorporated herein by
reference
(23)
Filed as an
exhibit to Form 10-Q, filed May 11, 2004, and incorporated herein
by
reference
(24)
Filed as an
exhibit to Form 8-K, filed July 5, 2005, and incorporated herein
by
reference
(25)
Filed as an
exhibit to Form 8-K, filed January 11, 2006, and incorporated herein
by
reference
(26)
Filed as an
exhibit to Form 8-K, filed January 11, 2006, and incorporated herein
by
reference
(27)
Filed as an
exhibit to Form 8-K, filed February 22, 2006, and incorporated
herein by
reference
(28)
Filed as an
exhibit to Form 8-K, filed March 9, 2006, and incorporated herein
by
reference
(29)
Filed as an
exhibit to Form 8-K, filed April 3, 2006, and incorporated herein
by
reference
(30)
Filed as an
exhibit to Form 8-K, filed June 1, 2006, and incorporated herein
by
reference
(31)
Filed as an
exhibit to Form 8-K, filed August 1, 2006, and incorporated herein
by
reference
(32)
Filed as an
exhibit to Form 8-K, filed August 25, 2006, and incorporated herein
by
reference
(33)
Filed as an
exhibit to Form 8-K, filed August 29, 2006, and incorporated herein
by
reference
(34)
Filed as an
exhibit to Form 10-K, filed December 13, 2006, and incorporated
herein by
reference
(35)
Filed as an
exhibit to Form 8-K, filed March 28, 2007, and incorporated herein
by
reference
(36)
Filed as an
exhibit to Form 8-K, filed September 27, 2007, and incorporated
herein by
reference
|
|
71
|
Exhibit
number
|
Exhibit
Description
|
|
(37)
Filed as an exhibit to Form 8-K, filed July 3, 2007, and incorporated
herein by reference.
(38)
Filed as an exhibit to Form 10-Q, filed August 9, 2007, and incorporated
herein by reference.
(39)
Filed as an exhibit to Form 10-K, filed October 27, 2006, and incorporated
by reference.
|
72
SIGNATURES
Pursuant
to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the
undersigned, thereunto duly authorized.
|
Tier
Technologies, Inc.
|
||
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Dated:December
13, 2007
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By:
|
/s/
RONALD L. ROSSETTI
|
|
Ronald
L. Rossetti
Chief
Executive
Officer
|
||
Pursuant
to the
requirements of the Securities Exchange Act of 1934, this report has been
signed
by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
/s/
RONALD L. ROSSETTI
Ronald
L. Rossetti
|
Chief
Executive Officer and Chairman of the Board (principal executive
officer)
|
December 13
2007
|
|
/s/
DAVID E. FOUNTAIN
David
E. Fountain
|
Chief
Financial Officer (principal financial officer and principal accounting
officer)
|
December
13, 2007
|
|
/s/
CHARLES W. BERGER
Charles
W. Berger
|
Director
|
December
13, 2007
|
|
/s/
SAMUEL CABOT III
Samuel
Cabot III
|
Director
|
December
13, 2007
|
|
/s/
JOHN J. DELUCCA
John
J. Delucca
|
Director
|
December
13, 2007
|
|
/s/
MORGAN P. GUENTHER
Morgan
P. Guenther
|
Director
|
December
13, 2007
|
|
/s/
T. MICHAEL SCOTT
T.
Michael Scott
|
Director
|
December 13,
2007
|
|
/s/
BRUCE R. SPECTOR
Bruce
R. Spector
|
Director
|
December
13, 2007
|
|
/s/
JAMES R. STONE
James
R. Stone
|
Director
|
December
13, 2007
|
73