UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31,
2009
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
__________________
Commission
file number 000-23195
TIER
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
94-3145844
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
10780
Parkridge Boulevard, Suite 400
Reston,
Virginia 20191
(Address
of principal executive offices)
(571)
382-1000
(Registrant's
telephone number, including area code)
Not
applicable
(Former
name, former address, and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer," "accelerated
filer," and "smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
At
January 29, 2010 there were 18,150,965 shares of the Registrant's Common Stock
outstanding.
TIER TECHNOLOGIES,
INC.
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
1
|
Item
1. Consolidated Financial Statements
(unaudited)
|
1
|
Consolidated
Balance Sheets
|
1
|
Consolidated
Statements of Operations
|
2
|
Consolidated
Statements of Comprehensive Income/(Loss)
|
3
|
Consolidated
Statements of Cash Flows
|
4
|
Consolidated
Supplemental Cash Flow Information
|
5
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
Note
1—Nature of Operations and Basis of Presentation
|
6
|
Note
2—Recent Accounting Pronouncements
|
7
|
Note
3—Investments
|
7
|
Note
4—Fair Value Measurements
|
9
|
Note
5—Customer Concentration and Risk
|
10
|
Note
6—Goodwill and Other Intangible Assets
|
11
|
Note
7—Income Taxes
|
12
|
Note
8—Contingencies and Commitments
|
12
|
Note
9—Related Party Transactions
|
15
|
Note
10—Restructuring
|
15
|
Note
11—Segment Information
|
15
|
Note
12—Shareholders’ Equity
|
17
|
Note
13—Share-based Payment
|
17
|
Note
14—Discontinued Operations
|
19
|
Note
15—Loss per Share
|
20
|
Note
16—Acquisition
|
21
|
Note
17—Subsequent Events
|
21
|
Item
2. Management's Discussion and Analysis of Financial
Condition
and
Results of Operations
|
22
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
30
|
Item
4. Controls and Procedures
|
30
|
PART
II. OTHER INFORMATION
|
31
|
Item
1A. Risk Factors
|
31
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
37
|
Item
5. Other Information
|
37
|
Item
6. Exhibits
|
38
|
SIGNATURE
|
39
|
EXHIBIT
INDEX
|
40
|
Private
Securities Litigation Reform Act Safe Harbor Statement
Certain
statements contained in this report, including statements regarding the future
development of and demand for our services and our markets, anticipated trends
in various expenses, expected costs of legal proceedings, expectations for the
divestitures of certain assets, and other statements that are not historical
facts, are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements relate to future
events or our future financial and/or operating performance and generally can be
identified as such because the context of the statement includes words such as
"may," "will," "intends," "plans," "believes," "anticipates," "expects,"
"estimates," "shows," "predicts," "potential," "continue," or "opportunity," the
negative of these words or words of similar import. These
forward-looking statements are subject to risks and uncertainties, including the
risks and uncertainties described and referred to under Item 1A. Risk Factors
beginning on page 31, which could cause actual results to differ materially
from those anticipated as of the date of this report. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TIER
TECHNOLOGIES, INC.
CONSOLIDATED BALANCE
SHEETS
(in
thousands)
|
|
December 31,
2009
|
|
|
September 30,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,577 |
|
|
$ |
21,969 |
|
Investments
in marketable securities
|
|
|
1,000 |
|
|
|
4,499 |
|
Restricted
investments
|
|
|
1,361 |
|
|
|
1,361 |
|
Accounts
receivable, net
|
|
|
4,780 |
|
|
|
4,790 |
|
Settlements
receivable, net
|
|
|
7,994 |
|
|
|
6,272 |
|
Prepaid
expenses and other current assets
|
|
|
2,659 |
|
|
|
2,239 |
|
Total
current assets
|
|
|
44,371 |
|
|
|
41,130 |
|
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net
|
|
|
8,470 |
|
|
|
7,990 |
|
Goodwill
|
|
|
17,345 |
|
|
|
17,329 |
|
Other
intangible assets, net
|
|
|
10,906 |
|
|
|
12,038 |
|
Investments
in marketable securities
|
|
|
30,081 |
|
|
|
31,169 |
|
Restricted
investments
|
|
|
6,000 |
|
|
|
6,000 |
|
Other
assets
|
|
|
709 |
|
|
|
571 |
|
Total
assets
|
|
$ |
117,882 |
|
|
$ |
116,227 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
373 |
|
|
$ |
84 |
|
Settlements
payable
|
|
|
9,808 |
|
|
|
9,591 |
|
Accrued
compensation liabilities
|
|
|
2,037 |
|
|
|
3,213 |
|
Accrued
discount fees
|
|
|
9,697 |
|
|
|
5,343 |
|
Other
accrued liabilities
|
|
|
2,465 |
|
|
|
3,425 |
|
Deferred
income
|
|
|
778 |
|
|
|
861 |
|
Total
current liabilities
|
|
|
25,158 |
|
|
|
22,517 |
|
Other
liabilities
|
|
|
1,266 |
|
|
|
1,121 |
|
Total
liabilities
|
|
|
26,424 |
|
|
|
23,638 |
|
|
|
|
|
|
|
|
|
|
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: 20,687 and 20,687; shares outstanding: 18,151 and
18,238
|
|
|
192,423 |
|
|
|
192,030 |
|
Treasury
stock—at cost, 2,536 and 2,449 shares
|
|
|
(21,020 |
) |
|
|
(20,271 |
) |
Accumulated
deficit
|
|
|
(79,945 |
) |
|
|
(79,170 |
) |
Total
shareholders’ equity
|
|
|
91,458 |
|
|
|
92,589 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
117,882 |
|
|
$ |
116,227 |
|
See Notes to Consolidated Financial
Statements
TIER
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
32,768 |
|
|
$ |
29,740 |
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
24,092 |
|
|
|
22,418 |
|
General
and administrative
|
|
|
6,327 |
|
|
|
6,630 |
|
Selling
and marketing
|
|
|
1,601 |
|
|
|
1,316 |
|
Depreciation
and amortization
|
|
|
1,608 |
|
|
|
1,459 |
|
Total
costs and expenses
|
|
|
33,628 |
|
|
|
31,823 |
|
Loss
from continuing operations before other income/(loss) and income
taxes
|
|
|
(860 |
) |
|
|
(2,083 |
) |
|
|
|
|
|
|
|
|
|
Other
income/(loss):
|
|
|
|
|
|
|
|
|
Gain/(loss)
on investments
|
|
|
12 |
|
|
|
(112 |
) |
Interest
income, net
|
|
|
127 |
|
|
|
304 |
|
Total
other income
|
|
|
139 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(721 |
) |
|
|
(1,891 |
) |
Income
tax provision
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(721 |
) |
|
|
(1,892 |
) |
Loss
from discontinued operations, net
|
|
|
(54 |
) |
|
|
(3,262 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(775 |
) |
|
$ |
(5,154 |
) |
|
|
|
|
|
|
|
|
|
Loss
per share—Basic and diluted:
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
From
discontinued operations
|
|
|
— |
|
|
|
(0.16 |
) |
Loss
per share—Basic and diluted
|
|
$ |
(0.04 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing:
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
|
18,156 |
|
|
|
19,735 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$ |
(775 |
) |
|
$ |
(5,154 |
) |
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Impact
of unrealized loss transferred from AOCI into net loss
|
|
|
— |
|
|
|
2,505 |
|
Other
comprehensive income
|
|
|
— |
|
|
|
2,505 |
|
Comprehensive
loss
|
|
$ |
(775 |
) |
|
$ |
(2,649 |
) |
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(775 |
) |
|
$ |
(5,154 |
) |
Less:
Loss from discontinued operations, net
|
|
|
(54 |
) |
|
|
(3,262 |
) |
Loss
from continuing operations, net
|
|
|
(721 |
) |
|
|
(1,892 |
) |
Non-cash
items included in net loss:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,608 |
|
|
|
1,483 |
|
Provision
for doubtful accounts
|
|
|
299 |
|
|
|
39 |
|
Deferred
rent
|
|
|
26 |
|
|
|
— |
|
Share-based
compensation
|
|
|
507 |
|
|
|
468 |
|
(Gain)/loss
on trading securities
|
|
|
(12 |
) |
|
|
112 |
|
Other
|
|
|
(4 |
) |
|
|
25 |
|
Net
effect of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and settlements receivable, net
|
|
|
(2,011 |
) |
|
|
(1,727 |
) |
Prepaid
expenses and other assets
|
|
|
(737 |
) |
|
|
(602 |
) |
Accounts
and settlements payable and accrued liabilities
|
|
|
2,737 |
|
|
|
1,308 |
|
Income
taxes receivable
|
|
|
(77 |
) |
|
|
(61 |
) |
Deferred
income
|
|
|
(83 |
) |
|
|
— |
|
Cash
provided by (used in) operating activities from continuing
operations
|
|
|
1,532 |
|
|
|
(847 |
) |
Cash
used in operating activities from discontinued operations
|
|
|
(54 |
) |
|
|
(3,209 |
) |
Cash
provided by (used in) operating activities
|
|
|
1,478 |
|
|
|
(4,056 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale securities
|
|
|
(1,000 |
) |
|
|
(11,470 |
) |
Maturities
of available-for-sale securities
|
|
|
4,499 |
|
|
|
2,401 |
|
Sales
of trading securities
|
|
|
1,100 |
|
|
|
— |
|
Maturities
of restricted investments
|
|
|
— |
|
|
|
500 |
|
Purchase
of equipment and software
|
|
|
(956 |
) |
|
|
(480 |
) |
Additions
to goodwill—ChoicePay acquisition
|
|
|
(16 |
) |
|
|
— |
|
Collection
on note receivable
|
|
|
261 |
|
|
|
— |
|
Proceeds
from sale of discontinued operations
|
|
|
— |
|
|
|
205 |
|
Cash
provided by (used in ) investing activities from continuing
operations
|
|
|
3,888 |
|
|
|
(8,844 |
) |
Cash
used in investing activities from discontinued operations
|
|
|
— |
|
|
|
(437 |
) |
Cash
provided by (used in) investing activities
|
|
|
3,888 |
|
|
|
(9,281 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of company stock
|
|
|
(749 |
) |
|
|
— |
|
Capital
lease obligations and other financing arrangements
|
|
|
(9 |
) |
|
|
(5 |
) |
Cash
used in financing activities
|
|
|
(758 |
) |
|
|
(5 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,608 |
|
|
|
(13,342 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
21,969 |
|
|
|
47,735 |
|
Cash
and cash equivalents at end of period
|
|
$ |
26,577 |
|
|
$ |
34,393 |
|
TIER
TECHNOLOGIES, INC.
CONSOLIDATED
SUPPLEMENTAL CASH FLOW INFORMATION
(unaudited)
|
|
Three
months ended
December
31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
10 |
|
|
$ |
3 |
|
Income
taxes paid, net
|
|
$ |
77 |
|
|
$ |
60 |
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in fair value of ARS Rights
|
|
$ |
151 |
|
|
$ |
4,834 |
|
Notes
receivable from third parties
|
|
$ |
— |
|
|
$ |
571 |
|
Transfer
from available-for-sale to trading securities, at par
value
|
|
$ |
— |
|
|
$ |
31,325 |
|
Increase
in fair value of trading securities
|
|
$ |
163 |
|
|
$ |
2,442 |
|
See
Notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1—NATURE OF OPERATIONS
AND BASIS OF PRESENTATION
NATURE OF
OPERATIONS
Tier
Technologies, Inc., or Tier, primarily provides Electronic Payment Solutions, or
EPS. EPS services are provided by our wholly owned subsidiary
Official Payments Corporation, or OPC. We operate in the following
biller direct markets:
·
|
Federal—which
includes federal income and business tax
payments;
|
·
|
State
and local—which includes state and local income tax
payments;
|
·
|
Property
tax—which covers state and local real property
tax;
|
·
|
Education—which
consists of services to post-secondary educational institutions;
and
|
·
|
Other—which
includes local government fines and fees, motor vehicle registration and
payments, rent, insurance, K-12 education meal pay and fee payments, and
personal property tax payments.
|
We also
operate in two other business areas which we are winding down. These
are portions of our former Government Business Process Outsourcing, or GBPO, and
Packaged Software Systems Integration, or PSSI, operations that we expect to
wind-down over a three-year period because they are neither compatible with our
long-term strategic direction nor complementary with the other businesses that
we were divesting. These operations include:
·
|
Voice and
Systems Automation (formerly part of GBPO)—provides call center interactive voice response
systems and support services, including customization, installation and
maintenance;
and
|
·
|
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.
|
For
additional information about our EPS and Wind-down Operations, see Note
11—Segment Information.
For
additional information about businesses in which we no longer operate, and have
divested, see Note 14—Discontinued Operations.
BASIS OF
PRESENTATION
Our
Consolidated Financial Statements were prepared in accordance with accounting
principles generally accepted in the United States of America, or US GAAP, for
interim financial information and in accordance with Regulation S-X, Article 10,
under the Securities Exchange Act of 1934, as amended. They are
unaudited and exclude some disclosures required for annual financial
statements. We believe we have made all necessary adjustments so that
our Consolidated Financial Statements are presented fairly and that all such
adjustments are of a normal recurring nature.
Preparing
financial statements requires us to make estimates and assumptions that affect
the amounts reported on our Consolidated Financial Statements and accompanying
notes. We believe that near-term changes could impact the following
estimates: effective tax rates, deferred taxes and associated valuation
allowances; collectability of receivables; share-based compensation; and
valuation of goodwill, intangibles and investments. Although we
believe the estimates and assumptions used in preparing our Consolidated
Financial Statements and related notes are reasonable in light of known facts
and circumstances, actual results could differ materially.
NOTE 2—RECENT ACCOUNTING
PRONOUNCEMENTS
FASB ASC
810. In December 2007, the Financial Accounting Standards
Board, or FASB, issued Accounting Standard Codification, or ASC 810, or FASB ASC
810, which requires companies to measure non-controlling interests in
subsidiaries at fair value and to classify them as a separate component of
equity. FASB ASC 810 is effective as of each reporting fiscal year
beginning after December 15, 2008, and applies only to transactions
occurring after the effective date. We have adopted FASB ASC 810
October 1, 2009. The adoption of FASB ASC 810 has not had a
material effect on our financial position or results of operations.
FASB ASC
805. In December 2007, FASB issued FASB ASC 805, which
requires companies to measure assets acquired and liabilities assumed in a
business combination at fair value. In addition, liabilities related
to contingent consideration are to be re-measured at fair value in each
subsequent reporting period. FASB ASC 805 also requires the acquirer
in pre-acquisition periods to expense all acquisition-related
costs. FASB ASC 805 is effective for fiscal years beginning after
December 15, 2008, and is applicable only to transactions occurring after
the effective date. We have adopted FASB ASC 805 October 1,
2009. The adoption of FASB ASC 805 has not had a material effect on
our financial position or results of operations.
FASB ASC
350-30-35. In April 2008, FASB issued FASB ASC
350-30-35-1. This ASC amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. FASB ASC 350-30-35-1 improves the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset under
other applicable accounting literature. We have adopted FASB ASC 350-30-35-1
October 1, 2009. The adoption of this ASC did not have a
material effect on our financial position and results of
operations.
FASB ASC
860. In June 2009, the FASB issued ASC 860, which
eliminates the concept of a qualifying special-purpose entity, creates more
stringent conditions for reporting a transfer of a portion of a financial asset
as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s interest in transferred financial assets. FASB ASC
860 will be effective for transfers of financial assets in fiscal years
beginning after November 15, 2009 and in interim periods within those
fiscal years with earlier adoption prohibited. We will adopt FASB ASC 860 on
October 1, 2010. We are currently evaluating the effect the
adoption of FASB ASC 860 will have on our financial position and results of
operations.
We own
investments in marketable securities designated as available-for-sale or trading
securities as defined by US GAAP. Restricted investments totaling
$1.4 million at December 31, 2009 and September 30, 2009, were
pledged in connection with performance bonds and a real estate operating lease
and will be restricted for the terms of the project performance periods and
lease period, the latest of which is estimated to end in August
2010. Our bank requires us to maintain a $6.0 million money
market investment as a compensating balance to guarantee availability of funds
for processing outgoing Automated Clearing House payments to our
clients. These investments are reported as Restricted investments on the
Consolidated Balance Sheets.
We
evaluate certain available-for-sale investments for other-than-temporary
impairment when the fair value of the investment is lower than its book
value. Factors that management considers when evaluating for
other-than-temporary impairment include: the length of time and the
extent to which market value has been less than cost; the financial condition
and near-term prospects of the issuer; interest rates; credit risk; the value of
any underlying portfolios or investments; and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in the market. We do not adjust the recorded book value for declines
in fair value that we believe are temporary, if we have the intent and ability
to hold the associated investments for the foreseeable future and we have not
made the decision to dispose of the securities as of the reported
date.
At
December 31, 2009 and September 30, 2009, our investment portfolio
included $30.1 million and $31.2 million, respectively, par value of
municipal bonds that were collateralized with student loans. During
the three months ended December 31, 2009, we liquidated $1.1 million
of our auction rate securities, or ARS.
On
November 11, 2008, we accepted an offer from our investment manager, UBS
AG, or UBS, providing us with rights related to our ARS, or ARS
Rights. The ARS Rights (which have features that operate like put
options) were covered in a prospectus dated October 7, 2008. The
ARS Rights entitle us to sell our existing ARS to UBS for a price equal to the
par value plus accrued but unpaid interest, at any time during the period
June 30, 2010 through July 2, 2012. The ARS Rights also
grant to UBS the sole discretion and right to sell or otherwise dispose of our
eligible ARS at any time until July 2, 2012, without prior notification, so
long as we receive a payment of par value. We expect to sell our ARS
under the ARS Rights offering. If the ARS Rights are not exercised
before July 2, 2012, they will expire and UBS will have no further rights
or obligation to buy our ARS. So long as we hold our ARS, they will
continue to accrue and pay interest as determined by the auction process or the
terms of the ARS if the auction process fails.
US GAAP
permits us to measure the ARS Rights, a recognized financial asset, at fair
value in order to match the changes in the fair value of the ARS. As
a result, unrealized gains and losses have been included in earnings and will
continue to be included in future periods. At December 31, 2009
the fair value of the ARS Rights totals $3.1 million, and is adjusted each
reporting period, with a credit to Gain/(loss) on investments in our
Consolidated Statements of Operations. We expect that future changes
in the fair value of the ARS Rights will approximate fair value movements in the
related ARS.
The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, we
exercise our ARS Rights, the underlying security matures and is paid (all of our
securities have maturities in excess of ten years) or a buyer outside the
auction process emerges. We do not believe the unsuccessful auctions
experienced to date are the result of the deterioration of the underlying credit
quality of these securities. Our securities represent AAA rated
student loan backed securities that are guaranteed by the issuing states and the
Federal Family Education Loan Program (FFELP).
Unrestricted
investments with original maturities of 90 days or less (as of the date that we
purchased the securities) are classified as cash equivalents. Except
for our restricted investments, ARS, and ARS Rights, all other investments are
categorized as available-for-sale investments. These securities are
recorded at estimated fair value, based on quoted market prices or pricing
methodologies. Any increases or decreases in fair value would be
recorded as unrealized gains and losses in other comprehensive
income. ARS and ARS Rights are classified as trading securities with
changes in fair value recorded in current earnings.
The
following table shows the balance sheet classification, amortized cost and
estimated fair value of investments included in current and long-term
investments in marketable securities:
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
(in
thousands)
|
|
Amortized
cost
|
|
|
Net
loss impact
|
|
|
Estimated
fair value
|
|
|
Amortized
cost
|
|
|
Net
loss
impact
|
|
|
Estimated
fair value
|
|
Investments
in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
bills
|
|
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
1,000 |
|
|
$ |
4,499 |
|
|
$ |
— |
|
|
$ |
4,499 |
|
Total
marketable securities
|
|
|
1,000 |
|
|
|
— |
|
|
|
1,000 |
|
|
|
4,499 |
|
|
|
— |
|
|
|
4,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
30,100 |
|
|
|
(3,157 |
) |
|
|
26,943 |
|
|
|
31,200 |
|
|
|
(3,320 |
) |
|
|
27,880 |
|
Auction
rate securities Rights Series
|
|
|
— |
|
|
|
3,138 |
|
|
|
3,138 |
|
|
|
— |
|
|
|
3,289 |
|
|
|
3,289 |
|
Total
trading investments
|
|
|
30,100 |
|
|
|
(19 |
) |
|
|
30,081 |
|
|
|
31,200 |
|
|
|
(31 |
) |
|
|
31,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
$ |
31,100 |
|
|
$ |
(19 |
) |
|
$ |
31,081 |
|
|
$ |
35,699 |
|
|
$ |
(31 |
) |
|
$ |
35,668 |
|
As of
December 31, 2009, all of the debt securities that were included in
marketable securities had remaining maturities within one year. As of
December 31, 2009, all the debt securities included as trading investments
have maturities in excess of ten years, with the exception of our ARS Rights
which expire in July 2012. While all of these debt securities have
long-term maturities, they are all auction rate securities with interest rates
that typically reset every 28 days.
NOTE 4—FAIR VALUE
MEASUREMENTS
Fair
value is defined under US GAAP as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The fair value hierarchy
is based on three levels of inputs that may be used to measure fair value as
follows:
Level
1—Quoted prices in active markets for identical assets or
liabilities.
Level
2—Inputs other than quoted prices in active markets, that are observable, either
directly or indirectly,
such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or
other
inputs that are observable or can be corroborated by observable market data for
substantially the
full
term of the assets or liabilities.
Level
3—Unobservable inputs, for which there is little or no market data for the
assets or liabilities.
The
following table represents the fair value hierarchy for our financial assets,
comprised of cash equivalents and investments, measured at fair value on a
recurring basis as of December 31, 2009.
Fair value measurements as of December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
2,308 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
— |
|
|
|
— |
|
|
|
26,943 |
|
|
|
26,943 |
|
Auction
Rate Securities Rights
|
|
|
— |
|
|
|
— |
|
|
|
3,138 |
|
|
|
3,138 |
|
U.S.
Treasury bills
|
|
|
1,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
Certificates
of deposit
|
|
|
— |
|
|
|
1,361 |
|
|
|
— |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,308 |
|
|
$ |
1,361 |
|
|
$ |
30,081 |
|
|
$ |
40,750 |
|
We
value ARS using a discounted cash flow approach. The assumptions used
in preparing the discounted cash flow model included estimates of the amount and
timing of future interest and principal payments, projections of interest rate
benchmarks, probability of full repayment of the principal considering the
credit quality of the issuers, and the rate of return required by investors to
own ARS given the current liquidity risk. The ARS Rights are a free
standing asset separate from the ARS. In order to value the ARS
Rights, we considered the intrinsic value, time value of money, and the
creditworthiness of UBS.
Changes
in fair value measurements of our securities are included in Gain/(loss) on investments on
our Consolidated Statements of Operations. The following table
presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level
3):
(in
thousands)
|
|
Significant
unobservable inputs (Level 3)
|
|
Balance
at October 1, 2009
|
|
$ |
31,169 |
|
Sale
of debt securities
|
|
|
(1,100 |
) |
Gain
included in earnings
|
|
|
12 |
|
Balance
at December 31, 2009
|
|
$ |
30,081 |
|
NOTE 5—CUSTOMER
CONCENTRATION AND RISK
We
derive a significant portion of our revenue from a limited number of
governmental customers. Typically, the contracts allow these
customers to terminate all or part of the contract for convenience or
cause. We have one client, the Internal Revenue Service, or IRS,
whose revenues exceeds 10% of revenues from EPS operations.
The
following table shows the revenues specific to our contract with the
IRS:
|
|
Three
months ended December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$ |
3,899 |
|
|
$ |
4,356 |
|
Percentage
of EPS Operations revenue
|
|
|
12.2 |
% |
|
|
15.4 |
% |
Accounts
receivable, net. We reported
$4.8 million in Accounts
receivable, net on our Consolidated Balance Sheets for December 31,
2009 and September 30, 2009. This item represents the short-term portion of
receivables from our customers and other parties and retainers that we expect to
receive. Approximately 15.5% and 30.9% of the balances reported at
December 31, 2009 and September 30, 2009, respectively, represent accounts
receivable, net that is attributable to operations that we intend to wind down
during the course of the next three years. The remainder of the Accounts receivable, net
balance is composed of receivables from certain of our EPS
customers. None of our customers have receivables that exceed 10% of
our total receivable balance. As of December 31, 2009 and
September 30,
2009, Accounts receivable,
net included an allowance for uncollectible accounts of $0.4 million
and $0.3 million, respectively, which represents the balance of receivables
that we believe are likely to become uncollectible.
Settlements
receivable, net. As of
December 31, 2009 and September 30, 2009, we reported
$8.0 million and $6.3 million, respectively, in Settlements receivable, net
on our Consolidated Balance Sheets, which represents amounts due from
credit or debit card companies or banks. Individuals and businesses
settle their obligations to our various clients, primarily utility and other
public sector clients, using credit or debit cards or via ACH
payments. We create a receivable for the amount due from the credit
or debit card company or bank and an offsetting payable to the
client. Once we receive confirmation the funds have been received, we
settle the obligation to the client. See Note 8—Contingencies and
Commitments for information about the settlements payable to our
clients.
NOTE 6—GOODWILL AND OTHER INTANGIBLE
ASSETS
GOODWILL
As a
result of our acquisition of substantially all of the assets of ChoicePay, Inc.
in January 2009, ChoicePay, Inc. has the potential to receive an earn out of up
to $2.0 million. Any earn out is recorded as additional goodwill
associated with the asset acquisition. The following table summarizes
changes in the carrying amount of goodwill during the three months ended
December 31, 2009.
(in
thousands)
|
|
EPS
|
|
|
Wind-down
|
|
|
Total
|
|
Balance
at September 30, 2009
|
|
$ |
17,329 |
|
|
$ |
— |
|
|
$ |
17,329 |
|
ChoicePay,
Inc. earn out
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
Balance
at December 31, 2009
|
|
$ |
17,345 |
|
|
$ |
— |
|
|
$ |
17,345 |
|
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. 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.
OTHER INTANGIBLE ASSETS,
NET
Currently,
all of our other intangible assets are included in our Continuing
Operations. We test our other intangible assets for impairment when
an event occurs or circumstances change that would more likely than not reduce
the fair value of the assets below the carrying value. No such events
occurred during the three months ended December 31, 2009. The
following table summarizes Other intangible assets, net,
for our Continuing Operations:
|
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
(in
thousands)
|
Amortization
period
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
Client
relationships
|
8-16
years
|
|
$ |
30,037 |
|
|
$ |
(21,501 |
) |
|
$ |
8,536 |
|
|
$ |
30,037 |
|
|
$ |
(20,557 |
) |
|
$ |
9,480 |
|
Technology
and research and development
|
5
years
|
|
|
5,618 |
|
|
|
(4,286 |
) |
|
|
1,332 |
|
|
|
5,618 |
|
|
|
(4,192 |
) |
|
|
1,426 |
|
Trademarks
|
6-10
years
|
|
|
3,463 |
|
|
|
(2,425 |
) |
|
|
1,038 |
|
|
|
3,463 |
|
|
|
(2,331 |
) |
|
|
1,132 |
|
Other
intangible assets, net
|
|
|
$ |
39,118 |
|
|
$ |
(28,212 |
) |
|
$ |
10,906 |
|
|
$ |
39,118 |
|
|
$ |
(27,080 |
) |
|
$ |
12,038 |
|
During
the three months ended December 31, 2009, we recognized $1.1 million
of amortization expense on our other intangible assets.
Significant
components of the provision for income taxes are as follows:
|
|
Three
months ended December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Current
income tax provision:
|
|
|
|
|
|
|
State
|
|
$ |
— |
|
|
$ |
1 |
|
Federal
|
|
|
— |
|
|
|
— |
|
Total
provision for income taxes
|
|
$ |
— |
|
|
$ |
1 |
|
We did
not record a federal tax provision due to availability of net operation loss
carryforwards. Deferred tax assets are reduced by a valuation
allowance, when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
LIABILITIES FOR UNRECOGNIZED
TAX BENEFITS
We have
examined our current and past tax positions taken, and have concluded that it is
more-likely-than-not these tax positions will be sustained in the event of an
examination and that there would be no material impact to our effective tax
rate. In the event interest or penalties had been accrued, our policy
is to include these amounts related to unrecognized tax benefits in income tax
expense. As of December 31, 2009, we had no accrued interest or
penalties related to uncertain tax positions. We file tax returns
with the IRS and in various states in which the statute of limitations may go
back to the tax year ended September 30, 2005. As of
December 31, 2009, we were not engaged in any federal or state tax
audits.
As of
December 31, 2009, we had no unrecognized tax benefits.
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 December 31, 2009, none of these matters
was expected to have a material impact on our financial position, results of
operations or cash flows. At December 31, 2009 and
September 30, 2009, we had legal accruals of $0.3 million and
$0.2 million, respectively, based upon estimates of key legal
matters.
BANK LINES OF
CREDIT
At
December 31, 2009, we had a credit facility that allowed us to obtain
letters of credit up to a total of $7.5 million. This credit
facility, which was scheduled to mature on January 31, 2010, grants the lender a
perfected security interest in cash collateral in an amount equal to all issued
and to be issued letters of credit. We pay 0.75% per annum for
outstanding letters of credit, but are not assessed any fees for the unused
portion of the line. As of December 31, 2009, $1.4 million
of letters of credit were outstanding under this credit
facility. These letters of credit were issued to secure performance
bonds and a facility lease. In January 2010, we extended this credit
facility until January 31, 2011 and reduced the letter of credit facility to
$5.0 million.
In
January 2010, we were notified we had been approved a line of credit of
$15,023,000 with UBS Bank USA, our investment manager, secured by our auction
rate securities. Pursuant to our participation in the ARS Rights
provided to us by UBS (see Credit Risk below), we are
entitled to borrow funds from UBS up to the par value of eligible auction rate
securities. This line of credit provides us liquidity for what are
currently illiquid investments should business needs arise.
The
line of credit is a no net cost loan. Advances against the line of
credit will bear interest at variable rates that will equal the weighted average
interest rate paid to Tier by the issuer of the ARS that are pledged to UBS as
collateral. No net cost loans may be repaid at any time without
penalty. Proceeds of the liquidation or sale of ARS pledged as
collateral will be used to repay the loan plus interest due. The line
of credit terminates the earlier of when our ARS used as collateral are sold to
UBS or the expiration of the rights offer.
CREDIT
RISK
We
maintain our cash in bank deposit accounts, certificates of deposit and money
market accounts. Typically, the balance in a number of these accounts
significantly exceeds federally insured limits. We have not
experienced any losses in such accounts and believe that any associated credit
risk is de
minimis.
At
December 31, 2009, our investment portfolio included $26.9 million,
fair value, of AAA-rated auction rate municipal bonds that were collateralized
with student loans. These municipal bonds are bought and sold in the
marketplace through a bidding process sometimes referred to as a “Dutch
Auction.” After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities, which we refer to as auction
rate securities. As a result of concerns in the sub-prime mortgage
market and overall credit market issues, we continue to experience unsuccessful
auctions, as there are insufficient buyers for the securities at the reset date
for our auction rate securities. The unsuccessful auctions and lack
of liquidity has caused a decrease in the fair value of these
securities. All of our securities are collateralized with student
loans. Securities collateralized with student loans are guaranteed by
the issuing state and the Federal Family Education Loan
Program. Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy. Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible.
In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager. This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest. Our investment banker has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer. Until liquidity in the market returns, or
our investment banker sells or disposes of securities, we may be unable to
liquidate these investments in a timely manner at par value.
PERFORMANCE, BID AND
GUARANTEE PAYMENT BONDS
Under
certain contracts or bids, we are required to obtain performance or bid bonds
from a licensed surety and to post the performance bonds with our
customers. Fees for obtaining the bonds are expensed over the life of
each bond. At December 31, 2009, we had $10.0 million of
bonds posted with clients. There were no claims pending against any
of these bonds.
In
February 2009, we completed the sale of our Unemployment Insurance, or UI,
business to RKV Technologies, Inc., or RKV. The sale was completed
pursuant to an Asset Purchase Agreement dated February 6,
2009. As part of the agreement, we are required to leave in place a
$2.4 million performance bond on the continuing contract with the State of
Indiana, or the State. Subsequent to the sale of the UI business to
RKV, the prime contractor, Haverstick Corporation, or Haverstick, the State, and
RKV determined that the contract completion will be delayed and additional
funding is needed to complete the contract. In November 2009
Haverstick cancelled its contract with RKV and directly rehired various RKV
resources and RKV contractors. We retain certain liabilities for completion of
the project and continue as the indemnitor under the performance
bond. Mediation is scheduled to take place in May 2010. We
do not believe resolution of this matter will have a material effect on our
financial position or results of operations.
Pursuant
to the terms of money transmitter licenses we obtain with individual states, we
are required to provide guarantee payment bonds from a licensed
surety. At December 31, 2009, we had $8.9 million of bonds
posted with 44 jurisdictions. There were no claims pending against
any of these bonds.
EMPLOYMENT
AGREEMENTS
As of
December 31, 2009, we had employment and change of control agreements with
five executives and one other key manager. If certain termination or
change of control events were to occur under the six contracts as of
December 31, 2009, we could be required to pay up to
$5.9 million.
In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan. Executives selected by our Chief Executive Officer are eligible
to participate. Under the PSU Plan, up to 800,000 Performance Stock
Units, or PSUs, have been approved for issuance. The PSUs will be
awarded upon the achievement and maintenance for a period of 60 days of specific
share performance targets of $8.00, $9.50, $11.00, and $13.00 per
share. We intend to pay the PSUs in cash in the pay period in which
the PSUs become fully vested. As of December 31, 2009, 605,000
PSUs have been issued to key executives. The PSU’s are considered
liability awards under US GAAP. As such, their expense is calculated
quarterly based on fair market value on the last day of the quarterly
period. Since we cannot estimate the fair market value of future
dates, we are unable to estimate the expense that will be recognized over the
remaining life of these PSUs. See Note 13—Share-based Payment for
additional information regarding the valuation of the PSUs.
Pursuant
to awards made in April 2008 and January 2009, our Chief Executive Officer has
200,000 restricted stock units, or RSUs, which may be payable in
cash. These RSUs are considered liability awards, and as such their
expense is calculated quarterly based on fair market value on the last day of
the quarterly period. Since we cannot estimate the fair market value
of future dates, we are unable to estimate the expense that will be recognized
over the remaining life of these RSUs. See Note 13—Share-based
Payment for additional information regarding the valuation of these
RSUs.
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
2018. Future minimum lease payments for non-cancelable leases with
terms of one year or more as of December 31, 2009 are as
follows:
(in
thousands)
|
|
Operating
leases (1)
|
|
|
Capital
Leases
(2)(3)
|
|
|
Total
|
|
Twelve
months ending December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
657 |
|
|
$ |
36 |
|
|
$ |
693 |
|
2011
|
|
|
431 |
|
|
|
30 |
|
|
|
461 |
|
2012
|
|
|
644 |
|
|
|
30 |
|
|
|
674 |
|
2013
|
|
|
661 |
|
|
|
10 |
|
|
|
671 |
|
2014
|
|
|
680 |
|
|
|
— |
|
|
|
680 |
|
Thereafter
|
|
|
2,403 |
|
|
|
— |
|
|
|
2,403 |
|
Total
minimum lease payments
|
|
$ |
5,476 |
|
|
$ |
106 |
|
|
$ |
5,582 |
|
(1) In
December 2009 we signed a lease for our new headquarters in Reston,
Virginia.
|
|
(2)
On our Consolidated Balance Sheets, the amount due within twelve months is
included in Other
accrued liabilities. The
remainder is included in Other
liabilities.
|
|
(3)
Total amount includes interest payments of $1. |
|
INDEMNIFICATION
AGREEMENTS
We have
indemnification agreements with certain of our directors and a number of key
executives. These agreements provide such persons with indemnification to the
maximum extent permitted by our Certificate of Incorporation, our Bylaws and the
General Corporation Law of the State of Delaware against all expenses, claims,
damages, judgments and other amounts (including amounts paid in settlement) for
which
such persons become liable as a result of acting in any capacity on our behalf,
subject to certain limitations. We are not able to estimate our
maximum exposure under these agreements.
NOTE 9—RELATED PARTY
TRANSACTIONS
ITC DELTACOM,
INC.
During
the three months ended December 31, 2009, we purchased $51,000 of telecom
services from ITC Deltacom, Inc., a company affiliated with a member of our
Board of Directors.
The
following table summarizes restructuring liabilities activity associated with
Continuing Operations for the three months ended December 31,
2009:
(in
thousands)
|
|
Severance
|
|
|
Facilities
closures
|
|
|
Total
|
|
Balance
at September 30, 2009
|
|
$ |
18 |
|
|
$ |
236 |
|
|
$ |
254 |
|
Additions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cash
payments
|
|
|
(18 |
) |
|
|
(110 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$ |
— |
|
|
$ |
126 |
|
|
$ |
126 |
|
At
December 31, 2009 and September 30, 2009, we had $0.1 million and
$0.3 million, respectively, of restructuring liabilities associated with
our Continuing Operations which is included in Other accrued liabilities on
our Consolidated Balance Sheets.
NOTE 11—SEGMENT
INFORMATION
Our
business consists of two reportable segments: Continuing Operations and
Discontinued Operations. Within our Continuing Operations segment, we
allocate resources to and assess the performance of our EPS Operations and
Wind-down Operations. Our Discontinued Operations includes portions
of our former GBPO and PSSI operations that have been
sold. Information regarding our Discontinued Operations can be found
in Note 14—Discontinued Operations.
The
following table presents the results of operations for our EPS Operations and
our Wind-down Operations for the three months ended December 31, 2009 and
2008.
(in
thousands)
|
|
EPS
|
|
|
Wind-
down
|
|
|
Total
|
|
Three
months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
31,920 |
|
|
$ |
848 |
|
|
$ |
32,768 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
23,832 |
|
|
|
260 |
|
|
|
24,092 |
|
General
and administrative
|
|
|
6,221 |
|
|
|
106 |
|
|
|
6,327 |
|
Selling
and marketing
|
|
|
1,601 |
|
|
|
— |
|
|
|
1,601 |
|
Depreciation
and amortization
|
|
|
1,335 |
|
|
|
273 |
|
|
|
1,608 |
|
Total
costs and expenses
|
|
|
32,989 |
|
|
|
639 |
|
|
|
33,628 |
|
(Loss)/income
from continuing operations before other income and income
taxes
|
|
|
(1,069 |
) |
|
|
209 |
|
|
|
(860 |
) |
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
127 |
|
|
|
— |
|
|
|
127 |
|
Gain
on investments
|
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
Total
other income
|
|
|
139 |
|
|
|
— |
|
|
|
139 |
|
(Loss)/income
from continuing operations before taxes
|
|
|
(930 |
) |
|
|
209 |
|
|
|
(721 |
) |
Income
tax provision
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
(Loss)/income
from continuing operations
|
|
$ |
(930 |
) |
|
$ |
209 |
|
|
$ |
(721 |
) |
(in
thousands)
|
|
EPS
|
|
|
Wind-
down
|
|
|
Total
|
|
Three
months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
28,241 |
|
|
$ |
1,499 |
|
|
$ |
29,740 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
21,838 |
|
|
|
580 |
|
|
|
22,418 |
|
General
and administrative
|
|
|
6,568 |
|
|
|
62 |
|
|
|
6,630 |
|
Selling
and marketing
|
|
|
1,313 |
|
|
|
3 |
|
|
|
1,316 |
|
Depreciation
and amortization
|
|
|
979 |
|
|
|
480 |
|
|
|
1,459 |
|
Total
costs and expenses
|
|
|
30,698 |
|
|
|
1,125 |
|
|
|
31,823 |
|
(Loss)/income
from continuing operations before other income/(loss) and income
taxes
|
|
|
(2,457 |
) |
|
|
374 |
|
|
|
(2,083 |
) |
Other
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
304 |
|
|
|
— |
|
|
|
304 |
|
Loss
on investment
|
|
|
(112 |
) |
|
|
— |
|
|
|
(112 |
) |
Total
other income
|
|
|
192 |
|
|
|
— |
|
|
|
192 |
|
(Loss)/income
from continuing operations before taxes
|
|
|
(2,265 |
) |
|
|
374 |
|
|
|
(1,891 |
) |
Income
tax provision
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
(Loss)/income
from continuing operations
|
|
$ |
(2,266 |
) |
|
$ |
374 |
|
|
$ |
(1,892 |
) |
Our
total assets for each of these businesses are shown in the following
table:
(in
thousands)
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
Continuing
operations:
|
|
|
|
|
|
|
EPS
|
|
$ |
116,303 |
|
|
$ |
113,600 |
|
Wind-down
|
|
|
1,579 |
|
|
|
2,627 |
|
Total
assets
|
|
$ |
117,882 |
|
|
$ |
116,227 |
|
NOTE 12—SHAREHOLDERS’
EQUITY
COMMON STOCK REPURCHASE
PROGRAM
In
January 2009, our Board of Directors, or the Board, authorized the repurchase of
up to $15.0 million of our common stock in the open market. On
August 13, 2009, our Board increased the repurchase amount to
$20.0 million. Through December 31, 2009, we purchased
1,651,898 shares of common stock for $12.3 million under this repurchase
program. We also participated in a previous repurchase program
authorized by our Board in October 2003 in which we purchased 884,400 shares of
common stock for $8.7 million. As of December 31, 2009, we
have repurchased 2,536,298 shares of common stock for $21.0 million under
the two plans, which are reported as Treasury stock on our
Consolidated Balance Sheets.
NOTE 13—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 discretion in
creating employee equity incentives, including incentive and non-statutory stock
options. Generally, these options vest as to 20% of the underlying
shares each year on the anniversary of the date granted and expire in ten
years. At December 31, 2009, there were 1,403,536 shares of
common stock available for future issuance under the Plan.
STOCK
OPTIONS
Stock-based
compensation expense for all stock-based compensation awards granted was based
on the grant-date fair value using the Black-Scholes model. We
recognize compensation expense for stock option awards on a ratable basis over
the requisite service period of the award. Stock-based compensation
expense was $0.2 million for the three months ended December 31,
2009. During the three months ended December 31, 2008, we
recognized $0.3 million in stock based compensation expense.
The
following table shows the weighted-average assumptions we used to calculate fair
value of share-based options using the Black-Scholes model, as well as the
weighted-average fair value of options granted and the weighted-average
intrinsic value of options exercised. We did not grant any options
during the three months ended December 31, 2009.
|
|
Three
months ended
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Weighted-average
assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
Expected
period that options will be outstanding (in
years)
|
|
|
— |
|
|
|
5.00 |
|
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
|
|
— |
% |
|
|
2.03 |
% |
Volatility
|
|
|
— |
% |
|
|
45.30 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
Weighted-average
fair value of options granted
|
|
$ |
— |
|
|
$ |
1.81 |
|
Weighted-average
intrinsic value of options exercised (in
thousands)
|
|
$ |
— |
|
|
$ |
— |
|
Expected
volatilities are based on historical volatility of our stock. In
addition, we used historical data to estimate option exercise and employee
termination within the valuation model.
Stock
option activity for the three months ended December 31, 2009 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, 2009
|
|
|
2,359 |
|
|
$ |
7.86 |
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Forfeitures
or expirations
|
|
|
(50 |
) |
|
|
9.74 |
|
|
|
|
|
Options
outstanding at December 31, 2009
|
|
|
2,309 |
|
|
$ |
7.82 |
|
7.39
years
|
|
$ |
3,032 |
|
Options
vested and expected to vest at December 31, 2009
|
|
|
1,995 |
|
|
$ |
7.85 |
|
7.25
years
|
|
$ |
2,609 |
|
Options
exercisable at December 31, 2009
|
|
|
1,250 |
|
|
$ |
8.25 |
|
6.47
years
|
|
$ |
1,461 |
|
As of
December 31, 2009, a total of $2.3 million of unrecognized
compensation cost related to stock options, net of estimated forfeitures, was
expected to be recognized over a 3.22 year weighted-average
period.
RESTRICTED STOCK
UNITS
On
April 30, 2008, we granted 550,000 restricted stock units which vest when
both the price target is achieved and the required service period is
met. In January 2009 we granted another 150,000 restricted stock
units which vest when both the price target is achieved and the required service
period is met. Pursuant to the Plan, 500,000 shares can be payable in
shares of our common stock. The remaining 200,000 shares may be
payable in cash and are recorded at their fair value of $0.2 million as
Other liabilities on
our Consolidated Balance Sheets. We used a Monte Carlo simulation
option pricing model to estimate the grant-date fair value using the following
assumptions:
|
|
December
31, 2009
|
|
|
|
Payable
in shares
|
|
|
Payable
in cash
|
|
Weighted-average
assumptions used in Monte Carlo simulation:
|
|
|
|
|
|
|
Original
period over which units will vest (in
years)
|
|
|
3.0 |
|
|
|
3.0 |
|
Remaining
period that units will be outstanding (in
years)
|
|
|
1.33 |
|
|
|
1.33 |
|
Interest
rate (based on U.S.
Treasury yield)
|
|
|
1.98 |
% |
|
|
0.69 |
% |
Volatility
|
|
|
39.53 |
% |
|
|
48.33 |
% |
Dividend
yield
|
|
|
— |
|
|
|
— |
|
Weighted-average
fair value of options granted
|
|
$ |
3.50 |
|
|
$ |
1.47 |
|
The
following table provides information on the expense related to the restricted
stock unit awards:
(in
thousands)
|
|
Equity
Award
|
|
|
Liability
Award(a)
|
|
Expense
recognized for three months ended December 31, 2009
|
|
$ |
155 |
|
|
$ |
(33 |
) |
Expense
recognized through December 31, 2009
|
|
|
921 |
|
|
|
163 |
|
Estimated
expense to be recognized through April 2011
|
|
|
829 |
|
|
(a)
|
|
a. Liability
awards are revalued at the end of every quarter based on the closing price
of our stock on the last day of the quarter. We are unable to
estimate the expense expected to be recognized for these
awards.
|
|
BOARD OF DIRECTOR RESTRICTED
STOCK UNITS
In
accordance with our Board of Directors, or Board, compensation packages, each
Board member is awarded 9,000 restricted stock units upon their election to our
Board at our annual meeting. We are obligated to pay these restricted
stock units in cash at the end of a three-year cliff vesting period, which is
March 20, 2012. On March 20, 2009, a total of 72,000
restricted stock units were approved to be awarded to our eight non-employee
elected board members. The amount payable to each member at the
vesting date will be the equivalent of 9,000 restricted stock units multiplied
by the closing price of our stock on March 20, 2012.
As of
December 31, 2009, we recognized $0.1 million in expense relating to
these awards, calculated as follows:
Number
of awards
|
|
|
72,000 |
|
Fair
value of award (closing price on day of valuation)
|
|
$ |
8.00 |
|
Total
fair value
|
|
$ |
576,000 |
|
Number
of months in measurement period
|
|
|
9 |
|
Expense
recognized to date
|
|
$ |
144,000 |
|
These
awards will be revalued each quarter based on the closing price of our stock on
the last day of the quarter. We cannot estimate the amount of expense
to be recognized on these awards through their vest date of March 20,
2012.
PERFORMANCE STOCK
UNITS
In
December 2008, upon recommendation of the Compensation Committee, our Board of
Directors adopted the Tier Technologies, Inc. Executive Performance Stock Unit
Plan, or the PSU Plan. Executives selected by our Chief Executive
Officer are eligible to participate. Under the PSU Plan, up to
800,000 Performance Stock Units, or PSUs, have been approved for
issuance. The PSUs will be awarded upon the achievement and
maintenance for a period of 60 days of specific share performance targets of
$8.00, $9.50, $11.00, and $13.00 per share. We intend to pay the PSUs
in cash in the pay period in which the PSUs become fully vested. The
executives will receive a cash payment equal to (x) the price of a share of our
common stock as of the close of market on the date of vesting, but not more than
$15.00, multiplied by (y) the number of PSUs that have been awarded to the
executive.
As of
December 31, 2009, 605,000 PSUs have been issued under the PSU
Plan. At December 31, 2009, these PSUs are recorded at their
fair value of $0.9 million, as Other liabilities on our
Consolidated Balance Sheets. We used a Monte Carlo simulation option
pricing model to estimate the grant-date fair value using the following
assumptions:
|
|
Payable
in cash
|
|
Weighted-average
assumptions used in Monte Carlo simulation:
|
|
|
|
Expected
period that units will be outstanding (in
years)
|
|
|
1.93 |
|
Interest
rate (based on U.S.
Treasury yield)
|
|
|
1.09 |
% |
Volatility
|
|
|
42.23 |
% |
Dividend
yield
|
|
|
— |
|
Weighted-average
fair value of PSUs granted
|
|
$ |
4.51 |
|
From
date of grant through December 31, 2009, we recorded $0.9 million of
expense related to these awards. The PSUs are considered liability
awards under US GAAP. As such, their expense is revalued each quarter
based on fair market value. Therefore, we cannot estimate the
remaining expense to be recognized for these PSUs.
NOTE 14—DISCONTINUED
OPERATIONS
SUMMARY OF REVENUE AND
(LOSS)/INCOME BEFORE TAXES—DISCONTINUED OPERATIONS
Except
for minor transitional activities, we do not have any ongoing involvement or
cash flows from former GBPO and PSSI businesses that we divested during fiscal
2008 and fiscal 2009. The following table summarizes our revenue and
pre-tax income, prior to any gain/(loss) on sale, generated by these operations
for the three months ended December 31, 2009 and 2008.
|
|
Three
months ended December 31,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
Revenues
(Discontinued operations):
|
|
|
|
|
|
|
GBPO
|
|
$ |
— |
|
|
$ |
— |
|
PSSI
|
|
|
— |
|
|
|
4,469 |
|
Total
revenues
|
|
$ |
— |
|
|
$ |
4,469 |
|
(Loss)/income
before taxes (Discontinued operations):
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
— |
|
|
$ |
(69 |
) |
PSSI
|
|
|
(54 |
) |
|
|
(3,193 |
) |
Total
(loss)/income before taxes
|
|
$ |
(54 |
) |
|
$ |
(3,262 |
) |
The
following table sets forth the computation of basic and diluted loss per
share:
|
|
Three
months ended December 31,
|
|
(in
thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Numerator:
Loss
from:
|
|
|
|
|
|
|
Continuing
operations, net of income taxes
|
|
$ |
(721 |
) |
|
$ |
(1,892 |
) |
Discontinued
operations, net of income taxes
|
|
|
(54 |
) |
|
|
(3,262 |
) |
Net
loss
|
|
$ |
(775 |
) |
|
$ |
(5,154 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
18,156 |
|
|
|
19,735 |
|
Effects
of dilutive common stock options
|
|
|
— |
|
|
|
— |
|
Adjusted
weighted-average shares
|
|
|
18,156 |
|
|
|
19,735 |
|
Loss
per basic and diluted share
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
From
discontinued operations
|
|
|
— |
|
|
|
(0.16 |
) |
Loss
per basic and diluted share
|
|
$ |
(0.04 |
) |
|
$ |
(0.26 |
) |
The
following options were not included in the computation of diluted loss per share
because the exercise price was greater than the average market price of our
common stock for the periods stated and, therefore, the effect would be
anti-dilutive:
|
Three
months ended December 31,
|
(in
thousands)
|
2009
|
2008
|
Weighted-average
options excluded from computation of diluted loss per
share
|
814
|
2,759
|
Due to
net losses from Continuing Operations, we have excluded an additional 259,000
shares at December 31, 2009 of common stock equivalents from the
calculation of diluted loss per share since their effect would have been
anti-dilutive. We have also excluded 500,000 shares of restricted
stock from the computation of diluted loss per share since their effect would
have been anti-dilutive.
In
January 2009, we completed the acquisition of substantially all of the assets of
ChoicePay, Inc. Per the terms of the acquisition agreement,
ChoicePay, Inc. is entitled to a potential earn out through December 31,
2013, based upon a percentage of the profitability of future defined new client
business, not to exceed $2.0 million. As of December 31,
2009, we have paid ChoicePay $0.1 million for this earn out.
The
unaudited pro forma financial information in the table below combines the
historical results for Tier and the historical results for ChoicePay for the
three months ended December 31, 2008, as if the acquisition took place at
the beginning of the fiscal year. This pro forma information is
provided for illustrative purposes only and does not purport to be indicative of
the actual results that would have been achieved by the combined operations for
the periods presented or that will be achieved by the combined operations in the
future.
(in
thousands, except per share data)
|
|
Three
months ended
December
31, 2008
|
|
Revenues—continuing
operations
|
|
$ |
31,436 |
|
Net
loss—continuing operations
|
|
$ |
(2,019 |
) |
Net
loss
|
|
$ |
(5,282 |
) |
Basic/diluted
loss per share—continuing operations
|
|
$ |
(0.10 |
) |
Basic/diluted
loss per share
|
|
$ |
(0.27 |
) |
NOTE 17—SUBSEQUENT
EVENTS
We have
reviewed our business activities through February 9, 2010, the issue date of our
financial statement, and have no subsequent events to report.
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report, as a result of the risks, uncertainties and
assumptions discussed under Item 1A. Risk Factors of this Quarterly
Report on Form 10-Q and other factors discussed in this section. For
more information regarding what constitutes a forward-looking statement, refer
to the Private Securities Litigation Reform Act Safe Harbor Statement on
page i.
The
following discussion and analysis is intended to help the reader understand the
results of operations and financial condition of Tier Technologies, Inc. This
discussion and analysis is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying notes to the
financial statements.
OVERVIEW
Tier
Technologies, Inc., or Tier, is a leading provider of biller direct electronic
payment solutions. These solutions provide processing for Web, call
center and point-of-sale environments. We partner and connect with a
host of payment processors and other payment service providers to offer our
clients a single source solution that simplifies electronic payment
management. Our solutions include multiple payment options, including
consolidation of income payments, bill presentment, convenience payments,
installment payments and flexible payment scheduling. Our solutions
offer our clients a range of online payment options, including credit and debit
cards, electronic checks, cash and money orders, and alternative payment
types.
SUMMARY
OF OPERATING RESULTS
The
following table provides a summary of our operating results for the three months
ended December 31, 2009 for our Continuing and Discontinued
Operations:
(in
thousands, except per share)
|
|
Net
(loss)/income
|
|
|
(Loss)/earnings
per share
|
|
Continuing
Operations:
|
|
|
|
|
|
|
EPS
|
|
$ |
(930 |
) |
|
$ |
(0.05 |
) |
Wind-down
|
|
|
209 |
|
|
|
0.01 |
|
Total
Continuing Operations
|
|
$ |
(721 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
Total
Discontinued Operations
|
|
$ |
(54 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(775 |
) |
|
$ |
(0.04 |
) |
Our
Continuing Operations consists of our Electronic Payment Solutions, or EPS,
Operations, and certain operations we intend to wind down over the next three
years. Revenues from our EPS Operations were $31.9 million for
the period ended December 31, 2009. As of December 31,
2009, transaction volume increased 65.0% and total dollars processed increased
23.8% over the same period last year. Our EPS Operations reported a
net loss of $0.9 million for the three months ended December 31,
2009. The seasonality of our business causes fluctuations from one
quarter to the next within our revenues and direct costs. However,
our general and administrative and selling and marketing expenses are more fixed
in nature. This type of revenue and cost structure has resulted in a
net loss for the first quarter of fiscal 2010. We have successfully streamlined
our costs to support our Wind-down operations, while still effectively managing
our ongoing contracts, which have resulted in reported net income from Wind-down
operations of $0.2 million.
Our
Discontinued Operations consists of businesses we have divested through fiscal
year 2009. We incurred minimal residual expenses relating to these
divested operations resulting in a $54,000 loss for the three months ended
December 31, 2009.
STRATEGY
AND GOALS FOR 2010
During
fiscal 2010 we intend to focus on the following key objectives:
·
|
Continue
the consolidation of our various
platforms;
|
·
|
Add
new products, payment options and payment channel
delivery;
|
·
|
Increase
share in the biller direct market;
|
·
|
Maintain
financial stability; and
|
Platform
consolidation: We intend to continue with our platform
consolidation efforts started in fiscal 2009. With the consolidation
of our back-office operations complete, we will focus on unifying our payment
platform. This process will result in one payment platform which is
designed to hold costs fixed per transaction while increasing transaction
processing capability, resulting in increased transaction margin. The
unified platform will also support the development and delivery of new products,
payment options and payment channels. Through our platform
consolidation efforts, further cost reduction opportunities will continuously be
evaluated.
Add new products, payment
options, and payment channel delivery: We intend to grow our
business by adding new products, payment options and payment
channels. We are constantly exploring ways to enhance our payment
solutions for our existing clients as well as attracting new
clients. Utilizing our unified platform, which is expected to be
completed in fiscal 2010, will allow us to offer a low-cost service platform to
our existing clients and their consumers.
Increase share in the biller
direct market: During fiscal 2009, we acquired ChoicePay,
which increased our footprint in the utilities vertical. During
fiscal 2010, we intend to continue to explore tag-in acquisitions and strategic
partnerships that could allow us to penetrate new markets and increase our
footprint in existing verticals. When our unified platform is
completed, we will offer a low-cost service platform to our clients and their
consumers, which can assist us in our cross-selling efforts to our existing
clients.
Maintain financial
stability: With the current market conditions, financial
stability is critical to the success of any company. Tier is
dedicated to pursuing profitable growth. Growth is some cases can
include additional costs attributable to acquisitions or expenses to enhance
processing technology. During fiscal 2010, we will focus on balancing
our corporate assets among these business opportunities and our current share
repurchase program. With the economy still facing an unstable
investment environment, we will maintain our current investment portfolio
strategy, which we believe minimizes our risk and volatility.
Improve
profitability: All of the key objectives above are directed
toward our overriding goal to reach and continuously increase the profitability
of Tier.
RESULTS
OF OPERATIONS
The
following table provides an overview of our results of operations for the three
months ended December 31, 2009 and 2008:
|
|
Three
months ended
|
|
|
Variance
|
|
|
|
December
31,
|
|
|
2009
vs. 2008
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Revenues
|
|
$ |
32,768 |
|
|
$ |
29,740 |
|
|
$ |
3,028 |
|
|
|
10.2 |
% |
Costs
and expenses
|
|
|
33,628 |
|
|
|
31,823 |
|
|
|
1,805 |
|
|
|
5.7 |
% |
Loss
from continuing operations before other income and income
taxes
|
|
|
(860 |
) |
|
|
(2,083 |
) |
|
|
1,223 |
|
|
|
58.7 |
% |
Other
income
|
|
|
139 |
|
|
|
192 |
|
|
|
(53 |
) |
|
|
(27.6 |
)% |
Loss
from continuing operations before income taxes
|
|
|
(721 |
) |
|
|
(1,891 |
) |
|
|
1,170 |
|
|
|
61.9 |
% |
Income
tax provision
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(100.0 |
)% |
Loss
from continuing operations
|
|
|
(721 |
) |
|
|
(1,892 |
) |
|
|
1,171 |
|
|
|
61.9 |
% |
(Loss)/income
from discontinued operations, net
|
|
|
(54 |
) |
|
|
(3,262 |
) |
|
|
3,208 |
|
|
|
98.3 |
% |
Net
loss
|
|
$ |
(775 |
) |
|
$ |
(5,154 |
) |
|
$ |
4,379 |
|
|
|
85.0 |
% |
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 EPS business and our Wind-down
operations. The following is an analysis of the variances in these
financial results.
Revenues (Continuing
Operations)
The
following table compares the revenues generated by our Continuing Operations
during the three months ended December 31, 2009 and 2008:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$ |
31,920 |
|
|
$ |
28,241 |
|
|
$ |
3,679 |
|
|
|
13.0 |
% |
Wind-down
|
|
|
848 |
|
|
|
1,499 |
|
|
|
(651 |
) |
|
|
(43.4 |
)% |
Total
|
|
$ |
32,768 |
|
|
$ |
29,740 |
|
|
$ |
3,028 |
|
|
|
10.2 |
% |
The
following sections discuss the key factors that caused these revenue changes
from our Continuing Operations.
EPS
Revenues: EPS provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients. EPS’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.
EPS
generated $31.9 million of revenues during the three months ended
December 31, 2009, a $3.7 million, or 13.0%, increase over the three
months ended December 31, 2008. During the three months ended
December 31, 2009, we processed 65.0% more transactions than we did in the
same period last year,
representing
23.8% more dollars. The lower growth in dollars processed as compared
with growth in transactions, is due primarily to the success of our stated
strategic intent to develop new verticals to diversify the
business. A significant amount of the new transactions were from
verticals with lower average dollar size; therefore, lower revenue per
transaction. The acquisition of ChoicePay Inc. in January 2009 has
allowed us to increase our presence in the utility vertical, and is the largest
factor in the increased transactions and dollars processed when comparing the
first quarter of fiscal year 2010 with 2009. For example, average
utility payments per transaction are lower than in our established property tax
and income tax businesses and therefore produced lower average revenue per
transaction. At the same time we introduced ACH as a payment option
in the utility vertical and several other verticals. While this
payment shift increases the percentage of profitability per transaction, it may
not always increase actual dollar profitability. Most of
our verticals experienced an increase in transactions processed during the three
months ended December 31, 2009 compared to the same period last year,
ranging from 8.3% to 280.6%. During the three months ended
December 31, 2009, we added 123 new payment types, which contributed to the
increase in revenues.
We
expect to see revenue growth in fiscal year 2010. The rate of this
growth is highly dependent on general economic trends. Our
government-based businesses, especially in the tax segment, experienced low to
negative revenue growth during fiscal year 2009, which is a departure from prior
year trends. This reduced growth has come in spite of the increase in
the number of tax forms processed, an increase in the number of government
clients, and the introduction of additional payment options. We
expect this softness to continue until the general economic environment improves
or tax rates are increased by legislative bodies, or both.
Wind-down
Revenues: During the three months ended December 31,
2009, our Wind-down Operations generated $0.8 million in revenues, a
$0.7 million, or 43.4%, decrease from the three months ended
December 31, 2008. Completion of several maintenance contracts
within our Voice and Systems Automation, or VSA, business and the substantial
completion of our Pension contract contributed to the decrease. We
expect to continue to see decreases in Wind-down revenues as we continue to
complete and wind down existing maintenance projects over the next three
years.
Direct Costs (Continuing
Operations)
Direct
costs, which represent costs directly attributable to providing services to
clients, consist predominantly of discount fees. Discount fees
include payment card interchange fees and assessments payable to the banks as
well as payment card processing fees. Other, less significant costs
include: payroll and payroll-related costs; travel-related expenditures;
co-location and telephony costs; and the cost of hardware, software and
equipment sold to clients. The following table provides a
year-over-year comparison of direct costs incurred by our Continuing Operations
during the three months ended December 31, 2009 and 2008:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Direct
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
fees
|
|
$ |
22,348 |
|
|
$ |
20,835 |
|
|
$ |
1,513 |
|
|
|
7.3 |
% |
Other
costs
|
|
|
1,484 |
|
|
|
1,003 |
|
|
|
481 |
|
|
|
48.0 |
% |
Total
EPS
|
|
|
23,832 |
|
|
|
21,838 |
|
|
|
1,994 |
|
|
|
9.1 |
% |
Wind-down
|
|
|
260 |
|
|
|
580 |
|
|
|
(320 |
) |
|
|
(55.2 |
)% |
Total
|
|
$ |
24,092 |
|
|
$ |
22,418 |
|
|
$ |
1,674 |
|
|
|
7.5 |
% |
The
following sections discuss the key factors that caused these changes in the
direct costs for Continuing Operations.
EPS Direct
Costs: Consistent with the growth of our EPS revenues, EPS
direct costs rose $2.0 million, or 9.1%, during the three months ended
December 31, 2009 compared to the same period last
year. Discount fees increased $1.5 million, or 7.3%, over the
same period last year, attributable to an increased number of transactions
processed offset by several cost savings initiatives and a shift in vertical
payment
type
and a shift in payment method. Within the $1.5 million overall
increase is the recognition of one-time cost benefits of $0.3 million in
settlement funds received relating to our payment card processing
fees.
Other
costs increased $0.5 million, or 48.0%, over the same period last year,
primarily due to increased telephonic costs of $0.3 million associated with
increased usage of our customer and client support centers. Labor and
labor-related costs increased $0.2 million, primarily attributable to the
acquisition of ChoicePay, offset by reduced consulting fees of
$0.1 million, as a result of our efforts to decrease dependency of outside
resources. Other costs attributable to the support of our contracts
and clients increased $0.1 million, of which the acquisition of ChoicePay
is the largest contributor.
Wind-down Direct
Costs: During the three months ended December 31, 2009,
direct costs from our wind-down operations decreased $0.3 million, or
55.2%, from the same period last year, consistent with the completion of
projects. As we wind down these operations, we expect that the direct
costs of these operations will continue to decrease during the remainder of
fiscal 2010.
General and Administrative
(Continuing Operations)
General
and administrative expenses consist primarily of payroll and payroll-related
costs for technology, product management, strategic initiatives, information
systems, general management, administrative, accounting, legal and fees paid for
outside services, as well as reporting, compliance and other costs that we incur
as a result of being a public company. Our information systems
expenses include costs to consolidate and enhance our processing platforms as
well as the costs associated with ongoing maintenance of these
platforms. The following table compares general and administrative
costs incurred by our Continuing Operations during the three months ended
December 31, 2009 and 2008:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$ |
6,221 |
|
|
$ |
6,568 |
|
|
$ |
(347 |
) |
|
|
(5.3 |
)% |
Wind-down
|
|
|
106 |
|
|
|
62 |
|
|
|
44 |
|
|
|
71.0 |
% |
Total
|
|
$ |
6,327 |
|
|
$ |
6,630 |
|
|
$ |
(303 |
) |
|
|
(4.6 |
)% |
EPS General and
Administrative: During the three months ended
December 31, 2009, EPS incurred $6.2 million of general and
administrative expenses, a $0.3 million, or 5.3%, decrease over the same
period last year. During the three months ended December 31,
2009, we experienced decreases of $0.3 million in consulting and outside
services, primarily due to the completion of strategic initiatives during fiscal
2009 as well as our efforts to decrease dependency on outside
resources. In addition, our labor and labor-related costs decreased
$0.2 million over the same period last year, consisting of a
$0.3 million decrease in severance expense, as a result of the completion
of the consolidation of our San Ramon, California office with our Auburn,
Alabama office during fiscal 2009, offset by a $0.1 million increase for
performance stock unit and incentive pay expense. We also reported a
$0.1 million decrease in travel and travel-related expenses, due to
decreased travel by our executive team.
Offsetting
these decreases were: the increase of $0.1 million in legal fees, primarily
associated with the settlement with one state in a money transmitter license
issue; a $0.1 million in increased software maintenance expense, primarily
attributable to increased data security efforts as well as the acquisition of
ChoicePay; and $0.1 million in bad debt expense, as a result of longer
payment cycles.
During
fiscal 2010, we expect to see decreases in general and administrative support
expense as we continue to recognize the benefits of our strategic cost saving
initiatives and continue to consolidate and streamline our EPS
operations.
Wind-down General
and Administrative: During the three months ended
December 31, 2009, Wind-down operations incurred $0.1 million of
general and administrative expenses, a $44,000, or 71.0%, increase over the same
period last year. This increase is primarily attributable to an
increase in bad debt
expense relating to one contract, which was substantially
complete in fiscal 2009, but final payment has not yet been received by the
client.
Selling and Marketing
(Continuing Operations)
Selling
and marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures and travel-related
expenditures. We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April 15th
federal tax season. The following table provides a year-over-year
comparison of selling and marketing costs incurred by our Continuing Operations
during the three months ended December 31, 2009 and 2008:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$ |
1,601 |
|
|
$ |
1,313 |
|
|
$ |
288 |
|
|
|
21.9 |
% |
Wind-down
|
|
|
— |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
(100.0 |
)% |
Total
|
|
$ |
1,601 |
|
|
$ |
1,316 |
|
|
$ |
285 |
|
|
|
21.7 |
% |
EPS Selling and
Marketing: During the three months ended December 31,
2009, EPS incurred $1.6 million of selling and marketing expenses, a
$0.3 million, or 21.9%, increase over the same period last
year. Labor and labor-related expenses increased $0.1 million
during the three months ended December 31, 2009 compared to the same period
last year, attributable to additional commission expense of $0.4 million as
a result of the one-time reduction of commission expense during the first
quarter of fiscal 2009 to modify historical commission plans, offset by
$0.3 million in labor costs consistent with our efforts to streamline our
labor force. We incurred $0.1 million in additional partnership
fees as a result of additional advertising efforts within certain
mediums. We also incurred $0.1 million in other costs relating
to increasing our brand awareness and developing new relations, including
increases in market research, travel and participation in various trade shows
and conferences.
During
fiscal 2010, we expect to see modest increases in EPS selling and marketing
expenses as we continue to build our sales and marketing staff and expand our
strategic partnership initiatives.
Wind-down Selling
and Marketing: As a result of our decision to not pursue new
contracts within Wind-down, we did not incur any selling and marketing expenses
during the three months ended December 31, 2009.
We do
not expect to incur selling and marketing expenses in Wind-down during fiscal
2010.
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. The following table compares
depreciation and amortization costs incurred by our Continuing Operations during
the three months ended December 31, 2009 and 2008:
|
|
Three
months ended
December
31,
|
|
|
Variance
|
|
(in
thousands, except percentages)
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
$ |
1,335 |
|
|
$ |
979 |
|
|
$ |
356 |
|
|
|
36.4 |
% |
Wind-down
|
|
|
273 |
|
|
|
480 |
|
|
|
(207 |
) |
|
|
(43.1 |
)% |
Total
|
|
$ |
1,608 |
|
|
$ |
1,459 |
|
|
$ |
149 |
|
|
|
10.2 |
% |
Depreciation
and amortization relating to EPS increased during the three months ended
December 31, 2009 by $0.4 million, or 36.4%, primarily associated with
the acquisition of ChoicePay. Our depreciation and
amortization within Wind-down decreased $0.2 million,
or 43.1%, consistent with our decision to primarily allocate resources to
EPS.
Other Income/(Loss)
(Continuing Operations)
Gain/(loss) on
investment: During the three months ended December 31, 2009,
we recognized a $12,000 gain related to the increase in fair value of our
auction rate securities, an increase of $0.1 million over the same period
last year.
Interest income,
net: Interest income during
the three months ended December 31, 2009 decreased $0.2 million
compared to the three months ended December 31, 2008, attributable to both
a decrease in the amount within our investment portfolio and decreases in
interest rates. Due to current market conditions, we have elected to
sell as many debt securities as possible and invest the funds in money market
accounts, treasury bills and commercial paper – often at lower interest rates
than our debt securities. Our interest rates fluctuate with changes
in the marketplace.
Income Tax Provision
(Continuing Operations)
We did
not report an income tax provision for the three months ended December 31,
2009. We reported an income tax provision of $1,000 for the three
months ended December 31, 2008. The provision for income taxes
represents state tax obligations incurred by our EPS operations. Our
Consolidated Statements of
Operations for the three months ended December 31, 2009 and 2008 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 income taxes, 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; changes in our valuation allowance; our ability to utilize
net operating losses and any non-deductible items related to acquisitions or
other nonrecurring charges.
At
December 31, 2009, we had $105.7 million of federal net operation loss
carryforwards, which expire beginning in fiscal 2018 through 2029, and
$92.8 million of state net operating loss carryforwards, most of which
begin to expire after fiscal 2017 through 2024.
DISCONTINUED
OPERATIONS
Our
Discontinued Operations consists of portions of our former GBPO and PSSI
businesses which we have divested and no longer operate. During the
three months ended December 31, 2009 and 2008, net losses from Discontinued
Operations were $0.1 million and $3.3 million,
respectively.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2009 we had $57.7 million in cash, cash equivalents and
marketable securities consistent with the balance at September 30,
2009. In addition, at December 31, 2009, and September 30,
2009, we had restricted cash of $7.4 million, of which $6.0 million is
used as a compensating balance required by our bank to guarantee availability of
funds for processing outgoing Automated Clearing House payments to our clients
and $1.4 million is used to collateralize outstanding letters of credit,
which are scheduled to come due during fiscal year 2010. At
December 31, 2009, we had an Amended and Restated Credit and Security
Agreement, as amended, with our lender, under which we may obtain up to
$7.5 million of letters of credit. Effective January 2010,
this agreement was modified to allow us to obtain up to $5.0 million of
letters of credit, and to extend its expiration date through January
2011. This 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. The $1.4 million of letters of credit
outstanding were issued to secure performance bonds and a property
lease.
In
January 2010, we were notified we had been approved a line of credit of
$15,023,000 with UBS Bank USA, our investment manager, secured by our auction
rate securities. Pursuant to our participation in the ARS Rights
provided to us by UBS, we are entitled to borrow funds from UBS up to the par
value of eligible
auction
rate securities. This line of credit provides us liquidity for what
are currently illiquid investments should business needs arise.
We
believe we have sufficient liquidity to meet currently anticipated growth,
including capital expenditures, working capital investments, and acquisitions,
as well as participation in our stock repurchase program for the next twelve
months. We expect to generate cash flows from operating activities
over the long term; however, we may experience significant fluctuations from
quarter to quarter resulting from the timing of billing and
collections. 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. Currently, we do not have any short or long-term
debt.
Net Cash
from Continuing Operations—Operating Activities. During the
three months ended December 31, 2009, our operating activities from
Continuing Operations provided $1.5 million of cash. This
reflects a net loss of $0.7 million from Continuing Operations and
$2.4 million of non-cash items. During the three months ended
December 31, 2009, $2.7 million of cash was generated by an increase
in accounts and settlements payable and accrued liabilities. An
increase in accounts receivable used $2.0 million of cash. An
increase in prepaid expenses and other assets used $0.7 million of
cash. In addition, an increase in income tax receivable used
$0.1 million of cash and a decrease in deferred income used
$0.1 million of cash.
Net Cash
from Continuing Operations—Investing Activities. Net cash
provided by our investing activities from Continuing Operations for the three
months ended December 31, 2009 was $3.9 million, including
$5.6 million of cash provided by maturities and sales of marketable
securities, offset by $1.0 million of cash used to purchase marketable
securities. During the three months ended December 31, 2009, the
collection of a note receivable provided $0.3 million of
cash. The purchase of equipment and software to support our EPS
operations used $1.0 million of cash.
Net Cash
from Continuing Operations—Financing Activities. For the three
months ended December 31, 2009 $0.7 million of cash was used for the
purchase of company stock and $9,000 of cash was used for capital lease
obligations.
Net Cash
from Discontinued Operations—Operating Activities. During the three
months ended December 31, 2009, our operating activities from Discontinued
Operations used $54,000 of cash as a result of the recognition of some residual
restructuring expenses.
In Note
3—Investments of our Consolidated Financial Statements we disclosed that at
December 31, 2009, our investment portfolio included $30.1 million par
value of AAA-rated auction rate municipal bonds that were collateralized with
student loans. If the banking system or the financial markets
continue to deteriorate or remain volatile, we may be unable to liquidate these
investments in a timely manner at par value. To minimize the
liquidity risks associated with these investments, we entered into an Auction
Rate Securities Rights offer with our investment manager. This
agreement allows us to sell our auction rate securities to the investment
manager for a price equal to the par value plus accrued but unpaid interest
beginning on June 30, 2010. Our investment manager has the right
to sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer on July 2, 2012.
CONTRACTUAL
OBLIGATIONS
During
the three months ended December 31, 2009, there was no material change
outside the ordinary course of business in the contractual obligations disclosed
in our most recent annual report.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial results of operations and financial position
requires us to make judgments and estimates that may have a significant impact
upon our financial results. We believe that of our accounting
policies, the following estimates and assumptions, which require complex
subjective judgments by management, could have a material impact on reported
results: estimates of project costs and percentage of completion;
estimates of effective tax rates, deferred taxes and associated valuation
allowances;
valuation of goodwill and intangibles; and estimated share-based
compensation. Actual results could differ materially from
management’s estimates.
For a
full discussion of our critical accounting policies and estimates, see the Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2009.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
maintain a portfolio of cash equivalents and investments in a variety of
securities including certificates of deposit, and government and non-government
debt securities. These securities are subject to interest rate risk
and may decline in value if market interest rates increase. If market
interest rates increase immediately and uniformly by ten percent from
levels at December 31, 2009, the fair value of the portfolio would decline
by about $18,200.
ITEM
4. CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2009. The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2009, our Chief
Executive Officer and our Chief Financial Officer concluded that as of that
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
There
was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
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-Q.
We have incurred losses in the past
and may not be profitable in the future. While we reported net
income of $1.1 million in fiscal year 2005, we have reported net losses of
$11.5 million in fiscal 2009, $27.4 million in fiscal 2008,
$3.0 million in fiscal 2007, and $9.5 million in fiscal
2006.
Our revenues and operating margins
may decline and may be difficult to forecast, which could result in a decline in
our stock price. Our revenues, operating margins and cash
flows are subject to significant variation from quarter to quarter due to a
number of factors, many of which are outside our control. These
factors include:
·
|
economic
conditions in the marketplace including
recession;
|
·
|
loss
of significant clients;
|
·
|
demand
for our services;
|
·
|
seasonality
of business, resulting from timing of property tax payments and federal
and state income tax payments;
|
·
|
timing
of service and product
implementations;
|
·
|
unplanned
increases in costs;
|
·
|
delays
in completion of projects;
|
·
|
costs
of compliance with laws and government regulations;
and
|
·
|
costs
of acquisitions, consolidation and integration of new business and
technology.
|
The
occurrence of any of these factors may cause the market price of our stock to
decline or fluctuate significantly, which may result in substantial losses to
investors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance. From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock. Fluctuations in the price
and trading volume of our stock may be rapid and severe and may leave investors
little time to react. Other factors that may affect the market price
of our stock include announcements of technological innovations or new products
or services by competitors and general economic or political conditions, such as
recession, acts of war or terrorism. Fluctuations in the price of our
stock could cause investors to lose all or part of their
investment.
Our
income tax and property tax processing revenue has been negatively impacted by
recent economic conditions and may continue to decline. As a result of the current global and U.S. economic
conditions, including unemployment and real estate foreclosures, we have
suffered a downturn in revenue in our property tax and income tax segments, due
to decreased payments of federal income tax and property tax by taxpayers who
pay taxes on our website and IVR payment processing systems. If
current conditions do not improve, additional declines in revenue may occur,
especially in the property tax and federal income tax segments, negatively
impacting use of our services and our overall revenues.
We could suffer material revenue
losses and liability in the event the divested business projects and contracts
are not successfully concluded. We have completed divestment
of certain operations and portions of the business including our former
Financial Institutions Data Match services, State Systems Integration, Financial
Management Systems and Unemployment Insurance operations. Certain
divestitures include contractual earn outs and revenue sharing arrangements
based on the buyers’ successful operation of the businesses
divested. If the businesses are not profitable or there are revenue
shortfalls, we may not receive the expected benefits from the divestitures,
which could have an adverse impact on our revenues. Additionally, we
remain liable for certain obligations under some of the divested projects and
their related contracts. In February 2009, we completed the sale of
our Unemployment Insurance, or UI, business to RKV Technologies, Inc, or
RKV. The sale was completed pursuant to an Asset Purchase Agreement
dated February 6, 2009. As a part of the agreement, Tier is required
to leave in place a $2.4 million performance bond on the continuing
contract for the State of Indiana, or the State. Subsequent to the
sale of the UI business to RKV, the prime contractor, Haverstick Corporation, or
Haverstick, the State, and RKV determined that the contract completion would be
delayed and additional funding would be needed to complete the
contract. In November 2009 Haverstick cancelled its contract with RKV
and directly rehired various RKV resources and contractors. Tier retains certain
liabilities for completion of the project, and continues as the indemnitor under
the performance bond. Mediation is scheduled to take place in May
2010. If this contract, or other divested contracts are not performed
successfully, or if there is a claim of delay or breach in connection with
services or products provided by either us or the acquiring company, liability
to Tier could result, causing damages, unanticipated costs, bond forfeitures and
loss of revenue.
As a result of our
divestitures and the transition to a primary focus on electronic payment
solutions, our business is less diverse and therefore more vulnerable to changes
affecting the electronic payments business generally. Our focus on electronic payment solutions going
forward and the recent divestiture of the majority of our legacy business units
unrelated to electronic payment solutions, including software licensing and
government system integration businesses, has resulted in loss of historical
revenue sources and a decrease in diversification of services and
markets. In the event of a business downturn in the electronic
payment solutions business due to increased competition, loss of clients,
economic conditions, technology changes, or in the event of increased costs,
disruption in services, a change in laws, or other events related to the
electronic payment solutions business there could be a greater negative impact
on our revenues than if we had retained our diverse
businesses.
We could suffer material losses or
significant disruption of our operations and business if we are not successful
in integration and consolidation of our operations. We are
consolidating and moving certain operations, facilities, departments, and
positions as part of our strategic plan to save costs and eliminate duplicative
operations and functions. We completed consolidation of the customer service/call center, client services,
implementation services, and some information technology services from San
Ramon, California, and Tulsa, Oklahoma, to our existing facility in Auburn,
Alabama, and we consolidated financial operations to Reston,
Virginia. If this restructuring and consolidation is not
successful, we could suffer disruption of our operations, systems or services;
incur a significant increase in costs; or suffer a loss of valuable staff and
historical knowledge, which could have a material adverse impact on our
business, significantly increase operating costs and result in operational
weaknesses and compliance deficiencies. On January 27, 2009, we
purchased substantially all of the assets of ChoicePay, Inc., an ePayments
solution provider based in Tulsa, Oklahoma. The acquisition included
intellectual property, the ChoicePay processing platform, systems, operations,
services, products, clients, employees, and other resources. We may
not be successful in integrating the acquired assets into our existing business
which could result in disruption of operations, inefficiencies, excess costs,
legal and financial liability, additional outsourcing of services and consulting
charges, failure to provide services and products as contracted with clients and
vendors, and impairment of earning and operating results.
If we undertake acquisitions, they
could be expensive, increase our costs or liabilities or disrupt our
business. One of our strategies may be to pursue growth
through acquisitions. 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.
Consolidation of our payment
processing platforms involves significant risk and may not be
successful. We are in the process of integrating and
consolidating our technology platforms. We currently maintain three
processing platforms: one in San Ramon, California; one in Auburn, Alabama; and
a third in Tulsa, Oklahoma, which we recently acquired in the ChoicePay
acquisition. Failure to timely, effectively, and efficiently
consolidate our payment processing platforms could result in significant risks,
including restricted and limited transaction volume, operational inefficiencies,
inability to add new products or services, inability to achieve our goals for
fiscal year 2010 (including our business development objectives), inability to
expand existing products and services, significant development costs, higher
labor costs, increased hardware and software costs, inability to provide certain
functionality, or system and service disruption or failure. Our
business is highly dependent upon having a safe and secure information
technology platform with sufficient capacity to meet both the high volume of
transactions and the future growth of our business. If our ability to
develop and/or acquire upgrades or replacements for our existing platforms does
not keep pace with the growth of our business, we may not be able to meet our
requirements for the sustainable and economic growth of the
business. Furthermore, if we are not able to acquire or develop these
platforms and systems on a timely and economical basis, our profitability may be
adversely affected. If we are unable to successfully integrate and
consolidate these payment processing platforms it could result in a significant
loss of clients and revenues and risk of liability.
Our revenues and cash flows could
decline significantly if we were unable to retain our largest client, or a
number of significant clients. The
majority of our client contracts, including our contract with the U.S. Internal
Revenue Service, allow clients to terminate all or part of their contracts on
short notice, or provide notice of non-renewal with little prior
notification. Our contract with the IRS has generated
19.8%, 27.8%, and 28.3% of our annual revenues from Electronic Payment Solutions
for fiscal years 2009, 2008, and 2007, respectively. In April 2009 we
were one of three companies awarded a multi-year contract by the IRS to provide
electronic payment solutions for personal and business taxes. The contract
contains a base period commencing April 2, 2009 and four one-year option periods
running until December 31, 2013. To obtain this contract, we reduced
our historic pricing. We compete with the other contract award
recipients to provide services to the IRS. If the other recipients
reduce their prices, or if additional companies are awarded contracts, we may
have to reduce our prices further to remain competitive. If we were unable
to retain this client, or replace it in the event it is terminated, or if we
were unable to renew this contract, or are unsuccessful in future re-bids of
this contract, or if we are forced to reduce our prices in response to
competitive pressures, our operating results and cash flows could decline
significantly. Termination or non-renewal of a number of client
contracts, or certain significant client contracts, including the IRS contract,
or a number of large state, local, utility or education-related contracts, could
result in significant loss of revenues and reduction in
profitability.
Security breaches or unauthorized
access to confidential data and personally identifiable information in our
facilities, computer networks, or databases, or those of our suppliers, may
cause harm to our business and result in liability and systems
interruptions. Our business requires us to obtain, process,
use, and destroy confidential and personally identifiable data and information
of clients and consumers. We have programs, procedures and policies
in place to protect against security breaches, unauthorized access and
fraud. Despite security measures we have taken, our systems may be
vulnerable to physical break-ins, fraud, computer viruses, attacks by hackers
and similar acts and events, causing interruption in service and loss or theft
of confidential data and personally identifiable
information
that we process and/or store. It is possible that our security
controls over confidential information and personal data, our training on data
security, and other practices we follow may not prevent the improper disclosure
or unauthorized access to confidential data and personally identifiable
information. Our third-party vendors or suppliers also may experience
security breaches, fraud, computer viruses, attacks by hackers or other similar
incidents involving the unauthorized access and theft of confidential data and
personally identifiable information. In January 2009, Heartland
Payment Systems reported a breach of security of its systems resulting in the
loss or theft of personally identifiable information. We contract
with Heartland for certain payment processing services for credit and debit
transactions in the education market. Although no security breach
occurred within our systems, and there is no specific information to date that
our clients’ or their related consumers’ information or data was compromised as
a result of this incident, if such client or consumer data and information was
lost or stolen, such an incident could potentially result in compliance costs,
loss of clients and revenues, liability and fines. Any security
breach within our systems, software or hardware or our vendors or suppliers
systems, software or hardware could result in unauthorized access, theft, loss,
disclosure, deletion or modification of such data and information, and could
cause harm to our business and reputation, liability for fines and damages,
costs of notification, and a loss of clients and revenue.
We could suffer material losses and
liability if our operations, systems or platforms are disrupted or fail to
perform properly or effectively. The continued efficiency and
proper functioning of our technical systems, platforms, and operational
infrastructure is integral to our performance. Failure of any or all of these
resources subjects us to significant risks. This includes but is not limited to
operational or technical failures of our systems and platforms, human error,
failure of third-party support and services, as well as the loss of key
individuals or failure of key individuals to perform. We process a
high volume of time-sensitive payment transactions. The majority of
our tax-related transactions are processed in short periods of time, including
between April 1 and April 15 of each tax year for federal tax
payments. If there is a defect or malfunction in our system software
or hardware, an interruption or failure due to damage or destruction, a loss of
system functionality, a delay in our system processing speed, a lack of system
capacity, or a loss of personnel on short notice, even for a short
period of time, our ability to process transactions and provide services may be
significantly limited, delayed or eliminated, resulting in lost business and
revenue and harm to our reputation. Our insurance may not be adequate
to compensate us for all losses that may occur as a result of any such event, or
any system, security or operational failure or disruption.
We could suffer material losses and
liabilities if the services of any of our third party suppliers, vendors or
other providers are disrupted, eliminated or fail to perform properly or
effectively. Our payment solution services, systems, security,
infrastructure and technology platforms are highly dependent on third party
services, software, hardware, including data transmission and telecom service
providers, subcontractors, co-location facilities, network access providers,
card companies, processors, banks, merchants and other suppliers and
providers. We also provide services on complex multi-party projects
where we depend on integration and implementation of third-party products and
services. The failure or loss of any of these third party systems,
services, software or products, our inability to obtain third party replacement
services, or damage to or destruction of such services could cause degraded
functionality, loss of product and service offerings, restricted transaction
capacity, limited processing speed and/or capacity, or system failure, which
could result in significant cost, liability, diminished profitability and damage
to our reputation and competitive position. Our insurance may not be
adequate to compensate us for all losses that may occur as a result of any such
event, or any system, security or operational failure or
disruption.
Changes in laws and government and
regulatory compliance requirements may result in additional compliance costs and
may adversely impact our reported earnings. Our business is
subject to numerous federal, state and local laws, government regulations,
corporate governance standards, compliance controls, accounting standards,
licensing and bonding requirements, industry/association rules, and public
disclosure requirements including under the Sarbanes Oxley Act of 2002, SEC
regulations, and Nasdaq Stock Market rules. Compliance with and
changes in these laws, regulations, standards and requirements may result in
increased general and administrative expenses for
outside
services, increased risks associated with compliance, and a diversion of
management time and attention from revenue-generating activities, which could
curtail the growth of our business.
Violation of any existing or future
laws or regulations, including laws governing money transmitters and anti-money
laundering laws, could expose us to substantial liability and fines, force us to
cease providing our services, or force us to change our business
practices. Our business is subject to numerous federal and
state laws and regulations, including some states’ money transmitter
regulations, and related licensing requirements, and anti-money laundering
laws. Compliance with federal and state laws and government
regulations regarding money transmitters, money laundering, privacy, data
security, fraud, and other laws and regulations associated with financial
transaction processing is critical to our business. New laws and
regulations in these areas may be enacted, or existing ones changed, which could
negatively impact our services, restrict or eliminate our ability to provide
services, make our services unprofitable, or create significant liability for
us. Our anti-money laundering program requires us to monitor
transactions, report suspicious activity, and prohibit certain
transactions. We are registered as a money services business, have a
number of state money transmitter licenses and have additional applications for
licensure as a money transmitter pending. We entered into a consent
order with one state which included payment of penalties for unlicensed activity
prior to our submission of the money transmitter application, and one other
state has imposed a fine. In the future we may be subject to
additional states’ money transmitter regulations, money laundering regulations,
regulation of internet transactions, and related payment of fees and
fines. We are also subject to the applicable rules of the
credit/debit card association, the National Automated Clearing House Association
(NACHA), and other industry standards. If we are found to be in
violation of any laws, rules, regulations or standards, we could be exposed to
significant financial liability, substantial fines and penalties, cease and
desist orders, and other sanctions that could restrict or eliminate our ability
to provide our services in one or more states or accept certain types of
transactions in one or more states, or could force us to make costly changes to
our business practices. Even if we are not forced to change our
business practices, the costs of compliance and obtaining necessary licenses and
regulatory approvals, could be substantial.
We operate in highly competitive
markets. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market
share. Our business is focused on electronic payment
transaction solutions and e-commerce services, which are highly competitive
markets and are served by numerous international, national and local
firms. Many of our 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.
Our revenues may fluctuate, and our
ability to maintain profitability is uncertain. Our business
primarily provides credit and debit card and electronic check payment options
for the payment of federal and state personal income taxes, real estate and
personal property taxes, business taxes, fines for traffic violations and
parking citations, educational, utility and rent obligations. Our revenues
depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective
constituents. Demand for our services could decline if consumers are
not receptive to paying a convenience fee, card associations change their rules,
laws are passed that do not allow us to charge the convenience fees, or if
credit or debit card issuers, marketing partners, or alliance partners change
terms, terminate services or products, or eliminate or reduce the value of
rewards to consumers under their respective rewards programs. The
fees charged by credit/debit card associations, financial institutions, and our
suppliers can be increased with little or no notice, which could reduce our
margins and harm our profitability.
Demand
for our services could also be adversely affected by a decline in the use of the
Internet, economic factors such as a decline in availability of credit,
increased unemployment, foreclosures, 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 is subject to increasing
competition and rapid technological change. If we are not able to
develop, market and deliver competitive technologies, our market share will
decline and our operating results and financial condition could
suffer.
Change in interchange rates could
have a significant impact on our cost of revenue
generation. Interchange rates charged by credit and debit card
companies through card issuing banks are a major factor in our delivery costs
for the services we perform. A change in such rates could have a
significant impact on our financial performance.
The success of our business is based
largely on our ability to attract and retain talented and qualified employees
and contractors. The market for skilled workers in our
industry is extremely competitive. In particular, qualified managers
and senior technical and professional staff are in great demand. If
we are not successful in our recruiting efforts or are unable to retain key
employees, our ability to staff projects and deliver products and services may
be adversely affected. We believe our success also depends upon the
continued services of senior management and a number of key employees whose
employment may terminate at any time. If one or more key employees
resigns to join a competitor, to form a competing company, or as a result of
termination or a divestiture, the loss of such personnel and any resulting loss
of existing or potential clients could harm our competitive
position.
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. 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. Our business is dependent on intellectual property
rights including software license rights and restrictions, and trademark
rights. From time to time we receive notices from others claiming we
are infringing on their intellectual property rights. Defending a
claim of infringement against us could prevent or delay our providing products
and services, cause us to pay substantial costs and damages or force us to
redesign products or enter into royalty or licensing agreements on less
favorable terms. If we are required to enter into such agreements or
take such actions, our operating margins could decline.
If we are not able to obtain adequate
or affordable insurance coverage or bonds, we could face significant liability
claims and increased premium costs and our ability to compete for business could
be compromised. We maintain insurance to cover various risks
in connection with our business. Additionally, our business includes
projects that require us to obtain performance, statutory and bid bonds from a
licensed surety. There is no guarantee that such insurance coverage
or bonds will continue to be available on reasonable terms, or at
all. If we are unable to obtain or maintain adequate insurance and
bonding coverage, potential liabilities associated with the risks discussed in
this report could exceed our coverage, and we may not be able to obtain new
contracts or continue to provide existing services, which could result in
decreased business opportunities and declining revenues.
Our markets are changing
rapidly. If we are not able to adapt to changing conditions, we may
lose market share and may not be able to compete
effectively. The markets for our products are characterized by
rapid changes in technology, client expectations and evolving industry
standards. Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market. If we
are unable to address these requirements, or if our products or services do not
achieve market acceptance, we may lose market share, and our revenues could
decline.
Our business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability. The failure to meet client expectations could
damage our reputation and compromise our ability to attract new
business. On certain projects we make performance guarantees, based
upon defined operating specifications, service levels and delivery dates, which
are sometimes backed by contractual guarantees and performance, statutory or bid
bonds. Unsatisfactory performance of services, disruption of
services, or unanticipated difficulties or delays in processing payments or
providing contracted services may result in termination of the contract, a
reduction in revenues, liability for penalties and damages, or claims against a
bond.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Repurchases of Equity Securities:
|
Period
Covered
|
|
Total
Number of Shares Purchased
(in
thousands)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Repurchased as Part of Publicly Announced
Program
(in
thousands)
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Repurchased under the Program (1)
(in
thousands)
|
|
October
1 through
October
31, 2009
|
|
|
86.8 |
|
|
$ |
8.62 |
|
|
|
86.8 |
|
|
$ |
7,664 |
|
November
1 through
November
30, 2009
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
December
1 through
December
31, 2009
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
|
|
|
86.8 |
|
|
$ |
8.62 |
|
|
|
86.8 |
|
|
$ |
7,664 |
|
(1) On January 21, 2009, the
Company’s Board of Directors authorized the repurchase, from time to time, of up
to $15.0 million of the
Company’s common stock. On
August 13, 2009, the authorized repurchase amount was increased to
$20.0 million.
ITEM
5. OTHER INFORMATION
On
December 9, 2009, we entered into a Deed of Lease agreement with Sunrise
Campus Investors for the lease of 25,583 square feet of office space located at
11130 Sunrise Valley Drive, Reston, Virginia. We intend to relocate
our headquarters to these premises in April 2010. The lease is
scheduled to expire in April 2018. The Deed of Lease agreement is
filed as an exhibit to this Form 10-Q.
ITEM
6. EXHIBITS
Exhibit
Number
|
Description
|
10.1
|
Deed
of Lease agreement between Tier Technologies, Inc. and Sunrise Campus
Investors, LLC, dated December 9, 2009. †
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. †
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. †
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
|
†Filed
herewith.
|
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
TIER TECHNOLOGIES,
INC |
|
|
|
Dated: February 9,
2010 |
|
|
|
|
|
|
By: |
/s/ Ronald W. Johnston |
|
|
Ronald W. Johnston |
|
|
Chief
Financial Officer |
|
|
(Principal
Financial and Accounting Officer) |
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
10.1
|
Deed
of Lease agreement between Tier Technologies, Inc. and Sunrise Campus
Investors, LLC, dated December 9, 2009. †
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. †
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended. †
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
|
†Filed
herewith.
|
|