e10vk
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 000-23195
TIER TECHNOLOGIES, INC.
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DELAWARE
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94-3145844 |
(State of Incorporation)
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(I.R.S. ID) |
10780 PARKRIDGE BOULEVARD4th FLOOR, RESTON, VA 20191
(Address of principal executive offices)
(571) 382-1000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated Filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of March 31, 2006, the aggregate market value of common stock held by non-affiliates of the
registrant was $156,969,000, based on the closing sale price as reported on the Nasdaq National
Market (now the Nasdaq Global Market). As of December 8, 2006, there were 20,383,606 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to our
executive officers, which is set forth under Part IExecutive Officers) have been omitted from
this report, as we expect to file with the Securities and Exchange Commission, not later than 120
days after the close of our fiscal year ended September 30, 2006, a definitive proxy statement for
our 2007 annual meeting of stockholders. The information required by Items 10, 11, 12, 13 and 14
of Part III of this report, which will appear in our definitive proxy statement, is incorporated by
reference into this report.
TIER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I |
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Item 1Business |
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Item 1ARisk Factors |
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Item 1BUnresolved Staff Comments |
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Item 2Properties |
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Item 3Legal Proceedings |
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Item 4Submission of Matters to a Vote of Security Holders |
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Executive Officers |
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PART II |
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Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6Selected Financial Data |
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Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7AQuantitative and Qualitative Disclosures about Market Risk |
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Item 8Financial Statements and Supplementary Data |
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Report of Independent Registered Public Accounting Firm |
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Consolidated Balance Sheets |
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Consolidated Statements of Operations |
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Consolidated Statements of Shareholders Equity |
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Consolidated Statements of Comprehensive (Loss) Income |
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Consolidated Statements of Cash Flows |
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Consolidated Supplemental Cash Flow Information |
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Note 1Organizational Overview |
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Note 2Summary of Significant Accounting Policies |
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Note 3(Loss) Earnings per Share |
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Note 4Customer Concentration and Risk |
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Note 5Investments |
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Note 6Property, Equipment and Software |
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Note 7Goodwill and Other Intangible Assets |
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Note 8Contingencies and Commitments |
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Note 9Shareholders Equity |
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Note 10Share-based Payment |
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Note 11Related Party Transactions |
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Note 12Segment Information |
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Note 13Income Taxes |
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Note 14Restructuring |
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Note 15Discontinued Operations |
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Note 16Subsequent Events |
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Selected Quarterly Financial data (Unaudited) |
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Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9aControls and Procedures |
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Item 9bOther Information |
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PART III |
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Item 10Directors and Executive Officers of the Registrant |
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Item 11Executive Compensation |
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Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13Certain Relationships and Related Transactions |
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Item 14Principal Accounting Fees and Services |
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PART IV |
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Item 15Exhibits, Financial Statement Schedules |
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SIGNATURES |
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Special Note About Forward-Looking Statements
Certain statements contained in this report, other than purely historical information
(including estimates, projections, statements relating to our business plans, objectives and
expected operating results and assumptions upon which those statements are based) are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Forward-looking statements relate to future events or to our future financial and/or
operating performance and generally can be identified as such, because the context of the statement
will include words such as may, will, intends, plans, believes, anticipates, expects,
estimates, shows, predicts, potential, continue, or opportunity and similar
expressions. Forward-looking statements are based on current expectations and assumptions that are
subject to risks and uncertainties that may cause actual results to differ materially from the
forward-looking statements. A detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from such forward-looking statements is
included in the section entitled 1ARisk Factors, beginning on page 6. We undertake no obligation
to update or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
ITEM 1BUSINESS
GENERAL
Tier Technologies, Inc. provides federal, state and local government and other public sector
clients with transaction processing services and software and systems integration. Typically, the
demand for our services is driven by an increasing preference of consumers and governmental
agencies to make payments electronically, increased acceptance of interactive voice response
systems and contact management solutions, as well as by legislative mandates, such as child support
and tax collections and disbursements. Originally incorporated in 1991 in California, we
reincorporated in Delaware effective July 15, 2005. We are headquartered in Reston, Virginia and
our 948 employees provide services to over 3,100 clients nationwide.
SEGMENT INFORMATION
We organize our operations into segments in order to provide management with a comprehensive
financial and operational view into our key business activities. These segments provide a
framework for aligning strategies and objectives and for allocating resources throughout our
organization. Our three segments are: Electronic Payment Processing, Government Business Process
Outsourcing, and Packaged Software and Systems Integration. The growth and revenues produced by
each of these segments is driven by the growth of our client base, as well as the addition of new
complementary services and products. The market for the services provided by each of our segments
is highly competitive and is served by numerous international, national and local firms, as well as
internal information technology resources of state and local governments. We believe the
efficiency of our systems, outstanding customer service, competitive pricing and innovative
technological solutions will enhance our standing relative to our competitors.
A description of each of our segments is provided below. See Note 12Segment Information of the
Notes to Consolidated Financial Statements for information regarding the profitability of each
segment.
Electronic Payment Processing, or EPP. Our EPP segment provides government and
public-sector clients with electronic payment processing alternatives for collecting taxes, fees
and other obligations. In fiscal year 2006, our client base included the U.S. Internal Revenue
Service, 26 states, the District of Columbia and nearly 2,600 local governments and other public
sector clients. While our EPP segment does have a large number of clients, over a third of our
revenues for this segment, representing 18% of our consolidated revenues, are generated under a
contract with the U.S. Internal Revenue Service.
Clients who use our electronic payment processing services can offer their customers the ability to
make tax, tuition and utility payments with a credit or debit card or an electronic check. Our
secure electronic payment processing services help our clients reduce remittance-processing costs,
increase collection speed and provide convenient payment alternatives to their constituents.
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During the last decade, increased consumer acceptance of electronic media, such as interactive
voice response systems and the Internet, have led to greater reliance on cashless payment methods
including credit and debit cards and electronic checks. However, many government entities have
neither the technical expertise nor the personnel to develop, implement and maintain electronic
payment processes or to accept Internet or telephonic originated payments. As a result, they rely
on external service providers, such as Tier, to perform this function.
During fiscal year 2006, we processed over 5.8 million transactions, representing nearly $3.6
billion of payments collected for federal and state income taxes, state business taxes, property
taxes, parking citations, traffic violations, local licenses, educational institution fees and
utility bills. The revenues we receive for payment services are transaction-based. Increases and
decreases in these revenues typically represent changes in the volume of transactions and
associated dollars that we process. This volume, in turn, reflects the size of our client base,
the level of customer acceptance of electronic payment processing alternatives, the number and type
of complementary partnership relationships and the variety of payment alternatives offered.
Typically, EPP revenues are higher in the second and third quarters of our fiscal year as a result
of the seasonal surge in income tax payments in March and April.
Government Business Process Outsourcing, or GBPO. Our GBPO segment focuses on child
support payment processing, child support financial institution data match services, health and
human services consulting, call centers and interactive voice response systems and other related
systems integration services. Because of the nature of the services provided by the GBPO segment,
revenues are relatively constant throughout the year. Our GBPO segment derives a significant
portion of its revenues from a limited number of large contracts. During fiscal year 2006, we
derived over 64% of our GBPO revenues from three contracts, including our contract with the State
of Michigan, which contributed over 10% of our consolidated revenues during fiscal 2006.
Under the U.S. Personal Responsibility and Work Opportunity Reconciliation Act of 1996, each state
must have an automated and centralized process for collecting and distributing child support
payments. Our payment processing operations provide many services related to this Act on behalf of
our state clients, including: the receipt, disbursement and processing of manual and electronic
child support payments; check and document imaging; and maintenance of payment and court order
histories. Our clients can choose from an array of service offerings, including: customer service
and call center operations; a government-to-consumer web application; and an interface between
states financial institutions and their respective child support enforcement divisions to assist
in the location and seizure of delinquent child support and full processing of child support
payments. During fiscal year 2006, we used internally developed software to process approximately
$3.7 billion of transactions for six states as the primary contractor and one state as a
subcontractor. Child support payment processing revenue is based on a per-transaction fee applied
to the number of transactions processed.
The U.S. Personal Responsibility and Work Opportunity Reconciliation Act of 1996 also created the
Financial Institution Data Match Program, which requires states to match delinquent obligations
against records held by financial institutions. When matches are identified, state child support
enforcement agencies can issue liens or levies on noncustodial parents bank accounts to expedite
the collection of past due child support obligations. We provide these services to a fifteen-state
alliance formed to develop and oversee outsourced financial institution match programs. We also
provide these services to two states that are not members of the alliance. Since 2002, we have
located more than $18.5 billion for our clients. We derive revenue under this program by assessing
a fee based on the number of financial institutions matched.
Packaged Software and System Integration, or PSSI. Our PSSI segment provides software
systems design, development and integration, maintenance and support services primarily to state
and local government clients. Our clients rely on us to integrate leading-edge technologies into
their operations that improve customer service and operational efficiency. Our PSSI segment
provides services to more than 500 clients nationwide; however, 25% of the revenues generated by
the PSSI segment in fiscal year 2006 were from projects with the State of Missouri. Our PSSI
segment offers these services through the following practice areas:
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Financial Management Systemsdevelops, implements and supports financial
management and purchasing systems for state and local governments; |
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Public Pension Administration Systemsprovides services to support the
design, development and implementation of pension applications for state, county
and city governments; |
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Unemployment Insurance Systemsprovides software application integration
services to state governments that are reforming unemployment insurance systems; |
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Voice and Systems Automationprovides call center interactive voice
response systems and support services, including customization, installation and
maintenance; and |
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State Systems Integrationprovides information technology development,
integration and maintenance support projects, primarily for the State of Missouri. |
The level of revenues generated by our PSSI segment is driven primarily by the size of our customer
base, the addition of new service offerings and new partnership relationships with complementary
service and technology providers. Revenues recognized by this segment reflect the specific
contract deliverables and are not influenced by seasonal changes.
SALES AND MARKETING
Our sales and marketing objective is to develop relationships with clients that result in
repeat long-term and cross-sale engagements. Each segment maintains a dedicated sales force that
may work cooperatively on joint sales efforts involving a combination of our services across
different segments. When a segment provides products or services to another segment, the
associated intercompany revenues and expenses are eliminated as part of our consolidation process.
Enhancing our commissioned sales force, we also utilize the business development capabilities of
our segment leaders in their vertical markets as a supplemental sales and delivery resource.
Members of our management team have a wide range of industry contacts and established reputations
in their applicable industries and play a key role in developing, selling and managing major
engagements. As a result of our market-focused sales approach, we believe that we are able to
identify and qualify for opportunities quickly and cost effectively.
We strive to generate new business by increasing brand awareness and recognition to our diverse
solution offerings using a variety of media. Our most significant marketing and advertising
program involves the promotion of electronic payment processing services offered by OPC. We work
with our government clients to publicize our services through advertisements in payment invoices,
publications and web sites, typically at little or no cost to us. We also enter cooperative
advertising and marketing arrangements with our card processing partners and major card-issuing
banks, including print and online advertising campaigns and promotions. In fiscal 2006, we used
newspaper, television, radio, internet and public relations campaigns to supplement these efforts.
COMPETITION
The transaction processing and software and systems integration markets are highly
competitive and are served by numerous international, national and local firms. Representative
market participants in transaction processing markets include: Affiliated Computer Systems, Inc.;
JPMorgan Chase; Systems and Methods, Inc.; and Link2Gov. Competition in the software and systems
integration market includes U.S. and international consulting and integration firms, the internal
information systems groups of our prospective clients, professional services companies, hardware
and application software vendors, and divisions of large integrated technology companies and
outsourcing companies. Representative market participants include: Accenture; CGI-AMS;
BearingPoint; Covansys; Deloitte; IBM; Tata (TCS America); Ciber; NIC, Inc.; Lawson; and Tyler
Technologies.
We believe that the principal competitive factors in our markets include reputation, project
management expertise, industry expertise, speed of development and implementation, technical
expertise, competitive pricing and the ability to deliver results, whether on a fixed-price or on a
time-and-materials basis. We believe that our ability to compete also depends in part on a number
of competitive factors outside our control, including the ability of our clients or competitors to
hire, retain and motivate project managers and other senior technical staff, the ownership by
competitors of software used by potential clients, the price at which others offer comparable
services, greater financial resources of our competitors, the ability of our clients to perform the
services themselves and the extent of our competitors responsiveness to client needs.
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INTELLECTUAL PROPERTY RIGHTS
Our success depends, in part, on our protection of our methodologies, solutions and
intellectual property rights. We rely upon a combination of nondisclosure, licensing and other
contractual arrangements, as well as trade secret, copyright and trademark laws to protect our
proprietary rights and the proprietary rights of third parties from whom we license intellectual
property. We enter into nondisclosure agreements with all our employees, subcontractors and
parties with whom we team. In addition, we control and limit distribution of proprietary
information. We cannot assure that these steps will be adequate to deter the misappropriation of
proprietary information or that we will be able to detect unauthorized use of this information and
take appropriate steps to enforce our intellectual property rights.
We have developed and acquired proprietary software that is licensed to clients pursuant to license
agreements and other contractual arrangements. We use intellectual property laws, including
copyright and trademark laws, to protect our proprietary rights. Part of our business also
develops software applications for specific client engagements and customizes existing software
products for specific clients. Ownership of developed software and customizations to existing
software is subject to negotiation with individual clients and is typically assigned to the client.
In some situations, we may retain ownership or obtain a license from our client, which permits us
or a third party to use and market the developed software or the customizations for the joint
benefit of the client and us or for our sole benefit.
AVAILABLE INFORMATION
Our Internet address is www.Tier.com. There we make available, free of charge, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports, as soon as reasonably practicable after we electronically file such
material with or furnish it to the Securities and Exchange Commission, or SEC. Our SEC reports can
be accessed through the investor relations section of our Web site. The information found on our
Web site is not part of this or any other report we file with or furnish to the SEC.
ITEM 1ARISK FACTORS
The following factors and other risk factors could cause our actual results to differ
materially from those contained in forward-looking statements in this Form 10-K.
If we fail to regain our listing status on Nasdaq, the value of our stock may continue to be
depressed, we may have difficulties attracting and retaining customers and employees and our
company may be susceptible to takeover attempts. Effective at the open of business on
May 25, 2006, our common stock was delisted from the Nasdaq National Market (now the Nasdaq Global
Market). Although we intend to apply for re-listing in the near future, we may not be successful in
having our common stock listed on the Nasdaq Global Market.
We have incurred losses in the past and may not be profitable in the future. We have
incurred losses in the past and we may do so in the future. While we reported net income from
continuing operations in fiscal year 2005, we reported losses from continuing operations of $9.5
million during the fiscal year 2006; $63,000 in fiscal year 2004 and $5.4 million in fiscal year
2003.
Our revenues and operating margins may decline and may be difficult to forecast, which could result
in a decline in our stock price. Our revenues, operating margins and cash flows are subject to
significant variation from quarter to quarter due to a number of factors, many of which are outside
our control. These factors include:
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economic conditions in the marketplace; |
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our customers budgets and demand for our services; |
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seasonality of business; |
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timing of service and product implementations; |
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unplanned increase in costs; |
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delay in completion of projects; |
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intense competition; |
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variability of software license revenues; and |
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integration and costs of acquisitions. |
The occurrence of any of these factors may cause the market price of our stock to decline or
fluctuate significantly, which may result in substantial losses to investors. We believe that
period-to-period comparisons of our operating results are not necessarily meaningful and/or
indicative of future performance. From time to time our operating results may fail to meet
analysts and investors expectations, which could cause a significant decline in the market price
of our stock. Price fluctuations and trading volume of our stock may be rapid and severe and may
leave investors little time to react. Other factors that may affect the market price of our stock
include announcements of technological innovations or new products or services by competitors, and
general economic or political conditions such as recession, acts of war or terrorism. Fluctuations
in the price of our stock could cause investors to lose all or part of their investment.
We rely on small numbers of projects, customers and target markets for significant portions of our
revenues and our cash flow may decline significantly if we are unable to retain or replace these
projects or clients. We depend on a small number of clients to generate a significant portion of
our revenues. The completion or cancellation of a large project or a significant reduction in
project scope could significantly reduce our revenues and cash flows. Many of our contracts allow
our clients to terminate the contract for convenience upon notice and without penalty. If any of
our large clients or prime contractors terminates its relationship with us, we will lose a
significant portion of our revenues and cash flows. Because of our specific market focus, adverse
economic conditions affecting government agencies in these markets could also result in a reduction
in our revenues and cash flows. During the fiscal year ended September 30, 2006, our ten largest
clients represented approximately 56% of our total revenues, including one contract that generated
over 18% of our total revenues. Our operating results and cash flows could decline significantly
if we cannot keep these clients, or replace them if lost.
Our markets are highly competitive. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market share. Our business is focused on transaction
processing and software systems solutions, which are highly competitive markets and are served by
numerous international, national and local firms. Many competitors have significantly greater
financial, technical and marketing resources and name recognition than we do. In addition, there
are relatively low barriers to entry into these markets and we expect to continue to face
additional competition from new entrants into our markets. Parts of our business are subject to
increasing pricing pressures from competitors, as well as from clients facing pressure to control
costs. Some competitors are able to operate at significant losses for extended periods of time,
which increases pricing pressure on our products and services. If we do not compete effectively,
the demand for our products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market share.
Changes in accounting standards could significantly change our reported results. Our accounting
policies and methods are fundamental to how we record and report our financial condition and
results of operations. From time to time, the Financial Accounting Standards Board changes the
financial accounting and reporting standards that govern the preparation of our financial
statements. These changes can be hard to predict and can materially impact how we record and report
our financial condition and results of operations. In some cases, we could be required to apply a
new or revised standard retroactively, resulting in our restating prior period financial
statements.
Changes in laws and government and regulatory compliance requirements may result in additional
compliance costs and may adversely impact our reported earnings. Our business is subject to
numerous federal, state and local laws, government regulations, corporate governance standards,
industry association rules and public disclosure requirements, which are subject to change.
Changing laws, regulations and standards relating to corporate governance, accounting standards,
and public disclosure, including the Sarbanes-Oxley Act
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2002, SEC regulations and Nasdaq Stock Market rules are creating uncertainty for companies and
increasing the cost of compliance. To maintain high standards of corporate governance and public
disclosure, we intend to invest all reasonably necessary resources to comply with evolving
standards. This investment may result in increased general and administrative expenses for outside
services and a diversion of management time and attention from revenue-generating activities. New
laws, regulations or industry standards may be enacted, or existing ones changed, which could
negatively impact our services and revenues. Taxes or fees may be imposed or we could be subject
to additional requirements in regard to privacy, security or qualification for doing business. For
our transaction processing services, we are subject to the rules of the National Automated Clearing
House Association and the applicable credit/debit card association rules. A change in such rules
and regulations could restrict or eliminate our ability to provide services or accept certain types
of transactions, and could increase costs, impair growth and make our services unprofitable.
The revenues provided by our EPP segment from electronic payment processing may fluctuate and the
ability to maintain profitability is uncertain. Our EPP segment primarily provides credit and
debit card and electronic check payment options for the payment of federal and state personal
income taxes, real estate and personal property taxes, business taxes, fines for traffic violations
and parking citations and educational and utility obligations. The revenues earned by our EPP
segment depend on consumers continued willingness to pay a convenience fee and our relationships
with clients such as government taxing authorities, educational institutions, public utilities and
their respective constituents. If consumers are not receptive to paying a convenience fee; if card
associations change their rules or if laws are passed which do not allow us to charge the
convenience fees; or if credit or debit card issuers or marketing partners eliminate or reduce the
value of rewards to consumers under their respective rewards programs, demand for electronic
payment processing services could decline. The processing fees charged by credit/debit card
associations and financial institutions can be increased with little or no notice, which could
reduce margins and harm our profitability. Demand for electronic payment processing services would
also be affected adversely by a decline in the use of the Internet or consumer migration to a new
or different technology or payment method. The use of credit and debit cards and electronic checks
to make payments to government agencies is subject to increasing competition and rapid technology
change. If we are not able to develop, market and deliver competitive technologies, our market
share will decline and our operating results and financial condition could suffer.
Our ability to grow depends largely on our ability to attract, integrate and retain qualified
personnel. The success of our business is based largely on our ability to attract and retain
talented and qualified employees and contractors. The market for skilled workers in our industry
is extremely competitive. In particular, qualified project managers and senior technical and
professional staff are in great demand worldwide. If we are not successful in our recruiting
efforts, or are unable to retain key employees, our ability to staff projects and deliver products
and services may be adversely affected. We believe our success also depends upon the continued
services of senior management and a number of key employees whose employment may terminate at any
time. If one or more key employees resigns to join a competitor or to form a competing company,
the loss of such personnel and any resulting loss of existing or potential clients could harm our
competitive position.
We depend on third parties for our products and services. Failure by these third parties to
perform their obligations satisfactorily could hurt our reputation, operating results and
competitiveness. Our business is highly dependent on working with other companies and
organizations to bid on and perform complex multi-party projects. We may act as a prime contractor
and engage subcontractors, or we may act as a subcontractor to the prime contractor. We use
third-party software, hardware and support service providers to perform joint engagements. We
depend on licensed software and other technology from a small number of primary vendors. We also
rely on a third-party co-location facility for our primary data center, use third-party processors
to complete payment transactions and use third-party software providers for system solutions,
security and infrastructure. The failure of any of these third parties to meet their contractual
obligations, our inability to obtain favorable contract terms, failures or defects attributable to
these third parties or their products, or the discontinuation of the services of a key
subcontractor or vendor could result in significant cost and liability, diminished profitability
and damage to our reputation and competitive position.
Our fixed-price and transaction-based contracts require accurate estimates of resources and
transaction volumes and failure to estimate these factors accurately could cause us to lose money
on these contracts. Our business relies on accurate estimates. If we underestimate the resources,
cost or time required for a project or overestimate the expected volume of transactions or
transaction dollars processed, our costs could be greater than expected or our revenues could be
less than expected. Under fixed-price contracts, we generally receive our
8
fee if we meet specified deliverables, such as completing certain components of a system
installation. For transaction-based contracts, we receive our fee on a per-transaction basis or as
a percentage of dollars processed, such as the number of child support payments processed or tax
dollars processed. If we fail to prepare accurate estimates on factors used to develop contract
pricing, such as labor costs, technology requirements or transaction volumes, we may incur losses
on those contracts and our operating margins could decline.
Our revenues are highly dependent on government funding and the loss or decline of existing or
future government funding could cause our revenues and cash flows to decline. A significant
portion of our revenues is derived from federal and state mandated projects. A large portion of
these projects may be subject to a reduction or discontinuation of funding which may cause early
termination of projects, diversion of funds away from our projects or delays in implementation.
The occurrence of any of these conditions could adversely affect our projected revenues, cash flows
and profitability.
If we are not able to obtain adequate or affordable insurance coverage or bonds, we could face
significant liability claims and increased premium costs and our ability to compete for business
could be compromised. We maintain insurance to cover various risks in connection with our
business. Additionally, our business includes projects that require us to obtain performance and
bid bonds from a licensed surety. There is no guarantee that such insurance coverage or bonds will
continue to be available on reasonable terms, or at all. If we are unable to successfully maintain
adequate insurance and bonding coverage, potential liabilities associated with the risks discussed
in this report could exceed our coverage, and we may not be able to obtain new contracts, which
could result in decreased business opportunities and declining revenues.
Unauthorized data access and other security breaches could have an adverse impact on our business
and our reputation. Security breaches or improper access to data in our facilities, computer
networks, or databases, or those of our suppliers, may cause harm to our business and result in
liability and systems interruptions. Despite security measures we have taken, our systems may be
vulnerable to physical break-ins, computer viruses, attacks by hackers and similar problems causing
interruption in service and loss or theft of data and information. Our third-party suppliers also
may experience security breaches involving the unauthorized access of proprietary information. A
security breach could result in theft, publication, deletion or modification of confidential
information, cause harm to our business and reputation and result in loss of clients and revenue.
We could suffer material losses if our operations fail to perform effectively. The potential for
operational risk exposure exists throughout our organization. Integral to our performance is the
continued efficacy of our technical systems, operational infrastructure, relationships with third
parties and key executives in our day-to-day and ongoing operations. Failure by any or all of these
resources subjects us to risks that may vary in size, scale and scope. This includes but is not
limited to operational or technical failures, ineffectiveness or exposure due to interruption in
third-party support as expected, as well as the loss of key individuals or failure on the part of
the key individuals to perform properly. Our insurance may not be adequate to compensate us for
all losses that may occur as a result of any such event, or any system, security or operational
failure or disruption.
Our business may be harmed by claims, lawsuits or investigations which could result in adverse
outcomes. At any given time, we are subject to a variety of claims and lawsuits. Adverse outcomes
in any particular claim, lawsuit, government investigation, tax determination, or other liability
matter may result in significant monetary damages, substantial costs, or injunctive relief against
us that could adversely affect our ability to conduct our business. We cannot guarantee that the
disclaimers, limitations of warranty, limitations of liability and other provisions set forth in
our contracts will be enforceable or will otherwise protect us from liability for damages. The
successful assertion of one or more claims against us may not be covered by, or may exceed our
available insurance coverage.
In May 2003, we received a subpoena from a grand jury in the Southern District of New York to
produce certain documents pursuant to an investigation by the Antitrust Division of the U.S.
Department of Justice, or the DOJ, involving the child support payment processing industry. We
have fully cooperated, and intend to continue to cooperate fully, with the subpoena and with the
DOJs investigation. On November 20, 2003, the DOJ granted us conditional amnesty pursuant to the
Antitrust Divisions Corporate Leniency Policy. Consequently, the DOJ will not bring any criminal
charges against us or our officers, directors and employees, as long as we continue to comply with
the Corporate Leniency Policy, which requires, among other things, our full cooperation in the
investigation and restitution payments if it is determined that parties were injured as a result of
impermissible anticompetitive
conduct. We anticipate that we will incur additional expenses as we continue to cooperate with the
investigation.
9
Such expenses and any restitution payments could negatively impact our reputation,
compromise our ability to compete and win new projects and result in financial losses.
In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting
documents relating to financial reporting and personnel issues. If the SEC were to conclude that
further investigative activities are merited or to take formal action against Tier, our reputation
could be impaired. We have cooperated, and intend to continue to cooperate, fully with this
investigation. We anticipate that we will incur additional legal and administrative expenses as we
continue to cooperate with the SECs investigation.
On November 20, 2006, the Company was served with a class action lawsuit on behalf of purchasers of
our common stock from November 29, 2001 to October 25, 2006, related to compliance with the
Securities Exchange Act of 1934. We anticipate that we will incur legal and administrative
expenses to defend this claim. In addition, significant adverse verdicts or settlements could
exceed the levels of our insurance coverage.
If we are not able to protect our intellectual property we could suffer serious harm to our
business. We protect our intellectual property rights through a variety of methods, such as use of
nondisclosure and license agreements, and use of trade secret, copyright and trademark laws.
Ownership of developed software and customizations to software are the subject of negotiation with
individual clients. Despite our efforts to safeguard and protect our intellectual property and
proprietary rights, there is no assurance that these steps will be adequate to avoid the loss or
misappropriation of our rights or that we will be able to detect unauthorized use of our
intellectual property rights. If we are unable to protect our intellectual property, competitors
could market services or products similar to ours, and demand for our offerings could decline,
resulting in an adverse impact on revenues.
We may be subject to infringement claims by third parties, resulting in increased costs and loss of
business. From time to time we receive notices from others claiming we are infringing on their
intellectual property rights. Defending a claim of infringement against us could prevent or delay
our providing products and services, cause us to pay substantial costs and damages, or force us to
redesign products or enter into royalty or licensing agreements on less favorable terms. If we are
required to enter into such agreements or take such actions, our operating margins could decline.
Our markets are changing rapidly and if we are not able to adapt to changing conditions, we may
lose market share and be unable to compete effectively. The markets for our products are
characterized by rapid changes in technology, client expectations and evolving industry standards.
Our future success depends on our ability to innovate, develop, acquire and introduce successful
new products and services for our target markets and to respond quickly to changes in the market.
If we are unable to address these requirements, or if our products do not achieve market
acceptance, we may lose market share and our revenues could decline.
We may not be successful in identifying acquisition candidates and, if we undertake acquisitions,
they could be expensive, increase our costs or liabilities or disrupt our business. One of our
strategies is to pursue growth through acquisitions. We may not be able to identify suitable
acquisition candidates at prices that we consider appropriate or to finance acquisitions at
favorable terms. If we do identify an appropriate acquisition candidate, we may be unsuccessful in
negotiating the terms of the acquisition, finance the acquisition or, if the acquisition occurs we
may be unsuccessful in integrating the acquired business into our existing business. Negotiations
of potential acquisitions and the integration of acquired business operations could disrupt our
business by diverting management attention away from day-to-day operations. Acquisitions of
businesses or other material operations may require additional debt or equity financing, resulting
in leverage or dilution of ownership. We also may not realize cost efficiencies or synergies that
we anticipated when selecting our acquisition candidates. In addition, we may need to record
write-downs from future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings. Acquisition candidates may have liabilities or adverse
operating issues that we fail to discover through due diligence prior to the acquisition. Any
costs, liabilities or disruptions associated with any future acquisitions we may pursue could harm
our operating results.
Our business is subject to increasing performance requirements, which could result in reduced
revenues and increased liability. Our business involves projects that are critical to the
operations of our clients businesses. The failure to meet client expectations could damage our
reputation and compromise our ability to
10
attract new business. On certain projects we make performance guarantees, based upon defined
operating specifications, service levels and delivery dates, which are sometimes backed by
contractual guarantees and performance bonds. Unsatisfactory performance or unanticipated
difficulties or delays in starting or completing such projects may result in termination of the
contract, a reduction in payment, liability for penalties and damages, or claims against a
performance bond. Client performance expectations or unanticipated delays could necessitate the
use of more resources than we initially budgeted for a particular project, which could increase our
project costs and make us less profitable.
ITEM 1BUNRESOLVED STAFF COMMENTS
There are no material unresolved written comments that were received from the Securities and
Exchange Commissions staff 180 days or more before the end of our fiscal year 2006 regarding our
periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2PROPERTIES
As of September 30, 2006, we leased over 185,000 square feet of space throughout the country.
These leased facilities included our 41,000 square foot corporate headquarters in Reston,
Virginia. We also leased 68,000 square feet of space for our payment processing centers in
Michigan, Kansas, Tennessee, Alabama and Kentucky. In addition, we leased 56,000 square feet of
space in Georgia, Connecticut, California, New Mexico, Missouri, Virginia and Pennsylvania to house
our subsidiary operations for the EPP and PSSI segments and the call centers for our GBPO segment
and to provide general office space for each of our three segments to support our projects and our
clients. We also own a 28,060 square foot building in Alabama which houses certain administrative,
call center, warehouse and other operations. Finally, we also leased 20,000 square feet in
California that we subleased to an unrelated third party.
ITEM 3LEGAL PROCEEDINGS
In May 2003, we received a subpoena from a grand jury in the Southern District of New York to
produce certain documents pursuant to an investigation by the Antitrust Division of the DOJ,
involving the child support payment processing industry. We have fully cooperated, and intend to
continue to cooperate fully, with the subpoena and with the DOJs investigation. On November 20,
2003, the DOJ granted us conditional amnesty pursuant to the Antitrust Divisions Corporate
Leniency Policy. Consequently, the DOJ will not bring any criminal charges against us or our
officers, directors and employees, as long as we continue to comply with the Corporate Leniency
Policy, which requires, among other things, our full cooperation in the investigation and
restitution payments if it is determined that parties were injured as a result of impermissible
anticompetitive conduct.
In May 2006, we received a subpoena from the Philadelphia District Office of the SEC requesting
documents relating to financial reporting and personnel issues. If the SEC were to conclude that
further investigative activities are merited or to take formal action against us, our reputation
could be impaired. We have cooperated and intend to continue to cooperate fully with this
investigation.
On November 20, 2006, the Company was served with a class action lawsuit on behalf of purchasers of
our common stock from November 29, 2001 to October 25, 2006. The suit alleges that Tier and
certain of our former and/or current officers violated the Securities Exchange Act of 1934, but did
not identify the damages being sought. This case is pending in the United States District Court
for the Eastern District of Virginia. We are not able to estimate the probability or level of
exposure associated with this complaint.
ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth quarter of fiscal
2006.
11
EXECUTIVE OFFICERS
The names, ages and positions of our executive officers at September 30, 2006, are listed in
the following table, together with their business experience during the past five years. Unless
otherwise specified, all officers served continuously since the date indicated. There is no family
relationship among the officers.
|
|
|
|
|
|
|
Date elected |
|
Name, age and position with the Registrant |
|
or appointed |
|
Ronald L Rossetti, Age 64(a)
Chairman of the Board, Chief Executive Officer |
|
May 2006 |
|
Steven M. Beckerman, Age 48(b)
Senior Vice President, Business Process Outsourcing |
|
March 2006 |
|
David E. Fountain, Age 46(c)
Senior Vice President, Chief Financial Officer and Treasurer |
|
May 2005 |
|
Michael A. Lawler, Age 43(d)
Senior Vice President (Electronic Payment Processing) |
|
June 2004 |
|
Deanne M. Tully, Age 48(e)
Vice President, General Counsel and Corporate Secretary |
|
July 2003 |
Vice President, General Counsel |
|
February 2001 |
|
Stephen V. Wade, Age 45(f)
Senior Vice President (Strategy and Business Development) |
|
October 2003 |
Vice President (Business Development and Sales) |
|
June 1999 |
|
|
|
(a) |
|
Mr. Rossetti served as President of Riverside Capital Partners, Inc., a venture capital investment firm, since
1997. Since 1997, Mr. Rossetti has also been a general partner in several real estate general partnerships, all commonly controlled
by Riverside Capital Holdings. |
|
(b) |
|
Prior to joining Tier, Mr. Beckerman was employed by Certegy Card Service, a company that provides debit, credit and
merchant card processing. From January 2004 to February 2006, Mr. Beckerman served as the Certegys Senior Vice President, Product
Management and from July 2000 to December 2003, Mr. Beckerman served as Certegys Vice President, Sales and Marketing. |
|
(c) |
|
Mr. Fountain served as Chief Financial Officer and Treasurer of National Processing Inc., a provider of payment
processing services, from 1999 to October 2004. |
|
(d) |
|
Mr. Lawler served as EPOS Corporation President and Chairman from 1991 to June 2004 and became Senior Vice President at
Tier upon the acquisition of EPOS. |
|
(e) |
|
Ms. Tully was Senior Counsel at Dillingham Construction Holdings, Inc. from 1996 to February 2001. |
|
(f) |
|
Mr. Wade resigned from the Company effective November 27, 2006. |
PART II
ITEM 5MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of September 30, 2006, our stock was quoted on the Pink Sheets under the symbol TIER or
TIER.PK. Prior to May 25, 2006, our stock was quoted on the Nasdaq National Market (now the Nasdaq
Global Market) under the symbol TIER. On May 25, 2006, our common stock was delisted from the
Nasdaq National Market, in accordance with a notification from the Nasdaq Listing Qualifications
Hearings Panel, or the Panel. In reaching its determination, the Panel cited concerns about the:
1) quality and timing of our communications with the Panel and the public regarding an independent
investigation performed by the Audit Committee of our Board of Directors; and 2) failure to file
our Annual Report on Form 10-K for fiscal year 2005 or our Quarterly Reports on Form 10-Q for the
first two quarters of fiscal year 2006. We appealed the Panels decision to the Nasdaq Listing and
Hearing Review Council, or the Listing Council. However, on July 26, 2006, the Listing Council
affirmed the Panels decision to delist our common stock. We intend to apply for re-listing in the
near future.
12
On December 8, 2006, there were 215 record holders of our common stock. The quarterly high and low
prices per share during fiscal 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
|
2006 |
|
2005 |
|
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
|
First quarter |
|
$ |
8.50 |
|
|
$ |
6.93 |
|
|
$ |
10.00 |
|
|
$ |
7.98 |
|
Second quarter |
|
$ |
8.08 |
|
|
$ |
7.34 |
|
|
$ |
9.73 |
|
|
$ |
6.45 |
|
Third quarter |
|
$ |
8.70 |
|
|
$ |
5.67 |
|
|
$ |
9.82 |
|
|
$ |
6.85 |
|
Fourth quarter |
|
$ |
7.05 |
|
|
$ |
5.25 |
|
|
$ |
9.67 |
|
|
$ |
7.51 |
|
We have never declared or paid cash dividends on our common stock and do not anticipate doing
so for the foreseeable future. Instead, we intend to retain our current and future earnings to
fund the development and growth of our business. Our current credit facility prohibits us from
declaring dividends.
SECURITIES
All of our equity compensation plans have received the approval of our security holders. The
following table summarizes key information about our equity compensation plans at September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
Number of securities to be issued |
|
|
|
|
|
Number of securities remaining |
|
|
upon exercise of outstanding |
|
Weighted-average exercise |
|
available for future issuance under |
|
|
options, warrants and rights |
|
price of outstanding options, |
|
equity compensation plans |
Plan category |
|
(in thousands) |
|
warrants and rights |
|
(in thousands) |
Equity compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Approved by security holders |
|
|
2,237 |
|
|
$ |
8.45 |
|
|
|
1,869 |
|
Not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,237 |
|
|
$ |
8.45 |
|
|
|
1,869 |
|
There were no sales of unregistered securities and no stock repurchases during fiscal 2006.
13
ITEM 6SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for the fiscal years
ended September 30, 2002 through 2006. You should read the following selected consolidated
financial data in conjunction with the financial statements, including the related notes, and Item
7Managements Discussion and Analysis of Financial Condition and Results of Operations.
Historical results are not necessarily indicative of results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended September 30, |
(in thousands, except per share data) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
Revenues |
|
$ |
168,731 |
|
|
$ |
150,601 |
|
|
$ |
127,777 |
|
|
$ |
115,577 |
|
|
$ |
84,433 |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
|
125,845 |
|
|
|
103,814 |
|
|
|
84,399 |
|
|
|
89,657 |
|
|
|
52,847 |
|
General and administrative |
|
|
38,540 |
|
|
|
28,958 |
|
|
|
28,233 |
|
|
|
23,606 |
|
|
|
14,508 |
|
Selling and marketing |
|
|
11,474 |
|
|
|
11,339 |
|
|
|
7,441 |
|
|
|
5,581 |
|
|
|
3,853 |
|
Depreciation and amortization |
|
|
5,257 |
|
|
|
6,065 |
|
|
|
5,109 |
|
|
|
5,423 |
|
|
|
3,764 |
|
Restructuring charges |
|
|
35 |
|
|
|
46 |
|
|
|
3,493 |
|
|
|
414 |
|
|
|
|
|
|
Total costs and expenses |
|
|
181,151 |
|
|
|
150,222 |
|
|
|
128,675 |
|
|
|
124,681 |
|
|
|
74,972 |
|
|
(Loss) income before discontinued and other income (loss) |
|
|
(12,420 |
) |
|
|
379 |
|
|
|
(898 |
) |
|
|
(9,104 |
) |
|
|
9,461 |
|
|
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
2,951 |
|
|
|
1,543 |
|
|
|
835 |
|
|
|
904 |
|
|
|
1,262 |
|
Realized loss on impairment of investments |
|
|
|
|
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income (loss) of unconsolidated affiliate |
|
|
445 |
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
3,470 |
|
|
|
874 |
|
|
|
835 |
|
|
|
904 |
|
|
|
1,262 |
|
|
(Loss) income before income taxes & discontinued operations |
|
|
(8,950 |
) |
|
|
1,253 |
|
|
|
(63 |
) |
|
|
(8,200 |
) |
|
|
10,723 |
|
Income tax provision (benefit) |
|
|
501 |
|
|
|
127 |
|
|
|
|
|
|
|
(2,764 |
) |
|
|
4,010 |
|
|
Net (loss) income from continuing operations |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(63 |
) |
|
$ |
(5,436 |
) |
|
$ |
6,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
169,549 |
|
|
$ |
176,742 |
|
|
$ |
171,980 |
|
|
$ |
161,374 |
|
|
$ |
197,975 |
|
Long-term obligations, less current portion |
|
$ |
|
|
|
$ |
|
|
|
$ |
89 |
|
|
$ |
195 |
|
|
$ |
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
|
|
|
$ |
(0.29 |
) |
|
$ |
0.39 |
|
Diluted |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
|
|
|
$ |
(0.29 |
) |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in calculating earnings (loss)
per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,495 |
|
|
|
19,470 |
|
|
|
18,987 |
|
|
|
18,782 |
|
|
|
17,225 |
|
Diluted |
|
|
19,495 |
|
|
|
19,593 |
|
|
|
18,987 |
|
|
|
18,782 |
|
|
|
17,225 |
|
14
ITEM 7MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our Managements Discussion and Analysis of Financial Condition and Results of Operations
includes forward-looking statements. We have based these forward-looking statements on our current
plans, expectations and beliefs about future events. In light of the risks, uncertainties and
assumptions discussed under Item 1ARisk Factors of this Annual Report on Form 10-K and other
factors discussed in this section, there are risks that our actual experience will differ
materially from the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report. For more information regarding what constitutes a
forward-looking statement refer to Special Note About Forward-Looking Statements on page 3.
OVERVIEW
We provide transaction processing services and software and systems integration services
primarily to federal, state and local governments and other public sector clients. We target
industry sectors where we believe demand for our services is less discretionary and is likely to
provide us with recurring revenue streams through long-term contracts. The forces driving the need
for our services tend to involve federal- or state-mandated services, such as child support payment
processing, as well as a fundamental shift in consumer preferences toward electronic payment
methods, rather than cash or paper checks. Since the markets we serve are highly competitive,
changes in our competitors strategies or service offerings could have a significant impact on our
profitability unless we adapt our business model to meet the changes in the marketplace.
We have derived, and expect to continue to derive, a significant portion of our revenues from a
small number of large clients or their constituents. For example, during the fiscal years ended
September 30, 2006 and 2005, contracts with our three largest clients and their constituents
generated 36% and 29%, respectively, of our total revenues, including our contracts with the U.S.
Internal Revenue Service and the State of Michigan that generated more than 18% and 10%,
respectively, of our total revenues during fiscal 2006. Substantially all of our contracts are
terminable by the client following limited notice and without significant penalty to the client.
Thus, unsatisfactory performance or unanticipated difficulties in completing projects may result in
client dissatisfaction, contractual or adjudicated monetary penalties or contract terminationsall
of which could have a material adverse effect upon our business, financial condition and results of
operations.
Our clients outsource portions of their business processes to us and rely on us for our
industry-specific information technology expertise and solutions. During fiscal 2006, nearly 73%
of our revenues were generated by our transaction-based services including: 1) child support
payment processing and related services for state government clients; and 2) electronic payment
processing services for federal, state and local government clients, which allow our clients to
offer their constituents the ability to use credit cards, debit cards or electronic checks to pay
taxes and other governmental obligations. We believe that we will continue to earn a significant
portion of our revenues from these transaction-based services for the foreseeable future. While
many of these transactions occur on a monthly basis, there are seasonal and annual fluctuations in
the volume of some transactions that we process, such as tax payments. We recognize revenues for
transaction-based services at the time the services are performed.
Our packaged software and systems integration segment primarily integrates our proprietary software
products and licensed third-party software products into our clients business operations. We
recognize these revenues on a time-and-material basis, percentage-of-completion basis or at the
time delivery is made, depending upon the terms of the contract and the requirements of associated
accounting standards.
RECENT EVENTS
The following recent events occurred related to our restatement of financial statements for
fiscal years 2002 through 2004 and for the fiscal quarters of 2004 and 2005, as well as the
resulting delay in the filing of our Annual Report on Form 10-K for fiscal year 2005 and our
Quarterly Reports on Form 10-Q for the quarters ended December 31, 2005, March 31, 2006 and June
30, 2006. For additional information regarding this restatement, see Amendment 3 to our Annual
Report on Form 10-K/A for the fiscal year ended September 30, 2004, which was filed on October 25,
2006, and our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, which was
filed on October 27, 2006. Subsequently, we also filed our Quarterly Report on Form 10-Q/A for the
15
quarter ended December 31, 2005 on November 13, 2006, our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006 on November 14, 2006 and our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006 on November 22, 2006.
Fiscal 2005 Filing Delay Announced. While preparing our financial statements
for the fiscal year ended September 30, 2005, senior management discovered a number of errors in
our historical financial statements, including the accounting for: 1) accounts receivable, net,
relating to a payment processing operation; 2) certain accruals and reserves; and 3) certain notes
receivable. Because of these errors, senior management recommended to the Audit Committee that we
delay the filing of our Annual Report on Form 10-K and restate our previously issued financial
statements. On December 12, 2005, the Audit Committee of our Board of Directors agreed with senior
managements recommendations and concluded that our previously issued financial statements for
fiscal years 2002, 2003 and 2004 (and for the associated fiscal quarters) would likely be restated
and, accordingly, should no longer be relied upon. On December 14, 2005, we announced that our
Annual Report on Form 10-K for the fiscal year ended September 30, 2005 would not be timely filed.
Subsequently, we did not file timely reports on Form 10-Q for the quarters ended December 31, 2005,
March 31, 2006 and June 30, 2006. In December 2005, the Audit Committee also initiated an
independent investigation of the qualitative and quantitative financial reporting issues giving
rise to the restatement.
Stockholder Rights Plan. On January 10, 2006, our Board of Directors adopted a
Stockholder Rights Plan, pursuant to which all of our shareholders received rights to purchase
shares of a new series of preferred stock. This plan was designed to enable all of our
shareholders to realize the full value of their investment in our company and to ensure that all of
our shareholders receive fair and equal treatment in the event that an unsolicited attempt is made
to acquire Tier. This plan is intended as a means to guard against abusive takeover tactics and was
not adopted in response to any proposal to acquire Tier. We believe this plan would discourage
efforts to acquire more than 10% of our common stock without first negotiating with the Board of
Directors.
Audit Committee Investigation. On May 12, 2006, we announced the completion of
an independent investigation conducted on behalf of the Audit Committee of our Board of Directors.
The scope of the independent investigation included an examination of the qualitative and financial
reporting issues giving rise to the restatement. Among other things, the investigation found
earnings management at Tier, particularly during the close of fiscal 2004.
Delisting by Nasdaq. On May 23, 2006, we received a notification from the
Nasdaq Listing Qualifications Hearings Panel, or the Panel, informing us of the Panels
determination to delist our securities, effective at the open of business on May 25, 2006. In
reaching its determination, the Panel cited: 1) concerns about the quality and timing of our
communications with the Panel and the public regarding an independent investigation performed by
the Audit Committee of our Board of Directors; and 2) our failure to file our Annual Report on Form
10-K for fiscal year 2005 or our Quarterly Reports on Form 10-Q for the first two quarters of
fiscal 2006. We appealed the Panels decision to the Nasdaq Listing and Hearing Review Council, or
the Listing Council. However, on July 26, 2006, the Listing Council affirmed the Panels decision
to delist our common stock. We intend to apply for re-listing in the near future.
Management Changes. On May 31, 2006, we announced the resignation of James R.
Weaver, our Chief Executive Officer, President and Chairman, following a recommendation by the
Audit Committee of our Board of Directors that his employment with Tier be terminated. Ronald L.
Rossetti, a member of our Board of Directors and the Audit Committee, agreed to serve as our Chief
Executive Officer and Chairman. Because he is no longer independent under SEC and Nasdaq rules,
Mr. Rossetti was replaced on the Audit Committee by Samuel Cabot III, another independent director.
SEC Subpoena. On May 31, 2006, we received a subpoena from the Philadelphia
District Office of the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues. Tier has cooperated, and intends to continue to
cooperate, fully in this investigation.
Claim. On November 20, 2006, we were served with a class action lawsuit on
behalf of purchasers of our common stock from November 29, 2001 to October 25, 2006. The suit
alleges that Tier and certain of our former and/or current officers violated the Securities
Exchange Act of 1934, but it did not identify the damages being sought. This case is pending in
the United States District Court for the Eastern District of Virginia. We are not able to estimate
the probability or level of exposure associated with this complaint.
16
RESULTS OF OPERATIONS
The following table provides an overview of our results of operations for fiscal years 2006,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
Year ended September 30, |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
(in thousands, except percentages) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
$ Amount |
|
|
% |
|
|
$ Amount |
|
|
% |
|
|
Revenues |
|
$ |
168,731 |
|
|
$ |
150,601 |
|
|
$ |
127,777 |
|
|
$ |
18,130 |
|
|
|
12 |
% |
|
$ |
22,824 |
|
|
|
18 |
% |
Costs and expenses |
|
|
181,151 |
|
|
|
150,222 |
|
|
|
128,675 |
|
|
|
30,929 |
|
|
|
21 |
% |
|
|
21,547 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before other income,
incomes taxes and discontinued
operations |
|
|
(12,420 |
) |
|
|
379 |
|
|
|
(898 |
) |
|
|
(12,799 |
) |
|
|
* |
|
|
|
1,277 |
|
|
|
* |
|
Other income |
|
|
3,470 |
|
|
|
874 |
|
|
|
835 |
|
|
|
2,596 |
|
|
|
* |
|
|
|
39 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and
discontinued operations |
|
|
(8,950 |
) |
|
|
1,253 |
|
|
|
(63 |
) |
|
|
(10,203 |
) |
|
|
* |
|
|
|
1,316 |
|
|
|
* |
|
Provision for income taxes |
|
|
501 |
|
|
|
127 |
|
|
|
|
|
|
|
374 |
|
|
|
* |
|
|
|
127 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(9,451 |
) |
|
|
1,126 |
|
|
|
(63 |
) |
|
|
(10,577 |
) |
|
|
* |
|
|
|
1,189 |
|
|
|
* |
|
Loss from discontinued operations, net of
income taxes |
|
|
|
|
|
|
|
|
|
|
(1,440 |
) |
|
|
|
|
|
|
* |
|
|
|
1,440 |
|
|
|
* |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
|
$ |
(10,577 |
) |
|
|
* |
|
|
$ |
2,629 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Our revenues increased to $168.7 million in fiscal 2006, an $18.1 million, or 12%, increase
over fiscal 2005. This increase primarily reflects a 39% year-over-year increase in revenues
earned by our Electronic Payment Processing, or EPP, segment, which resulted from an increase in
the volume of transactions processed under new and pre-existing contracts in that segment. The
increase in revenues from the improved performance of our EPP segment was partially offset by a 7%
year-over-year decrease in revenues earned by our Package Software and Systems Integration, or
PSSI, segment as a result of contracts that have completed or are nearing completion.
During fiscal 2005, our revenues increased to $150.6 million, a $22.8 million, or 18%, increase
over fiscal 2004. This increase primarily reflects: $18.2 million of incremental revenues from
EPOS, a subsidiary that we purchased in July 2004; $9.6 million of revenues generated by a new
five-year child support payment processing contract; and $10.5 million of revenues from additional
federal, state and local tax collections. These increases were partially offset by a $14.6 million
decline in revenues from contracts that were nearing completion in late fiscal 2004 and early
fiscal 2005, with the remaining $0.9 million decline resulting from changes in transactional rate
and volume.
The following table summarizes changes in our revenues during fiscal years 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
Year ended September 30, |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
(in thousands, except percentages) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
$ Amount |
|
|
% |
|
|
$ Amount |
|
|
% |
|
|
Revenues, by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP |
|
$ |
78,427 |
|
|
$ |
56,452 |
|
|
$ |
40,669 |
|
|
|
21,975 |
|
|
|
39 |
% |
|
$ |
15,783 |
|
|
|
39 |
% |
GBPO |
|
|
45,478 |
|
|
|
45,771 |
|
|
|
45,205 |
|
|
|
(293 |
) |
|
|
(1 |
)% |
|
|
566 |
|
|
|
1 |
% |
PSSI(1) |
|
|
44,826 |
|
|
|
48,378 |
|
|
|
41,903 |
|
|
|
(3,552 |
) |
|
|
(7 |
)% |
|
|
6,475 |
|
|
|
15 |
% |
|
Total |
|
$ |
168,731 |
|
|
$ |
150,601 |
|
|
$ |
127,777 |
|
|
$ |
18,130 |
|
|
|
12 |
% |
|
$ |
22,824 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fiscal 2005 excludes $5.1 million of PSSI segment revenues that were eliminated during the consolidation of our accounting results. |
Electronic Payment Processing Segment. Our EPP segment provides electronic payment
processing options, including the payment of taxes, fees and other obligations owed to government
entities, educational institutions and other public sector clients. The level of revenues reported
by our EPP segment reflect the number of contracts with clients, the volume of transactions
processed under each contract and the rates that we charge for each transaction that we process.
During fiscal 2006, our EPP segment generated $78.4 million of revenues, which represented $22.0
million, or 39%, of additional revenues compared with fiscal 2005. During fiscal 2005, our EPP
segment generated $56.5 million of revenues, a $15.8 million, or 39%, increase over fiscal 2004
results. Approximately $10.6 million and $4.9 million, respectively, of the year-over-year
increases in fiscal 2006 and 2005 were attributable to
17
increases in the volume of
payments processed for the EPP segments largest customer. Approximately $11.4 million and $5.6
million, respectively, of the year-over-year increases in fiscal 2006 and 2005 were attributable to
a rise in the volume of taxes and other payments processed for other state and local jurisdictions.
We believe these increases are largely attributable to a changing consumer preference toward using
electronic methods to pay federal, state, and local government obligations. The remaining revenue
increase in fiscal 2005 primarily reflects the inclusion of EPOS revenues for a full year.
Government Business Processing Segment. Our GBPO segment provides governmental clients
with child support payment processing, child support financial institution data match services,
health and human services consulting and other related systems integration services. Because of
the importance that these clients place on receiving consistent and reliable service, the contracts
with our GBPO customers are typically three to five years in duration and, because of our clients
past experience with our company, we may receive contract extensions or renewals.
During fiscal 2006, our GBPO segment generated $45.5 million in revenues, which represented a $0.3
million, or 1%, decrease from fiscal 2005. The completion of several contracts during fiscal 2006
and the second half of fiscal 2005 led to a $7.8 million revenue decrease from fiscal 2005. This
decrease was partially offset by $7.5 million of additional revenues generated by a child support
processing contract that commenced in the second quarter of fiscal 2005. During fiscal 2005, our
GBPO segment generated $45.8 million of revenues, which represented a $0.6 million, or 1%, increase
over the prior years performance. This increase was driven by $9.6 million of additional
revenues, including $2.3 million of one-time installation revenues generated from a five-year child
support payment processing contract that commenced in fiscal 2005. This increase was offset by an
$8.5 million reduction in revenues from four contracts that expired in 2005, and the remaining
decrease is attributable to lower rates and transaction volume. One of our GBPO segment contracts,
which will expire in June 2007, contributed approximately $7.6 million of revenues throughout
fiscal 2006. The absence of revenues from this contract in the fourth fiscal quarter of 2007 is
expected to reduce our fiscal year 2007 revenues and net income by approximately $1.9 million and
$1.0 million, respectively.
Packaged Software and Systems Integration Segment. Our PSSI segment provides software and
systems implementation services through practice areas in financial management systems, public
pension administration systems, unemployment insurance administration systems, computer telephony
and call centers and systems integration services. Since the services provided by our PSSI segment
are generally project-oriented, the contracts with our clients typically have a one to three year
contract term and may have subsequent maintenance and support phases. The revenue reported by our
PSSI segment in any given period reflects the size and volume of active contracts, as well as the
current phase in the project life cycle of individual contracts.
During fiscal 2006, our PSSI segment generated $44.8 million in revenues, which represented a $3.6
million, or 7%, decrease from fiscal 2005 results. This decrease resulted primarily from $10.9
million of contracts that were completed, nearing completion, or entering the maintenance phase of
the project during fiscal 2006. These decreases were partially offset by $8.4 million of revenues
earned from new contracts that we entered into during fiscal 2006 and the latter part of fiscal
2005. During fiscal 2005, our PSSI segment produced $48.4 million of revenues, which represented
$6.5 million, or 15%, of additional revenues during fiscal year 2005 as compared to fiscal year
2004. Approximately $8.3 million of this increase was attributable to the recognition of a full
year of revenues generated by EPOS, and $2.8 million of the year-over-year increase in fiscal 2005
was attributable to additional work that was being performed under pre-existing contracts. These
increases were partially offset by the absence of $4.4 million of revenues from contracts completed
or nearing completion during fiscal 2005.
18
Costs and Expenses
The following table provides an overview of the operating costs and expenses we incurred
during fiscal years 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
Year ended September 30, |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
(in thousands, except percentages) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
$ Amount |
|
|
% |
|
|
$ Amount |
|
|
% |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
$ |
125,845 |
|
|
$ |
103,814 |
|
|
$ |
84,399 |
|
|
$ |
22,031 |
|
|
|
21 |
% |
|
$ |
19,415 |
|
|
|
23 |
% |
General and administrative |
|
|
38,540 |
|
|
|
28,958 |
|
|
|
28,233 |
|
|
|
9,582 |
|
|
|
33 |
% |
|
|
725 |
|
|
|
3 |
% |
Selling and marketing |
|
|
11,474 |
|
|
|
11,339 |
|
|
|
7,441 |
|
|
|
135 |
|
|
|
1 |
% |
|
|
3,898 |
|
|
|
52 |
% |
Depreciation and amortization |
|
|
5,257 |
|
|
|
6,065 |
|
|
|
5,109 |
|
|
|
(808 |
) |
|
|
(13 |
)% |
|
|
956 |
|
|
|
19 |
% |
Restructuring charges |
|
|
35 |
|
|
|
46 |
|
|
|
3,493 |
|
|
|
(11 |
) |
|
|
(24 |
)% |
|
|
(3,447 |
) |
|
|
(99 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
$ |
181,151 |
|
|
$ |
150,222 |
|
|
$ |
128,675 |
|
|
$ |
30,929 |
|
|
|
(21 |
)% |
|
$ |
21,547 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Direct costsDirect costs, which represent costs directly attributable to providing
services to clients, include: labor and labor-related costs; independent contractor/subcontractor
costs; travel-related expenditures; credit card interchange fees and assessments; amortization of
intellectual property; amortization and depreciation of project-related equipment, hardware and
software purchases; and the cost of hardware, software and equipment sold to clients.
During fiscal 2006, direct costs increased $22.0 million, or 21%, over fiscal 2005. This
year-over-year increase primarily reflects: $16.3 million of additional interchange fees and other
costs incurred to support the increased volume of transactions processed by our EPP segment; $2.0
million of additional postage and printing charges to support an increase in the number of
transactions processed by our GBPO segment; $1.6 million of additional depreciation expense on
assets acquired for use on new projects undertaken during fiscal 2006; $1.4 million in one-time
costs incurred to reconcile certain accounts for one of our payment processing centers; and $0.7
million of accrued forward losses recognized on two contracts. During fiscal 2005, the direct
costs that we incurred to serve our clients rose to $103.8 million, a $19.4 million, or 23%,
increase over fiscal 2004. This increase reflects $14.7 million of additional interchange fees
resulting from the increased volume and level of transactions processed by our EPP segment and $5.5
million of additional labor and subcontractor costs needed to support new projects, including a new
five-year contract to provide child support payment processing services. These increases were
offset by a $0.8 million decrease in costs that are reimbursable under the terms of our contracts.
Direct costs include $3.7 million, $2.7 million and $2.3 million, respectively, of depreciation and
amortization directly associated with our projects for fiscal years 2006, 2005 and 2004.
General and administrative. General and administrative expenses consist
primarily of labor and labor-related costs for general management, administrative, accounting,
investor relations, compliance and legal functions and information systems.
During fiscal 2006, general and administrative costs increased $9.6 million, or 33%, over fiscal
2005. This increase primarily reflects: $4.8 million of additional legal, accounting and other
consulting costs associated with the restatement of our historical financial statements; $1.6
million of additional labor and labor-related expenses reflecting an increase in the size and
compensation of administrative staff; $0.9 million of severance expenses associated with the May
2006 separation of our Chief Executive Officer; and $0.4 million of travel costs. In addition,
since we adopted SFAS 123(R)Share-Based Payments, or SFAS 123R, beginning on October 1, 2005, we
recognized $1.6 million of expenses for share-based compensation for the first time in fiscal 2006,
including $0.2 million of expenses associated with the acceleration of options relating to the
separation of our former Chief Executive Officer.
During fiscal year 2005, our general and administrative costs increased $0.7 million, or 3%, over
the prior year. This year-over-year increase includes: $2.0 million of additional consulting and
accounting services, primarily attributable with our Sarbanes-Oxley compliance; $0.7 million of
additional bonus expense; $0.5 million of additional tax expense; $0.4 million of miscellaneous
office expenses; and $0.2 million of additional legal expenses. These increases are offset
primarily by the absence in fiscal 2005 of $2.3 million of expenses associated with the relocation
of our headquarters during fiscal 2004, as well as a $0.9 million decline in legal costs
attributable to the DOJ investigation.
19
Selling and marketing. Selling and marketing expenses consist primarily of labor
and labor-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. During fiscal 2006, selling and marketing expense increased
$0.1 million over fiscal 2005. The increase is attributable to $0.3 million of share-based
compensation expense resulting from the adoption of SFAS 123R and $0.3 million of additional
advertising expenses in fiscal 2005. These increases were partially offset by a $0.2 million
decrease in labor and labor-related expenses and a $0.4 million decrease in the cost of outside
professional services. During fiscal 2005, selling and marketing expenses increased $3.9 million,
or 52%, primarily because of additional labor and labor-related expenses resulting from the
addition of sales staff from the EPOS acquisition, an increase in PSSIs direct sales force and
bonuses associated with the successful sales efforts that resulted in a significant new state
project. The remaining increases primarily reflect other incremental selling and marketing costs
associated with our EPOS acquisition.
Depreciation and amortization. Depreciation and amortization consists primarily
of 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. Project-related depreciation and amortization is
included in direct costs. During fiscal 2006, depreciation and amortization decreased $0.8 million
from the preceding year. This decrease was due to the absence of depreciation expense on assets,
which became fully depreciated. During fiscal year 2005, depreciation and amortization increased
$1.0 million, or 19%, primarily as a result of incremental depreciation and amortization incurred
by EPOS after its acquisition.
Restructuring charges. Restructuring and other charges include costs that we
incurred to restructure the organization, including office relocation and severance costs. The
following table presents a breakdown of the costs included in restructuring charges:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
Year ended September 30, |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
$ Amount |
|
|
% |
|
|
$ Amount |
|
|
% |
|
|
Restructuring charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
571 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(571 |
) |
|
|
(100 |
)% |
Severance costs |
|
|
3 |
|
|
|
31 |
|
|
|
1,846 |
|
|
|
(28 |
) |
|
|
(90 |
)% |
|
|
(1,815 |
) |
|
|
(98 |
)% |
Office closure costs
(net of sublease
income) |
|
|
32 |
|
|
|
15 |
|
|
|
1,076 |
|
|
|
17 |
|
|
|
113 |
% |
|
|
(1,061 |
) |
|
|
(99 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35 |
|
|
$ |
46 |
|
|
$ |
3,493 |
|
|
$ |
(11 |
) |
|
|
(24 |
)% |
|
$ |
(3,447 |
) |
|
|
(99 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal years ended September 30, 2006 and 2005, we recorded $35,000 and $46,000,
respectively, of severance and office relocation charges that we incurred when we moved our New
Jersey Financial Institution Data Match Program operations to our Michigan office, a change that
was made to improve efficiency and reduce future operating costs. In fiscal year 2004, we incurred
$3.5 million of restructuring charges that resulted from the relocation of our corporate
headquarters from Walnut Creek, California to Reston, Virginia.
Other Income (Loss)
Equity in net income (loss) of unconsolidated affiliate. Equity in net income (loss)
of unconsolidated affiliate represents our share of the net income and losses from CPAS, Inc., an
entity in which we held 46.96% and 47.37%, respectively, of the outstanding common stock at
September 30, 2006 and 2005. During fiscal 2006, our share of CPAS net income was $0.4 million,
compared with a $0.2 million loss in fiscal 2005. This improvement resulted from new contracts
that CPAS was awarded in 2006 and the latter part of 2005. Since we purchased CPAS in October
2004, we did not report any income or loss for CPAS during fiscal 2004.
Loss on sale of investments. During the fiscal year 2005, we sold two of our
mutual fund investments at $0.5 million below cost.
20
Income Tax Provision
During fiscal 2006, 2005 and 2004, we reported an income tax provision of $501,000, $127,000
and zero, respectively. The fiscal year 2006 and 2005 provision for income taxes represents
federal and state tax obligations
incurred by our subsidiaries. Our Consolidated Statements of Operations for fiscal 2006, 2005 and
2004 do not reflect a federal tax provision because of offsetting adjustments to our valuation
allowance. Our effective tax rates differ from the federal statutory rate due to state and foreign
income taxes, tax-exempt interest income and the charge for establishing a valuation allowance on
our net deferred tax assets. Our future tax rate may vary due to a variety of factors, including,
but not limited to: the relative income contribution by tax jurisdiction; changes in statutory tax
rates; the amount of tax exempt interest income generated during the year; changes in our valuation
allowance; our ability to utilize foreign tax credits and net operating losses and any
non-deductible items related to acquisitions or other nonrecurring charges.
Discontinued Operations
There were no discontinued operations during fiscal year 2006 or 2005. However, during
fiscal year 2004 we incurred a loss of $1.4 million, which consisted of the historical operating
results of our U.S. Commercial Services and United Kingdom segments and asset impairment and
restructuring charges incurred to discontinue these segments.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirement is to fund working capital to support our organic growth,
including potential future acquisitions. We maintained a $15.0 million revolving credit facility
that was to expire on March 31, 2007, of which $15.0 million could be used for letters of credit
and additional borrowing. The credit facility set interest at the adjusted LIBOR rate plus 2.25%
or the lenders announced prime rate at our option. At September 30, 2005, there was $1.3 million
of standby letters of credit outstanding under this facility. The credit facility was
collateralized by first priority liens and security interests in our assets. The credit facility
contained certain restrictive covenants, including, but not limited to, limitations on the amount
of loans we may extend to officers and employees, the payment of dividends, the repurchase of
common stock and the incurrence of additional debt. As of September 30, 2005, there were no
outstanding borrowings under this facility. However, the delayed availability of our financial
statements for the fiscal year ended September 30, 2005 and the loss for the quarter ended
September 30, 2005 constituted events of default under the revolving credit agreement between Tier
and our lender. In addition, we incurred similar events of default for the quarter ended December
31, 2005. To address these events of default, we entered into an Amended and Restated Credit and
Security Agreement with the lender on March 6, 2006. The agreement, which amends and restates the
original agreement signed by Tier and the lender on January 29, 2003, made a number of significant
changes, including the termination of the $15.0 million revolving credit facility, the reduction of
financial reporting covenants and the elimination of financial ratio covenants. The March 6, 2006
agreement provides that we may obtain up to $15.0 million of letters of credit and also grants the
lender a perfected security interest in cash collateral in an amount equal to all issued and to be
issued letters of credit.
In addition to the letters of credit issued under the credit facility mentioned above, at September
30, 2006, we had a $3.0 million letter of credit outstanding, which was collateralized by certain
securities in our investment portfolio. This letter of credit was issued to secure a performance
bond.
Net Cash from Continuing OperationsOperating Activities
During fiscal 2006, our operating activities provided $4.9 million of cash. This reflects a
$9.5 million net loss, plus $12.5 million of noncash transactions that are included on our
Consolidated Statements of Operations. During fiscal 2006, $5.1 million was generated by a
decrease in the balance of accounts receivable, due to our successful collection efforts, and $1.3
million was generated by an increase in accounts payable and other accrued liabilities. These
increases were partially offset by a $2.8 million year-over-year decrease in prepaid expenses and
other assets, which was primarily caused by an increase in long-term retainers receivable from our
PSSI clients for long-term projects that are underway. In addition, a decrease in deferred income
used $2.0 million of cash, resulting from the completion and the nearing completion of a number of
contracts in our PSSI segment.
21
During fiscal 2005, the operating activities of our continuing operations provided $13.1 million of
cash. This reflects $1.1 million of income from continuing operations, plus $10.2 million of
noncash transactions that are included on our Consolidated Statements of Operations. During fiscal
2005, $2.5 million was generated by an increase in deferred revenue, of which $1.3 million is
attributable to a contract with the State of Pennsylvania. A year-over-year decrease of $2.1
million in prepaid expenses also contributed to the increase in cash provided by operating
activities
of continuing operations. These increases were offset primarily by $3.5 million of cash used to
support higher accounts receivable levels from increased sales.
During fiscal 2004, the operating activities of our continuing operations provided $25.4 million of
cash, including $9.1 million of cash from net income from continuing operations, adjusted for
non-cash items. In addition, during fiscal 2004 $9.0 million of cash was generated by a reduction
in accounts receivable caused by improved collection activities, while $9.4 million of operating
cash was generated by an increase in income taxes payable and $2.5 million of cash was used to pay
accounts payable and to reduce accrued liabilities.
Net Cash from Continuing OperationsInvesting Activities.
Net cash used in our investment activities from continuing operations for fiscal 2006 was
$14.0 million, including $46.0 million used to purchase marketable securities, offset by $44.3
million provided by sales and maturities. In addition, $14.3 million was used to purchase
restricted investments in the form of certificates of deposit required to collateralize performance
bonds, offset by $6.6 million generated by sales and maturities of restricted investments. In
addition, we used $4.8 million to purchase equipment and software, the majority of which was used
to install a call center under a new contract in 2006.
During fiscal 2005, our continuing operations used $13.5 million of cash for investing activities,
including $10.0 million used to purchase equipment and software, primarily for our Michigan
operations and $4.1 million used to purchase our investment in
CPAS and the assets of MyLocalGov.com.
During this period, the sales and maturities of our available-for-sale securities generated $72.7
million of cash and the maturities of restricted investments generated $3.3 million of cash, the
proceeds of which were invested in securities.
During fiscal 2004, we used $8.6 million for investing activities, of which $15.6 million was used
to purchase EPOS and $3.4 million was used to purchase equipment and software. During fiscal 2004,
purchases and maturities of marketable securities generated $6.3 million of cash. In addition,
during fiscal 2004, a decrease in the level of restricted investments that we were required to
maintain provided $4.4 million of cash, which we invested in marketable securities.
Net Cash from Continuing OperationsFinancing Activities.
Net cash used in our financing activities from continuing operations for fiscal 2006 was
$17,000, including $69,000 provided by the exercise of options to purchase our common stock,
partially offset by the use of $86,000 for capital lease obligations.
During fiscal 2005 and 2004, $0.2 million and $2.2 million, respectively, of cash was provided by
the financing activities of our continuing operations. These increases represent $0.3 million and
$2.4 million, respectively, of proceeds provided by the exercise of options to purchase our common
stock, partially offset by $0.1 million and $0.1 million, respectively, of cash used in both years
for capital lease obligations.
We expect to generate cash flows from operating activities over the long-term; however, we may
experience significant fluctuations from quarter to quarter resulting from the timing of the
billing and collection of large project milestones. We anticipate that our existing capital
resources, including our cash balances, cash that we anticipate will be provided by operating
activities and our available credit facilities will be adequate to fund our operations for at least
fiscal 2007. There can be no assurance that changes will not occur that would consume available
capital resources before such time. Our capital requirements and capital resources depend on
numerous factors, including: potential acquisitions; initiation of large child support payment
processing contracts that typically require large cash outlays for capital expenditures and
staff-up costs; contingent payments earned; new and existing contract requirements; the timing of
the receipt of accounts receivable, including unbilled receivables; the timing and ability to sell
investment securities held in our portfolio without a loss of principal; our ability to draw on our
bank facility; and employee growth. To the extent that our existing capital resources are
insufficient to meet our capital requirements, we will have to raise additional funds. There can
be no assurance that additional funding, if necessary, will be available on favorable terms, if at
all. The raising of additional capital may dilute our shareholders ownership in us.
22
Net Cash from Discontinued Operations.
During fiscal years 2006 and 2005, our discontinued operations used $21,000 and $386,000,
respectively, of cash, all of which was used in operating activities. During fiscal year 2004, our
discontinued operations provided $0.4 million, of which $1.9 million was generated by investing
activities, offset by $1.5 million used in operating activities. See Note 15Discontinued
Operations of the Notes to Consolidated Financial Statements for additional information regarding
our discontinued operations.
Due to the current economic climate, the performance bond market has changed significantly,
resulting in reduced availability of bonds, increased cash collateral requirements and increased
premiums. Some of our government contracts require a performance bond and future requests for
proposal may also require a performance bond. Our inability to obtain performance bonds, increased
costs to obtain such bonds or a requirement to pledge significant cash collateral in order to
obtain such bonds would adversely affect our business and our capacity to obtain additional
contracts. Increased premiums or a claim made against a performance bond could adversely affect
our earnings and cash flow and impair our ability to bid for future contracts.
Our discussion and analysis of our financial condition and results of operations is based on our
Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. Note 2Summary of Significant Accounting
Policies of our Notes to Consolidated Financial Statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions. We believe that
of our significant policies, the following are the most noteworthy because they are based upon
estimates and assumptions that require complex subjective judgments by management, which can have a
material effect on our reported results. Changes in these estimates or assumptions could
materially impact our financial condition and results of operations. Actual results could differ
materially from managements estimates.
Revenue Recognition. Certain judgments affect the application of our revenue policy. We derive
revenues primarily from transaction and payment processing, systems design and integration and
maintenance and support services. We recognize revenues in accordance with accounting principles
generally accepted in the United States, which, in some cases, require us to estimate costs and
project status. The primary methods that we use to recognize revenues are described below:
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|
|
Transaction-based contractsrevenues are recognized based on fees charged on
a per-transaction basis or fees charged as a percentage of dollars processed; |
|
|
|
|
Fixed-price contractsrevenues are recognized either on a
percentage-of-completion basis or when our customers accept the services we provide; |
|
|
|
|
Time and materials contractsrevenues are recognized when we perform
services and incur expenses; |
|
|
|
|
Delivery-based contractsrevenues are recognized when we have delivered and
the customer has accepted the product or service; |
|
|
|
|
Software maintenance contractsrevenues are recognized on a straight-line
basis over the contract term, which is typically one year; and |
|
|
|
|
Software licensesrevenues are recognized for perpetual software licenses
upon delivery when the fees are fixed and determinable, collection is probable and
specific objective evidence exists to determine the value of any undeliverable elements
of the arrangement. Revenues for software licenses with a fixed term are recognized on
a straight-line period over the term of the license. |
Any given contract may contain one or more elements with attributes of more than one of the
contract types described above. In those cases, we account for each element separately, using the
applicable accounting standards. In addition, we also establish an allowance for credit card
reversals and charge-backs as part of our revenue recognition practices. For all our segments, the
amount and timing of our revenue is difficult to predict. Any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly from quarter to quarter
and could result in future operating losses.
23
Collectibility of Receivables. Accounts receivable includes funds that are due to us to
compensate us for the services we provide to our customers. In addition, under certain contracts
by our GBPO segment we are obligated to fund any payments that we misapply and checks that we
receive for insufficient funds. We record the amounts that we fund for misapplied payments and
insufficient funds checks as receivables until the amounts can be collected. We have established
an allowance for doubtful accounts, which represents our best estimate of probable losses inherent
in the accounts receivable balance. Each quarter we adjust this allowance based upon managements
review and assessment of each category of receivable. Factors that we consider to establish this
adjustment include the age of receivables, past payment history and the demographics of the
associated debtors. Our allowance for uncollectible accounts is based both on the performance of
specific debtors and upon general categories of debtors.
Goodwill and Other Intangible Assets. We review goodwill and purchased intangible assets
with indefinite lives for impairment annually at the reporting unit level (operating segment) and
whenever events or changes indicate that the carrying value of an asset may not be recoverable in
accordance with the Financial Accounting Standards Board, or FASB, Statement of Financial
Accounting Standards, or SFAS, No. 142Goodwill and Other Intangible Assets. These events or
circumstances could include a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant portion of a reporting
unit. Application of the goodwill impairment test requires judgment, including the identification
of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill
to reporting units and determination of the fair value of each reporting unit. The fair value of
each reporting unit is estimated using a discounted cash flow methodology. This requires
significant judgments, including estimation of future cash flows, which is dependent on internal
forecasts, estimation of the long-term rate of growth for our business, the useful life over which
cash flows will occur and determination of our weighted-average cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair value and/or goodwill
impairment for each reporting unit.
Investments. We review our investments quarterly to identify other-than-temporary
impairments in accordance with SFAS 115Accounting for Certain Investments in Debt and Equity
Securities and SEC Staff Accounting Bulletin No 59Accounting for Noncurrent Marketable Equity
Securities. This determination requires us to use significant judgment in evaluating a number of
factors, including: the duration and extent to which the fair value of an investment is less than
its cost; the financial health of and near-term business outlook for the investee, including
factors such as industry and sector performance, changes in technology and operational and
financing cash flow; and our intent and ability to hold the investment. When investments exhibit
unfavorable attributes in these and other areas, we conduct additional analyses to determine that
the fair value of the investment is other-than-temporarily impaired.
Contingencies. The outcomes of legal proceedings and claims brought against us are subject
to significant uncertainty. SFAS 5Accounting for Contingencies, which requires that an estimated
loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to
income if it is probable that an asset has been impaired or a liability has been incurred and the
amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there
is at least a reasonable possibility that a loss has been incurred. In determining whether a loss
should be accrued we evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these
factors could materially impact our financial position or our results of operations.
Income Taxes. SFAS 109Accounting for Income Taxes establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting for income taxes
are to recognize the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been recognized in an
entitys financial statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or tax returns.
Variations in the actual outcome of these future tax consequences could materially impact our
financial position, results of operations or cash flows.
Discontinued Operations. During the year ended September 30, 2003, we adopted SFAS
144Accounting for the Impairment and Disposal of Long Lived Assets, or SFAS 144, which broadened
the presentation of discontinued operations from the disposal of a segment to the disposal of a
component of the entity. SFAS 144 also changed the timing of presentation from the point of
commitment, as was required under APB 30, to the point of actual disposal of the operations. We
must use our judgment to determine whether particular operations are considered a component of the
entity and when the operations should no longer be classified as continuing operations.
24
Share-Based Compensation. Beginning October 1, 2005, we adopted SFAS 123(R)Share-Based
Payment, or SFAS 123R, which requires public companies to expense employee share-based payments
based on fair value. In addition, the staff of the Securities and Exchange Commission issued SAB
107Share-Based Payment, or SAB 107, which provided public companies with additional guidance on
implementing SFAS 123R. We must use our judgment to determine key factors in determining the fair
value of the share-based payment, such as volatility, forfeiture rates and the expected term in
which the options will be outstanding.
RECENT ACCOUNTING STANDARDS
SFAS 154Accounting Changes and Error Corrections. In May 2005, FASB issued
Statement of Financial Accounting Standard No. 154Accounting Changes and Error Corrections, or
SFAS 154, which changes the requirements for the accounting for, and reporting of, a change in
accounting principle. It also carries forward earlier guidance for the correction of errors in
previously issued financial statements, as well as the guidance for changes in accounting estimate.
SFAS 154 applies to all voluntary changes in accounting principles, as well as changes mandated by
a standard-setting authority that do not include specific transition provisions. For such changes
in accounting principles, SFAS 154 requires retrospective application to prior periods financial
statements, unless it is impracticable to determine either period specific or cumulative effects of
the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. We adopted this standard beginning in October 2006.
Since this standard applies to both voluntary changes in accounting principles, as well as those
that may be mandated by standard-setting authorities, it is not possible to estimate the impact
that the adoption of this standard will have on our financial position and results of operations.
SFAS 157Fair Value Measurements. In October 2006, FASB issued Statement of Financial
Accounting Standards No. 157Fair Value Measurements, or SFAS 157. This standard establishes a
framework for measuring fair value and expands disclosures about fair value measurement of a
companys assets and liabilities. This standard also requires that the fair value measurement
should be determined based on the assumptions that market participants would use in pricing the
asset or liability. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and, generally, must be applied prospectively. We expect to
adopt this standard beginning in October 2008. Currently, we are evaluating the impact that this
new standard will have on our financial position and results of operations.
FIN 47Accounting for Conditional Asset Retirement Obligations. In March 2005, FASB
Interpretation No. 47Accounting for Conditional Asset Retirement Obligations, or FIN 47, was
issued. FIN 47 provides interpretive guidance on the term conditional asset retirement
obligation, which is used in SFAS 143Accounting for Asset Retirement Obligations. A conditional
asset retirement obligation is a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that may or may not be in
control of the entity. FIN 47 requires that the fair value of a liability for the conditional
asset retirement obligation should be recognized when incurredgenerally upon acquisition,
construction or development and/or through the normal operation of the asset. We adopted FIN 47
during the fourth quarter of fiscal 2006. Our adoption of FIN 47 did not materially impact our
financial position or results of operations.
FIN 48Accounting for Uncertainty in Income Taxes. In July 2006, FASB Interpretation No.
48Accounting for Uncertainty in Income Taxes, or FIN 48, was issued. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FASB Statement No. 109Accounting for Income Taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We expect to implement FIN 48 beginning on October 1,
2007. We are evaluating the impact that adopting FIN 48 will have on our financial position and
results of operations.
FSP 46R-6Determining the Variability to be Considered in Applying FASB Interpretation No.
46(R). In April 2006, FASB Staff Position FIN 46(R)-6Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46(R), or FSP 46R-6 was issued. This standard
addresses how a reporting enterprise should determine the variability to be considered in applying
FASB Interpretation No. 46Consolidation of Variable Interest Entities. Specifically, FSP 46(R)-6
prescribes the following two-step process for determining variability: 1) analyze the nature of
the risks in the entity being acquired; and 2) determine the purpose for which the entity was
created and the variability the entity is designed to create and pass along to its interest
holders. We adopted this standard on July 1, 2006 and will apply this FSP to any future ventures.
25
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive
officers and one non-executive officer. These agreements provide such persons with
indemnification, to the maximum extent permitted by our Articles
of Incorporation or Bylaws or by
the Delaware General Corporation Law, against all expenses, claims, damages, judgments and other
amounts (including amounts paid in settlement) for which such persons become liable as a result of
acting in any capacity on behalf of Tier, subject to certain limitations.
Employment Agreements
During fiscal 2005, four executives had employment agreements with us which entitled them to
severance payments ranging from 1.5 to 2 years of base salary if they are terminated without cause
or if certain events occurred as a result of a change of control of the Company. At September 30,
2006, we could pay as much as $0.8 million under these agreements if these events occurred.
During
fiscal 2006, we entered into Employment and Security Agreements with four executive officers
and certain other key managers. Under the terms of these agreements, if certain pre-defined events
were to occur as a result of a change in control of our Company, the individuals covered by these
agreements would be entitled to severance payments ranging between six to twelve months of their
current base salary. As of September 30, 2006, the maximum amount that could be paid under these
agreements would be $3.4 million.
Effective
May 31, 2006, we entered into a Separation Agreement and
Release with James R. Weaver,
who had served as our Chairman, Chief Executive Officer and President. This agreement included a
change of control clause whereby Mr. Weaver would receive $175,000 to $350,000 if a pre-defined
reorganization event were to occur within two years of the effective date of the agreement. As of
September 30, 2006, the maximum amount that could be paid under this agreement would be $350,000.
Effective June 2006, the Company entered into a one-year employment agreement with Ronald Rossetti.
Pursuant to the Agreement, Mr. Rossetti is entitled to receive a base salary of $50,000 per month
and a bonus of $50,000 per month. In the event that certain pre-defined events occur before the
end of this one-year agreement, we would be obligated to compensate Mr. Rossetti these amounts
through the remaining term of the one-year agreement. As of September 30, 2006, the maximum amount
that could be paid under these agreements would be $0.8 million.
Changes to 401(k) Plan
We announced that effective January 1, 2007 we will adopt a Safe Harbor non-elective employer
contribution for our 401(k) Plan. The safe harbor contribution of three percent of plan-eligible
compensation will be made to all plan-eligible employees. Our contributions to the 401(k) Plan
will become vested at the time we make the contributions. We believe that our contribution to this
plan will total approximately $1.0 million in fiscal year 2007.
26
Contractual Obligations
We have contractual obligations to make future payments on lease agreements, none of which
have remaining terms that extend beyond five years. Additionally, in the normal course of
business, we enter into contractual arrangements whereby we commit to future purchases of products
or services from unaffiliated parties. Purchase obligations are legally binding arrangements
whereby we agree to purchase products or services with a specific minimum quantity defined at a
fixed minimum or variable price over a specified period of time. The most significant purchase
obligation is for contracts with our subcontractors. The following table presents our expected
payments for contractual obligations that were outstanding at September 30, 2006. All of these
obligations are due within five years.
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Due in |
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Due after |
|
Due after |
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|
1 year |
|
1 year through |
|
3 years through |
(in thousands) |
|
Total |
|
or less |
|
3 years |
|
5 years |
|
Capital leases (equipment) |
|
$ |
124 |
|
|
$ |
42 |
|
|
$ |
81 |
|
|
$ |
1 |
|
Operating lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities leases |
|
|
9,360 |
|
|
|
3,398 |
|
|
|
5,962 |
|
|
|
|
|
Equipment leases |
|
|
138 |
|
|
|
60 |
|
|
|
78 |
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|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subcontractor |
|
|
2,826 |
|
|
|
1,866 |
|
|
|
960 |
|
|
|
|
|
Purchase order |
|
|
76 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
12,524 |
|
|
$ |
5,442 |
|
|
$ |
7,081 |
|
|
$ |
1 |
|
|
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain a portfolio of cash equivalents and investments in a variety of securities
including certificates of deposit, money market funds and government and non-government debt
securities. These available-for-sale securities are subject to interest rate risk and may decline
in value if market interest rates increase. If market interest rates increase immediately and
uniformly by ten percentage points from levels at September 30, 2006, the fair value of the
portfolio would decline by about $17,000.
27
ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms |
|
|
29 |
|
Consolidated Balance Sheets |
|
|
31 |
|
Consolidated Statements of Operations |
|
|
32 |
|
Consolidated Statements of Shareholders Equity |
|
|
33 |
|
Consolidated Statements of Comprehensive (Loss) Income |
|
|
34 |
|
Consolidated Statements of Cash Flows |
|
|
35 |
|
Notes to Consolidated Financial Statements |
|
|
37 |
|
Schedule IIValuation and Qualifying Accounts |
|
|
57 |
|
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Tier Technologies, Inc.
Reston, Virginia
We have audited the consolidated balance sheets of Tier Technologies, Inc. and subsidiaries as of
September 30, 2006 and 2005, and the related consolidated statements of operations, shareholders
equity, comprehensive (loss) income, and cash flows for the years then ended. Our audits also
included the financial statement schedule of Tier Technologies, Inc. listed in Item 15(a). These
financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tier Technologies, Inc. and subsidiaries as of
September 30, 2006 and 2005, and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Tier Technologies, Inc. and subsidiaries changed their method of accounting for stock-based
compensation in accordance with guidance provided in Statement of Financial Standards No. 123 (R),
Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Tier Technologies, Inc. and subsidiaries internal
control over financial reporting as of September 30, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated December 13, 2006 expressed an unqualified opinion
on managements assessment of the effectiveness of Tier Technologies, Inc.s internal control over
financial reporting and an unqualified opinion on the effectiveness of Tier Technologies, Inc.s
internal control over financial reporting.
|
|
|
/s/ McGladrey & Pullen, LLP |
|
|
|
|
|
December 13, 2006 |
|
|
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Tier Technologies, Inc.
In our
opinion, the consolidated statements of operations, of
shareholders equity, of comprehensive income (loss) and of cash
flows for the year ended September 30, 2004 of Tier
Technologies, Inc. and its subsidiaries (the Company)
present fairly, in all material respects, the results of operations
and cash flows for the year ended September 30, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule for the year ended September 30, 2004 listed in the accompanying index presents fairly, in
all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
|
|
|
/s/ PricewaterhouseCoopers, LLP |
|
|
|
|
|
December 27, 2004, except for the restatement described in Note 1 to the consolidated financial
statements (not presented herein), as to which the date is October 23, 2006. |
30
TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
18,486 |
|
|
$ |
27,843 |
|
Investments in marketable securities |
|
|
36,950 |
|
|
|
36,493 |
|
Accounts receivable, net |
|
|
15,035 |
|
|
|
19,449 |
|
Unbilled receivables |
|
|
2,918 |
|
|
|
3,094 |
|
Prepaid expenses and other current assets |
|
|
3,067 |
|
|
|
3,680 |
|
|
Total current assets |
|
|
76,456 |
|
|
|
90,559 |
|
|
|
|
|
|
|
|
|
|
Property, equipment and software, net |
|
|
13,466 |
|
|
|
13,501 |
|
Long-term accounts receivable |
|
|
|
|
|
|
1,560 |
|
Goodwill |
|
|
37,567 |
|
|
|
37,567 |
|
Other intangible assets, net |
|
|
21,879 |
|
|
|
26,147 |
|
Restricted investments |
|
|
12,287 |
|
|
|
3,335 |
|
Investment in unconsolidated affiliate |
|
|
3,978 |
|
|
|
3,590 |
|
Other assets |
|
|
3,916 |
|
|
|
483 |
|
|
Total assets |
|
$ |
169,549 |
|
|
$ |
176,742 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
871 |
|
|
$ |
1,902 |
|
Income taxes payable |
|
|
7,288 |
|
|
|
7,113 |
|
Accrued compensation liabilities |
|
|
5,325 |
|
|
|
5,139 |
|
Accrued subcontractor expense |
|
|
2,360 |
|
|
|
3,226 |
|
Other accrued liabilities |
|
|
11,823 |
|
|
|
7,836 |
|
Deferred income |
|
|
5,750 |
|
|
|
7,795 |
|
|
Total current liabilities |
|
|
33,417 |
|
|
|
33,011 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,922 |
|
|
|
2,192 |
|
|
Total liabilities |
|
|
35,339 |
|
|
|
35,203 |
|
|
|
|
|
|
|
|
|
|
|
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 capitalShares authorized: 44,260;
shares issued: 20,383 and 20,374; and shares outstanding: 19,499 and 19,490 |
|
|
184,387 |
|
|
|
182,066 |
|
Treasury stockat cost, 884 shares |
|
|
(8,684 |
) |
|
|
(8,684 |
) |
Notes receivable from related parties |
|
|
(4,275 |
) |
|
|
(3,998 |
) |
Accumulated other comprehensive loss |
|
|
(33 |
) |
|
|
(111 |
) |
Accumulated deficit |
|
|
(37,185 |
) |
|
|
(27,734 |
) |
|
Total shareholders equity |
|
|
134,210 |
|
|
|
141,539 |
|
|
Total liabilities and shareholders equity |
|
$ |
169,549 |
|
|
$ |
176,742 |
|
|
See Notes to Consolidated Financial Statements
31
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands, except per share data) |
|
2006 |
|
2005 |
|
2004 |
|
Revenues |
|
$ |
168,731 |
|
|
$ |
150,601 |
|
|
$ |
127,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
|
125,845 |
|
|
|
103,814 |
|
|
|
84,399 |
|
General and administrative |
|
|
38,540 |
|
|
|
28,958 |
|
|
|
28,233 |
|
Selling and marketing |
|
|
11,474 |
|
|
|
11,339 |
|
|
|
7,441 |
|
Depreciation and amortization |
|
|
5,257 |
|
|
|
6,065 |
|
|
|
5,109 |
|
Restructuring charges |
|
|
35 |
|
|
|
46 |
|
|
|
3,493 |
|
|
Total costs and expenses |
|
|
181,151 |
|
|
|
150,222 |
|
|
|
128,675 |
|
|
(Loss) income before other income, income taxes and loss
from discontinued operations |
|
|
(12,420 |
) |
|
|
379 |
|
|
|
(898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
2,951 |
|
|
|
1,543 |
|
|
|
835 |
|
Loss on sale of investments |
|
|
|
|
|
|
(501 |
) |
|
|
|
|
Equity in net income (loss) of unconsolidated affiliate |
|
|
445 |
|
|
|
(168 |
) |
|
|
|
|
Other income |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
3,470 |
|
|
|
874 |
|
|
|
835 |
|
|
(Loss) income from continuing operations before income taxes |
|
|
(8,950 |
) |
|
|
1,253 |
|
|
|
(63 |
) |
Income tax provision |
|
|
501 |
|
|
|
127 |
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(9,451 |
) |
|
|
1,126 |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(1,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per shareBasic: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
|
|
From discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.08 |
) |
|
(Loss) earnings per shareBasic |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per shareDiluted: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
|
|
From discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.08 |
) |
|
(Loss) earnings per shareDiluted |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
|
19,495 |
|
|
|
19,470 |
|
|
|
18,987 |
|
Diluted
(loss) earnings per share |
|
|
19,495 |
|
|
|
19,593 |
|
|
|
18,987 |
|
See Notes to Consolidated Financial Statements
32
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
$0.01 par value |
|
|
Treasury stock |
|
|
|
|
|
|
Accumulated other |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in- |
|
|
|
|
|
|
|
|
|
|
Notes receivable |
|
|
comprehensive (loss) |
|
|
Accumulated |
|
|
shareholders |
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
Shares |
|
|
Amount |
|
|
from shareholders |
|
|
income |
|
|
deficit |
|
|
equity |
|
|
Balance at September 30, 2003 |
|
|
880 |
|
|
$ |
930 |
|
|
|
18,662 |
|
|
$ |
172,496 |
|
|
|
|
|
|
$ |
|
|
|
$ |
403 |
|
|
|
(884 |
) |
|
$ |
(8,684 |
) |
|
$ |
(3,908 |
) |
|
$ |
(221 |
) |
|
$ |
(27,357 |
) |
|
$ |
133,659 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,503 |
) |
|
|
(1,503 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
2,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,196 |
|
Issuance of Class B common stock |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199 |
|
Conversion of Class A common stock into
Class B common stock |
|
|
(880 |
) |
|
|
(930 |
) |
|
|
880 |
|
|
|
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class B common stock in
business combinations |
|
|
|
|
|
|
|
|
|
|
402 |
|
|
|
4,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,447 |
|
Stock option revision charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552 |
|
Notes and interest receivable from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
51 |
|
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
(176 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
269 |
|
|
Balance at September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
20,324 |
|
|
|
180,820 |
|
|
|
|
|
|
|
|
|
|
|
659 |
|
|
|
(884 |
) |
|
|
(8,684 |
) |
|
|
(4,113 |
) |
|
|
(128 |
) |
|
|
(28,860 |
) |
|
|
139,694 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
1,126 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
54 |
|
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
Issuance of Class B common stock |
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
Issuance of Class B common stock in
business combinations |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
Conversion of Class B common stock
to $0.01 par value common stock |
|
|
|
|
|
|
|
|
|
|
(20,373 |
) |
|
|
(181,195 |
) |
|
|
20,373 |
|
|
|
204 |
|
|
|
180,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and interest receivable from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
321 |
|
Unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
89 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
(72 |
) |
|
Balance at September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,374 |
|
|
|
204 |
|
|
|
181,862 |
|
|
|
(884 |
) |
|
|
(8,684 |
) |
|
|
(3,998 |
) |
|
|
(111 |
) |
|
|
(27,734 |
) |
|
|
141,539 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,451 |
) |
|
|
(9,451 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Interest receivable from related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
(277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975 |
|
Unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
53 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
25 |
|
|
Balance at September 30, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
20,383 |
|
|
$ |
204 |
|
|
$ |
184,183 |
|
|
|
(884 |
) |
|
$ |
(8,684 |
) |
|
$ |
(4,275 |
) |
|
$ |
(33 |
) |
|
$ |
(37,185 |
) |
|
$ |
134,210 |
|
|
See Notes to Consolidated Financial Statements
33
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
Net (loss) income |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
|
Other comprehensive (loss) income, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) |
|
|
53 |
|
|
|
19 |
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less impact of realized losses (transferred
out of accumulated other comprehensive
income and included in net income) |
|
|
|
|
|
|
70 |
|
|
|
|
|
|
Net change from marketable securities |
|
|
53 |
|
|
|
89 |
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss) |
|
|
25 |
|
|
|
(72 |
) |
|
|
269 |
|
|
Other comprehensive income |
|
|
78 |
|
|
|
17 |
|
|
|
93 |
|
|
Comprehensive (loss) income |
|
$ |
(9,373 |
) |
|
$ |
1,143 |
|
|
$ |
(1,410 |
) |
|
See Notes to Consolidated Financial Statements
34
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
Less: Loss from discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
(1,440 |
) |
|
(Loss) income from continuing operations, net |
|
|
(9,451 |
) |
|
|
1,126 |
|
|
|
(63 |
) |
Non-cash items included in net (loss) income from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,998 |
|
|
|
8,992 |
|
|
|
7,139 |
|
Loss on retirement of equipment and software |
|
|
324 |
|
|
|
662 |
|
|
|
571 |
|
Stock options revision charge |
|
|
|
|
|
|
|
|
|
|
552 |
|
Stock-based compensation |
|
|
1,975 |
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
1,020 |
|
|
|
602 |
|
|
|
388 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
25 |
|
Equity in net (income) loss of unconsolidated affiliate |
|
|
(445 |
) |
|
|
168 |
|
|
|
|
|
Accrued forward loss on contract |
|
|
679 |
|
|
|
(214 |
) |
|
|
531 |
|
Net effect of changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
5,130 |
|
|
|
(3,518 |
) |
|
|
9,015 |
|
Prepaid expenses and other assets |
|
|
(2,819 |
) |
|
|
2,083 |
|
|
|
(485 |
) |
Accounts payable and accrued liabilities |
|
|
1,329 |
|
|
|
565 |
|
|
|
(2,455 |
) |
Income taxes payable |
|
|
175 |
|
|
|
106 |
|
|
|
9,382 |
|
Deferred income |
|
|
(2,045 |
) |
|
|
2,526 |
|
|
|
780 |
|
|
Cash provided by operating activities from continuing operations |
|
|
4,870 |
|
|
|
13,098 |
|
|
|
25,380 |
|
Cash used in operating activities from discontinued operations |
|
|
(21 |
) |
|
|
(386 |
) |
|
|
(1,531 |
) |
|
Net cash provided by operating activities |
|
|
4,849 |
|
|
|
12,712 |
|
|
|
23,849 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
(45,950 |
) |
|
|
(75,702 |
) |
|
|
(26,639 |
) |
Sales and maturities of marketable securities |
|
|
44,278 |
|
|
|
72,669 |
|
|
|
32,931 |
|
Restricted investments |
|
|
(7,685 |
) |
|
|
3,328 |
|
|
|
4,403 |
|
Business combinations, net of cash acquired |
|
|
|
|
|
|
(4,135 |
) |
|
|
(15,639 |
) |
Repayments on notes and accrued interest from related parties |
|
|
|
|
|
|
411 |
|
|
|
|
|
Purchase of equipment and software |
|
|
(4,849 |
) |
|
|
(10,027 |
) |
|
|
(3,429 |
) |
Other investing activities |
|
|
|
|
|
|
(64 |
) |
|
|
(241 |
) |
|
Cash used in investing activities from continuing operations |
|
|
(14,206 |
) |
|
|
(13,520 |
) |
|
|
(8,614 |
) |
Cash provided by investing activities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
1,913 |
|
|
Net cash used in investing activities |
|
|
(14,206 |
) |
|
|
(13,520 |
) |
|
|
(6,701 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under bank line of credit |
|
|
|
|
|
|
|
|
|
|
2,200 |
|
Repayments under bank line of credit |
|
|
|
|
|
|
|
|
|
|
(2,200 |
) |
Net proceeds from issuance of common stock |
|
|
69 |
|
|
|
302 |
|
|
|
2,395 |
|
Capital lease obligations and other financing arrangements |
|
|
(86 |
) |
|
|
(86 |
) |
|
|
(149 |
) |
|
Net cash (used in) provided by financing activities from continuing operations |
|
|
(17 |
) |
|
|
216 |
|
|
|
2,246 |
|
Effect of exchange rate changes on cash from continuing operations |
|
|
17 |
|
|
|
(60 |
) |
|
|
|
|
Effect of exchange rate changes on cash from discontinued operations |
|
|
|
|
|
|
|
|
|
|
230 |
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(9,357 |
) |
|
|
(652 |
) |
|
|
19,624 |
|
Cash and cash equivalents at beginning of period |
|
|
27,843 |
|
|
|
28,495 |
|
|
|
8,871 |
|
|
Cash and cash equivalents at end of period |
|
$ |
18,486 |
|
|
$ |
27,843 |
|
|
$ |
28,495 |
|
|
35
TIER TECHNOLOGIES, INC.
CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
13 |
|
|
$ |
23 |
|
|
$ |
99 |
|
Income taxes paid (refunded), net |
|
$ |
248 |
|
|
$ |
34 |
|
|
$ |
(9,573 |
) |
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease obligations and other financing arrangements |
|
$ |
64 |
|
|
$ |
40 |
|
|
$ |
|
|
Conversion of Class A common stock to Class B common stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
930 |
|
Class B common stock issued in business combination and acquisition |
|
$ |
|
|
|
$ |
79 |
|
|
$ |
4,447 |
|
Interest accrued on shareholder notes |
|
$ |
277 |
|
|
$ |
206 |
|
|
$ |
256 |
|
See Notes to Consolidated Financial Statements
36
NOTE 1ORGANIZATIONAL OVERVIEW
Tier Technologies, Inc., or Tier or the Company, provides transaction processing services and
software and systems integration services to federal, state, and local governments and other public
sector clients. We provide our services through three segments:
|
|
|
Electronic Payment Processing, or EPPprovides electronic payment processing
options, including payment of taxes, fees and other obligations owed to government
entities, educational institutions and other public sector clients; |
|
|
|
|
Government Business Process Outsourcing, or GBPOfocuses on child support
payment processing, child support financial institution data match services, health and
human services consulting, call center operations, electronic funds disbursement and other
related systems integration services; and |
|
|
|
|
Packaged Software and Systems Integration, or PSSIprovides software and systems
implementation services through practice areas in financial management systems, public
pension administration systems, unemployment insurance administration systems, electronic
government services, computer telephony and call centers and systems integration services. |
Our two principal subsidiaries, which are accounted for as part of our EPP and PSSI segments,
include:
|
|
|
Official Payments Corporation, or OPCprovides proprietary telephone and
Internet systems, as well as transaction processing and settlement for electronic payment
options to federal, state, and municipal government agencies, educational institutions and
other public sector clients; and |
|
|
|
|
EPOS Corporation, or EPOSprovides interactive communications and transaction
processing technologies to federal, state and municipal government agencies, educational
institutions and other public sector clients. |
We also own 46.96% of the outstanding common stock of CPAS Systems, Inc., or CPAS, a global
supplier of pension administration software systems.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. These financial statements and the accompanying notes are
prepared in accordance with accounting principles generally accepted in the United States of
America and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended. We
believe we have made all necessary adjustments so that the financial statements are presented
fairly and that all such adjustments are of a normal recurring nature.
Principles of Consolidation. The financial statements include the accounts of Tier
Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been
eliminated. We account for our 46.96% investment in CPAS, Inc. (an investment in which we exercise
significant influence, but do not control and are not the primary beneficiary) using the equity
method, under which our share of CPAS net income (loss) is recognized in the period in which it is
earned by CPAS. We purchased 47.37% of the outstanding common stock of CPAS on October 1, 2004 for
$3.6 million. Effective May 1, 2006, this percentage decreased to 46.96% due to the exercise of
options to purchase 27,500 shares of CPAS common stock by CPAS employees. As of September 30,
2006, our Consolidated Balance Sheets reflect a $4.0 million investment in unconsolidated
affiliate, which represents our $1.3 million equity in the underlying assets of CPAS and $2.7
million of goodwill.
Use of Estimates. Preparing financial statements requires management to make estimates and
assumptions that affect the amounts reported on our Consolidated Financial Statements and
accompanying notes. We believe that near-term changes could reasonably impact the following
estimates: project costs and percentage of completion; effective tax rates; deferred taxes and
associated valuation allowances; collectibility of receivables; share-based compensation; and
valuation of goodwill, intangibles and investments. Although we believe the estimates and
assumptions used in preparing our Consolidated Financial Statements and notes thereto are
reasonable in light of known facts and circumstances, actual results could differ materially.
37
Foreign Currencies. We use the local foreign currency as the functional currency to
translate our investment in CPAS and our remaining discontinued subsidiaries. The assets and
liabilities of the subsidiaries are translated into U.S.
dollars using exchange rates in effect at the balance sheet date, revenues and expenses are
translated using the average exchange rate for the period and gains and losses from this
translation process are included in Other comprehensive income in the shareholders equity section
of our Consolidated Balance Sheets.
Cash and Cash Equivalents. Cash equivalents are highly liquid investments with maturities
of three months or less at the date of purchase and are stated at amounts that approximate fair
value, based on quoted market prices. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts with financial institutions and highly liquid debt
securities of corporations, state governments, municipalities and the U.S. government.
In the course of operating a payment processing center for a client, we may maintain one or more
bank accounts to deposit and disburse funds for the client. The cash balance of the accounts and
the related liability of the same amount are netted in the accompanying Consolidated Balance
Sheets, since we have the right to offset such amounts.
Revenue Recognition and Credit Risk. We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is
probable. We assess collectibility based upon our clients financial condition and prior payment
history, as well as our performance under the contract. When we enter into certain arrangements
where we are obligated to deliver multiple products and/or services, we account for each unit of
the contract separately when each unit provides value to the customer on a standalone basis and
there is objective evidence of the fair value of the standalone unit.
Typically, our payment processing and call center operations earn revenues based upon a specific
fee per transaction or percentage of the dollar amount processed. We recognize these revenues in
the month that the service is provided.
We use the percentage-of-completion method to recognize revenues for software licenses and related
services for projects that require significant modification or customization that is essential to
the functionality of the software. We record a provision in those instances in which we believe a
contract will probably generate a net loss and we can reasonably estimate this loss. If we cannot
reasonably estimate the loss, we limit the amount of revenue that we recognize to the costs we have
incurred, until we can estimate the total loss. Advance payments from clients and amounts billed
to clients in excess of revenue recognized are recorded as deferred revenue. Amounts recognized as
revenue in advance of contractual billing are recorded as unbilled receivables.
For the sale of software that does not require significant modification, we recognize revenues from
license fees when persuasive evidence of an agreement exists, delivery of the software has
occurred, no significant implementation or integration obligations exist, the fee is fixed or
determinable and collectibility is probable. If we do not believe it is probable that we will
collect a fee, we do not recognize the associated revenue until we collect the payment.
For software license arrangements with multiple obligations (for example, undelivered maintenance
and support), we allocate revenues to each component of the arrangement using the residual value
method of accounting based on the fair value of the undelivered elements, which is specific to our
company. Fair value for the maintenance and support obligations for software licenses is based
upon the specific renewal rates.
Our license agreements do not offer return rights or price protection; therefore, we do not have
provisions for sales returns on these types of agreements. We do, however, offer routine,
short-term warranties that our proprietary software will operate free of material defects and in
conformity with written documentation. Under these agreements, if we have an active maintenance
agreement, we record a liability for our estimated future warranty claims, based on historical
experience. If there is no maintenance contract, the warranty is considered implied maintenance
and we defer revenues consistent with other maintenance and support obligations.
When we provide ongoing maintenance and support services, the associated revenue is deferred and
recognized on a straight-line basis over the life of the related contracttypically one year.
Generally, we recognize the revenues earned for non-essential training and consulting support when
the services are performed.
Finally, under the terms of a number of our contracts, we are reimbursed for certain costs that we
incur to support the project, including postage, stationery and printing. We include the amounts
that we are entitled to be reimbursed and any associated mark-up on these expenses in Revenues and
include the expenses in Direct costs in our Consolidated Statements of Operations.
Allowance for Doubtful Accounts. The allowance for doubtful accounts reflects our best
estimate of probable losses inherent in the accounts receivable balance. We determine the
allowance based on known troubled accounts, historical experience and other currently available
evidence. In addition, our OPC subsidiary records a sales return allowance, calculated monthly at
0.5% of gross revenues on the applicable contracts, to establish a reserve for the reversal of
convenience fees.
38
Convenience fees are charged to cardholders on a per transaction basis and are
reinstated to cardholders upon an approved payment
reversal. Additions to the provision for bad debts are included in General and administrative on
our Consolidated Statements of Operations, while the provision for sales return allowance is
included in Revenues. At September 30, 2006 and 2005, the balance of our allowance for doubtful
accounts was $3.0 million and $2.6 million, respectively.
Fair Value of Financial Instruments. The carrying amounts of certain financial
instruments, including cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to their short maturities. The carrying amounts of
notes receivable and long-term debt approximate fair value as the interest rates are charged at
market rates.
Investments in Marketable Securities. Investments in marketable securities are comprised
of available-for-sale securities. Restricted investments pledged in connection with performance
bonds and real estate operating leases are reported as Restricted investments on the Consolidated
Balance Sheets. Unrestricted investments with remaining maturities of 90 days or less (as of the
date that we purchased the securities) are classified as cash equivalents. Other securities that
would not otherwise be included in Restricted investments or Cash and cash equivalents are
classified on the Consolidated Balance Sheets as Investments in marketable securities. Our
investments are categorized as available-for-sale and recorded at estimated fair value, based on
quoted market prices. Increases and decreases in fair value are recorded as unrealized gains and
losses in Other comprehensive income. Realized gains and losses and declines in fair value judged
to be other-than-temporary are included in Loss on sale and impairment of investments. Interest
earned is included in interest income.
Advertising Expense. We expense advertising costs, net of cooperative advertising cash
contributions received from partners, during the period the advertising takes place. During fiscal
years 2006 and 2005, we incurred $1.1 million and $0.9 million, respectively, of net advertising
expenses.
Property, Equipment and Software. Property, equipment and software are stated at cost and
depreciated using the straight-line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from three to seven years. When assets are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations in the period realized. We recognize the fair value of the
liability for conditional asset retirement obligations when incurredgenerally upon acquisition,
construction or development and/or through the normal operation of the asset.
We expense the cost of software that we expect to sell, lease or market as research and development
costs, prior to the time that technical feasibility is established. Once technical feasibility is
established, we capitalize software development costs until the date that the software is available
for sale. Similarly, we expense the costs incurred for software that we expect to use internally
until the preliminary project stage has been completed. Subsequently, we capitalize direct service
and material costs, as well as direct payroll and payroll-related costs and interest costs incurred
during development. We amortize capitalized software costs over the estimated remaining life of
the software.
Goodwill. Goodwill is tested for impairment on an annual basis during the fourth fiscal
quarter and between annual tests if indicators of potential impairment exist, using a fair-value
based approach. No impairment of goodwill for continuing operations has been identified for any of
the periods presented.
Intangible Assets. We amortize intangible assets with finite lives using the straight-line
method over their estimated benefit period, ranging from one to ten years. We evaluate the
recoverability of intangible assets periodically and take into account events or circumstances that
warrant revised estimates of useful lives or that indicate that impairment exists. No impairment of
intangible assets has been identified for any of the periods presented.
(Loss) Earnings Per Share. Basic (loss) earnings per share are computed by dividing net
(loss) income by the weighted-average number of shares of common stock outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Share-Based Payment. Effective October 1, 2005, we adopted Statement of Financial
Accounting Standards No. 123(R)Share-Based Payment, or SFAS 123R, which requires companies to
expense share-based compensation based on fair value. Prior to October 1, 2005, we accounted for
share-based payment in accordance with Accounting Principles Board Opinion No. 25Accounting for
Stock Issued to Employees, and provided the disclosure required in SFAS 123Accounting for
Stock-Based Compensation, as amended by SFAS No. 148Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123.
39
Income Taxes. We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109Accounting for Income Taxes, or SFAS 109, which requires the use of
the liability method in accounting for
income taxes. Under this method, deferred income tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rules and laws that are expected to be in effect when the differences are
expected to reverse. Valuation allowances are established against net deferred tax assets when it
is more likely than not that some portion or all of the deferred tax asset will not be realized.
Comprehensive (Loss) Income. Our comprehensive income is comprised of net (loss) income,
foreign currency translation adjustments and unrealized gains (losses) on marketable investment
securities, net of related taxes.
Guarantees. We record guarantees at the fair value of the guarantee at its inception when
a guarantor is required to make payments to the guaranteed party upon failure of the third party to
perform under the obligations of the contract.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 154Accounting Changes and Error Corrections. In May 2005, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard No.
154Accounting Changes and Error Corrections, or SFAS 154, which changes the requirements for the
accounting for, and reporting of, a change in accounting principle. It also carries forward
earlier guidance for the correction of errors in previously issued financial statements, as well as
the guidance for changes in accounting estimate. SFAS 154 applies to all voluntary changes in
accounting principles, as well as changes mandated by a standard-setting authority that do not
include specific transition provisions. For such changes in accounting principles, SFAS 154
requires retrospective application to prior periods financial statements, unless it is
impracticable to determine either period-specific or cumulative effects of the change. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We adopted this standard beginning in October 2006. Since this standard
applies to both voluntary changes in accounting principles, as well as those that may be mandated
by standard-setting authorities, it is not possible to estimate the impact that the adoption of
this standard will have on our financial position and results of operations.
SFAS 157Fair Value Measurements. In October 2006, FASB issued Statement of Financial
Accounting Standards No. 157Fair Value Measurements, or SFAS 157. This standard establishes a
framework for measuring fair value and expands disclosures about fair value measurement of a
companys assets and liabilities. This standard also requires that the fair value measurement
should be determined based on the assumptions that market participants would use in pricing the
asset or liability. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and, generally, must be applied prospectively. We expect to
adopt this standard beginning in October 2008. Currently, we are evaluating the impact that this
new standard will have on our financial position and results of operations.
FIN 48Accounting for Uncertainty in Income Taxes. In July 2006, FASB Interpretation No.
48Accounting for Uncertainty in Income Taxes, or FIN 48, was issued. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FASB Statement No. 109Accounting for Income Taxes. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We expect to implement FIN 48 beginning on October 1,
2007. We are evaluating the impact that adopting FIN 48 will have on our financial position and
results of operations.
40
NOTE 3(LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands, except per share data) |
|
2006 |
|
2005 |
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations, net of income taxes |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(63 |
) |
Discontinued operations, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(1,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,451 |
) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
19,495 |
|
|
|
19,470 |
|
|
|
18,987 |
|
Effects of dilutive common stock options |
|
|
|
|
|
|
123 |
|
|
|
|
|
|
Adjusted weighted-average shares |
|
|
19,495 |
|
|
|
19,593 |
|
|
|
18,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per basic and diluted share |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
|
|
From discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.08 |
) |
|
(Loss) earnings per basic and diluted share |
|
$ |
(0.48 |
) |
|
$ |
0.06 |
|
|
$ |
(0.08 |
) |
|
The following options were not included in the computation of diluted (loss) earnings per
share because the exercise price was greater than the average market price of our common stock for
the periods stated and, therefore, the effect would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands, except per share amounts) |
|
2006 |
|
2005 |
|
2004 |
|
Weighted-average options excluded from
computation of diluted (loss) earnings per
share |
|
|
2,022 |
|
|
|
1,893 |
|
|
|
1,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices per share: |
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
20.70 |
|
|
$ |
20.70 |
|
|
$ |
20.70 |
|
Low |
|
$ |
5.91 |
|
|
$ |
8.53 |
|
|
$ |
9.97 |
|
In addition, 91,000 and 335,000 shares, respectively, of common stock equivalents were
excluded from the calculation of diluted loss per share at September 30, 2006 and September 30,
2004, respectively, since their effect would have been anti-dilutive.
NOTE 4CUSTOMER CONCENTRATION AND RISK
We derive a significant portion of our revenue from a limited number of governmental
customers. Typically, the contracts allow these customers to terminate all or part of the contract
for convenience or cause. During fiscal years 2006, 2005 and 2004, revenue from one customer
served by our EPP segment totaled $31.1 million, $20.5 million and $15.7 million, respectively,
which represented 18.4%, 13.6% and 12.3%, respectively, of our total revenues. During fiscal 2006,
revenues from another customer served by our GBPO segment totaled $18.1 million, or 10.7%, of our
total revenues.
As described in more detail below, we have several large accounts receivable and unbilled
receivable balances. A dispute, early contract termination or other collection issue with one of
these key customers could have a material adverse impact on our financial condition and results of
operations.
Accounts receivable, net. Accounts receivable, net, represents the short-term portion of
receivables from our customers and other parties and retainers that we expected to receive within
one year, less an allowance for accounts that we estimated would become uncollectible. Our
accounts receivable are comprised of the following three categories:
|
|
|
Customer receivablesreceivables from our customers; |
|
|
|
|
Mispost receivablesreceivables from individuals to whom our payment processing centers
made incorrect payments; and |
|
|
|
|
Not Sufficient Funds, or NSF, receivablesreceivables from individuals who paid their
child support payment with a check that had insufficient funds. |
41
We maintain a separate allowance for uncollectible accounts for each category of receivables, which
we offset against the receivables on our Consolidated Balance Sheet. As shown in the following
table, at September 30, 2006 and 2005, the balance of our Accounts receivable, net was $15.0
million and $19.4 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
Accounts receivable from: |
|
|
|
|
|
|
|
|
Customers |
|
$ |
14,719 |
|
|
$ |
18,017 |
|
Recipients of misposted payments |
|
|
1,445 |
|
|
|
1,843 |
|
Payers of NSF child support |
|
|
769 |
|
|
|
743 |
|
|
Total accounts receivable |
|
|
16,933 |
|
|
|
20,603 |
|
|
Allowance for uncollectible accounts receivable: |
|
|
|
|
|
|
|
|
Customer |
|
|
(1,037 |
) |
|
|
(632 |
) |
Mispost |
|
|
(1,171 |
) |
|
|
(1,375 |
) |
NSF |
|
|
(751 |
) |
|
|
(632 |
) |
|
Total accounts receivable allowance |
|
|
(2,959 |
) |
|
|
(2,639 |
) |
Short-term retainers receivable from customers |
|
|
1,061 |
|
|
|
3,045 |
|
Less: Long-term accounts receivable |
|
|
|
|
|
|
(1,560 |
) |
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
15,035 |
|
|
$ |
19,449 |
|
|
As of September 30, 2006 and 2005, one customer accounted for 20.0% and 18.8%, respectively,
of total customer accounts receivable. At September 30, 2005, we expected that $1.6 million of the
receivables from this customer would be received over one to three years and, accordingly, the $1.6
million of receivables was classified as Long-term accounts receivable on our Consolidated Balance
Sheets. Subsequently, this customer paid the remaining balance in October 2006; therefore, we
included the balance of the receivables from this customer in Accounts receivable, net as of
September 30, 2006.
Certain of our contracts allow customers to retain a portion of the amounts owed to us until
predetermined milestones are achieved or until the project is completed. At September 30, 2006 and
2005, Accounts receivable, net included $1.1 million and $3.0 million, respectively, of retainers
that we expected to receive in one year. In addition, there were $3.7 million and $0.3 million,
respectively, of retainers that we expected to be outstanding more than one year, which are
included in Other assets on our Consolidated Balance Sheets.
Unbilled Receivables. Unbilled receivables represent revenues that we have earned for the
work that has been performed to date that cannot be billed under the terms of the applicable
contract until we have completed specific project milestones or the customer has accepted our work.
At September 30, 2006 and 2005, unbilled receivables, which are all expected to become billable in
one year, were $2.9 million and $3.1 million, respectively. At September 30, 2006, four customers
accounted for 32.5%, 28.8%, 21.2% and 11.8%, respectively, of total unbilled receivables and at
September 30, 2005, two customers accounted for 55.5% and 32.5%, respectively, of unbilled
receivables.
NOTE 5INVESTMENTS
Investments are comprised of available-for-sale debt and equity securities as defined in SFAS
No. 115Accounting for Certain Investments in Debt and Equity Securities, or SFAS 115. Restricted
investments totaling $12.3 million and $3.3 million at September 30, 2006 and September 30, 2005,
respectively, were pledged in connection with performance bonds and real estate operating leases
and will be restricted for the terms of the project performance periods and lease periods, the
latest of which is estimated to end November 2009. These investments are reported as Restricted
investments on the Consolidated Balance Sheets.
In accordance with SFAS No. 95Statement of Cash Flows, unrestricted investments with remaining
maturities of 90 days or less (as of the date that we purchased the securities) are classified as
cash equivalents. We exclude from cash equivalents certain investments such as mutual funds and
auction rate securities. Securities such as these, and all other securities that would not
otherwise be included in Restricted investments or Cash and cash equivalents, are classified on the
Consolidated Balance Sheets as Investments in marketable securities. Except for our investment in
CPAS and our restricted investments, all of our investments are categorized as available-for-sale
under SFAS 115. As such, our securities are recorded at estimated fair value, based on quoted
market prices. Increases and decreases in fair value are recorded as unrealized gains and losses
in other comprehensive income.
42
The following table shows the balance sheet classification, amortized cost and estimated fair
values of investments included in cash equivalents, investments in marketable securities and
restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
September 30, 2005 |
|
|
Amortized |
|
Unrealized |
|
Estimated |
|
Amortized |
|
Unrealized |
|
Estimated |
(in thousands) |
|
cost |
|
loss |
|
fair value |
|
cost |
|
loss |
|
fair value |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
4,616 |
|
|
$ |
|
|
|
$ |
4,616 |
|
|
$ |
11,272 |
|
|
$ |
|
|
|
$ |
11,272 |
|
|
Total investments included in
cash and cash equivalents |
|
|
4,616 |
|
|
|
|
|
|
|
4,616 |
|
|
|
11,272 |
|
|
|
|
|
|
|
11,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprise
obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,629 |
|
|
|
(7 |
) |
|
|
1,622 |
|
Other (Primarily state and local bonds/notes) |
|
|
36,950 |
|
|
|
|
|
|
|
36,950 |
|
|
|
30,888 |
|
|
|
(13 |
) |
|
|
30,875 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996 |
|
|
|
|
|
|
|
2,996 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
|
Total marketable securities |
|
|
36,950 |
|
|
|
|
|
|
|
36,950 |
|
|
|
36,513 |
|
|
|
(20 |
) |
|
|
36,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored enterprise obligations |
|
|
3,348 |
|
|
|
(2 |
) |
|
|
3,346 |
|
|
|
3,370 |
|
|
|
(35 |
) |
|
|
3,335 |
|
Certificate of deposit |
|
|
8,941 |
|
|
|
|
|
|
|
8,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted investments |
|
|
12,289 |
|
|
|
(2 |
) |
|
|
12,287 |
|
|
|
3,370 |
|
|
|
(35 |
) |
|
|
3,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
53,855 |
|
|
$ |
(2 |
) |
|
$ |
53,853 |
|
|
$ |
51,155 |
|
|
$ |
(55 |
) |
|
$ |
51,100 |
|
|
As of September 30, 2006, all of the debt securities that were included in marketable
securities had remaining maturities in excess of ten years.
We evaluate certain available-for-sale investments for other-than-temporary impairment when the
fair value of the investment is lower than its book value. Factors that we consider when
evaluating for other-than-temporary impairment include: the length of time and the extent to which
market value has been less than cost; the financial condition and near-term prospects of the
issuer; interest rates, credit risk, the value of any underlying portfolios or investments; and our
intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in the market. We do not adjust the recorded book value for declines in fair
value that we believe are temporary, if we have the intent and ability to hold the associated
investments for the foreseeable future and we have not made the decision to dispose of the
securities as of the reported date.
If we determine impairment is other-than-temporary, we reduce the recorded book value of the
investment by the amount of the impairment and recognize a realized loss on the investment. At
September 30, 2006, we do not believe that any of our investments were other-than-temporarily
impaired. During fiscal 2005, we sold an investment in two mutual funds, which resulted in a $0.5
million realized loss. This loss is included in Loss on sale of investments on the Consolidated
Statement of Operations for fiscal year 2005.
NOTE 6PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
Software |
|
$ |
10,459 |
|
|
$ |
15,857 |
|
Computer equipment |
|
|
8,961 |
|
|
|
9,658 |
|
Furniture and equipment |
|
|
5,788 |
|
|
|
7,023 |
|
Land and building |
|
|
2,452 |
|
|
|
2,452 |
|
Leasehold improvements |
|
|
2,120 |
|
|
|
2,234 |
|
|
Total property, equipment and software, gross |
|
|
29,780 |
|
|
|
37,224 |
|
Less: Accumulated depreciation and amortization |
|
|
(16,314 |
) |
|
|
(23,723 |
) |
|
Total property, equipment and software, net |
|
$ |
13,466 |
|
|
$ |
13,501 |
|
|
We depreciate fixed assets on a straight-line basis over their estimated useful lives.
Leasehold improvements are amortized over the lesser of the estimated remaining life of the
leasehold or the remaining term of the lease. Total depreciation and amortization expense for
property, equipment and software for fiscal years 2006, 2005 and 2004 was $4.6 million, $4.1
million and $3.7 million, respectively. Of the total expense, amortization related to software for
fiscal years 2006, 2005 and 2004 was approximately $1.7 million, $1.8 million and $2.4 million,
respectively. Of the
43
total
depreciation and amortization expense, approximately $3.7 million, $2.7 million and $2.3 million
was included in Direct costs on our Consolidated Statements of Operations during fiscal years 2006,
2005 and 2004, respectively.
At September 30, 2006 and 2005, the cost of assets acquired under capital leases was approximately
$0.5 million and $0.9 million, respectively, and the related accumulated depreciation and
amortization was $0.4 million and $0.8 million, respectively.
NOTE 7GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for fiscal years 2006 and 2005 are as follows for
each of our operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment |
|
|
(in thousands) |
|
GBPO |
|
PSSI |
|
EPP |
|
Total |
|
Balance at September 30, 2004 |
|
$ |
5,284 |
|
|
$ |
17,920 |
|
|
$ |
14,323 |
|
|
$ |
37,527 |
|
Post acquisition adjustmentEPOS(1) |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
$ |
5,284 |
|
|
$ |
17,960 |
|
|
$ |
14,323 |
|
|
$ |
37,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
5,284 |
|
|
$ |
17,960 |
|
|
$ |
14,323 |
|
|
$ |
37,567 |
|
|
|
|
|
(1) |
|
During fiscal 2005, our PSSI segment recorded $40,000 of adjustments associated with the fiscal 2004 acquisition of EPOS. |
We test goodwill for impairment during the fourth quarter of each fiscal year at the
reporting unit level using a fair value approach, in accordance with SFAS No. 142Goodwill and
Other Intangible Assets. This annual testing identified no impairment to goodwill in fiscal 2006
or 2005. If an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment
between annual tests.
Other intangible assets, net, consisted of the following at September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
September 30, 2005 |
|
|
Amortization |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
(in thousands) |
|
period |
|
Gross |
|
amortization |
|
Net |
|
Gross |
|
amortization |
|
Net |
|
Client relationships |
|
10 years |
|
$ |
28,749 |
|
|
$ |
(11,176 |
) |
|
$ |
17,573 |
|
|
$ |
28,749 |
|
|
$ |
(8,301 |
) |
|
$ |
20,448 |
|
Technology |
|
3-10 years |
|
|
4,289 |
|
|
|
(1,986 |
) |
|
|
2,303 |
|
|
|
5,029 |
|
|
|
(1,870 |
) |
|
|
3,159 |
|
Trademarks |
|
7-10 years |
|
|
3,214 |
|
|
|
(1,342 |
) |
|
|
1,872 |
|
|
|
3,214 |
|
|
|
(1,019 |
) |
|
|
2,195 |
|
Non-compete agreements |
|
2-3 years |
|
|
615 |
|
|
|
(484 |
) |
|
|
131 |
|
|
|
615 |
|
|
|
(270 |
) |
|
|
345 |
|
|
Other intangible assets, net |
|
|
|
|
|
$ |
36,867 |
|
|
$ |
(14,988 |
) |
|
$ |
21,879 |
|
|
$ |
37,607 |
|
|
$ |
(11,460 |
) |
|
$ |
26,147 |
|
|
Amortization expense of other intangible assets was $3.5 million, $4.9 million and $3.7
million for fiscal years ended September 30, 2006, 2005 and 2004, respectively.
Estimated amortization expense for other intangible assets on our September 30, 2006 balance sheet
for the next five years is as follows:
|
|
|
|
|
|
|
Future |
(in thousands) |
|
expense |
|
Years ending September 30, |
|
|
|
|
2007 |
|
$ |
4,183 |
|
2008 |
|
|
4,053 |
|
2009 |
|
|
3,775 |
|
2010 |
|
|
3,204 |
|
2011 |
|
|
3,198 |
|
Thereafter |
|
|
3,466 |
|
|
Total future amortization expense |
|
$ |
21,879 |
|
|
44
ACQUISITIONS
Effective June 1, 2004, we purchased all of the outstanding stock of EPOS Corporation, an
Alabama corporation that supplies interactive voice response communication and electronic
transaction processing technologies. The $20.1 million purchase price was comprised of $15.6
million of cash and 402,422 shares of common stock valued at $4.5 million, based on the closing
price of common stock on June 1, 2004. The $15.6 million cash payment included $7.5 million of
payments to EPOS lenders and $0.8 million of estimated acquisition costs. The identifiable
intangible assets comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
(in thousands) |
|
Amount |
|
useful life |
|
Client relationships |
|
$ |
4,240 |
|
|
10 years |
Technology |
|
|
4,150 |
|
|
5 years |
Backlog and acquired contracts |
|
|
600 |
|
|
1 year |
Non-compete agreement |
|
|
560 |
|
|
3 years |
Technology & research and development |
|
|
30 |
|
|
7 years |
|
Total |
|
$ |
9,580 |
|
|
|
|
|
|
We allocated $8.2 million of goodwill acquired as part of the EPOS acquisition to our PSSI
segment. The value of the identifiable intangible assets was based on our then-current assessment of
the fair value. None of the goodwill is deductible for income tax purposes.
Many requests for proposals issued in the child support payment processing and unemployment
insurance practices require interactive voice response communication capabilities, such as those
provided by EPOS. Additionally, EPOS has established electronic payment processing capabilities
and clients in the secondary education and utilities industries that broaden our overall
capabilities and client base. We have established strategic, operational, business, financial and
valuation criteria that we use to evaluate potential acquisitions and believe that these criteria,
including valuation, are in line with market conditions.
The total purchase price paid was allocated to the assets acquired and liabilities assumed as
follows:
|
|
|
|
|
|
|
Upon purchase at |
(in thousands) |
|
June 1, 2004 |
|
Accounts receivable |
|
$ |
1,514 |
|
Prepaid expenses and other current assets |
|
|
989 |
|
Property, equipment and software |
|
|
2,413 |
|
Other assets |
|
|
37 |
|
Deferred income tax asset |
|
|
25 |
|
Accounts payable and accrued expenses |
|
|
(1,473 |
) |
Deferred revenue |
|
|
(1,190 |
) |
Other long-term liability |
|
|
(9 |
) |
Other acquired intangible assets |
|
|
9,580 |
|
Goodwill |
|
|
8,199 |
|
|
Total purchase price paid |
|
$ |
20,085 |
|
|
In April 2004, we purchased from PublicBuy.net LLC an e-procurement software solution and
related assets designed to streamline the purchasing process for public procurement officials, for
$1.3 million in cash, including $66,000 of estimated transaction costs. We allocated $75,000 of
the purchase price to intangible assets (which we amortized over 12 months) and allocated $1.2
million to software. We license this software to third parties as part of our suite of financial
management software offerings.
The accompanying Consolidated Financial Statements include the results of operations of these
acquired businesses and assets for periods subsequent to the respective acquisition dates.
NOTE 8CONTINGENCIES AND COMMITMENTS
LEGAL ISSUES
From time to time during the normal course of business, we are a party to litigation and/or
other claims. At September 30, 2006, none of these matters were expected to have a material impact
on our financial position, results of operations or cash flows. At September 30, 2006 and 2005, we
had legal accruals of $1.5 million and $1.0 million based upon estimates of key legal matters. In
November 2003, we were granted conditional amnesty in relation to a Department of Justice Antitrust
Division investigation involving the child support payment processing industry. We
45
have cooperated, and will continue to cooperate, with the investigation and, therefore, will continue to
incur legal costs. On May 31, 2006, we received a subpoena from the Philadelphia District Office
of the Securities and Exchange Commission requesting documents relating to financial reporting and
personnel issues. We have cooperated, and will continue to cooperate fully, in this investigation.
See Note 16Subsequent Events of the Notes to Consolidated Financial Statements for a shareholder
claim that we became aware of in November 2006.
BANK LINES OF CREDIT
Throughout fiscal 2005, the first quarter of fiscal 2006 and the majority of the second
quarter of fiscal 2006, we had a $15.0 million revolving credit facility that could be used for
letters of credit. This credit facility, which was to mature on March 31, 2007, was collateralized
by first priority liens and security interests in our assets. Interest was based either on the
adjusted LIBOR rate plus 2.25% or on the lenders announced prime rate at our option and was
payable monthly. In addition, we paid a fee of one-quarter of one percent of the average daily
unused portion of this facility. As of September 30, 2005, standby letters of credit totaling $1.3
million were outstanding under this agreement.
The delayed availability of our financial statements for the fiscal year ended September 30, 2005
and the quarter ended December 31, 2005, as well as the loss for the quarter ended September 30,
2005, constituted events of default under the revolving credit agreement. To address these events
of default, we entered into an Amended and Restated Credit and Security Agreement, or the
Agreement, with our lender on March 6, 2006, which replaced the original agreement signed in
January 2003. The terms of the Agreement allows us to obtain letters of credit up to a total of
$15.0 million and also grants the lender a perfected security interest in Cash Collateral in an
amount equal to all issued and to be issued letters of credit. This credit facility is scheduled
to mature on March 31, 2007. As of September 30, 2006, standby letters of credit totaling $8.9 million were outstanding under the Agreement. These letters of credit were issued to secure
performance bonds, insurance and a lease.
OTHER LETTERS OF CREDIT
At September 30, 2006 and 2005, we had $3.0 million and $3.2 million, respectively, of other
letters of credit outstanding that were collateralized by certain securities in our investment
portfolio. These other letters of credit were issued to secure performance bonds and a lease. We
report the investments used to collateralize these letters of credit as Restricted investments on
our Consolidated Balance Sheets.
CREDIT RISK
We maintain our cash in bank deposit accounts which, at times, may exceed federally insured
limits. We have not experienced any losses in such accounts and believe that any associated credit
risk is de minimis.
OPERATING AND CAPITAL LEASE OBLIGATIONS
We lease our principal facilities and certain equipment under non-cancelable operating and
capital leases, which expire at various dates through fiscal year 2011. Future minimum lease
payments for non-cancelable leases with terms of one year or more are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
Capital |
|
|
(in thousands) |
|
leases |
|
leases(1) |
|
Total |
|
Year ending September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
3,458 |
|
|
$ |
42 |
|
|
$ |
3,500 |
|
2008 |
|
|
3,130 |
|
|
|
39 |
|
|
|
3,169 |
|
2009 |
|
|
2,020 |
|
|
|
30 |
|
|
|
2,050 |
|
2010 |
|
|
890 |
|
|
|
12 |
|
|
|
902 |
|
2011 |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
Total minimum lease payments |
|
$ |
9,498 |
|
|
$ |
124 |
|
|
$ |
9,622 |
|
|
|
|
|
(1) |
|
The amounts due in fiscal year 2007 are included in Other current liabilities on our
Consolidated Balance Sheets. |
Certain leases contain provisions for rental options and rent escalations based on scheduled
increases, as well as increases resulting from a rise in certain costs incurred by the lessor.
During the fiscal years ended September 30, 2006, 2005 and 2004, we recorded rent expense of $2.2 million, $2.5 million and $2.7 million, respectively.
46
GUARANTEES
In conjunction with our participation as a subcontractor in a three-year contract for
unemployment insurance-related services, we guaranteed the performance of the prime contractor on
the project. The contract does not establish a limitation to the maximum potential future payments
under the guarantee; however, we estimate that the maximum potential undiscounted cost of the
guarantee is $2.8 million. In accordance with FASB Interpretation No. 45Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, we valued this guarantee based upon the sum of probability-weighted present values of
possible future cash flows. As of September 30, 2006, the remaining liability was $0.2 million,
which is being amortized over the term of the contract. We believe that the probability is remote
that the guarantee provision of this contract will be invoked.
PERFORMANCE BONDS
Under certain contracts, we are required to obtain performance bonds from a licensed surety
and to post the performance bonds with our customers. Fees for obtaining the bonds are expensed
over the life of each bond and are included in Direct Costs. At September 30, 2006, we had $20.7
million of bonds posted with clients. There were no claims pending against any of these bonds.
EMPLOYMENT AGREEMENTS
Effective June 2006, we entered into a one-year employment agreement with Ronald L. Rossetti,
our current Chief Executive Officer. Pursuant to the agreement, Mr. Rossetti is entitled to
receive a base salary of $50,000 per month and a bonus of $50,000 per month. In the event that
certain pre-defined events occur before the end of this one-year agreement, we would be obligated
to compensate Mr. Rossetti these amounts through the remaining term of the one-year agreement. As
of September 30, 2006, the maximum amount that could be paid under this agreement would be $0.8
million.
Effective May 31, 2006, we entered into a Separation Agreement and Release, or the Separation
Agreement, with James R. Weaver, who had served as our Chief Executive Officer, President and
Chairman. Pursuant to the Separation Agreement, we paid Mr. Weaver $975,000 of severance, of which
$700,000 was paid on June 8, 2006 and $275,000 was paid on November 30, 2006. We are also
obligated to provide Mr. Weaver with 18 months of COBRA-covered benefits, as well as pay the
premiums on other non-COBRA covered insurance benefits up to $20,000. The Separation Agreement
also includes a change of control clause, whereby Mr. Weaver would receive $175,000 to $350,000 if
a pre-defined reorganization event were to occur within two years of the effective date of the
Separation Agreement. Finally, the Separation Agreement accelerated and immediately vested all
330,000 of Mr. Weavers unvested options. The Separation Agreement provided that these options and
Mr. Weavers 563,039 previously vested options would expire 30 days after termination. Under the
terms of the Separation Agreement, all options expired as of June 30, 2006.
As of September 30, 2006, three other executives had employment agreements with us which entitled
them to severance payments ranging from 0.6 to 1.5 years of base salary if they are terminated
without cause or if certain events occur relating from a change of control of Tier. At September
30, 2006, we could have paid up to $0.8 million under these agreements if these events had
occurred. In March 2006, we entered into Employment and Security Agreements with four executive
officers and certain other key managers. Under the terms of these agreements, if certain
pre-defined events were to occur as a result of a change in control of our company, the individuals
covered by these agreements would be entitled to severance payments ranging from six to twelve
months of their current base salary. If these events had occurred on September 30, 2006, we would
have been obligated to have paid up to $3.4 million under these agreements.
See Note 16Subsequent Events of the Notes to Consolidated Financial Statements for details
regarding an employment agreement entered into with our Chief Financial Officer in December 2006.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with each of our directors and a number of
key executives. These agreements provide such persons with indemnification to the maximum extent
permitted by our Articles of Incorporation or Bylaws or by the Delaware General Corporation Law,
against all expenses, claims, damages, judgments and other amounts (including amounts paid in
settlement) for which such persons become liable as a result of acting in any capacity on our
behalf, subject to certain limitations. We are not able to estimate our maximum exposure under
these agreements.
47
FORWARD LOSSES
Throughout the term of our customer contracts, we forecast revenues and expenses over the
total life of the contract. In accordance with generally accepted accounting principles, if we
determine that the total expenses over the entire term of the contract will probably exceed the
total forecasted revenues over the term of the contract, we record an accrual in the current period
equal to the total forecasted losses over the term of the contract, less losses recognized to date,
if any. As of September 30, 2006 and 2005, accruals totaling $1.0 million and $0.3 million,
respectively, were included in Other accrued liabilities on our Consolidated Balance Sheets.
Changes in the accrued forward losses are reflected in Direct costs on our Consolidated Statements
of Operations.
NOTE 9SHAREHOLDERS EQUITY
In fiscal year 2003, the remaining 880,000 shares of Class A common stock, authorized in
1997, were converted to 880,000 shares of Class B common stock. In July 2005, we changed our state
of incorporation from California to Delaware and converted all shares of our Class B common stock
to $0.01 par value common stock. Accordingly, as of September 30, 2006 and 2005, no shares of
Class A or Class B common stock were authorized or outstanding. As of September 30, 2006 and 2005,
a total of 44,259,762 shares of common stock were authorized.
COMMON STOCK REPURCHASE PROGRAM
In October 1998, our Board of Directors authorized the repurchase of up to one million shares
of Class B common stock. The purchases were to be made in the open market or in privately
negotiated transactions at the discretion of our management, depending on financial and market
conditions or as otherwise provided by the Securities and Exchange Commission and the Nasdaq rules
and regulations. In April 2003, our Board increased the number of shares authorized for repurchase
to two million shares. As of September 30, 2005, we repurchased 884,400 shares of common stock for
$8.7 million. All such repurchases of our common stock were made prior to fiscal 2004. All stock
purchased under the common stock repurchase program is reported as Treasury stock on our
Consolidated Balance Sheets.
STOCKHOLDERS
RIGHTS AGREEMENT
On
January 10, 2006, our Board of Directors adopted a
stockholders Rights Agreement and declared a
dividend distribution of one Right for each outstanding share of our Common Stock to shareholders
of record at the close of business on January 23, 2006. Upon the occurrence of certain events,
each Right entitles the registered holder to purchase one one-thousandth of a share of our
Series A Junior Participating Preferred Stock, $0.01 par value per share at a purchase price of
$50.00 in cash, subject to adjustment. The stockholders Rights
Agreement was designed to enable
all of our shareholders to realize the full value of their investment in our company and to provide
reasonable assurance that all of our shareholders receive fair and equal treatment in the event
that an unsolicited attempt is made to acquire Tier.
EQUITY INCENTIVE PLAN
In February 1997, we adopted the 1996 Equity Incentive Plan, or the 1996 Plan, under which
the Board of Directors could issue incentive stock options for Class B stock. In June 2005, the
1996 Plan was replaced by the Amended and Restated 2004 Stock Incentive Plan, or the 2004 Plan.
Under the 2004 Plan, the Board of Directors may issue options, stock appreciation rights,
restricted stock and other stock-based awards (each an award) to our employees, officers,
directors, consultants and advisors. The Board, or a committee designated by the Board, has the
authority to grant awards and to adopt, amend and repeal such administrative rules, guidelines and
practices relating to the 2004 Plan. Awards may be made under the 2004 Plan for up to 1,000,000
shares of common stock, plus up to 3,486,788 shares of common stock subject to awards outstanding
as of the date the 2004 Plan was approved, under our 1996 Plan that have expired, or been
terminated, surrendered or canceled without having been fully exercised. Participants in the plan
may be granted awards for up to 300,000 shares in any given year. Under the plan, options are
granted with an exercise price of no less than fair market value and a term of up to ten years.
Options for a total of 2,236,554 shares of common stock were outstanding at September 30, 2006.
48
A summary of employee stock options outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of shares |
|
Weighted-average |
|
|
(in thousands) |
|
exercise price |
|
Options outstanding at September 30, 2003 |
|
|
2,717 |
|
|
$ |
11.68 |
|
Options granted |
|
|
782 |
|
|
$ |
8.29 |
|
Options cancelled |
|
|
(702 |
) |
|
$ |
12.95 |
|
Options exercised |
|
|
(350 |
) |
|
$ |
6.28 |
|
|
|
|
|
|
Options outstanding at September 30, 2004 |
|
|
2,447 |
|
|
$ |
11.00 |
|
Options granted |
|
|
913 |
|
|
$ |
8.56 |
|
Options cancelled |
|
|
(382 |
) |
|
$ |
10.44 |
|
Options exercised |
|
|
(10 |
) |
|
$ |
5.72 |
|
|
|
|
|
|
Options outstanding at September 30, 2005 |
|
|
2,968 |
|
|
$ |
10.34 |
|
Options granted |
|
|
988 |
|
|
$ |
6.14 |
|
Options cancelled |
|
|
(1,710 |
) |
|
$ |
7.07 |
|
Options exercised |
|
|
(9 |
) |
|
$ |
10.41 |
|
|
|
|
|
|
Options outstanding at September 30, 2006 |
|
|
2,237 |
|
|
$ |
8.45 |
|
|
|
|
|
|
The weighted-average fair value of options granted to employees during the years ended
September 30, 2006, 2005 and 2004 was $2.95, $4.14 and $5.24 per share, respectively. At September
30, 2006, 2005 and 2004, there were outstanding options to purchase 1.1 million, 1.8 million and
1.5 million shares of common stock exercisable at weighted-average exercise prices of $9.46, $10.93
and $11.37, respectively. At September 30, 2006, a total of 1.9 million shares of common stock
were available for grant. The weighted average remaining life of outstanding options at September
30, 2006 was 7.88 years.
The following table summarizes information about stock options outstanding at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
|
|
|
|
Number |
|
Weighted-average |
|
|
|
|
|
Number |
|
|
Range of exercise prices |
|
Outstanding |
|
remaining |
|
Weighted-average |
|
exercisable |
|
Weighted-average |
|
|
Low |
|
High |
|
(in thousands) |
|
contractual life |
|
exercise price |
|
(in thousands) |
|
exercise price |
|
|
|
$ |
3.25 |
|
|
$ |
5.25 |
|
|
|
31 |
|
|
0.70 years |
|
$ |
4.59 |
|
|
|
31 |
|
|
$ |
4.59 |
|
|
|
$ |
5.50 |
|
|
$ |
5.50 |
|
|
|
322 |
|
|
9.40 years |
|
$ |
5.50 |
|
|
|
247 |
|
|
$ |
5.50 |
|
|
|
$ |
5.88 |
|
|
$ |
5.91 |
|
|
|
13 |
|
|
7.23 years |
|
$ |
5.90 |
|
|
|
5 |
|
|
$ |
5.88 |
|
|
|
$ |
5.95 |
|
|
$ |
5.95 |
|
|
|
547 |
|
|
9.90 years |
|
$ |
5.95 |
|
|
|
|
|
|
$ |
|
|
|
|
$ |
6.00 |
|
|
$ |
7.81 |
|
|
|
323 |
|
|
5.63 years |
|
$ |
7.28 |
|
|
|
211 |
|
|
$ |
7.16 |
|
|
|
$ |
7.85 |
|
|
$ |
8.30 |
|
|
|
243 |
|
|
8.55 years |
|
$ |
8.08 |
|
|
|
156 |
|
|
$ |
8.20 |
|
|
|
$ |
8.47 |
|
|
$ |
8.62 |
|
|
|
263 |
|
|
7.98 years |
|
$ |
8.59 |
|
|
|
106 |
|
|
$ |
8.61 |
|
|
|
$ |
8.63 |
|
|
$ |
16.00 |
|
|
|
226 |
|
|
7.39 years |
|
$ |
10.56 |
|
|
|
121 |
|
|
$ |
11.84 |
|
|
|
$ |
16.04 |
|
|
$ |
19.56 |
|
|
|
259 |
|
|
5.19 years |
|
$ |
17.35 |
|
|
|
191 |
|
|
$ |
17.51 |
|
|
|
$ |
20.70 |
|
|
$ |
20.70 |
|
|
|
10 |
|
|
5.26 years |
|
$ |
20.70 |
|
|
|
8 |
|
|
$ |
20.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.25 |
|
|
$ |
20.70 |
|
|
|
2,237 |
|
|
7.88 years |
|
$ |
8.45 |
|
|
|
1,076 |
|
|
$ |
9.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE STOCK PURCHASE PLAN
In October 1997, we adopted the Employee Stock Purchase Plan, or ESPP, a non-compensatory
plan that allowed eligible employees to purchase shares of our Class B common stock. Under the
ESPP, employees purchased shares semi-annually at a price equal to 85% of the lesser of the fair
market value on either the first day or last day of the applicable purchase period. During fiscal
years September 30, 2005 and 2004, we issued 33,000 and 30,000 shares under the ESPP for $0.2
million and $0.2 million, respectively. We terminated the ESPP effective June 1, 2005.
NOTE 10SHARE-BASED PAYMENT
In
June 2005, our shareholders approved the Amended and Restated
2004 Stock Incentive Plan,
or the Plan, which provides our Board of Directors discretion with creating employee equity
incentives, including incentive and non-statutory stock options. Generally, these options vest as
to 20% of the underlying shares each year, beginning on the first anniversary of the grant date,
and expire in ten years. At September 30, 2006, there were 1,869,481 shares of common stock
reserved for future issuance under the Plan.
On October 1, 2005, we adopted the provisions of FASB Statement No. 123RShare-Based Payment, a
revision of FASB Statement No. 123Accounting for Stock-Based Compensation, or SFAS 123R. This
standard requires companies to recognize the expense related to the fair value of their stock-based
compensation awards. We
elected to use the modified prospective approach to transition to SFAS 123R, as allowed under the
statement; therefore, we have
49
not restated our financial results for prior periods. Under this
transition method, stock-based compensation expense for the fiscal year ended September 30, 2006
includes compensation expense for all stock-based compensation awards granted prior to, but not yet
vested as of September 30, 2005, based on the fair value on the grant date estimated in accordance
with the original provisions of SFAS 123. Stock-based compensation expense for all stock-based
compensation awards granted after October 1, 2005 was based on the fair value on the grant date,
estimated in accordance with the provisions of SFAS 123R using the Black-Scholes model. We
recognize compensation expense for stock option awards on a ratable basis over the requisite
service period of the award. For the fiscal year ended September 30, 2006, we recognized $2.0
million in stock-based compensation expense as required under SFAS 123R.
Prior to adopting SFAS 123R, we applied the recognition and measurement principles of Accounting
Principles Board Opinion No. 25Accounting for Stock-Based Compensation and provided the pro forma
disclosures previously required by SFAS 123. Prior to the adoption of SFAS 123R, we did not
include compensation expense for employee stock options in net income (loss), since all stock
options granted under those plans had an exercise price equal to the market value of the common
stock on the date of the grant. The following table illustrates the effects on net income (loss)
after tax and earnings per common share as if we had applied the fair value recognition provisions
of SFAS 123 to stock-based compensation during fiscal years ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended September 30, |
(in thousands, except per share data) |
|
2005 |
|
2004 |
|
Net income (loss) |
|
$ |
1,126 |
|
|
$ |
(1,503 |
) |
Add: Stock-based compensation expense
included in reported net loss, net of
related tax effects |
|
|
|
|
|
|
552 |
|
Less: Total stock-based compensation
expense, determined under fair value-based
method for all awards, net of tax effect |
|
|
2,527 |
|
|
|
2,440 |
|
|
Net loss, pro forma |
|
$ |
(1,401 |
) |
|
$ |
(3,391 |
) |
Earnings (loss) per basic and diluted share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.06 |
|
|
$ |
(0.08 |
) |
Pro forma |
|
$ |
(0.07 |
) |
|
$ |
(0.18 |
) |
The following tables shows the weighted average assumptions we used to calculate fair value
of share-based options using the Black-Scholes model, as well as the weighted-average fair value of
options granted and the weighted-average intrinsic value of options exercised.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
Weighted-average assumptions used in Black-Scholes Model: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected period that options will be outstanding (in years) |
|
|
5.00 |
|
|
|
4.55 |
|
|
|
5.68 |
|
Interest rate (based on 3-year U.S. Treasury Yields at time of grant) |
|
|
4.87 |
% |
|
|
3.76 |
% |
|
|
3.54 |
% |
Volatility |
|
|
48.21 |
% |
|
|
54.63 |
% |
|
|
69.88 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted |
|
$ |
2.95 |
|
|
$ |
4.11 |
|
|
$ |
5.21 |
|
Weighted-average intrinsic value of options exercised (in thousands) |
|
$ |
7 |
|
|
$ |
33 |
|
|
$ |
955 |
|
Expected volatilities are based on both the implied and historical volatility of our stock. In
addition, we used historical data to estimate option exercise and employee termination within the
valuation model.
Stock option activity for the fiscal year ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
Shares |
|
Exercise |
|
Remaining |
|
Aggregate |
(in thousands, except per share data) |
|
under option |
|
price |
|
contractual term |
|
intrinsic value |
|
Options outstanding at October 1, 2005 |
|
|
2,968 |
|
|
$ |
10.34 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
988 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9 |
) |
|
|
7.07 |
|
|
|
|
|
|
|
|
|
Forfeitures or expirations |
|
|
(1,710 |
) |
|
|
10.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2006 |
|
|
2,237 |
|
|
$ |
8.45 |
|
|
7.88 years |
|
$ |
971 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2006 |
|
|
1,076 |
|
|
$ |
9.46 |
|
|
6.59 years |
|
$ |
402 |
|
|
|
|
|
|
|
|
|
|
During the third quarter of fiscal 2006 we entered into a Separation Agreement with James R.
Weaver, our former Chief Executive Officer, terminating his employment with us effective May 31,
2006. Pursuant to that agreement, all of Mr. Weavers unvested shares became fully vested as of
May 31, 2006 and all of his options expired June 30, 2006. The accelerated vesting resulted in a
modification of the previous awards and the options had a weighted-average exercise price of $6.20.
50
As of September 30, 2006, a total of $2.6 million of unrecognized compensation cost related to
stock options, net of estimated forfeitures, was expected to be recognized over a 2.2 year
weighted-average period.
NOTE 11RELATED PARTY TRANSACTIONS
NOTES AND INTEREST RECEIVABLE
At September 30, 2006 and 2005, we had $4.3 million and $4.0 million, respectively, of
full-recourse notes and interest receivable from a former chairman of the board and chief executive
officer. These notes mature in 2007 and bear interest rates ranging from 6.54% to 7.18%. This
individual pledged 387,490 shares of common stock, with a market value of $2.6 million at September
30, 2006. Approximately $2.2 million of these full-recourse notes were issued in connection with
the exercise of options to purchase shares of our common stock.
At September 30, 2004, we also had a $75,000 full-recourse note, bearing 6.13% interest,
outstanding from the then-current Chairman of the Board and Chief Executive Officer. The note
provided that it would either become due in September 2005 or it would be forgiven upon his
relocation to the Boston, Massachusetts area before the due date. Subsequently, the Compensation
Committee of the Board of Directors forgave the loan in fiscal 2005 because it concluded that the
intention of the forgiveness provision had been met when our headquarters and the Chairman of the
Board were located in the same metropolitan area. Until the note was forgiven, the Chairman of the
Board and Chief Executive Officer made regularly scheduled interest payments on the outstanding
balance.
The notes with both of these former officers were entered into prior to the effective date of the
Sarbanes-Oxley Act of 2002. We have not entered into any notes with any directors or officers
following the effective date of that act.
These notes and the associated accrued interest are reported as Notes receivable from related
parties in the shareholders equity section of our Consolidated Balance Sheets. Interest earned on
these notes is included in Common stock and paid-in-capital in the shareholders equity section of
our Consolidated Balance Sheets.
OTHER RELATED-PARTY TRANSACTIONS
In 2006 and 2005, one of our subsidiaries purchased $0.5 million and $0.2 million,
respectively, of software licenses, maintenance and related services from Nuance Communications,
Inc., or Nuance, a company affiliated with one of the members of our Board of Directors.
We own a 46.96% interest in CPAS Systems, Inc., or CPAS, a Canadian entity that we account for
using the equity method. During 2006, we recognized $52,000 in revenue for services rendered in
connection with a pension project. In addition, during 2006 we purchased $0.2 million of software
licenses from CPAS relating to the same project.
NOTE 12SEGMENT INFORMATION
We evaluate the profitability of our EPP, GBPO and PSSI operating segments based on revenues
and direct costs, while other operating costs are evaluated on a geographical basis. The following
table presents financial information for the three reportable segments, including the elimination
of the revenues and costs associated with the purchase and installation of a call center from one
of our subsidiaries, which have been eliminated and are disclosed in the Eliminations column below:
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
EPP(1) |
|
GBPO(2) |
|
PSSI(3) |
|
Eliminations |
|
Total |
|
Year ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
78,427 |
|
|
$ |
45,478 |
|
|
$ |
44,826 |
|
|
$ |
|
|
|
$ |
168,731 |
|
Direct costs |
|
$ |
59,966 |
|
|
$ |
36,491 |
|
|
$ |
29,883 |
|
|
$ |
(495 |
) |
|
$ |
125,845 |
|
|
Year ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
56,452 |
|
|
$ |
45,771 |
|
|
$ |
53,451 |
|
|
$ |
(5,073 |
) |
|
$ |
150,601 |
|
Direct costs |
|
$ |
42,199 |
|
|
$ |
32,293 |
|
|
$ |
33,271 |
|
|
$ |
(3,949 |
) |
|
$ |
103,814 |
|
|
Year ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
40,669 |
|
|
$ |
45,205 |
|
|
$ |
41,903 |
|
|
$ |
|
|
|
$ |
127,777 |
|
Direct costs |
|
$ |
28,448 |
|
|
$ |
28,774 |
|
|
$ |
27,538 |
|
|
$ |
(361 |
) |
|
$ |
84,399 |
|
|
|
|
(1) |
|
During fiscal 2006, 2005 and 2004, the revenues from one customer represented 39.7%, 36.4% and 38.5%, respectively, of EPP
revenues. |
|
(2) |
|
During fiscal 2006 and 2005, the revenues from one customer represented 37.8% and 21.0%, respectively, of the revenues from the GBPO
segment. During fiscal 2006, 2005 and 2004, another customer produced 16.7%, 16.2% and 16.0%, respectively, of GBPO revenues. During fiscal 2004,
three other customers each contributed over 10% of GBPO revenues. |
|
(3) |
|
During fiscal 2006, 2005 and 2004, the revenues from one customer represented 25.3%, 24.8% and 29.7%, respectively, of PSSI revenues.
During fiscal 2006 another customer produced 13.8% of the PSSI revenues. During fiscal 2004 another customer provided 18.7% of PSSI revenues. |
Many of our assets are either corporate assets or are shared by multiple segments. As such,
we do not separately account for total assets by business segment.
NOTE 13INCOME TAXES
The components of deferred tax liabilities and assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangibles |
|
$ |
2,992 |
|
|
$ |
3,685 |
|
Internally developed software |
|
|
1,650 |
|
|
|
1,190 |
|
Other deferred tax liabilities |
|
|
569 |
|
|
|
597 |
|
Investment in subsidiary |
|
|
105 |
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
5,316 |
|
|
|
5,472 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
3,309 |
|
|
|
2,808 |
|
Deferred income |
|
|
6 |
|
|
|
4 |
|
Depreciation |
|
|
526 |
|
|
|
842 |
|
Accounts receivable allowance |
|
|
313 |
|
|
|
203 |
|
Investment in subsidiaries |
|
|
|
|
|
|
101 |
|
Other deferred tax assets |
|
|
924 |
|
|
|
596 |
|
Net operating loss carryforward |
|
|
27,669 |
|
|
|
26,063 |
|
Foreign tax credit carryforward |
|
|
566 |
|
|
|
608 |
|
Valuation allowance |
|
|
(27,997 |
) |
|
|
(25,753 |
) |
|
Total deferred tax assets |
|
|
5,316 |
|
|
$ |
5,472 |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
|
|
|
$ |
|
|
|
At September 30, 2006, we had $0.6 million of excess foreign tax carryforwards for the
purpose of offsetting future U.S. federal income tax. Such foreign tax carryforwards will begin to
expire in 2010. The benefit from the foreign
tax carryforwards may be limited in certain circumstances. We believe sufficient uncertainty
exists regarding the realizability of the foreign tax carryforwards such that a full valuation
allowance is required.
At September, 30, 2006, we had $73.0 million of federal net operating loss carryforwards, which
expire beginning in fiscal 2018. At September 30, 2006, we had $59.0 million of state net
operating loss carryforwards, which begin to expire in fiscal 2007. Of these amounts, $48.6
million of federal net operating loss carryforwards and $29.6 million of state net operating loss
carryforwards were acquired in the acquisition of OPC. Our ability to utilize the acquired federal
net operating loss carryforward is limited to $3,350,000 per year pursuant to Internal Revenue Code
Section 382, which imposes an annual limitation on the utilization of net operating loss
carryforwards following ownership changes.
52
At September 30, 2006, we maintained a full valuation allowance against the net deferred tax assets
due to the uncertainty regarding their utilization. At September 30, 2006, a total of $20.1
million and $2.8 million of the valuation allowance relates to deferred tax assets for which any
subsequently recognized tax benefits will reduce goodwill or increase common stock, respectively,
while the remaining $5.1 million benefit from the valuation allowance will be used to offset future
tax obligations from our continuing operations.
Our fiscal 2002 tax return included a $22.5 million loss on disposal of Australian operations for
which no tax benefit has been recorded. Any tax benefit recorded relating to this will be recorded
in discontinued operations.
Significant components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
Current income tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
456 |
|
|
$ |
37 |
|
|
$ |
|
|
State |
|
|
45 |
|
|
|
90 |
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
501 |
|
|
$ |
127 |
|
|
$ |
|
|
|
There were no deferred income tax provisions or benefits during the years ended September 30,
2006, 2005 or 2004.
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
U.S statutory federal tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State taxes, net of federal tax benefit |
|
|
3.5 |
% |
|
|
12.6 |
% |
|
|
(111.0 |
)% |
Tax exempt interest income |
|
|
0.3 |
% |
|
|
(4.6 |
)% |
|
|
307.8 |
% |
Tax effect of foreign operations |
|
|
|
|
|
|
11.8 |
% |
|
|
|
|
Meals and entertainment |
|
|
(1.5 |
)% |
|
|
7.5 |
% |
|
|
(145.6 |
)% |
Valuation allowance |
|
|
(32.1 |
)% |
|
|
(59.3 |
)% |
|
|
(71.0 |
)% |
Keyman life insurance |
|
|
|
|
|
|
|
|
|
|
(11.1 |
)% |
Stock-based compensation |
|
|
(4.2 |
)% |
|
|
|
|
|
|
|
|
Other |
|
|
(5.6 |
)% |
|
|
8.1 |
% |
|
|
(3.1 |
)% |
|
Effective tax rate |
|
|
(5.6 |
)% |
|
|
10.1 |
% |
|
|
|
|
|
NOTE 14RESTRUCTURING
During fiscal year 2003, we renewed our focus on serving the government sector, while exiting
unprofitable or marginal business operations. Goodwill and asset impairment charges were incurred
during fiscal year 2004, of which $0.4 million was included in Restructuring charges and $0.8
million was included in Loss from discontinued operations in our Consolidated Statements of
Operations.
During 2004, we incurred facility closure and severance costs associated with the relocation of our
administrative functions from Walnut Creek, California to Reston, Virginia. During the fourth
quarter of fiscal year 2005, we also moved our Financial Institution Data Match Program offices
from New Jersey to Michigan. The severance and office closure costs associated with both of these
relocations are shown as Restructuring charges in our Consolidated Statements of Operations.
Finally, as a result of the acquisition of OPC in July 2002, we assumed certain liabilities for
restructuring costs that OPC had previously recognized with the involuntary termination of
employees and the consolidation of facilities.
The following table summarizes restructuring charges we incurred during fiscal years 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, |
(in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
Asset impairment charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
571 |
|
Office closure costs (net of sublease income) |
|
|
32 |
|
|
|
15 |
|
|
|
1,076 |
|
Severance costs |
|
|
3 |
|
|
|
31 |
|
|
|
1,846 |
|
|
Total restructuring charges |
|
$ |
35 |
|
|
$ |
46 |
|
|
$ |
3,493 |
|
|
53
The following table summarizes restructuring liabilities associated with continuing
operations for fiscal years 2004 through 2006 (See Note 15Discontinued Operations of the Notes to
Consolidated Financial Statements for additional restructuring liabilities associated with our
discontinued operations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities |
(in thousands) |
|
Severance |
|
closures |
|
Total |
|
Balance at September 30, 2004 |
|
$ |
1,103 |
|
|
$ |
816 |
|
|
$ |
1,919 |
|
Additions |
|
|
18 |
|
|
|
|
|
|
|
18 |
|
Cash payments |
|
|
(791 |
) |
|
|
(206 |
) |
|
|
(997 |
) |
|
|
Balance at September 30, 2005 |
|
$ |
330 |
|
|
$ |
610 |
|
|
$ |
940 |
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(330 |
) |
|
|
(209 |
) |
|
|
(539 |
) |
|
|
Balance at September 30, 2006 |
|
$ |
|
|
|
$ |
401 |
|
|
$ |
401 |
|
|
As shown in the preceding table, we had $0.4 million and $0.9 million of restructuring
liabilities associated with our continuing operations at September 30, 2006 and 2005, respectively.
At September 30, 2006 and 2005, a total of $0.2 million and $0.4 million, respectively, was
included in Other current liabilities and the remainder was included in Other accrued liabilities
in the Consolidated Balance Sheets. We expect to pay $0.2 million and $0.2 million of these
liabilities during fiscal years 2007 and 2008, respectively.
NOTE 15DISCONTINUED OPERATIONS
In 2003, we restructured and abandoned our U.S. Commercial and United Kingdom segments.
Accordingly, the financial position, results of operations and cash flows for these segments have
been reported as discontinued operations for each period presented. During the fiscal year ended
September 30, 2004, we reported $1.8 million of revenue from discontinued operations and a loss
from discontinued operations of $1.4 million. There were no additional revenues or losses from
discontinued operations during fiscal year 2006 and 2005. At September 30, 2006 and 2005, Other
current liabilities on our Consolidated Balance Sheet included zero and $21,000 of net current
liabilities from discontinued operations.
NOTE 16SUBSEQUENT EVENTS
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
The following table summarizes the dates that we filed certain key reports with the
Securities and Exchange Commission:
|
|
|
|
|
Report name |
|
Period covered by report |
|
Date filed |
|
Annual Report on Form 10-K/A (Amendment 3)
|
|
Fiscal year ended September 30, 2004
|
|
October 25, 2006 |
|
|
|
|
|
Annual Report on Form 10-K
|
|
Fiscal year ended September 30, 2005
|
|
October 27, 2006 |
|
|
|
|
|
Quarterly Report on Form 10-Q/A
|
|
Quarter ended December 31, 2005
|
|
November 13, 2006 |
|
|
|
|
|
Quarterly Report on Form 10-Q
|
|
Quarter ended March 31, 2006
|
|
November 14, 2006 |
|
|
|
|
|
Quarterly Report on Form 10-Q
|
|
Quarter ended June 30, 2006
|
|
November 22, 2006 |
CLAIMS
On November 20, 2006, we were served with a class action lawsuit on behalf of purchasers of
our common stock from November 29, 2001 to October 25, 2006. The suit alleges that Tier and
certain of our former and/or current officers violated the Securities Exchange Act of 1934, but did
not identify the damages being sought. This case is pending in the United States District Court
for the Eastern District of Virginia. We are not able to estimate the probability or level of
exposure associated with this complaint.
SYSTEM OUTAGE
Between October 2, 2006 and October 5, 2006, an outage occurred with one of the systems we
use to serve one of our large customers. Because of this outage, we may incur penalties under the
provisions of the related contract. We are not able to determine the amount of penalties, if any,
that will be assessed; however, we preliminarily estimate that the penalties could range from zero
to $0.2 million.
54
CHANGES TO 401(k) PLAN
We announced that effective January 1, 2007 we will adopt a Safe Harbor non-elective employer
contribution for our 401(k) Plan. The safe harbor contribution of three percent of plan-eligible
compensation will be made to all plan-eligible employees. Our contributions to the 401(k) Plan
will become vested at the time we make the contributions. We believe that our contribution to this
plan will total approximately $1.0 million in fiscal year 2007.
MATERIAL CONTRACTS
On December 11, 2006, we entered into an employment agreement with David E. Fountain, Senior
Vice President and Chief Financial Officer. The agreement has an initial two-year term and will be
renewed automatically for successive one-year periods unless terminated earlier. Under the terms of
this employment agreement, Mr. Fountain shall be entitled to an initial base salary of $325,000,
and to participate in any of our incentive compensation plans, programs and/or arrangements
applicable to senior-level executives, including the Executive Incentive Compensation Plan. The
minimum annual incentive opportunity for Mr. Fountain shall not be less than 50% of that years
base salary, assuming satisfaction of performance goals. In addition, Mr. Fountain is eligible to
participate in any equity-based plans, programs or arrangements applicable to senior-level
executives. In the event that Mr. Fountains employment is terminated as a result of death,
certain instances of disability or without cause, Mr. Fountain will be entitled to, among other
things, one years salary and one years bonus (based on his average annual bonus over the previous
three years), a prorated bonus for the year of termination and one-year vesting of options (or, in
the case of termination without cause, vesting of options through the remaining term of the
agreement, whichever is greater). In the event Mr. Fountains employment is terminated by us or by
Mr. Fountain for good reason following a change of control of the Company, Mr. Fountain will be
entitled to receive, among other things, three times his base salary and three times his average
annual bonus over the previous three years, a prorated bonus for the year of termination, vesting
of options and 36 months of health insurance coverage. In conjunction with this agreement, on
December 11, 2006, we also entered into a Proprietary and Confidential Information, Developments,
Noncompetition and Nonsolicitation Agreement, which, in part, prohibits Mr. Fountain from competing
with us for a period of 18 months following his separation from Tier.
In December 2006, we awarded $180,500 of discretionary bonuses to 24 key employees, including a
$25,000 discretionary bonus to Michael A. Lawler, Senior Vice President, Electronic Payment
Processing. We awarded these bonuses to recognize the achievements of these individuals during
fiscal 2006.
55
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain unaudited consolidated quarterly statements of
operations data for each of the eight fiscal quarters ended September 30, 2006. In our opinion,
this information has been prepared on the same basis as the audited Consolidated Financial
Statements contained herein. This information should be read in conjunction with our Consolidated
Financial Statements and the notes thereto appearing elsewhere in this report. Our operating
results for any one quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 fiscal quarters |
|
2005 fiscal quarters |
(In thousands, except per share data) |
|
Fourth |
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
Consolidated statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
35,106 |
|
|
$ |
56,269 |
|
|
$ |
37,474 |
|
|
$ |
39,882 |
|
|
$ |
34,114 |
|
|
$ |
49,331 |
|
|
$ |
35,396 |
|
|
$ |
31,760 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
|
25,220 |
|
|
|
42,033 |
|
|
|
30,696 |
|
|
|
27,896 |
|
|
|
23,499 |
|
|
|
35,505 |
|
|
|
22,888 |
|
|
|
21,922 |
|
General and administrative |
|
|
11,010 |
|
|
|
11,748 |
|
|
|
8,859 |
|
|
|
6,923 |
|
|
|
8,568 |
|
|
|
7,209 |
|
|
|
6,639 |
|
|
|
6,542 |
|
Selling and marketing |
|
|
2,531 |
|
|
|
3,623 |
|
|
|
2,740 |
|
|
|
2,580 |
|
|
|
2,821 |
|
|
|
3,161 |
|
|
|
2,689 |
|
|
|
2,668 |
|
Depreciation and amortization |
|
|
1,307 |
|
|
|
1,306 |
|
|
|
1,325 |
|
|
|
1,319 |
|
|
|
1,447 |
|
|
|
1,502 |
|
|
|
1,568 |
|
|
|
1,548 |
|
Restructuring and other charges |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(4,997 |
) |
|
|
(2,441 |
) |
|
|
(6,146 |
) |
|
|
1,164 |
|
|
|
(2,267 |
) |
|
|
1,954 |
|
|
|
1,612 |
|
|
|
(920 |
) |
Total other income (loss) |
|
|
781 |
|
|
|
894 |
|
|
|
1,145 |
|
|
|
650 |
|
|
|
692 |
|
|
|
(250 |
) |
|
|
232 |
|
|
|
200 |
|
|
(Loss) income from operations, net of
income taxes |
|
|
(4,216 |
) |
|
|
(1,547 |
) |
|
|
(5,001 |
) |
|
|
1,814 |
|
|
|
(1,575 |
) |
|
|
1,704 |
|
|
|
1,844 |
|
|
|
(720 |
) |
Income tax provision (benefit) |
|
|
456 |
|
|
|
40 |
|
|
|
|
|
|
|
5 |
|
|
|
(115 |
) |
|
|
203 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(4,672 |
) |
|
$ |
(1,587 |
) |
|
$ |
(5,001 |
) |
|
$ |
1,809 |
|
|
$ |
(1,460 |
) |
|
$ |
1,501 |
|
|
$ |
1,805 |
|
|
$ |
(720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares issued and outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,499 |
|
|
|
19,499 |
|
|
|
19,493 |
|
|
|
19,490 |
|
|
|
19,490 |
|
|
|
19,477 |
|
|
|
19,464 |
|
|
|
19,447 |
|
Diluted |
|
|
19,499 |
|
|
|
19,499 |
|
|
|
19,493 |
|
|
|
19,627 |
|
|
|
19,490 |
|
|
|
19,578 |
|
|
|
19,539 |
|
|
|
19,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(2.72 |
)% |
|
|
(0.91 |
)% |
|
|
(2.82 |
)% |
|
|
1.01 |
% |
|
|
(0.83 |
)% |
|
|
0.85 |
% |
|
|
1.04 |
% |
|
|
(0.42 |
)% |
Return on average shareholders equity |
|
|
(3.43 |
)% |
|
|
(1.14 |
)% |
|
|
(3.53 |
)% |
|
|
1.27 |
% |
|
|
(1.03 |
)% |
|
|
1.06 |
% |
|
|
1.29 |
% |
|
|
(0.52 |
)% |
Total ending equity to total ending assets |
|
|
79.16 |
% |
|
|
79.45 |
% |
|
|
79.64 |
% |
|
|
79.71 |
% |
|
|
80.08 |
% |
|
|
80.98 |
% |
|
|
80.02 |
% |
|
|
80.52 |
% |
Total average equity to total average assets |
|
|
79.30 |
% |
|
|
79.55 |
% |
|
|
79.68 |
% |
|
|
79.89 |
% |
|
|
80.53 |
% |
|
|
80.50 |
% |
|
|
80.26 |
% |
|
|
80.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share of common stock data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1) |
|
$ |
(0.24 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.26 |
) |
|
$ |
0.09 |
|
|
$ |
(0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.09 |
|
|
$ |
(0.04 |
) |
Diluted(1) |
|
$ |
(0.24 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.26 |
) |
|
$ |
0.09 |
|
|
$ |
(0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.09 |
|
|
$ |
(0.04 |
) |
Book value |
|
$ |
6.88 |
|
|
$ |
7.08 |
|
|
$ |
7.14 |
|
|
$ |
7.33 |
|
|
$ |
7.26 |
|
|
$ |
7.29 |
|
|
$ |
7.21 |
|
|
$ |
7.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
171,659 |
|
|
$ |
174,269 |
|
|
$ |
177,573 |
|
|
$ |
178,560 |
|
|
$ |
176,439 |
|
|
$ |
176,037 |
|
|
$ |
174,316 |
|
|
$ |
172,337 |
|
Total liabilities |
|
$ |
35,528 |
|
|
$ |
35,646 |
|
|
$ |
36,089 |
|
|
$ |
35,903 |
|
|
$ |
34,352 |
|
|
$ |
34,330 |
|
|
$ |
34,403 |
|
|
$ |
32,967 |
|
Total shareholders equity |
|
$ |
136,131 |
|
|
$ |
138,623 |
|
|
$ |
141,484 |
|
|
$ |
142,657 |
|
|
$ |
142,087 |
|
|
$ |
141,707 |
|
|
$ |
139,913 |
|
|
$ |
139,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
7.05 |
|
|
$ |
8.70 |
|
|
$ |
8.08 |
|
|
$ |
8.50 |
|
|
$ |
9.67 |
|
|
$ |
9.82 |
|
|
$ |
9.73 |
|
|
$ |
10.00 |
|
Low |
|
$ |
5.25 |
|
|
$ |
5.67 |
|
|
$ |
7.34 |
|
|
$ |
6.93 |
|
|
$ |
7.51 |
|
|
$ |
6.85 |
|
|
$ |
6.45 |
|
|
$ |
7.98 |
|
|
|
|
(1) |
|
The sum of quarterly per share amounts may not equal annual per share amounts as the quarterly calculations are based on varying numbers of shares of common
stock. |
56
SCHEDULE II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
beginning of |
|
Additions/ |
|
|
|
|
|
end of |
(in thousands) |
|
period |
|
(reductions) |
|
Write-offs |
|
period |
|
Year ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables |
|
$ |
632 |
|
|
$ |
809 |
|
|
$ |
(404 |
) |
|
$ |
1,037 |
|
Allowance for NSF and mispost receivables |
|
|
2,007 |
|
|
|
211 |
|
|
|
(296 |
) |
|
|
1,922 |
|
Deferred tax asset valuation allowance |
|
|
25,754 |
|
|
|
2,243 |
|
|
|
|
|
|
|
27,997 |
|
Inventory allowance |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful receivables |
|
|
679 |
|
|
|
345 |
|
|
|
(392 |
) |
|
|
632 |
|
Allowance for NSF and mispost receivables |
|
|
2,252 |
|
|
|
256 |
|
|
|
(501 |
) |
|
|
2,007 |
|
Deferred tax asset valuation allowance |
|
|
22,699 |
|
|
|
3,055 |
|
|
|
|
|
|
|
25,754 |
|
Inventory allowance |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivables |
|
|
843 |
|
|
|
150 |
|
|
|
(314 |
) |
|
|
679 |
|
Allowance for NSF and mispost receivables |
|
|
1,659 |
|
|
|
1,057 |
|
|
|
(464 |
) |
|
|
2,252 |
|
Deferred tax asset valuation allowance |
|
|
23,787 |
|
|
|
(1,088 |
) |
|
|
|
|
|
|
22,699 |
|
Inventory allowance |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
75 |
|
57
ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9ACONTROLS 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 September 30, 2006. 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 SECs rules and forms. Disclosure controls and procedures include controls and procedures
designed to ensure that such information is accumulated and communicated to the companys
management, including its principal executive and principal financial officers, as appropriate, to
allow timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 30, 2006, 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.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed
by, or under the supervision of, the companys principal executive and principal financial officers
and effected by the companys board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
|
o |
|
pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company; |
|
|
o |
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and |
|
|
o |
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
September 30, 2006. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment, management concluded that, as of September 30, 2006, our internal control
over financial reporting is effective based on those criteria.
Our independent auditors have issued an audit report on our assessment of our internal control over
financial reporting. This report appears on page 59.
58
ATTESTATION REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Tier Technologies, Inc.
Reston, Virginia
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Tier Technologies, Inc. and subsidiaries maintained
effective internal control over financial reporting as of September 30, 2006, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Tier Technologies, Inc. and subsidiaries
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Tier Technologies, Inc. maintained effective internal
control over financial reporting as of September 30, 2006, is fairly stated, in all material
respects, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Tier
Technologies, Inc. maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of September 30, 2006 and the related
consolidated statements of operations, shareholders equity, comprehensive income and cash flows
for the year then ended of Tier Technologies, Inc. and our report dated December 13, 2006 expressed
an unqualified opinion.
|
|
|
/s/ McGladrey & Pullen, LLP |
|
|
|
|
|
Alexandria, Virginia |
|
|
December 13, 2006 |
|
|
59
IDENTIFICATION OF MATERIAL WEAKNESSES AND REPORTABLE CONDITIONS
In our Amendment 3 to our Annual Report on Form 10-K/A for the year ended September 30, 2004, we
identified seven material weaknesses that existed as of September 30, 2004. In our Annual Report
on Form 10-K for the year ended September 30, 2005, we indicated that six of those material
weaknesses had not been remediated as of September 30, 2005, which related to: 1) our control
environment; 2) accounting and reconciliations at one of our payment processing centers; 3)
processes used to estimate and record the allowance for uncollectible accounts receivable; 4)
revenue recognition for fixed-price contracts that are accounted for using the
percentage-of-completion method; 5) related-party notes; and 6) accrued liabilities. Subsequently,
we have implemented the processes, procedures and personnel changes we believe are necessary to
remediate all of these material weaknesses as of September 30, 2006.
In addition, during the preparation of the financial statements for June 30, 2006, our management
identified the following material weaknesses that existed at June 30, 2006:
|
|
|
We did not maintain effective control over the recognition of revenues and forward
losses for certain contractsWe determined that our process for forecasting total project
costs and revenues was not effective. These forecasts are a factor in determining the
timing of certain revenues and determining whether a project may result in a loss. In
addition, we determined that our process for recording the impact of these forecast
adjustments was not timely; and |
|
|
|
|
We did not maintain effective control over the recognition of expenses under SFAS
123RShare-Based Payments-We did not have effective controls in place to ensure that
complex share-based compensation transactions were recorded correctly. |
We have since implemented the processes, procedures and personnel changes we believe are necessary
to remediate these additional weaknesses as of September 30, 2006. These material weaknesses were
identified and remediated prior to the issuance of our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006 and our Annual Report on Form 10-K for the fiscal year ended September
30, 2006. Because both of these material weaknesses were identified and remediated before we filed
these reports with the SEC, neither of the material weakness resulted in a misstatement of our
financial statements.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fourth quarter of fiscal 2006, we completed the remediation of the material weaknesses
identified in our Amendment No. 3 to our Annual Report on Form 10-K/A for the year ended September
30, 2004 and our Annual Report on Form 10-K for the year ended September 30, 2005. Specifically,
we increased the formality and rigor around the operation of key accounting and financial
disclosure controls, including the documentation and testing of key financial accounting controls
and the implementation of appropriate policies and procedures designed to provide reasonable
assurance of:
|
|
|
accurate reporting of notes receivable and related interest receivable; |
|
|
|
|
accurate calculation and review of the revenues recognized using percentage-of-completion models; and |
|
|
|
|
preparation and maintenance of appropriate support for accounting transactions. |
In addition, during the fourth quarter of fiscal 2006, we instituted a number of additional
controls to remediate the two material weaknesses that we identified in the third quarter of fiscal
2006. These remediation efforts included the establishment of specific processes for accounting
for these transactions, additional management reviews and improvements in the documentation of
atypical stock-based transactions.
While our internal control over financial reporting has improved significantly as a result of the
changes made during fiscal 2006, we have identified certain areas that we will continue to enhance,
including the following:
|
|
|
we will automate certain controls that are currently performed manually; |
|
|
|
|
we will complete our written documentation of all key financial procedures; and |
|
|
|
|
we will consolidate and simplify our back office operations. |
Except for the changes described above, there were no other changes in our internal control over
financial reporting during the fourth quarter of fiscal 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
60
ITEM 9BOTHER INFORMATION
None.
PART III
ITEM 10DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A list of our executive officers and their biographical information appears in Part I,
Item 1 of this report. Information about our Directors may be found under the caption Election of
Directors and Board and Committee Meetings of our Proxy Statement for the Annual Meeting of
Stockholders to be held timely, or the Proxy Statement. That information is incorporated herein by
reference.
The information in the Proxy Statement set forth under the caption Section 16(a) Beneficial
Ownership Reporting Compliance is incorporated herein by reference.
We have adopted the Tier Technology Code of Ethics, a code of ethics that applies to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, Corporate Controller and
other finance organization employees. The code of ethics is available publicly on our website at
www.Tier.com. If we make any amendments to the Code of Ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer, or the Corporate Controller, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K.
ITEM 11EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions Compensation of Executive
Officers and is incorporated herein by reference.
ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information in the Proxy Statement set forth under the captions Equity Compensation Plan
Information and Beneficial Ownership is incorporated herein by reference.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption Certain Relationships and Related Transactions of
the Proxy Statement is incorporated herein by reference.
ITEM 14PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in the Proxy Statement
under the heading Principal Accounting Fees and Services and is incorporated herein by reference.
61
PART IV
ITEM 15EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) |
|
The following documents are filed as part of the report: |
|
(1) |
|
Financial Statements The financial statements are set forth under Item 8 of this
Annual Report on Form 10-K. See Financial Statements and Supplementary Data on page 28. |
|
|
(2) |
|
Financial Statement Schedules Schedule IIValuation and Qualifying Accounts is
set forth under Item 8 of this Annual Report on Form 10-K on page 57. All other schedules
have been omitted because they were either not required or not applicable or because the
information is otherwise included. |
|
|
(3) |
|
Exhibits |
|
|
|
Exhibit |
|
|
number |
|
Exhibit description |
|
3.1
|
|
Restated Certificate of Incorporation(1) |
|
|
|
3.2
|
|
Amended and Restated Bylaws(1) |
|
|
|
3.3
|
|
Certificate of Designations of Series A Junior Participating Preferred Stock(2) |
|
|
|
3.4
|
|
Amendment to the Companys Amended and Restated Bylaws(2) |
|
|
|
4.1
|
|
Form of common stock certificate(1) |
|
|
|
4.2
|
|
See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of common stock of the Registrant |
|
|
|
4.3
|
|
Rights Agreement, dated as of January 10, 2006, by and between Tier Technologies, Inc. and American Stock Transfer & Trust
Company, as Rights Agent(2) |
|
|
|
4.4
|
|
Form of Rights Certificate(2) |
|
|
|
10.1
|
|
Amended and Restated 1996 Equity Incentive Plan, dated January 28, 1999(3)* |
|
|
|
10.2
|
|
Form of Incentive Stock Option Agreement under the Registrants Amended and Restated 1996 Equity Incentive Plan(4)* |
|
|
|
10.3
|
|
Form of Nonstatutory Stock Option Agreement under the Registrants Amended and Restated 1996 Equity Incentive
Plan(4)* |
|
|
|
10.4
|
|
Amended and Restated 2004 Stock Incentive Plan(5)* |
|
|
|
10.5
|
|
Form of Incentive Stock Option Agreement under the Registrants Amended and Restated 2004 Stock Incentive Plan(5)* |
|
|
|
10.6
|
|
Form of Nonstatutory Stock Option Agreement under the Registrants Amended and Restated 2004 Stock Incentive
Plan(5)* |
|
|
|
10.7
|
|
Form of Restricted Stock Agreement under the Registrants Amended and Restated 2004 Stock Incentive Plan(5)* |
|
|
|
10.8
|
|
Form of California Indemnification Agreement(6) |
|
|
|
10.9
|
|
Form of Delaware Indemnification Agreement for officers(7)* |
|
|
|
10.10
|
|
Form of Delaware Indemnification Agreement for directors(7)* |
|
|
|
10.11
|
|
Tier Corporation 401(k) Plan, Summary Plan Description(8)* |
|
|
|
10.12
|
|
Incentive Compensation Plan, as amended(8)* |
|
|
|
10.13
|
|
Management Incentive Plan(10)* |
|
|
|
10.14
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of January 2, 1997(8) |
|
|
|
10.15
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of May 31, 1997(8) |
|
|
|
10.16
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of July 15, 1997(8) |
62
|
|
|
Exhibit |
|
|
number |
|
Exhibit description |
|
10.17
|
|
Amended and Restated Full Recourse Secured Promissory Note, dated as of April 1, 1998, by and between the Registrant and
James L. Bildner(11) |
|
|
|
10.18
|
|
Amended and Restated Full Recourse Secured Promissory Note, dated as of April 1, 1998, by and between the Registrant and
James L. Bildner(11) |
|
|
|
10.19
|
|
Amended and Restated Pledge Agreement, dated as of June 30, 1999, by and between the Registrant and James L.
Bildner(12) |
|
|
|
10.20
|
|
Second Amendment and Restated Pledge Agreement, dated as of June 30, 1999, by and between the Registrant and James L.
Bildner(12) |
|
|
|
10.21
|
|
Third Amendment and Restated Pledge Agreement, dated as of June 30, 1999, by and between the Registrant and James L.
Bildner(12) |
|
|
|
10.22
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of March 27, 2000. (Assignment of
the Note by and between the Registrant and William G. Barton, previously filed as Exhibit 10.17 to Form S-1)(13) |
|
|
|
10.23
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of March 27, 2000. (Assignment of
the Note by and between the Registrant and William G. Barton, previously filed as Exhibit 10.18 to Form S-1)(13) |
|
|
|
10.24
|
|
Full Recourse Promissory Note by and between the Registrant and James L. Bildner, dated as of March 27, 2000. (Assignment of
the Note by and between the Registrant and William G. Barton, previously filed as Exhibit 10.19 to Form S-1)(13) |
|
|
|
10.25
|
|
Pledge Agreement by and between the Registrant and James L. Bildner, dated as of March 27, 2000(13) |
|
|
|
10.26
|
|
Termination Agreement dated October 14, 2003, by and between Tier and James L. Bildner(14)* |
|
|
|
10.27
|
|
Pledge Agreement between Tier and James L. Bildner, dated April 1, 2004(15) |
|
|
|
10.28
|
|
First Amendment, dated June 14, 2004, to the Pledge Agreement between Tier and James L. Bildner, dated March 27,
2000(15) |
|
|
|
10.29
|
|
First Amendment, dated June 14, 2004, to the Second Amended and Restated Pledge Agreement between Tier and James L. Bildner,
dated June 30, 1999(15) |
|
|
|
10.30
|
|
First Amendment, dated June 14, 2004, to the Third Amended and Restated Pledge Agreement between Tier and James L. Bildner,
dated June 30, 1999(15) |
|
|
|
10.31
|
|
Cross-Collateralization Agreement dated December 13, 2004, by and between the Registrant and James L. Bildner(16) |
|
|
|
10.32
|
|
Severance and Change in Control Benefits Agreement by and between the Registrant and James Weaver, dated September 1,
2001(17)* |
|
|
|
10.33
|
|
Executive Employment Agreement, dated November 9, 2004, by and between Registrant and James R. Weaver(4)* |
|
|
|
10.34
|
|
Credit and Security Agreement as of January 29, 2003, by and between the Registrant, Official Payments Corporation and City
National Bank(18) |
|
|
|
10.35
|
|
Amendment dated January 24, 2005, to the Credit and Security Agreement dated January 29, 2003, by and between the Registrant,
Official Payments Corporation and City National Bank(19) |
|
|
|
10.36
|
|
Third Amendment, dated June 28, 2005, to the Credit and Security Agreement dated January 29, 2003, by and between the
Registrant, Official Payments Corporation and City National Bank(5) |
|
|
|
10.37
|
|
Letter Agreement, dated June 28, 2005, by and between Registrant and City National Bank(5) |
|
|
|
10.38
|
|
Employment Agreement dated May 28, 2004, by and between EPOS Corporation and Michael A. Lawler(20)* |
|
|
|
10.39
|
|
Supplemental Indemnity Agreement by and between Registrant and Bruce R. Spector, dated September 2, 2004(16)* |
|
|
|
10.40
|
|
Summary of Board Compensation(21)* |
|
|
|
10.41
|
|
Offer Letter by and between Registrant and David Fountain, dated May 2, 2005(22)* |
63
|
|
|
Exhibit |
|
|
number |
|
Exhibit description |
|
10.42
|
|
Executive Incentive Metrics for Chief Executive Officer and Chief Financial Officer for fiscal year ended September 30,
2005(22)* |
|
|
|
10.43
|
|
Senior Vice President Human Resources Compensation Summary(22)* |
|
|
|
10.44
|
|
Separation Agreement and Release between Registrant and Jeffrey McCandless, dated March 9, 2005(23)* |
|
|
|
10.45
|
|
Employment Agreement dated July 2, 2003 by and between Tier and Mr. Jeffrey A. McCandless(24)* |
|
|
|
10.46
|
|
Employment Agreement dated July 1, 2004 between Tier and Ms. Deanne M. Tully(7)* |
|
|
|
10.47
|
|
Executive Severance and Change in Control Benefits Agreement(7)* |
|
|
|
10.48
|
|
Third Amendment to Credit and Security Agreement with City National Bank, dated June 28, 2005(25) |
|
|
|
10.49
|
|
Shareholder Rights Plan and Rights Agreement, dated January 10, 2006(26) |
|
|
|
10.50
|
|
Assumption Agreement between Tier Technologies, Inc., Official Payments Corporation and EPOS Corporation, dated January 6,
2006(27) |
|
|
|
10.51
|
|
Security Agreement as of January 6, 2006 by and between the Registrant, Official Payments Corporation, EPOS Corporation and
City National Bank(27) |
|
|
|
10.52
|
|
Board approval of two one-time bonuses to David E. Fountain, dated February 21, 2006(28)* |
|
|
|
10.53
|
|
Amended and Restated Credit and Security Agreement between the Registrant, Official Payments Corporation, EPOS Corporation
and City National Bank(29) |
|
|
|
10.54
|
|
Form of Employment Security Agreements between Tier Technologies, Inc., and Steven Beckerman, Todd Vucovich, Steven Wade,
Michael Lawler, and Thomas Jack William, and Matthew Genz, dated March 28, 2006(30)* |
|
|
|
10.55
|
|
Management Incentive Plan for Steven Beckerman, Todd Vucovich, Steven Wade, Michael Lawler and Deanne Tully, dated March 28,
2006(30)* |
|
|
|
10.56
|
|
Separation Agreement between Tier Technologies, Inc., and James R. Weaver, dated May 31, 2006(31)* |
|
|
|
10.57
|
|
Employment Agreement between Tier Technologies, Inc., and Ronald L. Rossetti, dated July 26, 2006(32)* |
|
|
|
10.58
|
|
Non-Statutory Stock Option Agreement between Tier and Ronald L. Rossetti, dated July 26, 2006(32)* |
|
|
|
10.59
|
|
Discretionary Incentive Compensation Plan, dated August 22, 2006(33)* |
|
|
|
10.60
|
|
Option Grants awarded to David E. Fountain, Steven M. Beckerman, Michael Lawler, Deanne Tully, Stephen Wade, Charles Berger,
Samuel Cabot, Morgan Guenther, T. Michael Scott Bruce Spector, and fifteen other employees, dated August 24,
2006(34)* |
|
|
|
10.61
|
|
Employment Agreement between Tier and David E. Fountain, dated December 11, 2006* |
|
|
|
21.1
|
|
Subsidiaries of the Registrant |
|
|
|
23.1
|
|
Consent of McGladrey & Pullen,
LLP, Independent Registered Public Accounting Firm |
|
|
|
23.2
|
|
Consent of PricewaterhouseCoopers,
LLP, Independent Registered Public Accounting Firm |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange
Act of 1934 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange
Act of 1934 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
64
|
|
|
* |
|
Management contract or compensatory plan required to be filed as an exhibit to this report |
|
(1) |
|
Filed as an exhibit to Form 8-K, filed on July 19, 2005, and incorporated herein by reference |
|
(2) |
|
Filed as an exhibit to Form 10-Q, filed January 11, 2006, and incorporated herein by reference |
|
(3) |
|
Filed as an exhibit to Form 10-Q, filed May 11, 2001, and incorporated herein by reference |
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(4) |
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Filed as an exhibit to Form 8-K, filed November 12, 2004, and incorporated herein by reference |
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(5) |
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Filed as an exhibit to Form 8-K, filed July 5, 2005 and incorporated herein by reference |
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(6) |
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Filed as an exhibit to Form 10-K, filed December 21, 1998, and incorporated herein by reference |
|
(7) |
|
Filed as an exhibit to Form 10-K, filed October 27, 2006, and incorporated herein by reference |
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(8) |
|
Filed as an exhibit to Form S-1 (No. 333-37661), filed on October 10, 1997, and incorporated herein by reference |
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(9) |
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Filed as an exhibit to Form 8-K, filed on May 5, 2005, and incorporated herein by reference |
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(10) |
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Filed as an exhibit to Form 8-K, filed on May 27, 2005, and incorporated herein by reference |
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(11) |
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Filed as an exhibit to Form S-1/A (No. 333-52065), filed on May 7, 1998, and incorporated herein by reference |
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(12) |
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Filed as an exhibit to Form 10-Q, filed August 16, 1999, and incorporated herein by reference |
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(13) |
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Filed as an exhibit to Form 10-Q, filed May 15, 2000, and incorporated herein by reference |
|
(14) |
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Filed as an exhibit to Form 10-Q, filed February 13, 2004, and incorporated herein by reference |
|
(15) |
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Filed as an exhibit to Form 10-Q, filed August 15, 2004, and incorporated herein by reference |
|
(16) |
|
Filed as an exhibit to Form 8-K filed December 15, 2004, and incorporated herein by reference |
|
(17) |
|
Filed as an exhibit to Form 10-K, filed November 29, 2001, and incorporated herein by reference |
|
(18) |
|
Filed as an exhibit to Form 10-Q, filed May 12, 2003, and incorporated herein by reference |
|
(19) |
|
Filed as an exhibit to Form 10-Q, filed February 9, 2005, and incorporated herein by reference |
|
(20) |
|
Filed as an exhibit to Form 10-K filed December 28 2004, and incorporated herein by reference |
|
(21) |
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Filed as an exhibit to Form 10-Q, filed February 9, 2005, and incorporated herein by reference |
|
(22). |
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Filed as an exhibit to Form 10-Q, filed May 6, 2005, and incorporated herein by reference |
|
(23) |
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Filed as an exhibit to Form 8-K, filed March 14, 2005, and incorporated herein by reference |
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(24) |
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Filed as an exhibit to Form 10-Q, filed May 11, 2004, and incorporated herein by reference |
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(25) |
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Filed as an exhibit to Form 8-K, filed July 5, 2005, and incorporated herein by reference |
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(26) |
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Filed as an exhibit to Form 8-K, filed January 11, 2006, and incorporated herein by reference |
|
(27) |
|
Filed as an exhibit to Form 8-K, filed January 11, 2006, and incorporated herein by reference |
|
(28) |
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Filed as an exhibit to Form 8-K, filed February 22, 2006, and incorporated herein by reference |
|
(29) |
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Filed as an exhibit to Form 8-K, filed March 9, 2006, and incorporated herein by reference |
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(30) |
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Filed as an exhibit to Form 8-K, filed April 3, 2006, and incorporated herein by reference |
|
(31) |
|
Filed as an exhibit to Form 8-K, filed June 1, 2006, and incorporated herein by reference |
|
(32) |
|
Filed as an exhibit to Form 8-K, filed August 1, 2006, and incorporated herein by reference |
|
(33) |
|
Filed as an exhibit to Form 8-K, filed August 25, 2006, and incorporated herein by reference |
|
(34) |
|
Filed as an exhibit to Form 8-K, filed August 29, 2006, and incorporated herein by reference |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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Tier Technologies, Inc.
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Dated: December 13, 2006 |
By: |
/s/ RONALD L. ROSSETTI
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Ronald L. Rossetti |
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Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the dates indicated.
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Signature |
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Title |
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Date |
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/s/ RONALD L. ROSSETTI
Ronald L. Rossetti
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Chief Executive Officer and
Chairman of the Board
(principal executive
officer)
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December 13, 2006 |
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/s/ DAVID E. FOUNTAIN
David E. Fountain
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Chief Financial Officer
(principal financial officer
and principal accounting
officer)
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December 13, 2006 |
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/s/ CHARLES W. BERGER
Charles W. Berger
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Director
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December 13, 2006 |
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/s/ SAMUEL CABOT III
Samuel Cabot III
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Director
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December 13, 2006 |
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/s/ MORGAN P. GUENTHER
Morgan P. Guenther
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Director
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December 13, 2006 |
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/s/ T. MICHAEL SCOTT
T. Michael Scott
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Director
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December 13, 2006 |
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/s/ BRUCE R. SPECTOR
Bruce R. Spector
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Director
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December 13, 2006 |
66