Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2009
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION
FILE NUMBER 000-23195
TIER
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
(State
or other jurisdiction of Incorporation or organization)
|
94-3145844
(I.R.S.
Employer Identification No.)
|
10780
PARKRIDGE BOULEVARD—4th FLOOR,
RESTON, VA 20191
(Address
of principal executive
offices) (Zip
code)
Registrant's
telephone number, including area code: (571) 382-1000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
COMMON
STOCK, $0.01 PAR VALUE
|
Name
of each exchange on which registered
The
NASDAQ STOCK MARKET, LLC
|
Securities
registered pursuant to Section 12(g) of the Act
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer," "accelerated
filer," and "smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do not check if a smaller reporting company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
As of
March 31, 2009, the aggregate market value of common stock held by
non-affiliates of the registrant was $70,919,668, based on the closing sale
price of the common stock on March 31, 2009, as reported on The NASDAQ
Stock Market. As of November 4, 2009, there were 18,150,965 shares of common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Items 10, 11, 12, 13 and 14 of Part III (except for
information required with respect to our executive officers, which is set forth
under "Part I—Executive Officers") of this report, which will appear in our
definitive proxy statement relating to our 2010 annual meeting of stockholders,
is incorporated by reference into this report.
TIER
TECHNOLOGIES, INC.
FORM
10-K
TABLE
OF CONTENTS
part
1
|
1
|
Item
1—Business
|
1
|
Item
1A—Risk Factors
|
7
|
Item
1b—Unresolved Staff Comments
|
13
|
Item
2—Properties
|
13
|
Item
3—Legal Proceedings
|
13
|
Item
4—Submission Of Matters To A Vote Of Security Holders
|
13
|
Executive
Officers Of The Registrant
|
14
|
part
ii
|
14
|
Item
5—Market For Registrant’s Common Equity, Related Stockholder Matters And
Issuer Purchases Of Equity Securities
|
14
|
Item
6—Selected Financial Data
|
17
|
Item
7—Management’s Discussion And Analysis Of Financial Condition And Results
Of Operations
|
18
|
Item
7a—Quantitative And Qualitative Disclosures About Market
Risk
|
34
|
Item
8—Financial Statements And Supplementary Data
|
35
|
Report
Of Independent Registered Public Accounting Firm
|
36
|
Item
9—Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
|
72
|
Item
9a—Controls And Procedures
|
72
|
Item
9b—Other Information
|
74
|
Part
iii
|
74
|
Item
10—Directors, Executive Officers And Corporate Governance
|
74
|
Item
11—Executive Compensation
|
74
|
Item
12—Security Ownership Of Certain Beneficial Owners And Management And
Related Stockholder Matters
|
74
|
Item
13—Certain Relationships And Related Transactions And Director
Independence
|
74
|
Item
14—Principal Accounting Fees And Services
|
74
|
Part
iv
|
75
|
Item
15—Exhibits, Financial Statement Schedules
|
75
|
Signatures
|
78
|
i
Private
Securities Litigation Reform Act Safe Harbor Statement
Certain
statements contained in this report, including statements regarding the future
development of and demand for our services and our markets, anticipated trends
in various expenses, expected costs of legal proceedings, expectations for the
divestitures of certain assets, and other statements that are not historical
facts, are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements relate to future
events or our future financial and/or operating performance and can generally be
identified as such because the context of the statement includes words such as
"may," "will," "intends," "plans," "believes," "anticipates," "expects,"
"estimates," "shows," "predicts," "potential," "continue," or "opportunity," the
negative of these words or words of similar import. These
forward-looking statements are subject to risks and uncertainties, including the
risks and uncertainties described and referred to under Item 1A—Risk Factors
beginning on page 7, which could cause actual results to differ materially
from those anticipated as of the date of this report. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
GENERAL
Tier
Technologies, Inc., or Tier, is a leading provider of biller direct electronic
payment solutions, through our primary brand Official Payments, which is
accessed through our website www.OfficialPayments.com. These
solutions provide payment services for Web, automated Interactive Voice
Response, or IVR, call center and point-of-sale, or POS,
environments. We offer our clients a front-end platform designed
expressly for the biller direct market with a single source solution that
simplifies the management of electronic payments. Our solutions
include multiple enhanced payment services, including, consolidation of income
payments, bill presentment, convenience payments, installment payments and
flexible payment scheduling. We also offer our clients a range of
payment choices, including credit and debit cards, electronic checks, cash and
money orders, and emerging payment methods to meet the needs of their
customers. By utilizing our solutions, clients can reduce, if not
eliminate their management and expense of payment technology, PCI data security
requirements, and compliance with other payment industry standards.
We
perform these services in a variety of markets, which we refer to as
verticals. Our current verticals include:
·
|
Federal—which
includes federal income and business tax
payments;
|
·
|
State
and Local—which includes state and local income tax
payments;
|
·
|
Property
Tax—which covers state and local real property
tax;
|
·
|
Utility;
|
·
|
Education—which
consists of services to post-secondary educational institutions;
and
|
·
|
Other—includes
local government fines and fees, motor vehicle registration and payments,
rent, insurance, K-12 meal pay and fee payments and personal property tax
payments.
|
In
January 2009 we acquired ChoicePay, Inc., which we refer to as
ChoicePay. This acquisition allowed us to increase our footprint in
the utility vertical as well as accelerate our access to new products and
services as a result of technology provided by their operating
platform. As of May 2009, ChoicePay was fully integrated into our
company and does not operate as a standalone entity. The demand for
our services has been driven by an increasing preference of consumers and
merchants/billers to make payments electronically, increased acceptance of
interactive voice response systems and contact management solutions, as well as
by legislative mandates.
1
During
fiscal 2009, we also provided services in two business areas which we are
currently in the process of winding-down. While we continue to
support our existing contracts, we are not pursuing new
contracts. Those services include our Voice and Systems Automation,
or VSA, support services for interactive voice response systems, including
customization, installation and maintenance, and Public Pension Administration
Systems, or Pension, which supported the design, development and implementation
of pension applications for state, county and city governments. We
substantially completed our work in our Pension business during fiscal
2009. We expect to complete our VSA business within the next three
years.
Originally
incorporated in 1991 in California, we reincorporated in Delaware effective
July 15, 2005. We are headquartered in Reston,
Virginia. As of September 30, 2009, our 222 employees and
contractors provided services to over 3,900 clients nationwide.
ELECTRONIC
PAYMENT SOLUTIONS
Our
core business consists of our biller direct solutions which we refer to as
Electronic Payment Solutions, or EPS. We offer our services using
several pricing options such as transaction fee, convenience fee, flat fee, or
client absorbed fee (fees paid directly by the client for all services, in lieu
of those charges being paid by the constituent using the service), which can be
billed as a percentage fee, a fixed fee, or some combination of
both. As stated above, we provide services and solutions in several
different verticals. Our client base includes the U.S. Internal
Revenue Service, or IRS, 27 states, the District of Columbia and nearly 3,800
local governments and other public sector clients. We processed 14.9
million customer transactions, representing $6.9 billion in payments processed
across all of our verticals during fiscal 2009. In certain instances,
each customer transaction is composed of two sub-transactions, one for the
payment and one for the fee. EPS accounted for 96.1% of our revenues
from Continuing Operations for fiscal 2009.
Verticals
Federal—We provide
businesses and individuals the opportunity to pay certain federal income and
business tax obligations electronically via credit or debit
cards. Payment options include all major credit cards: American
Express®, Discover®, MasterCard®, Visa® and all debit cards. Payment
channels include Internet, IVR, and Agent (a third-party provider who accepts
payments on behalf of our client). The revenues we receive for these
services are typically based on a percentage of dollars
processed. During tax year 2008, we provided payment services for
nine types of tax forms for the IRS. The leading form paid through
our services is the individual IRS Form 1040, and when taxpayers submit this
form, they typically pay the “balance due” on their taxes at the conclusion of
the tax year. Based on the timing of tax obligation due dates, we
typically see higher revenues during our second and third quarters within this
payment vertical, primarily due to the April 15th federal income tax deadline
for personal and business income tax payments. Our revenues from this
vertical represented 26.0% of EPS revenues for fiscal year 2009. Our contract
with the IRS to provide payment services for federal tax payments contributed
19.8% of our EPS revenue for fiscal year 2009.
State and Local—We
offer a variety of electronic payment solutions to state and local governments
for electronic payments for personal income taxes and business
taxes These governments can provide electronic payment options to
their constituents via Internet, IVR, Agent, POS, and wedge readers using all
major credit cards (see above), debit cards and e-check. Based on the
client contract, revenues can be earned in any of the pricing models mentioned
above. Revenues earned within this vertical can be seasonal by
nature, as due dates for various state and local taxes determine the timing of
revenue earned. For fiscal year 2009, this vertical represented 8.2%
of EPS revenue. None of our clients within this vertical contributed
more than 10% to our total revenues for EPS for fiscal year 2009.
Property Tax—We offer
a variety of electronic payment solutions to state and local governments for the
collection of real property taxes. Electronic payment options include
Internet, IVR, Agent, POS, and wedge readers using all major credit cards (see
above), debit cards and e-check. Depending on the client contract,
revenues can be earned in any of the pricing models mentioned
above. As with any of our tax-based
2
business,
revenues earned are seasonal by nature, as due dates for various state and local
taxes determine the timing of revenue. For fiscal year 2009, this
vertical represented 29.5% of EPS revenue. None of our clients within
this vertical contributed more than 10% to our total revenues for EPS for fiscal
year 2009.
Utility—Within this
vertical we allow customers and constituents of various companies and
municipalities to pay their utility obligations electronically using all major
credit cards (see above), debit card, e-check, cash or money
order. The utility company customers can utilize the Internet, IVR,
POS, Agent, Walk-up locations or Kiosks to make these payments. With
the acquisition of ChoicePay in January 2009 our presence in the utilities
market has increased during fiscal year 2009. For fiscal year 2009,
this vertical represented 12.5% of EPS revenue. None of our clients
within this vertical generated more than 10% of our EPS revenues for fiscal year
2009.
Education—Our
solutions within the education vertical service post-secondary education
institutions. Solutions we provide to these clients include
electronic payment options for tuition and fee payments, housing and alumni
donations. Individuals with obligations to post-secondary
institutions may pay their obligations using all major credit cards (as above)
and e-check via Internet, IVR and POS. Within this vertical, we offer
electronic billing and installment payment plans to users. During
fiscal year 2009, this vertical represented 10.2% of EPS
revenue. None of our clients within this vertical generated more than
10% of our EPS revenues for fiscal year 2009.
Other—Our “other”
vertical encompasses state and local courts and citations, rent payments and
insurance payments for various entities, electronic payment options for meal and
fee payments for K-12 educational institutions, plus personal property tax
payments. Generally speaking, all major credit cards and e-check are
accepted payment forms using the following payment channels: Internet, IVR, POS,
Agent, and wedge readers. During fiscal year 2009, this vertical
represented 13.6% of our EPS revenues.
Revenue
Trends
As seen
in the chart below, EPS revenue and transaction volumes have increased over the
past five years. These increases are attributable to several factors:
(1) the shift among federal, state and local governments, education institutions
and private entities to electronic payment options, (2) organic growth,
including adding new vertical and payment options, and (3) the acquisition of
ChoicePay.
3
Since
launching our strategic plan in 2007, Tier management has invested in growing
new verticals, especially education and utilities. We made these
investments to provide a richer value proposition to our end-users by offering
more billers and payment types that could be accessed through our primary site
OfficialPayments.com and to diversify the risk to our investors by balancing
concentration in vertical markets. We believe that the results of
this strategy are reflected in our fiscal year 2009 performance. The
federal income tax vertical which used to represent more than half of total
company revenue is now less than 30% of EPS revenue. Our education
and utilities verticals, which were small to non-existent in 2006, each now
represent more than 10%of EPS revenue.
Vertical
|
Revenue
Contribution
Fiscal year
2009
|
CAGR(1)
|
||||||
Federal
|
26.0 | % | (4.3 | )% | ||||
State and
Local
|
8.2 | % | 4.6 | % | ||||
Property
Tax
|
29.5 | % | 7.0 | % | ||||
Utility
|
12.5 | % | 72.3 | % | ||||
Education
|
10.2 | % | 61.8 | % | ||||
Other
|
13.6 | % | 11.7 | % | ||||
Total
|
100.0 | % | 11.3 | % | ||||
(1)Compound
Annual Growth Rate of EPS Revenue for Fiscal Year 2007 to Fiscal Year
2009
|
WIND-DOWN
OPERATIONS
As of
September 30, 2009, our Wind-down operations consist of our VSA business
from our former Government Business Process Outsourcing, or GBPO, segment whose
operations are neither compatible with our long-term strategic direction nor
complementary with the other business units that we divested. We have
decided to complete, or in some cases extend, the term of existing contracts for
that business. Our VSA business provides interactive voice response
systems and support services, including customization,
4
installation
and maintenance. We service over 100 customers within this
business. None of the VSA customers contributed more than 10% of our
consolidated revenues.
At the
beginning of fiscal 2009, we were completing work within our Pension business,
formerly part of our Packaged Software Systems Integration, or PSSI,
segment. This business provided services to support the design,
development and implementation of pension applications for state, county and
city governments. As of September 30, 2009, we have
substantially completed work within this business.
DATA
SECURITY
Tier
takes the integrity and security of the financial information it processes on
behalf of individuals, businesses and all entities seriously. We are
PCI Data Security Standard and National Automated Clearing House Association
compliant, meaning we have professional security standards in place to protect
the information we obtain to process electronic payments. We also
undergo an annual comprehensive audit by the IRS. Tier has secured or
is in the process of securing Money Transmitter Licenses in every state where
this legislation is applicable.
During
fiscal 2009, our Board of Directors established a formal Data Security Committee
of the Board of Directors. This committee’s primary function is to
act on behalf of the board in fulfilling data security management
responsibilities as defined by applicable law and regulations, as well as
policies and procedures developed internally by Tier management. The
Data Security Committee oversees our work on identifying and evaluating security
risks and implementing safeguards and programs on data security integrity and
mitigation of security risks. This committee works with Tier
management to enhance current, and develop new, technical policies and
procedures which will strengthen security measures.
TECHNOLOGY
Throughout
fiscal 2009, we have been working on consolidating our operating platforms and
data centers, as well as our accounting platform, to enhance our efficiencies
and provide a top-quality product to our clients and their
customers. Our goal is to complete the consolidation during fiscal
2010 and begin retiring our present platforms thereafter. During
fiscal 2009, we consolidated our back-office processes and functions in San
Ramon, California and Tulsa, Oklahoma facilities with our Auburn, Alabama
facility. That consolidation resulted in increased efficiencies and a
reduction in overhead and duplicative operations and functions.
We
believe enhancing our technology and consolidating our platforms will provide
more robust features and functionality for our clients, including adding new
products, additional payment options and payment channels, enhanced reporting
and administrative management services, and enhanced customer self-service
tools.
SEGMENT
REPORTING
Tier
manages and reports its business in two segments, Continuing Operations and
Discontinued Operations. Our Continuing Operations consists of our
EPS operations and our Wind-down operations. Our Discontinued
Operations consists of portions of our former GBPO and PSSI segments, which we
have sold. Detailed information about the profitability of our
Continuing Operations can be found in Note 12—Segment Information to our
Consolidated Financial Statements. Information about our Discontinued
Operations can be found in Note 15—Discontinued Operations to our
Consolidated Financial Statements.
SALES
AND MARKETING
Our
sales and marketing objective is to develop relationships with customers and
clients that result in repeat long-term and cross-sale
engagements. Throughout fiscal year 2009 our selling and marketing
efforts have been dedicated to the growth of our EPS business. We
have focused on upgrading our strategic information systems to allow us to
establish direct relationships with end-users of our services, to grow
transactions
5
across
verticals, and deepen the strength of our primary brand Official
Payments. We will continue these initiatives in fiscal 2010 utilizing
our dedicated sales force, network of partnerships, experienced marketing team,
and our senior executive group. Members of our executive team have a
wide range of industry contacts and established reputations in the electronic
payments industry. They play a key role in developing, selling and
managing major engagements. As a result of our market-focused sales
approach, we believe that we are able to identify and qualify for opportunities
quickly and cost-effectively.
We
employ an integrated marketing strategy that creates broad-scale awareness to
support targeted marketing initiatives to our existing and prospective customers
and clients. These coordinated efforts are delivered by leveraging the
resources and communication channels of our strategic partners, vertical clients
and our own Official Payments communication channels. Our reliance on
marketing partnerships has begun to diminish as Official Payments customer base
and client footprint have grown and we have successfully developed our own
online targeted communication channels including email, web promotion and cross
sell initiatives.
INTELLECTUAL
PROPERTY RIGHTS
Our
success depends, in part, on 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.
COMPETITION
The
biller direct payments category is highly competitive and served by a wide array
of organizations involved in transaction payment markets including Link2Gov, a
subsidiary of FIS; RBS WorldPay; SallieMae Business Office Solutions; TouchNet
Information Systems, Inc; Bill Matrix, a subsidiary of Fiserv; and Online
Resources. We believe that the principal competitive factors in our
markets include reputation, industry expertise, client breadth, speed of
development and implementation, technical expertise, effective marketing
programs, competitive pricing and the ability to deliver results.
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.
6
Investing
in our common stock involves a degree of risk. You should carefully
consider the risks and uncertainties described below in addition to the other
information included or incorporated by reference in this annual
report. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock could fall.
The
following factors and other risk factors could cause our actual results to
differ materially from those contained in forward-looking statements in this
Form 10-K.
We have incurred losses in the past
and may not be profitable in the future. While we reported net
income of $1.1 million in fiscal year 2005, we have reported net losses of
$11.5 million in fiscal 2009, $27.4 million in fiscal 2008,
$3.0 million in fiscal 2007, and $9.5 million in fiscal
2006.
Our revenues and operating margins
may decline and may be difficult to forecast, which could result in a decline in
our stock price. Our revenues, operating margins and cash
flows are subject to significant variation from quarter to quarter due to a
number of factors, many of which are outside our control. These
factors include:
·
|
economic
conditions in the marketplace including
recession;
|
·
|
loss
of significant clients;
|
·
|
demand
for our services;
|
·
|
seasonality
of business, resulting from timing of property tax payments and federal
and state income tax payments;
|
·
|
timing
of service and product
implementations;
|
·
|
unplanned
increases in costs;
|
·
|
delays
in completion of projects;
|
·
|
intense
competition;
|
·
|
costs
of compliance with laws and government regulations;
and
|
·
|
costs
of acquisitions, consolidation and integration of new business and
technology.
|
The
occurrence of any of these factors may cause the market price of our stock to
decline or fluctuate significantly, which may result in substantial losses to
investors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance. From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock. Fluctuations in the price
and trading volume of our stock may be rapid and severe and may leave investors
little time to react. Other factors that may affect the market price
of our stock include announcements of technological innovations or new products
or services by competitors and general economic or political conditions, such as
recession, acts of war or terrorism. Fluctuations in the price of our
stock could cause investors to lose all or part of their
investment.
Our
income tax and property tax processing revenue has been negatively impacted by
recent economic conditions and may continue to decline. As a result of the current global and U.S. economic
conditions, including unemployment and real estate foreclosures, we have
suffered a downturn in revenue in our property tax and income tax segments, due
to decreased payments of federal income tax and property tax by taxpayers who
pay taxes on our website and IVR payment processing systems. If
current conditions do not improve, additional declines in revenue may occur,
especially in the property tax and federal income tax segments, negatively
impacting use of our services and our overall revenues.
We could suffer material revenue
losses and liability in the event the divested business projects and contracts
are not successfully concluded. We have completed divestment
of certain operations and portions of the business including our former
Financial Institutions Data Match services, State Systems Integration, Financial
Management Systems and Unemployment Insurance operations. Certain
divestitures include contractual earn outs and revenue sharing arrangements
based on the buyers’ successful operation
7
of the
businesses divested. If the businesses are not profitable or there
are revenue shortfalls, we may not receive the expected benefits from the
divestitures, which could have an adverse impact on our
revenues. Additionally, we remain liable for certain obligations
under some of the divested projects and their related contracts. In
February 2009, we completed the sale of our Unemployment Insurance, or UI,
business to RKV Technologies, Inc, or RKV. The sale was completed
pursuant to an Asset Purchase Agreement dated February 6, 2009. As a
part of the agreement, Tier is required to leave in place a $2.4 million
performance bond on the continuing contract for the State of Indiana, or the
State, for which RKV continues to provide services as a subcontractor to the
prime contractor, Haverstick Corporation, or Haverstick. Subsequent
to the sale, the State, Haverstick and RKV determined that the contract
completion would be delayed and additional funding would be needed to complete
the contract. Tier retains certain liabilities for completion of the
project, and continues as the indemnitor under the performance
bond. Tier is currently in discussions with the other parties
regarding contributions to fund completion of the project. If this
contract, or other divested contracts are not performed successfully, or if
there is a claim of delay or breach in connection with services or products
provided by either us or the acquiring company, liability could result causing
damages, unanticipated costs, bond forfeitures and loss of revenue.
As
a result of our divestitures and the transition to a primary focus on electronic
payment solutions, our business is less diverse and therefore more vulnerable to
changes affecting the electronic payments business
generally. Our focus on
electronic payment solutions going forward and the recent divestiture of the
majority of our legacy business units unrelated to electronic payment solutions,
including software licensing and government system integration businesses, has
resulted in loss of historical revenue sources and a decrease in diversification
of services and markets. In the event of a business downturn in
the electronic payment solutions business due to increased competition, loss of
clients, economic conditions, technology changes, or in the event of increased
costs, disruption in services, a change in laws, or other events related to the
electronic payment solutions business there could be a greater negative impact
on our revenues than if we had retained our diverse
businesses.
We could suffer material losses or
significant disruption of our operations and business if we are not successful
in integration and consolidation of our operations. We are
consolidating and moving certain operations, facilities, departments, and
positions as part of our strategic plan to save costs and eliminate duplicative
operations and functions. We completed consolidation of the customer
service/call center, client services, implementation services, and some
information technology services from San Ramon, California, and Tulsa, Oklahoma,
to our existing facility in Auburn, Alabama, and we consolidated financial
operations to Reston, Virginia. If this restructuring and
consolidation is not successful, we could suffer disruption of our operations,
systems or services; incur a significant increase in costs; or suffer a loss of
valuable staff and historical knowledge, which could have a material adverse
impact on our business, significantly increase operating costs and result in
operational weaknesses and compliance deficiencies. On
January 27, 2009, we purchased substantially all of the assets of
ChoicePay, Inc., an ePayments solution provider based in Tulsa,
Oklahoma. The acquisition included intellectual property, the
ChoicePay processing platform, systems, operations, services, products, clients,
employees, and other resources. We may not be successful in
integrating the acquired assets into our existing business which could result in
disruption of operations, inefficiencies, excess costs, legal and financial
liability, additional outsourcing of services and consulting charges, failure to
provide services and products as contracted with clients and vendors, and
impairment of earning and operating results.
If we undertake acquisitions, they
could be expensive, increase our costs or liabilities or disrupt our
business. One of our strategies may be to pursue growth
through acquisitions. Negotiations of potential acquisitions and the
integration of acquired business operations could disrupt our business by
diverting management attention away from day-to-day
operations. Acquisitions of businesses or other material operations
may require additional debt or equity financing, resulting in leverage or
dilution of ownership. We also may not realize cost efficiencies or
synergies that we anticipated when selecting our acquisition
candidates. In addition, we may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings. Acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition.
8
Any
costs, liabilities or disruptions associated with any future acquisitions we may
pursue could harm our operating results.
Consolidation of our payment
processing platforms involves significant risk and may not be
successful. We are in the process of integrating and
consolidating our technology platforms. We currently maintain three
processing platforms: one in San Ramon, California; one in Auburn, Alabama; and
a third in Tulsa, Oklahoma, which we recently acquired in the ChoicePay
acquisition. We expect to have one consolidated processing platform
by December 2010. Failure to timely, effectively, and efficiently
consolidate our payment processing platforms could result in significant risks,
including restricted and limited transaction volume, operational inefficiencies,
inability to add new products or services, inability to achieve our goals for
fiscal year 2010 (including our business development objectives), inability to
expand existing products and services, significant development costs, higher
labor costs, increased hardware and software costs, inability to provide certain
functionality, or system and service disruption or failure. Our
business is highly dependent upon having a safe and secure information
technology platform with sufficient capacity to meet both the high volume of
transactions and the future growth of our business. If our ability to
develop and/or acquire upgrades or replacements for our existing platforms does
not keep pace with the growth of our business, we may not be able to meet our
requirements for the sustainable and economic growth of the
business. Furthermore, if we are not able to acquire or develop these
platforms and systems on a timely and economical basis, our profitability may be
adversely affected. If we are unable to successfully integrate and
consolidate these payment processing platforms it could result in a significant
loss of clients and revenues and risk of liability.
Our revenues and cash flows could
decline significantly if we were unable to retain our largest client, or a
number of significant clients. The
majority of our client contracts, including our contract with the U.S. Internal
Revenue Service, allow clients to terminate all or part of their contracts on
short notice, or provide notice of non-renewal with little prior
notification. Our contract with the IRS has generated
19.8%, 27.8%, and 28.3% of our annual revenues from Electronic Payment Solutions
for fiscal years 2009, 2008, and 2007, respectively. In April 2009 we
were one of three companies awarded a multi-year contract by the IRS to provide
electronic payment solutions for personal and business taxes. The contract
contains a base period commencing April 2, 2009 and four one-year option periods
running until December 31, 2013. To obtain this contract, we reduced
our historic pricing. We compete with the other contract award
recipients to provide services to the IRS. If the other recipients
reduce their prices, or if additional companies are awarded contracts, we may
have to reduce our prices further to remain competitive. If we were unable
to retain this client, or replace it in the event it is terminated, or if we
were unable to renew this contract, or are unsuccessful in future re-bids of
this contract, or if we are forced to reduce our prices in response to
competitive pressures, our operating results and cash flows could decline
significantly. Termination or non-renewal of a number of client
contracts, or certain significant client contracts, including the IRS contract,
or a number of large state, local, utility or education-related contracts, could
result in significant loss of revenues and reduction in
profitability.
Security breaches or unauthorized
access to confidential data and personally identifiable information in our
facilities, computer networks, or databases, or those of our suppliers, may
cause harm to our business and result in liability and systems
interruptions. Our business requires us to obtain, process,
use, and destroy confidential and personally identifiable data and information
of clients and consumers. We have programs, procedures and policies
in place to protect against security breaches, unauthorized access and
fraud. Despite security measures we have taken, our systems may be
vulnerable to physical break-ins, fraud, computer viruses, attacks by hackers
and similar acts and events, causing interruption in service and loss or theft
of confidential data and personally identifiable information that we process
and/or store. It is possible that our security controls over
confidential information and personal data, our training on data security, and
other practices we follow may not prevent the improper disclosure or
unauthorized access to confidential data and personally identifiable
information. Our third-party vendors or suppliers also may experience
security breaches, fraud, computer viruses, attacks by hackers or other similar
incidents involving the unauthorized access and theft of confidential data and
personally identifiable information. In January 2009, Heartland
Payment Systems reported a breach of security of its systems resulting in the
loss or theft of
9
personally
identifiable information. We contract with Heartland for certain
payment processing services for credit and debit transactions in the education
market. Although no security breach occurred within our systems, and
there is no specific information to date that our clients’ or their related
consumers’ information or data was compromised as a result of this incident, if
such client or consumer data and information was lost or stolen, such an
incident could potentially result in compliance costs, loss of clients and
revenues, liability and fines. Any security breach within our
systems, software or hardware or our vendors or suppliers systems, software or
hardware could result in unauthorized access, theft, loss, disclosure, deletion
or modification of such data and information, and could cause harm to our
business and reputation, liability for fines and damages, costs of notification,
and a loss of clients and revenue.
We could suffer material losses and
liability if our operations, systems or platforms are disrupted or fail to
perform properly or effectively. The continued efficiency and
proper functioning of our technical systems, platforms, and operational
infrastructure is integral to our performance. Failure of any or all of these
resources subjects us to significant risks. This includes but is not limited to
operational or technical failures of our systems and platforms, human error,
failure of third-party support and services, as well as the loss of key
individuals or failure of key individuals to perform. We process a
high volume of time-sensitive payment transactions. The majority of
our tax-related transactions are processed in short periods of time, including
between April 1 and April 15 of each tax year for federal tax
payments. If there is a defect or malfunction in our system software
or hardware, an interruption or failure due to damage or destruction, a loss of
system functionality, a delay in our system processing speed, a lack of system
capacity, or a loss of personnel on short notice, even for a short
period of time, our ability to process transactions and provide services may be
significantly limited, delayed or eliminated, resulting in lost business and
revenue and harm to our reputation. Our insurance may not be adequate
to compensate us for all losses that may occur as a result of any such event, or
any system, security or operational failure or disruption.
We could suffer material losses and
liabilities if the services of any of our third party suppliers, vendors or
other providers are disrupted, eliminated or fail to perform properly or
effectively. Our payment solution services, systems, security,
infrastructure and technology platforms are highly dependent on third party
services, software, hardware, including data transmission and telecom service
providers, subcontractors, co-location facilities, network access providers,
card companies, processors, banks, merchants and other suppliers and
providers. We also provide services on complex multi-party projects
where we depend on integration and implementation of third-party products and
services. The failure or loss of any of these third party systems,
services, software or products, our inability to obtain third party replacement
services, or damage to or destruction of such services could cause degraded
functionality, loss of product and service offerings, restricted transaction
capacity, limited processing speed and/or capacity, or system failure, which
could result in significant cost, liability, diminished profitability and damage
to our reputation and competitive position. Our insurance may not be
adequate to compensate us for all losses that may occur as a result of any such
event, or any system, security or operational failure or
disruption.
Changes in laws and government and
regulatory compliance requirements may result in additional compliance costs and
may adversely impact our reported earnings. Our business is
subject to numerous federal, state and local laws, government regulations,
corporate governance standards, compliance controls, accounting standards,
licensing and bonding requirements, industry/association rules, and public
disclosure requirements including under the Sarbanes Oxley Act of 2002, SEC
regulations, and Nasdaq Stock Market rules. Compliance with and
changes in these laws, regulations, standards and requirements may result in
increased general and administrative expenses for outside services, increased
risks associated with compliance, and a diversion of management time and
attention from revenue-generating activities, which could curtail the growth of
our business.
Violation of any existing or future
laws or regulations, including laws governing money transmitters and anti-money
laundering laws, could expose us to substantial liability and fines, force us to
cease providing our services, or force us to change our business
practices. Our business is subject to numerous federal and
state laws and regulations, including some states’ money transmitter
regulations, and related licensing requirements, and anti-money laundering
laws. Compliance with federal and state laws and government
regulations regarding money transmitters, money laundering, privacy, data
security, fraud, and
10
other
laws and regulations associated with financial transaction processing is
critical to our business. New laws and regulations in these areas may
be enacted, or existing ones changed, which could negatively impact our
services, restrict or eliminate our ability to provide services, make our
services unprofitable, or create significant liability for us. Our
anti-money laundering program requires us to monitor transactions, report
suspicious activity, and prohibit certain transactions. We are
registered as a money services business, have a number of state money
transmitter licenses and have additional applications for licensure as a money
transmitter pending. We entered into a consent order with one state
which included payment of penalties for unlicensed activity prior to our
submission of the money transmitter application, and one other state has imposed
a fine. In the future we may be subject to additional states’ money
transmitter regulations, money laundering regulations, regulation of internet
transactions, and related payment of fees and fines. We are also
subject to the applicable rules of the credit/debit card association, the
National Automated Clearing House Association (NACHA), and other industry
standards. If we are found to be in violation of any laws, rules,
regulations or standards, we could be exposed to significant financial
liability, substantial fines and penalties, cease and desist orders, and other
sanctions that could restrict or eliminate our ability to provide our services
in one or more states or accept certain types of transactions in one or more
states, or could force us to make costly changes to our business
practices. Even if we are not forced to change our business
practices, the costs of compliance and obtaining necessary licenses and
regulatory approvals, could be substantial.
We operate in highly competitive
markets. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market
share. Our business is focused on electronic payment
transaction solutions and e-commerce services, which are highly competitive
markets and are served by numerous international, national and local
firms. Many of our competitors have significantly greater financial,
technical and marketing resources and name recognition than we do. In
addition, there are relatively low barriers to entry into these markets, and we
expect to continue to face additional competition from new entrants into our
markets. Parts of our business are subject to increasing pricing
pressures from competitors, as well as from clients facing pressure to control
costs. Some competitors are able to operate at significant losses for
extended periods of time, which increases pricing pressure on our products and
services. If we do not compete effectively, the demand for our
products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market
share.
Our revenues may fluctuate, and our
ability to maintain profitability is uncertain. Our business
primarily provides credit and debit card and electronic check payment options
for the payment of federal and state personal income taxes, real estate and
personal property taxes, business taxes, fines for traffic violations and
parking citations, educational, utility and rent obligations. Our revenues
depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective
constituents. Demand for our services could decline if consumers are
not receptive to paying a convenience fee, card associations change their rules,
laws are passed that do not allow us to charge the convenience fees, or if
credit or debit card issuers, marketing partners, or alliance partners change
terms, terminate services or products, or eliminate or reduce the value of
rewards to consumers under their respective rewards programs. The
fees charged by credit/debit card associations, financial institutions, and our
suppliers can be increased with little or no notice, which could reduce our
margins and harm our profitability.
Demand
for our services could also be adversely affected by a decline in the use of the
Internet, economic factors such as a decline in availability of credit,
increased unemployment, foreclosures, or consumer migration to a new or
different technology or payment method. The use of credit and debit
cards and electronic checks to make payments is subject to increasing
competition and rapid technological change. If we are not able to
develop, market and deliver competitive technologies, our market share will
decline and our operating results and financial condition could
suffer.
Change in interchange rates could
have a significant impact on our cost of revenue
generation. Interchange rates charged by credit and debit card
companies through card issuing banks are a major factor in our delivery costs
for the services we perform. A change in such rates could have a
significant impact on our financial performance.
11
The success of our business is based
largely on our ability to attract and retain talented and qualified employees
and contractors. The market for skilled workers in our
industry is extremely competitive. In particular, qualified managers
and senior technical and professional staff are in great demand. If
we are not successful in our recruiting efforts or are unable to retain key
employees, our ability to staff projects and deliver products and services may
be adversely affected. We believe our success also depends upon the
continued services of senior management and a number of key employees whose
employment may terminate at any time. If one or more key employees
resigns to join a competitor, to form a competing company, or as a result of
termination or a divestiture, the loss of such personnel and any resulting loss
of existing or potential clients could harm our competitive
position.
If we are not able to protect our
intellectual property, our business could suffer serious harm. Our
systems and operating platforms, scripts, software code and other intellectual
property are generally proprietary, confidential, and may be trade
secrets. We protect our intellectual property rights through a
variety of methods, such as use of nondisclosure and license agreements and use
of trade secret, copyright and trademark laws. Despite our efforts to
safeguard and protect our intellectual property and proprietary rights, there is
no assurance that these steps will be adequate to avoid the loss or
misappropriation of our rights or that we will be able to detect unauthorized
use of our intellectual property rights. If we are unable to protect
our intellectual property, competitors could market services or products similar
to ours, and demand for our offerings could decline, resulting in an adverse
impact on revenues.
We may be subject to infringement
claims by third parties, resulting in increased costs and loss of
business. Our business is dependent on intellectual property
rights including software license rights and restrictions, and trademark
rights. From time to time we receive notices from others claiming we
are infringing on their intellectual property rights. Defending a
claim of infringement against us could prevent or delay our providing products
and services, cause us to pay substantial costs and damages or force us to
redesign products or enter into royalty or licensing agreements on less
favorable terms. If we are required to enter into such agreements or
take such actions, our operating margins could decline.
If we are not able to obtain adequate
or affordable insurance coverage or bonds, we could face significant liability
claims and increased premium costs and our ability to compete for business could
be compromised. We maintain insurance to cover various risks
in connection with our business. Additionally, our business includes
projects that require us to obtain performance, statutory and bid bonds from a
licensed surety. There is no guarantee that such insurance coverage
or bonds will continue to be available on reasonable terms, or at
all. If we are unable to obtain or maintain adequate insurance and
bonding coverage, potential liabilities associated with the risks discussed in
this report could exceed our coverage, and we may not be able to obtain new
contracts or continue to provide existing services, which could result in
decreased business opportunities and declining revenues.
Our markets are changing
rapidly. If we are not able to adapt to changing conditions, we may
lose market share and may not be able to compete
effectively. The markets for our products are characterized by
rapid changes in technology, client expectations and evolving industry
standards. Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market. If we
are unable to address these requirements, or if our products or services do not
achieve market acceptance, we may lose market share, and our revenues could
decline.
Our business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability. The failure to meet client expectations could
damage our reputation and compromise our ability to attract new
business. On certain projects we make performance guarantees, based
upon defined operating specifications, service levels and delivery dates, which
are sometimes backed by contractual guarantees and performance, statutory or bid
bonds. Unsatisfactory performance of services, disruption of
services, or unanticipated difficulties or delays in processing payments or
providing contracted services may result in termination of the contract, a
reduction in revenues, liability for penalties and damages, or claims against a
bond.
12
ITEM
1B—UNRESOLVED STAFF COMMENTS
There
are no unresolved written comments that were received from the Securities and
Exchange Commission’s staff 180 days or more before the end of our fiscal year
2009 regarding our periodic or current reports under the Securities Exchange Act
of 1934.
ITEM
2—PROPERTIES
As of
September 30, 2009, we leased over 95,000 square feet of space throughout
the country, which includes our 41,000 square foot corporate headquarters in
Reston, Virginia. We also leased 51,000 square feet of space in
Georgia, California, and Oklahoma, to house our subsidiary operations for
EPS. Of those 51,000 square feet, we have vacated
20,000 square feet. We have also vacated 19,000 square feet of
office space in the Reston, Virginia facility. We also lease 3,000
square feet of office space in New Mexico which we have subleased to a third
party. Finally, we own a 28,000 square-foot building in Alabama
which houses certain administrative, call center, and other
operations.
ITEM
3—LEGAL PROCEEDINGS
On
May 31, 2006, we received a subpoena, and in January 2009 several former
employees received additional subpoenas from the Philadelphia District Office of
the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues. On October 29, 2009,
the SEC confirmed that their investigation is complete and they have determined
there will be no charges, fines or other enforcement actions as to Tier, or any
of the individuals who were subpoenaed.
ITEM
4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our stockholders during the fourth quarter
of fiscal 2009.
13
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
names, ages and positions of our executive officers at November 1, 2009,
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.
Name,
age and position with Registrant
|
Date
elected
or
appointed
|
Ronald
L. Rossetti, Age 66 (a)
|
|
Chairman
of the Board, Chief Executive Officer
|
May
2006
|
Nina
K. Vellayan, Age 42 (b)
|
|
Executive
Vice President, Chief Operating Officer
|
September
2009
|
Senior
Vice President, Chief Operating Officer
|
October
2008
|
Ronald
W. Johnston, Age 63 (c)
|
|
Senior
Vice President, Chief Financial Officer
|
July
2008
|
Keith
S. Kendrick, Age 52 (d)
|
|
Senior
Vice President, Strategic Marketing
|
June
2008
|
Keith
S. Omsberg, Age 48 (e)
|
|
Vice
President, General Counsel and Corporate Secretary
|
April
2008
|
(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)
Ms. Vellayan was promoted to Executive Vice President, Chief
Operating Officer in September 2009. Ms. Vellayan served as
President of Business Office Solutions, a division of Sallie Mae Inc.,
from 2001 through September 2008.
|
|
(c)
Mr. Johnston served as a CFO partner with Tatum LLC from August 2007
through June 2008; CFO and Treasurer for Grantham Education Corporation
from October 2004 through March 2007; and CFO for WorldSpace Corporation
from September 2002 through September 2004.
|
|
(d)
Mr. Kendrick served as Senior Vice President, Corporate Marketing
and Strategy with EFunds Corporation from December 2005 through September
2007 and co-founder and Chief Executive Officer of Vericate Corporation
from January 2003 through March 2005.
|
|
(e) Mr.
Omsberg served as Assistant General Counsel of Tier from June 2002 to
April 2008.
|
PART
II
ITEM
5—MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is quoted on the Nasdaq Global Market under the symbol
TIER. On November 4, 2009, there were 212 record holders of our
common stock. The quarterly high and low prices per share during
fiscal 2009 and 2008 were as follows:
Fiscal
year ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
First
quarter
|
$ | 7.57 | $ | 3.41 | $ | 11.01 | $ | 7.94 | ||||||||
Second
quarter
|
$ | 6.39 | $ | 4.48 | $ | 9.26 | $ | 6.75 | ||||||||
Third
quarter
|
$ | 7.90 | $ | 4.35 | $ | 8.75 | $ | 7.03 | ||||||||
Fourth
quarter
|
$ | 8.90 | $ | 7.10 | $ | 8.48 | $ | 7.06 |
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.
14
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
The
following graph compares the percentage change in cumulative stockholder return
on our common stock for the period September 30, 2004 through
September 30, 2009, with the cumulative total return on the NASDAQ
Composite Index and the Russell 2000 Index. We have selected the
Russell 2000 Index because it measures the performance of small-cap issuers and
because we believe there is no published index or peer group that adequately
compares to our business. The comparison assumes $100.00 was invested
on September 30, 2004 in our common stock and in each of the foregoing
indices and assumes reinvestment of all dividends, if any.
Measurement
Date
|
Tier
Technologies,
Inc.
|
NASDAQ
Composite
|
Russell
2000
|
|||||||||
9/30/04
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
9/30/05
|
89.64 | 113.78 | 117.95 | |||||||||
9/30/06
|
70.47 | 121.50 | 129.66 | |||||||||
9/30/07
|
105.70 | 143.37 | 145.65 | |||||||||
9/30/08
|
76.27 | 109.15 | 124.56 | |||||||||
9/30/09
|
87.88 | 112.55 | 112.67 |
The
information included under the heading "Comparison of 5 Year Cumulative Total
Return" in Item 5 of this Annual Report on Form 10-K is "furnished" and not
"filed" and shall not be deemed to be "soliciting material" or subject to
Regulation 14A, shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise
subject to the liabilities of that section, nor shall it be
15
deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Issuer
Repurchases of Equity Securities:
|
Period
Covered
|
Total
Number of Shares Repurchased
(in
thousands)
|
Average
Price Paid per Share
|
Total
Number of Shares Repurchased as Part of Publicly Announced Program (1)
(in
thousands)
|
Approximate
Dollar Value of Shares that May Yet Be Repurchased under the Program (1)
(in
thousands)
|
||||||||||||
July
1 through
July
31, 2009
|
200.0 | $ | 7.91 | 200.0 | $ | 10,102 | ||||||||||
August
1 through
August 31,
2009
|
252.7 | $ | 7.80 | 252.7 | 13,131 | (2) | ||||||||||
September
1 through
September
30, 2009
|
600.0 | $ | 7.86 | 600.0 | 8,413 | |||||||||||
Total
|
1,052.7 | $ | 7.86 | 1,052.7 | $ | 8,413 |
|
(1) On
January 21, 2009, the Company’s Board of Directors authorized the
repurchase, from time to time, of up to $15.0 million
of the Company’s common stock.
|
|
(2) On
August 13, 2009, the authorized repurchase amount was increased to
$20.0 million.
|
16
The
following table summarizes selected consolidated financial data for the fiscal
years ended September 30, 2005 through 2009. You should read the
following selected consolidated financial data in conjunction with the financial
statements, including the related notes, and Item 7—Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Historical results are not necessarily indicative of results to be expected for
any future period. Certain historical information in the following
table has been reclassified to conform to the current year
presentation.
Fiscal
years ended September 30,
|
||||||||||||||||||||
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Revenues
|
$ | 128,246 | $ | 122,571 | $ | 108,306 | $ | 90,916 | $ | 74,307 | ||||||||||
Costs
and expenses
|
134,400 | 137,259 | 130,724 | 113,956 | 92,211 | |||||||||||||||
Loss
before discontinued and other income
|
(6,154 | ) | (14,688 | ) | (22,418 | ) | (23,040 | ) | (17,904 | ) | ||||||||||
Other
income
|
723 | 2,731 | 4,094 | 3,470 | 874 | |||||||||||||||
Loss
before income taxes & discontinued operations
|
(5,431 | ) | (11,957 | ) | (18,324 | ) | (19,570 | ) | (17,030 | ) | ||||||||||
Income
tax provision
|
40 | 87 | 76 | 45 | 127 | |||||||||||||||
Loss
from continuing operations
|
(5,471 | ) | (12,044 | ) | (18,400 | ) | (19,615 | ) | (17,157 | ) | ||||||||||
(Loss)
income from discontinued operations, net
|
(6,035 | ) | (15,401 | ) | 15,366 | 10,164 | 18,283 | |||||||||||||
Net
(loss) income
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | (3,034 | ) | $ | (9,451 | ) | $ | 1,126 | ||||||
Total
assets
|
$ | 116,227 | $ | 137,351 | $ | 166,424 | $ | 169,860 | $ | 176,742 | ||||||||||
Long-term
obligations, less current portion
|
$ | 1,121 | $ | 136 | $ | 200 | $ | 1,359 | $ | 1,479 | ||||||||||
(Loss)
earnings per share—Basic and diluted:
|
||||||||||||||||||||
Continuing
operations
|
$ | (0.28 | ) | $ | (0.61 | ) | $ | (0.94 | ) | $ | (1.00 | ) | $ | (0.88 | ) | |||||
Discontinued
operations
|
$ | (0.31 | ) | $ | (0.79 | ) | $ | 0.78 | $ | 0.52 | $ | 0.94 | ||||||||
(Loss)
earnings per share—Basic and diluted
|
$ | (0.59 | ) | $ | (1.40 | ) | $ | (0.16 | ) | $ | (0.48 | ) | $ | 0.06 | ||||||
Weighted
average common shares used in computing:
|
||||||||||||||||||||
Basic
and diluted (loss) earning per share
|
19,438 | 19,616 | 19,512 | 19,495 | 19,470 |
17
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report, as a result of the risks, uncertainties and
assumptions discussed under Item 1A—Risk Factors of this Annual Report on Form
10-K and other factors discussed in this section. For information
regarding what constitutes a forward-looking statement please refer to Private
Securities Litigation Reform Act Safe Harbor Statement on page 1.
OVERVIEW
Tier
Technologies, Inc., or Tier, is a leading provider of biller direct electronic
payment solutions. These solutions provide processing for Web, call
center and point-of-sale environments. We partner and connect with a
host of payment processors and other payment service providers to offer our
clients a single source solution that simplifies electronic payment
management. Our solutions include multiple payment options,
including, consolidation of income payments, bill presentment, convenience
payments, installment payments and flexible payment scheduling. Our
solutions offer our clients a range of online payment options, including credit
and debit cards, electronic checks, cash and money orders, and alternative
payment types.
During
fiscal 2009 we completed the divestiture of our former Government Business
Process Outsourcing, or GBPO, and Packaged Software Systems Integration, or
PSSI, businesses. These operations are recorded as Discontinued
Operations on our Consolidated Statements of Operations.
SUMMARY
OF FISCAL YEAR 2009 OPERATING RESULTS
The
following table provides a summary of our operating results by segment for the
fiscal year ended September 30, 2009, for our Continuing and Discontinued
Operations:
Year
ended September 30, 2009
|
||||||||
(in
thousands, except per share)
|
Net
(loss) income
|
(Loss)
earnings per share
|
||||||
Continuing
Operations:
|
||||||||
EPS
|
$ | (5,609 | ) | $ | (0.29 | ) | ||
Wind-down
|
138 | 0.01 | ||||||
Total
Continuing Operations
|
$ | (5,471 | ) | $ | (0.28 | ) | ||
Total
Discontinued Operations
|
$ | (6,035 | ) | $ | (0.31 | ) | ||
Net
loss
|
$ | (11,506 | ) | $ | (0.59 | ) |
Our
Continuing Operations consists of our Electronic Payment Solutions, or EPS,
operations, and certain operations we intend to wind down over the next three
years, or our Wind-down operations. We recorded a consolidated net
loss of $11.5 million for fiscal year ended September 30, 2009, of
which $6.0 million was attributable to our Discontinued Operations, which
were fully divested as of February 2009, as well as restructuring and severance
costs associated with our strategic decision to focus on EPS operations and
streamline our general and administrative expenses.
Our
revenues from our EPS operations were $123.2 million for fiscal year ended
September 30, 2009. Transaction volume grew 44.5% and total
dollars processed grew 17.6% when compared to fiscal year ended
September 30, 2008. Despite the 5.7% revenue growth and
increased transaction volume, our direct costs only increased 2.3% during the
current fiscal year. This slower growth rate in direct costs is
primarily attributable to strategic on-going cost savings initiatives and the
benefit of certain one-time cost savings initiatives. The acquisition
of ChoicePay has resulted in increased processing charges, thus contributing
to
18
the
overall direct cost increases. We continue to seek new methods to
provide the same quality of service to our clients at lower costs.
Our EPS
operations reported a net loss of $5.6 million for fiscal year ended
September 30, 2009. This loss is an improvement over fiscal 2008
net loss of $12.0 million which reflects the benefit of ongoing efforts to
improve profitability.
Our
Wind-down operations reported net income of $0.1 million for the fiscal
year ended September 30, 2009. We continue to make efforts to
streamline our costs associated with supporting our Wind-down
operations.
Our
Discontinued Operations consists of businesses we have divested through February
2009. Our Discontinued Operations reported a net loss of
$6.0 million for the fiscal year ended September 30,
2009.
STRATEGY
AND GOALS FOR 2010
During
fiscal 2010 we intend to focus on the following key objectives:
·
|
Complete
consolidation of platforms;
|
·
|
Add
new products, payment options and payment channel
delivery;
|
·
|
Increase
share in the biller direct market;
|
·
|
Maintain
financial stability; and
|
·
|
Improve
profitability.
|
Platform
consolidation: We intend to continue with our platform
consolidation efforts started in fiscal 2009. As stated above, we
expect to complete this consolidation during fiscal 2010. With the
consolidation of our back-office operations complete, we will focus on unifying
our payment platform. This process will result in a stable payment
platform which is designed to hold costs fixed per transaction while increasing
transaction processing capability, resulting in increased transaction
margin. The unified platform will also support the development and
delivery of new products, payment options and payment
channels. Through our platform consolidation efforts, further cost
reduction opportunities will continuously be evaluated.
Add new products, payment
options, and payment channel delivery: We intend to grow our
business by adding new products, payment options and payment
channels. We are constantly exploring ways to enhance our payment
solutions for our existing clients as well as attracting new
clients. Utilizing our unified platform expected to be completed in
fiscal 2010 will allow us to offer a low-cost service platform to our existing
clients and their consumers.
Increase share in the biller
direct market: During fiscal 2009, we acquired ChoicePay,
which increased our footprint in the utilities vertical. During
fiscal 2010, we intend to continue to explore tag-in acquisitions and strategic
partnerships that could allow us to penetrate new markets and increase our
footprint in existing verticals. When our unified platform is
completed, we will offer a low-cost service platform to our clients and their
consumers, which can assist us in our cross-selling efforts to our existing
clients.
Maintain financial
stability: With the current market conditions, financial
stability is critical to the success of any company. Tier is
dedicated to pursuing profitable growth. Growth is some cases can
include additional costs attributable to acquisitions or expenses to enhance
processing technology. During fiscal 2010, we will focus on balancing
our corporate assets among these business opportunities and our current share
repurchase program. With the economy still facing an unstable
investment environment, we will maintain our current investment portfolio
strategy, which we believe minimizes our risk and volatility.
Improve
profitability: All of the key objectives above are directed
toward our overriding goal to reach and continuously increase profitability of
Tier.
19
RESULTS
OF OPERATIONS—FISCAL YEARS 2009 AND 2008
The
following table provides an overview of our results of operations for the fiscal
years ended September 30, 2009 and 2008:
Year
ended
|
Variance
|
|||||||||||||||
September
30,
|
2009
vs. 2008
|
|||||||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
Revenues
|
$ | 128,246 | $ | 122,571 | $ | 5,675 | 4.6 | % | ||||||||
Costs
and expenses:
|
||||||||||||||||
Direct
costs
|
95,594 | 95,234 | 360 | 0.4 | % | |||||||||||
General
and administrative
|
25,529 | 28,020 | (2,491 | ) | (8.9 | )% | ||||||||||
Selling
and marketing
|
6,708 | 8,677 | (1,969 | ) | (22.7 | )% | ||||||||||
Depreciation
and amortization
|
6,569 | 5,328 | 1,241 | 23.3 | % | |||||||||||
Total
costs and expenses
|
134,400 | 137,259 | (2,859 | ) | (2.1 | )% | ||||||||||
Loss
from continuing operations before other income and
income taxes
|
(6,154 | ) | (14,688 | ) | 8,534 | 58.1 | % | |||||||||
Other
income
|
723 | 2,731 | (2,008 | ) | (73.5 | )% | ||||||||||
Loss
from continuing operations before income taxes
|
(5,431 | ) | (11,957 | ) | 6,526 | 54.6 | % | |||||||||
Income
tax provision
|
40 | 87 | (47 | ) | (54.0 | )% | ||||||||||
Loss
from continuing operations
|
(5,471 | ) | (12,044 | ) | 6,573 | 54.6 | % | |||||||||
Loss
from discontinued operations, net
|
(6,035 | ) | (15,401 | ) | 9,366 | 60.8 | % | |||||||||
Net
loss
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | 15,939 | 58.1 | % |
The
following sections describe the reasons for key variances from year to year in
the results that we are reporting for Continuing and Discontinued
Operations.
COMPARISON—FISCAL
YEAR 2009 TO 2008
CONTINUING
OPERATIONS
The
Continuing Operations section of our Consolidated Statements of Operations
includes the results of operations of our core EPS business and our Wind-down
operations. The following is an analysis of the variances in these
financial results.
Revenues (Continuing
Operations)
The
following table compares the revenues generated by our Continuing Operations
during fiscal years 2009 and 2008:
Year ended September 30,
|
Variance
|
|||||||||||||||
(in thousands, except
percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
Revenues
|
||||||||||||||||
EPS
|
$ | 123,233 | $ | 116,641 | $ | 6,592 | 5.7 | % | ||||||||
Wind-down
|
5,013 | 5,930 | (917 | ) | (15.5 | )% | ||||||||||
Total
|
$ | 128,246 | $ | 122,571 | $ | 5,675 | 4.6 | % |
The
following sections discuss the key factors that caused these changes in revenue
from our Continuing Operations.
EPS
Revenues: EPS provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients. EPS’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that we
charge for each transaction that we process.
20
EPS
generated $123.2 million of revenues during the fiscal year ended
September 30, 2009, a $6.6 million, or 5.7%, increase over fiscal year
ended September 30, 2008. The acquisition of ChoicePay in
January, 2009 and an increase in transactions and dollars processed contributed
to the year over year increase in revenues. During fiscal year ended
September 30, 2009, we processed 44.5% more transactions than we did in the
same period last year, representing 17.6% more dollars. Most of our
verticals experienced an increase in transactions processed during the fiscal
year ended September 30, 2009, compared to the same period last year,
ranging from 4.9% to 321.4%. However, our Federal vertical and
portions of our Other vertical experienced decreases in transactions processed,
by 1.5% and 24.1%, respectively. During the 2009 fiscal year, we
added 287 new clients, 50 of which we acquired as a result of our acquisition of
ChoicePay, which contributed to the increase in revenues.
We
expect to see revenue growth in fiscal year 2010. The rate of this
growth is highly dependent on general economic trends. Our
government-based businesses, especially in the tax segment, have experienced low
to negative revenue growth during fiscal year 2009, which is a departure from
prior year trends. This reduced growth has come in spite of the
increase in the number of tax forms processed, an increase in the number of
government clients, and the introduction of additional payment
options. We expect this softness to continue until the general
economic environment improves or tax rates are increased by legislative bodies,
or both.
Wind-down
Revenues: During the fiscal year ended September 30,
2009, our Wind-down Operations generated $5.0 million in revenues, a
$0.9 million, or 15.5%, decrease from the fiscal year ended
September 30, 2008. Our Voice and Systems Automation, or VSA,
business reported $4.7 million in revenues during fiscal year ended
September 30, 2009, which is a $0.6 million decrease over the same
period last year. This decrease is primarily due to the completion of
projects. Our Pension business generated $0.3 million in
revenues for the fiscal year ended September 30, 2009. This is a
$0.3 million decrease over the same period last year due to the substantial
completion of all Pension projects during fiscal 2009.
We
expect to see continued decreases in revenues associated with our Wind-down
Operations as we continue to complete and wind down existing maintenance
projects over the next three years.
Direct Costs (Continuing
Operations)
Direct
costs, which represent costs directly attributable to providing services to
clients, consist predominantly of discount fees. Discount fees
include payment card interchange fees and assessments payable to the banks as
well as payment card processing fees. Other, less significant costs
include: payroll and payroll-related costs; travel-related expenditures;
co-location and telephony costs; and the cost of hardware, software and
equipment sold to clients. The following table provides a
year-over-year comparison of direct costs incurred by our Continuing Operations
during fiscal years 2009 and 2008:
Year ended September 30,
|
Variance
|
|||||||||||||||
(in thousands, except
percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
Direct
costs
|
||||||||||||||||
EPS:
|
||||||||||||||||
Discount
fees
|
$ | 88,657 | $ | 87,082 | $ | 1,575 | 1.8 | % | ||||||||
Other
costs
|
4,777 | 4,208 | 569 | 13.5 | % | |||||||||||
Total
EPS
|
93,434 | 91,290 | 2,144 | 2.3 | % | |||||||||||
Wind-down
|
2,160 | 3,944 | (1,784 | ) | (45.2 | )% | ||||||||||
Total
|
$ | 95,594 | $ | 95,234 | $ | 360 | 0.4 | % |
The
following sections discuss the key factors that caused these changes in direct
costs for Continuing Operations.
EPS Direct
Costs: For the fiscal year ended September 30, 2009,
direct costs increased $2.1 million, or 2.3%, over the fiscal year ended
September 30, 2008. Discount fees increased $1.6 million,
or 1.8%, over the same period last year, attributable to an increased number of
transactions processed offset by several cost savings initiatives and a shift in
vertical payment type and a shift in payment method. In addition,
we
21
received
a benefit of $0.5 million in one-time cost savings
initiatives. Other direct costs increased $0.6 million, or
13.5%, over the same period last year, primarily attributable to the acquisition
of ChoicePay, offset by the consolidation of our San Ramon, California and
Auburn, Alabama operations.
During
fiscal 2010, we expect to see continued increases in our EPS direct costs, in
tandem with revenue growth, as we strive to enhance this business and as more
clients move toward electronic payment solutions options.
Wind-down Direct
Costs: During the fiscal year ended September 30, 2009,
our Wind-down direct costs decreased $1.8 million, or 45.2%, from the same
periods last year. This decrease was primarily attributable to a
decrease in labor and labor-related expenses, including consultants and
subcontractors, of $1.1 million, a decrease in product and material costs
of $0.6 million, attributable to the completion of projects and
$0.1 million of travel and travel related expenditures.
As we
wind down these operations, we expect that the direct costs of these operations
will continue to decrease during fiscal 2010.
General and Administrative
(Continuing Operations)
General
and administrative expenses consist primarily of payroll and payroll-related
costs for technology, product management, strategic initiatives, information
systems, general management, administrative, accounting, legal and fees paid for
outside services. Our information systems expenses include costs to
consolidate and enhance our processing platforms as well as the costs associated
with ongoing maintenance of these platforms. The following table
compares general and administrative costs incurred by our Continuing Operations
during fiscal years 2009 and 2008:
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in thousands, except
percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
General and
administrative
|
||||||||||||||||
EPS
|
$ | 24,509 | $ | 26,932 | $ | (2,423 | ) | (9.0 | )% | |||||||
Wind-down
|
1,020 | 1,088 | (68 | ) | (6.3 | )% | ||||||||||
Total
|
$ | 25,529 | $ | 28,020 | $ | (2,491 | ) | (8.9 | )% |
EPS General and
Administrative: During the fiscal year ended
September 30, 2009, EPS incurred $24.5 million of general and
administrative expenses, a $2.4 million, or 9.0%, decrease over fiscal year
ended September 30, 2008. The most significant cost savings
during fiscal 2009 were a reduction in outside consulting services of
$2.0 million, primarily attributable to the completion in late fiscal 2008
of our strategic initiative reviews and our efforts during fiscal 2009 to reduce
our dependency on outside consultants and subcontractors. We also had
a reduction of $1.0 million in legal expenses, attributable to reduced
legal costs associated with our divestiture process, which were primarily
incurred during fiscal 2008, as well as reduced legal expenses associated with
an investigation being conducted by the Securities and Exchange Commission
during fiscal 2009 as compared to fiscal 2008, offset by additional costs
incurred during fiscal 2009 relating to our proxy and annual shareholders’
meeting. Our other tax expense decreased $0.4 million
year-over-year. We also had a $0.3 million reduction in
executive search fees.
Overall,
our labor and labor-related expenses decreased $0.3 million during fiscal
2009. Reductions in workforce as a result of our strategic
initiatives (despite added staff through our ChoicePay acquisition) contributing
$0.8 million to the overall decrease. Our reduction in
share-based payment expense attributable to one-time expense recognized in
fiscal 2008 contributed $0.6 million to the overall decrease. We
also recognized $0.1 million less severance cost during fiscal
2009. Offsetting these decreases is an increase in expense of
$1.2 million attributable to the performance stock unit plan introduced
during fiscal 2009.
Offsetting
these decreases are: a $0.5 million increase in restructuring costs
associated with reducing our facility needs as a result of our consolidation
efforts; a $0.4 million increase in office expense attributable to hardware
and software maintenance and repairs associated with our IT services as well as
the acquisition of
22
ChoicePay;
a $0.2 million increase in travel and travel-related expenses associated
with the acquisition of ChoicePay and our platform consolidation initiative; and
$0.2 million increase in business and licensing fees. In
addition, during fiscal 2008 we recognized a $0.2 million benefit of the
reversal of a legal reserve relating to a previously conducted Department of
Justice investigation that concluded in January 2008. The remaining
$0.1 million increase is attributable to miscellaneous administrative
expenses.
During
fiscal 2010, we expect to see decreases in general and administrative support
expense, primarily through further reductions in our labor-force and outside
services, as we continue to recognize the benefits of our strategic cost saving
initiatives and continue to consolidate and streamline our EPS
operations.
Wind-down General
and Administrative: During the fiscal year ended
September 30, 2009, our Wind-down operations general and administrative
expenses decreased $68,000 or 6.3% over the fiscal year ended September 30,
2008. These decreases are primarily attributable to the shift in
resources from our Wind-down operations to our EPS operations, which has
resulted in decreases in labor and labor-related expenses, including outside
consultants. Offsetting these decreases was an increase in bad debt
expense, which was a result of the benefit of bad debt collections during fiscal
2008.
During
fiscal 2010, we expect to see general and administrative support expenses for
our Wind-down operations fluctuate minimally as we continue to fully support
these operations.
Selling and Marketing
(Continuing Operations)
Selling
and marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures and travel-related
expenditures. We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April 15th
federal tax season. The following table provides a year-over-year
comparison of selling and marketing costs incurred by our Continuing Operations
during fiscal years 2009 and 2008:
Year ended September 30,
|
Variance
|
|||||||||||||||
(in thousands, except
percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
Selling and
marketing
|
||||||||||||||||
EPS
|
$ | 6,697 | $ | 8,486 | $ | (1,789 | ) | (21.1 | )% | |||||||
Wind-down
|
11 | 191 | (180 | ) | (94.2 | )% | ||||||||||
Total
|
$ | 6,708 | $ | 8,677 | $ | (1,969 | ) | (22.7 | )% |
EPS Selling and
Marketing: During the fiscal year ended September 30,
2009, EPS incurred $6.7 million of selling and marketing expenses, a
$1.8 million, or 21.1%, decrease over the same period last
year. Decreases in labor and labor-related expenses resulting from
staff reductions, lower commissionable revenue activities and modifications to
historical commission plans resulted in net savings of
$1.5 million. This decrease was partially offset by severance
expense of $0.3 million associated with the departure of a sales department
executive. A reduction in travel and travel-related costs contributed
$0.3 million to the year over year decrease and a reduction in advertising
and partnership-related costs contributed $0.3 million to the overall
decrease, primarily attributable to a more targeted advertising
effort. Furthermore, we had a $0.2 million reduction in outside
services as a result of our actions to reduce our past dependency on outside
consultants and subcontractors. Partially offsetting these decreases
is $0.2 million in other miscellaneous costs.
During
fiscal 2010, we expect to see modest increases in EPS selling and marketing
expenses as we continue to build our sales and marketing staff and expand our
strategic partnership initiatives.
Wind-down Selling
and Marketing: During fiscal year ended September 30, 2009, our
Wind-down selling and marketing expenses decreased $0.2 million, or 94.2%,
over the fiscal year ended September 30, 2008. These variances
are attributable to our strategic decision to focus on our EPS operations,
toward which all selling and marketing efforts have been directed. We
expect to incur minimal selling and marketing expenses relating to Wind-down
operations during fiscal 2010.
23
Depreciation and Amortization (Continuing
Operations)
Depreciation
and amortization represents expenses associated with the depreciation of
equipment, software and leasehold improvements, as well as the amortization of
intangible assets from acquisitions and other intellectual property not directly
attributable to client projects. The following table provides a
year-over-year comparison of depreciation and amortization costs incurred by our
Continuing Operations during fiscal years 2009 and 2008:
Year ended September 30,
|
Variance
|
|||||||||||||||
(in thousands, except
percentages)
|
2009
|
2008
|
$ | % | ||||||||||||
Depreciation and
amortization
|
||||||||||||||||
EPS
|
$ | 4,885 | $ | 3,900 | $ | 985 | 25.3 | % | ||||||||
Wind-down
|
1,684 | 1,428 | 256 | 17.9 | % | |||||||||||
Total
|
$ | 6,569 | $ | 5,328 | $ | 1,241 | 23.3 | % |
Depreciation
and amortization relating to our EPS operations increased $1.0 million, or
25.3%, for the fiscal year ended September 30, 2009 over the fiscal year
ended September 30, 2008, primarily due to the acquisition of ChoicePay
assets during January 2009. We incurred an additional
$0.3 million, or 17.9%, in amortization expense during fiscal year ended
September 30, 2009 over fiscal year ended September 30, 2008 for our
Wind-down operations as a result of the decision at the end of fiscal 2008 to
decrease the remaining useful life of certain intangible assets from four to two
years.
Other Income/(Loss)
(Continuing Operations)
Gain/(loss) on
investment: During fiscal year ended September 30, 2009, we
recognized a $31,000 loss related to the decrease in fair value of our auction
rate securities. During fiscal year ended September 30, 2008,
these securities were classified as available-for-sale, and therefore any gain
or loss was unrealized and recorded within Accumulated other comprehensive
loss on our Consolidated Balance Sheets.
Interest income,
net: Interest income during
fiscal year ended September 30, 2009 decreased $2.0 million compared
to fiscal year ended September 30, 2008, attributable to both a decrease in
the amount within our investment portfolio and decreases in interest
rates. Due to current market conditions, we have elected to sell as
many municipal bond debt securities as possible and invest the funds in money
market accounts, treasury bills and commercial paper – often at lower interest
rates than our debt securities. Our interest rates fluctuate with
changes in the marketplace.
Income Tax Provision
(Continuing Operations)
We
reported income tax provisions of $40,000 the fiscal year ended
September 30, 2009, a $47,000 decreased from September 30,
2008. The provision for income taxes represents state tax obligations
incurred by our EPS operations. Our Consolidated Statements of
Operations for the fiscal years ended September 30, 2009 and 2008 do not
reflect a federal tax provision because of offsetting adjustments to our
valuation allowance. Our effective tax rates differ from the federal
statutory rate due to state income taxes, 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 net operating losses and any non-deductible items related
to acquisitions or other nonrecurring charges.
At
September 30, 2009, we had $98.9 million of federal net operating loss
carryforwards, which expire beginning in fiscal 2018 through 2029, and
$82.1 million of state net operating loss carryforwards, most of which
begin to expire after fiscal 2017 through 2024.
DISCONTINUED
OPERATIONS
Our Discontinued
Operations consists of portions of our former GBPO and PSSI businesses which we
have divested and no longer operate. During years ended September 30,
2009 and 2008, net loss from Discontinued Operations was $6.0 million and
$15.4 million, respectively.
24
RESULTS
OF OPERATIONS—FISCAL YEARS 2008 AND 2007
The
following table provides an overview of our results of operations for the fiscal
years ended September 30, 2008 and 2007:
Year
ended
|
Variance
|
|||||||||||||||
September
30,
|
2008
vs. 2007
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
Revenues
|
$ | 122,571 | $ | 108,306 | $ | 14,265 | 13.2 | % | ||||||||
Costs
and expenses:
|
||||||||||||||||
Direct
costs
|
95,234 | 82,668 | 12,566 | 15.2 | % | |||||||||||
General
and administrative
|
28,020 | 26,372 | 1,648 | 6.3 | % | |||||||||||
Selling
and marketing
|
8,677 | 7,950 | 727 | 9.1 | % | |||||||||||
Depreciation
and amortization
|
5,328 | 4,573 | 755 | 16.5 | % | |||||||||||
Impairment
|
— | 9,161 | (9,161 | ) | (100.0 | )% | ||||||||||
Total
costs and expenses
|
137,259 | 130,724 | 6,535 | 5.0 | % | |||||||||||
Loss
from continuing operations before other income and
income taxes
|
(14,688 | ) | (22,418 | ) | 7,730 | 34.5 | % | |||||||||
Other
income
|
2,731 | 4,094 | (1,363 | ) | (33.3 | )% | ||||||||||
(Loss)
income from continuing operations before income
taxes
|
(11,957 | ) | (18,324 | ) | 6,367 | 34.8 | % | |||||||||
Income
tax provision
|
87 | 76 | 11 | 14.5 | % | |||||||||||
Loss
from continuing operations
|
(12,044 | ) | (18,400 | ) | 6,356 | 34.5 | % | |||||||||
Loss
from discontinued operations, net
|
(15,401 | ) | 15,366 | (30,767 | ) | * | ||||||||||
Net
loss
|
$ | (27,445 | ) | $ | (3,034 | ) | $ | (24,411 | ) | * | ||||||
*Not
meaningful
|
COMPARISON—FISCAL
YEAR 2008 TO 2007
CONTINUING
OPERATIONS
Revenues (Continuing
Operations)
The
following table provides a year-over-year comparison of changes in revenue
generated by our Continuing Operations during fiscal years 2008 and
2007.
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
Revenues
|
||||||||||||||||
EPS
|
$ | 116,641 | $ | 99,048 | $ | 17,593 | 17.8 | % | ||||||||
Wind-down
|
5,930 | 9,258 | (3,328 | ) | (36.0 | )% | ||||||||||
Total
|
$ | 122,571 | $ | 108,306 | $ | 14,265 | 13.2 | % |
The
following sections discuss the key factors that caused these revenue changes
from our Continuing Operations.
EPS
Revenues: EPS generated $116.4 million of revenue during
fiscal 2008, a $17.6 million, or 17.8%, increase over fiscal
2007. In fiscal 2008, we processed 27.6% more transactions than we
processed in fiscal 2007, representing 24.3% more total
dollars. Transaction growth rates during fiscal 2008 ranged from 4.3%
to 73.3% for all payment verticals, except a portion of our Other vertical,
which incurred an 8.5% decrease, primarily due to the cancellation of one K-12
meal pay contract. Our Property Tax vertical grew 73.3% from fiscal
2007 to fiscal 2008, while our Federal vertical grew 4.3%.
25
Wind-down
Revenues: During fiscal 2008, our Wind-down operations
generated $5.9 million in revenues, a $3.3 million, or 36.0%, decrease
from fiscal 2007. The overall revenue decrease was due primarily to
the completion or near completion of several projects during fiscal 2008 and
2007. Approximately $5.4 million of the revenues reported for
fiscal 2008 were generated by our Voice and Systems Automation, or VSA,
business.
Direct Costs (Continuing
Operations)
The
following table provides a year-over-year comparison of direct costs incurred by
our Continuing Operations during fiscal years 2008 and 2007:
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
Direct
costs
|
||||||||||||||||
EPS
|
$ | 91,290 | $ | 76,388 | $ | 14,902 | 19.5 | % | ||||||||
Wind-down
|
3,944 | 6,280 | (2,336 | ) | (37.2 | )% | ||||||||||
Total
|
$ | 95,234 | $ | 82,668 | $ | 12,566 | 15.2 | % |
The
following sections discuss the key factors that caused these changes in the
direct costs for Continuing Operations.
EPS Direct
Costs: Consistent with the year-over-year growth in our EPS
revenues, EPS’s direct costs rose $14.9 million, or 19.5%, in fiscal
2008. These increases directly reflect discount fees charged to us to
process the previously described increase in the number and volume of electronic
payments processed for our electronic payment solutions clients.
Wind-down Direct
Costs: Direct costs from our Wind-down operations decreased
$2.3 million, or 37.2%, during fiscal 2008 from fiscal 2007
results. The year-over-year reduction in direct costs during fiscal
2008 reflects the completion and near-completion of contracts, which, in turn,
caused a reduction in the level of subcontractor and labor and labor-related
costs that we incurred. During fiscal 2008 our Pension operations
decreased $1.2 million and our VSA operations costs decreased
$1.1 million.
General and Administrative
(Continuing Operations)
The
following table provides a year-over-year comparison of general and
administrative costs incurred by our Continuing Operations during fiscal years
2008 and 2007:
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
General
and administrative
|
||||||||||||||||
EPS
|
$ | 26,932 | $ | 23,088 | $ | 3,844 | 16.7 | % | ||||||||
Wind-down
|
1,088 | 3,284 | (2,196 | ) | (66.9 | )% | ||||||||||
Total
|
$ | 28,020 | $ | 26,372 | $ | 1,648 | 6.3 | % |
EPS General and
Administrative: During fiscal 2008, EPS incurred
$26.9 million of general and administrative expenses, a $3.8 million,
or 16.7%, increase over fiscal 2007. These increases are attributable primarily
to a $1.2 million increase for labor and labor-related
expenses. Contributing to the overall increase in labor and labor
related expenses is: $1.8 million as a result of a realignment
of resources from Discontinued Operations, the shift of staff from our Wind-down
VSA operations to our EPS operations; a $0.5 million increase in additional
share-based payment expenses, primarily attributable to the acceleration of
vesting of certain options for our Board of Directors; and $0.3 million of
additional severance expense.
26
Offsetting
these increases is a decrease of: $1.0 million in workforce reduction and
$0.4 million in bonus expense.
We also
incurred a $1.6 million increase for consulting services and recruiting
services attributable to our executive placement searches and services to
support our general and administrative functions, as well as to support our
strategic growth initiatives. Our legal fees increased
$0.2 million consisting of $0.5 million in legal fees associated with
applying for money transmitter licenses offset by a $0.3 million reversal
of a legal reserve related to an investigation previously conducted by the US
Department of Justice, which was dismissed in February 2008. The
remaining increase in expense year over year is attributable to: a
$0.3 million increase in bad debt expense; $0.3 million increase in
miscellaneous office and travel expenses; and a $0.2 million increase in
tax expense.
Wind-down General
and Administrative: During fiscal 2008, our Wind-down
operations incurred $1.1 million of general and administrative expenses, a
$2.2 million, or 66.9%, decrease over fiscal 2007. During fiscal
2007 we recorded a contract settlement for one of our Pension projects, which
contributed $1.3 million to the decline in expenses in fiscal
2008. Labor and labor-related expenses contributed $1.0 million
to the overall decline, primarily as a result of the shift of resources from our
VSA operations to EPS operations to support our strategic growth
initiatives. Miscellaneous office and business-related expenses
decreased $0.1 million, while bad debt expense increased $0.2 million
during the current fiscal year.
Selling and Marketing
(Continuing Operations)
The
following table provides a year-over-year comparison of selling and marketing
costs incurred by our Continuing Operations during fiscal years 2008 and
2007.
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
Selling
and marketing
|
||||||||||||||||
EPS
|
$ | 8,486 | $ | 6,859 | $ | 1,627 | 23.7 | % | ||||||||
Wind-down
|
191 | 1,091 | (900 | ) | (82.5 | )% | ||||||||||
Total
|
$ | 8,677 | $ | 7,950 | $ | 727 | 9.1 | % |
EPS Selling and
Marketing: During fiscal 2008, EPS incurred $8.5 million of
selling and marketing expenses, a $1.6 million, or 23.7%, increase over
fiscal 2007. Of the overall increase, $2.5 million is
attributable to an increase in labor and labor-related expenses, primarily due
to an increase in marketing efforts as a result of our strategic initiative to
grow our EPS operations. Offsetting this increase are: a
$0.3 million decrease in advertising expenses; a $0.3 million decrease
in miscellaneous office and consulting services; a $0.2 million decrease in
strategic partnership costs; and a $0.1 million decrease in travel and
travel-related expenses.
Wind-down Selling
and Marketing: During fiscal 2008, our Wind-down operations
incurred $0.2 million in selling and marketing expenses, a
$0.9 million, or 82.5%, decrease over the same period last
year. The decrease is primarily due to the absence of labor and
labor-related expenses as a result of the shift in marketing efforts to our EPS
strategic initiatives.
27
Depreciation and
Amortization (Continuing Operations)
Year
ended September 30,
|
Variance
|
|||||||||||||||
(in
thousands, except percentages)
|
2008
|
2007
|
$ | % | ||||||||||||
Depreciation
and amortization
|
||||||||||||||||
EPS
|
$ | 3,900 | $ | 3,810 | $ | 90 | 2.4 | % | ||||||||
Wind-down
|
1,428 | 763 | 665 | 87.2 | % | |||||||||||
Total
|
$ | 5,328 | $ | 4,573 | $ | 755 | 16.5 | % |
During
the fourth quarter of fiscal 2007 we reclassified our VSA operation from
held-for-sale to Wind-down and subsequently resumed depreciating and amortizing
its assets. As a result, our depreciation and amortization expense
increased $0.7 million in fiscal 2008 over the same period last
year.
Other Income (Continuing
Operations)
Interest income,
net: Interest income earned
during fiscal 2008 decreased $0.6 million, or 17.2%, from interest income
earned during fiscal 2007, to $2.7 million. The decrease in
interest rates earned on our investments, consistent with interest rate changes
in the marketplace, is the primary cause of the decline.
Income Tax Provision
(Continuing Operations)
We
reported income tax provisions of $87,000 for fiscal 2008, compared with $76,000
reported for fiscal 2007. The provision for income taxes represents
federal and state tax obligations incurred by our EPS operations. Our
Consolidated Statements of Operations do not reflect a federal tax provision
because of offsetting adjustments to our valuation allowance. Our
effective tax rates differ from the federal statutory rate due to state income
taxes, 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 net operating losses
and any non-deductible items related to acquisitions or other nonrecurring
charges.
DISCONTINUED
OPERATIONS
During
fiscal year ended September 30, 2008, net loss from Discontinued Operations of
our former GBPO and PSSI businesses was $15.4 million. During
fiscal year ended September 30, 2007, net income from Discontinued
Operations was $15.4 million. The $30.8 million decrease is
due to: $24.2 million decrease in revenues and $17.4 million decrease
in direct, general and administrative, selling and marketing and depreciation
and amortization expenses, offset by $15.0 million increase in impairment
expense during fiscal 2008, all as a result of our decision during fiscal 2007
to divest certain businesses.
LIQUIDITY
AND CAPITAL RESOURCES
As of
September 30, 2009 we had $57.6 million in cash, cash equivalents and
marketable securities compared with $79.0 million at September 30,
2008. The decrease of $21.4 million is primarily due to the
purchase of ChoicePay in February 2009 and the repurchase of our common
stock. In January 2009, we announced a stock repurchase program,
which authorizes the repurchase of up to $15.0 million of our common stock,
and in August 2009, our Board increased the size of the repurchase program to
$20.0 million. In addition, as of September 30, 2009 we had
restricted cash of $7.4 million, of which $6.0 million is used as a
compensating balance required by our bank to guarantee availability of funds for
processing outgoing Automated Clearing House payments to our clients and
$1.4 million is used to collateralize outstanding letters of credit, which
are scheduled to come due during fiscal year 2010. We currently have
an Amended and Restated Credit and Security Agreement, as amended, with our
lender,
28
under
which we may obtain up to $7.5 million of letters of
credit. This agreement also grants the lender a perfected security
interest in cash collateral in an amount equal to all issued and to be issued
letters of credit. The $1.4 million of letters of credit
outstanding were issued to secure performance bonds and a property
lease.
We
believe we have sufficient liquidity to meet currently anticipated growth,
including capital expenditures, working capital investments, and acquisitions,
as well as participation in our stock repurchase program for the next twelve
months. We expect to generate cash flows from operating activities
over the long term; however, we may experience significant fluctuations from
quarter to quarter resulting from the timing of billing and
collections. To the extent that our existing capital resources are
insufficient to meet our capital requirements, we will have to raise additional
funds. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at
all. Currently, we do not have any short or long-term
debt.
Net Cash
from Continuing Operations—Operating Activities. During the
fiscal year ended September 30, 2009, our operating activities from
Continuing Operations provided $2.0 million of cash. This
reflects a net loss of $5.5 million from Continuing Operations and
$9.6 million of non-cash items. During fiscal 2009,
$5.4 million of cash was generated by an increase in accounts payable and
accrued liabilities, primarily associated with settlements payable as a result
of the ChoicePay acquisition. An increase in accounts receivable,
associated with the settlements payable, used $6.5 million of
cash. A decrease in deferred income used $0.9 million of
cash. An increase in prepaid expenses and other assets used
$0.1 million of cash.
Net Cash
from Continuing Operations—Investing Activities. Net cash used
in our investing activities from Continuing Operations for the fiscal year ended
September 30, 2009 was $10.9 million, including $38.5 million of cash
used to purchase available-for-sale securities, offset by $36.4 million of
cash provided by maturities and sales of available-for-sale
securities. During fiscal 2009, $6.9 million of cash was used to
purchase substantially all of the assets of ChoicePay and $3.9 million of
cash was used to purchase equipment and software and fund internal development
of software primarily associated with our EPS business. The proceeds
from the sale of our Discontinued Operations provided $1.3 million of
cash. In addition, the release and maturity of restricted investments
provided $0.5 million of cash, and $0.1 million was provided by the
sale of trading securities. The collection of a note receivable
associated with the divestiture of our Financial Management Systems operations
provided $0.1 million of cash.
Net Cash
from Continuing Operations—Financing Activities. Net cash used
in our financing activities from Continuing Operations for the fiscal year ended
September 30, 2009 was $11.1 million. The purchase of
company stock used $11.6 million of cash, offset by $0.4 million
provided by the issuance of stock. Capital lease obligations used
$21,000 of cash.
Net Cash
from Discontinued Operations—Operating Activities. During the
fiscal year ended September 30, 2009, our operating activities from
Discontinued Operations used $5.2 million of cash. This reflects
a net loss of $6.0 million and $3.9 million of non-cash items, of
which $2.6 million related to the write-down of held-for-sale assets,
$1.5 million related to a loss recognized on the sale and disposal of our
discontinued operations, offset by $0.2 million related to a reduction in
bad debt expense. In addition, the net effect of changes in
discontinued assets and liabilities used $3.1 million of cash.
Net Cash
from Discontinued Operations—Investing Activities. Net cash
used in our investing activities from Discontinued Operations for the fiscal
year ended September 30, 2009 was $0.4 million, primarily used to fund
internal development of software.
In Note
3—Investments of our Consolidated Financial Statements we disclosed that at
September 30, 2009, our investment portfolio included $31.2 million
par value of AAA-rated auction rate municipal bonds that were collateralized
with student loans. If the banking system or the financial markets
continue to deteriorate or remain volatile, we may be unable to liquidate these
investments in a timely manner at par value. To minimize the
liquidity risks associated with these investments, we entered into an Auction
Rate Securities Rights offer with our investment manager. This
agreement allows us to sell our auction rate securities to the
29
investment
manager for a price equal to the par value plus accrued but unpaid interest
beginning in June 2010. Our investment manager has the right to
sell or dispose of our auction rate securities at par, at any time until the
expiration of the offer on July 2, 2012.
CRITICAL ACCOUNTING
POLICIES
Our
discussion and analysis of our financial condition and results of operations is
based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or US GAAP. Note 2—Summary of Significant Accounting Policies of our Notes to
Consolidated Financial Statements contains a summary of our significant
accounting policies, many of which require the use of estimates and
assumptions. We believe that of our significant policies, the
following are the most noteworthy because they are based upon estimates and
assumptions that require complex subjective judgments by management, which can
have a material effect on our reported results. Changes in these
estimates or assumptions could materially impact our financial condition and
results of operations. Actual results could differ materially from
management’s estimates.
Revenue
Recognition. Certain judgments affect the application of our
revenue policy. We derive revenues primarily from transaction and
payment processing, systems design and integration, and maintenance and support
services. We recognize revenues in accordance with accounting
principles generally accepted in the United States, which, in some cases,
require us to estimate costs and project status. Our EPS operations
primarily recognize revenues using a transaction-based method as described
below.
The
methods that we use to recognize revenues are described below:
Transaction-based
contracts—revenues are recognized based on fees charged on a
per-transaction basis or fees charged as a percentage of dollars
processed;
Fixed-price
contracts—revenues are recognized either on a percentage-of-completion
basis or when our customers accept the services we provide;
Time and
materials contracts—revenues are recognized when we perform services and
incur expenses;
Delivery-based
contracts—revenues are recognized when we have delivered, and the
customer has accepted, the product or service;
Software
licenses—revenues are recognized for perpetual software licenses upon
delivery when the fees are fixed and determinable, collection is probable and
specific objective evidence exists to determine the value of any undeliverable
elements of the arrangement. Revenues for software licenses with a
fixed term are recognized on a straight-line period over the term of the
license; and
Software
maintenance contracts—revenues are recognized on a straight-line basis
over the contract term, which is typically one year.
Any
given contract may contain one or more elements with attributes of more than one
of the contract types described above. In those cases, we account for
each element separately, using the applicable accounting
standards. In addition, we also establish an allowance for credit
card reversals and charge-backs as part of our revenue recognition
practices. For all our operations, the amount and timing of our
revenue is difficult to predict. Any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter to quarter and could result in future operating losses.
Collectibility
of Receivables. Accounts receivable
includes funds that are due to us to compensate us for the services we provide
to our customers. We have established an allowance for doubtful
accounts, which represents our best estimate of probable losses inherent in the
accounts receivable balance. Each quarter we adjust this allowance
based upon management’s review and assessment of each category of
receivable. Factors that we consider to establish this adjustment
include the age of receivables, past payment history and the demographics of the
associated debtors. Our allowance for uncollectible accounts is based
both on the performance of specific debtors and upon general categories of
debtors.
30
Goodwill
and Other Intangible Assets. We review goodwill and
purchased intangible assets with indefinite lives for impairment annually at the
reporting unit level and whenever events or changes indicate that the carrying
value of an asset may not be recoverable. 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 US GAAP. This determination requires us to use significant
judgment in evaluating a number of factors, including: the duration and extent
to which the fair value of an investment is less than its cost; the financial
health of and near-term business outlook for the investee, including factors
such as industry and sector performance, changes in technology and operational
and financing cash flow; and our intent and ability to hold the
investment. When investments exhibit unfavorable attributes in these
and other areas, we conduct additional analyses to determine whether the fair
value of the investment is other-than-temporarily impaired.
Fair-value
Measurements. In accordance with US
GAAP, we record our financial assets including: cash equivalents, restricted
cash, accounts receivable, accounts payable and accrued liabilities at cost,
which approximates fair value due to their short-term
nature. Investments in marketable securities are recorded at their
estimated fair value. Factors considered in determining their fair
value were: current and projected interest rates, quality of the underlying
collateral, credit ratings of the issuer, percentage participation in the
Federal Family Education Loan Program and a factor for illiquidity.
Contingencies. The outcomes of legal
proceedings and claims brought against us are subject to significant
uncertainty. US GAAP requires that an estimated loss from a loss
contingency such as a legal proceeding or claim should be accrued by a charge to
income if it is probable that an asset has been impaired or a liability has been
incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued, we evaluate a number of factors, including the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. Changes in these factors
could materially impact our financial position and our results of
operations.
Income
Taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns. US GAAP states we may
recognize a tax benefit from an uncertain tax position only if it is
more-likely-than-not that the tax position will be sustained on examination by
the taxing authorities, based on technical merits. 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. We must use our
judgment to determine whether particular operations are considered a component
of the entity and when the operations should no longer be classified as
continuing operations.
Share-Based
Compensation. US GAAP requires public
companies to expense employee share-based payments (including options,
restricted stock units and performance stock units) based on fair
value. We must use our judgment to determine key factors in
determining the fair value of the share-based payment, such as volatility,
forfeiture rates and the expected term in which the award will be
outstanding.
31
RECENT
ACCOUNTING STANDARDS
FASB ASC
810. In December 2007, the Financial Accounting Standards
Board, or FASB, issued Accounting Standard Codification, or ASC, 810, or FASB
ASC 810, which requires companies to measure noncontrolling interests in
subsidiaries at fair value and to classify them as a separate component of
equity. FASB ASC 810 is effective as of each reporting fiscal year
beginning after December 15, 2008, and applies only to transactions
occurring after the effective date. We will adopt FASB ASC 810
beginning October 1, 2009. We do not believe that the adoption
of FASB ASC 810 will have a material effect on our financial position or results
of operations.
FASB ASC
805. In December 2007, FASB issued FASB ASC 805, which
will require companies to measure assets acquired and liabilities assumed in a
business combination at fair value. In addition, liabilities related
to contingent consideration are to be re-measured at fair value in each
subsequent reporting period. FASB ASC 805 will also require the
acquirer in pre-acquisition periods to expense all acquisition-related
costs. FASB ASC 805 is effective for fiscal years beginning after
December 15, 2008, and is applicable only to transactions occurring after
the effective date. We will adopt FASB ASC 805 beginning
October 1, 2009. We are currently evaluating the effect the
adoption of FASB ASC 805 will have on our financial position and results of
operations.
FASB ASC
350-30-35-1. In April 2008, FASB issued FASB ASC
350-30-35-1. This ASC amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. FASB ASC 350-30-35-1 improves the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset under
other applicable accounting literature. We will adopt FASB ASC 350-30-35-1
beginning on October 1, 2009. We are currently evaluating the
impact this ASC will have on our financial position and results of
operations.
FASB ASC
820. In April 2009, the FASB issued three related staff
positions to clarify the application of FASB ASC 820 to fair value measurements
in the current economic environment, modify the recognition of
other-than-temporary impairments of debt securities, and require companies to
disclose the fair value of financial instruments in interim periods. The final
staff positions are effective for interim and annual periods ending after June
15, 2009.
·
|
FASB
ASC 820 (transitional 820-10-65-4)—which provides guidance on how to
determine the fair value of assets and liabilities under FASB ASC 820 in
the current economic environment and reemphasizes that the objective of a
fair value measurement remains the price that would be received to sell an
asset or paid to transfer a liability at the measurement
date.
|
·
|
FASB
ASC 320— which modifies the requirements for recognizing
other-than-temporarily impaired debt securities and significantly changes
the existing impairment model for such securities. It also modifies the
presentation of other-than-temporary impairment losses and increases the
frequency of and expands already required disclosures about
other-than-temporary impairment for debt and equity
securities.
|
·
|
FASB
ASC 820-10-50—which requires disclosures of the fair value of financial
instruments within the scope of FASB ASC 820 in interim financial
statements, adding to the current requirement to make those disclosures in
annual financial statements. The staff position also requires that
companies disclose the method or methods and significant assumptions used
to estimate the fair value of financial instruments and a discussion of
changes, if any, in the method or methods and significant assumptions
during the period.
|
We have
adopted the new staff positions as of June 30, 2009. These new
staff positions did not have a material impact on our financial position and
results of operations.
FASB ASC
860. In June 2009, the FASB issued ASC 860, which
eliminates the concept of a qualifying special-purpose entity, creates more
stringent conditions for reporting a transfer of a portion of a financial asset
as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s
32
interest
in transferred financial assets. FASB ASC 860 will be effective for transfers of
financial assets in fiscal years beginning after November 15, 2009, and in
interim periods within those fiscal years with earlier adoption prohibited. We
will adopt FASB ASC 860 on October 1, 2010.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
OFF-BALANCE
SHEET ARRANGEMENTS
We do
not have any off-balance sheet arrangements as those are defined under the SEC
rules.
INDEMNIFICATION
AGREEMENTS
We have
indemnification agreements with each of our directors and executive officers and
one non-executive officer. These agreements provide such persons with
indemnification, to the maximum extent permitted by our Articles of
Incorporation or Bylaws or by the General Corporation Law of the State of
Delaware, against all expenses, claims, damages, judgments and other amounts
(including amounts paid in settlement) for which such persons become liable as a
result of acting in any capacity on behalf of Tier, subject to certain
limitations.
EMPLOYMENT
AGREEMENTS
As of
September 30, 2009, we had employment and change of control agreements with
five executives and one other key manager. If certain termination or
change of control events were to occur under the six contracts as of
September 30, 2009, we could be required to pay up to
$5.7 million.
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, 2009. All of our contractual obligations expire by
2013.
Payments
due by period
|
||||||||||||
(in
thousands)
|
Total
|
2010
|
2011-2013 | |||||||||
Capital
lease obligations (equipment) (1)
|
$ | 115 | $ | 37 | $ | 78 | ||||||
Operating
lease obligations:
|
||||||||||||
Facilities
leases
|
1,242 | 1,242 | — | |||||||||
Equipment
leases
|
8 | 5 | 3 | |||||||||
Purchase
obligations:
|
||||||||||||
Subcontractor
|
310 | 310 | — | |||||||||
Purchase
order
|
143 | 143 | — | |||||||||
Total
contractual obligations
|
$ | 1,818 | $ | 1,737 | $ | 81 | ||||||
(1)
Includes interest payments of $2.
|
33
ITEM
7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
maintain a portfolio of cash equivalents and investments in a variety of
securities, including certificates of deposit, money market funds and government
and non-government debt securities. These available-for-sale
securities are subject to interest rate risk and may decline in value if market
interest rates increase. If market interest rates increase
immediately and uniformly by ten percentage points from levels at
September 30, 2009 the fair value of the portfolio would decline by
approximately $17,000.
34
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
36
|
CONSOLIDATED
BALANCE SHEETS
|
37
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
38
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
39
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
|
40
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
41
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
43
|
NOTE
1—NATURE OF OPERATIONS
|
43
|
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
43
|
NOTE
3—INVESTMENTS
|
49
|
NOTE
4—FAIR VALUE MEASUREMENTS
|
52
|
NOTE
5—CUSTOMER CONCENTRATION AND RISK
|
53
|
NOTE
6—PROPERTY, EQUIPMENT AND SOFTWARE
|
53
|
NOTE
7—GOODWILL AND OTHER INTANGIBLE ASSETS
|
54
|
NOTE
8—INCOME TAXES
|
56
|
NOTE
9—CONTINGENCIES AND COMMITMENTS
|
58
|
NOTE
10—RELATED PARTY TRANSACTIONS
|
60
|
NOTE
11—RESTRUCTURING
|
60
|
NOTE
12—SEGMENT INFORMATION
|
61
|
NOTE
13—SHAREHOLDERS’ EQUITY
|
63
|
NOTE
14—SHARE-BASED PAYMENT
|
63
|
NOTE
15—DISCONTINUED OPERATIONS
|
66
|
NOTE
16—LOSS PER SHARE
|
68
|
NOTE
17—ACQUISITION
|
68
|
NOTE
18—SUBSEQUENT EVENTS
|
69
|
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
70
|
SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS
|
71
|
35
To the
Board of Directors and Shareholders
Tier
Technologies, Inc.
We have
audited the accompanying consolidated balance sheets of Tier Technologies, Inc.
and subsidiaries as of September 30, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, comprehensive loss,
and cash flows for each of the three years in the period ended
September 30, 2009. Our audits also included the financial
statement schedule of Tier Technologies, Inc. and subsidiaries listed in Item
15(a). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Tier Technologies, Inc. and
subsidiaries as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2009, 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.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Tier Technologies, Inc. and subsidiaries’
internal control over financial reporting as of September 30, 2009, based
on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated November 9, 2009, expressed an
unqualified opinion on the effectiveness of Tier Technologies, Inc. and
subsidiaries internal control over financial reporting.
/s/ McGladrey & Pullen,
LLP
Vienna,
VA
November
9, 2009
36
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
(in
thousands)
|
September 30,
2009
|
September 30,
2008
|
||||||
ASSETS:
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 21,969 | $ | 47,735 | ||||
Investments
in marketable securities
|
4,499 | 2,415 | ||||||
Restricted
investments
|
1,361 | — | ||||||
Accounts
receivable, net
|
4,790 | 4,209 | ||||||
Settlements
receivable, net
|
6,272 | — | ||||||
Unbilled
receivables
|
— | 532 | ||||||
Prepaid
expenses and other current assets
|
2,239 | 1,331 | ||||||
Current
assets—held-for-sale
|
— | 11,704 | ||||||
Total
current assets
|
41,130 | 67,926 | ||||||
Property,
equipment and software, net
|
7,990 | 4,479 | ||||||
Goodwill
|
17,329 | 14,526 | ||||||
Other
intangible assets, net
|
12,038 | 13,455 | ||||||
Investments
in marketable securities
|
31,169 | 28,821 | ||||||
Restricted
investments
|
6,000 | 7,861 | ||||||
Other
assets
|
571 | 283 | ||||||
Total
assets
|
$ | 116,227 | $ | 137,351 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 84 | $ | 918 | ||||
Settlements
payable
|
9,591 | — | ||||||
Accrued
compensation liabilities
|
3,213 | 4,289 | ||||||
Accrued
discount fees
|
5,343 | 5,243 | ||||||
Other
accrued liabilities
|
3,425 | 4,667 | ||||||
Deferred
income
|
861 | 1,790 | ||||||
Current
liabilities—held-for-sale
|
— | 9,061 | ||||||
Total
current liabilities
|
22,517 | 25,968 | ||||||
Other
liabilities
|
1,121 | 136 | ||||||
Total
liabilities
|
23,638 | 26,104 | ||||||
Commitments
and contingencies (Note 9)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, no par value; authorized shares: 4,579;
no
shares issued and outstanding
|
— | — | ||||||
Common
stock and paid-in capital; shares authorized: 44,260;
shares
issued: 20,687 and 20,619; shares outstanding: 18,238 and
19,735
|
192,030 | 190,099 | ||||||
Treasury
stock—at cost, 2,449 and 884 shares
|
(20,271 | ) | (8,684 | ) | ||||
Accumulated
other comprehensive loss
|
— | (2,504 | ) | |||||
Accumulated
deficit
|
(79,170 | ) | (67,664 | ) | ||||
Total
shareholders’ equity
|
92,589 | 111,247 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 116,227 | $ | 137,351 |
See
Notes to Consolidated Financial Statements
37
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
ended September 30,
|
||||||||||||
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
Revenues
|
$ | 128,246 | $ | 122,571 | $ | 108,306 | ||||||
Costs
and expenses:
|
||||||||||||
Direct
costs
|
95,594 | 95,234 | 82,668 | |||||||||
General
and administrative
|
25,529 | 28,020 | 26,372 | |||||||||
Selling
and marketing
|
6,708 | 8,677 | 7,950 | |||||||||
Depreciation
and amortization
|
6,569 | 5,328 | 4,573 | |||||||||
Write-down
of goodwill and intangible assets
|
— | — | 9,161 | |||||||||
Total
costs and expenses
|
134,400 | 137,259 | 130,724 | |||||||||
Loss
from continuing operations before other income and income
taxes
|
(6,154 | ) | (14,688 | ) | (22,418 | ) | ||||||
Other
income:
|
||||||||||||
Income
from investments:
|
||||||||||||
Equity
in net income of unconsolidated affiliate
|
— | — | 475 | |||||||||
Realized
foreign currency gain
|
— | — | 239 | |||||||||
Gain
on sale of unconsolidated affiliate
|
— | — | 80 | |||||||||
Interest
income, net
|
754 | 2,731 | 3,300 | |||||||||
Loss
on investment
|
(31 | ) | — | — | ||||||||
Total
other income
|
723 | 2,731 | 4,094 | |||||||||
Loss
from continuing operations before income taxes
|
(5,431 | ) | (11,957 | ) | (18,324 | ) | ||||||
Income
tax provision
|
40 | 87 | 76 | |||||||||
Loss
from continuing operations
|
(5,471 | ) | (12,044 | ) | (18,400 | ) | ||||||
(Loss)
income from discontinued operations, net
|
(6,035 | ) | (15,401 | ) | 15,366 | |||||||
Net
loss
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | (3,034 | ) | |||
(Loss)
earnings per share—Basic and diluted:
|
||||||||||||
From
continuing operations
|
$ | (0.28 | ) | $ | (0.61 | ) | $ | (0.94 | ) | |||
From
discontinued operations
|
$ | (0.31 | ) | $ | (0.79 | ) | $ | 0.78 | ||||
Loss
per share—Basic and diluted
|
$ | (0.59 | ) | $ | (1.40 | ) | $ | (0.16 | ) | |||
Weighted
average common shares used in computing:
|
||||||||||||
Basic
and diluted loss per share
|
19,438 | 19,616 | 19,512 |
See
Notes to Consolidated Financial Statements
38
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Common Stock Issued | Paid-in- | Treasury Stock | Notes receivable from related | Accumulated other comprehensive | Accumulated | Total shareholders' | ||||||||||||||||||||||||||||||
(in thousands) | Shares | Amount | capital | Shares | Amount | parties | (loss) income | deficit | equity | |||||||||||||||||||||||||||
Balance
at September
30, 2006
|
20,383 | $ | 204 | $ | 184,183 | (884 | ) | $ | (8,684 | ) | $ | (4,275 | ) | $ | (33 | ) | $ | (37,185 | ) | $ | 134,210 | |||||||||||||||
Net loss
|
— | — | — | — | — | — | — | (3,034 | ) | (3,034 | ) | |||||||||||||||||||||||||
Exercise
of stock
options
|
42 | — | 213 | — | — | — | — | — | 213 | |||||||||||||||||||||||||||
Payment
on notes and interest receivable from related parties
|
— | — | 126 | — | — | 4,275 | — | — | 4,401 | |||||||||||||||||||||||||||
Share-based
payment
|
— | — | 1,691 | — | — | — | — | — | 1,691 | |||||||||||||||||||||||||||
Unrealized
gain on investments
|
— | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||
Impact
of realized foreign
currency
gains
|
— | — | — | — | — | — | (239 | ) | — | (239 | ) | |||||||||||||||||||||||||
Foreign
currency translation
adjustment
|
— | — | — | — | — | — | 270 | — | 270 | |||||||||||||||||||||||||||
Balance
at September
30, 2007
|
20,425 | 204 | 186,213 | (884 | ) | (8,684 | ) | — | — | (40,219 | ) | 137,514 | ||||||||||||||||||||||||
Net loss
|
— | — | — | — | — | — | — | (27,445 | ) | (27,445 | ) | |||||||||||||||||||||||||
Exercise
of stock
options
|
194 | 2 | 1,281 | — | — | — | — | — | 1,283 | |||||||||||||||||||||||||||
Share-based
payment
|
— | — | 2,399 | — | — | — | — | — | 2,399 | |||||||||||||||||||||||||||
Unrealized
loss
on
investments
|
— | — | — | — | — | — | (2,504 | ) | — | (2,504 | ) | |||||||||||||||||||||||||
Balance
at September
30, 2008
|
20,619 | 206 | 189,893 | (884 | ) | (8,684 | ) | — | (2,504 | ) | (67,664 | ) | 111,247 | |||||||||||||||||||||||
Net loss
|
— | — | — | — | — | — | — | (11,506 | ) | (11,506 | ) | |||||||||||||||||||||||||
Exercise
of stock
options
|
68 | 1 | 421 | — | — | — | — | — | 422 | |||||||||||||||||||||||||||
Share-based
payment
|
— | — | 1,509 | — | — | — | — | — | 1,509 | |||||||||||||||||||||||||||
Repurchase
of
common stock
|
— | — | — | (1,565 | ) | (11,587 | ) | — | — | — | (11,587 | ) | ||||||||||||||||||||||||
Impact
of realized losses transferred from Accumulated Other Comprehensive Income
and included in net loss
|
— | — | — | — | — | — | 2,504 | — | 2,504 | |||||||||||||||||||||||||||
Balance
at September
30, 2009
|
20,687 | $ | 207 | $ | 191,823 | (2,449 | ) | $ | (20,271 | ) | $ | — | $ | — | $ | (79,170 | ) | $ | 92,589 |
See
Notes to Consolidated Financial Statements
39
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
|
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
loss
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | (3,034 | ) | |||
Other
comprehensive (loss) income, net of taxes:
|
||||||||||||
Investments
in marketable securities:
|
||||||||||||
Unrealized
(loss) gain
|
— | (2,504 | ) | 2 | ||||||||
Impact
of realized loss transferred from Accumulated Other Comprehensive Income
and included in net loss
|
2,504 | — | — | |||||||||
Foreign
currency translation:
|
||||||||||||
Foreign
currency translation adjustment
|
— | — | 270 | |||||||||
Less
impact of realized gains (transferred from accumulated other comprehensive
income and included in net loss)
|
— | — | (239 | ) | ||||||||
Other
comprehensive income (loss)
|
2,504 | (2,504 | ) | 33 | ||||||||
Comprehensive
loss
|
$ | (9,002 | ) | $ | (29,949 | ) | $ | (3,001 | ) |
See
Notes to Consolidated Financial Statements
40
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
ended September 30,
|
||||||||||||
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | (3,034 | ) | |||
Less:
(Loss) income from discontinued operations, net
|
(6,035 | ) | (15,401 | ) | 15,366 | |||||||
Loss
from continuing operations, net
|
(5,471 | ) | (12,044 | ) | (18,400 | ) | ||||||
Non-cash
items included in net loss from continuing operations:
|
||||||||||||
Depreciation
and amortization
|
6,642 | 5,497 | 4,744 | |||||||||
Provision
for doubtful accounts
|
417 | 239 | (42 | ) | ||||||||
Accrued
forward loss on contracts
|
(28 | ) | (12 | ) | 25 | |||||||
Equity
in net income of unconsolidated affiliate
|
— | — | (475 | ) | ||||||||
Gain
on sale of unconsolidated affiliate
|
— | — | (80 | ) | ||||||||
Foreign
currency translation gain realized on sale of unconsolidated
affiliate
|
— | — | (239 | ) | ||||||||
Settlement
of pension contract
|
— | — | 1,254 | |||||||||
Share-based
compensation
|
2,522 | 2,224 | 1,514 | |||||||||
Write-down
of goodwill and intangible assets
|
— | — | 9,192 | |||||||||
Loss
on trading investments
|
31 | — | — | |||||||||
Other
|
9 | 465 | 8 | |||||||||
Net
effect of changes in assets and liabilities:
|
||||||||||||
Accounts
receivable and unbilled receivables
|
(6,510 | ) | 473 | (1,413 | ) | |||||||
Prepaid
expenses and other assets
|
(89 | ) | 261 | 3,050 | ||||||||
Accounts
payable and accrued liabilities
|
5,399 | 311 | (142 | ) | ||||||||
Income
taxes receivable
|
1 | 19 | 3 | |||||||||
Deferred
income
|
(929 | ) | (859 | ) | 129 | |||||||
Cash
provided by (used in) operating activities from continuing
operations
|
1,994 | (3,426 | ) | (872 | ) | |||||||
Cash
(used in) provided by operating activities from discontinued
operations
|
(5,187 | ) | 3,955 | 14,645 | ||||||||
Cash
(used in) provided by operating activities
|
(3,193 | ) | 529 | 13,773 | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchases
of available-for-sale securities
|
(38,455 | ) | (7,325 | ) | (21,012 | ) | ||||||
Sales
and maturities of available-for-sale securities
|
36,371 | 33,815 | 3,550 | |||||||||
Sales
of trading securities
|
125 | — | — | |||||||||
Purchases
of restricted investments
|
— | — | (22,611 | ) | ||||||||
Sales
and maturities of restricted investments
|
500 | 1,250 | 20,098 | |||||||||
Purchase
of equipment and software
|
(3,889 | ) | (1,951 | ) | (931 | ) | ||||||
Repayment
of notes and accrued interest from related parties
|
— | — | 4,401 | |||||||||
ChoicePay
asset purchase net of cash acquired
|
(6,927 | ) | — | — | ||||||||
Proceeds
from sale of discontinued operations and equity investment
|
1,255 | 8,735 | 4,784 | |||||||||
Collection
of note receivable
|
71 | — | — | |||||||||
Other
investing activities
|
— | — | (164 | ) | ||||||||
Cash
(used in) provided by investing activities for continuing
operations
|
(10,949 | ) | 34,524 | (11,885 | ) | |||||||
Cash
used in investing activities for discontinued operations
|
(437 | ) | (5,057 | ) | (4,010 | ) | ||||||
Cash
(used in) provided by investing activities
|
(11,386 | ) | 29,467 | (15,895 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Net
proceeds from issuance of common stock
|
421 | 1,283 | 213 | |||||||||
Purchase
of company stock
|
(11,587 | ) | — | — | ||||||||
Capital
lease obligations and other financing arrangements
|
(21 | ) | (56 | ) | (26 | ) | ||||||
Cash
(used in) provided by financing activities from continuing
operations
|
(11,187 | ) | 1,227 | 187 | ||||||||
Cash
used in financing activities for discontinued operations
|
— | (4 | ) | (6 | ) | |||||||
Cash
(used in) provided by financing activities
|
(11,187 | ) | 1,223 | 181 | ||||||||
Effect
of exchange rate changes on cash
|
— | — | (11 | ) | ||||||||
Net
(decrease) increase in cash and cash equivalents
|
(25,766 | ) | 31,219 | (1,952 | ) | |||||||
Cash
and cash equivalents at beginning of period
|
47,735 | 16,516 | 18,468 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 21,969 | $ | 47,735 | $ | 16,516 |
41
TIER
TECHNOLOGIES, INC.
|
CONSOLIDATED
SUPPLEMENTAL CASH FLOW INFORMATION
|
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$ | 14 | $ | 11 | $ | 13 | ||||||
Income
taxes paid, net
|
$ | 38 | $ | 24 | $ | 128 | ||||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
Interest
accrued on shareholder notes
|
$ | — | $ | — | $ | 126 | ||||||
Equipment
acquired under capital lease obligations and other financing
arrangements
|
$ | 116 | $ | 28 | $ | 26 | ||||||
Investments
released from restriction
|
$ | — | $ | 2,415 | $ | 3,414 | ||||||
Fair
value of ARS Rights
|
$ | 3,289 | $ | — | $ | — | ||||||
Receivables
from third parties
|
$ | 950 | $ | — | $ | — | ||||||
Transfer
from available-for-sale to trading securities, at par
value
|
$ | 31,325 | $ | — | $ | — | ||||||
Decrease
in fair value of trading securities
|
$ | 816 | $ | — | $ | — | ||||||
Purchase
price of ChoicePay acquisition
|
$ | 7,597 | $ | — | $ | — | ||||||
Fair
value of identifiable net assets acquired
|
$ | 4,794 | $ | — | $ | — | ||||||
Goodwill
arising from ChoicePay acquisition
|
$ | 2,803 | $ | — | $ | — |
See
Notes to Consolidated Financial Statements
42
|
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
NOTE
1—NATURE OF OPERATIONS
|
Tier
Technologies, Inc., or Tier, primarily provides Electronic Payment Solutions, or
EPS (previously referred to as Electronic Payment Processing, or
EPP). EPS services are provided by our wholly owned subsidiary
Official Payments Corporation, or OPC. We operate in the following
biller direct markets:
·
|
Federal—which
includes federal income and business tax
payments;
|
·
|
State
and Local—which includes state and local income tax
payments;
|
·
|
Property
Tax— which covers state and local real property
tax;
|
·
|
Utility;
|
·
|
Education—which
consists of services to post-secondary educational institutions;
and
|
·
|
Other—which
includes local government fines and fees, motor vehicle registration and
payments, rent, insurance, K-12 education meal pay and fee payments, and
personal property tax payments.
|
We also
operated in two other business areas which we are winding down. These
are portions of our former Government Business Process Outsourcing, or GBPO, and
Packaged Software Systems Integration, or PSSI, operations that we expect to
wind down over a four-year period because they are neither compatible with our
long-term strategic direction nor complementary with the other businesses that
we were divesting. These operations include:
· Voice and
Systems Automation (formerly part of GBPO)—provides call center interactive voice response
systems and support services, including customization, installation and
maintenance; and
· Public Pension Administration Systems (formerly part of
PSSI)—provides services to
support the design, development and implementation of pension applications for
state, county and city governments.
For
additional information about our EPS and Wind-down Operations, see Note
12—Segment Information.
For
additional information about businesses in which we no longer operate, and have
divested, see Note 15—Discontinued Operations.
|
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation. These financial statements and the accompanying
notes are prepared in accordance with accounting principles generally accepted
in the United States of America and conform to Regulation S-X under the
Securities Exchange Act of 1934, as amended. We believe we have made
all necessary adjustments so that the financial statements are presented fairly
and that all such adjustments are of a normal recurring nature.
Principles
of Consolidation. The financial statements include the
accounts of Tier Technologies, Inc. and its
subsidiaries. Intercompany transactions and balances have been
eliminated. Prior to the sale of our investment in CPAS, Inc. (an
investment in which we exercised significant influence, but did not control or
act as the primary beneficiary) in June 2007, we accounted for our 46.96%
interest in CPAS using the equity method, under which our share of CPAS’ net
income (loss) was recognized in the period in which it was earned by
CPAS.
Use of
Estimates. Preparing financial statements requires management
to make estimates and assumptions that affect the amounts reported on our
Consolidated Financial Statements and accompanying notes. We believe
that near-term changes could reasonably impact the following
estimates: project costs and percentage of completion; effective tax
rates; deferred taxes and associated valuation allowances;
43
collectibility
of receivables; share-based compensation; and valuation of goodwill, intangibles
and investments. Although we believe the estimates and assumptions
used in preparing our Consolidated Financial Statements and notes thereto are
reasonable in light of known facts and circumstances, actual results could
differ materially.
Foreign
Currencies. We use the local foreign currency as the
functional currency to translate our investment in certain inactive operations
and our former investment in CPAS. The assets and liabilities of the
subsidiaries are translated into U.S. dollars using exchange rates in effect at
the balance sheet date, revenues and expenses are translated using the average
exchange rate for the period and gains and losses from this translation process
are included in Accumulated
other comprehensive loss 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.
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.
Continuing
Operations
Our EPS
operations offer payment solutions services to our clients, which allow them to
offer their constituents (individuals or businesses) the ability to pay certain
financial obligations with their credit or debit cards, electronic check, cash
or money order, depending on the terms of the contract. Our revenue
is generated in the form of the convenience fee we are permitted to charge for
the electronic payment solutions service provided. Depending on the
agreement with the client, the convenience fee can be a fixed fee or a
percentage of the payment processed. In more than 90% of our
arrangements, this fee is charged directly to the constituent and is added to
their payment obligation at the point the payment is processed. Our
clients pay the remainder of the convenience fees we receive. We
recognize the revenue in the month in which the service is
provided.
We use
the percentage-of-completion method to recognize revenue associated with our
Pension wind-down operations, which substantially completed in
September 2009. This method of revenue recognition is discussed
in more detail in the following Discontinued Operations section.
Our
remaining Wind-down operations include software sales and maintenance and
support, as well as non-essential training and consulting. We
recognize the revenues on training and consulting projects in the month the
services are performed. The method of revenue recognition for
software sales and maintenance and support is discussed in more detail in the
following Discontinued Operations section.
Discontinued
Operations
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. As of September 30, 2008 our payment processing and
call center operations were completely divested.
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 it is probable that a contract will 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
44
recorded
as deferred revenue. Amounts recognized as revenue in advance of
contractual billing are recorded as unbilled receivables.
For the
sale of software that does not require significant modification, we recognize
revenues from license fees when persuasive evidence of an agreement exists,
delivery of the software has occurred, no significant implementation or
integration obligations exist, the fee is fixed or determinable and
collectibility is probable. If we do not believe it is probable that
we will collect a fee, we do not recognize the associated revenue until we
collect the payment.
For
software license arrangements with multiple obligations (for example,
undelivered maintenance and support), we allocate revenues to each component of
the arrangement using the residual value method of accounting based on the fair
value of the undelivered elements, which is specific to our
company. Fair value for the maintenance and support obligations for
software licenses is based upon the specific renewal rates.
Our
license agreements do not offer return rights or price protection; therefore, we
do not have provisions for sales returns on these types of
agreements. We do, however, offer routine, short-term warranties that
our proprietary software will operate free of material defects and in conformity
with written documentation. Under these agreements, if we have an
active maintenance agreement, we record a liability for our estimated future
warranty claims, based on historical experience. If there is no
maintenance contract, the warranty is considered implied maintenance and we
defer revenues consistent with other maintenance and support
obligations.
When we
provide ongoing maintenance and support services, the associated revenue is deferred and recognized on a
straight-line basis over the life of the related contract—typically one
year. Generally, we recognize the revenues earned for non-essential
training and consulting support when the services are
performed.
Finally,
under the terms of a number of our contracts, we are reimbursed for certain
costs that we incur to support the project, including travel, 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 as a direct cost in (Loss) income
from discontinued operations, net on 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 as a percentage of gross revenues on the
applicable contracts, to establish an allowance for the reversal of convenience
fees. From October 2008 to June 2009, this rate was 0.35% and was
increased to 0.40% in July 2009. 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 as a reduction against Revenues. The
balance of our allowance for doubtful accounts for Continuing Operations was
$0.4 million at September 30, 2009 and $0.3 million at
September 30, 2008.
Settlements
receivable, net. Individuals and
businesses settle their obligations to our various clients, primarily utility
and other public sector clients, using credit or debit cards or via ACH
payments. We create a receivable for the amount due from the credit
or debit card company or bank and an offsetting payable to the
client. Once we receive confirmation the funds have been received, we
settle the obligation to the client.
Fair
Value of Financial Instruments. The carrying amounts of
certain financial instruments, including cash equivalents, restricted cash,
accounts receivable, accounts payable and accrued liabilities, approximate fair
value due to their short maturities.
Investments
in Marketable Securities. Investments in marketable securities
are composed of available-for-sale securities and trading
securities. Restricted investments pledged in connection with
performance bonds and real estate operating leases are reported as Restricted investments on the
Consolidated Balance
45
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 trading securities and recorded at estimated fair value,
based on quoted market prices, or financial models if quoted market prices are
unavailable. Increases and decreases in fair value are recorded as
unrealized gains and losses in Other comprehensive income
for available-for-sale securities, and are recorded in the Consolidated
Statements of Operations as Loss in investments for trading
securities. Realized gains and losses and declines in fair value
judged to be other-than-temporary are included in the Consolidated Statements of
Operations as a Loss on
investment. Interest earned is included in Interest income,
net.
Our
securities are municipal bonds collateralized with student
loans. These municipal bonds are bought and sold in the marketplace
through a bidding process sometimes referred to as a "Dutch
Auction." Beginning in February 2008 we began to experience
unsuccessful auctions resulting from the uncertainty and turmoil of the credit
markets, particularly with the concerns about mortgage-backed
securities. Due to the lack of liquidity in the market, during fiscal
2008 we began classifying our investments in marketable securities as
long-term.
In
November 2008, we entered into an agreement with our investment manager,
UBS AG, or UBS, which entitles us to sell our Auction Rate Securities, or ARS,
to UBS for a price equal to the par value plus accrued but unpaid interest over
a given period of time. For complete details on this agreement,
please see Note 3—Investments. We value this agreement in accordance
with US GAAP at the fair value option for recognized financial assets, in order
to match the changes in the fair value of the ARS. Consistent with
this accounting treatment, we record unrealized gains and losses in Loss on investment in our
Consolidated Statements of Operations.
Prior
to entering into the agreement with UBS, we recorded our ARS as investments
available-for-sale. We recorded unrealized gains and losses on our
available-for-sale debt securities in Accumulated other comprehensive
loss in the shareholders’ equity section of our Consolidated Balance
Sheets. Such an unrealized loss did not reduce net income for the
applicable accounting period. In connection with entry into the UBS
agreement in November 2008, we transferred our ARS from investments
available-for-sale to trading securities in accordance with US
GAAP. The transfer to trading securities reflects management’s intent
to exercise our rights related to our ARS under our agreement with UBS, or ARS
Rights, during the period June 30, 2010 through July 2,
2012. Prior to our agreement with UBS, our intent was to hold the ARS
until the market recovered. We record gains or losses on trading
securities in Loss on
investment in our Consolidated Statements of Operations.
Advertising
Expense. We expense advertising costs, net of cooperative
advertising cash contributions received from partners, during the period the
advertising takes place. We incurred $0.4 million during fiscal
2009, $0.5 million during fiscal 2008, and $0.7 million during fiscal
2007 of net advertising expenses from Continuing Operations.
Property,
Equipment and Software. Property, equipment and software are
stated at cost and depreciated using the straight-line method over the shorter
of the estimated useful lives of the assets or the lease terms, ranging from
three to seven years. When assets are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations in the period
realized.
We
expense the cost of software that we expect to sell, lease or market as research
and development costs, prior to the time that technical feasibility is
established. Once technical feasibility is established, we capitalize
software development costs until the date that the software is available for
sale. Similarly, we expense the costs incurred for software that we
expect to use internally until the preliminary project stage has been
completed. Subsequently, we capitalize direct service and material
costs, as well as direct payroll and payroll-related costs and interest costs
incurred during development. We amortize capitalized software costs
at the greater of (a) the ratio of current revenues to total projected revenues
or (b) the straight-line method over the estimated remaining economic life of
the software. During fiscal year 2009 we recognized
46
$2.6 million
in impairment expense related to internally-developed software related to our
discontinued operations.
Goodwill. Goodwill
is typically tested for impairment on an annual basis at the end of each fiscal
year and between annual tests if indicators of potential impairment exist, using
a fair-value based approach. Subsequent to the decision during fiscal
2007 to divest certain portions of our operations through September 30,
2008, we have tested our goodwill for impairment on a quarterly
basis. Impairment for the operations classified as held-for-sale is
recorded in Discontinued Operations and impairment for all other operations,
including Wind-down Operations is recorded in Continuing
Operations. During fiscal 2008 we recorded goodwill impairment and
sale-related write downs of $8.8 million for Discontinued
Operations. During fiscal 2007 we recorded goodwill impairment of
$8.5 million for Continuing Operations and $2.5 million for
Discontinued Operations.
Intangible
Assets. We amortize intangible assets with finite lives over
their estimated benefit period, ranging from five to 16 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 existed during
fiscal 2009.
Held-For-Sale
Assets and Liabilities. Held-for-sale assets
and liabilities are presented on our Consolidated Balance Sheet at the lower of
their carrying value or fair value less costs to sell, once the criteria for
held-for-sale status has been met. In accordance with US GAAP, assets
are not depreciated or amortized while they are classified as held-for-sale. At
the time the asset group is classified as held-for-sale and during each
subsequent reporting period, we also evaluate goodwill for impairment at the
segment level, whenever the businesses classified as held-for-sale have been
fully integrated into the segment and the acquired goodwill benefits the rest of
the reporting unit. In the event that the asset group being disposed
of represents a business that is part of a segment, we allocate goodwill to be
included in the carrying amount of the business based on the relative fair
values of the business to be disposed of in relation to the remaining businesses
in the segment, in accordance with US GAAP.
(Loss)
Earnings Per Share. Basic (loss) earnings per share are
computed by dividing net (loss) income by the weighted-average number of shares
of common stock outstanding for the period. Diluted earnings per
share reflect 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. Share-based compensation cost for an option award is
measured at the grant date based on the fair value of the award and is
recognized as expense over the applicable vesting period of the award (typically
three to five years) using the ratable method. We also issue
restricted stock units and performance stock units. For restricted
stock units issuable in shares, we measure the award at the grant date fair
value and recognize the expense over the applicable vesting period of three
years. For the restricted stock units and performance stock units
payable in cash, we record expense based on the fair value of the awards on the
dates of each valuation, consistent with the recognition of awards classified as
liabilities under US GAAP.
Income
Taxes. Deferred income taxes are provided for the tax effect
of temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements. The liability
method is used to account for income taxes, which requires deferred taxes to be
recorded at the statutory rate expected to be in effect when the taxes are paid
or the differences are reversed. Valuation allowances are established
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. We
recognize the tax benefit of an uncertain tax position only if it is
more-likely-than-not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the
position.
Accumulated
Comprehensive (Loss) Income. Our accumulated comprehensive
(loss) income is composed of net (loss) income, foreign currency translation
adjustments and unrealized gains (losses) on marketable investment securities,
net of related taxes.
47
Guarantees. We
record guarantees at the fair value of the guarantee at its inception when a
guarantor is required to make payments to the guaranteed party upon failure of
the third party to perform under the obligations of the contract.
Accrued
Discount Fees. Our direct costs for our EPS operations
primarily consist of credit card interchange fees, in addition to assessments
and other costs passed onto us by our processors. Collectively, these
fees and costs are considered to be discount fees. Discount fees are
charged to us as a percentage of the dollar volume we transact, and for expense
purposes, are incurred during the month that the related transaction is
authorized for payment. Accrued discount fees represent the total
amount of discount fees which have been incurred by us on authorized
transactions, but have yet to be remitted by us as of the reporting
date. Discount fees are typically remitted by us in the calendar
month which follows the date of transaction authorization.
RECENT
ACCOUNTING PRONOUNCEMENTS
FASB ASC
810. In December 2007, the Financial Accounting Standards
Board, or FASB, issued Accounting Standard Codification, or ASC, 810, or FASB
ASC 810, which requires companies to measure noncontrolling interests in
subsidiaries at fair value and to classify them as a separate component of
equity. FASB ASC 810 is effective as of each reporting fiscal year
beginning after December 15, 2008, and applies only to transactions
occurring after the effective date. We will adopt FASB ASC 810
beginning October 1, 2009. We do not believe that the adoption
of FASB ASC 810 will have a material effect on our financial position or results
of operations.
FASB ASC
805. In December 2007, FASB issued FASB ASC 805, which
will require companies to measure assets acquired and liabilities assumed in a
business combination at fair value. In addition, liabilities related
to contingent consideration are to be re-measured at fair value in each
subsequent reporting period. FASB ASC 805 will also require the
acquirer in pre-acquisition periods to expense all acquisition-related
costs. FASB ASC 805 is effective for fiscal years beginning after
December 15, 2008, and is applicable only to transactions occurring after
the effective date. We will adopt FASB ASC 805 beginning
October 1, 2009. We are currently evaluating the effect the
adoption of FASB ASC 805 will have on our financial position and results of
operations.
FASB ASC
350-30-35-1. In April 2008, FASB issued FASB ASC
350-30-35-1. This ASC amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. FASB ASC 350-30-35-1 improves the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset under
other applicable accounting literature. We will adopt FASB ASC 350-30-35-1
beginning on October 1, 2009. We are currently evaluating the
impact this ASC will have on our financial position and results of
operations.
FASB ASC
820. In April 2009, the FASB issued three related staff
positions to clarify the application of FASB ASC 820 to fair value measurements
in the current economic environment, modify the recognition of
other-than-temporary impairments of debt securities, and require companies to
disclose the fair value of financial instruments in interim periods. The final
staff positions are effective for interim and annual periods ending after June
15, 2009.
·
|
FASB
ASC 820 (transitional 820-10-65-4)—which provides guidance on how to
determine the fair value of assets and liabilities under FASB ASC 820 in
the current economic environment and reemphasizes that the objective of a
fair value measurement remains the price that would be received to sell an
asset or paid to transfer a liability at the measurement
date.
|
·
|
FASB
ASC 320— which modifies the requirements for recognizing
other-than-temporarily impaired debt securities and significantly changes
the existing impairment model for such securities. It also modifies the
presentation of other-than-temporary impairment losses and increases the
frequency of and expands already required disclosures about
other-than-temporary impairment for debt and equity
securities.
|
48
·
|
FASB
ASC 820-10-50—which requires disclosures of the fair value of financial
instruments within the scope of FASB ASC 820 in interim financial
statements, adding to the current requirement to make those disclosures in
annual financial statements. The staff position also requires that
companies disclose the method or methods and significant assumptions used
to estimate the fair value of financial instruments and a discussion of
changes, if any, in the method or methods and significant assumptions
during the period.
|
We have
adopted the new staff positions as of June 30, 2009. These new
staff positions did not have a material impact on our financial position and
results of operations.
FASB ASC
860. In June 2009, the FASB issued ASC 860, which
eliminates the concept of a qualifying special-purpose entity, creates more
stringent conditions for reporting a transfer of a portion of a financial asset
as a sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor’s interest in transferred financial assets. FASB ASC
860 will be effective for transfers of financial assets in fiscal years
beginning after November 15, 2009, and in interim periods within those
fiscal years with earlier adoption prohibited. We will adopt FASB ASC 860 on
October 1, 2010.
|
NOTE
3—INVESTMENTS
|
DEBT
AND EQUITY SECURITIES
We own
investments in marketable securities designated as available-for-sale or trading
securities as defined by US GAAP. Restricted investments totaling
$1.4 million at September 30, 2009, and $1.9 million at
September 30, 2008 were pledged in connection with performance bonds and
real estate operating leases and will be restricted for the terms of the project
performance periods and lease periods, the latest of which is estimated to end
in March 2010. Our bank requires us to maintain a $6.0 million
money market investment as a compensating balance to guarantee availability of
funds for processing outgoing Automated Clearing House payments to our
clients. These investments are reported as Restricted investments on the
Consolidated Balance Sheets.
We
evaluate certain available-for-sale investments for other-than-temporary
impairment when the fair value of the investment is lower than its book
value. Factors that management considers when evaluating for
other-than-temporary impairment include: the length of time and the
extent to which market value has been less than cost; the financial condition
and near-term prospects of the issuer; interest rates; credit risk; the value of
any underlying portfolios or investments; and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in the market. We do not adjust the recorded book value for declines
in fair value that we believe are temporary, if we have the intent and ability
to hold the associated investments for the foreseeable future and we have not
made the decision to dispose of the securities as of the reported
date.
At
September 30, 2009 and September 30, 2008, our investment portfolio
included $31.2 million and $31.3 million, respectively, par value of
municipal bonds that were collateralized with student loans. These
municipal bonds are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch Auction.” After the initial
issuance of the securities, the interest rate on the securities is reset at
prescribed intervals (typically every 28 days), based upon the market demand for
the securities on the reset date. We refer to these securities as
auction rate securities, or ARS. Beginning in February 2008, some of
the auctions for these securities were unsuccessful. Our investments
are rated AAA, the issuers are current on all of their payment obligations, and
we continue to earn interest on our auction rate security investments at the
pre-determined contractual rate. As a result of the unsuccessful
auctions and the uncertainty in the credit market, the estimated fair value of
the investments no longer approximates par value. During the fiscal
year ended September 30, 2008, we recorded an unrealized loss of
$2.5 million, which is included in Accumulated other comprehensive
loss on our Consolidated Balance Sheets, to write down the book value of
the investments to fair market value. We determined fair market value
of our investments using a discounted cash flow approach. During
fiscal 2008 we reclassified these securities from current Investments
49
in marketable securities to
long-term Investments in
marketable securities on our Consolidated Balance Sheets as a result of
the lack of liquidity due to market conditions.
On
November 11, 2008, we accepted an offer from our investment manager, UBS
AG, or UBS, providing us with rights related to our ARS, or ARS Rights or the
Rights. The ARS Rights (which have features that operate like put
options) were covered in a prospectus dated October 7, 2008. The
ARS Rights entitle us to sell our existing ARS to UBS for a price equal to the
par value plus accrued but unpaid interest, at any time during the period
June 30, 2010 through July 2, 2012. The ARS Rights also
grant to UBS the sole discretion and right to sell or otherwise dispose of our
eligible ARS at any time until July 2, 2012, without prior notification, so
long as we receive a payment of par value plus any accrued but unpaid
interest. We expect to sell our ARS under the Rights
offering. If the ARS Rights are not exercised before July 2,
2012, they will expire and UBS will have no further rights or obligation to buy
our ARS. So long as we hold our ARS, they will continue to accrue and
pay interest as determined by the auction process or the terms of the ARS if the
auction process fails.
The ARS
Rights represent a firm agreement in accordance with US GAAP, which defines a
firm agreement as an agreement with an unrelated party, binding on both parties
and usually legally enforceable, with the following characteristics: (a) the
agreement specifies all significant terms, including the quantity to be
exchanged, the fixed price, and the timing of the transaction, and (b) the
agreement includes a disincentive for nonperformance that is sufficiently large
to make performance probable.
The
issuance of a prospectus and the settlements UBS executed with the Securities
and Exchange Commission and other state regulatory authorities provide the
assurance that our agreement with UBS is legally enforceable. The
terms of the settlement agreement have been communicated to the public and our
rights under the settlement are spelled out in the prospectus.
The ARS
Rights between Tier and UBS relate to the ARS held by us, but are not embedded
in or attached to the ARS. Rather, the ARS Rights are freestanding
instruments that must be accounted for separately from the ARS. US
GAAP defines a freestanding financial instrument as a “financial instrument that
is entered into separately and apart from any of the entity’s other financial
instruments or equity transactions, or that is entered into in conjunction with
some other transaction that is legally detachable and separately
exercisable.” The ARS Rights are contractual arrangements entered
into between UBS and Tier, are legally separate from the ARS, and can be
exercised independently of any other instrument or event.
US GAAP
permits us to measure the ARS Rights, a recognized financial asset, at fair
value in order to match the changes in the fair value of the ARS. As
a result, unrealized gains and losses have been included in earnings and will
continue to be included in future periods. At September 30, 2009
we recorded the fair value of the Rights as $3.3 million with a credit to
Loss on investments in
our Consolidated Statements of Operations. We expect that future
changes in the fair value of the Rights will approximate fair value movements in
the related ARS.
Prior
to accepting the UBS offer, we recorded our ARS as investments
available-for-sale. We recorded unrealized gains and losses on our
available-for-sale debt securities in Accumulated other comprehensive
loss in the shareholders’ equity section of our Consolidated Balance
Sheets. Such an unrealized loss did not reduce net income for the
applicable accounting period. In connection with our acceptance of
the UBS offer in November 2008, we transferred our ARS from investments
available-for-sale to trading securities in accordance with US
GAAP. The transfer to trading securities reflects management’s intent
to exercise our ARS Rights during the period June 30, 2010 through
July 2, 2012. Prior to our agreement with UBS, our intent was to
hold the ARS until the market recovered. The transfer to trading
securities resulted in recognizing a loss of $3.3 million in Loss on investment in our
Consolidated Statements of Operations for the year ended September 30,
2009, an increase of $0.8 million compared to the unrealized loss of
$2.5 million at September 30, 2008.
The
funds associated with failed auctions will not be accessible until a successful
auction occurs, the issuer calls or restructures the underlying security, we
exercise our ARS Rights, the underlying security matures and is paid (all of our
securities have maturities in excess of ten years) or a buyer outside the
auction
50
process
emerges. We do not believe the unsuccessful auctions experienced to
date are the result of the deterioration of the underlying credit quality of
these securities, since our securities are municipal bonds collateralized with
student loans. Securities collateralized with student loans are
guaranteed by the issuing state and the Federal Family Education Loan
Program. Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy. UBS has also decided to
participate in the US Treasury's Temporary Guarantee Program. Even
with these assurances, we intend to convert our investments in auction rate
securities to other investments as liquidity returns and conditions
permit.
Unrestricted
investments with original maturities of 90 days or less (as of the date that we
purchased the securities) are classified as cash equivalents. Except
for our restricted investments, ARS, and ARS Rights, all other investments are
categorized as available-for-sale investments. These securities are
recorded at estimated fair value, based on quoted market prices or pricing
methodologies. Increases and decreases in fair value are recorded as
unrealized gains and losses in other comprehensive income. As
explained above ARS and ARS Rights are classified as trading securities with
changes in fair value recorded in current earnings.
The
following table shows the balance sheet classification, amortized cost and
estimated fair value of investments included in current and long-term
investments in marketable securities:
September
30, 2009
|
September
30, 2008
|
|||||||||||||||||||||||||||
(in
thousands)
|
Amortized
cost
|
Unrealized
loss
|
Net
loss
impact
|
Estimated
fair value
|
Amortized
cost
|
Unrealized
loss
|
Estimated
fair value
|
|||||||||||||||||||||
Investments
in marketable securities:
|
||||||||||||||||||||||||||||
Treasury
bills
|
$ | 4,499 | $ | — | $ | — | $ | 4,499 | $ | — | $ | — | $ | — | ||||||||||||||
Certificates
of deposit
|
— | — | — | — | 2,415 | — | 2,415 | |||||||||||||||||||||
Total
marketable securities
|
4,499 | — | — | 4,499 | 2,415 | — | 2,415 | |||||||||||||||||||||
Long-term
investments in marketable securities:
|
||||||||||||||||||||||||||||
Trading
investments:
|
||||||||||||||||||||||||||||
Debt
securities (State and local bonds)
|
31,200 | — | (3,320 | ) | 27,880 | — | — | — | ||||||||||||||||||||
Auction
rate securities Rights Series
|
— | — | 3,289 | 3,289 | — | — | — | |||||||||||||||||||||
Total
trading investments
|
31,200 | — | (31 | ) | 31,169 | — | — | — | ||||||||||||||||||||
Available-for-sale
investments:
|
||||||||||||||||||||||||||||
Debt
securities (State and local bonds)
|
— | — | — | — | 31,325 | (2,504 | ) | 28,821 | ||||||||||||||||||||
Total
available-for-sale investments
|
— | — | — | — | 31,325 | (2,504 | ) | 28,821 | ||||||||||||||||||||
Total
investments
|
$ | 35,699 | $ | — | $ | (31 | ) | $ | 35,668 | $ | 33,740 | $ | (2,504 | ) | $ | 31,236 |
As of
September 30, 2009, all of the debt securities that were included in
short-term marketable securities had remaining maturities within one
year. As of September 30, 2009, all the debt securities included
as trading investments have maturities in excess of ten years. While
all of these trading securities have long-term maturities, they are all auction
rate securities with interest rates that typically reset every 28
days.
EQUITY
INVESTMENTS
In June
2007 we sold our 46.96% investment of the outstanding common stock of CPAS, a
Canadian-based supplier of pension administration software systems, back to CPAS
for $4.8 million (USD). The sale price was approximately equal
to the US-dollar equivalent of our book value in the CPAS investment as of
June 30, 2007, plus estimated taxes and other disposal costs. In
June 2007, we recorded a gain of $80,000 on the sale of this investment and
realized a foreign currency gain on the investment of $239,000.
51
|
NOTE
4—FAIR VALUE MEASUREMENTS
|
Fair
value is defined under US GAAP as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The fair value hierarchy
is based on three levels of inputs that may be used to measure fair value as
follows:
Level
1—Quoted prices in active markets for identical assets or
liabilities.
Level
2—Inputs other than quoted prices in active markets, that are observable, either
directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level
3—Unobservable inputs, for which there is little or no market data for the
assets or liabilities.
The
following table represents the fair value hierarchy for our financial assets,
comprised of cash equivalents and investments, measured at fair value on a
recurring basis as of September 30, 2009.
Fair value measurements as of September 30,
2009
|
||||||||||||||||
(in
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Cash
equivalents:
|
||||||||||||||||
Money
market
|
$ | 816 | $ | — | $ | — | $ | 816 | ||||||||
Investments
in marketable securities:
|
||||||||||||||||
U.S.
Treasury bills
|
4,499 | — | — | 4,499 | ||||||||||||
Debt
securities
|
— | — | 27,880 | 27,880 | ||||||||||||
Auction
Rate Securities Rights
|
— | — | 3,289 | 3,289 | ||||||||||||
Restricted
investments:
|
||||||||||||||||
Money
market
|
6,000 | — | — | 6,000 | ||||||||||||
Certificates
of deposit
|
— | 1,361 | — | 1,361 | ||||||||||||
Total
|
$ | 11,315 | $ | 1,361 | $ | 31,169 | $ | 43,845 |
We
value ARS using a discounted cash flow approach. The assumptions used
in preparing the discounted cash flow model included estimates of the amount and
timing of future interest and principal payments, projections of interest rate
benchmarks, probability of full repayment of the principal considering the
credit quality of the issuers, and the rate of return required by investors to
own ARS given the current liquidity risk. The ARS Rights are a free
standing asset separate from the ARS. In order to value the ARS
Rights, we considered the intrinsic value, time value of money, and the
creditworthiness of UBS.
Changes
in fair value measurements of our securities are included in Loss on investment on our
Consolidated Statements of Operations. The following table presents a
reconciliation of all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3):
(in
thousands)
|
Significant
unobservable inputs (Level 3)
|
|||
Balance
at October 1, 2008
|
$ | 28,821 | ||
Change
in temporary valuation adjustment included in Accumulated other
comprehensive loss
|
2,504 | |||
Sale
of debt security
|
(125 | ) | ||
Loss
included in earnings
|
(3,320 | ) | ||
Recognition
of ARS rights
|
3,289 | |||
Balance
at September 30, 2009
|
$ | 31,169 |
52
|
NOTE
5—CUSTOMER CONCENTRATION AND RISK
|
We
derive a significant portion of our revenue from a limited number of
governmental customers. Typically, the contracts allow these
customers to terminate all or part of the contract for convenience or
cause. We have one client, the Internal Revenue Service, or IRS,
whose revenues exceeds 10% of revenues from EPS operations.
The
following table shows the revenues specific to our contract with the
IRS:
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Revenue
|
$ | 24,354 | $ | 32,572 | $ | 28,138 | ||||||
Percentage
of EPS Operations revenue
|
19.8 | % | 27.8 | % | 28.3 | % |
Accounts
receivable, net. As of
September 30, 2009 and 2008, we reported $4.8 million and
$4.2 million, respectively, in Accounts receivable, net on
our Consolidated Balance Sheets. This item represents the short-term portion of
receivables from our customers and other parties and retainers that we expect to
receive. Approximately 30.9% and 32.7% of the balances reported at
September 30, 2009 and 2008, respectively, represent accounts receivable, net
that is attributable to operations that we intend to wind down during the course
of the next three years. Within our Wind-down operations, we have one
client whose accounts receivable balance makes up 21.9% of our total receivable
balance at September 30, 2009. The remainder of the Accounts receivable, net
balance is composed of receivables from certain of our EPS
customers. None of our EPS customers have receivables that exceed 10%
of our total receivable balance. As of September 30, 2009 and
2008, Accounts receivable,
net included an allowance for uncollectible accounts of
$0.3 million, which represents the balance of receivables that we believe
are likely to become uncollectible.
Certain
of our contracts allow customers to retain a portion of the amounts owed to us
until predetermined milestones are achieved or until the project is
completed. At September 30, 2008, Accounts receivable, net
included $0.4 million, of retainers that were received during fiscal
2009.
Settlements
receivable, net. As of
September 30, 2009, we reported $6.3 million in Settlements receivable, net
on our Consolidated Balance Sheets, which represents amounts due from
credit or debit card companies or banks. Individuals and businesses
settle their obligations to our various clients, primarily utility and other
public sector clients, using credit or debit cards or via ACH
payments. We create a receivable for the amount due from the credit
or debit card company or bank and an offsetting payable to the
client. Once we receive confirmation the funds have been received, we
settle the obligation to the client. See Note 9—Contingencies and
Commitments for information about the settlements payable to our
clients.
|
NOTE
6—PROPERTY, EQUIPMENT AND SOFTWARE
|
Property, equipment and software,
net consist of the following:
September
30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Software
|
$ | 5,003 | $ | 1,728 | ||||
Computer
equipment
|
4,563 | 6,650 | ||||||
Furniture
and equipment
|
1,294 | 2,279 | ||||||
Land
and building
|
2,651 | 2,651 | ||||||
Leasehold
improvements
|
290 | 411 | ||||||
Total
property, equipment and software, gross
|
13,801 | 13,719 | ||||||
Less:
Accumulated depreciation and amortization
|
(5,811 | ) | (9,240 | ) | ||||
Total
property, equipment and software, net
|
$ | 7,990 | $ | 4,479 |
53
We
depreciate fixed assets on a straight-line basis over their estimated useful
lives. Leasehold improvements are amortized over the lesser of the
estimated remaining life of the leasehold or the remaining term of the lease.
Depreciation and amortization expense associated with property, equipment and
software that we held and used for our Continuing Operations is reported on the
following lines on our Consolidated Statements of Operations:
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Depreciation
and amortization expenses for property, equipment and
software:
|
||||||||||||
Included
in Direct
costs:
|
||||||||||||
Software
|
$ | 26 | $ | 12 | $ | 12 | ||||||
Equipment
|
47 | 78 | 77 | |||||||||
Total
included in Direct
costs
|
73 | 90 | 89 | |||||||||
Included
in Depreciation and
amortization:
|
||||||||||||
Software
|
410 | 180 | 171 | |||||||||
Equipment
|
1,198 | 964 | 828 | |||||||||
Total
included in Depreciation
and amortization
|
1,608 | 1,144 | 999 | |||||||||
Total
depreciation and amortization expense for property, equipment and
software
|
$ | 1,681 | $ | 1,234 | $ | 1,088 |
In
addition to the depreciation and amortization reflected in the above table, the
line titled (Loss) income from
discontinued operations, net on our Consolidated Statements of Operations
included depreciation and amortization expenses of $79,000 for fiscal 2008 and
$1.9 million for fiscal 2007. These amounts represent depreciation and
amortization expense that was recorded until these assets were classified as
held for sale. Property, equipment, software and capitalized leases
used by our operations that are held-for-sale are reported as Current assets—held-for-sale
on our Consolidated Balance Sheets. See Note
15—Discontinued Operations for additional information
The
cost of assets acquired under capital leases for our Continuing Operations was
approximately $152,000 at September 30, 2009 and $261,000 at September 30,
2008. The related accumulated depreciation and amortization was $44,000 at
September 30, 2009 and $210,000 at September 30, 2008.
|
NOTE
7—GOODWILL AND OTHER INTANGIBLE
ASSETS
|
GOODWILL
In
January 2009 we purchased substantially all of the assets of ChoicePay, Inc.,
and recorded $2.8 million in goodwill associated with the
transaction. The following table summarizes changes in the carrying
amount of goodwill during fiscal years 2009 and 2008 for our Continuing and
Discontinued Operations. The goodwill for our Continuing Operations
is reported on the line titled Goodwill on our Consolidated
Balance Sheets, while the goodwill for our Discontinued Operations is included
in the line titled Current
assets—held-for-sale.
Continuing
Operations
|
Discontinued
Operations
|
|||||||||||||||||||||||||||
(in
thousands)
|
EPS
|
Wind-down
|
Total
|
GBPO
|
PSSI
|
Total
|
Total
|
|||||||||||||||||||||
Balance
at September 30, 2007
|
$ | 14,526 | $ | — | $ | 14,526 | $ | 3,219 | $ | 8,907 | $ | 12,126 | $ | 26,652 | ||||||||||||||
Fiscal
year 2008 goodwill impairment
|
— | — | — | (141 | ) | (8,470 | ) | (8,611 | ) | (8,611 | ) | |||||||||||||||||
Goodwill
write-off (divestitures)
|
— | — | — | (3,078 | ) | (437 | ) | (3,515 | ) | (3,515 | ) | |||||||||||||||||
Balance
at September 30, 2008
|
14,526 | — | 14,526 | — | — | — | 14,526 | |||||||||||||||||||||
ChoicePay,
Inc. Asset Purchase
|
2,803 | — | 2,803 | — | — | — | 2,803 | |||||||||||||||||||||
Balance
at September 30, 2009
|
$ | 17,329 | $ | — | $ | 17,329 | $ | — | $ | — | $ | — | $ | 17,329 |
As a
general practice, we test goodwill for impairment during the fourth quarter of
each fiscal year at the reporting unit level using a fair value
approach. If an event occurs or circumstances change that would
more
54
likely
than not reduce the fair value of a reporting unit below its carrying value, we
would evaluate goodwill for impairment between annual tests. One such
triggering event is when there is a more-likely-than-not expectation that a
reporting unit or a significant portion of a reporting unit will be sold or
otherwise disposed of.
In the
quarter ended September 30, 2008, we reviewed for impairment the goodwill
assets classified as held-for-sale, as well as goodwill for our assets
classified as held and used. As a result of the quarterly and annual
reviews, we identified the need to reduce goodwill for our Discontinued
Operations by $8.6 million. We recorded an additional
$3.5 million reduction of goodwill associated with the divestiture of
certain business units.
OTHER
INTANGIBLE ASSETS, NET
Currently,
all of our other intangible assets are included in Continuing
Operations. We test our other intangible assets for impairment when
an event occurs or circumstances change that would more likely than not reduce
the fair value of the assets below the carrying value. No such events
occurred during fiscal years ended September 30, 2009 or
2008. The following table summarizes Other intangible assets, net,
for our Continuing Operations:
September
30, 2009
|
September
30, 2008
|
||||||||||||||||||||||||
(in
thousands)
|
Amortization
period
|
Gross
|
Accumulated
amortization
|
Net
|
Gross
|
Accumulated
amortization
|
Net
|
||||||||||||||||||
Client
relationships
|
8
-16 years
|
$ | 28,408 | $ | (20,353 | ) | $ | 8,055 | $ | 28,408 | $ | (16,829 | ) | $ | 11,579 | ||||||||||
Add:
ChoicePay, Inc.
|
1,629 | (204 | ) | 1,425 | — | — | — | ||||||||||||||||||
30,037 | (20,557 | ) | 9,480 | 28,408 | (16,829 | ) | 11,579 | ||||||||||||||||||
Technology
and research and development
|
5
years
|
3,966 | (3,956 | ) | 10 | 3,966 | (3,317 | ) | 649 | ||||||||||||||||
Add:
ChoicePay, Inc.
|
1,652 | (236 | ) | 1,416 | — | — | — | ||||||||||||||||||
5,618 | (4,192 | ) | 1,426 | 3,966 | (3,317 | ) | 649 | ||||||||||||||||||
Trademarks
|
6
-10 years
|
3,200 | (2,293 | ) | 907 | 3,200 | (1,973 | ) | 1,227 | ||||||||||||||||
Add:
ChoicePay, Inc.
|
263 | (38 | ) | 225 | — | — | — | ||||||||||||||||||
3,463 | (2,331 | ) | 1,132 | 3,200 | (1,973 | ) | 1,227 | ||||||||||||||||||
Other
intangible assets, net
|
$ | 39,118 | $ | (27,080 | ) | $ | 12,038 | $ | 35,574 | $ | (22,119 | ) | $ | 13,455 |
All of
our other intangible assets have finite lives and, as such, are subject to
amortization. Amortization expense for other intangible assets was
$5.0 million for fiscal 2009, $4.2 million for fiscal 2008, and
$3.6 million for fiscal 2007, all of which is related to Continuing
Operations. As of September 30, 2009, we expect to recognize the
following amortization expense on other intangible assets over the next five
years:
(in
thousands)
|
Future
expense
|
|||
Years
ending September 30,
|
||||
2010
|
$ | 4,514 | ||
2011
|
3,445 | |||
2012
|
2,951 | |||
2013
|
599 | |||
2014
|
145 | |||
Thereafter
|
384 | |||
Total
future amortization expense
|
$ | 12,038 |
55
|
NOTE
8—INCOME TAXES
|
Significant
components of the provision for income taxes are as follows:
Continuing
Operations
|
Discontinued
Operations
|
|||||||||||||||||||||||
Year
ended September 30,
|
Year
ended September 30,
|
|||||||||||||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
Current
income tax provision:
|
||||||||||||||||||||||||
State
|
$ | 40 | $ | 87 | $ | 76 | $ | — | $ | — | $ | — | ||||||||||||
Federal
|
— | — | — | — | — | (7,599 | ) | |||||||||||||||||
Total
provision for income taxes
|
$ | 40 | $ | 87 | $ | 76 | $ | — | $ | — | $ | (7,599 | ) |
The
effective tax rate differs from the applicable U.S. statutory federal income tax
rate as follows:
Year
ended September 30,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
U.S.
statutory federal tax rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State
taxes, net of federal tax benefit
|
2.9 | % | 4.1 | % | 3.9 | % | ||||||
Tax
exempt interest income
|
— | 0.1 | % | 0.2 | % | |||||||
Meals
and entertainment
|
(0.7 | )% | (0.6 | )% | (0.9 | )% | ||||||
Goodwill
and intangible asset impairment
|
— | — | (27.7 | )% | ||||||||
Valuation
allowance
|
(32.9 | )% | (34.1 | )% | (7.0 | )% | ||||||
Stock-based
compensation
|
(4.8 | )% | (3.6 | )% | (3.2 | )% | ||||||
Other
|
0.8 | % | (0.6 | )% | — | |||||||
Effective tax
rate
|
(0.7 | )% | (0.7 | )% | (0.7 | )% |
Deferred
income taxes reflect the tax effect of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The components of deferred
income tax assets and liabilities are as follows:
September 30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Deferred
tax assets:
|
||||||||
Accrued
expenses
|
$ | 1,224 | $ | 2,587 | ||||
Depreciation
|
— | 151 | ||||||
Accounts
receivable allowance
|
13 | 240 | ||||||
Intangibles
|
4,129 | 1,941 | ||||||
Other
deferred tax assets
|
1,030 | 1,263 | ||||||
Net
operating loss carryforward
|
38,111 | 33,229 | ||||||
Valuation
allowance
|
(43,763 | ) | (36,698 | ) | ||||
Total
deferred tax assets
|
744 | 2,713 | ||||||
Deferred
tax liabilities:
|
||||||||
Depreciation
|
132 | — | ||||||
Internally
developed software
|
— | 2,104 | ||||||
Other
deferred tax liabilities
|
326 | 322 | ||||||
Investment
in subsidiary
|
286 | 287 | ||||||
Total
deferred tax liabilities
|
744 | 2,713 | ||||||
Net
deferred tax assets (liabilities)
|
$ | — | $ | — |
At
September 30, 2009, we had $98.9 million of federal net operating loss
carryforwards, which begin to expire in fiscal 2018 through 2029. At
September 30, 2009, we had $82.1 million of state net operating loss
carryforwards, most of which begin to expire after fiscal 2017 through
2024.
56
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. In evaluating our ability to realize
deferred tax assets, we considered all available positive and negative
evidence. As of September 30, 2009, we maintained a full
valuation allowance against the net deferred tax assets due to the uncertainty
regarding utilization. As of September 30, 2009, a total of
$20.3 million of the valuation allowance related to deferred tax assets for
which any subsequently recognized tax benefits would be subject to FASB
ASC 805, therefore adjustments to the valuation allowances will be recorded
as a component of income tax expense, and $3.0 million of the valuation
allowance related to deferred tax assets for which any subsequent recognized tax
benefits would increase common stock.
We have
completed a detailed study regarding the application of Section 382 of the
Internal Revenue Code of 1986 (Section 382) which imposes an annual limitation
on the utilization of net operating loss carryforwards following an ownership
change. Application of the findings of this study resulted in a
limitation of net operating loss carryforward amounts. Of the
$98.9 million of federal net operating loss carryforward and
$82.1 million on the state net operating loss carryforward,
$48.6 million and $29.6 million, respectively, were acquired with the
purchase of Official Payments Corporation in 2002. Our ability to
realize the acquired federal net operating loss carryforward is limited to
$3,350,000 per year pursuant to Internal Revenue Code Section
382. The balance of our federal net operating loss carryforwards, is
currently limited to $5,993,000 per annum pursuant to Internal Revenue Code
Section 382.
Our
fiscal 2002 tax return included a $22.5 million loss on disposal of
Australian operations. In fiscal 2003 we requested and received
$6.5 million of federal income tax refunds associated with this
disposal. Although we received the refund in October 2003, we fully
reserved the entire balance because of uncertainty about the final review and
resolution of this transaction by the Internal Revenue Service. From
October 2003 to February 2007, we increased our reserve by $1.1 million to
recognize the potential interest and penalties we could have incurred if the
Internal Revenue Service had made an unfavorable decision.
In
March 2007, we were notified by the Internal Revenue Service that its Joint
Committee on Taxation had completed its review and had approved the
$6.5 million refund. As a result, during the second quarter of
fiscal 2007, we reversed the $6.5 million of reserve for the refund and the
$1.1 million reserve for potential interest and penalties. This
$7.6 million reversal has been recorded on our 2007 Consolidated Statements
of Operations as (Loss)/income
from discontinued operations, net.
LIABILITIES
FOR UNRECOGNIZED TAX BENEFITS
We have
examined our current and past tax positions taken, and have concluded that it is
more-likely-than-not these tax positions will be sustained in the event of an
examination and that there would be no material impact to our effective tax
rate. In the event interest or penalties had been accrued, our policy
is to include these amounts related to unrecognized tax benefits in income tax
expense. As of September 30, 2009, we had no accrued interest or
penalties related to uncertain tax positions. Our audit with the IRS
for tax year ended September 30, 2005, concluded with no interest or
penalties imposed. We file tax returns with the IRS and in various
states in which the statute of limitations may go back to the tax year ended
September 30, 2005. As of September 30, 2009, we were not
engaged in any federal or state tax audits.
As of
September 30, 2009, we had no unrecognized tax benefits. The
following table summarizes our unrecognized tax benefits for fiscal years 2009
and 2008:
(in
thousands)
|
||||
Balance
at September 30, 2007
|
$ | — | ||
Increases
for tax positions related to prior years
|
42 | |||
Balance
at September 30, 2008
|
42 | |||
Decreases
for tax positions related to prior years
|
(42 | ) | ||
Balance
at September 30, 2009
|
$ | — |
57
|
NOTE
9—CONTINGENCIES AND COMMITMENTS
|
LEGAL
ISSUES
From
time to time during the normal course of business, we are a party to litigation
and/or other claims. At September 30, 2009, none of these
matters was expected to have a material impact on our financial position,
results of operations or cash flows. At September 30, 2009 and
September 30, 2008, we had legal accruals of $0.2 million and
$0.8 million, respectively, based upon estimates of key legal
matters.
On
May 31, 2006, we received a subpoena, and in January 2009 several former
employees received additional subpoenas from the Philadelphia District Office of
the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues. On October 29, 2009,
the SEC confirmed that their investigation is complete and they have determined
there will be no charges, fines or other enforcement actions as to Tier, or any
of the individuals who were subpoenaed.
BANK
LINES OF CREDIT
At
September 30, 2009, we had a credit facility that allowed us to obtain
letters of credit up to a total of $7.5 million. This credit
facility, which is scheduled to mature on January 31, 2010, grants the
lender a perfected security interest in cash collateral in an amount equal to
all issued and to be issued letters of credit. We pay 0.75% per annum
for outstanding letters of credit, but are not assessed any fees for the unused
portion of the line. As of September 30, 2009, $1.4 million
of letters of credit were outstanding under this credit
facility. These letters of credit were issued to secure performance
bonds and a facility lease.
SETTLEMENTS
PAYABLE
Settlements payable on our
Consolidated Balance Sheets consists of payments due primarily to utility
companies and other public sector clients. As individuals and
businesses settle their obligations to our various clients, we generate a
receivable from the credit or debit card company and a payable to the
client. Once we receive confirmation the funds have been received by
the credit card company, we settle the liabilities to the
client. This process may take several business days to complete and
can result in unsettled funds at the end of a reporting period.
CREDIT
RISK
We
maintain our cash in bank deposit accounts, certificates of deposit and money
market accounts. Typically, the balance in a number of these accounts
significantly exceeds federally insured limits. We have not
experienced any losses in such accounts and believe that any associated credit
risk is de
minimis.
At
September 30, 2009, our investment portfolio included $27.9 million,
fair value, of AAA-rated auction rate municipal bonds that were collateralized
with student loans. These municipal bonds are bought and sold in the
marketplace through a bidding process sometimes referred to as a “Dutch
Auction.” After the initial issuance of the securities, the interest
rate on the securities is reset at a prescribed interval (typically every 28
days), based upon the demand for these securities, which we refer to as auction
rate securities. As a result of concerns in the sub-prime mortgage
market and overall credit market issues, we continue to experience unsuccessful
auctions, as there are insufficient buyers for the securities at the reset date
for our auction rate securities. The unsuccessful auctions and lack
of liquidity has caused a decrease in the fair value of these
securities. All of our securities are collateralized with student
loans. Securities collateralized with student loans are guaranteed by
the issuing state and the Federal Family Education Loan
Program. Under the Higher Education Act, student loans cannot be
cancelled (discharged) due to bankruptcy. Because of this, we
continue to believe the credit quality of these securities is high and the
principal collectible.
In
November 2008 we entered into an Auction Rate Securities Rights offer with our
investment manager. This agreement allows us to sell our auction rate
securities to the investment manager for a price equal to the par value plus
accrued but unpaid interest. Our investment manager has the right to
sell or dispose of our auction rate securities at par plus accrued but unpaid
interest, at any time until the expiration of the offer.
58
Until
liquidity in the market returns, or our investment manager sells or disposes of
the securities, we may be unable to liquidate these investments in a timely
manner at par value.
PERFORMANCE
AND GUARANTEE PAYMENT 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. At
September 30, 2009, we had $10.0 million of bonds posted with
clients.
In
February 2009, we completed the sale of our Unemployment Insurance, or UI,
business to RKV Technologies, Inc., or RKV. The sale was completed
pursuant to an Asset Purchase Agreement dated February 6,
2009. As part of the agreement, we are required to leave in place a
$2.4 million performance bond on the continuing contract with the State of
Indiana, or the State, for which RKV continues to provide services as a
subcontractor to the prime contractor, Haverstick Corporation, or
Haverstick. Subsequent to the sale, the State, Haverstick and RKV
determined that the contract completion would be delayed and additional funding
would be needed to complete the contract. We retain certain
liabilities for completion of the project and continue as the indemnitor under
the performance bond. We are currently in discussions with the other
parties regarding contributions to fund completion of the project. We
do not believe resolution of this matter will have a material effect on our
financial position or results of operations.
Pursuant
to the terms of money transmitter licenses we obtain with individual states, we
are required to provide guarantee payment bonds from a licensed
surety. At September 30, 2009, we had $7.0 million of bonds
posted with 31 states. There were no claims pending against any of
these bonds.
EMPLOYMENT
AGREEMENTS
As of
September 30, 2009, we had employment and change of control agreements with
five executives and one other key manager. If certain termination or
change of control events were to occur under the six contracts as of
September 30, 2009, we could be required to pay up to
$5.7 million.
In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan. Executives selected by our Chief Executive Officer are eligible
to participate. Under the PSU Plan, up to 800,000 Performance Stock
Units, or PSUs, have been approved for issuance. The PSUs will be
awarded upon the achievement and maintenance for a period of 60 days of specific
share performance targets of $8.00, $9.50, $11.00, and $13.00 per
share. We intend to pay the PSUs in cash in the pay period in which
the PSUs become fully vested. As of September 30, 2009, 605,000
PSUs have been issued to key executives. The PSU’s are considered
liability awards under US GAAP. As such, their expense is calculated
quarterly based on fair market value on the last day of the quarterly
period. Since we cannot estimate the fair market value of future
dates, we are unable to estimate the expense that will be recognized over the
remaining life of these PSUs. See Note 14—Share-based Payment for
additional information regarding the valuation of the PSUs.
Pursuant
to awards in April 2008 and January 2009, our Chief Executive Officer has
200,000 restricted stock units, or RSUs, which may be payable in
cash. These RSUs are considered liability awards, and as such their
expense is calculated quarterly based on fair market value on the last day of
the quarterly period. Since we cannot estimate the fair market value
of future dates, we are unable to estimate the expense that will be recognized
over the remaining life of these RSUs. See Note 14—Share-based
Payment for additional information regarding the valuation of these
RSUs.
OPERATING
AND CAPITAL LEASE OBLIGATIONS
We
lease our principal facilities and certain equipment under non-cancelable
operating and capital leases, which expire at various dates through fiscal year
2013. Future minimum lease payments for non-cancelable leases with
terms of one year or more as of September 30, 2009 are as
follows:
59
(in
thousands)
|
Operating
leases
|
Capital
leases(1)
(2)
|
Total
|
|||||||||
Year
ending September 30,
|
||||||||||||
2010
|
$ | 1,247 | $ | 37 | $ | 1,284 | ||||||
2011
|
3 | 31 | 34 | |||||||||
2012
|
- | 30 | 30 | |||||||||
2013
|
- | 17 | 17 | |||||||||
Total
minimum lease payments
|
$ | 1,250 | $ | 115 | $ | 1,365 | ||||||
(1) On
our Consolidated Balance Sheets, the amount due within twelve months is
included in Total
current liabilities. The remainder is included in Other
liabilities.
(2) Total
amount includes interest payments of $2.
|
Certain
leases contain provisions for rental options and rent escalations based on
scheduled increases, as well as increases resulting from a rise in certain costs
incurred by the lessor. We recorded rent expense of $1.1 million
during fiscal 2009, $1.9 million during fiscal 2008, and $2.8 million
during fiscal 2007.
INDEMNIFICATION
AGREEMENTS
We have
indemnification agreements with directors and key executives. These agreements
provide such persons with indemnification to the maximum extent permitted by our
Certificate of Incorporation, our Bylaws and the General Corporation Law of the
State of Delaware against all expenses, claims, damages, judgments and other
amounts (including amounts paid in settlement) for which such persons become
liable as a result of acting in any capacity on our behalf, subject to certain
limitations. We are not able to estimate our maximum exposure under
these agreements.
|
NOTE
10—RELATED PARTY TRANSACTIONS
|
EDGAR,
DUNN & COMPANY
During
the fiscal year ended September 30, 2009, 2008 and 2007, we purchased
$0.2 million, $0.3 million, and $0.4 million, respectively, of
consultancy services relating to our EPS operations from Edgar, Dunn &
Company, a company affiliated with a member of our Board of
Directors.
ITC
DELTACOM, INC.
During
the fiscal year ended September 30, 2009, 2008 and 2007, we purchased
$0.2 million, $0.6 million, and $0.3 million, respectively, of
telecom services from ITC Deltacom, Inc., a company affiliated with a member of
our Board of Directors.
|
NOTE
11—RESTRUCTURING
|
As part
of our strategic initiative, during fiscal 2009 we incurred restructuring
liabilities of $1.4 million for severance and facility closing
costs. Severance costs relate to combining certain operational
functions within our EPS operations and the wind down of our VSA
operations.
The
following table summarizes restructuring liability charges we incurred relating
to our Continuing Operations during fiscal years 2009 and 2008. We
did not incur any restructuring liability charges during fiscal
2007. The restructuring liability charges are included in General and administrative on
our Consolidated Statement of Operations.
Year
ended September 30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Office
closure costs (net of sublease income)
|
$ | 630 | $ | 6 | ||||
Severance
costs
|
778 | 845 | ||||||
Total
restructuring liability charges
|
$ | 1,408 | $ | 851 |
60
The
following table summarizes restructuring liabilities associated with Continuing
Operations for fiscal years 2009 and 2008:
(in
thousands)
|
Severance
|
Facilities
closures
|
Total
|
|||||||||
Balance
at September 30, 2007
|
$ | — | $ | 180 | $ | 180 | ||||||
Additions
|
845 | 6 | 851 | |||||||||
Cash
payments
|
(249 | ) | (186 | ) | (435 | ) | ||||||
Balance
at September 30, 2008
|
596 | — | 596 | |||||||||
Additions
|
778 | 630 | 1,408 | |||||||||
Cash
payments
|
(1,356 | ) | (394 | ) | (1,750 | ) | ||||||
Balance
at September 30, 2009
|
$ | 18 | $ | 236 | $ | 254 |
At
September 30, 2009 and 2008, we had $0.3 million and $0.6 million, respectively,
of restructuring liabilities associated with our Continuing Operations which is
included in Other current
liabilities on our Consolidated Balance Sheets.
|
NOTE
12—SEGMENT INFORMATION
|
Our business
consists of two reportable segments: Continuing Operations and Discontinued
Operations. Within our Continuing Operations segment, we allocate
resources to and assess the performance of our EPS Operations and Wind-down
Operations. Our Discontinued Operations includes businesses within
our former GBPO and PSSI operations that have been sold. Information
regarding our Discontinued Operations can be found in Note 15—Discontinued
Operations.
The
following table presents the results of operations for our EPS operations and
our Wind-down operations for fiscal years ended September 30, 2009, 2008
and 2007.
(in
thousands)
|
EPS
|
Wind-
down
|
Total
|
|||||||||
Fiscal
year ended September 30, 2009:
|
||||||||||||
Revenues
|
$ | 123,233 | $ | 5,013 | $ | 128,246 | ||||||
Costs
and expenses:
|
||||||||||||
Direct
costs
|
93,434 | 2,160 | 95,594 | |||||||||
General
and administrative
|
24,509 | 1,020 | 25,529 | |||||||||
Selling
and marketing
|
6,697 | 11 | 6,708 | |||||||||
Depreciation
and amortization
|
4,885 | 1,684 | 6,569 | |||||||||
Total
costs and expenses
|
129,525 | 4,875 | 134,400 | |||||||||
(Loss)
income from continuing operations before other
income and income taxes
|
(6,292 | ) | 138 | (6,154 | ) | |||||||
Other
income (expense):
|
||||||||||||
Interest
income (expense)
|
754 | — | 754 | |||||||||
Loss
on investment
|
(31 | ) | — | (31 | ) | |||||||
Total
other income
|
723 | — | 723 | |||||||||
(Loss)
income from continuing operations before taxes
|
(5,569 | ) | 138 | (5,431 | ) | |||||||
Income
tax provision
|
40 | — | 40 | |||||||||
(Loss)
income from continuing operations
|
$ | (5,609 | ) | $ | 138 | $ | (5,471 | ) | ||||
61
(in thousands) | EPS |
Wind-
down
|
Total | |||||||||
Fiscal
year ended September 30, 2008:
|
||||||||||||
Revenues
|
$ | 116,641 | $ | 5,930 | $ | 122,571 | ||||||
Costs
and expenses:
|
||||||||||||
Direct
costs
|
91,290 | 3,944 | 95,234 | |||||||||
General
and administrative
|
26,932 | 1,088 | 28,020 | |||||||||
Selling
and marketing
|
8,486 | 191 | 8,677 | |||||||||
Depreciation
and amortization
|
3,900 | 1,428 | 5,328 | |||||||||
Total
costs and expenses
|
130,608 | 6,651 | 137,259 | |||||||||
Loss
from continuing operations before other
income and income taxes
|
(13,967 | ) | (721 | ) | (14,688 | ) | ||||||
Other
income (expense):
|
||||||||||||
Interest
income (expense)
|
2,733 | (2 | ) | 2,731 | ||||||||
Total
other income (expense)
|
2,733 | (2 | ) | 2,731 | ||||||||
Loss
from continuing operations before taxes
|
(11,234 | ) | (723 | ) | (11,957 | ) | ||||||
Income
tax provision
|
87 | — | 87 | |||||||||
Loss
from continuing operations
|
$ | (11,321 | ) | $ | (723 | ) | $ | (12,044 | ) |
(in
thousands)
|
EPS
|
Wind-
down
|
Total
|
|||||||||
Fiscal
year ended September 30, 2007:
|
||||||||||||
Revenues
|
$ | 99,048 | $ | 9,258 | $ | 108,306 | ||||||
Costs
and expenses:
|
||||||||||||
Direct
costs
|
76,388 | 6,280 | 82,668 | |||||||||
General
and administrative
|
23,088 | 3,284 | 26,372 | |||||||||
Selling
and marketing
|
6,859 | 1,091 | 7,950 | |||||||||
Depreciation
and amortization
|
3,810 | 763 | 4,573 | |||||||||
Write
down of goodwill and intangible assets
|
— | 9,161 | 9,161 | |||||||||
Total
costs and expenses
|
110,145 | 20,579 | 130,724 | |||||||||
Loss
from continuing operations before other
income and income taxes
|
(11,097 | ) | (11,321 | ) | (22,418 | ) | ||||||
Other
income:
|
||||||||||||
Interest
income
|
3,300 | — | 3,300 | |||||||||
Income
from equity investments
|
794 | — | 794 | |||||||||
Other
income
|
4,094 | — | 4,094 | |||||||||
Loss
from continuing operations before taxes
|
(7,003 | ) | (11,321 | ) | (18,324 | ) | ||||||
Income
tax provision
|
76 | — | 76 | |||||||||
Loss
from continuing operations
|
$ | (7,079 | ) | $ | (11,321 | ) | $ | (18,400 | ) |
Our
total assets for each of these businesses are shown in the following
table:
62
As
of September 30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Continuing
Operations:
|
||||||||
EPS
|
$ | 113,600 | $ | 120,715 | ||||
Wind-down
|
2,627 | 4,932 | ||||||
Assets
for continuing operations
|
116,227 | 125,647 | ||||||
Assets-held-for-sale
|
— | 11,704 | ||||||
Total
assets
|
$ | 116,227 | $ | 137,351 |
See
Note 15—Discontinued Operations for a breakdown of assets that are
classified as held-for-sale.
|
NOTE
13—SHAREHOLDERS’ EQUITY
|
As of
September 30, 2009, a total of 44,259,762 shares of $0.01 par value common stock
were authorized, of which 18,337,763 shares were outstanding, and a total of
4,579,047 shares of preferred stock were authorized, of which none were
outstanding. Under our current credit facility, we are prohibited
from declaring or paying any dividends (see Note 9—Contingencies and
Commitments).
COMMON
STOCK REPURCHASE PROGRAM
In
January 2009, our Board of Directors, or the Board, authorized the repurchase of
up to $15.0 million of our common stock in the open
market. Through September 30, 2009, we purchased 1,565,100
shares of common stock for $11.6 million under this repurchase
program. On August 13, 2009, our Board increased the repurchase
amount to $20.0 million. We also participated in a previous
repurchase program authorized by our Board in October 2003 in which we purchased
884,400 shares of common stock for $8.7 million. As of
September 30, 2009, we have repurchased 2,449,500 shares of common stock
for $20.3 million under the two plans, which are reported as Treasury stock on our
Consolidated Balance Sheets.
EQUITY
INCENTIVE PLAN
Under
our Amended and Restated 2004 Stock Incentive Plan, options for 2,859,270 shares
of common stock were outstanding at September 30, 2009. Of those
shares, 500,000 are restricted stock units which vest when both the price target
is achieved and the required service period is met.
On
August 14, 2009, we amended our Stockholder Rights Plan to accelerate our “Final
Expiration Date” from the close of business on January 10, 2016 to the close of
business on August 14, 2009. As a result of this amendment, effective
as of the close of business on August 14, 2009, the Rights (as defined in the
Rights Agreement) expired and were no longer outstanding and the Rights
Agreement was effectively terminated.
|
NOTE
14—SHARE-BASED PAYMENT
|
Stock
options are issued under the Amended and Restated 2004 Stock Incentive Plan, or
the Plan. The Plan provides our Board of Directors discretion in
creating employee equity incentives, including incentive and non-statutory stock
options. Generally, these options vest as to 20% of the underlying
shares each year on the anniversary of the date granted and expire in ten
years. At September 30, 2009, there were 1,352,936 shares of
common stock reserved for future grants under the Plan.
STOCK
OPTIONS
Stock-based
compensation expense for all option awards granted was based on the grant-date
fair value using the Black-Scholes model. We recognize compensation
expense for stock option awards on a ratable basis over the requisite service
period of the award. Stock-based compensation expense was
$1.0 million for fiscal 2009, $2.1 million for fiscal 2008, and
$1.7 million for fiscal 2007.
63
The
following table shows the weighted-average assumptions we used to calculate fair
value of share-based options using the Black-Scholes model, as well as the
weighted-average fair value of options granted and the weighted-average
intrinsic value of options exercised.
September
30,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Weighted-average
assumptions used in Black-Scholes model:
|
||||||||||||
Expected
period that options will be outstanding (in
years)
|
5.00 | 5.00 | 5.00 | |||||||||
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
2.02 | % | 3.52 | % | 4.66 | % | ||||||
Volatility
|
45.60 | % | 42.87 | % | 47.54 | % | ||||||
Dividend
yield
|
— | — | — | |||||||||
Weighted-average
fair value of options granted
|
$ | 2.14 | $ | 3.98 | $ | 3.53 | ||||||
Weighted-average
intrinsic value of options exercised (in
thousands)
|
$ | 81 | $ | 251 | $ | 122 |
Expected
volatilities are based on historical volatility of our stock. In
addition, we used historical data to estimate option exercise and employee
termination within the valuation model.
Stock
option activity for the fiscal year ended September 30, 2009 is as
follows:
Weighted-average
|
|||||||||||||
(in
thousands, except price and years)
|
Shares
under option
|
Exercise
price
|
Remaining
contractual term
|
Aggregate
intrinsic value
|
|||||||||
Options
outstanding at October 1, 2008
|
2,702 | $ | 9.07 | ||||||||||
Granted
|
570 | 5.08 | |||||||||||
Exercised
|
(68 | ) | 6.20 | ||||||||||
Forfeitures
or expirations
|
(845 | ) | 10.01 | ||||||||||
Options
outstanding at
September
30, 2009
|
2,359 | $ | 7.86 |
7.66
years
|
$ | 3,219 | |||||||
Options
vested and expected to vest at September 30, 2009
|
2,032 | $ | 7.88 |
7.51
years
|
$ | 2,772 | |||||||
Options
exercisable at
September
30, 2009
|
1,073 | $ | 8.33 |
6.43
years
|
$ | 1,260 |
As of
September 30, 2009, a total of $2.6 million of unrecognized
compensation cost related to stock options, including estimated forfeitures, was
expected to be recognized over a 3.5 year weighted-average
period.
RESTRICTED
STOCK UNITS
On
April 30, 2008, we granted 550,000 restricted stock units which vest when
both the price target is achieved and the required service period is
met. In January 2009 we granted another 150,000 restricted stock
units which vest when both the price target is achieved and the required service
period is met. Pursuant to the Plan, 500,000 shares can be payable in
shares of our common stock. The remaining 200,000 shares may be
payable in cash and are recorded at their fair value of $0.2 million as
Other liabilities on
our Consolidated Balance Sheets. We used a Monte Carlo simulation
option pricing model to estimate the grant-date fair value using the following
assumptions:
September
30, 2009
|
||||||||
Payable
in shares
|
Payable
in cash
|
|||||||
Weighted-average
assumptions used in Monte Carlo simulation:
|
||||||||
Original
period over which units vest (in
years)
|
3.00 | 3.00 | ||||||
Remaining
period that units will be outstanding (in
years)
|
1.58 | 1.58 | ||||||
Interest
rate (based on U.S.
Treasury yield)
|
1.98 | % | 0.72 | % | ||||
Volatility
|
39.53 | % | 45.39 | % | ||||
Dividend
yield
|
— | — | ||||||
Weighted-average
fair value of options granted
|
$ | 3.50 | $ | 2.07 |
64
Restricted
stock unit activity for the equity portion of the awards for the period ended
September 30, 2009 is as follows:
(in
thousands)
|
Shares
|
|||
Restricted
at October 1, 2008(1)
|
500 | |||
Granted
|
— | |||
Vested
|
— | |||
Forfeited
|
— | |||
Restricted
at September 30, 2009
|
500 | |||
(1)
Of the 700,000 restricted stock units awarded, 500,000 are payable in
shares.
|
We
recorded $0.5 million of expense for the equity portion of the awards and
$0.2 million for the liability portion of the awards during fiscal year
2009 and $0.3 million during fiscal year 2008. As of
September 30, 2009, we have $1.2 million in unrecognized compensation
cost relating to the equity portion of the awards, expected to be recognized
through April 2011. Since the liability portion of the awards is
revalued at the end of every quarter based on the closing price of our stock on
the last day of the quarter, we are unable to estimate the amount of expense
expected to be recognized on those awards.
BOARD
OF DIRECTOR RESTRICTED STOCK UNITS
In
accordance with our Board of Directors, or Board, compensation packages, each
Board member is awarded 9,000 restricted stock units upon their election to our
Board at our annual meeting. We are obligated to pay these restricted
stock units in cash at the end of a three-year cliff vesting period, which is
March 20, 2012. On March 20, 2009, a total of 72,000
restricted stock units were approved to be awarded to our eight non-employee
elected board members. The amount payable to each member at the
vesting date will be the equivalent of 9,000 restricted stock units multiplied
by the closing price of our stock on March 20, 2012.
As of
September 30, 2009, we recognized $0.1 million in expense relating to
these awards, calculated as follows:
Number
of awards
|
72,000 | |||
Fair
value of award (closing price on day of valuation)
|
$ | 8.48 | ||
Total
fair value
|
$ | 610,560 | ||
Number
of months in measurement period
|
6 | |||
Expense
for fiscal year 2009
|
$ | 101,760 |
These
awards will be revalued each quarter based on the closing price of our stock on
the last day of the quarter. We cannot estimate the amount of expense
to be recognized on these awards through their vest date of March 20,
2012.
PERFORMANCE
STOCK UNITS
In
December 2008, the Compensation Committee of our Board of Directors adopted the
Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU
Plan. Executives selected by our Chief Executive Officer are eligible
to participate. Under the PSU Plan, up to 800,000 Performance Stock
Units, or PSUs, have been approved for issuance. The PSUs will be
awarded upon the achievement and maintenance for a period of 60 days of specific
share performance targets of $8.00, $9.50, $11.00, and $13.00 per
share. We intend to pay the PSUs in cash in the pay period in which
the PSUs become fully vested. The executives will receive a cash
payment equal to (x) the price of a share of our common stock as of the close of
market on the date of vesting, but not more than $15.00, multiplied by (y) the
number of PSUs that have been awarded to the executive.
As of
September 30, 2009, 605,000 PSUs have been issued under the PSU
Plan. As of September 30, 2009, these shares are recorded at
their fair value of $0.7 million, as Other liabilities on our
Consolidated
65
Balance
Sheets. We used a Monte Carlo simulation option pricing model to
estimate the grant-date fair value using the following assumptions:
Payable
in cash
|
||||
Weighted-average
assumptions used in Monte Carlo simulation:
|
||||
Expected
period that units will be outstanding (in
years)
|
2.18 | |||
Interest
rate (based on U.S.
Treasury yield)
|
1.04 | % | ||
Volatility
|
41.53 | % | ||
Dividend
yield
|
— | |||
Weighted-average
fair value of options granted
|
$ | 5.44 |
For the
year ended September 30, 2009, we recorded $0.7 million of expense
related to these awards. The PSUs are considered liability awards
under US GAAP. As such, their expense is revalued each quarter based
on fair market value. Therefore, we cannot estimate the remaining
expense to be recognized for these PSUs.
|
NOTE
15—DISCONTINUED OPERATIONS
|
DIVESTITURES
On
November 30, 2008, we completed the sale of the assets, operations and
certain liabilities of our Financial Management Systems, or FMS,
business. The sale was completed pursuant to an Asset Purchase
Agreement dated November 4, 2008 for a purchase price of $0.8 million,
subject to a working capital adjustment, of which $0.2 million was payable
in cash and the remaining $0.6 million is secured with an interest bearing
note payable over 18 months.
In
February 2009, we completed the sale of our Unemployment Insurance, or UI,
business. The sale was completed pursuant to an Asset Purchase
Agreement dated February 6, 2009 for a purchase price of $1.5 million
payable as follows, $1,050,000 due at closing, $300,000 due in July 2009, and
$150,000 due upon assignment of three contracts. In addition, if the
purchaser is awarded a named contract, the purchaser will pay Tier 5% of service
related revenue. This sale completed our divestiture
process.
Long-lived
asset groups classified as held-for-sale are to be measured at the lower of
their carrying value or fair value less cost to sell. As a result of
our analysis, we determined operations within our former GBPO and PSSI
operations had carrying values which exceeded their fair value. The
following table shows the impairment expense recorded for fiscal years ended
September 30, 2009, 2008 and 2007, which is included in (Loss)/ income from discontinued
operations, net:
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Impairment
expense
|
||||||||||||
Goodwill
impairment
|
$ | — | $ | 8,790 | $ | 2,493 | ||||||
Long-lived
asset impairment
|
2,594 | 8,974 | 299 | |||||||||
Total
impairment expense
|
$ | 2,594 | $ | 17,764 | $ | 2,792 |
SUMMARY
OF REVENUE AND (LOSS)/INCOME BEFORE TAXES—DISCONTINUED OPERATIONS
Except
for minor transitional activities, we do not have any ongoing involvement or
cash flows from former GBPO and PSSI businesses that we divested during fiscal
2008 and fiscal 2009. The following table summarizes our revenue and
pre-tax income, prior to any gain/(loss) on sale, generated by these operations
for the fiscal years ended September 30, 2009, 2008 and 2007.
66
Year
ended September 30,
|
||||||||||||
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Revenues
(Discontinued operations):
|
||||||||||||
GBPO
|
$ | — | $ | 20,235 | $ | 37,677 | ||||||
PSSI
|
4,777 | 24,608 | 31,372 | |||||||||
Total
revenues
|
$ | 4,777 | $ | 44,843 | $ | 69,049 | ||||||
(Loss)/income
before taxes (Discontinued operations):
|
||||||||||||
GBPO
|
$ | (81 | ) | $ | 6,448 | $ | 6,574 | |||||
PSSI
|
(5,954 | ) | (21,674 | ) | 263 | |||||||
Other/eliminations
|
— | 757 | 452 | |||||||||
Total
(loss) income before taxes
|
$ | (6,035 | ) | $ | (14,469 | ) | $ | 7,289 |
AUSTRALIAN
OPERATIONS
In
fiscal 2002, we disposed of most of our Australian operations and in fiscal 2003
we requested and received $6.5 million of federal income tax refunds
associated with this disposal. Although we received the refund in
October 2003, we fully reserved the entire balance because of uncertainty about
the final review and resolution of this transaction by the Internal Revenue
Service. From October 2003 to February 2007, we increased our reserve
by $1.1 million to recognize the potential interest and penalties we could
have incurred if the Internal Revenue Service made an unfavorable
decision.
In
March 2007, we were notified by the Internal Revenue Service that its Joint
Committee on Taxation had completed its review and had approved the
$6.5 million of refund. As a result, during the second quarter
of fiscal 2007, we reversed the $6.5 million of reserve for the refund and
the $1.1 million reserve for potential interest and
penalties. This $7.6 million reversal has been recorded on our
Consolidated Statements of Operations as (Loss) income from discontinued
operations, net.
In May
2007 we were notified by the Australian government that our operations in
Australia, which were primarily disposed of in fiscal 2002, were able to be
fully liquidated. During the quarter ended June 30, 2007, we
recorded net income of $0.5 million associated with the reversal of certain
accruals that had been recorded in anticipation of costs, which were not
actually incurred associated with the final close-out of the Australian
operations.
67
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)
|
2009
|
2008
|
2007
|
|||||||||
Numerator:
(Loss)
income from:
|
||||||||||||
Continuing
operations, net of income taxes
|
$ | (5,471 | ) | $ | (12,044 | ) | $ | (18,400 | ) | |||
Discontinued
operations, net of income taxes
|
(6,035 | ) | (15,401 | ) | 15,366 | |||||||
Net
loss
|
$ | (11,506 | ) | $ | (27,445 | ) | $ | (3,034 | ) | |||
Denominator:
|
||||||||||||
Weighted-average
common shares outstanding
|
19,438 | 19,616 | 19,512 | |||||||||
Effects
of dilutive common stock options
|
— | — | — | |||||||||
Adjusted
weighted-average shares
|
19,438 | 19,616 | 19,512 | |||||||||
(Loss)
earnings per basic and diluted share
|
||||||||||||
From
continuing operations
|
$ | (0.28 | ) | $ | (0.61 | ) | $ | (0.94 | ) | |||
From
discontinued operations
|
$ | (0.31 | ) | $ | (0.79 | ) | $ | 0.78 | ||||
Loss
per basic and diluted share
|
$ | (0.59 | ) | $ | (1.40 | ) | $ | (0.16 | ) |
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)
|
2009
|
2008
|
2007
|
|||||||||
Weighted-average
options excluded from computation of diluted loss per
share
|
1,422 | 1,709 | 1,523 |
Due to
net losses from Continuing Operations, we have excluded an additional 425,556
shares at September 30, 2009, 234,270 shares at September 30, 2008,
and 154,500 shares at September 30, 2007, of common stock equivalents from
the calculation of diluted loss per share since their effect would have been
anti-dilutive. We have also excluded 500,000 shares of restricted
stock from the computation of diluted (loss) earnings per share since their
effect would have been anti-dilutive.
|
NOTE
17—ACQUISITION
|
On
January 27, 2009, we completed the acquisition of substantially all of the
assets of ChoicePay,Inc. for $7.5 million in cash at closing and a
potential earn out, based upon a percentage of the profitability of future
defined new client business, not to exceed $2.0 million. This
acquisition allowed us to increase our footprint in the utility vertical as well
as accelerate our access to new products and services as a result of technology
provided by their operating platform. The results of operations have
been included in our Consolidated Statements of Operations as of the date of
acquisition. The excess of the purchase price over the estimated fair
values of the assets acquired and liabilities assumed was allocated to
goodwill.
68
The
following table summarizes the fair values of the assets acquired and
liabilities assumed of ChoicePay, Inc. at the acquisition date:
(in
thousands)
|
As
of January 27, 2009
|
|||
Assets
|
||||
Cash
and cash equivalents
|
$ | 4,552 | ||
Accounts
receivable, net
|
248 | |||
Prepaid
assets
|
140 | |||
Property,
equipment and software, net
|
1,250 | |||
Other
intangible assets, net
|
3,544 | |||
Total
assets acquired
|
9,734 | |||
Liabilities
|
||||
Accounts
payable, escrow
|
3,892 | |||
Other
accrued liabilities
|
1,048 | |||
Total
liabilities assumed
|
4,940 | |||
Net
assets acquired
|
$ | 4,794 |
We have
recorded $2.8 million of goodwill associated with the acquisition of
ChoicePay, calculated as the purchase price of $7.5 million plus the fiscal
year earn out of $0.1 million less net assets acquired of
$4.8 million.
The
unaudited pro forma financial information in the table below combines the
historical results for Tier and the historical results for ChoicePay for the
fiscal years ended September 30, 2009, 2008 and 2007, as if the acquisition
took place at the beginning of the fiscal year. This pro forma
information is provided for illustrative purposes only and does not purport to
be indicative of the actual results that would have been achieved by the
combined operations for the periods presented or that will be achieved by the
combined operations in the future.
Year ended September
30,
|
||||||||||||
(in thousands, except per share
data)
|
2009
|
2008
|
2007
|
|||||||||
Revenues—continuing
operations
|
$ | 130,472 | $ | 128,446 | $ | 118,013 | ||||||
Net loss—continuing
operations
|
(7,034 | ) | (15,781 | ) | (21,279 | ) | ||||||
Net
loss
|
(13,069 | ) | (31,182 | ) | (5,913 | ) | ||||||
Basic/diluted loss per
share—continuing operations
|
$ | (0.36 | ) | $ | (0.80 | ) | $ | (1.09 | ) | |||
Basic/diluted loss per
share
|
$ | (0.67 | ) | $ | (1.59 | ) | $ | (0.30 | ) |
|
NOTE
18—SUBSEQUENT EVENTS
|
On
October 29, 2009, we received confirmation from the Securities and Exchange
Commission that their investigation begun in May 2006 is complete and they have
determined there will be no charges, fines or other enforcement actions as to
Tier, or any of the individuals who were subpoenaed.
During
October 2009 we purchased 86,798 shares of common stock for $0.7 million
under our Common Stock Repurchase Program.
We have
reviewed our business activities through November 9, 2009, and have no
additional subsequent events to report.
69
|
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, 2009. 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.
2009
fiscal quarters
|
2008
fiscal quarters
|
|||||||||||||||||||||||||||||||
(In thousands, except per
share data)
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
Consolidated
statement of operations data:
|
||||||||||||||||||||||||||||||||
Revenues
|
$ | 25,685 | $ | 44,213 | $ | 28,608 | $ | 29,740 | $ | 22,759 | $ | 44,896 | $ | 25,961 | $ | 28,955 | ||||||||||||||||
Costs
and expenses:
|
||||||||||||||||||||||||||||||||
Direct
costs
|
19,038 | 33,367 | 20,771 | 22,418 | 17,108 | 36,374 | 19,518 | 22,234 | ||||||||||||||||||||||||
General
and administrative
|
5,118 | 6,269 | 7,512 | 6,630 | 7,544 | 6,494 | 6,873 | 7,109 | ||||||||||||||||||||||||
Selling
and marketing
|
1,244 | 2,236 | 1,912 | 1,316 | 2,066 | 2,492 | 2,005 | 2,114 | ||||||||||||||||||||||||
Depreciation
and amortization
|
1,628 | 1,858 | 1,624 | 1,459 | 1,355 | 1,347 | 1,330 | 1,296 | ||||||||||||||||||||||||
(Loss)
income from continuing operations
|
(1,343 | ) | 483 | (3,211 | ) | (2,083 | ) | (5,314 | ) | (1,811 | ) | (3,765 | ) | (3,798 | ) | |||||||||||||||||
Total
other income
|
115 | 163 | 253 | 192 | 437 | 503 | 824 | 967 | ||||||||||||||||||||||||
(Loss)
income from continuing operations before income taxes
|
(1,228 | ) | 646 | (2,958 | ) | (1,891 | ) | (4,877 | ) | (1,308 | ) | (2,941 | ) | (2,831 | ) | |||||||||||||||||
Income
tax provision
|
37 | 1 | 1 | 1 | 36 | 23 | 12 | 16 | ||||||||||||||||||||||||
(Loss)
income from continuing operations
|
(1,265 | ) | 645 | (2,959 | ) | (1,892 | ) | (4,913 | ) | (1,331 | ) | (2,953 | ) | (2,847 | ) | |||||||||||||||||
Income
(loss) from discontinued operations, net
|
37 | (408 | ) | (2,402 | ) | (3,262 | ) | (3,951 | ) | (12,282 | ) | (584 | ) | 1,416 | ||||||||||||||||||
Net
(loss) income
|
$ | (1,228 | ) | $ | 237 | $ | (5,361 | ) | $ | (5,154 | ) | $ | (8,864 | ) | $ | (13,613 | ) | $ | (3,537 | ) | $ | (1,431 | ) | |||||||||
Weighted
average shares issued and outstanding:
|
||||||||||||||||||||||||||||||||
Basic
|
19,438 | 19,458 | 19,711 | 19,735 | 19,616 | 19,635 | 19,551 | 19,543 | ||||||||||||||||||||||||
Diluted
|
19,438 | 19,597 | 19,711 | 19,735 | 19,616 | 19,635 | 19,551 | 19,543 | ||||||||||||||||||||||||
Performance
ratios:
|
||||||||||||||||||||||||||||||||
Return
on average assets
|
(1.00 | )% | 0.18 | % | (4.05 | )% | (3.78 | )% | (6.16 | )% | (8.79 | )% | (2.16 | )% | (0.86 | )% | ||||||||||||||||
Return
on average shareholders' equity
|
(1.27 | )% | 0.23 | % | (5.05 | )% | (4.68 | )% | (7.66 | )% | (10.77 | )% | (2.62 | )% | (1.04 | )% | ||||||||||||||||
Total
ending equity to total ending
assets
|
79.66 | % | 78.89 | % | 79.87 | % | 80.54 | % | 80.99 | % | 79.90 | % | 83.18 | % | 81.39 | % | ||||||||||||||||
Total
average equity to total average assets
|
79.25 | % | 79.38 | % | 80.21 | % | 80.77 | % | 80.42 | % | 81.58 | % | 82.26 | % | 82.01 | % | ||||||||||||||||
Per
share of common stock data:
|
||||||||||||||||||||||||||||||||
(Loss)
earnings per share—Basic & Diluted:
|
||||||||||||||||||||||||||||||||
Continuing
operations(1)
|
$ | (0.06 | ) | $ | 0.03 | $ | (0.15 | ) | $ | (0.10 | ) | $ | (0.25 | ) | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.14 | ) | |||||||||
Discontinued
operations(1)
|
$ | 0.00 | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.16 | ) | $ | (0.20 | ) | $ | (0.62 | ) | $ | (0.03 | ) | $ | 0.07 | ||||||||||
(Loss)
earnings per share—Basic & Diluted
|
$ | (0.06 | ) | $ | 0.01 | $ | (0.27 | ) | $ | (0.26 | ) | $ | (0.45 | ) | $ | (0.69 | ) | $ | (0.18 | ) | $ | (0.07 | ) | |||||||||
Book
value
|
$ | 4.76 | $ | 5.18 | $ | 5.24 | $ | 5.53 | $ | 5.67 | $ | 6.12 | $ | 6.78 | $ | 7.01 | ||||||||||||||||
Average
balance sheet data:
|
||||||||||||||||||||||||||||||||
Total
assets
|
$ | 122,477 | $ | 129,077 | $ | 132,435 | $ | 136,397 | $ | 143,892 | $ | 154,953 | $ | 163,858 | $ | 167,333 | ||||||||||||||||
Total
liabilities
|
$ | 25,409 | $ | 26,617 | $ | 26,205 | $ | 26,230 | $ | 28,174 | $ | 28,537 | $ | 29,068 | $ | 30,107 | ||||||||||||||||
Total
shareholders' equity
|
$ | 97,068 | $ | 102,460 | $ | 106,230 | $ | 110,167 | $ | 115,718 | $ | 126,416 | $ | 134,790 | $ | 137,226 | ||||||||||||||||
Market
price per share of common stock:
|
||||||||||||||||||||||||||||||||
High
|
$ | 8.90 | $ | 7.90 | $ | 6.39 | $ | 7.57 | $ | 8.48 | $ | 8.75 | $ | 9.26 | $ | 11.01 | ||||||||||||||||
Low
|
$ | 7.10 | $ | 4.35 | $ | 4.48 | $ | 3.41 | $ | 7.06 | $ | 7.03 | $ | 6.75 | $ | 7.94 | ||||||||||||||||
(1) The
sum of quarterly per share amounts may not equal annual per share amounts
as the quarterly calculations are based on varying number of shares of
common stock.
|
70
Valuation
and Qualifying Accounts
(in
thousands)
|
Balance
at beginning of period
|
Additions/
(reductions)
|
Write-offs
|
Balance
at
end
of period
|
||||||||||||
Year
ended September 30, 2009:
|
||||||||||||||||
Allowance
for receivables
|
$ | 346 | $ | 459 | $ | (417 | ) | $ | 388 | |||||||
Deferred
tax asset valuation allowance
|
36,698 | 7,065 | — | 43,763 | ||||||||||||
Year
ended September 30, 2008:
|
||||||||||||||||
Allowance
for receivables
|
$ | 1,195 | $ | (557 | ) | $ | (292 | ) | $ | 346 | ||||||
Deferred
tax asset valuation allowance
|
28,875 | 7,823 | — | 36,698 | ||||||||||||
Inventory
allowance
|
75 | 390 | (465 | ) | — | |||||||||||
Year
ended September 30, 2007:
|
||||||||||||||||
Allowance
for receivables
|
$ | 926 | $ | 452 | $ | (183 | ) | $ | 1,195 | |||||||
Deferred
tax asset valuation allowance
|
27,997 | 878 | — | 28,875 | ||||||||||||
Inventory
allowance
|
75 | — | — | 75 |
71
None.
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, 2009. The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate, to allow
timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 30, 2009, our Chief Executive
Officer and our Chief Financial Officer concluded that as of that date, our
disclosure controls and procedures were effective at the reasonable assurance
level.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the company’s principal executive and principal financial
officers and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2009. 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, 2009, our
internal control over financial reporting is effective based on those
criteria.
Our
independent auditors have issued an audit report on our internal control over
financial reporting. This report appears on page 73.
72
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Tier
Technologies, Inc.
We have
audited Tier Technologies, Inc. and subsidiaries’ internal control over
financial reporting as of September 30, 2009, based on criteria established in
Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. 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 included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company's internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (b) 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 (c)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Tier Technologies, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of September
30, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
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, 2009, and the related consolidated statements of operations, shareholders’
equity, comprehensive loss and cash flows for the year then ended of Tier
Technologies, Inc. and subsidiaries and our report dated November 9, 2009
expressed an unqualified opinion.
/s/ McGladrey & Pullen,
LLP
Vienna,
VA
November
9, 2009
73
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
have been no changes in our internal control over financial reporting during the
quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B—OTHER INFORMATION
On
September 28, 2009, we received a letter from City National Bank, our
lender under our Amended and Restated Credit and Security Agreement dated March
6, 2009, by and between us, Official Payments Corporation, EPOS Corporation and
City National Bank, as amended, advising us that this agreement had been renewed
through January 31, 2010.
PART
III
ITEM
10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
A list
of our executive officers and their biographical information appears in Part I
of this report. Information about our Directors may be found under
the caption Election of
Directors in our Proxy Statement for our 2010 Annual Meeting of
Stockholders, or the Proxy Statement. That information is
incorporated herein by reference.
The
information in the Proxy Statement set forth under the captions Audit Committee Financial Expert,
Audit Committee and
Section 16(a) Beneficial Ownership Reporting Compliance is incorporated
herein by reference.
We have
adopted the Tier Technology Code of Ethics, a code of
ethics that applies to our Chief Executive Officer, Chief Financial Officer,
Chief Accounting Officer, Corporate Controller and other finance organization
employees. The code of ethics is available publicly on our website at
www.Tier.com. If we make any amendments to the Code of Ethics or grant any
waiver, including any implicit waiver, from a provision of the code to our Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, or the
Corporate Controller, we will disclose the nature of such amendment or waiver on
our website or in a report on Form 8-K.
ITEM
11—EXECUTIVE COMPENSATION
The
information in the Proxy Statement set forth under the captions Compensation Discussion and
Analysis, Executive Compensation, Director Compensation, Compensation Committee
Interlocks and Insider Participation and Compensation Committee
Report is incorporated herein by reference.
ITEM
12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information in the Proxy Statement set forth under the captions Stock Ownership and Equity Compensation Plan
Information is incorporated herein by reference.
ITEM
13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND
DIRECTOR INDEPENDENCE
The
information set forth under the captions Certain Relationships and Related
Transactions and
Director Independence of the Proxy Statement is incorporated herein by
reference.
ITEM
14—PRINCIPAL ACCOUNTANT 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.
74
PART
IV
(a) The
following documents are filed as part of the report:
|
Financial
Statements – The financial statements are set forth under Item 8 of this
Annual Report on Form 10-K. See Financial Statements and
Supplementary Data on page
35.
|
|
Financial
Statement Schedules – Schedule II—Valuation and
Qualifying Accounts is set forth under Item 8 of this Annual
Report on Form 10-K on page 71. All other schedules have been
omitted because they were either not required or not applicable or because
the information is otherwise
included.
|
|
Exhibits
|
Exhibit
number
|
Exhibit
description
|
2.1
|
Purchase
and Sale Agreement between Tier Technologies, Inc. and Informatix, Inc.,
dated June 30, 2008 (1)
|
2.2
|
Asset
Purchase Agreement between Tier Technologies, Inc., Cowboy Acquisition
Company and ChoicePay, Inc., dated as of January 13, 2009 (2)
|
3.1
|
Restated
Certificate of Incorporation (3)
|
3.2
|
Amended
and Restated Bylaws of Tier Technologies, Inc., as amended (4)
|
4.1
|
Form
of common stock certificate (5)
|
4.2
|
See
Exhibits 3.1 and 3.2, for provisions of the Restated Certificate of
Incorporation and Amended and Restated Bylaws, as amended of the
Registrant defining rights of the holders of common stock of the
Registrant
|
10.1
|
Amended
and Restated 1996 Equity Incentive Plan, dated January 28, 1999 (6)*
|
10.2
|
Form
of Incentive Stock Option Agreement under the Registrant’s Amended and
Restated 1996 Equity Incentive Plan (7)*
|
10.3
|
Form
of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
Restated 1996 Equity Incentive
Plan
(7)*
|
10.4
|
Amended
and Restated 2004 Stock Incentive Plan (8)*
|
10.5
|
Form
of Incentive Stock Option Agreement under the Registrant’s Amended and
Restated 2004 Stock Incentive Plan (8)*
|
10.6
|
Form
of Nonstatutory Stock Option Agreement under the Registrant’s Amended and
Restated 2004 Stock Incentive Plan (8)*
|
10.7
|
Form
of Restricted Stock Agreement under the Registrant’s Amended and Restated
2004 Stock Incentive Plan (8)*
|
10.8
|
Form
of California Indemnification Agreement (9)
|
10.9
|
Form
of Delaware Indemnification Agreement for officers (10)
|
10.10
|
Form
of Delaware Indemnification Agreement for directors (10)
|
10.11
|
Tier
Corporation 401(k) Plan, Summary Plan Description (9)*
|
10.12
|
Supplemental
Indemnity Agreement by and between Registrant and Bruce R. Spector, dated
September 2, 2004 (11)*
|
10.13
|
Employment
Agreement dated July 1, 2004 between Tier Technologies, Inc. and Ms.
Deanne M. Tully (10)*
|
10.14
|
Executive
Severance and Change in Control Benefits Agreement (10)*
|
10.15
|
Amended
and Restated Credit and Security Agreement between the Registrant,
Official Payments Corporation, EPOS Corporation and City National Bank
dated March 6, 2006 (12)
|
10.16
|
Form
of Employment Security Agreements between Tier Technologies, Inc., and
each of Steven Beckerman, Todd Vucovich, and Michael Lawler, dated March
28, 2006 (13)
*
|
10.17
|
Employment
Agreement between Tier Technologies, Inc., and Ronald L. Rossetti, dated
July 26, 2006 (14)*
|
10.18
|
Non-Statutory
Stock Option Agreement between Tier and Ronald L. Rossetti, dated July 26,
2006 (14)*
|
75
Exhibit
number
|
Exhibit
description
|
10.19
|
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 (15)*
|
10.20
|
Employment
Agreement between Tier Technologies, Inc. and David E. Fountain, dated
December 11, 2006 (16)*
|
10.21
|
First
Amendment to Amended and Restated Credit and Security Agreement dated
March 20, 2007 between the Registrant, Official Payments Corporation, EPOS
Corporation and City National Bank (17)
|
10.22
|
Second
Amendment to Amended and Restated Credit and Security Agreement dated
September 26, 2007 between the Registrant, Official Payments Corporation,
EPOS Corporation and City National Bank (18)
|
10.23
|
Share
Repurchase Agreement between CPAS Systems, Inc., Tier Ventures Corporation
and Tier Technologies, Inc. dated June 29, 2007 (19)
|
10.24
|
Employment
Agreement between Tier Technologies, Inc., and Kevin Connell, dated August
9, 2007 (20)*
|
10.25
|
Transition
Agreement between Tier Technologies, Inc., and Deanne M. Tully dated
December 12, 2007 (10)*
|
10.26
|
Separation
Agreement and Release between Tier Technologies, Inc., and Todd F.
Vucovich, dated February 12, 2007 (10)*
|
10.27
|
Amendment
to the Separation Agreement and Release between Tier Technologies, Inc.,
and Todd F. Vucovich, dated November 15, 2007 (10)*
|
10.28
|
Employment
Agreement between Tier Technologies, Inc. and Ronald L. Rossetti, dated
April 30, 2008. (21)*
|
10.29
|
Employment
Agreement between Tier Technologies, Inc. and Keith Kendrick, dated June
30, 2008 (22)*
|
10.30
|
Employment
Agreement between Tier Technologies, Inc. and Ronald W. Johnston, dated
July 1, 2008 (22)*
|
10.31
|
Independent
Contractor Agreement between Tier Technologies, Inc. and Steven M.
Beckerman,
dated
August 6, 2008 (23)
*
|
10.32
|
Third
Amendment to Amended and Restated Credit and Security Agreement between
Tier Technologies, Inc., Official Payments Corporation, EPOS Corporation
and City National Bank dated September 29, 2008 (24)
|
10.33
|
Employment
Agreement between Tier Technologies, Inc. and Nina K. Vellayan, dated
September 22, 2008 (25)
|
10.34
|
UBS
Offering Letter dated October 8, 2008, together with Acceptance Form of
Tier Technologies, Inc., dated November 11, 2008 (26)
|
10.35
|
UBS
Offering Letter dated October 8, 2008, together with Acceptance Form of
Tier Technologies, Inc., dated November 11, 2008 (26)
|
10.36
|
Enterprise
Value Award Plan Amendment to Reflect Supplemental Award dated December 4,
2008 between Tier Technologies, Inc. and Ronald L. Rossetti (27)*
|
10.37
|
Tier
Technologies, Inc. Executive Performance Stock Unit Plan (27)*
|
10.38
|
Employment
Agreement between Tier Technologies, Inc. and Keith Omsberg, effective as
of May 6, 2009 (28)*
|
10.39
|
Renewal
Letter: Short Clear Extension of Termination Date between Tier
Technologies, Inc., Official Payments Corporation, EPOS Corporation and
City National Bank †
|
21.1
|
Subsidiaries
of the Registrant
|
23.1
|
Consent
of McGladrey & Pullen, LLP, Independent Registered Public Accounting
Firm
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
76
Exhibit
number
|
Exhibit
description
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
*
Management contract or compensatory plan required to be filed as an
exhibit to this report
†
Filed as an exhibit to this report
(1)
Filed as an exhibit to Form 10-Q, filed August 7, 2008, and incorporated
herein by reference
(2)
Filed as an exhibit to Form 8-K, filed on January 20, 2009, and
incorporated herein by reference
(3)
Filed as an exhibit to Form 8-K, filed on July 19, 2005, and
incorporated herein by reference
(4)
Filed as an exhibit to Form 8-K, filed on February 24, 2009, and
incorporated herein by reference
(5)
Filed as an exhibit to Form 10-Q/A, filed November 3, 2008, and
incorporated herein by reference
(6)
Filed as an exhibit to Form 10-Q, filed May 11, 2001, and
incorporated herein by reference
(7)
Filed as an exhibit to Form 8-K, filed November 12, 2004, and
incorporated herein by reference
(8)
Filed as an exhibit to Form 8-K, filed July 5, 2005 and
incorporated herein by reference
(9)
Filed as an exhibit to Form S-1 (No. 333-37661), filed on October
10, 1997, and incorporated herein by reference
(10)
Filed as an exhibit to Form 10-K, filed October 27, 2006, and incorporated
herein by reference
(11).Filed
as an exhibit to Form 10-Q, filed May 6, 2005, and incorporated herein by
reference
(12)
Filed as an exhibit to Form 8-K, filed March 9, 2006, and incorporated
herein by reference
(13)
Filed as an exhibit to Form 8-K, filed April 3, 2006, and incorporated
herein by reference
(14)
Filed as an exhibit to Form 8-K, filed August 1, 2006, and incorporated
herein by reference
(15)
Filed as an exhibit to Form 8-K, filed August 29, 2006, and incorporated
herein by reference
(16)
Filed as an exhibit to Form 10-K, filed December 13, 2006, and
incorporated herein by reference
(17)
Filed as an exhibit to Form 8-K, filed March 28, 2007, and incorporated
herein by reference
(18)
Filed as an exhibit to Form 8-K, filed September 27, 2007, and
incorporated herein by reference
(19)
Filed as an exhibit to Form 8-K, filed July 3, 2007, and incorporated
herein by reference
(20)
Filed as an exhibit to Form 10-Q, filed August 9, 2007, and incorporated
herein by reference
(21)
Filed as an exhibit to Form 10-Q, filed May 6, 2008, and incorporated
herein by reference
(22)
Filed as an exhibit to Form 8-K, filed July 7, 2008, and incorporated
herein by reference
(23)
Filed as an exhibit to Form 8-K, filed August 7, 2008, and incorporated
herein by reference
(24)
Filed as an exhibit to Form 8-K, filed October 3, 2008, and incorporated
herein by reference
(25)
Filed as an exhibit to Form 10-K, filed December 8, 2008, and incorporated
herein by reference
(26)
Filed as an exhibit to Form 10-Q, filed February 9, 2009, and incorporated
herein by reference
(27)
Filed as an exhibit to Form 10-Q, filed May 11, 2009, and incorporated
herein by reference
(28)
Filed as an exhibit to Form 8-K, filed May 19, 2009, and
incorporated herein by
reference
|
77
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
TIER
TECHNOLOGIES, INC.
|
||
Dated:November
10, 2009
|
By:
|
/s/
RONALD L. ROSSETTI
Ronald
L. Rossetti
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following
persons in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/
RONALD L. ROSSETTI
Ronald
L. Rossetti
|
Chief
Executive Officer and Chairman of the Board (principal executive
officer)
|
November
10, 2009
|
/s/
RONALD W. JOHNSTON
Ronald
W. Johnston
|
Chief
Financial Officer (principal financial officer and principal accounting
officer)
|
November
10, 2009
|
/s/
CHARLES W. BERGER
Charles
W. Berger
|
Director
|
November
10, 2009
|
/s/
JOHN J. DELUCCA
John
J. Delucca
|
Director
|
November
10, 2009
|
/s/
DANIEL J. DONOGHUE
Daniel
J. Donoghue
|
Director
|
November
10, 2009
|
/s/
MORGAN P. GUENTHER
Morgan
P. Guenther
|
Director
|
November
10, 2009
|
/s/
PHILIP G. HEASLEY
Philip
G. Heasley
|
Director
|
November
10, 2009
|
/s/
MICHAEL R. MURPHY
Michael
R. Murphy
|
Director
|
November
10, 2009
|
/s/
DAVID A. POE
David
A. Poe
|
Director
|
November
10, 2009
|
/s/
ZACHARY F. SADEK
Zachary
F. Sadek
|
Director
|
November
10, 2009
|
78