Attached files

file filename
EX-10.45 - EMPLOYMENT AGREEMENT BETWEEN TIER TECHNOLOGIES, INC. AND ATUL GARG, DATED OCTOBER 19, 2010 - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1045.htm
EX-10.44 - LETTER OF AMENDMENT TO EMPLOYMENT AGREEMENT DATED NOVEMBER 3, 2010, BETWEEN KEITH OMSBERG AND TIER TECHNOLOGIES, INC. - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1044.htm
EX-10.42 - AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT NO. 0006 DATED JULY 12, 2010 BETWEEN THE INTERNAL REVENUE SERVICE AND OFFICIAL PAYMENTS CORPORATION - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1042.htm
EX-23.1 - CONSENT OF MCGLADREY & PULLEN, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit231.htm
EX-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 - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit322.htm
EX-21.1 - SUBSIDIARIES OF REGISTRANT - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit211.htm
EX-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 - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit321.htm
EX-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 - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit311.htm
EX-10.47 - INCENTIVE AND NONSTATUTORY STOCK OPTION AGREEMENT BETWEEN TIER TECHNOLOGIES, INC. AND ALEX P. HART - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1047.htm
EX-10.46 - NONSTATUTORY STOCK OPTION AGREEMENT FOR INDUCEMENT GRANT BETWEEN TIER TECHNOLOGIES, INC. AND ALEX P. HART - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1046.htm
EX-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 - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit312.htm
EX-10.43 - LETTER OF AMENDMENT TO EMPLOYMENT AGREEMENT DATED AUGUST 31, 2010, BETWEEN RONALD W. JOHNSTON AND TIER TECHNOLOGIES, INC. - OFFICIAL PAYMENTS HOLDINGS, INC.exhibit1043.htm

 
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, 2010
 
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.)
 
11130 Sunrise Valley Drive, Suite 300, Reston, Virginia 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨    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.  x
 
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, 2010, the aggregate market value of common stock held by non-affiliates of the registrant was $109,921,041, based on the closing sale price of the common stock on March 31, 2010, as reported on The NASDAQ Stock Market. As of November 16, 2010, there were 18,230,965 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 2011 annual meeting of stockholders, is incorporated by reference into this report.
 
 

 


 
TIER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
 
Part I
1
Item 1—Business
1
Item 1A—Risk Factors
6
Item 1B—Unresolved Staff Comments
7
Item 2—Properties
13
Item 3—Legal Proceedings
14
Item 4—Removed And Reserved
14
Executive Officers Of The Registrant
15
Part II
15
Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
Item 6—Selected Financial Data
18
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 7A—Quantitative and Qualitative Disclosures About Market Risk
35
Item 8—Financial Statements and Supplementary Data
36
Report of Independent Registered Public Accounting Firm
37
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 Accountant 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 about our technology projects, and other statements that are not historical facts, are forward-looking statements within the meaning of the federal securities laws.  These forward-looking statements relate to future events or our future financial and/or operating performance and can generally be identified as such because the context of the statement includes words such as "may," "will," "intends," "plans," "believes," "anticipates," "expects," "estimates," "shows," "predicts," "potential," "continue," or "opportunity," the negative of these words or words of similar import.  These forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described and referred to under Item 1A—Risk Factors beginning on page 6, which could cause actual results to differ materially from those anticipated as of the date of this report.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
PART I
 
ITEM 1—BUSINESS
 
GENERAL
 
Tier Technologies, Inc., or Tier, is a leading provider of biller direct electronic payment solutions, through our primary brand Official Payments. These solutions provide payment services via multiple channels including the Internet, 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 convenience fee payments, absorbed payments, payment reminder and automated 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 while offering their customers secure and convenient means to pay their bills. The demand for our services has been driven by an increasing preference of consumers and merchants/billers to make payments electronically, increased acceptance of online, interactive voice response systems and contact management solutions, as well as by legislative mandates.
 
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 and business 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.
 
During fiscal 2010, we also provided services in one business area which we are currently in the process of winding-down.  While we continue to support our existing contracts in this area, we are not pursuing new contracts.  The business that we are winding down is our Voice and Systems Automation business, or VSA, which provides services for interactive voice response systems, including customization, installation and maintenance.  We expect to complete our VSA business within the next two years.
 
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Originally incorporated in 1991 in California, we reincorporated in Delaware effective July 15, 2005.  We are headquartered in Reston, Virginia.  As of September 30, 2010, our 220 employees and 23 contractors provided services to over 4,600 clients nationwide.
 
Our Continuing Operations consist of two reportable segments, Electronic Payment Solutions, or EPS, operations and Wind-down operations.  Our Wind-down operations consist of one business area that we intend to wind down over the next two years.  Revenues from our EPS operations were $127.2 million for the fiscal year ended September 30, 2010.  For the fiscal year ended September 30, 2010, transaction volume increased 25.9% and total dollars processed increased 13.0% over the same period last year.  Our EPS operations reported a net loss of $6.2 million for fiscal 2010.  Revenues from our EPS operations make up 97.7% of our revenues from Continuing Operations.  The seasonality of our business causes fluctuations from one quarter to the next within our revenues and direct costs.  However, our general and administrative and selling and marketing expenses are more fixed in nature.  We have successfully streamlined our costs to support our Wind-down operations, while still effectively managing our ongoing contracts.
 
Discontinued Operations is a reportable segment, which consists of businesses we have divested through fiscal year 2009.  We incur minimal residual expense relating to our divested operations.  For the fiscal year ended September 30, 2010 we reported a net loss of $0.2 million for Discontinued Operations primarily associated with legal fees and restructuring expense as well as the write-off of a receivable determined to be uncollectible.  These expenses were offset by a $0.6 million earn-out we received from the company that purchased our former Government Business Process Outsourcing, or GBPO, business, pursuant to a Purchase and Sale Agreement dated June 9, 2008.
 
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, 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.  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 4,600 additional clients, consisting primarily of local governments and other public sector clients and approximately 100 private sector clients.  We processed 18.7 million customer transactions, representing $7.8 billion in payments processed across all of our verticals during fiscal 2010.  As of September 30, 2010, we offered nearly 9,200 payment types.  In certain instances, each customer transaction is composed of two sub-transactions, one for the payment amount and one for the fee.
 
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 major debit cards including some regional ATM card networks.  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 2010, we provided payment services for 23 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.  Revenues from our Federal vertical represented 20.5% of EPS revenues for fiscal year 2010.  Our contract with the IRS to provide payment services for federal tax payments contributed 17.1% of our EPS revenue for fiscal year 2010.
 
 
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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 2010, this vertical represented 8.5% of EPS revenue.  None of our clients within this vertical contributed more than 10% to our total revenues for EPS for fiscal year 2010.
 
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 business, revenues earned are seasonal by nature, as due dates for various state and local taxes determine the timing of revenue.  For fiscal year 2010, this vertical represented 27.3% of EPS revenue.  None of our clients within this vertical contributed more than 10% to our total revenues for EPS for fiscal year 2010.
 
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.  For fiscal year 2010, this vertical represented 15.3% of EPS revenue.  None of our clients within this vertical generated more than 10% of our EPS revenues for fiscal year 2010.
 
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.  During fiscal year 2010, this vertical represented 13.6% of EPS revenue.  None of our clients within this vertical generated more than 10% of our EPS revenues for fiscal year 2010.
 
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 2010, this vertical represented 14.8% of our EPS revenues.
 
Revenue Trends
 
As seen in the chart below, EPS revenue and transaction volumes have increased over the past six 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) general market shift in consumer preference from cash and check to electronic forms of payment.
 
 
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EPS Revenue Trend
 
Commencing in the fall of 2006, our Board oversaw a strategic review of our business.  That review resulted in a decision to focus on electronic payment solutions and divest our other businesses.  During fiscal 2009, we completed the divestiture of our former GBPO business and our former Packaged Software Systems Integrations, or PSSI, business.  As part of our strategic decision to focus on electronic payment solutions, we have also 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.  The federal income tax vertical, which used to represent more than half of total company revenue, is now just over 20% of EPS revenue.  Our education and utilities verticals, which were small to non-existent in 2007, currently represent more than 10% of EPS revenue.
 
Vertical
Revenue Contribution
Fiscal year 2010
CAGR(1)
Federal
20.5%
(9.3)%
State and Local
8.5%
5.4%
Property Tax
27.3%
3.1%
Utility
15.3%
55.6%
Education
13.6%
53.4%
Other
14.8%
11.5%
     
Total
100.0%
8.6%
(1)Compound Annual Growth Rate of EPS Revenue for Fiscal Year 2007 to Fiscal Year 2010
 
WIND-DOWN OPERATIONS
 
As of September 30, 2010, our Wind-down operations consist of our VSA business from our former GBPO segment whose operations are neither compatible with our long-term strategic direction nor complementary
 
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with the other business units that we divested.  We intend to complete these projects over the next two years.  Our VSA business provides interactive voice response systems and support services, including customization, installation and maintenance.  We service over 100 customers within this business.  None of the VSA customers contributed more than 10% of our consolidated revenues.
 
DATA SECURITY
 
Tier takes the integrity and security of the financial information it processes on behalf of individuals, businesses and other 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 2010, the responsibilities of our Data Security Committee of the Board of Directors were expanded to include operational risks.  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 and operational 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
 
As a result of a number of acquisitions, including Official Payments Corporation, or OPC, EPOS Corporation and most recently, ChoicePay, Inc., we operate our business on multiple technology platforms.  In 2009, we made the decision to consolidate our operations onto a single technology platform over time.  While we have made some progress in the consolidation efforts, we determined in fiscal 2010 that completion of the development of a consolidated platform and the migration of our approximately 4,600 biller direct clients to that platform would take longer than originally anticipated.  We are continuing to evaluate the platform consolidation project.  We expect to review our plans related to a consolidated platform in mid-fiscal 2011.  At this time, we have postponed all migration plans for current customers.  During fiscal year 2011, we expect that our technology efforts will focus principally on (1) increasing platform stability by improving the platforms’ availability and reliability, (2) improving security and compliance, (3) retention of existing clients, by increasing the products and features available to clients, and (4) completion of infrastructure initiatives.
 
SEGMENT REPORTING
 
Tier manages and reports its business in three segments: EPS, Wind-down and Discontinued operations.  Our Discontinued Operations consists of portions of our former GBPO and PSSI segments, which we have sold.  Detailed information about the profitability of EPS and Wind-down can be found in Note 11—Segment Information to our Consolidated Financial Statements.  Information about our Discontinued Operations can be found in Note 14—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 2010 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 across verticals, and deepen the strength of our primary brand Official Payments.  We continue these initiatives in 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
 
 
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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 the 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.
 
We are launching programs to increase customer adoption and utilization through expanded cross-selling capabilities and enhanced My Account functionality.  My Account is a personal registration function offered through our subsidiary, Official Payments Corporation.  We plan to launch new e-commerce products and payment services for partners and biller direct clients including additional payment channels such as mobile and walk-up payment.
 
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.
 
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; CheckFree and Bill Matrix, subsidiaries of Fiserv; Oracle, 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 in a timely manner.
 
AVAILABLE INFORMATION
 
Our Internet address is www.tier.com.  There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission, or SEC.  Our SEC reports can be accessed through the Investor Relations section of our Web site.  The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
 
 
ITEM 1A—RISK FACTORS
 
 
Investing in our common stock involves a degree of risk.  You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this 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.
 
 
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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 $6.2 million in fiscal 2010, $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 federal verticals, 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 verticals, negatively impacting use of our services and our overall revenues.
 
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. We operate on multiple platforms.  If any or all of the platforms or portions of the platforms, systems, or resources are disrupted or fail to perform properly or effectively, we could incur significant remediation costs and we might not be able to process transactions or provide services during the disruption or failure, which would result in a decrease in revenue.  Our operations, systems and platforms might be disrupted or fail to perform properly for many reasons including operational or technical failures of our systems and platforms, human error, failure of third-party support and services, system failure due to age and lack of integrity of hardware and software infrastructure, existence of single points of failure which has resulted in system interruption and outages, diminished availability and reliability of our services causing us to fail to meet contractual service level requirements, and loss of key individuals or failure of key individuals to perform who have unique knowledge of system architecture and platform customizations.  We process a high volume of time-sensitive payment
 
 
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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 platforms or system software or hardware, an interruption or failure due to damage or destruction, a loss of system or platform 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.  We might be required to incur significant costs to remediate or address any such defect, malfunction, interruption, failure, loss of functionality, delay, lack of capacity, or loss of personnel. Our insurance may not provide coverage or be adequate to compensate us for losses that may occur as a result of any such event, or any system, platform, security or operational failure or disruption.
 
In the event we proceed with consolidation of our technology platforms, the consolidation involves significant risk and may not be successful or may be delayed.  We are in the process of evaluating the consolidation of 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.  Consolidation of our technology 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 2011 and 2012, 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 safe and secure information technology platforms 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 technology platforms it could result in a significant loss of clients, loss of revenues, and risk of liability.
 
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.
 
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
 
 
8

 
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.  In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse customers for any funds stolen as a result of such actions or breaches.  Our third-party vendors or suppliers also may experience security breaches, fraud, computer viruses, attacks by hackers or other similar incidents involving the unauthorized access and theft of confidential data and personally identifiable information.  In January 2009, Heartland Payment Systems reported a breach of security of its systems resulting in the loss or theft of personally identifiable information.  We contract with Heartland for certain payment processing services for credit and debit transactions in the education market.  Although no security breach occurred within our systems, and there is no specific information to date that our clients’ or their related consumers’ information or data was compromised as a result of this incident, if such client or consumer data and information was lost or stolen, such an incident could potentially result in compliance costs, loss of clients and revenues, liability and fines.  Any security breach within our systems, software or hardware or our vendors’ or suppliers’ systems, software or hardware could result in unauthorized access, theft, loss, disclosure, deletion or modification of such data and information, and could cause harm to our business and reputation, liability for fines and damages, costs of notification, and a loss of clients and revenue.
 
Financial loss could result from fraudulent payments, lack of integrity of systems, or fraudulent use of our systems or the systems of third parties. We receive funds and facilitate payment and settlement of funds on behalf of clients, consumers and businesses for a variety of transaction types including debit/credit cards, ACH payments and other electronic bill payments.  Our facilitation of these payments depends on the integrity of our systems and our technology infrastructure as well as the integrity of the systems and technology infrastructure of third parties in the payment transaction process such as financial institutions, processors, networks, and other businesses, and vendors and suppliers.  In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse customers for any funds stolen as a result of such actions or breaches. If the integrity of this payment process is impaired or the ability to detect fraud or fraudulent payments compromised, including in connection with verification, authentication, settlement, and other payment processes, it could result in financial loss.
 
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 provide coverage or be adequate to compensate us for losses that may occur as a result of any such event, or any system, security or operational failure or disruption.
 
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 17.1%, 19.8%, and 27.8% of our annual revenues from Electronic Payment Solutions for fiscal years 2010, 2009, and 2008, 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
 
 
9

 
commencing April 2, 2009 and ending December 31, 2009 and four one-year option periods running until December 31, 2013.  To obtain this contract, we reduced our historical 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.
 
Violation of any existing or future laws or regulations, including laws governing money transmitters and anti-money laundering laws, could expose us to substantial liability and fines, force us to cease providing our services, or force us to change our business practices.  Our business is subject to numerous federal and state laws and regulations, including some states’ money transmitter regulations and related licensing requirements, and anti-money laundering laws.  Compliance with federal and state laws and government regulations regarding money transmitters, money laundering, privacy, data security, fraud, and other laws and regulations associated with payment transaction services 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 consent orders with two states which included payment of a fine for unlicensed activity prior to our submission of the money transmitter application, and two other states have imposed an assessment or 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 could suffer material revenue losses and liability in the event the divested business projects and contracts are not successfully concluded.  We have completed divestment of certain operations and portions of the business including our former Financial Institutions Data Match services, State Systems Integration, Financial Management Systems and Unemployment Insurance operations.  Certain divestitures include contractual earn-outs and revenue sharing arrangements based on the buyers’ successful operation of the businesses divested.  If the businesses are not profitable or there are revenue shortfalls, we may not receive the expected benefits from the divestitures, which could have an adverse impact on our revenues.  Additionally, we remain liable for certain obligations under some of the divested projects and their related contracts.  In February 2009, we completed the sale of our Unemployment Insurance, or UI, business to RKV Technologies, Inc, or RKV.  The sale was completed pursuant to an Asset Purchase Agreement dated February 6, 2009.  As a part of the agreement, Tier is required to leave in place a $2.4 million performance bond on the continuing contract for the State of Indiana, or the State.  Subsequent to the sale of the UI business to RKV, the prime contractor, Haverstick Corporation, or Haverstick, the State, and RKV determined that the contract completion would be delayed and additional funding would be needed to complete the contract.  In November 2009 Haverstick cancelled its contract with RKV and directly rehired various RKV resources and contractors. Tier retains certain liabilities for completion of the project, and continues as the indemnitor under the performance bond.  Mediation is expected to take place by September 2011 to discuss the costs of project completion.  If this contract or other divested contracts are not performed
 
 
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successfully, or if there is a claim of delay or breach in connection with services or products provided by either us or the acquiring company, liability to Tier could result, causing damages, unanticipated costs, bond forfeitures and loss of revenue.
 
As a result of our divestitures and the transition to a primary focus on electronic payment solutions, our business is less diverse and therefore more vulnerable to changes affecting the electronic payments business generally.  Our focus on electronic payment solutions since fiscal year 2007 and the 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.
 
If we undertake acquisitions, they could be expensive, increase our costs or liabilities or disrupt our business.  One of our strategies may be to pursue growth through acquisitions.  Negotiations of potential acquisitions and the integration of acquired business operations could disrupt our business by diverting management attention away from day-to-day operations.  Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in leverage or dilution of ownership.  We also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates.  In addition, we may need to record write-downs from future impairments of identified intangible assets and goodwill, which could reduce our future reported earnings.  Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.  Any costs, liabilities or disruptions associated with any future acquisitions we may pursue could harm our operating results.
 
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.
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law which implements new laws and regulations.  At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact our business.  Compliance with these new laws and regulations will likely result in additional costs which could be significant and could adversely impact the Company’s results of operations, financial condition and liquidity.
 
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.
 
 
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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 (ACH) 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.  On July 21, 2010, President Obama signed HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 1075 of this legislation requires the Federal Reserve to set guidelines for reasonable interchange transaction fees for electronic debit transactions.  The Federal Reserve has nine months from the date of enactment to publish guidelines and the guidelines will become effective one year from the date of enactment.  Among areas of relevance to the Company, the law provides for assessing if any interchange transaction fee is reasonable and proportionate to the cost incurred by the card issuer with respect to the transaction and prohibits payment card networks from restricting the number of payment card networks on which an electronic debit transaction may be processed, prohibits payment card networks from inhibiting the ability of the Company from setting a minimum transaction amount for credit card transactions.
 
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.
 
 
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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.
 
As a result of the recent conditions in the financial and credit markets we may not be able to obtain credit.   The recent worldwide and U.S. economic crisis has made it difficult to borrow money or obtain credit.  We currently have no credit line or credit facility and rely solely on cash on hand, investments and cash from operations to fund our business.  If current levels of economic and market disruption and volatility continue or worsen, there can be no assurance that credit, bank loans, contractual lending agreements or other funding sources will be available on reasonable terms, or at all.   If we were not able to fund operations our level of services, staffing, resources or equipment may need to be reduced or eliminated which could negatively impact our revenue and stock price.
 
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.  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.  Additionally, the failure to meet client expectations could damage our reputation and compromise our ability to attract new business.
 
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 2010 regarding our periodic or current reports under the Securities Exchange Act of 1934.
 
ITEM 2—PROPERTIES
 
As of September 30, 2010, we leased 38,324 square feet of space throughout the country, which includes our 25,583 square foot corporate headquarters in Reston, Virginia.  We also leased 12,741 square feet of space in
 
 
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California and Oklahoma, to support portions of our EPS operations.  In addition, we own a 28,060 square-foot building in Alabama which houses certain administrative, call center, and other operations.
 
 
ITEM 3—LEGAL PROCEEDINGS
 
We are not currently involved in any material pending legal proceedings.
 
 
ITEM 4—REMOVED AND RESERVED
 

 

 
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EXECUTIVE OFFICERS OF THE REGISTRANT
 
The names, ages and positions of our executive officers at November 1, 2010, 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
Alex P. Hart, Age 48 (a)
 
President, Chief Executive Officer and Director
August 2010
   
Ronald W. Johnston, Age 64 (b)
 
Senior Vice President, Chief Financial Officer
July 2008
   
Keith S. Kendrick, Age 53 (c)
 
Senior Vice President, Strategic Marketing
June 2008
   
Atul Garg, Age 44 (d)
 
Senior Vice President, Product Management
November 2010
   
Keith S. Omsberg, Age 49 (e)
 
Vice President, General Counsel and Corporate Secretary
April 2008
   
    (a) Mr. Hart served as President of the Fuelman Fleet Cards business unit of Fleetcor Technologies, Inc., a provider of specialized payment products and services to commercial fleets, major oil companies and petroleum marketers, from September 2009 through August 2010.  From May 2007 to April 2008 Mr. Hart served as Executive Vice President and General Manager of Electronic Banking Services for Check Free Corporation, a provider of financial electronic commerce products and services.  From October 2002 to May 2007, he served as President and Chief Executive Officer of Corillian Corporation, a provider of online banking and bill payment software and services.
   (b)  Mr. Johnston served as a CFO partner with Tatum LLC, a professional services firm, from August 2007 through June 2008; CFO and Treasurer for Grantham Education Corporation, a for-profit post-secondary university, from October 2004 through March 2007; and CFO for WorldSpace Corporation, a satellite broadcast and content development company from September 2002 through September 2004.
    (c) Mr. Kendrick served as Senior Vice President, Corporate Marketing and Strategy with EFunds Corporation, a publicly traded enterprise payments and data solutions company, from December 2005 through September 2007 and co-founder and Chief Executive Officer of Vericate Corporation, an analytical software company focused on fraud detection in the retail drug transaction industry, from January 2003 through March 2005.
    (d)  Mr. Garg served as Executive consultant, Senior Vice President with Fleetcor Technologies, Inc., a provider of specialized payment products and services to commercial fleets, major oil companies and petroleum marketers, from June 2009 to October 2010.  Mr. Garg served as Senior Vice President, eBusiness from November 2007 to  May 2009, Senior Vice President, Small Business Cards from October 2006 to November 2007, Senior Manager, Commercial Cards and Small Business from October 2004 to October 2006 and Director, Project Development, Private Label Credit Card from June 2002 to  October 2004, for HSBC Bank USA, N.A., one of the world’s largest banks, providing personal financial services and commercial, global and private banking services.
(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 8, 2010, there were 203 record holders of our common stock.  The quarterly high and low prices per share during fiscal 2010 and 2009 were as follows:
 
 
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Fiscal year ended September 30,
 
   
2010
   
2009
 
   
High
   
Low
   
High
   
Low
 
First quarter
  $ 9.00     $ 7.43     $ 7.57     $ 3.41  
Second quarter
  $ 8.32     $ 7.10     $ 6.39     $ 4.48  
Third quarter
  $ 8.58     $ 5.99     $ 7.90     $ 4.35  
Fourth quarter
  $ 6.90     $ 4.53     $ 8.90     $ 7.10  
 
 
We have never declared or paid cash dividends on our common stock and do not anticipate doing so for the foreseeable future.  Our current letter of credit facility prohibits us from declaring dividends.
 
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, 2005 through September 30, 2010, with the cumulative total return on the NASDAQ Composite Index, the Russell 2000 Index and a composite of selected peers.  The peer group consists of: ACI Worldwide Inc., Alliance Data Systems Corporation, Bottomline Technologies (de), Inc, Fiserv, Inc., Global Payments Inc., Heartland Payment Systems, Inc., Jack Henry & Associates, Inc, Online Resource Corporation, Total Systems Services Inc and Wright Express Corporation.  We selected these companies because these are all the public companies that operate primarily in the electronic payments industry.  We have included a peer group index this year in order to facilitate a comparison between an investment in Tier and an investment in other companies in our industry.  The comparison assumes $100.00 was invested on September 30, 2005 in our common stock and in each of the foregoing indices and assumes reinvestment of all dividends, if any.
 
 
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Total Return Chart
 
 
Measurement
Date
 
Tier
Technologies, Inc.
   
NASDAQ
Composite
   
Russell
2000
   
Peer
Group
 
9/30/05
  $ 100.00     $ 100.00     $ 100.00     $ 100.00  
9/30/06
    78.61       106.39       109.92       118.44  
9/30/07
    117.92       127.37       123.49       129.16  
9/30/08
    85.09       96.70       105.60       115.92  
9/30/09
    98.03       100.00       95.52       112.39  
9/30/10
    64.05       112.86       108.27       134.99  
 
The information included under the heading "Comparison of 5 Year Cumulative Total Return" in Item 5 of this Annual Report on Form 10-K is "furnished" and not "filed" and shall not be deemed to be "soliciting material" or subject to Regulation 14A, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended September 30, 2010, we did not repurchase any of our common stock. On January 21, 2009, our Board of Directors authorized the repurchase of up to $15.0 million of our common stock in the open market from time to time.  On August 13, 2009, the Board increased the maximum repurchase amount to $20.0 million.  As of September 30, 2010, we had purchased 1,651,898 shares of common stock for
 
 
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$12.3 million under this repurchase program.  Up to $7.7 million worth of our common stock may be purchased by us under this repurchase program in the future.
 
 
ITEM 6—SELECTED FINANCIAL DATA
 
 
The following table summarizes selected consolidated financial data for the fiscal years ended September 30, 2006 through 2010.  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)
 
2010
   
2009
   
2008
   
2007
   
2006
 
Revenues
  $ 130,224     $ 128,246     $ 122,571     $ 108,306     $ 90,916  
Costs and expenses
    136,593       134,400       137,259       130,724       113,956  
Loss from continuing operations before other income and income taxes
    (6,369 )     (6,154 )     (14,688 )     (22,418 )     (23,040 )
Other income
    451       723       2,731       4,094       3,470  
Loss from continuing operations before income taxes
    (5,918 )     (5,431 )     (11,957 )     (18,324 )     (19,570 )
Income tax provision
    30       40       87       76       45  
Loss from continuing operations
    (5,948 )     (5,471 )     (12,044 )     (18,400 )     (19,615 )
(Loss) income from discontinued operations, net
    (245 )     (6,035 )     (15,401 )     15,366       10,164  
Net loss
  $ (6,193 )   $ (11,506 )   $ (27,445 )   $ (3,034 )   $ (9,451 )
                                         
Total assets
  $ 113,025     $ 120,547     $ 137,351     $ 166,424     $ 169,860  
Long-term obligations, less current portion
  $ 1,853     $ 1,121     $ 136     $ 200     $ 1,359  
(Loss) earnings per share—Basic and diluted:
                                       
Continuing operations
  $ (0.33 )   $ (0.28 )   $ (0.61 )   $ (0.94 )   $ (1.00 )
Discontinued operations
  $ (0.01 )   $ (0.31 )   $ (0.79 )   $ 0.78     $ 0.52  
Loss per share—Basic and diluted
  $ (0.34 )   $ (0.59 )   $ (1.40 )   $ (0.16 )   $ (0.48 )
Weighted average common shares used in computing:
                                       
Basic and diluted (loss) earnings per share
    18,153       19,438       19,616       19,512       19,495  
 

 

 
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ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements.  We have based these forward-looking statements on our current plans, expectations and beliefs about future events.  Our actual performance could differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report, as a result of the risks, uncertainties and assumptions discussed under Item 1A—Risk Factors of this Annual Report on Form 10-K and other factors discussed in this section.  For information regarding what constitutes a forward-looking statement 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 bill presentment, convenience payments, installment payments and flexible payment scheduling.  Our solutions offer our clients a range of online payment options, including credit and debit cards, electronic checks, cash and money orders, and alternative payment types.
 
SUMMARY OF FISCAL YEAR 2010 OPERATING RESULTS
 
The following table provides a summary of our operating results by segment for the fiscal year ended September 30, 2010, for our Electronic Payment Solutions, or EPS, operations, our Wind-down operations and Discontinued operations:
 
   
Year ended September 30, 2010
 
(in thousands, except per share)
 
Net (loss) income
   
(Loss) earnings per share
 
Continuing Operations:
           
EPS
  $ (6,207 )   $ (0.34 )
Wind-down
    259       0.01  
Total Continuing Operations
  $ (5,948 )   $ (0.33 )
                 
Total Discontinued Operations
  $ (245 )   $ (0.01 )
                 
Net loss
  $ (6,193 )   $ (0.34 )
 
Our Continuing Operations consists of EPS and Wind-down operations.  Our Wind-down operations consist of one business area we intend to wind down over the next two years.  Our revenues from our EPS operations were $127.2 million for the fiscal year ended September 30, 2010.  Transaction volume grew 25.9% and total dollars processed grew 13.0% when compared to the fiscal year ended September 30, 2009.  Given the nature of our transaction based business, increases in our revenue also result in increases in our direct costs, although not always at the same rate.  Our direct costs increased 3.9% in fiscal year 2010 over fiscal year 2009, primarily due to additional co-location and telephonic costs associated with our data center consolidation efforts.
 
EPS operations reported a net loss of $6.2 million for the fiscal year ended September 30, 2010.  The reported net loss for the fiscal year ended September 30, 2009 was $5.6 million.  The $0.6 million variance is primarily attributable to the increase in direct costs as discussed above and an increase in depreciation expense as we continue to enhance our IT infrastructure and data security efforts.  We incurred some one-time legal and severance costs, which further contributed to the increase in net loss year over year.
 
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Our Wind-down operations reported net income of $0.3 million for the fiscal year ended September 30, 2010.  We continue to make efforts to streamline our costs associated with supporting our Wind-down operations.
 
Our Discontinued Operations consist of businesses we have divested through February 2010.  Our Discontinued Operations reported a net loss of $0.2 million for the fiscal year ended September 30, 2010.

 
STRATEGY AND GOALS FOR 2011
 
During fiscal 2011 we expect to focus on the following key objectives:
 
·  
Expand market share in the biller direct market;
 
·  
Strengthen our technology environment;
 
·  
Establish a market driven approach to our business;
 
·  
Strengthen our management team; and
 
·  
Improve profitability.
 
Expand market share in the biller direct market:   During fiscal 2010, we continued to explore strategic partnerships and potential acquisitions that would allow us to penetrate new markets and increase our share in existing vertical markets.  We offer a low-cost service platform to our billers and their customers as well as a number of payment and channel options, which facilitates the acquisition of new billers and provides the opportunity to cross sell and up sell our existing billers.  During fiscal 2011, we expect to review our costs and seek more efficient means of delivering services to our clients while expanding our product offerings to increase our market share.  We will continue to focus increased resources and marketing programs on our fastest growing, higher margin verticals, education and utilities.  As a result of our continued growth, we provide services to billers and their customers in all 50 states and the District of Columbia.
 
Strengthen our technology environment:  As a result of a number of acquisitions, including Official Payments Corporation (OPC), EPOS Corporation and most recently, ChoicePay, Inc., we operate our business on multiple technology platforms.  In 2009, we made the decision to consolidate our operations onto a single technology platform over time.  The goals of the consolidation were to facilitate our ability to develop, sell and implement new and enhanced product offerings, improve margins by spreading fixed platform costs over a growing number of transactions, simplify our operations and reporting structure and make it easier to integrate potential future acquisitions. While we have made some progress in the consolidation efforts, we have found that completion of the development of a consolidated platform and the migration of our approximately 4,000 biller direct customers to that platform would take longer than originally anticipated.  Our original plan was to complete development during calendar year 2010 and complete customer migration in calendar year 2011.  We are continuing to evaluate the platform consolidation.  At this time, we have postponed all migration plans for current customers. Our immediate focus is to strengthen our present platforms and make the necessary investments to provide competitive products on each of our existing platforms. We are developing these products as self-contained, reusable components, which could be used with multiple clients and platforms.  Previously, we had delayed product rollout so that products could be made available on the consolidated platform.  During fiscal year 2011, we expect that our technology efforts will focus principally on (1) increasing platform stability by improving the platforms’ availability and reliability, (2) security and compliance, (3) retention of existing clients, by increasing the products and features to clients, and (4) completion of infrastructure initiatives.  We expect to review our plans related to a consolidated platform in mid-fiscal 2011.
 
Establish a market driven approach to our business:  We have increased our focus on understanding the dynamics of our markets so that our market strategies and product offerings better meet the evolving needs of the market.  We continue to broaden our product offerings in line with the evolving needs of our customers.  We have expanded our payment channels to include the Web; automated interactive voice response (IVR); agent based call centers and point-of-sale environments, including financial services kiosks.  We offer our billers a technology platform designed expressly for the biller direct market with a single
 
 
20

 
source solution that simplifies the management of electronic payments.  We offer bill-payers a range of payment choices including credit and debit cards, electronic checks (ACH), cash and money orders. We are beginning to implement emerging payment methods such as Green Dot MoneyPak, Bill Me Later and the Revolution card.  By utilizing our solutions, clients can reduce the time and expense devoted to management of their payment technology and compliance with PCI-DSS and other industry standards.  We have started an ongoing upgrade of our strategic information systems to allow us to establish direct relationships with end-users of the Company’s services allowing us to grow transactions across multiple verticals and deepen the strength of our primary brand, Official Payments. 
 
Strengthen our management team:  In the last quarter of fiscal 2010, the Board appointed Alex P. Hart to the position of President and Chief Executive Officer.  During fiscal year 2011 we expect to reevaluate our people and organizational structure, with the goal of ensuring that we have the right people to meet the needs of our clients and their customers in an efficient and effective manner.  In November 2010, Atul Garg joined us as Senior Vice President, Product Management.  We expect to strengthen our technology leadership early in fiscal 2011.
 
Improve profitability:  Having completed the divestiture of business units that were not profitable or not in line with our strategic focus on the biller direct market, we have aggressively worked to reduce our sales, marketing, general and administrative (SG&A) costs over the last several years.  This has involved substantial headcount reductions and facilities consolidations including the consolidation of our data centers, which is in progress.  We expect to continue to improve profitability by growing revenues while continuing to aggressively manage SG&A expenses.  We are also working to manage our direct costs, which are primarily the interchange fees, payment processing fees, banking fees and dues and assessments we pay the card companies.  In fiscal 2011 we expect to improve our margins by negotiating better rates with our merchant acquirers and payment processors, adding lower cost providers and incenting our billers and their customers to use payment options and channels which offer better margins.
 
 
RESULTS OF OPERATIONS—FISCAL YEAR 2010 AND 2009
 
The following table provides an overview of our results of operations for the fiscal years ended September 30, 2010 and 2009:
 
      Year ended    
Variance
 
   
September 30,
   
2010 vs. 2009
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
Revenues
  $ 130,224     $ 128,246     $ 1,978       1.5 %
Costs and expenses:
                               
Direct costs
    98,328       95,594       2,734       2.9 %
General and administrative
    25,199       25,529       (330 )     (1.3 )%
Selling and marketing
    6,355       6,708       (353 )     (5.3 )%
Depreciation and amortization
    6,711       6,569       142       2.2 %
Total costs and expenses
    136,593       134,400       2,193       1.6 %
Loss from continuing operations before other income
and income taxes
    (6,369 )     (6,154 )     (215 )     3.5 %
Other income
    451       723       (272 )     (37.6 )%
Loss from continuing operations before income taxes
    (5,918 )     (5,431 )     (487 )     (9.0 )%
Income tax provision
    30       40       (10 )     (25.0 )%
Loss from continuing operations
    (5,948 )     (5,471 )     (477 )     (8.7 )%
Loss from discontinued operations, net
    (245 )     (6,035 )     5,790       95.9 %
Net loss
  $ (6,193 )   $ (11,506 )   $ 5,313       46.2 %
 
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.
 
 
21

 
COMPARISON—FISCAL YEAR 2010 TO 2009
 
CONTINUING OPERATIONS
 
The Continuing Operations section of our Consolidated Statements of Operations includes the results of operations of our core EPS operations 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 2010 and 2009:
 
   
Year ended September 30,
   
Variance
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
Revenues
                         
EPS
  $ 127,223     $ 123,233     $ 3,990       3.2 %
Wind-down
    3,001       5,013       (2,012 )     (40.1 )%
Total
  $ 130,224     $ 128,246     $ 1,978       1.5 %
 
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.
 
During the fiscal year ended September 30, 2010, EPS generated $127.2 million of revenues, a $4.0 million, or 3.2%, increase over the same period last year.  During fiscal year 2010, we processed 25.9% more transactions than we did in our prior fiscal year, representing 13.0% more dollars.  The lower growth in dollars processed as compared with growth in transactions is due primarily to the success of our stated strategic intent to develop new verticals to diversify the business and lower average dollar transactions in our various tax verticals primarily related to current economic conditions.  A significant amount of the new transactions were from verticals with lower average dollar size, which resulted in lower revenue per transaction.  For example, average utility payments per transaction are lower than in our established property tax and income tax businesses and therefore produced lower average revenue per transaction.  At the same time we introduced ACH and a fixed price debit card as a payment option in the utility vertical and several other verticals.  In the last year, we have also seen that this shift in payment type has reduced our average revenue per transaction and our average direct costs per transaction.  For this reason, the shift in payment type has increased our average “profit” per transaction, when profit is calculated on a percentage basis, even though the average “profit” per transaction may not have increased on an absolute dollar basis.  During fiscal year 2010, all of our verticals experienced an increase in the transactions processed when compared to fiscal year 2009, ranging from 9.0% to 44.1%.  During fiscal year 2010, we added 728 new payment types, bringing our total of payment types offered to nearly 9,200.
 
We expect to see revenue growth in fiscal year 2011 compared with the fiscal year 2010 as we continue to add new payment types for existing clients and continue our selling and marketing efforts to add new clients in our various verticals.  As with the fiscal year 2010, the rate of growth will be dependent on general economic trends.  Our government-based businesses, especially in the tax verticals, experienced low revenue growth during fiscal year 2010 and we have the same expectation for fiscal year 2011.
 
Wind-down Revenues:  During the fiscal year ended September 30, 2010, our Wind-down operations generated $3.0 million, a $2.0 million or 40.1%, decrease from the fiscal year ended September 30, 2009.  Completion of several maintenance contracts within our VSA business and the substantial completion of our
 
 
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Pension business contract contributed to the decreases.  We expect to continue to see decreases in Wind-down revenues as we continue to complete and wind down existing maintenance projects over the next two 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 2010 and 2009:
 
   
Year ended September 30,
   
Variance
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
Direct costs
                         
EPS:
                         
Discount fees
  $ 90,853     $ 88,657     $ 2,196       2.5 %
Other costs
    6,197       4,777       1,420       29.7 %
Total EPS
    97,050       93,434       3,616       3.9 %
Wind-down
    1,278       2,160       (882 )     (40.8 )%
Total
  $ 98,328     $ 95,594     $ 2,734       2.9 %
 
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, 2010, direct costs increased $3.6 million, or 3.9%, over the fiscal year ended September 30, 2009.  Discount fees increased $2.2 million, or 2.5%, over the same period last year, attributable to an increased number of transactions processed offset by several cost savings initiatives and a shift in payment method.  In addition, we received a benefit of $0.3 million in one-time cost savings initiatives.
 
Other costs increased $1.4 million, or 29.7%, over the same period last year.  The increase is primarily associated with an increase in telephonic and co-location costs of $1.6 million associated with increased usage of our customer and client support centers, as well as one-time costs for consolidation of our data centers.  Labor and labor-related costs increased $0.6 million, primarily attributable to the acquisition of ChoicePay and enhancements to our call center in Auburn, Alabama, offset by reduced consulting fees of $0.3 million, as a result of our efforts to decrease dependency on outside resources.  Equipment expenses also increased $0.1 million as additional call center equipment was required as a result of consolidation efforts and increased staffing at our Auburn call center.  These increases were offset by a $0.6 million decrease in product and material costs and other miscellaneous direct costs.
 
During fiscal 2011, 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.  We also may see some additional expenses as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which could impact our interchange fees and lead to additional compliance costs.
 
Wind-down Direct Costs:  During the fiscal year ended September 30, 2010, our Wind-down direct costs decreased $0.9 million, or 40.8%, from the same period last year.  This decrease was primarily attributable to a decrease in labor and labor-related expenses, including consultants and subcontractors, of $0.9 million, a decrease in product and material costs of $0.1 million, attributable to the completion of projects and $0.1 million in telephonic costs.  Offsetting these decreases is an increase of $0.2 million of maintenance costs associated with the support of our current projects.
 
As we wind down these operations, we expect that the direct costs of these operations will continue to decrease during fiscal 2011.
 
 
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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 2010 and 2009:
 
   
Year ended September 30,
   
Variance
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
General and administrative
                         
EPS
  $ 24,821     $ 24,509     $ 312       1.3 %
Wind-down
    378       1,020       (642 )     (62.9 )%
Total
  $ 25,199     $ 25,529     $ (330 )     (1.3 )%

EPS General and Administrative:  During the fiscal year ended September 30, 2010, EPS incurred $24.8 million of general and administrative expenses, a $0.3 million, or 1.3%, increase over the same period last year.  During fiscal year 2010 we incurred $1.0 million in additional legal expenses when compared to fiscal year 2009, primarily associated with various corporate governance issues.  In addition, severance expense increased $0.6 million year-over-year as a result of the departure of two executives, partially offset by the absence of severance costs associated with our office consolidation during fiscal year 2009.  We also incurred year-over-year increases as follows: $0.4 million in recruiting expenses as a result of executive searches during fiscal year 2010; $0.3 million in equipment and software expenses associated with enhancements to our IT infrastructure and data security; $0.3 million in tax expenses, which is the result of the reversal of over-accrued tax expenses during the fiscal year 2009 thereby reducing our tax expense during fiscal year 2009 as well as additional state tax responsibilities in fiscal year 2010; $0.2 million in bad debt expense as a result of longer payment cycles; $0.2 million in bank fees as a result of fee increases and lower earnings credits; $0.1 million in rent expense associated with the duplicate rent period during the build-out of our new Reston headquarters offset by reduction in office space in Georgia and Tulsa; and $0.1 million in telephone and related expenses.
 
Primarily offsetting these increases is a decrease in labor and other labor-related expenses of $2.1 million.  This decrease is made up of a reduction in incentive compensation of $1.7 million for fiscal year 2010 compared to fiscal year 2009, based on estimated bonus payouts for fiscal year 2010.  In addition, share-based payment expenses decreased $0.2 million year-over-year primarily as a result of decreases in fair market value associated with our performance stock units and $0.2 million in other miscellaneous labor and related expenses as a result of streamlining our general and administrative workforce.  Restructuring expenses were down $0.4 million when comparing fiscal year 2010 with fiscal year 2009 due to the completion of our office consolidation efforts during fiscal year 2009.  Travel and travel-related expenses decreased $0.2 million year-over-year primarily associated with a reduction in executive travel.  Further contributing to the decreases are a $0.1 million decrease in accounting fees and a $0.1 million decrease in business licenses and fees as we move from application status to renewal status for our money transmitter licenses.
 
During fiscal year 2010 we incurred some one-time costs we do not anticipate incurring during fiscal year 2011.  As such, we are expecting our general and administrative costs to decrease during fiscal year 2011.
 
Wind-down General and Administrative:  During the fiscal year ended September 30, 2010, our Wind-down general and administrative costs decreased $0.6 million, or 62.9%, as compared to the fiscal year ended September 30, 2009.  Our labor and labor related expenses, including consultants, decreased $0.8 million year-over-year as a result of our strategic decision to focus on EPS operations.  Our telephone and related costs also decreased $0.1 million when comparing fiscal year 2010 to fiscal year 2009.  Offsetting these decreases is an increase of $0.2 million in bad debt expense associated with a receivable we have determined may be uncollectable.
 
 
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We expect to see continued decreases in general and administrative expenses for our Wind-down operations as we complete projects.
 
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 2010 and 2009:
 
   
Year ended September 30,
   
Variance
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
Selling and marketing
                         
EPS
  $ 6,355     $ 6,697     $ (342 )     (5.1 )%
Wind-down
          11       (11 )     (100.0 )%
Total
  $ 6,355     $ 6,708     $ (353 )     (5.3 )%
 
EPS Selling and Marketing: During the fiscal year ended September 30, 2010, EPS incurred $6.4 million of selling and marketing expenses, a $0.3 million or 5.1%, decrease compared to the fiscal year ended September 30, 2009.  Contributing to the overall decrease in expense is a reduction of $0.7 million in labor and labor related costs as follows: a $0.6 million decrease in labor force and related expenses as we continue to streamline our business; a $0.3 million decrease in severance expense year-over-year attributable to severance expense recognized in fiscal year 2009 relating to the departure of an executive as well expense associated with our consolidation efforts; and a $0.2 million reduction in share-based payment expense, primarily due to the reduction in the fair market value of our performance stock units, offset by an increase in commission expense of $0.5 million relating to an adjustment in fiscal year 2009 to modify historical commission plans.  In addition, our strategic partnership fees decreased $0.2 million year-over-year due to the nature of our current partnership agreements.  These decreases are offset by an increase of $0.3 million in advertising expenses as we work towards more targeted marketing campaigns and $0.2 million in miscellaneous travel and office related expenses.
 
During fiscal year 2011, we anticipate an increase in selling and marketing expenses, primarily in labor and labor related expenses, as well as advertising expenses, as we focus on adding new clients and new payment types and services to existing clients.
 
Wind-down Selling and Marketing:  We did not incur any selling and marketing expenses in our Wind-down operations during fiscal year 2010 and incurred minimal expenses during fiscal year 2009.  This is consistent with our efforts to focus the maintenance and growth of our business on our EPS operations.
 
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 2010 and 2009:
 
   
Year ended September 30,
   
Variance
 
(in thousands, except percentages)
 
2010
   
2009
     $       %  
Depreciation and amortization
                         
EPS
  $ 5,625     $ 4,885     $ 740       15.2 %
Wind-down
    1,086       1,684       (598 )     (35.5 )%
Total
  $ 6,711     $ 6,569     $ 142       2.2 %
 
 
 
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Depreciation and amortization relating to our EPS operations increased $0.7 million, or 15.2%, for the fiscal year ended September 30, 2010 over the fiscal year ended September 30, 2009, primarily due to the acquisition of ChoicePay assets during January 2009 as well as the depreciation of internally developed capitalized software during fiscal year 2010.  Our Wind-down operations depreciation and amortization expense decreased $0.6 million, or 35.5% when comparing fiscal year 2010 to 2009, consistent with our strategic decision to focus on our EPS operations.
 
Other Income (Continuing Operations)
 
Gain on investment:  During the fiscal year ended September 30, 2010 we recognized a $31,000 gain related to the increase in fair value of our auction rate securities. This is a $62,000 improvement over the fiscal year ended September 30, 2009.
 
Gain on sale of assets:  During the fiscal year ended September 30, 2010 we recognized a $6,000 gain associated with the sale of assets during the current fiscal year.
 
Interest income, net:  Interest income during the fiscal year ended September 30, 2010 decreased $0.3 million compared to the fiscal year ended September 30, 2009, 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, discount notes 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 $30,000 for the fiscal year ended September 30, 2010, a $10,000 decrease from September 30, 2009.  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, 2010 and 2009 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, 2010, we had $111.3 million of federal net operating loss carryforwards, which expire beginning in fiscal 2018 through 2030, and $94.7 million of state net operating loss carryforwards, most of which begin to expire after fiscal 2017 through 2025.  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.
 
DISCONTINUED OPERATIONS
 
Our Discontinued Operations consist of portions of our former GBPO and PSSI businesses which we have divested and no longer operate.  During years ended September 30, 2010 and 2009, net loss from Discontinued Operations was $0.2 million and $6.0 million, respectively.
 
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:
 
 
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     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 operations 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.
 
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
 
 
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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.
 
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 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.
 
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 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.
 
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 period 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.
 
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
 
 
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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) contributed $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 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.
 
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.
 
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:
 
 
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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.
 
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.
 
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,
 
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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 consist 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.
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
At September 30, 2010 we had $54.0 million in cash, cash equivalents and marketable securities compared with $57.6 million at September 30, 2009.  Of the $57.6 million at September 30, 2009, $31.2 million consisted of marketable securities which were illiquid as of September 30, 2009.  During fiscal year 2010, we were able to liquidate these securities and invest the proceeds in short-term and cash equivalent investments.  In addition, as of September 30, 2010 we had restricted cash of $7.3 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 $1.3 million is used to collateralize outstanding letters of credit, which are scheduled to come due during calendar year 2010.  We currently have an Amended and Restated Credit and Security Agreement, as amended, with our lender, under which we may obtain up to $5.0 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 $1.3 million of letters of credit outstanding were issued to secure performance bonds and a property lease.
 
Our current investment strategy is to ensure our cash, cash equivalents and marketable securities remain as liquid as possible.  We intend to concentrate our investments in short term U.S. Treasury bills to ensure we can meet our liquidity needs over the next twelve months.  We believe we have sufficient liquidity to meet currently anticipated needs, 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, 2010, our operating activities from Continuing Operations provided $2.0 million of cash.  This reflects a net
 
 
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loss of $5.9 million from Continuing Operations and $9.4 million of non-cash items.  During fiscal 2010, $0.8 million of cash was generated by a decrease in accounts and settlements receivable, $0.6 million of cash was generated by decrease in prepaid expenses and other assets and $0.1 million of cash was generated by a decrease in income tax.  A decrease in accounts and settlements payable and other accrued liabilities used $2.7 million of cash and a decrease in deferred income used $0.3 million of cash.
 
Net Cash from Continuing Operations—Investing Activities.  Net cash generated by our investing activities from Continuing Operations for the fiscal year ended September 30, 2010 was $22.8 million, including $31.2 million of cash generated by the sale of trading securities and $19.9 million of cash generated by the maturities and sale of available-for-sale securities, offset by the use of $23.6 million of cash to purchase available-for-sale securities.  The collection of a note receivable generated $0.5 million of cash.  The purchase of equipment and software to support our EPS operations used $5.2 million of cash and additional goodwill recognized associated with the ChoicePay earn-out used $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, 2010 was $0.7 million.  The purchase of company stock used $0.7 million of cash, offset by $82,000 provided by the issuance of stock.  Capital lease obligations used $36,000 of cash.
 
Net Cash from Discontinued Operations—Operating Activities.  During the fiscal year ended September 30, 2010, our operating activities from Discontinued Operations used $0.9 million of cash as a result of residual expenses related to our divested businesses.
 
Net Cash from Discontinued Operations—Investing Activities.  During the fiscal year ended September 30, 2010, investing activities from discontinued operations provided $0.6 million of cash as a result of an earn-out payment from the company that purchased our former GBPO business, pursuant to the Purchase and Sale Agreement.
 
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;
 
 
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; and
 
 
Software maintenance contracts—revenues are recognized on a straight-line basis over the contract term, which is typically one year.
 
 
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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.
 
Collectability 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.
 
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
 
 
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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.
 
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.
 
RECENT ACCOUNTING STANDARDS
 
FASB ASC 860.  In June 2009, the FASB issued FASB ASC 860, which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. FASB ASC 860 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009 and in interim periods within those fiscal years with earlier adoption prohibited. We will adopt FASB ASC 860 on October 1, 2010.  We are currently evaluating the effect the adoption of FASB ASC 860 will have on our financial position and results of operations.
 
FASB ASU 2010-06.  In January 2010, the FASB issued Accounting Standards Update, or ASU, or FASB ASU 2010-06, which amends the disclosure requirements relating to recurring and nonrecurring fair value measurements.  New disclosures are required about transfers into and out of the levels 1 and 2 fair value hierarchy and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements.  This ASU also requires an entity to present information about purchases, sales, issuances and settlements for significant unobservable inputs on a gross basis rather than as a net number.  This ASU was effective for us with the reporting period beginning January 1, 2010, except for the disclosures on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning October 1, 2011.  The adoption of this ASU had no impact on our financial position and results of operations, as it only requires additional disclosures.
 
FASB ASU 2010-20.  In July 2010, the FASB issued, FASB ASU 2010-20, which amends ASC 310 by requiring additional, more robust disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses.  We will adopt the disclosure requirements in our December 31, 2010 quarterly report.  The adoption of this ASU had no impact on our financial position and results of operations, as it only changes disclosure requirements.
 
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
 
Our Certificate of Incorporation obligates us to indemnify our directors and officers against all expenses, judgments, fines and amounts paid in settlement for which such persons become liable as a result of acting in any capacity on behalf of Tier, if the director or officer met the standard of conduct specified in the Certificate, and subject to the limitations specified in the Certificate.  In addition, we have indemnification agreements with certain of our directors and officers, which supplement the indemnification obligations in our Certificate.  These agreements generally obligate us to indemnify the indemnitees against expenses incurred because of their status as a director or officer, if the indemnitee met the standard of conduct specified in the agreement, and subject to the limitations specified in the agreement.
 
 
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EMPLOYMENT AGREEMENTS
 
As of September 30, 2010, we had employment and change of control agreements with four executives and one other key manager.  If certain termination or change of control events were to occur under the five contracts as of September 30, 2010, we could be required to pay up to $3.9 million.  In addition, pursuant to the terms of our employment contract with our current CEO, we could be required to pay up to $0.1 million relating to relocation expenses and legal fees in association with the review and negotiation of the employment contract.
 
CONTRACTUAL OBLIGATIONS
 
We have contractual obligations to make future payments on lease agreements, which have remaining terms that extend beyond five years.  During the fiscal year ended September 30, 2010, we entered into a lease agreement for space in Reston, Virginia to house our headquarters.  This lease agreement ends in fiscal year 2018.  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 following table presents our expected payments for contractual obligations that were outstanding at September 30, 2010.  All of our contractual obligations expire by 2018.
 
(in thousands)
 
Total
   
2011
      2012-2013     2014-2015  
Thereafter
Capital lease obligations (equipment) (1)
  $ 78     $ 31     $ 47   $   $  
                                       
Operating lease obligations:
                                     
Facilities leases
    5,563       468       1,590     1,625     1,880  
Equipment leases
    23       6       12     5      
                                       
Purchase obligations:
                                     
Subcontractor
    110       110                
Purchase order
    182       182                
Total contractual obligations
  $ 5,956     $ 797     $ 1,649   $ 1,630   $ 1,880  
(1) Includes interest payments of $1.
           
 

 
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 securities.  These securities are subject to interest rate risk and may decline in value if market interest rates increase.  If market interest rates increase immediately and uniformly by ten percentage points from levels at September 30, 2010 the fair value of the portfolio would decline by approximately $43,000.
 

 
35

 

 
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 




Report of Independent Registered Public Accounting Firm
37
Consolidated Balance Sheets
38
Consolidated Statements of Operations
39
Consolidated Statements of Shareholders’ Equity
40
Consolidated Statements of Comprehensive Loss
41
Consolidated Statements of Cash Flows
42
Notes To Consolidated Financial Statements
44
Note 1—Nature of Operations
44
Note 2—Summary of Significant Accounting Policies
44
Note 3—Investments
49
Note 4—Fair Value Measurements
50
Note 5—Customer Concentration and Risk
52
Note 6—Property, Equipment and Software
53
Note 7—Goodwill and Other Intangible Assets
54
Note 8—Income Taxes
55
Note 9— Commitments And Contingencies
57
Note 10—Related Party Transactions
59
Note 11—Segment Information
60
Note 12—Shareholders’ Equity
62
Note 13—Share-based Payment
62
Note 14—Discontinued Operations
65
Note 15—Loss per Share
67
Note 16—Acquisition
67
Note 17—Restructuring
68
Note 18—Subsequent Events
69
Selected Quarterly Financial Data (Unaudited)
70
Schedule II
71


 
36

 


 
Report of Independent Registered Public Accounting Firm
 
 
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, 2010 and 2009, 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, 2010.  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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2010, 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, 2010, 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 22, 2010, 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 22, 2010


 
37

 

TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30,
2010
   
September 30,
2009
 
ASSETS:
           
Current assets:
           
Cash and cash equivalents
  $ 45,757     $ 21,969  
Investments in marketable securities
    8,249       4,499  
Restricted investments
    1,311       1,361  
Accounts receivable, net
    4,883       4,790  
Settlements receivable, net
    8,356       10,592  
Prepaid expenses and other current assets
    1,407       2,239  
Total current assets
    69,963       45,450  
                 
Property, equipment and software, net
    12,032       7,990  
Goodwill
    17,381       17,329  
Other intangible assets, net
    7,477       12,038  
Investments in marketable securities
          31,169  
Restricted investments
    6,000       6,000  
Other assets
    172       571  
Total assets
  $ 113,025     $ 120,547  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
               
Current liabilities:
               
Accounts payable
  $ 1,059     $ 84  
Settlements payable
    10,716       13,911  
Accrued compensation liabilities
    4,261       3,213  
Accrued discount fees
    4,624       5,343  
Other accrued liabilities
    2,718       3,425  
Deferred income
    558       861  
Total current liabilities
    23,936       26,837  
Other liabilities:
               
Deferred rent
    1,257        
Other liabilities
    596       1,121  
Total other liabilities
    1,853       1,121  
Total liabilities
    25,789       27,958  
                 
Commitments and contingencies (Note 9)
               
                 
Shareholders’ equity:
               
Preferred stock, no par value; authorized shares:  4,579;
no shares issued and outstanding
           
Common stock, $0.01 par value, and paid-in capital; shares authorized: 44,260;
shares issued: 20,706 and 20,687; shares outstanding: 18,170 and 18,238
    193,620       192,030  
Treasury stock—at cost, 2,536 and 2,449 shares
    (21,020 )     (20,271 )
Accumulated other comprehensive loss
    (1 )      
Accumulated deficit
    (85,363 )     (79,170 )
Total shareholders’ equity
    87,236       92,589  
Total liabilities and shareholders’ equity
  $ 113,025     $ 120,547  
See Notes to Consolidated Financial Statements

 
38

 

TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 

 
   
Year ended September 30,
 
(in thousands, except per share data)
 
2010
   
2009
   
2008
 
                   
Revenues
  $ 130,224     $ 128,246     $ 122,571  
                         
Costs and expenses:
                       
Direct costs
    98,328       95,594       95,234  
General and administrative
    25,199       25,529       28,020  
Selling and marketing
    6,355       6,708       8,677  
Depreciation and amortization
    6,711       6,569       5,328  
Total costs and expenses
    136,593       134,400       137,259  
                         
Loss from continuing operations before other income and income taxes
    (6,369 )     (6,154 )     (14,688 )
                         
Other income:
                       
Interest income, net
    414       754       2,731  
Gain (loss) on investment
    31       (31 )      
Gain on sale of assets
    6              
Total other income
    451       723       2,731  
                         
Loss from continuing operations before income taxes
    (5,918 )     (5,431 )     (11,957 )
Income tax provision
    30       40       87  
                         
Loss from continuing operations
    (5,948 )     (5,471 )     (12,044 )
Loss from discontinued operations, net
    (245 )     (6,035 )     (15,401 )
                         
Net loss
  $ (6,193 )   $ (11,506 )   $ (27,445 )
                         
Loss per share—Basic and diluted:
                       
From continuing operations
  $ (0.33 )   $ (0.28 )   $ (0.61 )
From discontinued operations
  $ (0.01 )   $ (0.31 )   $ (0.79 )
Loss per share—Basic and diluted
  $ (0.34 )   $ (0.59 )   $ (1.40 )
                         
Weighted average common shares used in computing:
                       
Basic and diluted loss per share
    18,153       19,438       19,616  
See Notes to Consolidated Financial Statements

 
39

 
 
TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 
                                 Accumulated other             Total  
     Common Stock Issued      Paid-in-     Treasury Stock      comprehensive      Accumulated      shareholders'  
 (in thousands)    Shares       Amount       capital      Shares     Amount      (loss) income      deficit      equity  
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