OFFICIAL PAYMENTS HOLDINGS, INC. - FORM 10-Q

Attached files

file	filename
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-10.4 - AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT NO. 0008 DATED MARCH 9, 2011 BETWEEN THE INTERNAL REVENUE SERVICE AND OFFICIAL PAYMENTS CORPORATION - OFFICIAL PAYMENTS HOLDINGS, INC.	exhibit104.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, AS AMENDED. - OFFICIAL PAYMENTS HOLDINGS, INC.	exhibit312.htm
EX-10.5 - AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT NO. 0009 DATED APRIL 6, 2011 BETWEEN THE INTERNAL REVENUE SERVICE AND OFFICIAL PAYMENTS CORPORATION - OFFICIAL PAYMENTS HOLDINGS, INC.	exhibit105.htm
EX-10.3 - EMPLOYMENT AGREEMENT DATED DECEMBER 13, 2010 BETWEEN TIER TECHNOLOGIES, INC. AND SANDIP MOHAPATRA - OFFICIAL PAYMENTS HOLDINGS, INC.	exhibit103.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, AS AMENDED. - OFFICIAL PAYMENTS HOLDINGS, INC.	exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

__________________

Commission file number 000-23195

TIER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3145844
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11130 Sunrise Valley Drive, Suite 300 Reston, Virginia	20191
(Address of principal executive offices)	(Zip code)

(571) 382-1000

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer," "accelerated filer," and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At April 30, 2011 there were 16,596,621 shares of the Registrant's Common Stock outstanding.

TIER TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	1
Item 1. Consolidated Financial Statements	1
Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Comprehensive Loss	3
Consolidated Statements of Cash Flows	4
Consolidated Supplemental Cash Flow Information	5
Notes to Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	33
Item 4. Controls and Procedures	33
PART II. OTHER INFORMATION	35
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6. Exhibits	43
SIGNATURE	44
EXHIBIT INDEX	45

Private Securities Litigation Reform Act Safe Harbor Statement

Statements made in this report that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to future events or Tier’s future financial and/or operating performance and generally can be identified as such because the context of the statement includes words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “shows,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Tier undertakes no obligation to update any such forward-looking statements. Each of these statements is made as of the date hereof based only on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. Actual events or results may differ materially from those projected in any of such statements due to various factors, including, but not limited to: general economic conditions, which affect Tier’s financial results in all our markets, which we refer to as “verticals,” particularly the federal vertical, the state and local vertical and property tax vertical; effectiveness and performance of our systems, payment processing platforms and operational infrastructure; our ability to grow EPS revenue while controlling our costs; the potential loss of funding by clients, including due to government budget shortfalls or revisions to mandated statutes; the timing, initiation, completion, renewal, extension or early termination of client projects; our ability to realize revenues from our business development opportunities; the impact of governmental investigations or litigation; and unanticipated claims as a result of project performance, including due to the failure of software providers or subcontractors to satisfactorily complete engagements. For a discussion of these and other factors which may cause our actual events or results to differ from those projected, please refer to Item 1A. Risk Factors beginning on page 35 of this report.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TIER TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)	March 31, 2011			September 30, 2010
	(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	43,043		$	45,757
Investments in marketable securities		—			8,249
Restricted investments		—			1,311
Accounts receivable, net		3,556			4,883
Settlements receivable, net		10,774			8,356
Prepaid expenses and other current assets		1,265			1,407
Total current assets		58,638			69,963

Property, equipment and software, net		12,409			12,032
Goodwill		17,416			17,381
Other intangible assets, net		5,758			7,477
Restricted investments		6,000			6,000
Other assets		165			172
Total assets	$	100,386		$	113,025

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	286		$	1,059
Settlements payable		12,770			10,716
Accrued compensation liabilities		3,115			4,261
Accrued discount fees		4,940			4,624
Other accrued liabilities		2,553			2,718
Deferred income		489			558
Total current liabilities		24,153			23,936
Other liabilities:
Deferred rent		1,490			1,257
Other liabilities		708			596
Total other liabilities		2,198			1,853
Total liabilities		26,351			25,789

Contingencies and commitments (Note 8)

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: 20,772 and 20,706; shares outstanding: 16,597 and 18,170		192,948			193,620
Treasury stock—at cost, 4,175 and 2,536 shares		(31,383	)		(21,020	)
Accumulated other comprehensive loss		—			(1	)
Accumulated deficit		(87,530	)		(85,363	)
Total shareholders’ equity		74,035			87,236
Total liabilities and shareholders’ equity	$	100,386		$	113,025

See Notes to Consolidated Financial Statements

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended March 31,						Six months ended March 31,
(in thousands, except per share data)	2011			2010			2011			2010
Revenues	$	30,266		$	30,674		$	63,236		$	63,442

Costs and expenses:
Direct costs		23,332			22,536			48,202			46,628
General and administrative		4,884			6,192			10,809			12,519
Selling and marketing		1,822			1,438			3,372			3,039
Depreciation and amortization		1,806			1,635			3,564			3,243
Total costs and expenses		31,844			31,801			65,947			65,429
Loss from continuing operations before other income and income taxes		(1,578	)		(1,127	)		(2,711	)		(1,987	)

Other income:
Interest income, net		20			171			57			298
Gain on investments		—			2			—			14
Total other income		20			173			57			312

Loss from continuing operations before income taxes		(1,558	)		(954	)		(2,654	)		(1,675	)
I Income tax benefit		(186	)		(145	)		(185	)		(145	)

Loss from continuing operations		(1,372	)		(809	)		(2,469	)		(1,530	)
Gain from discontinued operations, net		300			295			302			241

Net loss	$	(1,072	)	$	(514	)	$	(2,167	)	$	(1,289	)

(Loss) gain per share—Basic and diluted:
From continuing operations	$	(0.08	)	$	(0.04	)	$	(0.14	)	$	(0.08	)
From discontinued operations		0.02			0.01			0.02			0.01
(Loss) gain per share—Basic and diluted	$	(0.06	)	$	(0.03	)	$	(0.12	)	$	(0.07	)

Weighted average common shares used in computing:
Basic and diluted loss per share		16,928			18,151			17,577			18,154

See Notes to Consolidated Financial Statements

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

	Three months ended March 31,						Six months ended March 31,
(in thousands)	2011			2010			2011			2010
Net loss	$	(1,072	)	$	(514	)	$	(2,167	)	$	(1,289	)
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on investment in marketable securities		—			(1	)		1			(1	)
Other comprehensive (loss) income		—			(1	)		1			(1	)
Comprehensive loss	$	(1,072	)	$	(515	)	$	(2,166	)	$	(1,290	)

See Notes to Consolidated Financial Statements

TIER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended March 31,
(in thousands)	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,167	)	$	(1,289	)
Less: Gain from discontinued operations, net		302			241
Loss from continuing operations, net		(2,469	)		(1,530	)
Non-cash items included in net loss:
Depreciation and amortization		3,564			3,243
Provision for doubtful accounts		192			511
Deferred rent		224			165
Share-based compensation		(846	)		1,079
Capitalized software impairment loss		246			—
Gain on trading securities		—			(14	)
Other		—			(6	)
Net effect of changes in assets and liabilities:
Accounts and settlements receivable, net		(1,283	)		(63	)
Prepaid expenses and other assets		171			(272	)
Accounts and settlements payable and accrued liabilities		290			6,175
Income taxes receivable		(22	)		49
Deferred income		(69	)		(283	)
Cash (used in) provided by operating activities from continuing operations		(2	)		9,054
Cash used in operating activities from discontinued operations		(7	)		(219	)
Cash (used in) provided by operating activities		(9	)		8,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities		(5,998	)		(6,897	)
Maturities of available-for-sale securities		14,576			5,998
Sales of trading securities		—			5,200
Maturities of restricted investments		983			—
Purchase of equipment and software		(2,450	)		(2,605	)
Additions to goodwill—ChoicePay acquisition		(35	)		(19	)
Collection on note receivable		—			261
Cash provided by investing activities from continuing operations		7,076			1,938
Cash provided by investing activities from discontinued operations		309			460
Cash provided by investing activities		7,385			2,398
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		289			—
Purchase of company stock		(10,363	)		(749	)
Capital lease obligations and other financing arrangements		(16	)		(18	)
Cash used in financing activities		(10,090	)		(767	)
Net (decrease) increase in cash and cash equivalents		(2,714	)		10,466
Cash and cash equivalents at beginning of period		45,757			21,969
Cash and cash equivalents at end of period	$	43,043		$	32,435

TIER TECHNOLOGIES, INC.

CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION

(unaudited)

	Six months ended March 31,
(in thousands)	2011		2010
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2	$	12
Income taxes paid (refunded), net	$	42	$	(34	)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations	$	18	$	—
Investments released from restriction	$	327	$	—
Decrease in fair value of ARS Rights	$	—	$	598
Increase in fair value of trading securities	$	—	$	584
Tenant improvements acquired with deferred rent credit	$	—	$	959

See Notes to Consolidated Financial Statements

Tier Technologies, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NATURE OF OPERATIONS

Tier Technologies, Inc., or Tier, primarily provides Electronic Payment Solutions, or EPS, services which are provided by our wholly owned subsidiary Official Payments Corporation, or OPC. We operate in the following biller direct markets:

·	Federal—which includes federal income and business tax payments;

·	State and local—which includes state and local income tax payments and business tax payments;

·	Property tax—which covers state and local real property tax;

·	Utility—which includes private and public utilities;

·	Education—which consists of services to post-secondary educational institutions; and

·	Other—which includes local government fines and fees, motor vehicle registration and payments, rent, insurance, K-12 education meal payments and fee payments, and personal property tax payments.

We also operate in one other business area called our Voice and Systems Automation, or VSA, business, which we are winding down over the next two years because the services are neither compatible with our long-term strategic direction nor complementary with businesses we have divested. VSA provides call center interactive voice response systems and support services, which include customization, installation and maintenance.

For additional information about our EPS and Wind-down operations, see Note 9—Segment Information.

BASIS OF PRESENTATION

Our Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, for interim financial information and in accordance with Regulation S-X, Article 10, under the Securities Exchange Act of 1934, as amended. They are unaudited and exclude some disclosures required for annual financial statements. We reclassified historical information in the Consolidated Statement of Cash Flows to conform with the current period presentations. Within discontinued operations, we reclassified from operating activities to investing activities, the gain on disposal of discontinued operations. We believe we have made all necessary adjustments so that our Consolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature.

Preparing financial statements requires us to make estimates and assumptions that affect the amounts reported on our Consolidated Financial Statements and accompanying notes. We believe that near-term changes could impact the following estimates: collectability of receivables; share-based compensation; valuation of goodwill, intangibles and investments; contingent liabilities; and effective tax rates, deferred taxes and associated valuation allowances. Although we believe the estimates and assumptions used in preparing our Consolidated Financial Statements and related notes are reasonable in light of known facts and circumstances, actual results could differ materially.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASC 860. In June 2009, the Financial Accounting Standards Board, or FASB, issued FASB Accounting Standards Codification, or 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

Tier Technologies, Inc.

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 adopted FASB ASC 860 effective October 1, 2010. The adoption of this ASC had no impact on our financial position and results of operations.

FASB ASU 2010-06. In January 2010, the FASB issued FASB Accounting Standards Update, or 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 2010-28. In December 2010, the FASB issued FASB ASU 2010-28, which affects entities evaluating goodwill for impairment under FASB ASC 350-20. ASU 2010-28, among other things, requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that goodwill impairment exists. If an entity concludes that it is more likely than not that goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. ASU 2010-28 is effective for impairment tests performed during an entity’s fiscal year beginning after December 15, 2010, with early adoption not permitted. We will adopt this ASU effective October 1, 2011. We do not believe the adoption of this ASU will have a material impact on our financial position or results of operations.

NOTE 3—INVESTMENTS

At March 31, 2011, all of our investments were classified as cash and cash equivalents. We had $8.2 million of discount notes classified as available-for sale as defined by GAAP at September 30, 2010. In addition, our bank requires us to maintain a $6.0 million money market investment as a compensating balance to guarantee availability of funds for processing outgoing Automated Clearing House payments to our clients. This money market investment is reported as Restricted investments on the Consolidated Balance Sheets.

Unrestricted investments with original maturities of 90 days or less (as of the date that we purchased the securities) are classified as cash equivalents.

The following table shows the balance sheet classification, amortized cost and estimated fair value of investments included in current investments in marketable securities:

	March 31, 2011						September 30, 2010
(in thousands)	Amortized cost		Unrealized gain (loss)		Estimated fair value		Amortized cost		Unrealized gain (loss)		Estimated fair value
Investments in marketable securities:
Certificates of deposit	$	—	$	—	$	—	$	50	$	—	$	50
Discount notes		—		—		—		8,199		—		8,199
Total marketable securities		—		—		—		8,249		—		8,249

Total investments	$	—	$	—	$	—	$	8,249	$	—	$	8,249

NOTE 4—FAIR VALUE MEASUREMENTS

Fair value is defined under US GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in

Tier Technologies, Inc.

an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value as follows:

Level 1—	Quoted prices in active markets for identical assets or liabilities.
Level 2—	Inputs other than quoted prices in active markets, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—	Unobservable inputs, for which there is little or no market data for the assets or liabilities.

The following table represents the fair value hierarchy for our financial assets, comprised of cash equivalents and investments, measured at fair value on a recurring basis as of March 31, 2011 and September 30, 2010.

Fair value measurements as of March 31, 2011

(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents:
U. S. Treasury bills	$	21,749	$	—	$	—	$	21,749
Money market		992		—		—		992

Restricted investments:
Money market		6,000		—		—		6,000
Total	$	28,741	$	—	$	—	$	28,741

Fair value measurements as of September 30, 2010

(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents:
U.S. Treasury bills	$	23,514	$	—	$	—	$	23,514
Money market		1,932		—		—		1,932

Investments in marketable securities:
Discount notes		—		8,199		—		8,199
Certificates of deposit		—		50		—		50

Restricted investments:
Money market		6,000		—		—		6,000
Certificates of deposit		—		1,311		—		1,311
Total	$	31,446	$	9,560	$	—	$	41,006

NOTE 5—CUSTOMER CONCENTRATION AND RISK

We derive a significant portion of our revenue from a limited number of governmental customers. Typically, the contracts allow these customers to terminate all or part of the contract for convenience or cause. We have one client, the Internal Revenue Service, or IRS, which is the source of more than 10% of our revenues from EPS operations.

The following table shows the revenues specific to our contract with the IRS:

	Six months ended March 31,
(in thousands)	2011			2010
Revenue	$	8,997		$	8,000
Percentage of EPS revenue		14.4	%		12.9	%

Tier Technologies, Inc

Accounts receivable, net. We reported $3.6 million and $4.9 million in Accounts receivable, net on our Consolidated Balance Sheets for March 31, 2011 and September 30, 2010, respectively. This item represents the short-term portion of receivables from our customers and other parties and retainers that we expect to receive. Approximately 8.0% and 19.8% of the balances reported at March 31, 2011 and September 30, 2010, respectively, represent accounts receivable, net that is attributable to operations that we intend to wind down during the course of the next two years. The remainder of the Accounts receivable, net balance is composed of receivables from certain of our EPS customers. None of our customers have receivables that exceed 10% of our total receivable balance. As of March 31, 2011 and September 30, 2010, Accounts receivable, net included an allowance for uncollectible accounts of $0.5 million and $1.1 million, respectively, which represents the balance of receivables that we believe are likely to become uncollectible.

Settlements receivable, net. As of March 31, 2011 and September 30, 2010, we reported $10.8 million and $8.4 million, respectively, in Settlements receivable, net on our Consolidated Balance Sheets, which represents amounts due from credit or debit card companies or banks. Individuals and businesses settle their obligations to our various clients, primarily utility and other public sector clients, using credit or debit cards or via ACH payments. We create a receivable for the amount due from the credit or debit card company or bank and an offsetting payable to the client. Once we receive confirmation the funds have been received, we settle the obligation to the client. See Note 8-Contingencies and Commitments for information about the settlements payable to our clients.

NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL

As a result of our acquisition of substantially all of the assets of ChoicePay, Inc. in January 2009, we may be required to pay an earn out of up to $2.0 million through December 31, 2013, based upon a percentage of the gross profits generated by specific client contracts. Any earn out is recorded as additional goodwill associated with the asset acquisition. As of March 31, 2011, we have paid ChoicePay approximately $118,900 for this earn-out. We expect the remaining potential earn out will not exceed $300,000 over the remaining life of the agreement. The following table summarizes changes in the carrying amount of goodwill during the six months ended March 31, 2011.

(in thousands)	EPS		Total
Balance at September 30, 2010	$	17,381	$	17,381
ChoicePay, Inc. earn out		35		35
Balance at March 31, 2011	$	17,416	$	17,416

As a general practice, we test goodwill for impairment during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, we would evaluate goodwill for impairment between annual tests. One such triggering event is when there is a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. No such events occurred during the six months ended March 31, 2011.

OTHER INTANGIBLE ASSETS, NET

Currently, all of our other intangible assets are included in our Continuing Operations. We test our other intangible assets for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of the assets below the carrying value. No such events occurred during the six months ended March 31, 2011. During the three months ended March 31, 2011 we evaluated the life of our client relationships acquired with the ChoicePay acquisition. This evaluation led to the decision to shorten the life of those client relationships to ten years from sixteen. The amortization period has been adjusted

Tier Technologies, Inc

prospectively to reflect the reduction in expected life. The following table summarizes Other intangible assets, net, for our Continuing Operations:

		March 31, 2011							September 30, 2010
(in thousands)	Amortization period	Gross		Accumulated amortization			Net		Gross		Accumulated amortization			Net
Client relationships	8-10 years	$	26,059	$	(21,727	)	$	4,332	$	30,037	$	(24,378	)	$	5,659
Technology and research and development	5 years		1,842		(983	)		859		5,618		(4,556	)		1,062
Trademarks	6-10 years		3,463		(2,896	)		567		3,463		(2,707	)		756
Other intangible assets, net		$	31,364	$	(25,606	)	$	5,758	$	39,118	$	(31,641	)	$	7,477

During the six months ended March 31, 2011, we recognized $1.7 million of amortization expense on our other intangible assets.

NOTE 7—INCOME TAXES

Significant components of the provision for income taxes at the consolidated level, which includes Continuing Operations and Discontinued Operations, are as follows:

	Three months ended March 31,				Six months ended March 31,
(in thousands)	2011		2010		2011		2010
Current income tax provision:
State	$	20	$	15	$	22	$	15
Federal		—		—		—		—
Total provision for income taxes	$	20	$	15	$	22	$	$ 15

We did not record a federal tax provision due to availability of net operating loss carryforwards. Our effective tax rates differ from the federal statutory rate due to state income taxes, and the charge for establishing a valuation allowance on our net deferred tax assets. Our future tax rate may vary due to a variety of factors, including, but not limited to: the relative income contribution by tax jurisdiction; changes in statutory tax rates; changes in our valuation allowance; our ability to utilize net operating losses and any non-deductible items related to acquisitions or other nonrecurring charges. Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations, extraordinary items, other comprehensive income and items charged or credited to shareholders’ equity. However, an exception to the general rule is provided when there is a pre-tax loss from continuing operations and pre-tax income from other categories in the current year. In such instances, income from other categories must be considered in allocating the aggregate tax provision for the period among the various categories. The intra-period tax allocation rules in ASC 740-20 related to items charged directly to other categories of income or loss can result in deferred tax assets or liabilities that remain until certain events occur. Income tax expense related to Continuing Operations for the three and six months ended March 31, 2011 includes a benefit of $0.2 million due to the required intra-period tax allocation. Conversely, Discontinued Operations for the three and six months ended March 31, 2011 includes a charge of $0.2 million related to a gain on disposal of discontinued operations.

Tier Technologies, Inc

LIABILITIES FOR UNRECOGNIZED TAX BENEFITS

We have examined our current and past tax positions taken, and have concluded that it is more likely than not these tax positions will be sustained in the event of an examination and that there would be no material impact to our effective tax rate. In the event interest or penalties had been accrued, our policy is to include these amounts related to unrecognized tax benefits in income tax expense. As of March 31, 2011 we had no accrued interest or penalties related to uncertain tax positions. We file tax returns with the IRS and in various states in which the statute of limitations may go back to the tax year ended September 30, 2006. As of March 31, 2011, we were not engaged in a federal audit. Currently, we are in the process of providing information for a Virginia state income tax audit.

As of March 31, 2011, we had no unrecognized tax benefits.

NOTE 8-CONTINGENCIES AND COMMITMENTS

LEGAL ISSUES

From time to time during the normal course of business, we are a party to litigation and/or other claims. At March 31, 2011, none of these matters was expected to have a material impact on our financial position, results of operations or cash flows. At March 31, 2011 and September 30, 2010, we had legal accruals of $1.0 million and $1.0 million, respectively, based upon estimates of key legal matters.

SETTLEMENTS PAYABLE

Settlements payable on our Consolidated Balance Sheets consists of payments due primarily to utility companies and other public sector clients. As individuals and businesses settle their obligations to our various clients, we generate a receivable from the credit or debit card company and a payable to the client. Once we receive confirmation the funds have been received by the card company, we settle the liabilities to the client. This process may take several business days to complete and can result in unsettled funds at the end of a reporting period. We had $12.8 million and $10.7 million, respectively, of settlements payable at March 31, 2011 and September 30, 2010.

CREDIT RISK

We maintain our cash in bank deposit accounts and money market accounts. Typically, the balance in a number of these accounts significantly exceeds federally insured limits. We have not experienced any losses in such accounts and believe that any associated credit risk is de minimis. At March 31, 2011, our investment portfolio is solely comprised of U.S. Treasury bills. Our investment portfolio and cash and cash equivalents approximate fair value.

PERFORMANCE, BID AND GUARANTEE PAYMENT BONDS

Pursuant to the terms of money transmitter licenses we obtain with individual states, we are required to provide guarantee payment bonds from a licensed surety. At March 31, 2011, we had $9.4 million of bonds posted with 43 jurisdictions. There were no claims pending against any of these bonds.

Under certain contracts or bids, we are required to obtain performance or bid bonds from a licensed surety and to post the performance bonds with our customers. Fees for obtaining the bonds are expensed over the life of each bond. At March 31, 2011, we had $6.1 million of bonds posted with clients. There were no claims pending against any of these bonds.

In February 2009, we completed the sale of our Unemployment Insurance, or UI, business to RKV Technologies, Inc., or RKV. The sale was completed pursuant to an Asset Purchase Agreement dated February 6, 2009. As part of the agreement, we are required to leave in place a $2.4 million performance bond on the continuing contract with the State of Indiana, or the State. Subsequent to the sale of the UI business to RKV, the prime contractor, Haverstick Corporation, or Haverstick, the State, and RKV determined that the contract completion will be delayed and additional funding is needed to complete the contract. In November 2009 Haverstick cancelled its contract with RKV and directly rehired various RKV

Tier Technologies, Inc

resources and RKV contractors. We retain certain liabilities for completion of the project and continue as the indemnitor under the performance bond. The project is scheduled to be completed in September 2011 and mediation will take place after that to discuss the cost of project completion.

Since the sale of the UI business in February 2009, we have had limited access to information about the project status and scope and have not received an accounting of the additional project tasks and their related costs to complete the contract. In 2009, we offered $420,000 as a contribution towards project completion. The parties involved could not come to an agreement, so we remain a party to the contract.

EMPLOYMENT AGREEMENTS

As of March 31, 2011, we had employment and change of control agreements with five executives. If certain termination or change of control events were to occur under the five contracts as of March 31, 2011, we would have been required to pay up to $3.2 million. We are also obligated to reimburse two of our executives for expenses incurred in moving their immediate family from their respective homes to the Reston area. Under these obligations, we could be required to pay up to $130,000.

In March 2011, we accrued $0.3 million of severance expense associated with the departure on March 3, 2011, of our former CFO, in accordance with the Employment Agreement signed on July 1, 2008, amendment signed on August 31, 2010 and the Severance Agreement and Release of Claims dated March 4, 2011. Pursuant to the terms of the employment agreement, the severance will be paid in September 2011. This accrual is included in Accrued compensation liabilities on our Consolidated Balance Sheets.

During the three months ended December 31, 2010, we paid $1.2 million to a former executive pursuant to the terms of the Employment Agreement and the Separation Agreement and Release executed by the former executive. The severance payment was accrued in June 2010.

In February 2011, we paid $0.3 million to our former COO in accordance with the Employment Agreement signed on October 1, 2008 and the Severance Agreement and Release of Claims dated August 17, 2010. The severance payment was accrued in August 2010.

In December 2008, the Compensation Committee of our Board of Directors adopted the Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU Plan. Executives selected by our chief executive officer are eligible to participate. Under the PSU Plan, up to 800,000 Performance Stock Units, or PSUs, have been approved for issuance. As of March 31, 2011, we may award up to 225,000 PSUs to key executives. The PSUs will be awarded upon the achievement and maintenance for a period of 60 days of specific share performance targets of $8.00, $9.50, $11.00, and $13.00 per share. We intend to pay the PSUs in cash in the pay period in which the PSUs become fully vested. The PSUs are considered liability awards under US GAAP. As such, their expense is calculated quarterly based on fair market value on the last day of the quarterly period. Since we cannot estimate the fair market value of future dates, we are unable to estimate the expense that will be recognized over the remaining life of these PSUs. See Note 10—Share-based Payment for additional information regarding the valuation of the PSUs.

OPERATING AND CAPITAL LEASE OBLIGATIONS

We lease our principal facilities and certain equipment under non-cancelable operating and capital leases, which expire at various dates through fiscal year 2018. Future minimum lease payments for non-cancelable leases with terms of one year or more as of March 31, 2011 are as follows:

Tier Technologies, Inc

(in thousands)	Operating leases		Capital Leases (1)(2)		Total
Twelve months ending March 31,
2012	$	767	$	36	$	803
2013		801		35		836
2014		823		8		831
2015		844		3		847
2016		738				738
Thereafter		1,528		—		1,528
Total minimum lease payments	$	5,501	$	82	$	5,583

(1)	On our Consolidated Balance Sheets, the amount due within twelve months is included in Other accrued liabilities. The remainder is included in Other liabilities.
(2)	Total amount includes interest payments of $4.

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.

NOTE 9—SEGMENT INFORMATION

Our business consists of three reportable segments: Electronic Payment Solutions, or EPS, Wind-down and Discontinued Operations. Our Discontinued Operations includes portions of our former GBPO and PSSI operations that have been sold. Information regarding our Discontinued Operations can be found in Note 11—Discontinued Operations.

The following table presents the results of operations for our EPS operations and our Wind-down operations for the three and six months ended March 31, 2011 and 2010.

Tier Technologies, Inc

(in thousands)	EPS			Wind- down		Total
Three months ended March 31, 2011:
Revenues	$	29,904		$	362	$	30,266
Costs and expenses:
Direct costs		23,266			66		23,332
General and administrative		4,871			13		4,884
Selling and marketing		1,822			—		1,822
Depreciation and amortization		1,806			—		1,806
Total costs and expenses		31,765			79		31,844
(Loss) income from continuing operations before other income and income taxes		(1,861	)		283		(1,578	)
Other income:
Interest income, net		20			—		20
Total other income		20			—		20
(Loss) income from continuing operations before taxes		(1,841	)		283		(1,558	)
Income tax benefit		(186	)		—		(186	)
(Loss) income from continuing operations	$	(1,655	)	$	283	$	(1,372	)

(in thousands)	EPS			Wind- down			Total
Three months ended March 31, 2010:
Revenues	$	29,985		$	689		$	30,674
Costs and expenses:
Direct costs		22,223			313			22,536
General and administrative		6,092			100			6,192
Selling and marketing		1,438			—			1,438
Depreciation and amortization		1,329			306			1,635
Total costs and expenses		31,082			719			31,801
Loss from continuing operations before other income and income taxes		(1,097	)		(30	)		(1,127	)
Other income:
Interest income, net		171			—			171
Gain on investments		2			—			2
Total other income		173			—			173
Loss from continuing operations before taxes		(924	)		(30	)		(954	)
Income tax benefit		(145	)		—			(145	)
Loss from continuing operations	$	(779	)	$	(30	)	$	(809	)

Tier Technologies, Inc

(in thousands)	EPS			Wind- down		Total
Six months ended March 31, 2011:
Revenues	$	62,381		$	855	$	63,236
Costs and expenses:
Direct costs		48,083			119		48,202
General and administrative		10,809			—		10,809
Selling and marketing		3,372			—		3,372
Depreciation and amortization		3,564			—		3,564
Total costs and expenses		65,828			119		65,947
(Loss) income from continuing operations before other income and income taxes		(3,447	)		736		(2,711	)
Other income:
Interest income, net		57			—		57
Total other income		57			—		57
(Loss) income from continuing operations before taxes		(3,390	)		736		(2,654	)
Income tax benefit		(185	)		—		(185	)
(Loss) income from continuing operations	$	(3,205	)	$	736	$	(2,469	)

(in thousands)	EPS			Wind- down		Total
Six months ended March 31, 2010:
Revenues	$	61,905		$	1,537	$	63,442
Costs and expenses:
Direct costs		46,055			573		46,628
General and administrative		12,313			206		12,519
Selling and marketing		3,039			—		3,039
Depreciation and amortization		2,664			579		3,243
Total costs and expenses		64,071			1,358		65,429
(Loss) income from continuing operations before other income and income taxes		(2,166	)		179		(1,987	)
Other income:
Interest income, net		298			—		298
Gain on investments		14			—		14
Total other income		312			—		312
(Loss) income from continuing operations before taxes		(1,854	)		179		(1,675	)
Income tax benefit		(145	)		—		(145	)
(Loss) income from continuing operations	$	(1,709	)	$	179	$	(1,530	)

Our total assets for each of these businesses are shown in the following table:

(in thousands)	March 31, 2011		September 30, 2010
Continuing operations:
EPS	$	100,079	$	112,368
Wind-down		307		657
Total assets	$	100,386	$	113,025

Tier Technologies, Inc

NOTE 10—SHARE-BASED PAYMENT

Stock options are issued under the Amended and Restated 2004 Stock Incentive Plan, or the Plan. The Plan provides our Board of Directors discretion in creating employee equity incentives, including incentive and non-statutory stock options. Generally, these options vest as to 20% of the underlying shares each year on the anniversary of the date granted and expire in ten years. At March 31, 2011, there were 1,858,703 shares of common stock available for future issuance under the Plan.

STOCK OPTIONS—AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN

The following table shows the weighted-average assumptions we used to calculate fair value of share-based options using the Black-Scholes model, as well as the weighted-average fair value of options granted and the weighted-average intrinsic value of options exercised. We granted 80,000 during the three months ended March 31, 2011 and over the six months ended we awarded 280,000 options from the Plan.

	Three months ended March 31,						Six months ended March 31,
	2011			2010			2011			2010
Weighted-average assumptions used in Black-Scholes model:
Expected period that options will be outstanding (in years)		5.00			—			5.00			—
Interest rate (based on U.S. Treasury yields at time of grant)		2.39	%		—	%		1.52	%		—	%
Volatility		46.65	%		—	%		46.89	%		—	%
Dividend yield		—			—			—			—
Weighted-average fair value of options granted	$	2.48		$	—		$	2.41		$	—
Weighted-average intrinsic value of options exercised (in thousands)	$	1		$	—		$	83		$	—

Expected volatilities are based on historical volatility of our stock. In addition, we used historical data to estimate option exercise and employee termination within the valuation model.

STOCK OPTIONS—INDUCEMENT GRANT

On August 16, 2010, we granted 100,000 options to our current CEO as an inducement grant outside of the Plan. These options vest as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 1/48th of the original number of shares on the same date in each succeeding month following the first anniversary of the grant date until the fourth anniversary of the grant date.

STOCK OPTIONS

Stock option activity for all option grants for the six months ended March 31, 2011 is as follows:

				Weighted-average
(in thousands, except per share data)	Shares under option			Exercise price		Remaining contractual term	Aggregate intrinsic value
Options outstanding at October 1, 2010		2,453		$	7.43
Granted		280			5.71
Exercised		(66	)		4.38
Forfeitures or expirations		(299	)		7.20
Options outstanding at March 31, 2011		2,368		$	7.34	6.97 years	$	267
Options vested and expected to vest at March 31, 2011		2,020		$	7.40	6.79 years	$	206
Options exercisable at March 31, 2011		1,336		$	8.10	5.68 years	$	84

Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value using the Black-Scholes model. We recognize compensation expense for stock option awards on a ratable basis over the requisite service period of the award. Stock-based

Tier Technologies, Inc

compensation expense was $0.2 million for the three months ended March 31, 2011 and 2010 and $0.4 million for the six months ended March 31, 2011 and 2010.

As of March 31, 2011 a total of $1.8 million of unrecognized compensation cost related to stock options, net of estimated forfeitures, was expected to be recognized over a 2.99 year weighted-average period.

RESTRICTED STOCK UNITS

The 700,000 restricted stock units awarded to our former CEO contained a price target and a service condition to vest. Due to the departure of the former CEO in June 2010, the service condition was not met. However, pursuant to his separation agreement, if the target was achieved by March 26, 2011, the RSUs would vest. The price target was not attained; therefore the RSUs did not vest. US GAAP allows us to reverse the expense recognized on an award in which the service condition was not met. In March 2011, we reversed $1.5 million in expense related to these RSUs.

BOARD OF DIRECTOR RESTRICTED STOCK UNITS

In accordance with our Board compensation package, our non-employee Board members are awarded 9,000 restricted stock units upon their election to our Board at our annual meeting. The following awards have been made:

	Total restricted stock units awarded		Vesting date
2009 annual meeting		72,000	March 20, 2012
2010 annual meeting		54,000	May 11, 2011

The amount payable to each member at the vesting date will be the equivalent of 9,000 restricted stock units multiplied by the closing price of our stock on the vesting date. During February 2010 we entered into an agreement in which two of our board members not standing for re-election at our 2010 annual meeting of stockholders were each entitled to the accelerated vesting on April 8, 2010 of the restricted stock units that they were awarded in March 2009.

The following table provides information on the expense related to the restricted stock unit awards to the Board of Directors:

(in thousands)	2010 annual meeting		2009 annual meeting
Expense recognized for the quarter ended March 31, 2011	$	57	$	9
Expense recognized through March 31, 2011	$	272	$	477	(a)
Estimated expense to be recognized through vesting date	(b)		(b)

(a)	This amount includes the $0.1 million recognized related to the acceleration for the two board members not standing for re-election at our 2010 annual meeting.
(b)	Liability awards are revalued at the end of every quarter based on the closing price of our stock on the last day of the quarter. We are unable to estimate the expense expected to be recognized for these awards.

PERFORMANCE STOCK UNITS

In December 2008, upon recommendation of the Compensation Committee, our Board of Directors adopted the Tier Technologies, Inc. Executive Performance Stock Unit Plan, or the PSU Plan. Executives selected by our Chief Executive Officer are eligible to participate. Under the PSU Plan, up to 800,000 Performance Stock Units, or PSUs, have been approved for issuance. The PSUs will be awarded upon the achievement and maintenance for a period of 60 days of specific share performance targets of $8.00, $9.50, $11.00, and $13.00 per share. We intend to pay the PSUs in cash in the pay period in which the PSUs become fully vested. The executives will receive a cash payment equal to (x)

Tier Technologies, Inc

the price of a share of our common stock as of the close of market on the date of vesting, but not more than $15.00, multiplied by (y) the number of PSUs that have been awarded to the executive.

As of March 31, 2011, we may award up to 225,000 PSUs under the PSU Plan. At March 31, 2011, these PSUs are recorded at their fair value of $0.1 million, as Other liabilities on our Consolidated Balance Sheets. We used a Monte Carlo simulation option pricing model to estimate the fair value using the following assumptions:

	Payable in cash
Weighted-average assumptions used in Monte Carlo simulation:
Original period over which units will vest (in years)		3.00
Remaining period that units will be outstanding (in years)		0.68
Interest rate (based on U.S. Treasury yield)		0.22	%
Volatility		47.88	%
Dividend yield		—
Weighted-average fair value of PSUs granted	$	0.32

The following table provides information on the expense related to the performance stock unit awards:

(in thousands)	Liability Award
Expense recognized for the quarter ended March 31, 2011	$	(139	)
Expense recognized through March 31, 2011	$	53
Estimated expense to be recognized through December 2011	(a)

(a)	Liability awards are revalued at the end of every quarter based on the closing price of our stock on the last day of the quarter and other assumptions noted above as used in the Monte Carlo simulation. We are unable to estimate the expense expected to be recognized for these awards.

NOTE 11—DISCONTINUED OPERATIONS

SUMMARY OF REVENUE AND (LOSS)/INCOME FROM DISCONTINUED OPERATIONS

Except for minor transitional activities, we do not have any ongoing involvement or cash flows from former GBPO and PSSI businesses that we divested during fiscal 2008 and fiscal 2009. The following table summarizes our revenue and pre-tax income, prior to any gain/(loss) on sale, and net loss from discontinued operations generated by these operations for the three and six months ended March 31, 2011 and 2010.

	Three months ended March 31,					Six months ended March 31,
(in thousands)	2011		2010			2011			2010
Revenues (Discontinued operations):
GBPO	$	—	$	—		$	—		$	—
PSSI		—		—			—			—
Total revenues	$	—	$	—		$	—		$	—
Income (loss) from discontinued operations:
GBPO	$	—	$	—		$	—		$	—
PSSI		2		(165	)		(7	)		(219	)
Income (loss) before taxes		2		(165	)		(7	)		(219	)
Gain on disposal (net of taxes):
GBPO		298		450			298			450
PSSI		—		10			11			10
Net income from discontinued operations	$	300	$	295		$	302		$	241

Tier Technologies, Inc

NOTE 12—LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss per share:

	Three months ended March 31,						Six months ended March 31,
(in thousands, except per share data)	2011			2010			2011			2010
Numerator: (Loss) income from:
Continuing operations, net of income taxes	$	(1,372	)	$	(809	)	$	(2,469	)	$	(1,530	)
Discontinued operations, net of income taxes		300			295			302			241
Net loss	$	(1,072	)	$	(514	)	$	(2,167	)	$	(1,289	)
Denominator:
Weighted-average common shares outstanding		16,928			18,151			17,577			18,154
Effects of dilutive common stock options		—			—			—			—
Adjusted weighted-average shares		16,928			18,151			17,577			18,154
(Loss) earnings per basic and diluted share
From continuing operations	$	(0.08	)	$	(0.04	)	$	(0.14	)	$	(0.08	)
From discontinued operations		0.02			0.01			0.02			0.01
Loss per basic and diluted share	$	(0.06	)	$	(0.03	)	$	(0.12	)	$	(0.07	)

The following options were not included in the computation of diluted loss per share because the exercise price was greater than the average market price of our common stock for the periods stated and, therefore, the effect would be anti-dilutive:

	Three months ended March 31,				Six months ended March 31,
(in thousands)	2011		2010		2011		2010
Weighted-average options excluded from computation of diluted loss per share		1,254		1,217		1,534		1,001

Due to net losses from Continuing Operations, the following common stock equivalents were excluded from the calculation of diluted loss per share since their effect would have been anti-dilutive:

	Three months ended March 31,				Six months ended March 31,
(in thousands)	2011		2010		2011		2010
Common stock equivalents excluded from computation of diluted loss per share		39		540		31		565

NOTE 13—SHAREHOLDERS’ EQUITY

COMMON STOCK REPURCHASE PROGRAM

On November 11, 2010, our Board of Directors, or the Board, terminated the stock repurchase plan which allowed us to repurchase up to $20.0 million of our common stock in the open market. Under this plan we purchased 1,651,898 shares of our common stock for $12.3 million.

Tier Technologies, Inc

TENDER OFFER

On November 11, 2010, the Board authorized Tier to commence a cash tender offer to purchase up to an aggregate of $10.0 million in value of our common stock. On December 17, 2010, we commenced a tender offer to purchase up to $10.0 million in value of our common stock at a price within (and including) the range of $5.80 per share to $6.20 per share.

The tender offer expired on January 20, 2011. As a result of the tender offer, we accepted for payment on January 20, 2011, and have repurchased 1,639,344 shares of our common stock for a price of $6.10 per share, for a total cost of approximately $10.0 million, excluding fees and expenses related to the offer.

NOTE 14—SUBSEQUENT EVENTS

We have reviewed our business activities through May 9, 2011, the issue date of our financial statements, and have no subsequent events to report.

Tier Technologies, Inc

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. Our actual performance could differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report, as a result of the risks, uncertainties and assumptions discussed under Item 1A. Risk Factors of this Quarterly Report on Form 10-Q and other factors discussed in this section. For more information regarding what constitutes a forward-looking statement, refer to the Private Securities Litigation Reform Act Safe Harbor Statement on page i.

The following discussion and analysis is intended to help the reader understand the results of operations and financial condition of Tier Technologies, Inc. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.

OVERVIEW

Tier Technologies, Inc., or Tier, is a leading provider of biller direct electronic payment solutions. These solutions provide processing for Web, call center and point-of-sale environments. We partner and connect with a host of payment processors and other payment service providers to offer our clients a single source solution that simplifies electronic payment management. Our solutions include multiple payment options, including bill presentment, convenience payments, installment payments and flexible payment scheduling. Our solutions offer our clients a range of online payment options, including credit and debit cards, electronic checks, cash and money orders, and alternative payment types.

SUMMARY OF OPERATING RESULTS

The following table provides a summary of our operating results by segment for the three and six months ended March 31, 2011, for our Continuing Operations, which consists of Electronic Payment Solutions, or EPS, operations, and Wind-down operations and our Discontinued Operations:

	Three months ended March 31, 2011						Six months ended March 31, 2011
(in thousands, except per share)	Net (loss) income			(Loss) earnings per share			Net (loss) income			(Loss) earnings per share
Continuing Operations:
EPS	$	(1,655	)	$	(0.10	)	$	(3,205	)	$	(0.18	)
Wind-down		283			0.02			736			0.04
Total Continuing Operations	$	(1,372	)	$	(0.08	)	$	(2,469	)	$	(0.14	)

Total Discontinued Operations	$	300		$	0.02		$	302		$	0.02

Net loss	$	(1,072	)	$	(0.06	)	$	(2,167	)	$	(0.12	)

Our Continuing Operations consists of our Electronic Payment Solutions, or EPS, operations, and certain operations we intend to wind down over the next two years. Revenues from EPS were $29.9 million and $62.4 million for the three and six months ended March 31, 2011, respectively, a decrease of 0.3% and an increase of 0.8% from the three and six months ended March 31, 2010. For the three months ended March 31, 2011, transaction volume increased 7.9% and total dollars processed increased 5.9% over the same period last year. For the six months ended March 31, 2011, transaction volume increased 9.4%

Tier Technologies, Inc

and total dollars processed increased 5.0% when compared with the same period last year. Our EPS operations reported a net loss of $1.7 million for the three months ended March 31, 2011 and $3.2 million for the six months ended March 31, 2011. The increase in interchange fees, primarily due to shifts in payment type related to the loss of several large utility clients, an increase in discount fees charged by one of the payment networks, and the seasonality of our business, as discussed below, have been the significant contributors to the net loss for the three and six months ended March 31, 2011. We have successfully streamlined our costs to support our Wind-down operations, while still effectively managing our ongoing contracts, which have resulted in reported net income from Wind-down operations of $0.3 million and $0.7 million for the three and six months ended March 31, 2011.

SEASONALITY OF BUSINESS

In many of our verticals transaction and payment volume can vary resulting from due dates of obligations from consumers or constituents. For example, our transaction and payment volume are typically higher in our fiscal third quarter, which includes the April U.S. federal tax season, and typically lower in our fiscal fourth quarter. The fluctuation in our transaction and payment volume causes fluctuations in our revenues and direct costs. However, our general and administrative and selling and marketing expenses are more fixed in nature. This type of revenue and cost structure can lead to losses in a quarter with slower transaction and payment volume.

STRATEGY AND GOALS FOR 2011

After a strategic review of our business under the leadership of our new management team, the company expects to focus on four key areas during this fiscal year and for the foreseeable future:

·	Making reliability a reality

·	Going where the payments are

·	Funding the future

·	Working together

Making reliability a reality: 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. As we stated in August, 2010, 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. Where possible, 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 the first half of fiscal year 2011, our technology efforts focused 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) ongoing progress in our infrastructure initiatives. We anticipate reviewing our plans for our platforms in the second half of fiscal 2011.

Going where the payments are: 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.

Tier Technologies, Inc

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. We offer our billers a technology platform designed expressly for the biller direct market with a single 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 and Bill Me Later. 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 our services allowing us to grow transactions across multiple verticals and deepen the strength of our primary brand, Official Payments. We expect to explore strategic partnerships and potential acquisitions that would allow us to penetrate new markets and increase our share in existing vertical markets. 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 core verticals to reinforce our market position. As a result of our continued growth, we provide services to billers and their customers in all 50 states and the District of Columbia.

Funding the future: 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, or 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 are working to achieve profitability by growing revenues while managing our SG&A expenses and our direct costs, which are primarily the interchange fees, payment processing fees, banking fees and dues and assessments we pay the payment networks. In fiscal 2011, we will continue to work to improve our margins by seeking better rates from the payment networks and our payment processors, adding lower cost processors and incenting our billers and their customers to use payment options and channels which offer better margins.

Working together: In the last quarter of fiscal 2010, the Board appointed Alex P. Hart to the position of President and Chief Executive Officer. In November 2010, Atul Garg joined us as Senior Vice President, Product Management. In March 2011, we announced the appointment of Sandip Mohapatra as Chief Technology Officer. In March 2011, we also announced that our CFO had resigned and that we were seeking a CFO with payments industry experience. In May we appointed a new SVP of sales. We have promoted several individuals in the organization to new responsibilities in sales, operations, development, implementations, information technology and human resources. On an ongoing basis, 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.

RESULTS OF OPERATIONS

The following table provides an overview of our results of operations for the three months and six ended March 31, 2011 and 2010:

Tier Technologies, Inc

	Three months ended						Variance
	March 31,						2011 vs. 2010
(in thousands, except percentages)	2011			2010			$			%
Revenues	$	30,266		$	30,674		$	(408	)	(1.3	)%
Costs and expenses		31,844			31,801			43		0.1	%
Loss from continuing operations before other income and income taxes		(1,578	)		(1,127	)		(451	)	(40.0	)%
Other income		20			173			(153	)	(88.4	)%
Loss from continuing operations before income taxes		(1,558	)		(954	)		(604	)	(63.3	)%
Income tax benefit		186			145			41		28.3	%
Loss from continuing operations		(1,372	)		(809	)		(563	)	(69.6	)%
Income from discontinued operations, net		300			295			5		1.7	%
Net loss	$	(1,072	)	$	(514	)	$	(558	)	(108.6	)%

Six months ended

Variance

OFFICIAL PAYMENTS HOLDINGS, INC. - FORM 10-Q - May 9, 2011

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