##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission file number 000-23195
 TIER TECHNOLOGIES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-3145844(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 10780 Parkridge Boulevard, Suite 400
Reston, Virginia 20191
(Address of principal executive offices)
 (571) 382-1000
(Registrants telephone number, including area code)
 Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



TIER TECHNOLOGIES, INC.
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Consolidated Financial Statements (unaudited)
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statements of Comprehensive Income (Loss)
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    5Note 1Overview of Organization and Basis of Presentation
    
    
    5Note 2Recent Accounting Pronouncements
    
    
    6Note 3Customer Concentration and Risk
    
    
    7Note 4Investments
    
    
    8Note 5Goodwill and Other Intangible Assets
    
    
    9Note 6Earnings (Loss) per Share
    
    
    10Note 7Segment Information
    
    
    10Note 8Restructuring
    
    
    11Note 9Contingencies and Commitments
    
    
    11Note 10Related Party Transactions
    
    
    13Note 11Share-based Payment
    
    
    13Note 12Restatement of Prior Period Results
    
    
    16Note 13Subsequent Events
    
    
    16Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    28Item 1Legal Proceedings
    
    
    28Item 1ARisk Factors
    
    
    28SIGNATURE
    
    
    35
  Private Securities Litigation Reform Act Safe Harbor Statement
 Item 1ARisk Factors




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##### 



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 TIER TECHNOLOGIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
    
    December 31, 2005
    
    September 30, 2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,799
    
    
    $
    27,843Investments in marketable securities
    
    
    46,832
    
    
    
    36,493Accounts receivable, net
    
    
    23,432
    
    
    
    19,449Unbilled receivables
    
    
    3,867
    
    
    
    3,094Prepaid expenses and other current assets
    
    
    3,150
    
    
    
    3,680Total current assets
    
    
    95,080
    
    
    
    90,559Property, equipment and software, net
    
    
    13,653
    
    
    
    13,501Long-term accounts receivable
    
    
    1,437
    
    
    
    1,560Goodwill
    
    
    37,567
    
    
    
    37,567Other intangible assets, net
    
    
    25,080
    
    
    
    26,147Restricted investments
    
    
    3,351
    
    
    
    3,335Investment in unconsolidated affiliate
    
    
    3,630
    
    
    
    3,590Other assets
    
    
    580
    
    
    
    483Total assets
    
    $
    180,378
    
    
    $
    176,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,433
    
    
    $
    1,902Income taxes payable
    
    
    7,021
    
    
    
    7,113Accrued compensation liabilities
    
    
    5,492
    
    
    
    5,139Accrued subcontractor expenses
    
    
    2,886
    
    
    
    3,226Other accrued liabilities
    
    
    9,664
    
    
    
    7,738Deferred income
    
    
    7,895
    
    
    
    7,795Other current liabilities
    
    
    84
    
    
    
    98Total current liabilities
    
    
    34,475
    
    
    
    33,011Other liabilities
    
    
    2,129
    
    
    
    2,192Total liabilities
    
    
    36,604
    
    
    
    35,203Commitments and contingencies (Note 9)Shareholders equity:Preferred stock, no par value; authorized shares: 4,579;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock and paid-in capitalShares authorized:44,260 and 44,260; shares issued: 20,375 and 20,374;
shares outstanding: 19,491 and 19,490
    
    
    182,549
    
    
    
    182,066Treasury stockat cost, 884 shares
    
    
    (8,684
    )
    
    
    (8,684
    )Notes receivable from related parties
    
    
    (4,065
    )
    
    
    (3,998
    )Accumulated other comprehensive loss
    
    
    (101
    )
    
    
    (111
    )Accumulated deficit
    
    
    (25,925
    )
    
    
    (27,734
    )Total shareholders equity
    
    
    143,774
    
    
    
    141,539Total liabilities and shareholders equity
    
    $
    180,378
    
    
    $
    176,742
 See Notes to Consolidated Financial Statements
 1




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##### 



TIER TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three months endedDecember 31,2004(in thousands, except per share data)
    
    2005
    
    (As restated)Revenues
    
    $
    39,882
    
    
    $
    31,760Costs and expenses:Direct costs
    
    
    27,896
    
    
    
    21,922General and administrative
    
    
    6,923
    
    
    
    6,542Selling and marketing
    
    
    2,580
    
    
    
    2,668Depreciation and amortization
    
    
    1,319
    
    
    
    1,548Total costs and expenses
    
    
    38,718
    
    
    
    32,680Income (loss) before other income (loss) and income taxes
    
    
    1,164
    
    
    
    (920
    )Other income (loss):Equity in net income (loss) of unconsolidated affiliate
    
    
    59
    
    
    
    (95
    )Interest income, net
    
    
    591
    
    
    
    295Total other income
    
    
    650
    
    
    
    200Income (loss) before income taxes
    
    
    1,814
    
    
    
    (720
    )Provision for income taxes
    
    
    5
    
    
    
    Net income (loss)
    
    $
    1,809
    
    
    $
    (720
    )Basic and diluted earnings (loss) per share
    
    $
    0.09
    
    
    $
    (0.04
    )Weighted average common shares used in computing:Basic earnings (loss) per share
    
    
    19,490
    
    
    
    19,447Diluted earnings (loss) per share
    
    
    19,627
    
    
    
    19,447
 See Notes to Consolidated Financial Statements
 2




---



##### 



TIER TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 Three months ended December 31,2004(in thousands)
    
    2005
    
    (As restated)Net income (loss)
    
    $
    1,809
    
    
    $
    (720
    )Other comprehensive income (loss), net of tax:Unrealized income (loss) on available-for-sale investments
    
    
    30
    
    
    
    (168
    )Foreign currency translation adjustment
    
    
    (20
    )
    
    
    71Other comprehensive income (loss)
    
    
    10
    
    
    
    (97
    )Comprehensive income (loss)
    
    $
    1,819
    
    
    $
    (817
    )
 See Notes to Consolidated Financial Statements
 3




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##### 



TIER TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Three months ended December 31,2004(in thousands)
    
    2005
    
    (Restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    1,809
    
    
    $
    (720
    )Non-cash items included in net income (loss):Depreciation and amortization
    
    
    2,262
    
    
    
    2,185Loss on retirement of equipment and software
    
    
    7
    
    
    
    21Provision for doubtful accounts
    
    
    342
    
    
    
    (208
    )Equity in net (income) loss of unconsolidated affiliate
    
    
    (59
    )
    
    
    95Share-based compensation
    
    
    407
    
    
    
    Net effect of changes in assets and liabilities:Accounts receivable
    
    
    (4,975
    )
    
    
    (1,679
    )Prepaid expenses and other assets
    
    
    433
    
    
    
    336Accounts payable and accrued liabilities
    
    
    1,380
    
    
    
    802Income taxes payable
    
    
    (92
    )
    
    
    Deferred income
    
    
    100
    
    
    
    453Cash provided by operating activities
    
    
    1,614
    
    
    
    1,285CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities
    
    
    (31,650
    )
    
    
    (20,448
    )Sales and maturities of marketable securities
    
    
    21,326
    
    
    
    14,679Restricted securities
    
    
    
    
    
    
    (19
    )Purchase of equipment and software
    
    
    (1,316
    )
    
    
    (3,020
    )Investment in unconsolidated affiliate
    
    
    
    
    
    
    (3,817
    )Other investing activities
    
    
    (1
    )
    
    
    (295
    )Cash used in investing activities
    
    
    (11,641
    )
    
    
    (12,920
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    9
    
    
    
    162Capital lease obligations and other financing arrangements
    
    
    (7
    )
    
    
    (52
    )Cash provided by financing activities
    
    
    2
    
    
    
    110Effect of exchange rate changes on cash
    
    
    (19
    )
    
    
    70Net decrease in cash and cash equivalents
    
    
    (10,044
    )
    
    
    (11,455
    )Cash and cash equivalents at beginning of period
    
    
    27,843
    
    
    
    28,495Cash and cash equivalents at end of period
    
    $
    17,799
    
    
    $
    17,040SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    4
    
    
    $
    7Income taxes paid (refunded), net
    
    $
    61
    
    
    $
    (134
    )SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Equipment acquired under capital lease obligations and
other financing arrangements
    
    $
    
    
    
    $
    40
 See Notes to Consolidated Financial Statements
 4




---



##### 



Tier Technologies, Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE 1OVERVIEW OF ORGANIZATION AND BASIS OF PRESENTATION
 ORGANIZATION
  
    
    Electronic Payment Processing, or EPPprovides electronic payment processing
options, including payment of taxes, fees and other obligations owed to government
entities, educational institutions and other public sector clients;
    
    Government Business Process Outsourcing, or GBPOfocuses on child
support payment processing, child support financial institution data match services, health
and human services consulting and other related systems integration services; and
    
    Packaged Software and Systems Integration, or PSSIprovides software and
systems implementation services through practice areas in financial management systems,
public pension administration systems, unemployment insurance administration systems,
electronic government services, computer telephony and call centers, and systems
integration services for the State of Missouri.
  
    
    Official Payments Corporation, or OPCprovides proprietary telephone and
Internet systems and transaction processing and settlement for electronic payment options to
federal, state, and municipal government agencies, educational institutions and other
public sector clients; and
    
    EPOS Corporation, or EPOSprovides interactive communications and transaction
processing technologies to federal, state and municipal government agencies, educational
institutions and other public sector clients.
  BASIS OF PRESENTATION
  Investment in unconsolidated affiliate,
  5




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##### 



Tier Technologies, Inc.
  Note 12Restatement of Prior Period
Financial Results
 
 NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
 SFAS 154Accounting Changes and Error Corrections . Accounting
Changes and Error Corrections
  SFAS 157Fair Value Measurements . Fair Value Measurements
 FIN 47Accounting for Conditional Asset Retirement Obligations. Accounting for Conditional Asset Retirement Obligations Accounting for Asset Retirement Obligations.
 FIN 48Accounting for Uncertainty in Income Taxes . Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 FSP 46R-6Determining the Variability to be Considered in Applying FASB Interpretation No.
46(R) Determining the Variability to Be
Considered in Applying
 6




---



##### 



Tier Technologies, Inc.
 FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
 FSP 115-1 and 124-1Impairment of Investments. The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments
 FSP 123(R)-3Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards Note
11Share-Based Payment
 
 NOTE 3CUSTOMER CONCENTRATION AND RISK
   Accounts receivable, net . Accounts receivable, net
 
    
    Customer receivablesreceivables from our clients;
    
    Mispost receivablesreceivables from individuals to whom our payment processing
centers made incorrect payments; and
    
    Not Sufficient Funds (NSF) receivablescertain receivables from individuals
who paid their child support payment with a check that had insufficient funds.
 Accounts receivable, net
 7




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##### 



Tier Technologies, Inc.
 (in thousands)
    
    December 31, 2005
    
    September 30, 2005Accounts receivable from:Customers
    
    $
    22,087
    
    
    $
    18,017Recipients of misposted payments
    
    
    1,802
    
    
    
    1,843Payers of NSF child support
    
    
    704
    
    
    
    743Total accounts receivable
    
    
    24,593
    
    
    
    20,603Allowance for uncollectible accounts receivable:Customer
    
    
    (823
    )
    
    
    (632
    )Mispost
    
    
    (1,455
    )
    
    
    (1,375
    )NSF
    
    
    (661
    )
    
    
    (632
    )Total allowance for uncollectible accounts
    
    
    (2,939
    )
    
    
    (2,639
    )Short-term accounts receivable retainer
    
    
    3,215
    
    
    
    3,045Long-term accounts receivable
    
    
    (1,437
    )
    
    
    (1,560
    )Accounts receivable, net (in current assets)
    
    $
    23,432
    
    
    $
    19,449
 Long-term
accounts receivable
 Accounts receivable, net Other assets
 Unbilled Receivables.
 
 NOTE 4INVESTMENTS
 Accounting for Certain Investments in Debt and Equity Securities Restricted
investments
 Statement of Cash Flows Restricted investments Cash and cash equivalents Investments in marketable securities
 8




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##### 



Tier Technologies, Inc.
  December 31, 2005
    
    September 30, 2005Amortized
    
    Unrealized
    
    Estimated
    
    Amortized
    
    Unrealized
    
    Estimated(in thousands)
    
    cost
    
    loss
    
    fair value
    
    cost
    
    loss
    
    fair valueCash equivalents:Money market
    
    $
    4,120
    
    
    $
    
    
    
    $
    4,120
    
    
    $
    11,272
    
    
    $
    
    
    
    $
    11,272Total investments included in cash
and cash equivalents
    
    
    4,120
    
    
    
    
    
    
    
    4,120
    
    
    
    11,272
    
    
    
    
    
    
    
    11,272Investments in marketable securities:Debt securities:U.S. government sponsored enterprise obligations
    
    
    629
    
    
    
    (2
    )
    
    
    627
    
    
    
    1,629
    
    
    
    (7
    )
    
    
    1,622Other (Primarily state & local bonds/notes)
    
    
    45,208
    
    
    
    (3
    )
    
    
    45,205
    
    
    
    30,888
    
    
    
    (13
    )
    
    
    30,875Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    2,996Equity securities
    
    
    1,000
    
    
    
    
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Total marketable securities
    
    
    46,837
    
    
    
    (5
    )
    
    
    46,832
    
    
    
    36,513
    
    
    
    (20
    )
    
    
    36,493Restricted investments:U.S. government sponsored enterprise obligations
    
    
    3,371
    
    
    
    (20
    )
    
    
    3,351
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Total restricted investments
    
    
    3,371
    
    
    
    (20
    )
    
    
    3,351
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Total investments
    
    $
    54,328
    
    
    $
    (25
    )
    
    $
    54,303
    
    
    $
    51,155
    
    
    $
    (55
    )
    
    $
    51,100
 Investments in
marketable securities
 December 31,
    
    September 30,(in thousands)
    
    2005
    
    2005Within one year
    
    $
    3,132
    
    
    $
    5,647Greater than ten years
    
    
    42,700
    
    
    
    26,850Total
    
    $
    45,832
    
    
    $
    32,497
   
 NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  Goodwill and Other Intangible
Assets
 9




---



##### 



Tier Technologies, Inc.
   December 31, 2005
    
    September 30, 2005Amortization
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    Accumulated(in thousands)
    
    period
    
    Gross
    
    amortization
    
    Net
    
    Gross
    
    amortization
    
    NetClient relationships
    
    10 years
    
    $
    28,749
    
    
    $
    (9,019
    )
    
    $
    19,730
    
    
    $
    28,749
    
    
    $
    (8,301
    )
    
    $
    20,448Technology & research and
development
    
    3-10 years
    
    
    4,289
    
    
    
    (1,344
    )
    
    
    2,945
    
    
    
    5,029
    
    
    
    (1,870
    )
    
    
    3,159Trademarks
    
    6-10 years
    
    
    3,214
    
    
    
    (1,100
    )
    
    
    2,114
    
    
    
    3,214
    
    
    
    (1,019
    )
    
    
    2,195Non-compete agreements
    
    2-3 years
    
    
    615
    
    
    
    (324
    )
    
    
    291
    
    
    
    615
    
    
    
    (270
    )
    
    
    345Other intangible assets, net
    
    
    
    
    
    $
    36,867
    
    
    $
    (11,787
    )
    
    $
    25,080
    
    
    $
    37,607
    
    
    $
    (11,460
    )
    
    $
    26,147
  
 NOTE 6EARNINGS (LOSS) PER SHARE
  Three months endedDecember 31,(in thousands, except per share amounts)
    
    2005
    
    2004Numerator:Net income (loss)
    
    $
    1,809
    
    
    $
    (720
    )Denominator:Weighted-average common shares outstanding
    
    
    19,490
    
    
    
    19,447Effects of dilutive common stock options
    
    
    137
    
    
    
    Adjusted weighted-average shares
    
    
    19,627
    
    
    
    19,447Earnings (loss) per share:Basic
    
    $
    0.09
    
    
    $
    (0.04
    )Diluted
    
    $
    0.09
    
    
    $
    (0.04
    )
  Three months endedDecember 31,(in thousands, except per share amounts)
    
    2005
    
    2004Weighted-average options excluded from
computation of diluted earnings (loss) per
share
    
    
    2,379
    
    
    
    2,075Range of exercise prices per share:High
    
    $
    20.70
    
    
    $
    20.70Low
    
    $
    6.96
    
    
    $
    7.81
  
 NOTE 7SEGMENT INFORMATION
  10




---



##### 



Tier Technologies, Inc.
  Three months ended(in thousands)
    
    EPP(1)
    
    GBPO(2)
    
    PSSI(3)
    
    Eliminations
    
    TotalDecember 31, 2005Revenues
    
    $
    15,051
    
    
    $
    12,076
    
    
    $
    12,755
    
    
    $
    
    
    
    $
    39,882Direct costs
    
    $
    11,074
    
    
    $
    9,590
    
    
    $
    7,363
    
    
    $
    (131
    )
    
    $
    27,896December 31, 2004Revenues
    
    $
    11,385
    
    
    $
    9,492
    
    
    $
    14,900
    
    
    $
    (4,017
    )
    
    $
    31,760Direct costs
    
    $
    7,994
    
    
    $
    6,424
    
    
    $
    9,930
    
    
    $
    (2,426
    )
    
    $
    21,922
 (1)
    
    During the three months ended December 31, 2005 and 2004, the revenues from one customer produced 15.4% and 15.8%,
respectively, of the revenues reported for the EPP segment.(2)
    
    During the three months ended December 31, 2005, the revenues from one new customer produced 35.8% of the
revenues for the GBPO segment. During the three months ended December 31, 2005 and 2004, the revenues from another customer produced
15.7% and 19.9%, respectively, of the revenues for the GBPO segment.(3)
    
    During the three months ended December 31, 2005 and 2004, the revenues from one customer produced 22.4% and
22.5%, respectively, of the revenues reported for the PSSI segment.
  
 NOTE 8RESTRUCTURING
 General and
administrative
  Facilities(in thousands)
    
    Severance
    
    closures
    
    TotalBalance at September 30, 2005
    
    $
    330
    
    
    $
    610
    
    
    $
    940Additions
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (67
    )
    
    
    (49
    )
    
    
    (116
    )Balance at December 31, 2005
    
    $
    263
    
    
    
    561
    
    
    
    824
 Other liabilities Other accrued liabilities
 
 NOTE 9CONTINGENCIES AND COMMITMENTS
 LEGAL ISSUES
  11




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##### 



Tier Technologies, Inc.
 Note 13Subsequent Events
 BANK LINES OF CREDIT
  Note 13Subsequent Events
 LETTERS OF CREDIT
 Restricted investments
 CREDIT RISK
 de minimis
 GUARANTEES
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
 PERFORMANCE BONDS
 Prepaid expenses and other current assets Direct costs
 12




---



##### 



Tier Technologies, Inc.
 EMPLOYMENT AGREEMENTS
 Note 13Subsequent Events
 INDEMNIFICATION AGREEMENTS
 Note 13Subsequent Events
 
 NOTE 10RELATED PARTY TRANSACTIONS
 NOTES AND ACCRUED INTEREST RECEIVABLE
  Notes receivable from related
parties Common stock and paid-in-capital
 OTHER RELATED-PARTY TRANSACTIONS
 Note 13Subsequent Events
  
 NOTE 11SHARE-BASED PAYMENT
  Share-Based Payment , a
revision of FASB Statement No. 123Accounting for Stock-Based Compensation
 13




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##### 



Tier Technologies, Inc.
  Accounting for Stock-Based Compensation
 Three months ended(in thousands, except per share data)
    
    December 31, 2004Net loss:
    
    $
    (720
    )Add: Total stock-based compensation expense determined under fair value-based
method for all awards, net of tax effect
    
    
    (581
    )Pro forma net loss
    
    $
    (1,301
    )Loss per basic and diluted share:As reported
    
    $
    (0.04
    )Pro forma
    
    $
    (0.07
    )Weighted-average shares used in computing basic and diluted earnings (loss) per share
    
    
    19,447
  Three months ended December 31,2005
    
    2004Expected life (in years)
    
    
    6.50
    
    
    
    6.50Interest rate
    
    
    4.38
    %
    
    
    3.63
    %Volatility
    
    
    49.07
    %
    
    
    62.81
    %Dividend yield
    
    
    
    
    
    
    
  14




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##### 



Tier Technologies, Inc.
  Weighted-averageExercise
    
    Remaining
    
    AggregateShares
    
    price per
    
    contractual
    
    intrinsic(in thousands, except per share data)
    
    under option
    
    share
    
    term
    
    valueOptions outstanding at October 1, 2005
    
    
    2,968
    
    
    $
    10.34Granted
    
    
    33
    
    
    
    8.47Exercised
    
    
    (1
    )
    
    
    7.65Forfeitures or expirations
    
    
    (122
    )
    
    
    9.41Options outstanding at December 31, 2005
    
    
    2,878
    
    
    $
    10.36
    
    
    6.4 years
    
    $
    530Options exercisable at December 31, 2005
    
    
    2,013
    
    
    $
    10.81
    
    
    5.5 years
    
    $
    520
  15




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##### 



Tier Technologies, Inc.
 
 NOTE 12RESTATEMENT OF PRIOR PERIOD RESULTS
  Three months endedDecember 31, 2004(In thousands, except per share data)
    
    As Reported
    
    Adjustment
    
    As RestatedRevenues
    
    $
    31,679
    
    
    $
    81
    
    
    $
    31,760Costs and expenses:
    
    
    Direct costs
    
    
    21,883
    
    
    
    39
    
    
    
    21,922General and administrative
    
    
    6,880
    
    
    
    (338
    )
    
    
    6,542Selling and marketing
    
    
    2,579
    
    
    
    89
    
    
    
    2,668Depreciation and amortization
    
    
    1,550
    
    
    
    (2
    )
    
    
    1,548Total costs and expenses
    
    
    32,892
    
    
    
    (212
    )
    
    
    32,680Loss before other income (loss) and income taxes
    
    
    (1,213
    )
    
    
    293
    
    
    
    (920
    )Other income
    
    
    279
    
    
    
    (79
    )
    
    
    200Loss from before income taxes
    
    
    (934
    )
    
    
    214
    
    
    
    (720
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (934
    )
    
    $
    214
    
    
    $
    (720
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.04
    )Average shares issued and outstanding:Basic
    
    
    19,447
    
    
    
    
    
    
    
    19,447Diluted
    
    
    19,447
    
    
    
    
    
    
    
    19,447
 
 NOTE 13SUBSEQUENT EVENTS
 AUDIT COMMITTEE INVESTIGATION AND RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
    16




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##### 



Tier Technologies, Inc.
       BANK LINES OF CREDIT
   RELATED PARTY AGREEMENTS
 CPAS.
 17




---



##### 



Tier Technologies, Inc.
 James R. Weaver.
 EMPLOYMENT AGREEMENTS
   SETTLEMENT OF ALLEGED COPYRIGHT INFRINGEMENT
  PROJECT CONTINGENT LOSS
  18




---



##### 



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. In light of the risks, uncertainties and
assumptions discussed under Risk Factors of this Quarterly Report on Form 10-Q and other factors
discussed in this section, there are risks that our actual performance will differ materially from
the expectations and beliefs reflected in the forward-looking statements in this section and
throughout this report. For more information regarding what constitutes a forward-looking
statement refer to the Risk Factors section.
 OVERVIEW
     19




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##### 



Tier Technologies, Inc.
 RECENT EVENTS
  Fiscal 2005 Filing Delay Announced.
 Stockholder Rights Plan .
 Audit Committee Investigation.
 Delisting by Nasdaq
 Management Changes.
 20




---



##### 



Tier Technologies, Inc.
 SEC Subpoena
 RESULTS OF OPERATIONS
  Stock-Based Payment
  Three months endedDecember 31,
    
    
    Variance(in thousands, except percentages)
    
    2005
    
    
    2004
    
    
    $ Amount
    
    
    %Revenues
    
    $
    39,882
    
    
    $
    31,760
    
    
    $
    8,122
    
    
    
    26
    %Costs and expenses
    
    
    38,718
    
    
    
    32,680
    
    
    
    6,038
    
    
    
    18
    %Income (loss) before other income, income taxes
    
    
    1,164
    
    
    
    (920
    )
    
    
    2,084
    
    
    
    *Other income
    
    
    650
    
    
    
    200
    
    
    
    450
    
    
    
    225
    %Loss before income taxes
    
    
    1,814
    
    
    
    (720
    )
    
    
    2,534
    
    
    
    *Provision for income taxes
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    *Net income (loss)
    
    $
    1,809
    
    
    $
    (720
    )
    
    $
    2,529
    
    
    
    *
 *
    
    Not meaningful
  21




---



##### 



Tier Technologies, Inc.
 Revenues
  Three months endedDecember 31,
    
    
    Variance(in thousands, except percentages)
    
    2005
    
    
    2004
    
    
    $ Amount
    
    
    %Revenue, by segment:EPP
    
    $
    15,051
    
    
    $
    11,385
    
    
    $
    3,666
    
    
    
    32
    %GBPO
    
    
    12,076
    
    
    
    9,492
    
    
    
    2,584
    
    
    
    27
    %PSSI(1)
    
    
    12,755
    
    
    
    10,883
    
    
    
    1,872
    
    
    
    17
    %Total revenues
    
    $
    39,882
    
    
    $
    31,760
    
    
    $
    8,122
    
    
    
    26
    %
 (1)
    
    Revenues for the PSSI segment for the three months ended December 31, 2004
excludes $4.0 million of revenues that are eliminated during the consolidation of our accounting
results.
 Electronic Payment Processing Segment, or EPP
  Government Business Processing Outsourcing Segment, or GBPO 
  Packaged Software and Systems Integration Segment, or PSSI
 22




---



##### 



Tier Technologies, Inc.
   Costs and Expenses
  Three months endedDecember 31,
    
    
    Variance(in thousands, except percentages)
    
    2005
    
    
    2005
    
    
    $ Amount
    
    
    %Direct costs
    
    $
    27,896
    
    
    $
    21,922
    
    
    $
    5,974
    
    
    
    27
    %General and administrative
    
    
    6,923
    
    
    
    6,542
    
    
    
    381
    
    
    
    6
    %Selling and marketing
    
    
    2,580
    
    
    
    2,668
    
    
    
    (88
    )
    
    
    (3
    )%Depreciation and amortization
    
    
    1,319
    
    
    
    1,548
    
    
    
    (229
    )
    
    
    (15
    )%Total costs and expenses
    
    $
    38,718
    
    
    $
    32,680
    
    
    $
    6,038
    
    
    
    18
    %
 Direct costs.
 General and administrative.
 Selling and marketing. th
 23




---



##### 



Tier Technologies, Inc.
 Depreciation and amortization.
 Other Income (Loss)
 Equity in net income (loss) of unconsolidated affiliate .
 Interest income, net.
 Provision for income taxes. Accounting for Income Taxes
 LIQUIDITY AND CAPITAL RESOURCES
   24




---



##### 



Tier Technologies, Inc.
 Net Cash from Operating Activities
  Net Cash from Investing Activities
  Net Cash from Financing Activities
   CONTRACTUAL OBLIGATIONS
  25




---



##### 



Tier Technologies, Inc.
  Due in
    
    
    Due after
    
    
    Due after1 year
    
    
    1 year through
    
    
    3 years through(in thousands)
    
    Total
    
    
    or less
    
    
    3 years
    
    
    5 yearsCapital leases (equipment)
    
    $
    125
    
    
    $
    74
    
    
    $
    49
    
    
    $
    2Operating lease obligations:Facilities leases
    
    
    11,099
    
    
    
    3,324
    
    
    
    7,352
    
    
    
    423Equipment leases
    
    
    194
    
    
    
    75
    
    
    
    119
    
    
    
    Purchase obligations(1)Subcontractor
    
    
    1,235
    
    
    
    1,124
    
    
    
    111
    
    
    
    Purchase order
    
    
    60
    
    
    
    60
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    12,713
    
    
    $
    4,657
    
    
    $
    7,631
    
    
    $
    425
 (1) Obligations that are legally binding agreements 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 are defined as purchase obligations.
  CRITICAL ACCOUNTING POLICIES
  Managements
Discussion and Analysis of Financial Condition and Results of Operations
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
   26




---



##### 



Tier Technologies, Inc.
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   
    
    The Board of Directors appointed a new Chairman and Chief Executive Officer during
the third quarter of fiscal 2006;
    
    We established and communicated an atmosphere of zero-tolerance for improper behavior;
    
    We increased the formality and rigor around the operation of key accounting and
financial disclosure controls, including the documentation and testing of key financial
accounting controls and the implementation of appropriate policies and procedures to
provide reasonable assurance of:
 °
    
    timely account reconciliations;°
    
    reasonable and accurate accounting estimates and accrued liabilities;°
    
    accurate reporting of notes receivable and related interest receivable;°
    
    accurate calculation and review of the revenues recognized using
percentage-of-completion models;°
    
    documentation of managements review and approval of transactions; and°
    
    preparation and maintenance of appropriate support for accounting transactions.
   
    
    we will automate certain controls that are currently performed manually;
    
    we will complete our written documentation of all key financial procedures; and
    
    we will consolidate and simplify our back office operations.
 27




---



##### 



Tier Technologies, Inc.
 
 PART II. OTHER INFORMATION
 
 ITEM 1LEGAL PROCEEDINGS
   
 ITEM 1ARISK FACTORS
  If we fail to regain our listing status on the Nasdaq, the value of our stock may continue to
be depressed, we may have difficulties attracting and retaining customers and employees and our
Company may be susceptible to takeover attempts.
 We have incurred losses in the past and we cannot ensure that we will be profitable.
 Our revenues and operating margins may decline and may be difficult to forecast, which could
result in a decline in our stock price.
 
    
    economic conditions in the marketplace;
    
    our customers budgets and demand for our services;
    
    seasonality of business;
    
    timing of service and product implementations;
    
    unplanned increase in costs;
    
    delay in completion of projects;
    
    intense competition;
    
    variability of software license revenues; and
    
    integration and costs of acquisitions.
 28




---



##### 



Tier Technologies, Inc.
  We rely on small numbers of projects, customers and target markets for significant portions of our
revenues and our cash flow may decline significantly if we are unable to retain or replace these
projects or clients.
 Our markets are highly competitive. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market share.
 Changes in accounting standards could significantly change our reported results.
 Material weaknesses in our internal controls over financial reporting may result in adverse impact
on our business. Control and Procedures
 Changes in laws and government and regulatory compliance requirements may result in additional
compliance costs and may adversely impact our reported earnings.
 29




---



##### 



Tier Technologies, Inc.
  The revenues provided by our EPP segment from electronic payment processing may fluctuate and the
ability to maintain profitability is uncertain.
 Our ability to grow depends largely on our ability to attract, integrate and retain qualified
personnel.
 We depend on third parties for our products and services. Failure by these third parties to
perform their obligations satisfactorily could hurt our reputation, operating results and
competitiveness.
 Our fixed-price and transaction-based contracts require accurate estimates of resources and
transaction volumes and failure to estimate these factors accurately could cause us to lose money
on these contracts.
 30




---



##### 



Tier Technologies, Inc.
  Our revenues are highly dependent on government funding and the loss or decline of existing or
future government funding could cause our revenues and cash flows to decline.
 Our business is subject to increasing performance requirements, which could result in reduced
revenues and increased liability.
 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.
 Unauthorized data access and other security breaches could have an adverse impact on our business
and our reputation.
 We could suffer material losses if our operations fail to perform effectively.
 Our business may be harmed by claims, lawsuits or investigations which could result in adverse
outcomes.
 31




---



##### 



Tier Technologies, Inc.
    If we are not able to protect our intellectual property we could suffer serious harm to our
business
 We may be subject to infringement claims of third parties, resulting in increased costs and loss of
business.
 Our markets are rapidly changing and if we are not able to continue to adapt to changing
conditions, we may lose market share and be unable to compete effectively.
 We may not be successful in identifying acquisition candidates and, if we undertake acquisitions,
they could be expensive, increase our costs or liabilities or disrupt our business. One of our
strategies is to pursue growth through acquisitions.
 32




---



##### 



Tier Technologies, Inc.
  33




---



##### 



Tier Technologies, Inc.
 Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as
amended.31.2
    
    Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as
amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
  Filed herewith.
 34




---



##### 



Tier Technologies, Inc.
 
 SIGNATURE
  Tier Technologies, Inc.Dated: November 7, 2006By:
    
    /s/ David E. FountainDavid E. FountainChief Financial Officer(Principal Financial and Accounting Officer)
 35