##### 



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 endedJune 30, 2006
 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
(State or other jurisdiction 
of incorporation or organization)
    
    94-3145844
(I.R.S. Employer
Identification No.)
 10780 Parkridge Boulevard, Suite 400
Reston, Virginia 20191
(Address of principal executive offices)
 Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
 (571) 382-1000
(Registrants telephone number, including area code)
 o þ
  o þ o
 o þ




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##### 



TIER TECHNOLOGIES, INC.
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    2Item 1. Consolidated Financial Statements (unaudited)
    
    
    2Consolidated Balance Sheets
    
    
    2Consolidated Statements of Operations
    
    
    3Consolidated Statements of Comprehensive (Loss) Income
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Note 1Organization and Basis of Presentation
    
    
    6Note 2Recent Accounting Pronouncements
    
    
    7Note 3Customer Concentration and Risk
    
    
    8Note 4Investments
    
    
    9Note 5Goodwill and Other Intangible Assets
    
    
    10Note 6(Loss) Earnings per Share
    
    
    11Note 7Shareholders Equity
    
    
    11Note 8Segment Information
    
    
    12Note 9Restructuring
    
    
    12Note 10Contingencies and Commitments
    
    
    13Note 11Related Party Transactions
    
    
    15Note 12Share-Based Payment
    
    
    15Note 13Restatement of Prior Period Results
    
    
    16Note 14Subsequent Events
    
    
    18Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 6. Exhibits
    
    
    35SIGNATURE
    
    
    36
 Private Securities Litigation Reform Act Safe Harbor Statement
 Item 1ARisk Factors
 1




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##### 



PART I. FINANCIAL INFORMATION
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    September 30,(in thousands)
    
    2006
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,621
    
    
    $
    27,843Investments in marketable securities
    
    
    44,100
    
    
    
    36,493Accounts receivable, net
    
    
    14,586
    
    
    
    19,449Unbilled receivables
    
    
    2,550
    
    
    
    3,094Prepaid expenses and other current assets
    
    
    2,899
    
    
    
    3,680Total current assets
    
    
    85,756
    
    
    
    90,559Property, equipment and software, net
    
    
    13,515
    
    
    
    13,501Long-term accounts receivable
    
    
    1,191
    
    
    
    1,560Goodwill
    
    
    37,567
    
    
    
    37,567Other intangible assets, net
    
    
    22,946
    
    
    
    26,147Restricted investments
    
    
    5,078
    
    
    
    3,335Investment in unconsolidated affiliate
    
    
    4,107
    
    
    
    3,590Other assets
    
    
    3,609
    
    
    
    483Total assets
    
    $
    173,769
    
    
    $
    176,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,198
    
    
    $
    1,902Income taxes payable
    
    
    6,900
    
    
    
    7,113Accrued compensation liabilities
    
    
    5,675
    
    
    
    5,139Accrued subcontractor expense
    
    
    2,309
    
    
    
    3,226Other accrued liabilities
    
    
    12,513
    
    
    
    7,738Deferred income
    
    
    5,045
    
    
    
    7,795Other current liabilities
    
    
    63
    
    
    
    98Total current liabilities
    
    
    33,703
    
    
    
    33,011Other liabilities
    
    
    2,014
    
    
    
    2,192Total liabilities
    
    
    35,717
    
    
    
    35,203Commitments and contingencies (Note 10)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;
shares issued: 20,383 and 20,374; shares outstanding: 19,499
and 19,490
    
    
    183,464
    
    
    
    182,066Treasury stockat cost, 884 shares
    
    
    (8,684
    )
    
    
    (8,684
    )Notes receivable from related parties
    
    
    (4,204
    )
    
    
    (3,998
    )Accumulated other comprehensive loss
    
    
    (11
    )
    
    
    (111
    )Accumulated deficit
    
    
    (32,513
    )
    
    
    (27,734
    )Total shareholders equity
    
    
    138,052
    
    
    
    141,539Total liabilities and shareholders equity
    
    $
    173,769
    
    
    $
    176,742
 See Notes to Consolidated Financial Statements
 2




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##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    
    
    
    
    2005(in thousands, except per share data)
    
    2006
    
    (As restated)
    
    2006
    
    (As restated)Revenues
    
    $
    56,269
    
    
    $
    49,331
    
    
    $
    133,625
    
    
    $
    116,487Costs and expenses:Direct costs
    
    
    42,033
    
    
    
    35,505
    
    
    
    100,625
    
    
    
    80,315General and administrative
    
    
    11,748
    
    
    
    7,209
    
    
    
    27,530
    
    
    
    20,390Selling and marketing
    
    
    3,623
    
    
    
    3,161
    
    
    
    8,943
    
    
    
    8,518Depreciation and amortization
    
    
    1,306
    
    
    
    1,502
    
    
    
    3,950
    
    
    
    4,618Total costs and expenses
    
    
    58,710
    
    
    
    47,377
    
    
    
    141,048
    
    
    
    113,841(Loss) income before other income (loss) and income taxes
    
    
    (2,441
    )
    
    
    1,954
    
    
    
    (7,423
    )
    
    
    2,646Other income (loss):Equity in net income (loss) of unconsolidated affiliate
    
    
    35
    
    
    
    (138
    )
    
    
    556
    
    
    
    (380
    )Realized loss on impairment of investments
    
    
    
    
    
    
    (494
    )
    
    
    
    
    
    
    (494
    )Net interest income
    
    
    859
    
    
    
    382
    
    
    
    2,133
    
    
    
    1,056Total other income (loss)
    
    
    894
    
    
    
    (250
    )
    
    
    2,689
    
    
    
    182(Loss) income before income taxes
    
    
    (1,547
    )
    
    
    1,704
    
    
    
    (4,734
    )
    
    
    2,828Income tax provision
    
    
    40
    
    
    
    203
    
    
    
    45
    
    
    
    242Net (loss) income
    
    $
    (1,587
    )
    
    $
    1,501
    
    
    $
    (4,779
    )
    
    $
    2,586Basic and diluted (loss) earnings per share
    
    $
    (0.08
    )
    
    $
    0.08
    
    
    $
    (0.25
    )
    
    $
    0.13Weighted-average common shares used in computing:Basic (loss) earnings per share
    
    
    19,499
    
    
    
    19,477
    
    
    
    19,494
    
    
    
    19,463Diluted (loss) earnings per share
    
    
    19,499
    
    
    
    19,578
    
    
    
    19,494
    
    
    
    19,580
 See Notes to Consolidated Financial Statements
 3




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##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (unaudited)
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    
    
    
    
    2005(in thousands)
    
    2006
    
    (As restated)
    
    2006
    
    (As restated)Net (loss) income
    
    $
    (1,587
    )
    
    $
    1,501
    
    
    $
    (4,779
    )
    
    $
    2,586Other comprehensive income (loss), net of tax:Unrealized gain (loss) marketable securities
    
    
    1
    
    
    
    (230
    )
    
    
    55
    
    
    
    (429
    )Less impact of realized losses (transferred
out of AOCI and included in net (loss)
income)
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    494Foreign currency translation adjustment
    
    
    56
    
    
    
    (11
    )
    
    
    45
    
    
    
    6Other comprehensive income
    
    
    57
    
    
    
    253
    
    
    
    100
    
    
    
    71Comprehensive (loss) income
    
    $
    (1,530
    )
    
    $
    1,754
    
    
    $
    (4,679
    )
    
    $
    2,657
 See Notes to Consolidated Financial Statements
 4




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##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Nine months endedJune 30,2005(in thousands)
    
    2006
    
    (As restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income:
    
    $
    (4,779
    )
    
    $
    2,586Non-cash items included in net (loss) income:Depreciation and amortization
    
    
    6,725
    
    
    
    6,467Realized loss on impairment of investments
    
    
    
    
    
    
    494Loss on retirement of equipment and software
    
    
    283
    
    
    
    Provision for doubtful accounts
    
    
    957
    
    
    
    297Equity in (income) loss of unconsolidated affiliate
    
    
    (556
    )
    
    
    380Accrued forward loss on contract
    
    
    1,478
    
    
    
    (188
    )Share-based compensation
    
    
    1,123
    
    
    
    Net effect of changes in assets and liabilities:Accounts receivable
    
    
    4,819
    
    
    
    (3,868
    )Prepaid expenses and other assets
    
    
    (2,345
    )
    
    
    (1,813
    )Accounts payable and accrued liabilities
    
    
    1,996
    
    
    
    1,430Income taxes payable
    
    
    (213
    )
    
    
    50Deferred income
    
    
    (2,750
    )
    
    
    (294
    )Cash provided by operating activities
    
    
    6,738
    
    
    
    5,541CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of marketable securities
    
    
    (45,950
    )
    
    
    (31,671
    )Sales and maturities of marketable securities
    
    
    37,164
    
    
    
    34,001Purchases of restricted investments
    
    
    (3,878
    )
    
    
    (780
    )Maturities of restricted investments
    
    
    3,367
    
    
    
    Purchase of equipment and software
    
    
    (3,688
    )
    
    
    (9,005
    )Investment in subsidiaries and unconsolidated affiliate
    
    
    
    
    
    
    (4,102
    )Other investing activities
    
    
    
    
    
    
    (37
    )Cash used in investing activities
    
    
    (12,985
    )
    
    
    (11,594
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    69
    
    
    
    295Capital lease obligations and other financing arrangements
    
    
    (80
    )
    
    
    (64
    )Cash (used in) provided by financing activities
    
    
    (11
    )
    
    
    231Effect of exchange rate changes on cash
    
    
    36
    
    
    
    30Net decrease in cash and cash equivalents
    
    
    (6,222
    )
    
    
    (5,792
    )Cash and cash equivalents at beginning of period
    
    
    27,843
    
    
    
    28,495Cash and cash equivalents at end of period
    
    $
    21,621
    
    
    $
    22,703SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    13
    
    
    $
    43Income taxes paid (refunded), net
    
    $
    189
    
    
    $
    (41
    )SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Equipment acquired under capital lease obligations and other
financing arrangements
    
    $
    64
    
    
    $
    40Common stock issued in lieu of acquisition cost for investment
    
    $
    
    
    
    $
    79Interest
accrued on shareholder notes
    
    $
    206
    
    
    $
    212
 See Notes to Consolidated Financial Statements
 5




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 NOTE 1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.
  
    
    Official Payments Corporation, or OPCprovides proprietary telephone and
Internet systems, as well as transaction processing and settlement for electronic payment
options to federal, state and municipal government agencies, educational institutions and
other public sector clients; and
    
    EPOS Corporation, or 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
 6
         Note 13Restatement of Prior
Period 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 FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities
 7




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##### 



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 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receivables from individuals who paid
their child support payment with a check that had insufficient funds.
 Accounts receivable, net
 8




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##### 



(in thousands)
    
    June 30, 2006
    
    September 30, 2005Accounts receivable from:Customers
    
    $
    15,541
    
    
    $
    18,017Recipients of misposted payments
    
    
    1,617
    
    
    
    1,843Payers of NSF child support
    
    
    769
    
    
    
    743Total accounts receivable
    
    
    17,927
    
    
    
    20,603Allowance for uncollectible accounts receivable:Customers
    
    
    (1,101
    )
    
    
    (632
    )Recipients of misposted payments
    
    
    (1,347
    )
    
    
    (1,375
    )Payers of NSF child support
    
    
    (751
    )
    
    
    (632
    )Total allowance for uncollectible accounts
    
    
    (3,199
    )
    
    
    (2,639
    )Short-term accounts receivable retainer
    
    
    1,049
    
    
    
    3,045Less: Long-term accounts receivable
    
    
    (1,191
    )
    
    
    (1,560
    )Accounts receivable, net
    
    $
    14,586
    
    
    $
    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
  9




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##### 



June 30, 2006
    
    September 30, 2005Amortized
    
    Unrealized
    
    Estimated
    
    Amortized
    
    Unrealized
    
    Estimated(in thousands)
    
    cost
    
    loss
    
    fair value
    
    cost
    
    loss
    
    fair valueCash equivalents:Money market
    
    $
    5,373
    
    
    $
    
    
    
    $
    5,373
    
    
    $
    11,272
    
    
    $
    
    
    
    $
    11,272Total investments included in cash
and cash equivalents
    
    
    5,373
    
    
    
    
    
    
    
    5,373
    
    
    
    11,272
    
    
    
    
    
    
    
    11,272Investments in marketable securities:Debt securities:Auction rate certificates
    
    
    44,100
    
    
    
    
    
    
    
    44,100
    
    
    
    30,888
    
    
    
    (13
    )
    
    
    30,875U.S. government sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,629
    
    
    
    (7
    )
    
    
    1,622Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    2,996Total short-term investments
    
    
    44,100
    
    
    
    
    
    
    
    44,100
    
    
    
    36,513
    
    
    
    (20
    )
    
    
    36,493Restricted investments:U.S. government sponsored enterprise
obligations
    
    
    3,200
    
    
    
    
    
    
    
    3,200
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Certificate of deposit
    
    
    1,878
    
    
    
    
    
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    Total investments available-for-sale
    
    
    5,078
    
    
    
    
    
    
    
    5,078
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Total investments
    
    $
    54,551
    
    
    $
    
    
    
    $
    54,551
    
    
    $
    51,155
    
    
    $
    (55
    )
    
    $
    51,100
 Investments in
marketable securities
 (in thousands)
    
    June 30, 2006
    
    September 30, 2005Within one year
    
    $
    
    
    
    $
    5,647Greater than ten years
    
    
    44,100
    
    
    
    26,850Total
    
    $
    44,100
    
    
    $
    32,497
  Realized loss on impairment of investments
 NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  Goodwill and Other Intangible
Assets
 10




---



##### 



June 30, 2006
    
    September 30, 2005Amortization
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    Accumulated(in thousands)
    
    period
    
    Gross
    
    amortization
    
    Net
    
    Gross
    
    amortization
    
    NetClient relationships
    
    10 years
    
    $
    28,749
    
    
    $
    (10,457
    )
    
    $
    18,292
    
    
    $
    28,749
    
    
    $
    (8,301
    )
    
    $
    20,448Technology & research and
development
    
    3-10 years
    
    
    4,289
    
    
    
    (1,772
    )
    
    
    2,517
    
    
    
    5,029
    
    
    
    (1,870
    )
    
    
    3,159Trademarks
    
    6-10 years
    
    
    3,214
    
    
    
    (1,261
    )
    
    
    1,953
    
    
    
    3,214
    
    
    
    (1,019
    )
    
    
    2,195Non-compete agreements
    
    2-3 years
    
    
    615
    
    
    
    (431
    )
    
    
    184
    
    
    
    615
    
    
    
    (270
    )
    
    
    345Other
intangible assets, net
    
    
    
    $
    36,867
    
    
    $
    (13,921
    )
    
    $
    22,946
    
    
    $
    37,607
    
    
    $
    (11,460
    )
    
    $
    26,147
  NOTE 6(LOSS) EARNINGS PER SHARE
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    
    
    
    
    2005(in thousands, except per share amounts)
    
    2006
    
    (As restated)
    
    2006
    
    (As restated)Numerator:Net (loss) income
    
    $
    (1,587
    )
    
    $
    1,501
    
    
    $
    (4,779
    )
    
    $
    2,586Denominator:Weighted-average common shares outstanding
    
    
    19,499
    
    
    
    19,477
    
    
    
    19,494
    
    
    
    19,463Effects of dilutive common stock options
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    117Adjusted weighted-average shares
    
    
    19,499
    
    
    
    19,578
    
    
    
    19,494
    
    
    
    19,580Basic and diluted (loss) earnings per share
    
    $
    (0.08
    )
    
    $
    0.08
    
    
    $
    (0.25
    )
    
    $
    0.13
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,(in thousands, except per share amounts)
    
    2006
    
    2005
    
    2006
    
    2005Weighted-average options excluded
from computation of diluted (loss)
earnings per share
    
    
    1,807
    
    
    
    2,472
    
    
    
    2,184
    
    
    
    2,434Range of exercise prices per share:High
    
    $
    20.70
    
    
    $
    20.70
    
    
    $
    20.70
    
    
    $
    20.70Low
    
    $
    6.96
    
    
    $
    6.96
    
    
    $
    6.96
    
    
    $
    6.96
  NOTE 7SHAREHOLDERS EQUITY
  11




---



##### 



NOTE 8SEGMENT INFORMATION
  Three months ended
    
    Nine months ended(in thousands)
    
    EPP(1)
    
    GBPO(2)
    
    PSSI(3)
    
    Eliminations
    
    Total
    
    EPP(1)
    
    GBPO(2)
    
    PSSI(3)
    
    Eliminations
    
    TotalJune 30, 2006:Revenues
    
    $
    33,869
    
    
    $
    10,657
    
    
    $
    11,743
    
    
    $
    
    
    
    $
    56,269
    
    
    $
    64,384
    
    
    $
    34,511
    
    
    $
    34,730
    
    
    $
    
    
    
    $
    133,625Direct costs
    
    $
    26,950
    
    
    $
    7,403
    
    
    $
    7,801
    
    
    $
    (121
    )
    
    
    42,033
    
    
    $
    49,487
    
    
    $
    28,814
    
    
    $
    22,697
    
    
    $
    (373
    )
    
    $
    100,625June 30, 2005 (as Restated):Revenues
    
    $
    23,516
    
    
    $
    12,549
    
    
    $
    13,679
    
    
    $
    (413
    )
    
    $
    49,331
    
    
    $
    45,532
    
    
    $
    33,677
    
    
    $
    42,148
    
    
    $
    (4,870
    )
    
    $
    116,487Direct costs
    
    $
    17,790
    
    
    $
    9,342
    
    
    $
    8,945
    
    
    $
    (572
    )
    
    
    35,505
    
    
    $
    33,550
    
    
    $
    23,441
    
    
    $
    27,037
    
    
    $
    (3,713
    )
    
    $
    80,315
 
 (1)
    
    During the three and nine months ended June 30, 2006 and 2005, the revenues from one customer produced 58.5% and 41.8%, respectively, and 54.1% and 38.4%, respectively, of the revenues for the EPP segment.(2)
    
    During the three and nine months ended June 30, 2006 and 2005, the revenues from one customer produced 41.5% and 37.7%, respectively, and 25.4% and 16.3%, respectively, of the revenues for the GBPO segment.
During the three and nine months ended June 30, 2006 and 2005, the revenues from another customer produced 18.0% and 16.4%, respectively, and 14.9% and 16.5%, respectively, of the revenues for the GBPO segment.(3)
    
    During the three and nine months ended June 30, 2006, the revenues from one customer produced 32.0% and 26.6%, respectively, of the revenues for the PSSI segment. During the same periods in fiscal 2005, the
revenues from this customer produced 26.4% and 26.8%, respectively, of the revenues for the PSSI segment.  NOTE 9RESTRUCTURING
 General and administrative
  Facilities(in thousands)
    
    Severance
    
    closures
    
    TotalBalance at September 30, 2005
    
    $
    330
    
    
    $
    610
    
    
    $
    940Additions
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (183
    )
    
    
    (147
    )
    
    
    (330
    )Balance at June 30, 2006
    
    $
    147
    
    
    
    463
    
    
    
    610
 Other liabilities Other accrued liabilities
 12




---



##### 



NOTE 10CONTINGENCIES AND COMMITMENTS
 LEGAL ISSUES
 Note 14Subsequent Events
 BANK LINES OF CREDIT
  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
 13




---



##### 



PERFORMANCE BONDS
  EMPLOYMENT AGREEMENTS
    INDEMNIFICATION AGREEMENTS
  FORWARD LOSSES
 Other accrued liabilities Direct costs
 14




---



##### 



NOTE 11RELATED PARTY TRANSACTIONS
 NOTES RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
  Notes receivable from related
parties Common stock and paid-in-capital
 OTHER RELATED-PARTY TRANSACTIONS
   NOTE 12SHARE-BASED PAYMENT
  Share-Based Payment, Accounting for Stock-Based Compensation.
 Accounting for Stock-Based Compensation
 15




---



##### 



Three months ended
    
    Nine months ended(in thousands, except per share data)
    
    June 30, 2005
    
    June 30, 2005Net income (restated)
    
    $
    1,501
    
    
    $
    2,586Less: Total stock-based
compensation expense determined
under fair value-based method for
all awards, net of tax effect
    
    
    723
    
    
    
    1,988Pro forma net income
    
    $
    778
    
    
    $
    598Net income per basic and diluted share:As reported
    
    $
    0.08
    
    
    $
    0.13Pro forma
    
    $
    0.04
    
    
    $
    0.03
  Three months ended June 30,
    
    Nine months ended June 30,2006
    
    2005
    
    2006
    
    2005Expected life (in years)
    
    
    5.00
    
    
    
    5.00
    
    
    
    5.00
    
    
    
    4.49Interest rate
    
    
    4.88
    %
    
    
    3.72
    %
    
    
    4.88
    %
    
    
    3.72
    %Volatility
    
    
    46.99
    %
    
    
    44.37
    %
    
    
    46.99
    %
    
    
    44.37
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   Weighted-Weighted-
    
    averageaverage
    
    remaining
    
    AggregateShares under
    
    exercise
    
    contractual
    
    intrinsic(in thousands, except per share data)
    
    option
    
    price
    
    term
    
    valueOptions outstanding at October 1, 2005
    
    
    2,968
    
    
    $
    10.34Granted
    
    
    113
    
    
    
    8.59Exercised
    
    
    (10
    )
    
    
    7.07Forfeitures or expirations
    
    
    (1,707
    )
    
    
    10.42Options outstanding at June 30, 2006
    
    
    1,364
    
    
    $
    10.13
    
    
    
    6.84
    
    
    $
    45Options exercisable at June 30, 2006
    
    
    826
    
    
    $
    10.55
    
    
    
    5.89
    
    
    $
    45
   NOTE 13RESTATEMENT OF PRIOR PERIOD RESULTS
 BACKGROUND FOR THE RESTATEMENT OF OUR HISTORICAL FINANCIAL STATEMENTS
  16




---



##### 



RESTATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2005
  Three months ended June 30, 2005(In thousands, except per share data)
    
    As reported
    
    Adjustment
    
    As restatedRevenues
    
    $
    49,649
    
    
    $
    (318
    )
    
    $
    49,331Costs and expenses:Direct costs
    
    
    35,521
    
    
    
    (16
    )
    
    
    35,505General and administrative
    
    
    7,445
    
    
    
    (236
    )
    
    
    7,209Selling and marketing
    
    
    3,161
    
    
    
    
    
    
    
    3,161Depreciation and amortization
    
    
    1,504
    
    
    
    (2
    )
    
    
    1,502Total costs and expenses
    
    
    47,631
    
    
    
    (254
    )
    
    
    47,377Income before other income (loss) and income taxes
    
    
    2,018
    
    
    
    (64
    )
    
    
    1,954Other income
    
    
    (125
    )
    
    
    (125
    )
    
    
    (250
    )Income before income taxes
    
    
    1,893
    
    
    
    (189
    )
    
    
    1,704Provision for income taxes
    
    
    172
    
    
    
    31
    
    
    
    203Net income
    
    $
    1,721
    
    
    $
    (220
    )
    
    $
    1,501Basic and diluted loss per share
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.08Average shares issued and outstanding:Basic
    
    
    19,477
    
    
    
    19,477
    
    
    
    19,477Diluted
    
    
    19,578
    
    
    
    19,578
    
    
    
    19,578
 17




---



##### 



Nine months ended June 30, 2005(In thousands, except per share data)
    
    As reported
    
    Adjustment
    
    As restatedRevenues
    
    $
    116,605
    
    
    $
    (118
    )
    
    $
    116,487Costs and expenses:Direct costs
    
    
    80,465
    
    
    
    (150
    )
    
    
    80,315General and administrative
    
    
    21,196
    
    
    
    (806
    )
    
    
    20,390Selling and marketing
    
    
    8,753
    
    
    
    (235
    )
    
    
    8,518Depreciation and amortization
    
    
    4,624
    
    
    
    (6
    )
    
    
    4,618Total costs and expenses
    
    
    115,038
    
    
    
    (1,197
    )
    
    
    113,841Income before other income (loss) and income taxes
    
    
    1,567
    
    
    
    1,079
    
    
    
    2,646Other income
    
    
    521
    
    
    
    (339
    )
    
    
    182Income before income taxes
    
    
    2,088
    
    
    
    740
    
    
    
    2,828Provision for income taxes
    
    
    192
    
    
    
    50
    
    
    
    242Net income
    
    $
    1,896
    
    
    $
    690
    
    
    $
    2,586Basic and diluted loss per share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.13Average shares issued and outstanding:Basic
    
    
    19,463
    
    
    
    19,463
    
    
    
    19,463Diluted
    
    
    19,580
    
    
    
    19,580
    
    
    
    19,580
 NOTE 14SUBSEQUENT EVENTS
 REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
  Report name
    
    Period covered by report
    
    Date filedAnnual Report on Form 10-K/A (Amendment 3)
    
    Fiscal year ended September 30, 2004
    
    October 25, 2006Annual Report on Form 10-K
    
    Fiscal year ended September 30, 2005
    
    October 27, 2006Quarterly Report on Form 10-Q/A
    
    Quarter ended December 31, 2005
    
    November 13, 2006Quarterly Report on Form 10-Q
    
    Quarter ended March 31, 2006
    
    November 14, 2006
 CLAIMS
  SYSTEM OUTAGE
  18




---



##### 



CHANGES TO 401(k) PLAN
  19




---



##### 



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 experience will differ materially from
the expectations and beliefs reflected in the forward-looking statements in this section and
throughout this report. For more information regarding what constitutes a forward-looking
statement refer to the Risk Factors section.
 OVERVIEW
     RECENT EVENTS
  20




---



##### 



Fiscal 2005 Filing Delay Announced.
 Stockholder Rights Plan .
 Audit Committee Investigation.
 Delisting by Nasdaq
 Management Changes.
 SEC Subpoena
 21




---



##### 



Claim.
 RESULTS OF OPERATIONS
 Share-Based Payment,
 Three months ended
    
    
    
    
    
    
    
    
    
    Nine months endedJune 30,
    
    Variance
    
    June 30,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Revenues
    
    $
    56,269
    
    
    $
    49,331
    
    
    $
    6,938
    
    
    
    14
    %
    
    $
    133,625
    
    
    $
    116,487
    
    
    $
    17,138
    
    
    
    15
    %Costs and expenses
    
    
    58,710
    
    
    
    47,377
    
    
    
    11,333
    
    
    
    24
    %
    
    
    141,048
    
    
    
    113,841
    
    
    
    27,207
    
    
    
    24
    %(Loss) income before other income,
income taxes
    
    
    (2,441
    )
    
    
    1,954
    
    
    
    (4,395
    )
    
    
    *
    
    
    
    (7,423
    )
    
    
    2,646
    
    
    
    (10,069
    )
    
    
    *Other income (loss)
    
    
    894
    
    
    
    (250
    )
    
    
    1,144
    
    
    
    *
    
    
    
    2,689
    
    
    
    182
    
    
    
    2,507
    
    
    
    *(Loss) income before income taxes
    
    
    (1,547
    )
    
    
    1,704
    
    
    
    (3,251
    )
    
    
    *
    
    
    
    (4,734
    )
    
    
    2,828
    
    
    
    (7,562
    )
    
    
    *Provision for income taxes
    
    
    40
    
    
    
    203
    
    
    
    (163
    )
    
    
    (80
    )%
    
    
    45
    
    
    
    242
    
    
    
    (197
    )
    
    
    (81
    )%Net (loss) income
    
    $
    (1,587
    )
    
    $
    1,501
    
    
    $
    (3,088
    )
    
    
    *
    
    
    $
    (4,779
    )
    
    $
    2,586
    
    
    $
    (7,365
    )
    
    
    *
 *
    
    Not meaningful
  Revenues
  22




---



##### 



Three months ended
    
    
    
    
    
    
    
    
    
    Nine months endedJune 30,
    
    Variance
    
    June 30,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Revenue, by segment:EPP
    
    $
    33,869
    
    
    $
    23,516
    
    
    $
    10,353
    
    
    
    44
    %
    
    $
    64,384
    
    
    $
    45,532
    
    
    $
    18,852
    
    
    
    41
    %GBPO
    
    
    10,657
    
    
    
    12,549
    
    
    
    (1,892
    )
    
    
    (15
    )%
    
    
    34,511
    
    
    
    33,677
    
    
    
    834
    
    
    
    2
    %PSSI*
    
    
    11,743
    
    
    
    13,266
    
    
    
    (1,523
    )
    
    
    (11
    )%
    
    
    34,730
    
    
    
    37,278
    
    
    
    (2,548
    )
    
    
    (7
    )%Total revenues
    
    $
    56,269
    
    
    $
    49,331
    
    
    $
    6,938
    
    
    
    14
    %
    
    $
    133,625
    
    
    $
    116,487
    
    
    $
    17,138
    
    
    
    15
    %
 *
    
    Excludes revenues that are eliminated during the consolidation of our accounting results of $0.4 million and $4.9 million, respectively, for the three and
nine months ended June 30, 2005. To date, there have been no intercompany revenues generated during fiscal 2006 which would require elimination. Electronic Payment Processing Segment, or EPP
  Government Business Processing Segment, or GBPO 
  Packaged Software and Systems Integration Segment, or PSSI
  23




---



##### 



Costs and Expenses
  Three months ended June 30,
    
    Variance
    
    Nine months ended June 30,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Direct costs
    
    $
    42,033
    
    
    $
    35,505
    
    
    $
    6,528
    
    
    
    18
    %
    
    $
    100,625
    
    
    $
    80,315
    
    
    $
    20,310
    
    
    
    25
    %General and administrative
    
    
    11,748
    
    
    
    7,209
    
    
    
    4,539
    
    
    
    63
    %
    
    
    27,530
    
    
    
    20,390
    
    
    
    7,140
    
    
    
    35
    %Selling and marketing
    
    
    3,623
    
    
    
    3,161
    
    
    
    462
    
    
    
    15
    %
    
    
    8,943
    
    
    
    8,518
    
    
    
    425
    
    
    
    5
    %Depreciation and amortization
    
    
    1,306
    
    
    
    1,502
    
    
    
    (196
    )
    
    
    (13
    )%
    
    
    3,950
    
    
    
    4,618
    
    
    
    (668
    )
    
    
    (14
    )%Total costs and expenses
    
    $
    58,710
    
    
    $
    47,377
    
    
    $
    11,333
    
    
    
    24
    %
    
    $
    141,048
    
    
    $
    113,841
    
    
    $
    27,207
    
    
    
    24
    %
 Direct costs.
 General and administrative.
 Selling and marketing. th
 24




---



##### 



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
  25




---



##### 



Net Cash from Operating Activities
  Net Cash from Investing Activities
  Net Cash from Financing Activities
    26




---



##### 



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  Due after
    
    
    Due afterDue in
    
    
    1 year
    
    
    3 years1 year
    
    
    through
    
    
    through(in thousands)
    
    Total
    
    
    or less
    
    
    3 years
    
    
    5 yearsCapital leases (equipment)
    
    $
    145
    
    
    $
    53
    
    
    $
    90
    
    
    $
    2Operating lease obligations:Facilities leases
    
    
    10,069
    
    
    
    3,411
    
    
    
    6,644
    
    
    
    14Equipment leases
    
    
    157
    
    
    
    66
    
    
    
    91
    
    
    
    Purchase obligations(1)Subcontractor
    
    
    2,208
    
    
    
    1,192
    
    
    
    1,016
    
    
    
    Purchase order
    
    
    761
    
    
    
    761
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    13,340
    
    
    $
    5,483
    
    
    $
    7,841
    
    
    $
    16
 (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 AND ESTIMATES
  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
  27




---



##### 



IDENTIFICATION OF MATERIAL WEAKNESSES AND REPORTABLE CONDITIONS
  
    
    We did not maintain effective control over the recognition of revenues and forward
losses for certain contractsWe determined that our process for forecasting total project
costs and revenues was not effective. These forecasts are a factor in determining the
timing of certain revenues and determining whether a project may result in a loss. In
addition, we determined that our process for recording the impact of these forecast
adjustments was not timely.
    
    We did not maintain effective control over the recognition of expenses under SFAS
123RShare-Based Payments-We did not have effective controls in place to ensure that
complex share-based compensation transactions were recorded correctly.
  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   
    
    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:
 o
    
    timely account reconciliations;o
    
    reasonable and accurate accounting estimates and accrued liabilities;o
    
    accurate reporting of notes receivable and related interest receivable;
 28




---



##### 



o
    
    documentation of managements review and approval of transactions; ando
    
    preparation and maintenance of appropriate support for accounting transactions.
   o
    
    we instituted a multi-step process for reviewing forecasts
and models used to accrue revenues for fixed-price contracts; ando
    
    we established a multi-step review process for reviewing all
technically complex and materially significant stock option
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.
 29




---



##### 



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;
 30




---



##### 




    
    unplanned increase in costs;
    
    delay in completion of projects;
    
    intense competition;
    
    variability of software license revenues; and
    
    integration and costs of acquisitions.
  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
 31




---



##### 



Changes in laws and government and regulatory compliance requirements may result in additional
compliance costs and may adversely impact our reported earnings.
 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.
 32




---



##### 



Our fixed-price and transaction-based contracts require accurate estimates of resources and
transaction volumes and failure to estimate these factors accurately could cause us to lose money
on these contracts.
 Our 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.
 33




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Our business may be harmed by claims, lawsuits or investigations which could result in adverse
outcomes.
    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.
 34




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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.
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    
    Form of Employment Security Agreement between Tier and Messrs. Beckerman, Vucovich, Wade, Lawler and Genz,
dated March28, 2006.(1)10.2
    
    
    Management Incentive Plan for fiscal year 2006, dated March 29, 2006.(2)10.3
    
    
    Separation Agreement and Release between Tier and James R. Weaver, dated May 31, 2006.(3)10.4
    
    
    Letter Agreement between Tier and Ronald L. Rossetti, dated July 26, 2006.(4)10.5
    
    
    Non-Statutory Stock Option Agreement between Tier and Ronald L. Rossetti, dated July 26, 2006.(4)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.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.(1)
    
    Filed as an exhibit to Form 8-K, filed on April 3, 2006, and incorporated herein by reference.(2)
    
    Filed as an exhibit to Form 8-K, filed on April 3, 2006, and incorporated herein by reference.(3)
    
    Filed as an exhibit to Form 8-K, filed on June 1, 2006, and incorporated herein by reference.(4)
    
    Filed as an exhibit to Form 8-K, filed on August 1, 2006, and incorporated herein by reference. 35




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SIGNATURE
  Tier
Technologies, Inc.Dated: November 21, 2006By:
    /s/ David E. FountainDavid E. FountainChief Financial Officer
(Principal Financial and Accounting Officer) 36