**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

 

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**(MarkOne)**

 

| x                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                               |                                                                                          |
| **For the quarterly period ended  March 31, 2003** |
|                                               |                                                                                          |   |
| **OR**                                             |
|                                               |                                                                                          |   |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                    |                                                                                               |  |  |

 

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**Commission file number 000-23195**

 

**TIER TECHNOLOGIES, INC.**

(Exactname of Registrant as specified in its charter)

 

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

 

| **2001 N. Main Street, Suite 500  Walnut Creek, California 94596** |
|--------------------------------------------------------------------|
| (Address of principal executive offices)                           |
| (Zip Code)                                                         |
|                                                               |
| **(925) 937-3950**                                                 |
| (Registrant’s telephone number, including area code)          |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. 

 

| (1) Yesý  No o |   | (2) Yes ý  No o |
|---------------------|--------|----------------------|

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
| (1) Yes ý  No o |   |
|----------------------|--------|

 

As of April 30, 2003, the number of shares outstanding of theRegistrant’s Class A Common Stock was 880,000 and the number of sharesoutstanding of the Registrant’s Class B Common Stock was 17,696,711.

** **

 

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** **

**TIER TECHNOLOGIES, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 

**Part I—FINANCIALINFORMATION**

** **
| Item 1.                            | Condensed Consolidated  Financial Statements (unaudited)                                                     |
|------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                         |
|                               | Condensed  Consolidated Balance Sheets as of March 31, 2003 and September 30, 2002                           |
|                               |                                                                                                         |
|                               | Condensed  Consolidated Statements of Operations for the three and six months ended  March 31, 2003 and 2002 |
|                               |                                                                                                         |
|                               | Condensed  Consolidated Statements of Cash Flows for the six months ended March 31, 2003  and 2002           |
|                               |                                                                                                         |
|                               | Notes  to Condensed Consolidated Financial Statements                                                        |
|                               |                                                                                                         |
| Item  2.                           | 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                                                                                     |
|                               |                                                                                                         |
| **Part II—OTHER INFORMATION** |
|                               |                                                                                                         |
| Item 1.                            | Legal Proceedings                                                                                            |
|                               |                                                                                                         |
| Item  4.                           | Submission  of Matters to a Vote of Security Holders                                                         |
|                               |                                                                                                         |
| Item 6.                            | Exhibits and  Reports on Form 8-K                                                                            |
|                               |                                                                                                         |
| Signatures.                        |
|                               |
| Certifications                     |

 

2

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**PARTI.   FINANCIAL INFORMATION**

 

**ITEM1.   FINANCIAL STATEMENTS**

 

**TIER TECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

**(in thousands)**

** **
|                                                                              |   | **March 31,  2003** |       | **September  30,  2002** |       |
|-----------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------|------------|
| **ASSETS**                                                                        |   |                |       |                     |       |
|                                                                              |   |                |       |                     |       |
| **Current assets:**                                                               |   |                | ** ** |                     | ** ** |
| Cash and cash  equivalents                                                        |   | $                   | 38,445     |                     | $          | 41,750 |   |
| Short-term  investments                                                           |   | 9,809               |       | 18,571                   |       |
| Accounts  receivable, net                                                         |   | 37,284              |       | 32,686                   |       |
| Prepaid expenses  and other current assets                                        |   | 7,246               |       | 7,908                    |       |
| Total current  assets                                                             |   | 92,784              |       | 100,915                  |       |
| Equipment and  software, net                                                      |   | 7,591               |       | 8,751                    |       |
| Notes and  accrued interest receivable from related parties, less current portion |   | 2,049               |       | 1,967                    |       |
| Goodwill and other  acquired intangible assets, net                               |   | 74,080              |       | 76,118                   |       |
| Long-term  investments                                                            |   | 18,462              |       | 11,906                   |       |
| Other assets                                                                      |   | 1,515               |       | 1,462                    |       |
| Total assets                                                                      |   | $                   | 196,481    |                     | $          | 201,119 |   |
|                                                                              |   |                |       |                     |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                    |   |                |       |                     |       |
|                                                                              |   |                |       |                     |       |
| **Current liabilities:**                                                          |   |                |       |                     |       |
| Accounts payable                                                                  |   | $                   | 2,780      |                     | $          | 959 |   |
| Accrued  liabilities                                                              |   | 9,156               |       | 11,184                   |       |
| Accrued  subcontractor expenses                                                   |   | 2,404               |       | 3,257                    |       |
| Accrued  compensation and related liabilities                                     |   | 4,174               |       | 3,979                    |       |
| Purchase price  payable and accrued contingent earnouts                           |   | 2,190               |       | 3,387                    |       |
| Deferred income                                                                   |   | 3,826               |       | 3,231                    |       |
| Other current  liabilities                                                        |   | 1,396               |       | 2,226                    |       |
| Total current  liabilities                                                        |   | 25,926              |       | 28,223                   |       |
| Long-term debt,  less current portion                                             |   | 257                 |       | 288                      |       |
| Deferred taxes  payable                                                           |   | 4,458               |       | 4,458                    |       |
| Other  liabilities                                                                |   | 1,074               |       | 1,129                    |       |
| Total  liabilities                                                                |   | 31,715              |       | 34,098                   |       |
|                                                                              |   |                |       |                     |       |
| Commitments and  contingencies                                                    |   |                |       |                     |       |
|                                                                              |   |                |       |                     |       |
| **Shareholders’ equity:**                                                    |   |                |       |                     |       |
| Common stock, no  par value                                                       |   | 164,333             |       | 169,772                  |       |
| Notes receivable  from shareholders                                               |   | (1,773              | )          | (1,773                   | )          |
| Accumulated  other comprehensive loss                                             |   | (412                | )          | (291                     | )          |
| Retained  earnings (accumulated deficit)                                          |   | 2,618               |       | (687                     | )          |
| Total  shareholders’ equity                                                  |   | 164,766             |       | 167,021                  |       |
| Total  liabilities and shareholders’ equity                                  |   | $                   | 196,481    |                     | $          | 201,119 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

3

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**TIER TECHNOLOGIES, INC.**

 

#### **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

**(in thousands, except per share data)**

** **
|                                                                                                                                             |   | **Three Months Ended****March 31,** |   | **Six Months Ended****March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                             |   | **2003**                            |   | **2002**                          |   | **2003** |   | **2002** |   |
| Net revenues                                                                                                                                     |   | $                                   | 33,228 |                              | $      | 22,064 |   | $ | 65,423 |   | $ | 45,074 |   |
| Cost of revenues                                                                                                                                 |   | 21,777                              |   | 12,830                            |   | 42,093 |   | 26,821 |   |
| Gross profit                                                                                                                                     |   | 11,451                              |   | 9,234                             |   | 23,330 |   | 18,253 |   |
| Costs and  expenses:                                                                                                                             |   |                                |   |                              |   |   |   |   |   |
| Selling and  marketing                                                                                                                           |   | 1,857                               |   | 1,286                             |   | 3,776 |   | 2,637 |   |
| General and  administrative                                                                                                                      |   | 5,623                               |   | 3,645                             |   | 11,427 |   | 7,736 |   |
| Business  combination integration                                                                                                                |   | 275                                 |   | —                            |   | 680 |   | — |   |
| Depreciation and  amortization                                                                                                                   |   | 1,409                               |   | 1,345                             |   | 2,810 |   | 2,722 |   |
| Income from  continuing operations                                                                                                               |   | 2,287                               |   | 2,958                             |   | 4,637 |   | 5,158 |   |
| Interest income  (expense), net                                                                                                                  |   | 307                                 |   | 520                               |   | 693 |   | 631 |   |
| Income from  continuing operations before income taxes                                                                                           |   | 2,594                               |   | 3,478                             |   | 5,330 |   | 5,789 |   |
| Provision for  income taxes                                                                                                                      |   | 1,013                               |   | 1,287                             |   | 2,025 |   | 2,142 |   |
| Income from  continuing operations, net of income taxes                                                                                          |   | 1,581                               |   | 2,191                             |   | 3,305 |   | 3,647 |   |
| Discontinued  operations:                                                                                                                        |   |                                |   |                              |   |   |   |   |   |
| Loss from  operations of discontinued operation, net of income taxes                                                                             |   | —                              |   | (1,015                            | )      | — |   | (1,273 | ) |
| Loss on disposal  of discontinued  operation (including  provision of $719 for operating loss during disposal period), net of income  taxes |   | —                              |   | (15,085                           | )      | — |   | (15,085 | ) |
| Loss from  discontinued operation, net of income taxes                                                                                           |   | —                              |   | (16,100                           | )      | — |   | (16,358 | ) |
| Net income  (loss)                                                                                                                               |   | $                                   | 1,581  |                              | $      | (13,909 | ) | $ | 3,305 |   | $ | (12,711 | ) |
|                                                                                                                                             |   |                                |   |                              |   |   |   |   |   |
| Income from  continuing operations, net of income taxes:                                                                                         |   |                                |   |                              |   |   |   |   |   |
| Per basic share                                                                                                                                  |   | $                                   | 0.08   |                              | $      | 0.12 |   | $ | 0.17 |   | $ | 0.23 |   |
| Per diluted  share                                                                                                                               |   | $                                   | 0.08   |                              | $      | 0.11 |   | $ | 0.17 |   | $ | 0.21 |   |
|                                                                                                                                             |   |                                |   |                              |   |   |   |   |   |
| Loss from  discontinued operation, net of income taxes:                                                                                          |   |                                |   |                              |   |   |   |   |   |
| Per basic share                                                                                                                                  |   | $                                   | — |                              | $      | (0.89 | ) | $ | — |   | $ | (1.03 | ) |
| Per diluted  share                                                                                                                               |   | $                                   | — |                              | $      | (0.83 | ) | $ | — |   | $ | (0.95 | ) |
|                                                                                                                                             |   |                                |   |                              |   |   |   |   |   |
| Net income  (loss):                                                                                                                              |   |                                |   |                              |   |   |   |   |   |
| Per basic share                                                                                                                                  |   | $                                   | 0.08   |                              | $      | (0.77 | ) | $ | 0.17 |   | $ | (0.80 | ) |
| Per diluted  share                                                                                                                               |   | $                                   | 0.08   |                              | $      | (0.72 | ) | $ | 0.17 |   | $ | (0.74 | ) |
|                                                                                                                                             |   |                                |   |                              |   |   |   |   |   |
| Shares used in  computing basic income (loss) per share                                                                                          |   | 18,834                              |   | 18,050                            |   | 18,944 |   | 15,865 |   |
| Shares used in  computing diluted income (loss) per share                                                                                        |   | 19,355                              |   | 19,337                            |   | 19,580 |   | 17,231 |   |

 

See Notes toCondensed Consolidated Financial Statements

 

4

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**TIER TECHNOLOGIES, INC.**

 

#### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

**(in thousands)**

** **
|                                                                                                                                                       |   | **Six Months  Ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                                       |   | **2003**                         |   | **2002** |   |
| **Operating activities**                                                                                                                                   |   |                             |   |   |   |
| Income from continuing  operations, net of income taxes                                                                                                    |   | $                                | 3,305  |   | $ | 3,647 |   |
| Adjustments to reconcile income from continuing operations, net of  income taxes to net cash from continuing operations provided by operating  activities: |   |                             |   |   |   |
| Depreciation and amortization                                                                                                                              |   | 4,003                            |   | 3,826 |   |
| Provision for doubtful accounts                                                                                                                            |   | 47                               |   | 212 |   |
| Tax benefit of stock options exercised                                                                                                                     |   | 196                              |   | 3,806 |   |
| Forgiveness of notes receivable from employees                                                                                                             |   | 27                               |   | 36 |   |
| Change in operating assets and liabilities, net of effects of  business combinations:                                                                      |   |                             |   |   |   |
| Accounts receivable                                                                                                                                        |   | (4,946                           | )      | (421 | ) |
| Prepaid expenses and other assets                                                                                                                          |   | 975                              |   | (904 | ) |
| Accounts payable and accrued liabilities                                                                                                                   |   | (1,531                           | )      | (1,433 | ) |
| Deferred income                                                                                                                                            |   | 605                              |   | (523 | ) |
| Net cash from continuing  operations provided by operating activities                                                                                      |   | 2,681                            |   | 8,246 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Investing  activities**                                                                                                                                  |   |                             |   |   |   |
| Purchase of equipment and  software                                                                                                                        |   | (1,001                           | )      | (1,240 | ) |
| Notes and accrued interest  receivable from related parties                                                                                                |   | (135                             | )      | (100 | ) |
| Repayments on notes and  accrued interest receivable from related parties                                                                                  |   | 14                               |   | 273 |   |
| Business combinations, net of  cash acquired                                                                                                               |   | (961                             | )      | (9,843 | ) |
| Restricted cash                                                                                                                                            |   | —                           |   | (4,010 | ) |
| Purchases of  available-for-sale securities                                                                                                                |   | (19,298                          | )      | (38,911 | ) |
| Sales of available-for-sale  securities                                                                                                                    |   | 5,989                            |   | — |   |
| Maturities of available-for-sale  securities                                                                                                               |   | 15,533                           |   | 4,498 |   |
| Other assets                                                                                                                                               |   | —                           |   | 82 |   |
| Net cash from continuing  operations provided by (used in) investing activities                                                                            |   | 141                              |   | (49,251 | ) |
|                                                                                                                                                       |   |                             |   |   |   |
| **Financing  activities**                                                                                                                                  |   |                             |   |   |   |
| Net proceeds from issuance of  Class B common stock                                                                                                   |   | 1,028                            |   | 84,478 |   |
| Repurchase of Class B common  stock                                                                                                                        |   | (6,665                           | )      | — |   |
| Payments on capital lease  obligations and other financing arrangements                                                                                    |   | (344                             | )      | (732 | ) |
| Net cash from continuing  operations provided by (used in) financing activities                                                                            |   | (5,981                           | )      | 83,746 |   |
| Effect of exchange rate  changes on cash                                                                                                                   |   | (146                             | )      | 122 |   |
| Net cash provided by (used in)  continuing operations                                                                                                      |   | (3,305                           | )      | 42,863 |   |
| Net cash used in discontinued  operation                                                                                                                   |   | —                           |   | (1,401 | ) |
| Net increase (decrease) in  cash and cash equivalents                                                                                                      |   | (3,305                           | )      | 41,462 |   |
| Cash and cash equivalents at  beginning of period                                                                                                          |   | 41,750                           |   | 13,174 |   |
| Cash and cash equivalents at  end of period                                                                                                                |   | $                                | 38,445 |   | $ | 54,636 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Supplemental  disclosures of cash flow information**                                                                                                     |   |                             |   |   |   |
| Cash paid during the period  for:                                                                                                                          |   |                             |   |   |   |
| Interest                                                                                                                                                   |   | $                                | 31     |   | $ | 203 |   |
| Income taxes paid (refunded), net                                                                                                                          |   | $                                | 2,393  |   | $ | 1,178 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Supplemental  disclosures of non-cash transactions**                                                                                                     |   |                             |   |   |   |
| Equipment acquired under  capital lease obligations and other financingarrangements                                                                        |   | $                                | 68     |   | $ | 1,633 |   |
| Assumed liabilities related to  business combinations                                                                                                      |   | $                                | — |   | $ | 2,951 |   |
| Class B common stock issued in  business combinations                                                                                                      |   | $                                | — |   | $ | 783 |   |
| Conversion of Class A common  stock to Class B common stock                                                                                                |   | $                                | — |   | $ | 98 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

5

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**TIER TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**NOTE1—BASIS OF PRESENTATION**

 

The accompanying condensed consolidated financialstatements of Tier Technologies, Inc. (‘‘Tier’’ or the ‘‘Company’’) include theaccounts of the Company and its wholly owned subsidiaries. All significantintercompany transactions and balances have been eliminated in consolidation.In the opinion of management, the condensed consolidated financial statementsreflect all normal and recurring adjustments which are necessary for a fairpresentation of the Company’s financial position, results of operations andcash flows as of the dates and for the periods presented. The condensedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information.Consequently, these statements do not include all the disclosures normallyrequired by generally accepted accounting principles for annual financialstatements nor those normally made in the Company’s Annual Report on Form 10-K.Accordingly, reference should be made to the Company’s Form 10-K filed onDecember 11, 2002 and other reports the Company has filed with the Securitiesand Exchange Commission for additional disclosures, including a summary of theCompany’s accounting policies, which have not materially changed. Theconsolidated results of operations for the three and six months ended March 31,2003 are not necessarily indicative of results that may be expected for thefiscal year ending September 30, 2003 or any future period, and the Companymakes no representations related thereto.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makecertain estimates and assumptions that affect the reported amounts of assetsand liabilities, disclosures of contingent assets and liabilities and theresults of operations during the reporting period. Actual results could differmaterially from those estimates.

 

Certain reclassifications have been made to the priorperiod financial statements to conform to the current period presentation.

 

**NOTE2—REVENUE RECOGNITION**

 

The Company derives netrevenues from transaction processing services, software development services,software license and maintenance fees, IT consulting and  professionalconsulting.  The Company generally billsclients on a per-transaction basis, a fixed price basis or a time and materialsbasis.  Net revenues fromtransaction-based contracts are generally recognized based on fees charged on aper-transaction basis or fees charged as a percentage of dollarsprocessed.  Net revenues pursuant toprofessional consulting services under fixed-fee contracts and time andmaterials contracts are generally recognized as services are performed. Netrevenues pursuant to software development fixed-fee contracts are generallyrecognized as services are rendered on the percentage-of-completion method ofaccounting (based on the ratio of costs incurred to total estimated projectcosts). Net revenues from software licenses that do not include significantimplementation or customization services are recognized upon delivery when thefees are fixed and determinable, collection is probable and vendor specificevidence exists to determine the value of any undeliverable elements of thearrangement. Net revenues from software maintenance contracts are recognizedratably over the term of the contract, typically one year.

 

Net revenues includereimbursements from clients for out-of-pocket expenses.  Reimbursement revenues for each periodpresented were less than 10% of total net revenues for the respective period.

 

Provisions for estimated losseson uncompleted contracts are recognized in the period such losses becomeprobable and can be reasonably estimated. To date, such losses have beeninsignificant. Most of the Company’s contracts are terminable by the clientfollowing limited notice and without significant penalty to the client. Thecompletion, cancellation or significant reduction in the scope of a largeproject would have a material adverse impact on the Company’s business,financial condition and results of operations.  For the three and six months ended March 31, 2003, revenue fromone client totaled approximately $3,344,000 and $6,579,000, respectively, whichrepresented 10.1% of total net revenues in each period.  For the three months ended March 31, 2002,revenues from two clients totaled approximately $3,030,000 and  $2,239,000, which represented 13.7% and10.1%, respectively, of total net revenues. For the six months ended March 31, 2002, revenues from three clientstotaled approximately $7,327,000, $4,967,000 and $4,953,000, which represented16.3%, 11.0% and 11.0%, respectively, of total net revenues.

 

6

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Unbilled receivables arise on a contract when thecumulative net revenue recognized exceeds the cumulative amount billed inaccordance with the contractual billing terms. Unbilled receivables were$20,149,000 and $16,475,000 at March 31, 2003 and September 30, 2002,respectively, of which approximately $19,538,000 and $15,258,000, respectively,related to contracts with governmental agencies.  Unbilled receivables for two clients accounted for 54.5% and16.6%, respectively, of total unbilled receivables at March 31, 2003.  Total accounts receivable, includingunbilled receivables, for these two clients accounted for 34.8% and 13.3%,respectively, of total net accounts receivable, including unbilled receivables,at March 31, 2003.  Unbilled receivablesfor two clients accounted for 40.2% and 25.4%, respectively, of total unbilledreceivables at September 30, 2002. Total accounts receivable, including unbilled receivables, for these twoclients accounted for 20.0% and 18.2%, respectively, of total net accountsreceivable, including unbilled receivables, at September 30, 2002.  Also included in accounts receivable andother assets at March 31, 2003, were approximately $1,182,000 representingbalances billed but not paid by customers under retainage provisions in thecontracts, of which approximately $514,000 is expected to be collected withinone year, $423,000 is expected to be collected within two years and $245,000 isexpected to be collected within three years. Included in accounts receivable at September 30, 2002, wereapproximately $925,000 of retainages, of which approximately $529,000 isexpected to be collected within one year and $396,000 is expected to be collectedwithin two years.

 

Net revenues derived from sales to governmentalagencies, including convenience fees earned by the Company’s subsidiary,Official Payments Corporation (“OPAY”), on payments made by citizens togovernment agencies, were approximately $59,256,000 and $34,977,000 for the sixmonths ended March 31, 2003 and 2002, respectively.

 

**NOTE3—LONG-TERM INVESTMENTS**

 

Investments with maturities greater than twelve monthsas of the balance sheet date are classified as long-term investments.  These long-term investments are categorizedby the Company as available-for-sale and are recorded at amounts thatapproximate fair value based on quoted market prices and are primarilycomprised of state and local municipalities’ debt readily traded on over-the-countermarkets.

 

Included in long-term investments at March 31, 2003and September 30, 2002 is approximately $7,706,000 that is pledged inconnection with performance bonds and real estate operating leases and will berestricted for the terms of the project performance periods and lease periods,the latest of which is estimated to be through May 2005.

 

**NOTE4—BANK LINES OF CREDIT**

 

At March 31, 2003, theCompany had a $15.0 million revolving credit facility, all of which may be usedfor letters of credit.  The creditfacility has a maturity date of January 31, 2005.  The credit facility is collateralized by first priority liens andsecurity interests in the Company’s assets. Interest is based on either the adjusted LIBOR rate plus 2.5% or thelender’s announced prime rate plus 0.25%, at the Company’s option, and ispayable monthly.  As of March 31, 2003,there were no outstanding borrowings or standby letters of credit.  Among other provisions, the credit facilityrequires the Company to maintain certain minimum financial ratios. As of March31, 2003, the Company was in compliance with all financial ratios.

 

At March 31, 2003, the Company also had a $2.5 millionnon-revolving line of credit for financing capital expenditures that may bedrawn upon until January 29, 2004. Principal payments must be made in 36 equal monthly payments commencingFebruary 29, 2004.  This credit facilityhas a maturity date of January 31, 2007. Interest is based on either the LIBOR rate plus 2.75% or the lender’sannounced prime rate plus 0.5%, at the Company’s option and is payablemonthly.  As of March 31, 2003, theCompany had no borrowings under this line of credit.

 

In addition to the creditfacilities noted above, the Company had letters of credit totalingapproximately $3,346,000, which were collateralized by certain securities inthe Company’s long-term investment portfolio at March 31, 2003.  Also, OPAY had a letter of creditoutstanding in the amount of approximately $138,000 secured by a certificate ofdeposit.  These letters of credit wereissued to secure performance bonds and to meet various facility leaserequirements.

 

7

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At March 31, 2003, theCompany’s Australian subsidiary had letters of credit outstanding totaling approximately$49,000 (based on the March 31, 2003 exchange rate of AU$1.67 to U.S.$1.00) tomeet certain facility lease requirements. These letters of credit were securedby term deposits with an Australian bank.

 

**NOTE5—GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS, NET**

 

In July 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets.”  As of October 1, 2002, the Company adoptedSFAS 142 and no longer amortizes goodwill. Under SFAS 142, the Company will evaluate goodwill for impairmentannually during the fourth quarter of its fiscal year, or more frequently ifimpairment indicators arise. Identifiable intangible assets that have finite lives will continue tobe amortized over their estimated useful lives.

 

The Company completedinitial impairment tests in accordance with SFAS 142 in the first quarter offiscal year 2003.  Results of theinitial impairment tests did not indicate any impairment loss.  Impairment tests involve the use ofestimates related to the fair market values of the business operations withwhich goodwill is associated.  Losses,if any, resulting from the annual impairment tests will be reflected inoperating income in the statement of operations.

 

Goodwill and other acquiredintangible assets, net, consisted of the following at March 31, 2003 and September 30, 2002:

 
|                                  |   | **March 31,  2003** |   | **September 30,  2002** |   |
|---------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                  |   | **(in thousands)**  |   |
| Client Relationships                  |   | $                   | 24,400 |                    | $      | 24,400 |   |
| Trademarks                            |   | 3,200               |   | 3,200                   |   |
| Technology                            |   | 740                 |   | 740                     |   |
| Acquired contracts                    |   | 500                 |   | 500                     |   |
| Non-compete agreements                |   | 150                 |   | 150                     |   |
| Total accumulated amortization        |   | (2,558              | )      | (789                    | )      |
| Other acquired intangible assets, net |   | 26,432              |   | 28,201                  |   |
| Goodwill                              |   | 47,648              |   | 47,917                  |   |
| Total                                 |   | $                   | 74,080 |                    | $      | 76,118 |   |

 

The changes in the carryingamount of goodwill for the six months ended March 31, 2003 are as follows (in thousands):

 
|                             |   | **U.S.  Commercial Services** |   | **U.S.****Government Services** |   | **Official****Payments** |   | **United****Kingdom Operations** |   | **Total** |   |
|----------------------------------|--------|-------------------------------|--------|---------------------------------|--------|--------------------------|--------|----------------------------------|--------|-----------|--------|
| Balance as of September 30, 2002 |   | $                             | 17,924 |                            | $      | 15,110                   |   | $                                | 14,845 |      | $      | 38 |   | $ | 47,917 |   |
| Goodwill activity                |   | —                        |   | (215                            | )      | (54                      | )      | —                           |   | (269      | )      |
| Balance as of March 31,  2003    |   | $                             | 17,924 |                            | $      | 14,895                   |   | $                                | 14,791 |      | $      | 38 |   | $ | 47,648 |   |

 

8

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Had the Company beenaccounting for goodwill under SFAS 142 for the three and six months ended March31, 2002, the Company’s net loss andloss per share would have been as follows:

 
|                                       |   | **Three  Months Ended  March 31, 2002**   |    | **Six  Months  Ended  March 31, 2002** |   |
|--------------------------------------------|--------|-------------------------------------------|---------|---------------------------------------------|--------|
|                                       |   | **(in thousands, except per share data)** |    |
|                                       |   |                                      |    |                                        |   |
| Reported net loss                          |   | $                                         | (13,909 | )                                           | $      | (12,711 | ) |
| Add back goodwill amortization, net of tax |   | 572                                       |    | 1,144                                       |   |
| Adjusted net income                        |   | $                                         | (13,337 | )                                           | $      | (11,567 | ) |
|                                       |   |                                      |    |                                        |   |
| Loss per basic share:                      |   |                                      |    |                                        |   |
| As reported                                |   | $                                         | (0.77   | )                                           | $      | (0.80 | ) |
| Goodwill amortization, net of tax          |   | 0.03                                      |    | 0.07                                        |   |
| Adjusted loss per basic share              |   | $                                         | (0.74   | )                                           | $      | (0.73 | ) |
|                                       |   |                                      |    |                                        |   |
| Loss per diluted share:                    |   |                                      |    |                                        |   |
| As reported                                |   | $                                         | (0.72   | )                                           | $      | (0.74 | ) |
| Goodwill amortization, net of tax          |   | 0.03                                      |    | 0.07                                        |   |
| Adjusted loss per diluted share            |   | $                                         | (0.69   | )                                           | $      | (0.67 | ) |

 

**NOTE 6 — SHAREHOLDERS’ EQUITY**

 

**Common Stock Repurchase Program**

 

Duringthe six months ended March 31, 2003, the Company repurchased 568,000 shares ofClass B common stock at a total cost of approximately $6.7 million.  These repurchases were made under the CommonStock Repurchase Program authorized by the Board of Directors.  As of March 31, 2003, a total ofapproximately 884,000 shares had been repurchased under this program at a totalcost of approximately $8.7 million.

 

**Pro Forma Impact of Employee Stock Options**

 

In December 2002, the FASB issued Statement ofFinancial Accounting Standards No. 148 (“SFAS 148”), “Accounting forStock-Based Compensation – Transition and Disclosure” – an amendment ofStatement of Financial Accounting Standards No. 123 (“SFAS 123”) “Accountingfor Stock-Based Compensation.”  SFAS 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require prominent disclosure in both annual andinterim financial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results.

 

9

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The Company elected to account for its employee stockoptions under Accounting Principles Board Opinion No. 25 (“APB 25”),“Accounting for Stock Issued to Employees.” No compensation expense was recognized for options granted under theCompany’s employee stock option plan in all periods presented.  Had compensation cost for the Company’semployee stock option plan been determined based on fair value at the grantdate consistent with SFAS 123, the Company’s net income (loss) and earnings(loss) per share would have been reduced to the pro forma amounts indicatedbelow:

 
|                                                                                     |   | **Three  Months Ended  March 31,**               |   | **Six Months  Ended  March 31,** |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------|--------|
|                                                                                     |   | **2003**                                         |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                                     |   | **(in thousands,   except per share data)** |   |
| Net income (loss), as reported                                                           |   | $                                                | 1,581  |                             | $      | (13,909 | ) | $ | 3,305 |   | $ | (12,711 | ) |
| Deduct:  Pro forma employee compensation cost  related to stock options, net of tax |   | (691                                             | )      | (954                             | )      | (1,598 | ) | (1,714 | ) |
| Pro forma net  income (loss)                                                             |   | $                                                | 890    |                             | $      | (14,863 | ) | $ | 1,707 |   | $ | (14,425 | ) |
|                                                                                     |   |                                             |   |                             |   |   |   |   |   |
| Net income  (loss) per basic share:                                                      |   |                                             |   |                             |   |   |   |   |   |
| As reported                                                                              |   | $                                                | 0.08   |                             | $      | (0.77 | ) | $ | 0.17 |   | $ | (0.80 | ) |
| Pro forma                                                                                |   | $                                                | 0.05   |                             | $      | (0.82 | ) | $ | 0.09 |   | $ | (0.91 | ) |
|                                                                                     |   |                                             |   |                             |   |   |   |   |   |
| Net income  (loss) per diluted share:                                                    |   |                                             |   |                             |   |   |   |   |   |
| As reported                                                                              |   | $                                                | 0.08   |                             | $      | (0.72 | ) | $ | 0.17 |   | $ | (0.74 | ) |
| Pro forma                                                                                |   | $                                                | 0.05   |                             | $      | (0.79 | ) | $ | 0.09 |   | $ | (0.86 | ) |

 

10

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**NOTE 7 —  INCOME(LOSS) PER SHARE**

 

Thefollowing table sets forth the computation of basic and diluted income (loss)per share:

 
|                                                                                                             |   | **Three Months Ended****March 31,**              |       | **Six Months Ended****March 31,** |       |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|-----------------------------------|------------|
|                                                                                                             |   | **2003**                                         |       | **2002**                          |       | **2003** |   | **2002** |   |
|                                                                                                             |   | **(in  thousands,  except per share data)** |       |
| Numerator:                                                                                                       |   |                                             | ** ** |                              | ** ** |   | ** ** |   | ** ** |
| Income from continuing operations, net of  income taxes                                                          |   | $                                                | 1,581      |                              | $          | 2,191 |   | $ | 3,305 |   | $ | 3,647 |   |
| Loss from discontinued operation, net of  income taxes                                                      |   | —                                           |       | (16,100                           | )          | — |   | (16,358 | ) |
| Net income (loss)                                                                                                |   | $                                                | 1,581      |                              | $          | (13,909 | ) | $ | 3,305 |   | $ | (12,711 | ) |
| Denominator for basic income (loss) per share-weighted average  common shares outstanding.                       |   | 18,834                                           |       | 18,050                            |       | 18,944 |   | 15,865 |   |
| Effects of dilutive securities:                                                                                  |   |                                             |       |                              |       |   |   |   |   |
| Common stock options                                                                                             |   | 521                                              |       | 1,255                             |       | 636 |   | 1,320 |   |
| Contingently issuable shares                                                                                     |   | —                                           |       | 32                                |       | — |   | 46 |   |
| Denominator for diluted income (loss) per share-adjusted weighted  average common shares and assumed conversions |   | 19,355                                           |       | 19,337                            |       | 19,580 |   | 17,231 |   |
| Income from continuing operations, net of income taxes:                                                          |   |                                             |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                                | 0.08       |                              | $          | 0.12 |   | $ | 0.17 |   | $ | 0.23 |   |
| Per diluted share                                                                                                |   | $                                                | 0.08       |                              | $          | 0.11 |   | $ | 0.17 |   | $ | 0.21 |   |
| Loss from discontinued operation, net of income taxes:                                                           |   |                                             |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                                | —     |                              | $          | (0.89 | ) | $ | — |   | $ | (1.03 | ) |
| Per diluted share                                                                                                |   | $                                                | —     |                              | $          | (0.83 | ) | $ | — |   | $ | (0.95 | ) |
| Net income (loss):                                                                                               |   |                                             |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                                | 0.08       |                              | $          | (0.77 | ) | $ | 0.17 |   | $ | (0.80 | ) |
| Per diluted share                                                                                                |   | $                                                | 0.08       |                              | $          | (0.72 | ) | $ | 0.17 |   | $ | (0.74 | ) |

 

For the three and six months ended March 31, 2003,options to purchase approximately 1,373,000 and 995,000 shares of Class Bcommon stock, respectively, at prices ranging from $13.75 to $20.70 per shareand $15.19 to $20.70 per share, respectively, were outstanding but were notincluded in the computation of diluted income per share because the options’exercise prices were greater than the average market price of the shares forthese periods.  For the three and sixmonths ended March 31, 2002, options to purchase approximately 89,000 and117,000 shares of Class B common stock, respectively, at prices ranging from$17.75 to $20.70 per share and $19.56 to $20.70 per share, respectively, wereoutstanding but were not included in the computation of diluted income (loss)per share because the options’ exercise prices were greater than the averagemarket price of the shares for this period.

 

11

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**NOTE8—COMPREHENSIVE INCOME (LOSS)**

 

The Company’scomprehensive income (loss) was as follows: 

 
|                                                             |   | **Three  Months Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                             |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                             |   | **(in thousands)**                 |   |
| Net income(loss)                                                 |   | $                                  | 1,581  |                             | $      | (13,909 | ) | $ | 3,305 |   | $ | (12,711 | ) |
| Net change in  unrealized gain on available-for-sale investments |   | (32                                | )      | —                           |   | 16 |   | — |   |
| Foreign currency  translation adjustments                        |   | (46                                | )      | 312                              |   | (136 | ) | 844 |   |
| Comprehensive  income (loss)                                     |   | $                                  | 1,503  |                             | $      | (13,597 | ) | $ | 3,185 |   | $ | (11,867 | ) |

 

**NOTE9—SEGMENT INFORMATION**

 

The Company is managed through four reportablesegments: U.S. Commercial Services, U.S. Government Services, Official Paymentsand United Kingdom Operations.  TheCompany evaluates the performance of its operating segments based on netrevenue and gross profit (net revenue less direct costs), while other operatingcosts are evaluated on a geographical basis. Accordingly, the Company does not include selling and marketingexpenses, general and administrative expenses, depreciation and amortizationexpense not attributable to state child support  payment processing centers, interest income (expense), otherincome (expense) and income tax expense in segment profitability.  The table below presents financialinformation for the four reportable segments:

 
|                                   |   | **U.S.  Commercial  Services** |   | **U.S.  Government   Services** |   | **Official  Payments** |   | **United  Kingdom  Operations** |   | **Total** |   |
|----------------------------------------|--------|--------------------------------|--------|---------------------------------|--------|------------------------|--------|---------------------------------|--------|-----------|--------|
|                                   |   | **(in  thousands)**            |   |
| **Three Months Ended March 31, 2003:** |   |                           |   |                            |   |                   |   |                            |   |      |   |
| Net revenues                           |   | $                              | 2,567  |                            | $      | 23,588                 |   | $                               | 6,577  |      | $      | 496 |   | $ | 33,228 |   |
| Gross profit                           |   | 992                            |   | 8,300                           |   | 2,055                  |   | 104                             |   | 11,451    |   |
|                                   |   |                           |   |                            |   |                   |   |                            |   |      |   |
| **Three Months Ended March 31, 2002:** |   |                           |   |                            |   |                   |   |                            |   |      |   |
| Net revenues                           |   | $                              | 4,723  |                            | $      | 16,546                 |   | $                               | — |      | $      | 795 |   | $ | 22,064 |   |
| Gross Profit                           |   | 2,417                          |   | 6,549                           |   | —                 |   | 268                             |   | 9,234     |   |
|                                   |   |                           |   |                            |   |                   |   |                            |   |      |   |
| **Six  Months Ended March 31, 2003:**  |   |                           |   |                            |   |                   |   |                            |   |      |   |
| Net revenues                           |   | $                              | 5,110  |                            | $      | 46,554                 |   | $                               | 12,702 |      | $      | 1,057 |   | $ | 65,423 |   |
| Gross profit                           |   | 2,289                          |   | 16,405                          |   | 4,209                  |   | 427                             |   | 23,330    |   |
|                                   |   |                           |   |                            |   |                   |   |                            |   |      |   |
| **Six  Months Ended March 31, 2002:**  |   |                           |   |                            |   |                   |   |                            |   |      |   |
| Net revenues                           |   | $                              | 9,567  |                            | $      | 34,187                 |   | $                               | — |      | $      | 1,320 |   | $ | 45,074 |   |
| Gross profit                           |   | 4,627                          |   | 13,193                          |   | —                 |   | 433                             |   | 18,253    |   |

 

**NOTE10—NEW ACCOUNTING PRONOUNCEMENTS**

 

In November 2002,the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness to Others.” FIN 45 elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder the guarantees it has issued. The disclosure requirements are effectivefor financial statements of interim or annual periods ending after December 15,2002. These disclosure provisions require a guarantor to disclose certain typesof guarantees, even if the likelihood of requiring the guarantor’s performanceis remote. The following is a description of arrangements which the Company iscurrently required to disclose in accordance with FIN 45.

 

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The Company has various agreements in which it may be obligated toindemnify the other party with respect to certain matters.  Generally, these indemnification clauses areincluded in contracts arising in the normal course of business under which theCompany customarily agrees to hold the other party harmless against losses arisingfrom a breach of representations related to such matters as title to assetssold and licensed or certain intellectual property rights.  Payment by the Company under suchindemnification clauses is generally conditioned on the other party making aclaim that is subject to challenge by the Company and dispute resolutionprocedures specified in the particular contract.  Further, the Company’s obligations under these agreements may belimited in terms of time and/or amount, and in some instances, the Company mayhave recourse against third parties for certain payments made by theCompany.  It is not possible to predictthe maximum potential amount of future payments under these indemnificationagreements due to the conditional nature of the Company’s obligations and theunique facts of each particular agreement. Historically, payments made by the Company under these agreements havenot been material.  As of March 31,2003, management was not aware of any indemnification agreements that wouldrequire material payments.

 

As disclosed in Note 8 to the consolidated financial statements for thefiscal year ended September 30, 2002, the Company may be required to makecontingent payments related to the achievement of future performance targets bycertain acquisitions.  As of March 31,2003, contingent payments of approximately $8.3 million may be made over thenext 26 months upon the achievement of certain performance targets.  These amounts are not included inliabilities at March 31, 2003.  If it isdetermined that these contingent payments are earned in the future, the Companywill record the liability at that time.

 

FIN 45 alsorequires that a guarantor recognize a liability at the inception of certainguarantees. The initial recognition and measurement provisions of FIN 45 areapplicable to guarantees issued or modified after December 31, 2002. Theadoption of the initial recognition and measurement provisions of FIN 45 didnot have a material effect on the Company’s financial statements.

 

In January 2003, the FASBissued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities.” An entity is subject to the consolidation rules of FIN 46 and isreferred to as a variable interest entity (“VIE”) if the entity’s equityinvestors lack the characteristics of a controlling financial interest or donot have sufficient equity at risk for the entity to finance its operationswithout additional subordinated financial support. FIN 46 applies immediatelyto VIEs created after January 31, 2003. For VIEs created prior to February 1,2003, the Company is required to apply the provisions beginning July 1, 2003.Additionally, FIN 46 requires disclosure of VIEs in financial statements issuedafter January 31, 2003 if it is reasonably possible that as of the transitiondate: 1) the enterprise will be the primary beneficiary of an existing VIE thatwill require consolidation or 2) the enterprise will hold a significantvariable interest in, or have significant involvement with, an existing VIE.The Company does not currently have any VIEs that it will need to consolidateor disclose.

 

**NOTE11—RECENT ACCOUNTING PRONOUNCEMENTS**

 

InNovember 2002, the Emerging Issues Task Force issued a final consensus on Issue00-21:  “Accounting for RevenueArrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how and when to recognize revenues onarrangements requiring delivery of more than one product or service.  Issue 00-21 is effective prospectively forarrangements entered into in fiscal periods beginning after June 15, 2003.  Companies may also elect to apply theprovisions of Issue 00-21 to existing arrangements and record the incomestatement impact as the cumulative effect of a change in accounting principle.  The Company is evaluating Issue 00-21 todetermine the impact on its results of operations.

 

**NOTE 12—SUBSEQUENT EVENTS**

* *

*CommonStock Repurchase Program*

In April 2003, the Boardincreased the number of shares authorized for repurchase under the Company'sCommon Stock Repurchase Program to a total of 2.0 million.   As a result of this increase, the Companyis authorized to repurchase up to approximately 1.1 million additional sharesunder this program.

* *

*Legal Proceedings*

On May 8, 2003, theCompany received a notice of demand for arbitration in connection with adispute over payments related to an acquisition.  The claim is for not less than $700,000 plus interest, attorneys'fees and associated costs.  As of thisfiling, the Company had not evaluated the merits, if any, of the claim.

 

 

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I**TEM2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**PrivateSecurities Litigation Reform Act Safe Harbor Statement**

 

Certain statements contained in this report, includingstatements regarding the development of and demand for our services and ourmarkets and other statements that are not historical facts, are forward-lookingstatements within the meaning of the federal securities laws. Theseforward-looking statements relate to future events or our future financialand/or operating performance and can generally be identified as such becausethe context of the statement will include words such as “may”, “will”,“intends”, “plans”, “believes”, “anticipates”, “expects”, “estimates”, “shows”,“predicts”, “potential”, “continue”, or “opportunity”, the negative of thesewords or words of similar import. These forward-looking statements aresubject to risks and uncertainties, including the risks and uncertaintiesdescribed and referred to under “Factors That May Affect Future Results”beginning on page 23, that could cause actual results to differ materially fromthose anticipated as of the date of this report.

 

**Overview**

 

We are a vertically focused provider of end-to-endbusiness solutions to public sector, national and multinational clients. We formulate, evaluate and implement solutionsthat allow clients to rapidly channel emerging technologies into their businessoperations. We combine our understanding of enterprise-wide systems with domainknowledge in four primary vertical markets—government, healthcare, insuranceand utilities. We focus on markets that are driven by forces that create demandfor our services and are anticipated to provide us with recurring long-termrevenue streams. Our net revenues increased to $65.4 million in the sixmonths ended March 31, 2003 from $45.1 million in the six months ended March31, 2002. A significant portion of our net revenue is derived from sales togovernment agencies. For the six months ended March 31, 2003, approximately90.6% of our net revenues were derived from sales to government agencies,including convenience fees earned by the Company’s subsidiary, OfficialPayments Corporation (“OPAY”), on payments made by citizens to government agencies,as compared to 77.6% for the six months ended March 31, 2002. Excluding ourAustralian discontinued operation, our workforce, composed of employees,independent contractors and subcontractors, increased to 800 on March 31, 2003from 724 on March 31, 2002.

 

We derive net revenues primarilyfrom transaction processing services, software development services, softwarelicense and maintenance fees, IT consulting and professional consulting.  We bill clients on a per-transaction basis,a fixed price basis or a time and materials basis.  We recognize net revenues from transaction-based contracts basedon fees charged on a per-transaction basis or fees charged as a percentage ofdollars processed.  We recognize fixedprice net revenues for software development, implementation, and customizationusing the percentage-of-completion method, based upon the ratio of costsincurred to total estimated project costs. We recognize net revenues fromsoftware licenses that do not include significant implementation or customizationservices upon delivery to the licensee when the fees are fixed anddeterminable, collection is probable and vendor specific evidence exists todetermine the value of any undelivered elements of the arrangement. Werecognize time and materials net revenues and professional consulting servicesunder fixed fee arrangements as we perform services and incur expenses. Werecognize revenues from software maintenance contracts ratably over the term ofthe contract, typically one year. The percentage of our net revenuesgenerated on a fixed price basis was 35.1% for the six months ended March 31,2003 and 50.4% for the six months ended March 31, 2002. The percentage of ournet revenues generated on a per-transaction basis was 45.9% for the six monthsended March 31, 2003 and 33.3% for the six months ended March 31, 2002.  We believe that the percentage of total netrevenues attributable to fixed price and per-transaction based contracts willcontinue to be significant. Substantially all of our contracts are terminable by the clientfollowing limited notice and without significant penalty to the client. Fromtime to time, in the regular course of our business, we negotiate themodification, termination, renewal or transition of time and materials, fixedprice and per-transaction based contracts that may involve an adjustment to thescope, duration or nature of the project, billing rates or price.  If we significantly overestimate the volumefor transaction-based contracts or underestimate the resources, costs or timerequired for fixed price or per-transaction based contracts, our financialcondition and results of operations would be materially and adverselyaffected.  Unsatisfactory performance ofservices or proprietary software, or unanticipated difficulties or delays incompleting projects may result in client dissatisfaction and a reduction inpayment to us, termination of a contract, or payment of damages or penalties byus as a result of litigation or otherwise, which could have a material adverseeffect upon our business, financial condition and results of operations.

 

We have derived a significant portion of our netrevenues from a small number of large clients. For some of these clients, weperform a number of different projects pursuant to multiple contracts orpurchase orders. For the six months ended March 31, 2003, the California PublicEmployees’ Retirement System (“CalPERS”) accounted for 10.1% of our netrevenues.  We anticipate that asubstantial portion of our net revenues will continue to be derived

 

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from a small number of large clients. The completion, cancellation orsignificant reduction in the scope of a large project would have a materialadverse effect on our business, financial condition and results of operations.

 

As our clients face pressure to control costs undercontinuing uncertain economic and political conditions, we face increasingpricing pressures. We continue to see clients reduce or defer theirexpenditures or defer the start of work already contracted.  Some of our competitors are capable ofoperating at significant losses for extended periods of time, increasingpricing pressure on our products and services.

 

Personnel, facility and depreciation and amortizationexpenses represent a significant percentage of our operating expenses and arerelatively fixed in advance of any particular quarter. We manage our personnelutilization rates by carefully monitoring our needs and anticipating personnelincreases based on specific project requirements. To the extent net revenues donot increase at a rate commensurate with these additional expenses, our resultsof operations could be materially and adversely affected. In addition, to theextent that we are unable to hire and retain salaried employees to staff new orexisting client engagements or retain hourly employees or  contractors, our business, financialcondition and results of operations would be materially and adversely affected.

 

From December 1996 through March 31, 2003, we made 19acquisitions for a total cost of approximately $140.6 million using cash,shares of Class B common stock and debt. We also incurred $2.9 million incumulative compensation charges related to business combinations and $1.0million in cumulative business combination integration charges resulting fromthese acquisitions. Generally, we record contingent payments as additionalgoodwill at the time the payment can be determined beyond a reasonable doubt.If a contingent payment is based, in part, on a seller’s continuing employmentwith us, the payments are recorded as compensation expense under U.S. generallyaccepted accounting principles over the vesting period when the amount isdeemed probable.  Business combinationintegration costs are comprised of transitional salaries and benefits, travel,consulting and allocated facility costs related to the acquisition of OPAY andare expensed as incurred.  Theseacquisitions helped us to expand our operations, to broaden our client base,delivery offerings and technical expertise and to supplement our humanresources.

 

International operations, primarily from Europeancontracts, accounted for 1.6% of our net revenues for the six months endedMarch 31, 2003 and 2.9% for the six months ended March 31, 2002, excluding ourAustralian discontinued operation. We believe that the percentage of total netrevenues attributable to international operations will be insignificant due tothe sale of substantially all of the assets of our Australian operation inSeptember 2002. International operations subject us to foreign currencytranslation adjustments and transaction gains and losses for amountsdenominated in foreign currencies.

 

# **Critical Accounting Policies and Estimates**

 

The discussion and analysis of our financial conditionand results of operations are based upon consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectour reported assets, liabilities, net revenues and expenses, and our relateddisclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including thoserelated to revenue recognition, cost of revenues, collectibility ofreceivables, goodwill and intangible assets, income taxes, restructuringobligations and discontinued operations. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances.  Such experience and assumptions form thebasis of judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under different assumptionsor conditions.

 

We believe the following critical accounting policiesand the related judgments and estimates significantly affect the preparation ofour consolidated financial statements:

 

*Basisof Presentation*. During the quarter ended March 31, 2002, we adopted a plan to sell ourAustralian operations, and in September 2002, we completed the sale. TheAustralian operations are accounted for as a discontinued operation, and,accordingly, amounts in the consolidated financial statements and related notesfor all periods presented reflect discontinued operation accounting.

 

*RevenueRecognition.*  Certainjudgments affect the application of our revenue recognition policy.   Net revenues from transaction-basedcontracts are generally recognized based on fees charged on a per-transactionbasis or fees charged as a percentage of total dollars processed.  We establish the per-transaction fee ortransaction fee percentage in our clients’ contracts based on estimated  future costs and the estimate of transactionvolume over the life of the contract. Any significant variance from the estimated number of transactions oraverage transaction

 

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dollars processed could significantly impact the resulting grossprofit.  Net revenues from fixed pricesoftware development, implementation and customization contracts are generallyrecognized using the percentage-of-completion method of accounting based uponthe ratio of costs incurred to total estimated project costs.  The total estimated cost is calculated basedon historical experience.  Anysignificant changes in total estimated costs could significantly impact therecognition of net revenue.  Netrevenues from professional consulting services under fixed price contracts arerecognized as services are provided. Any significant difference between the timing of revenues recognized andcosts incurred has a significant impact on the gross profit.  For OPAY’s electronic credit card paymenttransactions, we estimate sales returns and allowances attributable to creditcard reversals and chargebacks in determining net revenues. The amount andtiming of our net revenue is difficult to predict, and any shortfall in netrevenue or delay in recognizing net revenue could cause our operating resultsto vary significantly from quarter to quarter and could result in futureoperating losses.

 

Revenue recognition rules for software contracts arevery complex.  Software license netrevenue is recognized when there is persuasive evidence of an arrangement, thefee is fixed or determinable, collectibility is probable and delivery to theclient has occurred, provided the arrangement does not require significantimplementation or customization of the software.  When significant implementation or customization services areincluded, software license net revenue is recognized on thepercentage-of-completion method of accounting. Net revenues from software maintenance contracts are recognized ratablyover the term of the contract, typically one year.  Implementation services are periodically performed under fixed-feearrangements and, in such cases, net revenues are recognized on apercentage-of-completion basis.

 

Generally our government contracts are subject to“fiscal funding” clauses, which entitle the client, in the event of budgetaryconstraints, to reduce or eliminate the services we are to provide, with acorresponding reduction in the fee the client must pay.  Net revenues are recognized under  such contracts only when we consider thelikelihood of cancellation of funding to be remote.

 

*Cost ofRevenues and Transaction Volume Estimates.*  We establish the per-transaction fee ortransaction fee percentage in our client contracts based on estimated futurecosts and estimated transaction volume over the life of the contract.  Included in our cost estimates for certainchild support payment processing contracts are estimates regarding misappliedpayments and payments that are rejected due to insufficient funds to the extentwe are to bear these costs. Any significant variance from our estimates couldsignificantly impact our gross profit and gross profit margin.  We recognize fixed price net revenues forsoftware development, implementation and customization projects using thepercentage-of-completion method, based upon the ratio of costs incurred tototal estimated project costs.  Anysignificant changes in total project costs could significantly affect our grossprofit and gross profit margin.

 

*Collectibilityof Receivables.*  Aconsiderable amount of judgment is required to assess the ultimate realizationof receivables, including assessing the probability of collection and thecurrent credit worthiness of our clients. Probability of collection is based upon the assessment of the client’sfinancial condition through the review of its current financial statements orcredit reports.  For follow-on sales toexisting clients, prior payment history is also used to evaluate probability ofcollection. We maintain an allowance for doubtful accounts for accountsreceivable balances and a sales return and allowance provision for reversalsand chargebacks from consumers who use our credit card payment services. Wehave not experienced significant credit losses historically, except for thewrite-off of approximately $2,020,000 due to a contract dispute during thefiscal year ended September 30, 1999. However, there is no assurance that we will not need to record increasesto these balances in the future.  Wehave several large accounts receivable and unbilled receivable balances, andany dispute, early contract termination or other collection issues could have amaterial adverse impact on our financial condition and results of operations.

 

We are currently pursuing legal action against aformer client for which we have received a court judgment.  The total outstanding receivable isapproximately $709,000.  We believe wehave adequate reserves against this balance. If we were to be unsuccessful in collecting on this judgment, thewrite-off of this receivable could have a material adverse impact on ourresults of operations.

 

*Goodwilland Other Intangible Assets.* Consideration paid in connection with acquisitions is required to beallocated to the acquired assets, including identifiable intangible assets, andliabilities acquired.  Acquired assetsand liabilities are recorded based on our estimate of fair value, whichrequires significant judgment with respect to future cash flows and discountrates.  For intangible assets, we arerequired to estimate the useful life of the asset and recognize its cost as anexpense over the useful life.  Weregularly evaluate acquired businesses for potential indicators of impairmentof goodwill and other intangible assets. Our judgments regarding the existence of

 

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impairment indicators are based on market conditions, operationalperformance of our acquired businesses and identification of reportingunits.  Future events could cause us toconclude that impairment indicators exist and that goodwill and otherintangible assets associated with our acquired businesses are impaired.  Beginning October 1, 2002, we adoptedStatement of Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and OtherIntangible Assets.”  Accordingly, ourgoodwill and other intangible assets that have an indefinite useful life are nolonger amortized but instead are reviewed at least annually forimpairment.  During the quarter endedDecember 31, 2002, we completed the initial impairment test and the results didnot indicate any impairment loss. Impairment tests involve the use of estimates related to the fair marketvalue of the business operations with which goodwill is associated.  If we do not meet our long-term forecasts,or if the trading price of our common stock does not sufficiently improve, wecould be required to record impairment charges related to goodwill and otherintangible assets, which could adversely affect our financial results.  In the fourth quarter of fiscal year 2003,we will perform our annual impairment test to determine if goodwill associatedwith our segments is impaired. Any resulting impairment loss could have amaterial adverse impact on our financial condition and results of operations.

 

*IncomeTaxes.*  We arerequired to estimate our income taxes in each of the jurisdictions in which weoperate as part of the process of preparing our consolidated financialstatements.  This process involves usestimating our actual current tax liability including assessing temporarydifferences resulting from differing tax treatment of items, such as thedifference in amortizable lives for intangible assets for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities.  Wemust then assess the likelihood that our net deferred tax assets will berecovered from future taxable income and, to the extent we believe thatrecovery is not likely, we must establish a valuation allowance.

 

*Determinationof Restructuring Obligations*.  As a result of our acquisition of OPAY, we assumed certainliabilities for restructuring costs that OPAY had previously recognized inconnection with the involuntary termination of employees and the consolidationof facilities.  The restructuring liability for involuntary terminationsconsists of compensation and benefits costs incurred under severanceagreements.  To the extent thatemployees scheduled for involuntarily termination are in fact retained, orseverance agreements are modified, adjustments to the established restructuringliability may be required.  Therestructuring liability for consolidation of facilities is the estimated netobligation payable on office facilities scheduled for abandonment.  The estimated net obligation includes thegross obligation payable under existing lease agreements through estimateddisposition dates, estimated costs of abandonment or lease transfer, as offsetby estimated sublease income.  To the extent we are unable to sublease orotherwise dispose of the facilities on the dates estimated, or the estimatedsublease income or estimated costs differ from our estimates, the restructuringliability may require adjustment.

 

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**Resultsof Operations**

 

The following table summarizes our operating results as a percentage ofnet revenues for each of the periods indicated: 

 
|                                                    |   | **Three  Months Ended  March 31,** |       | **Six Months  Ended  March 31,** |       |
|---------------------------------------------------------|--------|------------------------------------|------------|----------------------------------|------------|
|                                                    |   | **2003**                           |       | **2002**                         |       | **2003** |   | **2002** |   |
|                                                    |   |                               | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Net revenues                                            |   | 100.0                              | %          | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                        |   | 65.5                               |       | 58.1                             |       | 64.3 |   | 59.5 |   |
| Gross profit                                            |   | 34.5                               |       | 41.9                             |       | 35.7 |   | 40.5 |   |
| Costs and  expenses:                                    |   |                               |       |                             |       |   |   |   |   |
| Selling and  marketing                                  |   | 5.6                                |       | 5.9                              |       | 5.8 |   | 5.9 |   |
| General and  administrative                             |   | 16.9                               |       | 16.5                             |       | 17.5 |   | 17.2 |   |
| Business  combination integration                       |   | 0.8                                |       | —                           |       | 1.0 |   | — |   |
| Depreciation and  amortization                          |   | 4.3                                |       | 6.1                              |       | 4.3 |   | 6.0 |   |
| Income from  continuing operations                      |   | 6.9                                |       | 13.4                             |       | 7.1 |   | 11.4 |   |
| Interest income  (expense), net                         |   | 0.9                                |       | 2.4                              |       | 1.1 |   | 1.4 |   |
| Income from  continuing operations before income taxes  |   | 7.8                                |       | 15.8                             |       | 8.2 |   | 12.8 |   |
| Provision for  income taxes                             |   | 3.0                                |       | 5.9                              |       | 3.1 |   | 4.7 |   |
| Income from  continuing operations, net of income taxes |   | 4.8                                | %          | 9.9                              | %          | 5.1 | % | 8.1 | % |

 

**ThreeMonths Ended March 31, 2003 and March 31, 2002**

 

*NetRevenues.*  We generatenet revenues primarily by providing transaction processing services, softwaredevelopment services and professional consulting on client engagements and fromsoftware license and maintenance fees. For OPAY’s electronic credit cardpayment transactions, we estimate sales returns and allowances attributable tocredit card reversals and chargebacks in determining net revenues. Net revenuesincreased 50.6% to $33.2 million for the three months ended March 31, 2003 from$22.1 million in the three months ended March 31, 2002. This increase resultedprimarily from an increase in U.S. Government Services net revenues ofapproximately $7.0 million and net revenues of approximately $6.6 millionattributable to OPAY, which was acquired in late July 2002, partially offset bya decrease in U.S. Commercial Services net revenues of approximately $2.2million.  The increase in net revenuesfrom U.S. Government Services operations resulted primarily from the new publicpension software systems projects, new child support payment processingcontracts under our agreement with ACS State and Local Solutions, Inc. and theacquisition of certain assets of the Government Solutions Center (“GSC”) ofKPMG Consulting, Inc. (now BearingPoint, Inc.) in March 2002.  The decrease in net revenues from U.S.Commercial Services operations resulted primarily from the completion ofseveral large projects in prior periods and the general weakness in the U.S.Commercial Services sector.

 

Net revenues include reimbursements from clients forout-of-pocket expenses.  Reimbursementrevenues for each period represented were less than 10% of total net revenuesfor the respective period.  We expectreimbursement revenues to increase in absolute dollars in future periodsprimarily due to new contracts and anticipated future contracts primarily inour child support payment processing operations.

 

*GrossProfit.*   Gross profitrepresents net revenues less cost of revenues. Cost of revenues consists primarily of those costs directly attributableto providing service to a client, including employee salaries and incentivecompensation, independent contractor and subcontractor costs, credit carddiscount fees,  employee benefits,payroll taxes, travel-related expenditures, amortization of certainintellectual property and costs of project-related equipment, hardware orsoftware purchases. For state child support payment processing centeroperations, cost of revenues also includes facility, depreciation andamortization expenses and direct overhead costs.  Cost of revenues includes $623,000 of depreciation and amortizationfor the three months ended March 31, 2003 and $539,000 for the three monthsended March 31, 2002.  Gross profitincreased 24.0% to $11.5 million for the three months ended March 31, 2003 from$9.2 million for the three months ended March 31, 2002. Gross profit margindecreased to 34.5% for the three months ended March 31, 2003 from 41.9% for thethree months ended March 31, 2002. This decrease resulted primarily from theaddition of OPAY’s net revenues in the current fiscal year, and an increase innet revenues from U.S. Government operations, both of which historically havehad lower gross profit margins than 

 

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our average gross profit margin, and a decrease in the percentage ofour net revenues derived from U.S. Commercial Services operations, which hashistorically had higher gross profit marginsthan our average gross profit margin. Our gross profit margin has also decreased due to lower gross profitmargins on contracts where we are a subcontractor or where we have an increaseduse of subcontractors for services or technology.

 

*Sellingand Marketing.  *Sellingand marketing expenses consist primarily of personnel costs, sales commissions,advertising and marketing expenditures, and travel-related expenditures.Selling and marketing expenses increased to $1.9 million for the three monthsended March 31, 2003 from $1.3 million for the three months ended March 31,2002.  As a percentage of net revenues,selling and marketing expenses decreased to 5.6% for the three months endedMarch 31, 2003 from 5.9% for the three months ended March 31, 2002.  We expect selling and marketing expenses toincrease in absolute dollars for the remainder of fiscal year 2003 as we willhave a full year of sales and marketing expenses from OPAY and as we continueto make investments in our marketing and branding initiatives and our businessdevelopment efforts.  We expect salesand marketing expenses to fluctuate from quarter to quarter due to items suchas seasonal advertising and marketing expense for OPAY during the April 15thtax season and increased FICA tax expense at the beginning of a new calendaryear.

 

*Generaland Administrative.*  General and administrative expenses consist primarily of personnel costsrelated to general management and administrative functions, human resources,resource management, OPAY’s engineering, client service and customer servicedepartments, staffing, accounting and finance, legal, facilities andinformation systems, as well as business insurance costs, facility costs andprofessional fees related to legal, audit, tax, external financial reportingand investor relations matters. General and administrative expenses increased54.3% to $5.6 million for the three months ended March 31, 2003 from $3.6million for the three months ended March 31, 2002. As a percentage of netrevenues, general and administrative expenses increased to 16.9% for the threemonths ended March 31, 2003 from 16.5% for the three months ended March 31,2002. We expect general and administrative expenses will increase in absolutedollars for fiscal year 2003 as we will have a full year of general andadministrative expenses from the OPAY and GSC operations, as well as increasedbusiness insurance costs, increased FICA costs at the beginning of a newcalendar year, increased employee benefit costs, increased rent expense due toexpansion of our facilities and anticipated costs to comply with therequirements of the Sarbanes-Oxley Act of 2002.

 

*Business Combination Integration.* Businesscombination integration costs consist of expenses attributable to employees andconsultants of OPAY who were retained on a short-term basis following ouracquisition of OPAY, solely for the purpose of providing training andcompleting other transition tasks in connection with the integration of OPAYinto our operations. These costs consist of compensation, employee benefits,travel, consulting and allocated facilities costs and are expensed in theperiod in which they are incurred. Business combination integration costs were $275,000 for the threemonths ended March 31, 2003 which was 0.8% of net revenues.

 

*Depreciationand Amortization.*  Depreciation and amortization consists primarily of expenses associatedwith depreciation of equipment and improvements and amortization of intangibleassets resulting from acquisitions and intellectual property not directlyattributable to client projects. Project-related depreciation and amortization is included in cost ofrevenues.  Depreciation and amortizationwas $1.4 million for the three months ended March 31, 2003 and $1.3 million forthe three months ended March 31, 2002. As a percentage of net revenues,depreciation and amortization decreased to 4.3% for the three months endedMarch 31, 2003  from 6.1% for the threemonths ended March 31, 2002.  Thedecrease in amortization expense resulting from the adoption of SFAS 142 wascompletely offset by increased amortization of acquired intangibles from theOPAY and GSC acquisitions.

 

*InterestIncome  (Expense), Net.*   Net interest income decreased 41.0% to$307,000 for the three months ended March 31, 2003 compared to net interestincome of $520,000 for the three months ended March 31, 2002.  This decrease was primarily attributable tointerest earned on a lower average investment balance and lower investmentyields.

 

*Provision  for Income Taxes.* Theprovision for income taxes was $1.0 million for the three months ended March31, 2003 and $1.3 million for the threemonths ended March 31, 2002.  Our effective tax rate was 39.1% for thethree months ended March 31, 2003 and37.0% for the three months ended March 31, 2002.  The effective tax rate in the upcoming quarters and for the yearending September 30, 2003 may vary due to a variety of factors, including, butnot limited to, the relative income contribution by tax jurisdiction, theamount of tax exempt interest income generated during the year, changes instatutory tax rates, the ability to utilize foreign tax credits and foreign netoperating losses, and any non-deductible items related to acquisitions or othernonrecurring charges. We will continue to monitor the effective tax rate on aquarterly basis.

 

*Discontinued operation.*   Theloss from operations of discontinued operation represents the historical operatinglosses incurred by our Australian operation. The loss for the three months ended March 31, 2002 was $1.0 million.  

 

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The loss on disposal of discontinuedoperation represented the estimated loss on the disposal of our Australianoperations and the estimated future operating losses through the disposalperiod.  The loss on disposal was $15.1million for the three months ended March 31, 2002.  The sale of the Australian operation was completed in September2002.

 

**SixMonths Ended March 31, 2003 and March 31, 2002**

 

*Net Revenues.  *Net revenues increased 45.1% to $65.4 million for the six monthsended March 31, 2003 from $45.1 million in the six months ended March 31,2002.  This increase resulted primarilyfrom an increase in U.S. Government operations of approximately $12.4 millionand net revenues attributable to the acquisition of OPAY of approximately $12.7million, partially offset by a decrease in U.S. Commercial Services netrevenues of approximately $4.5 million. The increase in net revenues from U.S. Government Services operationsresulted primarily from the new public pension software systems projects,increased transaction processing net revenues and the acquisition of certainassets of GSC.  The decrease in netrevenues from U.S. Commercial Services operations resulted primarily from thecompletion of several large projects in the prior year and general weakness inthe U.S. Commercial Services sector.

 

*Gross Profit.  *Gross profit increased 27.8%to $23.3 million for the six months ended March 31, 2003 from $18.3 million inthe six months ended March 31, 2002. Gross margin decreased to 35.7% for thesix months ended March 31, 2003 from 40.5% in the six months ended March 31,2002.  The decrease in gross margin wasprimarily attributable to the addition of OPAY’s net revenues in the currentfiscal year period and an increase in net revenues from U.S. GovernmentServices operations, both of which historically have had lower gross profitmargins than our average, and a decrease in net revenues derived from U.S.Commercial Services operations, which have historically had higher gross profitmargins than our average. Cost of revenues includes $1.2 million ofdepreciation and amortization for the six months ended March 31, 2003 and $1.1million for the six months ended March 31, 2002.

 

*Selling and Marketing.  *Selling and marketingexpenses increased 43.2% to $3.8 million for the six months ended March 31,2003 from $2.6 million in the six months ended March 31, 2002. As a percentageof net revenues, selling and marketing expenses decreased to 5.8% for the sixmonths ended March 31, 2003 from 5.9% in the six months ended March 31,2002.  The increase in selling andmarketing expenses in total dollars was primarily attributable to the additionof  OPAY’s sales and marketing costs inthe current fiscal year period.

 

*General and Administrative.  *General andadministrative expenses increased 47.7% to $11.4 million for the six monthsended March 31, 2003 from $7.7 million in the six months ended March 31, 2002.As a percentage of net revenues, general and administrative expenses increasedto 17.5% for the six months ended March 31, 2003 from 17.2% in the six monthsended March 31, 2002.  The increase ingeneral and administrative expenses in total dollars was primarily attributableto the acquisitions of OPAY and GSC, as well as increases in business insurancecosts, increased employee benefit costs and increased rent expense due to theexpansion of our facilities.

 

*Business Combination Integration.*  Business combination integration costs wereapproximately $680,000 for the six months ended March 31, 2003.

 

*Depreciation and Amortization*.   Depreciation and amortization increased3.2% to $2.8 million for the six months ended March 31, 2003 from $2.7 millionin the six months ended March 31, 2002. As a percentage of net revenues,depreciation and amortization decreased to 4.3% for the six months ended March31, 2003 from 6.0% in the six months ended March 31, 2002.  The decrease in amortization resulting fromthe adoption of SFAS 142 was completely offset by increased amortization  of other intangible assets acquired in theOPAY and GSC acquisitions.

 

*Interest Income (Expense), Net.  *We had net interestincome of $693,000 for the six months ended March 31, 2003 compared to netinterest income of $631,000 for the six months ended March 31, 2002.

 

*Provision for Income Taxes*.   Provision for income taxes decreased 5.5%to $2.0 million for the six months ended March 31, 2003 from $2.1 million inthe six months ended March 31, 2002. For the six months ended March 31, 2003, our effective tax rate was38.0% and for the six months ended March 31, 2002, our effective tax rate was37.0%. The future tax rate may vary due to avariety of factors, including, but not limited to, the amount of tax exemptinterest income generated during the year, the relative income contribution bytax jurisdiction, changes in statutory tax rates, the ability to utilizeforeign tax credits and foreign net operating losses, and any non-deductibleitems related to acquisitions or other nonrecurring charges.  We will continue to closely monitor oureffective tax rate on a quarterly basis.

 

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*Discontinuedoperation.*  The lossfrom operations of discontinued operation was $1.3 million for the six monthsended March 31, 2002, and the loss on disposal of discontinued operation was$15.1 million for the six months ended March 31, 2002.

 

**Liquidityand Capital Resources**

 

Our principal capital requirement is to fund workingcapital to support our growth, including potential future acquisitions,remaining purchase price installments and potential contingent payments due toprior acquisitions.  We maintain a $15.0million revolving credit facility that expires on January 31, 2005, of which$15.0 million may be used for letters of credit.  The credit facility bears interest at the adjusted LIBOR rateplus 2.5% or the lender’s announced prime rate plus 0.25%, at our option. Thecredit facility is collateralized by first priority liens and securityinterests in our assets.  The creditfacility contains certain restrictive covenants including, but not limited to,limitations on the amount of loans we may extend to officers and employees andthe incurrence of additional debt.  Thecredit facility requires the maintenance of certain financial covenants,including a minimum quarterly net income requirement, minimum tangible net worth,a minimum ratio of debt to tangible net worth and a minimum ratio of liquidassets to current liabilities.  As ofMarch 31, 2003, we were in compliance with the covenants of the creditfacility. There were no outstanding borrowings or standby letters of creditunder this facility as of March 31, 2003.

 

At March 31, 2003, we also had a $2.5 millionnon-revolving line of credit for financing capital expenditures that may bedrawn upon until January 29, 2004. Principal payments must be made in 36 equalmonthly payments commencing February 29, 2004. This credit facility has amaturity date of January 31, 2007. Interest is based on either the LIBOR rate plus 2.75% or the lender’sannounced prime rate plus 0.5%, at our option and is payable monthly.  As of March 31, 2003, we had no borrowingsunder this line of credit.

 

In addition to the credit facilities mentioned above,we had letters of credit totaling approximately $3,346,000, which werecollateralized by certain securities in our long-term investment portfolio atMarch 31, 2003.  Furthermore, oursubsidiary, OPAY, had a letter of credit outstanding in the amount ofapproximately $138,000 secured by a certificate of deposit.  These letters of credit were issued tosecure performance bonds and to meet various facility lease requirements.

 

Our Australian subsidiary has letters of credittotaling approximately $49,000 (based on the March 31, 2003 exchange rate ofAU$1.67 to U.S. $1.00) outstanding at March 31, 2003 to meet certain remainingfacility lease requirements.  Theseletters of credit were secured by term deposits with an Australian bank.

 

During the six months ended March 31, 2003, werepurchased 568,000 shares of Class B common stock at a total cost ofapproximately $6.7 million under the stock repurchase program authorized by ourBoard of Directors in October 1998. These purchases were funded through current holdings of cash andshort-term investments.  In April 2003,the Board increased the number of shares authorized for repurchase to a totalof 2.0 million shares.  As a result, weare authorized to repurchase up to approximately 1.1 million additional sharesof Class B common stock under this program. The timing and volume of our future purchases under this program willdepend on market conditions.

 

Net cash from continuing operations provided byoperating activities was $2.7 million in the six months ended March 31, 2003 ascompared to $8.2 million in the six months ended March 31, 2002.  The decrease in net cash from continuingoperations provided by operating activities is largely attributable to thecollection of several large receivable balances in the prior year and theincrease in unbilled receivables balance resulting from work performed oncontracts with milestone based billings.

 

Net cash from continuing operations provided by investingactivities was $141,000 in the six months ended March 31, 2003 as compared tonet cash from continuing operations used in investing activities of $49.3million in the six months ended March 31, 2002. The net cash from continuingoperations used in investing activities for the six months ended March 31, 2002was primarily attributable to increased investments in marketable securitiesresulting from the investment of the proceeds of our follow-on stock offering.

 

Capital expenditures, including equipment and softwareacquired under financing arrangements but excluding assets acquired or leasedthrough business combinations, were approximately $1.1 million in the sixmonths ended March 31, 2003 and $2.9 million in the six months ended March 31,2002.  We anticipate that in fiscal year2003, we will have capital expenditures similar to fiscal year 2002 related to,among other things, purchases of computer equipment to enhance our operationsand support our growth, as well as potential expenditures related to new office

 

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leases and the establishment or expansion of child support paymentprocessing and other transaction processing centers.

 

Net cash from continuing operations used in financingactivities totaled $6.0 million in the six months ended March 31, 2003 ascompared to net cash from continuing operations provided by financingactivities of $83.7 million in the six months ended March 31, 2002.  The net cash from continuing operations usedin financing activities for the six months ended March 31, 2003 resultedprimarily from the repurchase of Class B common stock under our stockrepurchase program.  The net cash fromcontinuing operations provided by financing activities for the six months endedMarch 31, 2002 resulted primarily from the proceeds of our follow-on stockoffering and the exercise of employee stock options.

 

We expect to generate cash flows from operatingactivities over the long-term; however, we may experience significantfluctuations from quarter to quarter resulting from the timing of the billingand collection of large project milestones particularly for our pension software systems projects.  We anticipate that our existing capitalresources, including our cash balances, cash that we anticipate will beprovided by operating activities and our available credit facilities, will beadequate to fund our operations for at least the next 12 months. There can beno assurance that changes will not occur that would consume available capitalresources before such time.  Our capitalrequirements and capital resources depend on numerous factors, includingpotential acquisitions, contingent payments earned, new and existing contractrequirements, the timing of the receipt of accounts receivable, our ability todraw on our bank facility and employee growth. To the extent that our existing capital resources are insufficient tomeet our capital requirements, we will have to raise additional funds. Therecan be no assurance that additional funding, if necessary, will be available onfavorable terms, if at all.  The raisingof additional capital may dilute our shareholders’ ownership in us.

 

Due to the current economic climate, the performancebond market has substantially changed, resulting in reduced availability ofbonds, increased cash collateral requirements and increased premiums.  Some of our government contracts require aperformance bond and future requests for proposal may also require aperformance bond.  Our inability toobtain performance bonds, increased costs to obtain such bonds or a requirementto pledge significant cash collateral in order to obtain such bonds wouldadversely affect our business and our capacity to obtain additionalcontracts.  Increased premiums or aclaim made against a performance bond could adversely affect our earnings andcash flow and impair our ability to bid for future contracts.

 

**Disclosures About ContractualObligations And Commercial Commitments as of March 31, 2003**

 

As of March 31, 2003, we had the following obligationsand commitments to make future payments under contracts, contractualobligations and commercial commitments (in thousands):

 
|                                                    |   | **Payments due by period** |   |
|---------------------------------------------------------|--------|----------------------------|--------|
| **Contractual Cash Obligations**                        |   | **Total**                  |   | **Less than  1 year** |   | **2 - 3 years** |   | **4 -5 years** |   | **After 5 years** |   |
| Debt, including interest                                |   | $                          | 558    |   | $ | 266 |   | $ | 250 |   | $ | 42 |   | $ | — |   |
| Operating leases                                        |   | 11,810                     |   | 3,844 |   | 5,385 |   | 2,292 |   | 289 |   |
| Purchase price  payable and accrued contingent earnouts |   | 2,190                      |   | 2,190 |   | — |   | — |   | — |   |
| Restructuring  liability                                |   | 1,901                      |   | 957 |   | 751 |   | 193 |   | — |   |
|                                                         |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                             |   | **Amount of commitment expiration per period** |   |
|----------------------------------|--------|------------------------------------------------|--------|
| **Other Commercial Commitments** |   | **Total  amounts  committed**                  |   | **Less than  1 year** |   | **2 -  3 years** |   | **4 -  5 years** |   | **After 5  years** |   |
| Standby letters  of credit       |   | $                                              | 3,533  |   | $ | 3,187 |   | $ | 151 |   | $ | — |   | $ | 195 |   |
| Performance  bonds               |   | 36,550                                         |   | 18,319 |   | 18,231 |   | — |   | — |   |
|                                  |        |                                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

###### **RecentAccounting Standards**

 

InNovember 2002, the Emerging Issues Task Force issued a final consensus on Issue00-21:  “Accounting for RevenueArrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how and when to recognize revenues onarrangements requiring delivery of more than one product or service.  Issue 00-21 is effective prospectively forarrangements entered into in fiscal periods beginning after June 15, 2003.  Companies may also elect to apply the

 

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provisions of Issue 00-21 toexisting arrangements and record the income statement impact as the cumulativeeffect of a change in accounting principle. We are evaluating Issue 00-21 to determine the impact on our results ofoperations.

 

**FactorsThat May Affect Future Results**

 

The following factors andother risk factors could cause our actual results to differ materially fromthose contained in forward-looking statements in this Form 10-Q.

 

**Our quarterly net revenues, operatingresults and cash flows are volatile, may fluctuate significantly from quarterto quarter  and may be difficult toforecast, which may cause the market price of our Class B common stock todecline.**

 

Our net revenues,operating results and cash flows are subject to significant variation fromquarter to quarter due to a number of factors, many of which are outside ourcontrol.  Among other things, thesefactors include:

 

•               thenumber, size and scope of projects in which we are engaged;

•               demand for our services generated bystrategic partnerships and certain prime contractors;

•               dependence on our technology partners;

•               the adequacy of provisions for losses,including provisions for accounts receivable and other receivables;

•               economic conditions in the vertical andgeographic markets we serve;

•               the accuracy of estimated resources andcosts required to complete our contracts;

•               the accuracy of estimated transactionvolume and transaction dollars processed in computing transaction net revenuesfrom our child support payment processing center operations and OPAY’s paymentprocessing center operations;

•               costs incurred on projects before wehave the right to invoice and ultimately collect cash from our clients;

•               our consultant utilization rates and thenumber of billable days in a particular quarter which may be significantlyimpacted by increased vacations and public holidays;

•               the seasonality of OPAY’s business, dueprimarily to the fact that the majority of federal and state personal incometax payments are made in March and April and real estate and personal propertytax payments may be made annually or semi-annually in many jurisdictions;

•               the contractual terms and degree ofcompletion of projects;

•               any delays or costs incurred inconnection with, or early termination of, a project;

•               our ability to staff projects withsalaried employees versus hourly employees, hourly independent contractors andsubcontractors;

•               the amount and timing of costs relatedto our sales and marketing and other initiatives;

•               variability of software license feerevenue in a particular quarter;

•               start-up costs incurred in connectionwith the initiation of large projects; and

•                  anyassessment of potential penalties or contingent obligations in connection witha project.

 

The timing andrealization of opportunities in our sales pipeline make the timing andvariability of net revenues difficult to forecast. A high percentage of ouroperating expenses, particularly personnel, facility and depreciation andamortization, are fixed in advance. We also typically reach the annuallimitation on FICA contributions for many of our U.S. employees before the endof the calendar year. As a result, U.S. employer payroll taxes will vary

 

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significantly from quarter to quarter during the fiscal year and willgenerally be higher at the beginning of the calendar year and net revenues willvary from quarter to quarter during the fiscal year.  Because of the variability of our quarterly operating results, webelieve that period-to-period comparisons of our operating results are notnecessarily meaningful, should not be relied upon as indications of futureperformance and may result in volatility and declines in the price of our Class B common stock. In addition, ouroperating results may from time to time be below the expectations of analystsand investors.  If so, the market priceof our Class B common stock may decline significantly.

 

As discussed in Note 5 to our Condensed ConsolidatedFinancial Statements, we adopted SFAS 142 as of October 1, 2002.  This standard requires that goodwill nolonger be amortized, and instead, be tested for impairment on a periodic basis.  Impairment tests involve the use of estimatesrelated to the fair market value of the business operations with which goodwillis associated.  If we do not meet ourlong-term forecasts, or if the trading price of our common stock does notimprove, we could be required to record impairment charges related to goodwilland other intangible assets, which could adversely affect our financialresults.  In the fourth quarter offiscal year 2003, we will perform our annual impairment test to determine ifgoodwill and other intangible assets associated with our segments areimpaired.  This analysis may result in anon-cash impairment charge of up to approximately $74.1 million, whichrepresents the balance of goodwill and other intangible assets at March 31,2003.  The impairment charge, if any,would depend upon the estimated value of the business to which the goodwill andother intangible assets relate and the value of other assets and liabilities atthat time.  Any resulting impairmentloss could have a material adverse impact on our financial condition andresults of operations.

 

**A continued decline in the currenteconomic climate could adversely affect our net revenues and cash flows.**

 

We continue to experienceincreasing pricing pressures from competitors as well as from clients facingpressure to control costs under continuing uncertain economic and politicalconditions. We continue to see clients reduce or defer their expenditures ordefer the start of work already contracted. Some of our competitors are capable of operating at significant lossesfor extended periods of time, increasing pricing pressure on our products andservices.  If we do not maintaincompetitive pricing, the demand for our products and services, as well as ourmarket share, may decline, having an adverse effect on our business.  From time to time, in responding tocompetitive pressures, we lower the prices of our products and services.  If we are unable to reduce our costs orimprove operating efficiencies when we offer such lower prices, our netrevenues and margins will be adversely affected.

 

OPAY’s net revenues aregenerated primarily based on convenience fees charged as a percentage ofdollars processed for income taxes and other payments.  Income taxes are dependent on the amount ofincome earned by taxpaying citizens.  Acontinued decline in economic conditions could reduce the per capita income ofcitizens, and thus reduce the amount of income tax payments consumers remit togovernment entities, which may reduce OPAY’s revenues from convenience fees.  In addition, continued decline in theeconomy may result in a reduction in consumer spending, particularly fornon-essential goods and services, which may result in a reduction in consumers’use of OPAY’s services.  If the economycontinues to decline, our results of operations and cash flows could beadversely affected.

 

**We depend on government agencies fora majority of our net revenues and the loss or decline of existing or futuregovernment agency funding would adversely affect our net revenues and cashflows.**

 

For the six months endedMarch 31, 2003, approximately 90.6% of our net revenues were derived fromservices provided to government agencies, including convenience fees earned byOPAY with respect to payments made by citizens to government agencies.  These government agencies may be subject tobudget cuts, budgetary constraints, a reduction or discontinuation of fundingor changes in the political or regulatory environment that may cause governmentagencies to terminate projects, divert funds or delay implementation. These governmentagencies may terminate most of these contracts at any time without cause. Inaddition, revisions to or repeals of mandated statutes and regulations,including changes to the timing of required compliance, may cause governmentagencies to divert funds. A significant reduction in funds available forgovernment agencies to purchase professional services or business solutionswould significantly reduce our net revenues and cash flows.  The loss of a major government client, orany significant reduction or delay in orders by that client, would alsosignificantly reduce our net revenues and cash flows.  Additionally, government contracts are generally subject toaudits and investigations by government agencies.  If the results of these audits or investigations are negative,our reputation could be damaged, contracts could be terminated or significantpenalties could be assessed.  If acontract is terminated for any reason, our ability to fully recover certainamounts may be impaired resulting in a material adverse impact on our financialcondition and results of operations.

 

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**We relyon small numbers of projects, clients and target markets for significantportions of our net revenues, and our operating results and cash flows maydecline significantly if we cannot keep or replace these projects or clients orif conditions in our target markets deteriorate.**

 

The completion,cancellation or significant reduction in the scope or imposition of significantpenalties for our failure to meet scheduled delivery requirements of a largeproject would significantly reduce our net revenues and cash flows.  Most of our contracts are terminable by theclient following limited notice and without significant penalty to the client.We have derived, and believe that we will continue to derive, a significantportion of our net revenues from a limited number of clients. For the sixmonths ended March 31, 2003, CalPERS accounted for 10.1% of our net revenues.  Under our agreement with ACS, we currentlyperform services for three different state governments as a subcontractor toACS.  For the six months ended March 31,2003, work performed under these three subcontracts accounted for 8.7% of totalnet revenues.  The volume of work performedfor specific clients or prime contractors is likely to vary from period toperiod, and a major client in one period may not use our services in asubsequent period.  If any of our largeclients or prime contractors terminates its relationship with us, we will losea significant portion of our net revenues and cash flows. Many of our contractswith clients and prime contractors can be terminated at any time withoutcause.  In addition, as a result of ourfocus in specific vertical markets, economic and other conditions that affectthe companies and government agencies in these markets could also result in areduction in our net revenues and cash flows. Many of our contracts with clients and prime contractors can beterminated at any time without cause. Because we derive a significant portion of our net revenues from alimited number of clients, we have several large accounts receivable andunbilled receivable balances.  At March31, 2003, unbilled receivables for two clients accounted for 54.5% and 16.6% oftotal unbilled receivables.  At March31, 2003, total accounts receivable, including unbilled receivables, for thesetwo clients accounted for 34.8% and 13.3%, respectively of total net accountsreceivable, including unbilled receivables. Any dispute, early contracttermination or other collection issues could have a material adverse impact onour financial condition and results of operations.

 

For the six months endedMarch 31, 2003, the IRS accounted for 26.7% of OPAY’s net revenues.  The existing contract with the IRS allowsthe IRS to terminate OPAY’s services at any time for any or no reason.  The loss of the IRS as a client, or adecrease in IRS-related transactions because of increased competition fromanother IRS-authorized service provider, could result in a reduction in our netrevenues and cash flows.

 

**Because we sometimes work with third parties and/or use thirdparty software in providing products and services to clients, our reputation,operating results and competitiveness could be adversely affected by thosethird parties.**

 

We frequently join withother organizations to bid and perform an engagement. In these engagements, wemay engage subcontractors or we may act as a subcontractor to the primecontractor of the engagement. We also use third-party software or technologyproviders to jointly bid and perform engagements. Our ability to service someof our clients depends to a large extent on our use of various softwareprograms that we license from a small number of primary software vendors. Inthese situations, we depend on the software, resources and technology of thesethird parties in order to perform work under the engagement. Actions orfailures attributable to these third parties or their products or to the primecontractor or subcontractor could adversely impact a project, damage ourreputation and adversely affect our ability to attract new business. Inaddition, the refusal or inability of these third parties to permit continueduse of their software, services or technology by us, our inability to gainaccess to software that has been placed in escrow by third parties, or thediscontinuance or termination by the client or prime contractor of our servicesor the services of a key subcontractor, would harm our operating results andthe competitiveness of our products and services.  If we are unable to meet our contractual requirements with ourclients, we could be subjected to claims by our clients.

 

**We have completed numerous acquisitions and may completeothers, which could increase our costs or be disruptive.**

 

One component of ourbusiness strategy is to expand our presence in new or existing markets byacquiring additional businesses. From December 1996 through March 31,2003, we acquired 19 businesses using cash, equity and debt, with some ofthose acquisitions also involving assumed liabilities and contingent payments.Acquisitions involve a number of special risks, including:

•     failure to realize the value of the acquiredassets, businesses or projects;

•      diversion of management’s attention;

•      failure to retain key personnel;

•      entrance into markets in which we havelimited or no prior experience;

•      increased general and administrativeexpenses;

•     client dissatisfaction or performance problemswith acquired assets, businesses or projects;

 

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•     write-offs due to impairment of goodwill and otherintangible assets and other charges against earnings;

•      assumption of unknown liabilities;

•                  the potentially dilutive issuance ofour common stock, the use of significant amounts of cash or the incurrence ofsubstantial amounts of debt; and

•     other unanticipated events or circumstances.

** **

We may not be able toidentify, acquire or profitably manage additional businesses or integrate successfullyany acquired businesses without substantial expense, delay or other operationalor financial problems. Without additional acquisitions, we are unlikely tomaintain historical growth rates.

 

At the end of July 2002,we acquired OPAY, which has a history of losses.  Although OPAY initiated a restructuring plan in November 2001designed to reduce certain operating expenses and we intend to further reduceoperating expenses for OPAY as we integrate this acquisition and complete therestructuring, there can be no assurance that OPAY will attain profitability.

 

The use of credit cardsto make payments to government agencies is still relatively new andevolving.  To date, OPAY’s business hasconsisted primarily of providing credit card payment options for the payment ofbalance due federal and state personal income taxes, real estate and personalproperty taxes and fines for traffic violations and parking citations.  Because OPAY has only a limited operatinghistory, it is difficult to evaluate its business and prospects and the risks,expenses and difficulties that we may face in implementing OPAY’s businessmodel.  OPAY’s business model is basedon consumers’ willingness to pay a convenience fee (in addition to theirrequired government or other payment) for the use of OPAY’s credit card paymentoption.  Our success with respect toOPAY will depend on maintaining OPAY’s relationship with the IRS and onmaintaining existing, and developing additional, relationships with state andlocal government agencies, especially state taxing authorities, and theirrespective constituents.  There can beno assurances that we will be able to develop new OPAY relationships ormaintain existing OPAY relationships, and the failure to do so could have amaterial and adverse effect on our business, operating results and financial condition.  In addition, if consumers are not receptive to paying aconvenience fee, if credit card associations change their rules and do notallow us to charge the convenience fees or, if credit card issuers eliminate orreduce the value of rewards obtained under their respective rewards programs,demand for OPAY’s services may decline or fail to grow, which would have amaterial and adverse effect on our business, operating results and financialcondition.  Demand for OPAY’s serviceswould also be adversely impacted by a decline in the use of the Internet.  Factors that could reduce the level ofInternet usage or electronic commerce include the actual or perceived lack ofsecurity or privacy of information, traffic congestion or other Internet accessdelays, excessive governmental regulation, increases in access costs, or theunavailability of cost-effective high speed service.

 

**Our failure to deliver error-free products and services couldresult in reduced payments, significant financial liability or additional coststo us, as well as negative publicity.**

 

Many of our engagementsinvolve projects that are critical to the operations of our clients’ businessesand provide benefits that may be difficult to quantify. The failure by us, orby third parties on an engagement in which we are a subcontractor, to meet aclient’s expectations in the performance of the engagement could damage ourreputation and adversely affect our ability to attract new business. We haveundertaken, and may in the future undertake, projects in which we guaranteeperformance based upon defined operating specifications or guaranteed deliverydates. We also have undertaken, and may in the future undertake, projects thatrequire us to obtain a performance bond from a licensed surety and to post theperformance bond with the client. Unsatisfactory performance or unanticipateddifficulties or delays in completing such projects may result in clientdissatisfaction and a reduction in payment to us, payment of material penaltiesor material damages by us as a result of litigation or otherwise, or claims bya client against the performance bond posted by us. In addition, unanticipateddelays could necessitate the use of more resources than we initially budgetedfor a particular project, which could increase our costs for that project.

 

OPAY’s electronic creditcard payment services and our child support payment processing services  are designed to provide payment managementfunctions and to limit our clients’ risk of fraud or loss in effectingtransactions with their constituents. As electronic services become more critical to our clients, we may besubjected to claims regarding our alleged liability for the processing offraudulent or erroneous transactions. In addition, defects or programming errors in the software we use couldcause service interruptions.  Ourservices depend on hardware, software and supporting infrastructure that isinternally developed, purchased and/or licensed from third parties.  Although we conduct extensive

 

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testing, software may contain defects or programming errors, or may notproperly interface with third party systems, particularly when first introducedor when new versions are released.  Inaddition, we may experience disruptions in service from third-partyproviders.  To the extent that defectsor errors are undetected in the future and cannot be resolved satisfactorily orin a timely manner, our business could suffer. If one or more claims were brought against us, even if unsuccessful,their defense would likely be time consuming, costly and potentially damagingto our reputation.  Any such liabilityor claim could have a material and adverse effect on our business, operatingresults and financial condition.

 

**Our operating results may be adversely affected if we fail toaccurately estimate the resources necessary to meet our obligations under fixedprice contracts or the volume of transactions or transaction dollars processedunder our transaction-based contracts.**

 

Underestimating theresources, costs or time required for a fixed price project or atransaction-based contract or overestimating the expected volume oftransactions or transaction dollars processed under a transaction-basedcontract would cause our costs under fixed price contracts to be greater thanexpected and our fees under transaction-based contracts to be less thanexpected, and our related profit, if any, to be less. Under fixed pricecontracts, we generally receive our fee if we meet specified deliverables suchas completing certain components of a system installation. Fortransaction-based contracts, we receive our fee on a per-transaction basis oras a percentage of dollars processed, such as the number of child supportpayments processed or income tax dollars processed. To earn a profit on thesecontracts, we rely upon accurately estimating costs involved and assessing theprobability of meeting the specified objectives or realizing the expectednumber or average dollar amounts of transactions within the contracted timeperiod. If we fail to estimate accurately the factors upon which we base ourcontract pricing, or we are unable to successfully obtain change orders, we mayincur losses on those contracts or be unable to complete our performanceobligations. During the six months ended March 31, 2003, 35.1% of our netrevenues were generated on a fixed price basis and 45.9% of our net revenueswere generated from transaction-based contracts. We believe that the percentageof net revenues attributable to fixed price and transaction-based contractswill continue to be significant for the foreseeable future.

 

**If we are unable to obtain adequate insurance coverage orsufficient performance bonds for any reason, our business will be adverselyaffected.**

 

We maintain insurance tocover a variety of different business risks. There can be no assurance that we can maintain the same scope and amountof insurance coverage on reasonable terms or obtain such insurance at all.  Our inability to renew policies or maintainthe same level of coverage would adversely affect our business and increase ourrisk exposure.  Any claims against ourpolicies may impact our ability to obtain such insurance on reasonable terms,if at all.

 

We have undertaken, andmay in the future undertake, projects that require us to obtain a performancebond from a licensed surety and post the performance bond with the client.  There can be no assurance that such performancebonds will continue to be available on reasonable terms, if at all.  Our inability to obtain performance bondswould adversely affect our business and our capacity to obtain additionalcontracts. Increased premiums or a claim made against a performance bond couldadversely affect our earnings and cash flow and impair our ability to bid forfuture contracts.

 

**Our business will suffer if we are unable to attract,successfully integrate and retain qualified personnel and key employees.**

 

If we are unable toattract, retain, train, manage and motivate skilled employees, particularlyproject managers and other senior technical personnel, our ability toadequately manage and staff our existing projects and to bid for or obtain newprojects could be impaired, which would adversely affect our business and itsgrowth. The failure of our employees to achieve expected levels of performancecould adversely affect our business. There is significant competition foremployees with the skills required to perform the services we offer. In particular,qualified project managers and senior technical and professional staff are ingreat demand worldwide. In addition, we require that many of our employeestravel to client sites to perform services on our behalf, which may make aposition with us less attractive to potential employees. We may not be able toidentify and successfully recruit and integrate a sufficient number of skilledemployees into our operations, which would harm our business and its growth.Our success also depends upon the continued services of a number of keyemployees, including our chief executive officer and the leaders of ourstrategic business units. Any of our employees may terminate their employmentat any time. The loss of the services of any key employee could significantlydisrupt our operations. In addition, if one or more of our key employeesresigns to join a competitor or to form a competing company, the loss ofsuch personnel and any resulting loss of existing or potential clients to anysuch competitor could adversely affect our competitive position and operatingresults.

 

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**Our markets are highly competitive, and our business andprospects will be adversely affected if we do not compete effectively for anyreason.**

 

The informationtechnology, transaction processing and consulting services markets are highlycompetitive and are served by numerous international, national and local firms.We may not be able to compete effectively in these markets. Market participantsinclude systems consulting and integration firms, including internationalconsulting firms and related entities, the internal information systems groupsof our prospective clients, professional services companies, hardware andapplication software vendors, and divisions of large integrated technologycompanies and outsourcing companies. Many of these competitors havesignificantly greater financial, technical and marketing resources, generategreater net revenues and have greater name recognition than we do. In addition,there are relatively low barriers to entry into the information technology andconsulting services markets, and we have faced, and expect to continue to face,additional competition from new entrants into the information technology andconsulting services markets.

 

We believe that the principal competitive factors inthe information technology and consulting services markets include:

•     reputation;

•     project management expertise;

•     industry expertise;

•     speed of development and implementations;

•     technical expertise;

•     competitive pricing; and

•     the ability to deliver results on a fixed priceand transaction basis as well as a time and materials basis.

 

We believe that ourability to compete also depends in part on a number of competitive factorsoutside our control, including:

•     the ability of our clients or competitors to hire,retain and motivate project managers and other senior technical staff;

•     the ownership by competitors of software used bypotential clients;

•     the price at which others offer comparableservices;

•     the ability of our clients to perform the servicesthemselves; and

•     the extent of our competitors’ responsiveness toclient needs.

 

If we do not competeeffectively on one or more of these competitive factors, our business and ourability to execute our business strategy will be impaired.

 

**Our Class B common stock price and trading volume hasbeen and could continue to be volatile, which could result in substantiallosses for investors in our Class B common stock.**

 

Our Class B commonstock price has been and could continue to be volatile. These pricefluctuations may be rapid and severe and may leave investors little time toreact. Factors that affect the market price of our Class B common stockinclude:

•     quarterly variations in operating results;

•     announcements of technological innovations or newproducts or services by us or our competitors;

•     general conditions in the information technologyindustry or the industries in which our clients compete;

•     changes in earnings estimates by securitiesanalysts or us; and

•     general economic and political conditions such asrecessions and acts of war or terrorism.

 

Fluctuations in the priceof our Class B common stock could contribute to investors losing all orpart of their investment.

 

 

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**We could become subject to lawsuits that could result inmaterial liabilities to us or cause us to incur material costs.**

 

Any failure in a client’ssystem or failure to meet a material deliverable could result in a claimagainst us for substantial damages, regardless of our responsibility for suchfailure. We cannot guarantee that the disclaimers, limitations ofwarranty,  limitations of liability andother provisions set forth in our contracts will be enforceable or willotherwise protect us from liability for damages. Any claim by a shareholder orderivative action brought by a shareholder could result in a material liabilityto us.  Our insurance, which includescoverage for errors or omissions and directors and officers liability, may notcontinue to be available on reasonable terms or in sufficient amounts to coverone or more claims, and the insurer may disclaim coverage as to any futureclaim. The successful assertion of one or more claims against us that exceedavailable insurance coverage or changes in insurance policies, includingpremium increases or the imposition of large deductible or co-insurancerequirements, would adversely affect our business.

 

**The software products we provide compete in markets that arerapidly changing and we must develop, acquire and introduce new products andtechnologies to grow our net revenues and remain competitive.**

 

The markets for productswe provide are characterized by rapid technological change, changes in clientdemands and evolving industry standards. As a result, our future success will continue to depend upon our abilityto develop new products or product enhancements that address the future needsof our target markets and to respond to these changing standards andpractices.  We may not be successful indeveloping, introducing and marketing new products or product enhancements on atimely and cost effective basis, or at all, and our new products and productenhancements may not adequately meet the requirements of the marketplace orachieve market acceptance.  If we areunable, for technological or other reasons, to develop and introduce newproducts or enhancements of existing products in a timely manner in response tochanging market conditions or client requirements, or if new products or newversions of existing products do not achieve market acceptance, our businesswould be seriously harmed.  In addition,our ability to develop new products and product enhancements is dependant uponthe products of other software vendors. If the products of such vendors have design defects or flaws, or if suchproducts are unexpectedly delayed in their introduction, our business could beseriously harmed.  Software products ascomplex as those we offer may contain undetected defects or errors when firstintroduced or as new versions are released. Although we have not experienced significant adverse effects resultingfrom software errors, we cannot be certain that, despite testing by us and ourclients, defects or errors will not be found in new products or enhancementsafter general release, resulting in loss of or delay in market acceptance,which could seriously harm our business.

 

**We couldsuffer material losses if our systems or operations fail or are disrupted.**

 

Any system failure,including network, software or hardware failure or operations disruptions,whether caused by us, a third party service provider, unauthorized intruders orhackers, computer viruses, natural disasters, power shortage, capacityconstraints, health epidemics or terrorist attacks, could cause interruptions,delays in our business, loss of data or damage to our reputation.  Any systems failure in our OPAY business,particularly during income tax season, could have a material adverse impact onour reputation, results of operations and financial condition.  In addition, if our mail, communications orutilities are disrupted or fail, our operations, including our child supporttransaction processing, could be suspended or interrupted, we could incurcontractual penalties and our business could be harmed. Our property insuranceand business interruption insurance may not be adequate to compensate us forall losses that may occur as a result of any system or operational failure ordisruption.

 

**If we failto adapt our business to changes in economic or business conditions, ourbusiness may be adversely affected.**

 

Personnel, facility anddepreciation and amortization expenses represent a significant percentage ofour operating expenses and are relatively fixed in advance of any particularquarter. We manage our personnel utilization rates by carefully monitoring ourneeds and anticipating personnel increases based on specific projectrequirements. To the extent net revenues do not increase at a rate commensuratewith these additional expenses, our results of operations could be materiallyand adversely affected.  If we fail toalign our operating expenses with prevailing economic or business conditions,our operating results and financial condition could be adversely affected.

 

A constraint in OPAY’scapacity to process transactions could impair the quality and availability ofOPAY’s service.  Capacity constraintsmay cause unanticipated system disruptions, impair quality and lower the levelof service.

 

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Although we believe that OPAY has sufficiently expanded its systemcapacity to accommodate anticipated future growth, there are no assurances thatOPAY will not suffer capacity constraints caused by a sharp increase in the useof its services.  Due to the largenumber of tax payments made in March and April, there is an increased risk thatOPAY will suffer a capacity constraint during that period, which could have an adverseeffect on our business, operating results and financial condition.

 

**IfOPAY’s clients and credit card issuers cease to publicize OPAY’s services oradversely change the manner in which they promote OPAY’s services, consumer useof its services may slow, and we may suffer a large increase in advertisingcosts.**

 

Currently, OPAY’sgovernment clients and credit card issuers provide a significant portion of thepublicity for its services, without any charge to OPAY.  If these government clients or credit cardissuers cease to publicize OPAY’s services, or decide to charge OPAY for thispublicity, advertising costs will increase substantially, resulting in amaterial and adverse effect on our business, operating results and financialcondition.   While OPAY endeavors in itsagreements with its clients to require such clients to undertake suchadvertising activities, many of the clients and credit card issuers have noobligation to continue to provide this publicity, and there are no assurancesthat they will continue to do so.  Inaddition, OPAY’s clients may publicize other services, including those of itscompetitors.  For example, the IRS’s2001 Form 1040 instruction booklet and Forms 1040ES and 4868 listed acompetitor’s name before OPAY’s name in regard to providers of electroniccredit card payment services, whereas in the 2002 forms (i.e., payments made in2003), OPAY’s name was listed first.

 

**If we are unable to protect our intellectual property andproprietary rights, our business could be adversely affected.**

 

The steps we take toprotect our intellectual property rights may be inadequate to avoid the loss ormisappropriation of that information, or to detect unauthorized use of suchinformation. We rely on a combination of trade secrets, nondisclosureagreements, licensing agreements and other contractual arrangements, andcopyright and trademark laws to protect our intellectual property rights. Wealso enter into nondisclosure agreements with our employees, subcontractors andthe parties we team with for contracts and generally require that our clientsenter into such agreements. We also control and limit access to our proprietaryinformation.

 

We have proprietarysoftware that is licensed to clients pursuant to licensing agreements and othercontractual arrangements. We utilize intellectual property laws, includingcopyright and trademark laws, to protect our proprietary rights. Issuesrelating to the ownership of, and rights to use, software and applicationframeworks can be complicated, and there can be no assurance that disputes willnot arise that affect our ability to resell or reuse such software andapplication frameworks. A portion of our business also involves the developmentof software applications for specific client engagements. Ownership of suchsoftware is the subject of negotiation with each particular client and istypically assigned to the client. We also develop software applicationframeworks and may retain ownership or marketing rights to these applicationframeworks, which may be adapted through further customization for futureclient projects. Some of our clients have prohibited us from marketing thesoftware and application frameworks developed specifically for them for aspecified period of time or to specified third parties, and others may demandsimilar or other restrictions in the future.

 

Infringement claims maybe asserted against us in the future that may not be successfully defended. Theloss or misappropriation of our intellectual property or the unsuccessfuldefense of any claim of infringement could prevent or delay our providing ourproducts and services, cause us to become liable for substantial damages, orforce us to enter into royalty or licensing agreements.

 

**Compliancewith changing regulation of corporate governance and public disclosure mayresult in additional expenses.**

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 (“the Sarbanes-OxleyAct”), new SEC regulations and Nasdaq Stock Market rules, are creating uncertaintyfor companies such as ours. To maintain high standards of corporate governanceand public disclosure, we intend to invest all reasonably necessary resourcesto comply with evolving standards. This investment may result in increasedgeneral and administrative expenses and a diversion of management time andattention from revenue-generating activities.

 

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**Controlof our company by our chief executive officer could make it difficult foranother company to acquire us and could depress the price of our Class Bcommon stock.**

 

Concentration of votingcontrol could have the effect of delaying or preventing a change in control ofus and  may affect the market price ofour Class B common stock.  Thevoting power held by  Mr. JamesL. Bildner, our chief executive officer, in Class A and Class B common stock owned by Mr. Bildner andvested options to acquire Class B common stock held by Mr. Bildner,represented 34.6% of our total common stock voting power outstanding at March31, 2003. As a result, Mr. Bildner may be able to control the outcome ofall corporate actions requiring shareholder approval, including changes in ourequity incentive plan, the election of a majority of our directors, proxycontests, mergers, tender offers or other transactions that could give holdersof our Class B common stock the opportunity to realize a premium over thethen-prevailing market price for their shares of Class B common stock.

 

**Our issuance of preferred stock could make it difficult foranother company to acquire us, thereby depressing the price of our Class Bcommon stock.**

 

Our board of directorshas the authority to issue preferred stock and to determine the preferences,limitations and relative rights of shares of preferred stock and to fix thenumber of shares constituting any series and the designation of such series,without any further vote or action by our shareholders. The preferred stockcould be issued with voting, liquidation, dividend and other rights superior tothe rights of our Class B common stock. The potential issuance ofpreferred stock may delay or prevent a change in control of us, discourage bidsfor the Class B common stock at a premium over the market price andadversely affect the market price and the voting and other rights of theholders of our Class B common stock.

 

**Because we operate in foreign countries, we face additionalrisks related to foreign political, legal and economic conditions.**

 

Our internationalbusiness operations are subject to a number of risks, including, but notlimited to:

•      fluctuations in the value of foreigncurrencies;

•      difficulties in building and managingforeign operations;

•      difficulties in enforcing agreements andcollecting receivables through foreign legal systems;

•      longer payment cycles; and

•      unexpected regulatory, economic orpolitical changes in foreign markets.

Our operations could beadversely affected by any of these risks.

 

**ITEM3.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market risk representsthe risk of loss that may impact our financial position, results of operationsor cash flows due to adverse changes in market prices and rates. We are exposedto market risk because of changes in foreign currency exchange rates asmeasured against the U.S. dollar and currencies used by our operations in theUnited Kingdom.

 

###### **Foreign currency exchange rate risk**

 

We conduct operations inthe United Kingdom through a U.S.-incorporated subsidiary. Net revenues fromthese operations are typically denominated in British Pounds and Euros, therebypotentially affecting our financial position, results of operations and cashflows due to fluctuations in exchange rates. Net revenues from United Kingdom operations represented 1.6% of ourtotal net revenues for the six months ended March 31, 2003. Near-term changesin exchange rates may have a material impact on our future net revenues,earnings, fair values or cash flows.  Wehave not engaged in foreign currency hedging transactions during the six monthsended March 31, 2003. There can be no assurance that a sudden and significantdecline in the value of the British Pound or Euro would not have a materialadverse effect on our financial condition and results of operations.

 

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**Interest rate sensitivity**

 

We maintain a portfolioof cash equivalents and investments in a variety of securities, includingcertificates of deposit, money market funds and government and non-governmentdebt securities. These available-for-sale securities are subject to interestrate risk and may fall in value if market interest rates increase. If marketinterest rates increase immediately and uniformly by 10 percentage points fromlevels at March 31, 2003, the fair value of the portfolio would decline by $2.0million. We anticipate having the ability to hold our fixed income investmentsuntil maturity, and therefore do not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change inmarket interest rates on our securities portfolio.

 

###### **ITEM 4.   CONTROLS AND PROCEDURES**

 

Ourchief executive officer and chief financial officer performed an evaluation ofour disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as ofMarch 31, 2003 (the “Evaluation Date”). Based on the evaluation, the chief executive officer and chief financialofficer concluded that our disclosure controls and procedures were effective andsufficient to ensure that the information required to be disclosed in thereports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.

 

Therehave been no significant changes in our internal controls since the EvaluationDate.  We are not aware of anysignificant change in any otherfactors that can significantly affect our internal controls subsequent to theEvaluation Date.

 

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**PART II.   OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

** **

On May 8, 2003, wereceived a notice of demand for arbitration in connection with a dispute overpayments related to an acquisition.  Theclaim is for not less than $700,000 plus interest, attorneys' fees andassociated costs.  As of this filing, wehad not evaluated the merits, if any, of the claim.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The following proposalswere adopted by the margins indicated at Tier’s Annual Meeting of Shareholdersheld on January 22, 2003:

 
|                                                                                                                                                                 |   | ***Voted  For*** |         | ***Votes  Withheld*** |   | ***Abstentions*** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------------|-----------------------|--------|-------------------|--------|
| **Proposal**                                                                                                                                                         |   | *** ***     | *** *** | *** ***          |
| 1.  To elect a Board of Directors to hold office until the next Annual Meeting of  Shareholders or until their respective successors have been elected or  approved: |   |             |         |                  |   |              |   |
| -  James L. Bildner                                                                                                                                             |   | 23,979,358       |         | 910,024               |   | —            |   |
| -  Charles W. Berger                                                                                                                                                 |   | 24,422,796       |         | 466,586               |   | —            |   |
| -  Samuel Cabot III (a)                                                                                                                                              |   | 15,598,522       |         | 490,860               |   | —            |   |
| -  Ronald L. Rossetti (a)                                                                                                                                            |   | 15,950,222       |         | 139,160               |   | —            |   |
| -  Morgan P. Guenther                                                                                                                                                |   | 24,750,222       |         | 139,160               |   | —            |   |
| -  William C. VanFaasen                                                                                                                                              |   | 24,410,996       |         | 478,386               |   | —            |   |
|                                                                                                                                                                 |   |             |         |                  |   |              |   |
| 2.  To ratify the selection of PricewaterhouseCoopers LLP as independent auditors  of  the Company for its fiscal year ending September 30, 2003                     |   | 23,998,124       |         | 886,658               |   | 4,600             |   |

 

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(a)   Class B Director

 

**ITEM6.   EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)*Exhibits.*

* *
| **Exhibit****Number** |   | **Description**                                                                                                                                         |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.48                 |   | Letter Amendment to  Employment Agreement by and between the Registrant and Michael Presto, dated  January 3, 2003                                      |
| 10.49                 |   | Credit and Security  Agreement as of January 29, 2003 by and between the Registrant and City  National Bank.                                            |
| 99.1                  |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.2                  |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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(b) *Reports on Form 8-K.*

 

The Company did not fileany reports on Form 8-K during the three months ended March 31, 2003.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                | TIER TECHNOLOGIES, INC. |
|---------------------|-------------------------|
|                |                    |   |
| Dated: May 12, 2003 |                    |   |
|                |                    |   |
|                | By:                     | /s/ LAURA B.  DEPOLE |
|                |                    |   |
|                |                    | **Laura B. DePole** |
|                |                    | **Chief Financial Officer** |
|                |                    | **(Principal Financial and Accounting  Officer)** |

 

 

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** **

**CERTIFICATION**

 

I, James L. Bildner,certify that:

 

1.    Ihave reviewed this quarterly report on Form 10-Q of Tier Technologies, Inc.;

 

2.    Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.    Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for the periods presented in this quarterly report;

 

4.    Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.    Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.    Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

  
| Dated: May 12, 2003 | /s/  JAMES L.  BILDNER |
|---------------------|----------------------------------|
|                |                             |
|                | James L.  Bildner,               |
|                | Chief Executive  Officer         |

 

35

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**CERTIFICATION**

I, Laura B. DePole,certify that:

 

1.    Ihave reviewed this quarterly report on Form 10-Q of Tier Technologies, Inc.;

 

2.    Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.    Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for the periods presented in this quarterly report;

 

4.    Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

d)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

e)  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the “EvaluationDate”); and

 

f)  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.    Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

c) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

d) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.    Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

  

 
| Dated: May 12, 2003 | /s/  LAURA  B. DEPOLE |
|---------------------|---------------------------------|
|                |                            |
|                | Laura B. DePole                 |
|                | Chief Financial  Officer        |

 

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