##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
 (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 Commission file number 000-23195
 TIER TECHNOLOGIES, INC.
 (Exact name of Registrant as specified in its charter)
 
 Delaware
(State or other jurisdiction 
of incorporation or organization)
    
    94-3145844
(I.R.S. Employer
Identification No.)
 10780 Parkridge Boulevard, Suite 400
Reston, Virginia 20191
(Address of principal executive offices)
 Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
 (571) 382-1000
(Registrants telephone number, including area code)
 o x
  Large accelerated filer o
    
    Accelerated filer x
    
    Non-accelerated filer o
  o x




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##### 



TIER TECHNOLOGIES, INC.
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Consolidated Financial Statements (unaudited)
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statements of Comprehensive (Loss) Income
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    5Note 1Organization and Basis of Presentation
    
    
    5Note 2Recent Accounting Pronouncements
    
    
    6Note 3Customer Concentration and Risk
    
    
    7Note 4Investments
    
    
    8Note 5Goodwill and Other Intangible Assets
    
    
    9Note 6(Loss) Earnings per Share
    
    
    10Note 7Shareholders Equity
    
    
    10Note 8Segment Information
    
    
    11Note 9Restructuring
    
    
    11Note 10Contingencies and Commitments
    
    
    12Note 11Related Party Transactions
    
    
    13Note 12Share-based Payment
    
    
    14Note 13Restatement of Prior Period Results
    
    
    16Note 14Subsequent Events
    
    
    17Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    34SIGNATURE
    
    
    35
  Private Securities Litigation Reform Act Safe Harbor Statement  Item 1ARisk Factors




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##### 



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 TIER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,833
    
    
    $
    27,843Investments in marketable securities
    
    
    45,200
    
    
    
    36,493Accounts receivable, net
    
    
    14,413
    
    
    
    19,449Unbilled receivables
    
    
    3,357
    
    
    
    3,094Prepaid expenses and other current assets
    
    
    2,652
    
    
    
    3,680Total current assets
    
    
    86,455
    
    
    
    90,559Property, equipment and software, net
    
    
    13,591
    
    
    
    13,501Long-term accounts receivable
    
    
    1,314
    
    
    
    1,560Goodwill
    
    
    37,567
    
    
    
    37,567Other intangible assets, net
    
    
    24,013
    
    
    
    26,147Restricted investments
    
    
    5,076
    
    
    
    3,335Investment in unconsolidated affiliate
    
    
    4,071
    
    
    
    3,590Other assets
    
    
    2,681
    
    
    
    483Total assets
    
    $
    174,768
    
    
    $
    176,742LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    822
    
    
    $
    1,902Income taxes payable
    
    
    6,884
    
    
    
    7,113Accrued compensation liabilities
    
    
    5,125
    
    
    
    5,139Accrued subcontractor expense
    
    
    2,720
    
    
    
    3,226Other accrued liabilities
    
    
    12,157
    
    
    
    7,738Deferred income
    
    
    5,745
    
    
    
    7,795Other current liabilities
    
    
    63
    
    
    
    98Total current liabilities
    
    
    33,516
    
    
    
    33,011Other liabilities
    
    
    2,059
    
    
    
    2,192Total liabilities
    
    
    35,575
    
    
    
    35,203Commitments and contingencies (Note 10)Shareholders equity:Preferred stock, no par value, authorized
shares: 4,579: no shares issued or outstanding
    
    
    
    
    
    
    Common stock and paid-in capitalShares
authorized: 44,260; shares issued: 20,383
and 20,374; shares outstanding: 19,499
and 19,490
    
    
    183,003
    
    
    
    182,066Treasury stockat cost, 884 shares
    
    
    (8,684
    )
    
    
    (8,684
    )Notes receivable from related parties
    
    
    (4,132
    )
    
    
    (3,998
    )Accumulated other comprehensive loss
    
    
    (68
    )
    
    
    (111
    )Accumulated deficit
    
    
    (30,926
    )
    
    
    (27,734
    )Total shareholders equity
    
    
    139,193
    
    
    
    141,539Total liabilities and shareholders equity
    
    $
    174,768
    
    
    $
    176,742
 See Notes to Consolidated Financial Statements
 1




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##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three months ended March 31,
    
    
    Six months ended March 31,2005
    
    
    
    
    
    
    2005(in thousands, except per share data)
    
    2006
    
    
    (As restated)
    
    
    2006
    
    
    (As restated)Revenues
    
    $
    37,474
    
    
    $
    35,396
    
    
    $
    77,356
    
    
    $
    67,156Costs and expenses:Direct costs
    
    
    30,696
    
    
    
    22,888
    
    
    
    58,592
    
    
    
    44,810General and administrative
    
    
    8,859
    
    
    
    6,639
    
    
    
    15,782
    
    
    
    13,181Selling and marketing
    
    
    2,740
    
    
    
    2,689
    
    
    
    5,320
    
    
    
    5,357Depreciation and amortization
    
    
    1,325
    
    
    
    1,568
    
    
    
    2,644
    
    
    
    3,116Total costs and expenses
    
    
    43,620
    
    
    
    33,784
    
    
    
    82,338
    
    
    
    66,464(Loss) income before other income (loss) and income taxes
    
    
    (6,146
    )
    
    
    1,612
    
    
    
    (4,982
    )
    
    
    692Other income (loss):Equity in net income (loss) of unconsolidated affiliate
    
    
    462
    
    
    
    (147
    )
    
    
    521
    
    
    
    (242
    )Net interest income
    
    
    683
    
    
    
    379
    
    
    
    1,274
    
    
    
    674Total other income
    
    
    1,145
    
    
    
    232
    
    
    
    1,795
    
    
    
    432(Loss) income before income taxes
    
    
    (5,001
    )
    
    
    1,844
    
    
    
    (3,187
    )
    
    
    1,124Income tax provision
    
    
    
    
    
    
    39
    
    
    
    5
    
    
    
    39Net (loss) income
    
    $
    (5,001
    )
    
    $
    1,805
    
    
    $
    (3,192
    )
    
    $
    1,085Basic and diluted earnings (loss) per share
    
    $
    (0.26
    )
    
    $
    0.09
    
    
    $
    (0.16
    )
    
    $
    0.06Weighted-average common shares used in computing:Basic (loss) earnings per share
    
    
    19,493
    
    
    
    19,464
    
    
    
    19,491
    
    
    
    19,448Diluted (loss) earnings per share
    
    
    19,493
    
    
    
    19,539
    
    
    
    19,491
    
    
    
    19,573
 See Notes to Consolidated Financial Statements
 2




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##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (unaudited)
 Three months ended March 31,
    
    
    Six months ended March 31,2005
    
    
    
    
    
    
    2005(in thousands)
    
    2006
    
    
    (As restated)
    
    
    2006
    
    
    (As restated)Net (loss) income
    
    $
    (5,001
    )
    
    $
    1,805
    
    
    $
    (3,192
    )
    
    $
    1,085Other comprehensive income (loss), net of tax:Unrealized gain (loss) on available-for-sale investments
    
    
    24
    
    
    
    (30
    )
    
    
    54
    
    
    
    (199
    )Foreign currency translation adjustment
    
    
    9
    
    
    
    (55
    )
    
    
    (11
    )
    
    
    17Other comprehensive income (loss)
    
    
    33
    
    
    
    (85
    )
    
    
    43
    
    
    
    (182
    )Comprehensive (loss) income
    
    $
    (4,968
    )
    
    $
    1,720
    
    
    $
    (3,149
    )
    
    $
    903
 See Notes to Consolidated Financial Statements
 3




---



##### 



TIER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Six months ended March 31,2005(in thousands)
    
    2006
    
    
    (As restated)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income:
    
    $
    (3,192
    )
    
    $
    1,085Non-cash items included in net income:Depreciation and amortization
    
    
    4,478
    
    
    
    4,105Loss on retirement of equipment and software
    
    
    28
    
    
    
    (129
    )Provision for doubtful accounts
    
    
    599
    
    
    
    235Equity in net (income) loss of unconsolidated affiliate
    
    
    (521
    )
    
    
    242Accrued forward loss on contract
    
    
    2,791
    
    
    
    Share based compensation
    
    
    734
    
    
    
    Net effect of changes in assets and liabilities:Accounts receivable
    
    
    4,420
    
    
    
    (5,502
    )Prepaid expenses and other assets
    
    
    (1,170
    )
    
    
    (402
    )Accounts payable and accrued liabilities
    
    
    (144
    )
    
    
    2,343Income taxes payable
    
    
    (229
    )
    
    
    Deferred income
    
    
    (2,050
    )
    
    
    318Cash provided by operating activities
    
    
    5,744
    
    
    
    2,295CASH FLOWS FROM INVESTING ACTIVITIES:Purchases marketable securities
    
    
    (42,100
    )
    
    
    (3,715
    )Sales and maturities of marketable securities
    
    
    32,214
    
    
    
    17,045Purchases of restricted securities
    
    
    (2,878
    )
    
    
    (787
    )Maturities of restricted investments
    
    
    2,371
    
    
    
    Purchase of equipment and software
    
    
    (2,392
    )
    
    
    (6,764
    )Investment in subsidiaries and unconsolidated affiliate
    
    
    
    
    
    
    (4,005
    )Other investing activities
    
    
    (1
    )
    
    
    (215
    )Cash (used in) provided by investing activities
    
    
    (12,786
    )
    
    
    1,559CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance common stock
    
    
    69
    
    
    
    388Capital lease obligations and other financing arrangements
    
    
    (31
    )
    
    
    (44
    )Cash provided by financing activities
    
    
    38
    
    
    
    344Effect of exchange rate changes on cash
    
    
    (6
    )
    
    
    (47
    )Net (decrease) increase in cash and cash equivalents
    
    
    (7,010
    )
    
    
    4,151Cash and cash equivalents at beginning of period
    
    
    27,843
    
    
    
    28,495Cash and cash equivalents at end of period
    
    $
    20,833
    
    
    $
    32,646SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    8
    
    
    $
    14Income taxes paid, net
    
    $
    188
    
    
    $
    126SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:Equipment acquired under capital lease obligations and other
financing arrangements
    
    $
    14
    
    
    $
    40
 See Notes to Consolidated Financial Statements
 4




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##### 



Tier Technologies, Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
 ORGANIZATION
  
    
    Electronic Payment Processing, or EPPprovides electronic payment processing
options, including payment of taxes, fees and other obligations owed to government
entities, educational institutions and other public sector clients;
    
    Government Business Process Outsourcing, or GBPOfocuses on child support
payment processing, child support financial institution data match services, health and
human services consulting and other related systems integration services; and
    
    Packaged Software and Systems Integration, or PSSIprovides software and
systems implementation services through practice areas in financial management systems,
public pension administration systems, unemployment insurance administration systems,
electronic government services, computer telephony and call centers and systems integration
services for the State of Missouri.
  
    
    Official Payments Corporation, or OPCprovides proprietary telephone and
Internet systems, as well as transaction processing and settlement for electronic payment
options to federal, state, and municipal government agencies, educational institutions and
other public sector clients; and
    
    EPOS Corporation, or EPOSprovides interactive communications and transaction
processing technologies to federal, state and municipal government agencies, educational
institutions and other public sector clients.
  BASIS OF PRESENTATION
  Investment in unconsolidated affiliate
 5
       Tier Technologies, Inc.
  Note 13Restatement of Prior
Period Financial Results
 
 NOTE 2RECENT ACCOUNTING PRONOUNCEMENTS
 SFAS 154Accounting Changes and Error Corrections . Accounting
Changes and Error Corrections
  SFAS 157Fair Value Measurements Fair Value Measurements
 FIN 47Accounting for Conditional Asset Retirement Obligations . Accounting for Conditional Asset Retirement Obligations Accounting for Asset Retirement Obligations.
 FIN 48Accounting for Uncertainty in Income Taxes Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 FSP 46R-6Determining the Variability to be Considered in Applying FASB Interpretation No.
46(R) . Determining the Variability to Be
Considered in Applying FASB Interpretation No. 46(R) Consolidation of 6
       Tier Technologies, Inc.
 Variable Interest Entities
 FSP 115-1 and 124-1Impairment of Investments . The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments
 FSP 123(R)-3Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards . Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, Note
12Share-Based Payment.
 
 NOTE 3CUSTOMER CONCENTRATION AND RISK
   Accounts receivable, net . Accounts receivable, net
 
    
    Customer receivablesreceivables from our clients;
    
    Mispost receivablesreceivables from individuals to whom our payment processing
centers made incorrect payments; and
    
    Not Sufficient Funds (NSF) receivablesreceivables from individuals who paid
their child support payment with a check that had insufficient funds.
 Accounts receivable, net
 7      Tier Technologies, Inc.
 (in thousands)
    
    March 31, 2006
    
    
    September 30, 2005Accounts receivable from:Customers
    
    $
    14,820
    
    
    $
    18,017Recipients of misposted payments
    
    
    1,749
    
    
    
    1,843Payers of NSF child support
    
    
    735
    
    
    
    743Total accounts receivable
    
    
    17,304
    
    
    
    20,603Allowance for uncollectible accounts receivable:Customer
    
    
    (952
    )
    
    
    (632
    )Mispost
    
    
    (1,407
    )
    
    
    (1,375
    )NSF
    
    
    (736
    )
    
    
    (632
    )Total allowance for uncollectible accounts
    
    
    (3,095
    )
    
    
    (2,639
    )Short-term accounts receivable retainer
    
    
    1,518
    
    
    
    3,045Long-term accounts receivable
    
    
    (1,314
    )
    
    
    (1,560
    )Accounts receivable, net
    
    $
    14,413
    
    
    $
    19,449
 Long-term accounts receivable
 Accounts receivable, net Other assets
 Unbilled Receivables.
 
 NOTE 4INVESTMENTS
 Accounting for Certain Investments in Debt and Equity Securities, Restricted investments
 Statement of Cash Flows Restricted investments Cash and cash equivalents Investments in marketable securities
 8
      Tier Technologies, Inc.  March 31, 2006
    
    
    September 30, 2005Amortized
    
    
    Unrealized
    
    
    Estimated
    
    
    Amortized
    
    
    Unrealized
    
    
    Estimated(in thousands)
    
    cost
    
    
    loss
    
    
    fair value
    
    
    cost
    
    
    loss
    
    
    fair valueCash equivalents:Money market
    
    $
    5,221
    
    
    $
    
    
    
    $
    5,221
    
    
    $
    11,272
    
    
    $
    
    
    
    $
    11,272Total investments included in cash
and cash equivalents
    
    
    5,221
    
    
    
    
    
    
    
    5,221
    
    
    
    11,272
    
    
    
    
    
    
    
    11,272Investments in marketable securities:Debt securities:Other loans
    
    
    44,200
    
    
    
    
    
    
    
    44,200
    
    
    
    30,888
    
    
    
    (13
    )
    
    
    30,875U.S. government sponsored
enterprise obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,629
    
    
    
    (7
    )
    
    
    1,622Equity securities
    
    
    1,000
    
    
    
    
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    2,996Total short-term investments
    
    
    45,200
    
    
    
    
    
    
    
    45,200
    
    
    
    36,513
    
    
    
    (20
    )
    
    
    36,493Restricted investments:U.S. government sponsored enterprise
obligations
    
    
    3,199
    
    
    
    (1
    )
    
    
    3,198
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Certificate of deposit
    
    
    1,878
    
    
    
    
    
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    Total investments available-for-sale
    
    
    5,077
    
    
    
    (1
    )
    
    
    5,076
    
    
    
    3,370
    
    
    
    (35
    )
    
    
    3,335Total investments available-for-sale
    
    $
    55,498
    
    
    $
    (1
    )
    
    $
    55,497
    
    
    $
    51,155
    
    
    $
    (55
    )
    
    $
    51,100
 Investments in
marketable securities
 (in thousands)
    
    March 31, 2006
    
    
    September 30, 2005Within one year
    
    $
    
    
    
    $
    5,647Greater than ten years
    
    
    44,200
    
    
    
    26,850Total
    
    $
    44,200
    
    
    $
    32,497
   
 NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  Goodwill and Other Intangible
Assets
 9      Tier Technologies, Inc.  March 31, 2006
    
    
    September 30, 2005Amortization
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    
    Accumulated(in thousands)
    
    period
    
    
    Gross
    
    
    amortization
    
    
    Net
    
    
    Gross
    
    
    amortization
    
    
    NetClient relationships
    
    10 years
    
    $
    28,749
    
    
    $
    (9,738
    )
    
    $
    19,011
    
    
    $
    28,749
    
    
    $
    (8,301
    )
    
    $
    20,448Technology & research and
development
    
    3-10 years
    
    
    4,289
    
    
    
    (1,558
    )
    
    
    2,731
    
    
    
    5,029
    
    
    
    (1,870
    )
    
    
    3,159Trademarks
    
    6-10 years
    
    
    3,214
    
    
    
    (1,181
    )
    
    
    2,033
    
    
    
    3,214
    
    
    
    (1,019
    )
    
    
    2,195Non-compete agreements
    
    2-3 years
    
    
    615
    
    
    
    (377
    )
    
    
    238
    
    
    
    615
    
    
    
    (270
    )
    
    
    345Other intangible assets, net
    
    
    
    
    
    $
    36,867
    
    
    $
    (12,854
    )
    
    $
    24,013
    
    
    $
    37,607
    
    
    $
    (11,460
    )
    
    $
    26,147
  
 NOTE 6(LOSS) EARNINGS PER SHARE
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net (loss) income
    
    $
    (5,001
    )
    
    $
    1,805
    
    
    $
    (3,192
    )
    
    $
    1,085Denominator:Weighted-average common shares outstanding
    
    
    19,493
    
    
    
    19,464
    
    
    
    19,491
    
    
    
    19,448Effects of dilutive common stock options
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    125Adjusted weighted-average shares
    
    
    19,493
    
    
    
    19,539
    
    
    
    19,491
    
    
    
    19,573Basic and diluted (loss) earnings per share
    
    $
    (0.26
    )
    
    $
    0.09
    
    
    $
    (0.16
    )
    
    $
    0.06
  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted-average options excluded
from computation of diluted (loss)
earnings per share
    
    
    2,383
    
    
    
    2,524
    
    
    
    2,362
    
    
    
    1,924Range of exercise prices per share:High
    
    $
    20.70
    
    
    $
    20.70
    
    
    $
    20.70
    
    
    $
    20.70Low
    
    $
    7.61
    
    
    $
    7.81
    
    
    $
    7.61
    
    
    $
    8.53
  
 NOTE 7SHAREHOLDERS EQUITY


10      Tier Technologies, Inc. 
 NOTE 8SEGMENT INFORMATION
  Three months ended
    
    
    Six months ended(in thousands)
    
    GBPO(1)
    
    
    PSSI(2)
    
    
    EPP(3)
    
    
    Eliminations
    
    
    Total
    
    
    GBPO(1)
    
    
    PSSI(2)
    
    
    EPP(3)
    
    
    Eliminations
    
    
    TotalMarch 31, 2006:Net revenues
    
    $
    11,778
    
    
    $
    10,232
    
    
    $
    15,464
    
    
    $
    
    
    
    $
    37,474
    
    
    $
    23,854
    
    
    $
    22,987
    
    
    $
    30,515
    
    
    $
    
    
    
    $
    77,356Direct costs
    
    $
    11,821
    
    
    $
    7,533
    
    
    $
    11,463
    
    
    $
    (121
    )
    
    
    30,696
    
    
    $
    21,411
    
    
    $
    14,896
    
    
    $
    22,537
    
    
    $
    (252
    )
    
    $
    58,592March 31, 2005:Net revenues
    
    $
    11,636
    
    
    $
    13,569
    
    
    $
    10,631
    
    
    $
    (440
    )
    
    $
    35,396
    
    
    $
    21,128
    
    
    $
    28,469
    
    
    $
    22,016
    
    
    $
    (4,457
    )
    
    $
    67,156Direct costs
    
    $
    7,675
    
    
    $
    8,162
    
    
    $
    7,766
    
    
    $
    (715
    )
    
    
    22,888
    
    
    $
    14,099
    
    
    $
    18,092
    
    
    $
    15,760
    
    
    $
    (3,141
    )
    
    $
    44,810
 
 (1)
    
    The revenues from one customer produced 36.4% and 36.0%, respectively, of the revenues for the GBPO segment during the three and six months ended March 31, 2006, and produced 20.0% and 11.2%, respectively,
of GBPO revenues during the three and six months ended March 31, 2005. The revenues from another customer produced 15.9% and 15.7%, respectively, of the GBPO revenues for the three and six months ended March 31, 2006, while
the revenues from this customer produced 15.5% and 17.4%, respectively, of GBPO revenues during the three and six months ended March 31, 2005.(2)
    
    During the three and six months ended March 31, 2006, the revenues from one customer produced 25.5% and 23.8%, respectively, of the revenues for the PSSI segment. During the three and six months ended March
31, 2005, the revenues from this customer produced 24.9% and 26.9%, respectively, of the revenues for the PSSI segment.(3)
    
    During the three and six months ended March 31, 2006, the revenues from one customer produced 30.9% and 23.3%, respectively, of the revenues for EPP segment. During the three and six months ended March 31,
2005, the revenues from this customer produced 27.7% and 21.5%, respectively, of the revenues for the EPP segment.  
 NOTE 9RESTRUCTURING
 General and administrative
  Facilities(in thousands)
    
    Severance
    
    
    closures
    
    
    TotalBalance at September 30, 2005
    
    $
    330
    
    
    $
    610
    
    
    $
    940Additions
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (130
    )
    
    
    (98
    )
    
    
    (228
    )Balance at March 31, 2006
    
    $
    200
    
    
    $
    512
    
    
    $
    712
 Other liabilities Other accrued liabilities


11      Tier Technologies, Inc. 
 NOTE 10CONTINGENCIES AND COMMITMENTS
 LEGAL ISSUES
 Note 14Subsequent Events
 BANK LINES OF CREDIT
  LETTERS OF CREDIT
 Restricted
investments
 CREDIT RISK
 de minimis
 GUARANTEES
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others


12      Tier Technologies, Inc. PERFORMANCE BONDS
 Prepaid expenses and other current assets Direct costs
 EMPLOYMENT AGREEMENTS
 Note 14Subsequent Events
 INDEMNIFICATION AGREEMENTS
  FORWARD LOSSES
 Other accrued liabilities Direct costs
 CONSTRUCTION COMMITMENT
  
 NOTE 11RELATED PARTY TRANSACTIONS
 NOTES RECEIVABLE AND ACCRUED INTEREST RECEIVABLE
  13
      Tier Technologies, Inc.  Notes receivable from related
parties Common stock and paid-in-capital
 OTHER RELATED-PARTY TRANSACTIONS
   
 NOTE 12SHARE-BASED PAYMENT
  Share-Based Payment a revision of FASB Statement No. 123Accounting for Stock-Based Compensation
 Accounting for Stock-Based Compensation


14      Tier Technologies, Inc. Three months ended
    
    
    Six months ended(in thousands, except per share data)
    
    March 31, 2005
    
    
    March 31, 2005Net income
    
    $
    1,805
    
    
    $
    1,085Less: Total stock-based compensation
expense determined under fair
value-based method for all awards,
net of tax effect
    
    
    524
    
    
    
    1,394Pro forma net income (loss)
    
    $
    1,281
    
    
    $
    (309
    )Earnings (loss) per basic and diluted share:As reported
    
    $
    0.09
    
    
    $
    0.06Pro forma
    
    $
    0.07
    
    
    $
    (0.02
    )Weighted-average shares used in computing:Basic earnings (loss) per share
    
    
    19,464
    
    
    
    19,448Diluted
    
    
    19,539
    
    
    
    19,573
  Three months ended March 31,
    
    
    Six months ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected life (in years)
    
    
    5.00
    
    
    
    1.29
    
    
    
    5.00
    
    
    
    3.21Interest rate
    
    
    4.50
    %
    
    
    4.18
    %
    
    
    4.50
    %
    
    
    4.18
    %Volatility
    
    
    48.04
    %
    
    
    38.88
    %
    
    
    48.04
    %
    
    
    38.88
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   Weighted-averageShares under
    
    
    Weighted-average
    
    
    remaining
    
    
    Aggregate intrinsic(in thousands, except per share data)
    
    option
    
    
    exercise price
    
    
    contractual term
    
    
    valueOptions outstanding at October 1, 2005
    
    
    2,968
    
    
    $
    10.34Granted
    
    
    38
    
    
    
    8.36Exercised
    
    
    (10
    )
    
    
    7.07Forfeitures or expirations
    
    
    (160
    )
    
    
    9.42Options outstanding at March 31, 2006
    
    
    2,836
    
    
    $
    10.38
    
    
    
    6.15
    
    
    $
    1,093Options exercisable at March 31, 2006
    
    
    2,012
    
    
    $
    10.88
    
    
    
    5.33
    
    
    $
    957
  15
      Tier Technologies, Inc. 
 NOTE 13RESTATEMENT OF PRIOR PERIOD RESULTS
  Three months ended March 31, 2005(In thousands, except per share data)
    
    As Reported
    
    
    Adjustment
    
    
    As RestatedRevenues
    
    $
    35,277
    
    
    $
    119
    
    
    $
    35,396Costs and expenses:Direct costs
    
    
    23,061
    
    
    
    (173
    )
    
    
    22,888General and administrative
    
    
    6,871
    
    
    
    (232
    )
    
    
    6,639Selling and marketing
    
    
    3,013
    
    
    
    (324
    )
    
    
    2,689Depreciation and amortization
    
    
    1,570
    
    
    
    (2
    )
    
    
    1,568Total costs and expenses
    
    
    34,515
    
    
    
    (731
    )
    
    
    33,784Income before other income (loss) and income taxes
    
    
    762
    
    
    
    850
    
    
    
    1,612Other income
    
    
    367
    
    
    
    (135
    )
    
    
    232Income before income taxes
    
    
    1,129
    
    
    
    715
    
    
    
    1,844Provision for income taxes
    
    
    20
    
    
    
    19
    
    
    
    39Net income
    
    $
    1,109
    
    
    $
    696
    
    
    $
    1,805Basic and diluted loss per share
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.09Average shares issued and outstanding:Basic
    
    
    19,464
    
    
    
    19,464
    
    
    
    19,464Diluted
    
    
    19,539
    
    
    
    19,539
    
    
    
    19,539
  Six months ended March 31, 2005(In thousands, except per share data)
    
    As Reported
    
    
    Adjustment
    
    
    As RestatedRevenues
    
    $
    66,956
    
    
    $
    200
    
    
    $
    67,156Costs and expenses:Direct costs
    
    
    44,944
    
    
    
    (134
    )
    
    
    44,810General and administrative
    
    
    13,751
    
    
    
    (570
    )
    
    
    13,181Selling and marketing
    
    
    5,592
    
    
    
    (235
    )
    
    
    5,357Depreciation and amortization
    
    
    3,120
    
    
    
    (4
    )
    
    
    3,116Total costs and expenses
    
    
    67,407
    
    
    
    (943
    )
    
    
    66,464Income before other income (loss) and income taxes
    
    
    (451
    )
    
    
    1,143
    
    
    
    692Other income
    
    
    646
    
    
    
    (214
    )
    
    
    432Income before income taxes
    
    
    195
    
    
    
    929
    
    
    
    1,124Provision for income taxes
    
    
    20
    
    
    
    19
    
    
    
    39Net income
    
    $
    175
    
    
    $
    910
    
    
    $
    1,085Basic and diluted loss per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.06Average shares issued and outstanding:Basic
    
    
    19,448
    
    
    
    19,448
    
    
    
    19,448Diluted
    
    
    19,573
    
    
    
    19,573
    
    
    
    19,573


16      Tier Technologies, Inc. NOTE 14SUBSEQUENT EVENTS
 AUDIT COMMITTEE INVESTIGATION AND RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS


17      Tier Technologies, Inc. RELATED PARTY TRANSACTIONS
 James R. Weaver.
 EMPLOYMENT AGREEMENT
  SYSTEM OUTAGE
  CHANGES TO 401(k) PLAN
  18      Tier Technologies, Inc.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Managements Discussion and Analysis of Financial Condition and Results of Operations
includes forward-looking statements. We have based these forward-looking statements on our current
plans, expectations and beliefs about future events. In light of the risks, uncertainties and
assumptions discussed under Risk Factors of this Quarterly Report on Form 10-Q and other factors
discussed in this section, there are risks that our actual experience will differ materially from
the expectations and beliefs reflected in the forward-looking statements in this section and
throughout this report. For more information regarding what constitutes a forward-looking
statement refer to the Risk Factors section.
 OVERVIEW
     19
      Tier Technologies, Inc.
 RECENT EVENTS
  Fiscal 2005 Filing Delay Announced.
 Stockholder Rights Plan .
 Audit Committee Investigation.
 Delisting by Nasdaq
 Management Changes.
 20
      Tier Technologies, Inc.
  Unasserted Claim.
 SEC Subpoena
 RESULTS OF OPERATIONS
 Stock-Based Payment, .
 Three months ended
    
    
    
    
    
    
    
    
    
    Six months endedMarch 31,
    
    Variance
    
    March 31,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Revenues
    
    $
    37,474
    
    
    $
    35,396
    
    
    $
    2,078
    
    
    
    6
    %
    
    $
    77,356
    
    
    $
    67,156
    
    
    $
    10,200
    
    
    
    15
    %Costs and expenses
    
    
    43,620
    
    
    
    33,784
    
    
    
    9,836
    
    
    
    29
    %
    
    
    82,338
    
    
    
    66,464
    
    
    
    15,874
    
    
    
    24
    %(Loss) income before other income,
income taxes
    
    
    (6,146
    )
    
    
    1,612
    
    
    
    (7,758
    )
    
    
    *
    
    
    
    (4,982
    )
    
    
    692
    
    
    
    (5,674
    )
    
    
    *Other income
    
    
    1,145
    
    
    
    232
    
    
    
    913
    
    
    
    *
    
    
    
    1,795
    
    
    
    432
    
    
    
    1,363
    
    
    
    *(Loss) income before income taxes
    
    
    (5,001
    )
    
    
    1,844
    
    
    
    (6,845
    )
    
    
    *
    
    
    
    (3,187
    )
    
    
    1,124
    
    
    
    (4,311
    )
    
    
    *Provision for income taxes
    
    
    
    
    
    
    39
    
    
    
    (39
    )
    
    
    *
    
    
    
    5
    
    
    
    39
    
    
    
    (34
    )
    
    
    (87
    )%Net (loss) income
    
    $
    (5,001
    )
    
    $
    1,805
    
    
    $
    (6,806
    )
    
    
    *
    
    
    $
    (3,192
    )
    
    $
    1,085
    
    
    $
    (4,277
    )
    
    
    *
 *Not meaningful
  Revenues
  21
      Tier Technologies, Inc.
  Three months ended
    
    
    
    
    
    
    
    
    
    Six months endedMarch 31,
    
    Variance
    
    March 31,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Revenue, by segment:EPP
    
    $
    15,464
    
    
    $
    10,631
    
    
    $
    4,833
    
    
    
    45
    %
    
    $
    30,515
    
    
    $
    22,016
    
    
    $
    8,499
    
    
    
    39
    %GBPO
    
    
    11,778
    
    
    
    11,636
    
    
    
    142
    
    
    
    1
    %
    
    
    23,854
    
    
    
    21,128
    
    
    
    2,726
    
    
    
    13
    %PSSI*
    
    
    10,232
    
    
    
    13,129
    
    
    
    (2,897
    )
    
    
    (22
    )%
    
    
    22,987
    
    
    
    24,012
    
    
    
    (1,025
    )
    
    
    (4
    )%Total revenues
    
    $
    37,474
    
    
    $
    35,396
    
    
    $
    2,078
    
    
    
    6
    %
    
    $
    77,356
    
    
    $
    67,156
    
    
    $
    10,200
    
    
    
    15
    %
 *Excludes revenues that are eliminated during the consolidation of our accounting results of $0.4 million and $4.5 million, respectively, for the three
and six months ended March 31, 2005. To date, there have been no intercompany revenues generated during fiscal 2006 which would require elimination.
 Electronic Payment Processing Segment, or EPP
  Government Business Processing Segment, or GBPO.
  Packaged Software and Systems Integration Segment, or PSSI
 22
      Tier Technologies, Inc.
   Costs and Expenses
  Three months ended
    
    
    
    
    
    
    
    
    
    Six months endedMarch 31,
    
    Variance
    
    March 31,
    
    Variance(in thousands, except percentages)
    
    2006
    
    2005
    
    $ Amount
    
    %
    
    2006
    
    2005
    
    $ Amount
    
    %Direct costs
    
    $
    30,696
    
    
    $
    22,888
    
    
    $
    7,808
    
    
    
    34
    %
    
    $
    58,592
    
    
    $
    44,810
    
    
    $
    13,782
    
    
    
    31
    %General and administrative
    
    
    8,859
    
    
    
    6,639
    
    
    
    2,220
    
    
    
    33
    %
    
    
    15,782
    
    
    
    13,181
    
    
    
    2,601
    
    
    
    20
    %Selling and marketing
    
    
    2,740
    
    
    
    2,689
    
    
    
    51
    
    
    
    2
    %
    
    
    5,320
    
    
    
    5,357
    
    
    
    (37
    )
    
    
    (1
    )%Depreciation and amortization
    
    
    1,325
    
    
    
    1,568
    
    
    
    (243
    )
    
    
    (15
    )%
    
    
    2,644
    
    
    
    3,116
    
    
    
    (472
    )
    
    
    (15
    )%Total costs and expenses
    
    $
    43,620
    
    
    $
    33,784
    
    
    $
    9,836
    
    
    
    29
    %
    
    $
    82,338
    
    
    $
    66,464
    
    
    $
    15,874
    
    
    
    24
    %
 Direct costs.
 General and administrative.
 23
      Tier Technologies, Inc.
  Selling and marketing. th
 Depreciation and amortization.
 Other Income (Loss)
 Equity in net income (loss) of unconsolidated affiliate .
 Interest income, net.
 Provision for income taxes. Accounting for Income Taxes,
 LIQUIDITY AND CAPITAL RESOURCES
  24
      Tier Technologies, Inc.
   Net Cash from Operating Activities
  Net Cash from Investing Activities
  Net Cash from Financing Activities
   25
      Tier Technologies, Inc.
   CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
  Due in
    
    Due after
    
    Due after1 year
    
    1 year through
    
    3 years through(in thousands)
    
    Total
    
    or less
    
    3 years
    
    5 yearsCapital leases (equipment)
    
    $
    116
    
    
    $
    68
    
    
    $
    46
    
    
    $
    2Operating lease obligations:Facilities leases
    
    
    10,856
    
    
    
    3,387
    
    
    
    7,371
    
    
    
    98Equipment leases
    
    
    208
    
    
    
    102
    
    
    
    106
    
    
    
    Purchase obligations(1)Subcontractor
    
    
    698
    
    
    
    587
    
    
    
    111
    
    
    
    Purchase order
    
    
    298
    
    
    
    298
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    12,176
    
    
    $
    4,442
    
    
    $
    7,634
    
    
    $
    100
 (1) Obligations that are legally binding agreements whereby we agree to purchase products or
services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified
period of time are defined as purchase obligations.
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Managements
Discussion and Analysis of Financial Condition and Results of Operations
 26
      Tier Technologies, Inc.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
   CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   
    
    The Board of Directors appointed a new Chairman and Chief Executive Officer during
the third quarter of fiscal 2006;
    
    We established and communicated an atmosphere of zero-tolerance for improper behavior;
    
    We increased the formality and rigor around the operation of key accounting and
financial disclosure controls, including the documentation and testing of key financial
accounting controls and the implementation of appropriate policies and procedures to
provide reasonable assurance of:
 
    
    timely account reconciliations;
    
    reasonable and accurate accounting estimates and accrued liabilities;
    
    accurate reporting of notes receivable and related interest receivable;
    
    accurate calculation and review of the revenues recognized using
percentage-of-completion models;
 27
      Tier Technologies, Inc.
 
    
    documentation of managements review and approval of transactions; and
    
    preparation and maintenance of appropriate support for accounting transactions.
   
    
    we will automate certain controls that are currently performed manually;
 
    
    we will complete our written documentation of all key financial procedures; and
 
    
    we will consolidate and simplify our back office operations.
 28
      Tier Technologies, Inc.
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 1A. RISK FACTORS
  If we fail to regain our listing status on the Nasdaq, the value of our stock may continue to
be depressed, we may have difficulties attracting and retaining customers and employees and our
Company may be susceptible to takeover attempts.
 We have incurred losses in the past and we cannot ensure that we will be profitable.
 Our revenues and operating margins may decline and may be difficult to forecast, which could
result in a decline in our stock price.
 
    
    economic conditions in the marketplace;
    
    our customers budgets and demand for our services;
    
    seasonality of business;
    
    timing of service and product implementations;
 29
      Tier Technologies, Inc.
 
    
    unplanned increase in costs;
    
    delay in completion of projects;
    
    intense competition;
    
    variability of software license revenues; and
    
    integration and costs of acquisitions.
  We rely on small numbers of projects, customers and target markets for significant portions of our
revenues and our cash flow may decline significantly if we are unable to retain or replace these
projects or clients.
 Our markets are highly competitive. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market share.
 Changes in accounting standards could significantly change our reported results.
 Material weaknesses in our internal controls over financial reporting may result in adverse impact
on our business. Control and Procedures
 30
      Tier Technologies, Inc.
 Changes in laws and government and regulatory compliance requirements may result in additional
compliance costs and may adversely impact our reported earnings.
 The revenues provided by our EPP segment from electronic payment processing may fluctuate and the
ability to maintain profitability is uncertain.
 Our ability to grow depends largely on our ability to attract, integrate and retain qualified
personnel.
 We depend on third parties for our products and services. Failure by these third parties to
perform their obligations satisfactorily could hurt our reputation, operating results and
competitiveness.
 31
      Tier Technologies, Inc.
 Our fixed-price and transaction-based contracts require accurate estimates of resources and
transaction volumes and failure to estimate these factors accurately could cause us to lose money
on these contracts.
 Our revenues are highly dependent on government funding and the loss or decline of existing or
future government funding could cause our revenues and cash flows to decline.
 Our business is subject to increasing performance requirements, which could result in reduced
revenues and increased liability.
 If we are not able to obtain adequate or affordable insurance coverage or bonds, we could face
significant liability claims and increased premium costs and our ability to compete for business
could be compromised.
 Unauthorized data access and other security breaches could have an adverse impact on our business
and our reputation.
 We could suffer material losses if our operations fail to perform effectively.
 32
      Tier Technologies, Inc.
 Our business may be harmed by claims, lawsuits or investigations which could result in adverse
outcomes.
   If we are not able to protect our intellectual property we could suffer serious harm to our
business
 We may be subject to infringement claims of third parties, resulting in increased costs and loss of
business.
 Our markets are rapidly changing and if we are not able to continue to adapt to changing
conditions, we may lose market share and be unable to compete effectively.
 We may not be successful in identifying acquisition candidates and, if we undertake acquisitions,
they could be expensive, increase our costs or liabilities or disrupt our business.
 33
      Tier Technologies, Inc.
  ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    
    Certificate of Designations of Series A Junior Participating Preferred Stock(1)3.2
    
    
    Amendment to the Companys Amended and Restated Bylaws(1)4.1
    
    
    Rights Agreement, dated as of January 10, 2006, by and between Tier Technologies, Inc. and American Stock
Transfer & Trust Company, as Rights Agent(1)4.2
    
    
    Form of Rights Certificate(1)10.1
    
    
    Assumption Agreement as of January 6, 2006 by and between the Registrant, Official Payments Corporation,
EPOS Corporation and City National Bank(2)10.2
    
    
    Security Agreement as of January 6, 2006 by and between EPOS Corporation and City National Bank(2)10.3
    
    
    Amended and Restated Credit and Security Agreement dated March 6, 2006 between the Registrant, Official
Payments Corporation, EPOS Corporation and City National Bank(3)31.1
    
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. 32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
 (2)
 (3)
 34
      Tier Technologies, Inc.
 
 SIGNATURE
  Tier
Technologies, Inc.Dated: November 14, 2006By:
    /s/ David E. FountainDavid E. FountainChief Financial Officer
(Principal Financial and Accounting Officer) 35