**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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**(MarkOne)**

 
| **ý**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **For the quarterly period ended June  30, 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) Yes ý  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 July 29, 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 17,750,752.

 

 

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**TIER TECHNOLOGIES, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| **Part I—FINANCIAL  INFORMATION** |
|----------------------------------------|
|                                   |   |
| Item 1.                                | Condensed Consolidated  Financial Statements (unaudited) |
|                                   |   |
|                                   | Condensed  Consolidated Balance Sheets as of June 30, 2003 and September 30, 2002 |
|                                   |   |
|                                   | Condensed  Consolidated Statements of Operations for the three and nine months ended  June 30, 2003 and 2002 |
|                                   |   |
|                                   | Condensed  Consolidated Statements of Cash Flows for the nine months ended June 30, 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 6.                                | Exhibits  and Reports on Form 8-K |
|                                   |   |
| Signatures                             |

 

2

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**PARTI.   FINANCIAL INFORMATION**

 

**ITEM1.   FINANCIAL STATEMENTS**

 

**TIER TECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

**(in thousands)**

 
|                                                                              |   | **June 30,  2003** |       | **September  30,  2002** |       |
|-----------------------------------------------------------------------------------|--------|--------------------|------------|--------------------------|------------|
| **ASSETS**                                                                        |   |               | ** ** |                     | ** ** |
|                                                                              |   |               |       |                     |       |
| **Current assets:**                                                               |   |               | ** ** |                     | ** ** |
| Cash and cash  equivalents                                                        |   | $                  | 37,148     |                     | $          | 41,750 |   |
| Short-term  investments                                                           |   | 9,119              |       | 18,571                   |       |
| Accounts  receivable, net                                                         |   | 35,906             |       | 32,686                   |       |
| Prepaid expenses  and other current assets                                        |   | 7,781              |       | 7,908                    |       |
| Total current  assets                                                             |   | 89,954             |       | 100,915                  |       |
| Equipment and  software, net                                                      |   | 6,913              |       | 8,751                    |       |
| Notes and  accrued interest receivable from related parties, less current portion |   | 2,099              |       | 1,967                    |       |
| Goodwill and  other acquired intangible assets, net                               |   | 73,269             |       | 76,118                   |       |
| Long-term  investments                                                            |   | 22,725             |       | 11,906                   |       |
| Other assets                                                                      |   | 2,168              |       | 1,462                    |       |
| Total assets                                                                      |   | $                  | 197,128    |                     | $          | 201,119 |   |
|                                                                              |   |               |       |                     |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                    |   |               |       |                     |       |
|                                                                              |   |               |       |                     |       |
| **Current liabilities:**                                                          |   |               |       |                     |       |
| Accounts payable                                                                  |   | $                  | 1,507      |                     | $          | 959 |   |
| Accrued  liabilities                                                              |   | 8,774              |       | 11,184                   |       |
| Accrued  subcontractor expenses                                                   |   | 4,532              |       | 3,257                    |       |
| Accrued  compensation and related liabilities                                     |   | 3,885              |       | 3,979                    |       |
| Purchase price  payable and accrued contingent earnouts                           |   | 3⁄4             |       | 3,387                    |       |
| Deferred income                                                                   |   | 3,002              |       | 3,231                    |       |
| Other current  liabilities                                                        |   | 2,345              |       | 2,226                    |       |
| Total current  liabilities                                                        |   | 24,045             |       | 28,223                   |       |
| Long-term debt,  less current portion                                             |   | 227                |       | 288                      |       |
| Deferred taxes  payable                                                           |   | 4,458              |       | 4,458                    |       |
| Other  liabilities.                                                               |   | 1,061              |       | 1,129                    |       |
| Total  liabilities                                                                |   | 29,791             |       | 34,098                   |       |
|                                                                              |   |               |       |                     |       |
| Commitments and contingencies                                                     |   |               |       |                     |       |
|                                                                              |   |               |       |                     |       |
| **Shareholders’ equity:**                                                    |   |               |       |                     |       |
| Common stock, no  par value                                                       |   | 164,707            |       | 169,772                  |       |
| Notes receivable  from shareholders                                               |   | (1,773             | )          | (1,773                   | )          |
| Accumulated  other comprehensive loss                                             |   | (342               | )          | (291                     | )          |
| Retained  earnings (accumulated deficit)                                          |   | 4,745              |       | (687                     | )          |
| Total  shareholders’ equity                                                  |   | 167,337            |       | 167,021                  |       |
| Total  liabilities and shareholders’ equity                                  |   | $                  | 197,128    |                     | $          | 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****June 30,** |   | **Nine Months Ended****June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                             |   | **2003**                           |   | **2002**                          |   | **2003** |   | **2002** |   |
| Net  revenues                                                                                                                                    |   | $                                  | 45,526 |                              | $      | 26,330 |   | $ | 110,949 |   | $ | 71,404 |   |
| Cost  of revenues                                                                                                                                |   | 32,677                             |   | 15,930                            |   | 74,770 |   | 42,751 |   |
| Gross  profit                                                                                                                                    |   | 12,849                             |   | 10,400                            |   | 36,179 |   | 28,653 |   |
| Costs  and expenses:                                                                                                                             |   |                               |   |                              |   |   |   |   |   |
| Selling  and marketing                                                                                                                           |   | 1,974                              |   | 1,360                             |   | 5,750 |   | 3,997 |   |
| General  and administrative                                                                                                                      |   | 5,986                              |   | 4,303                             |   | 17,413 |   | 12,039 |   |
| Other  charges                                                                                                                                   |   | 260                                |   | —                            |   | 260 |   | — |   |
| Business  combination integration                                                                                                                |   | 192                                |   | —                            |   | 872 |   | — |   |
| Depreciation  and amortization                                                                                                                   |   | 1,269                              |   | 1,375                             |   | 4,079 |   | 4,096 |   |
| Income  from continuing operations                                                                                                               |   | 3,168                              |   | 3,362                             |   | 7,805 |   | 8,521 |   |
| Interest  income (expense), net                                                                                                                  |   | 263                                |   | 472                               |   | 956 |   | 1,103 |   |
| Income  from continuing operations before income taxes                                                                                           |   | 3,431                              |   | 3,834                             |   | 8,761 |   | 9,624 |   |
| Provision  for income taxes                                                                                                                      |   | 1,304                              |   | 1,419                             |   | 3,329 |   | 3,561 |   |
| Income  from continuing operations, net of income taxes                                                                                          |   | 2,127                              |   | 2,415                             |   | 5,432 |   | 6,063 |   |
| Discontinued  operations:                                                                                                                        |   |                               |   |                              |   |   |   |   |   |
| Loss  from operations of discontinued operation, net of income taxes                                                                             |   | —                             |   | —                            |   | — |   | (1,273 | ) |
| Loss  on disposal of discontinued  operation  (including provision of $719 for operating loss during disposal period), net  of income taxes |   | —                             |   | —                            |   | — |   | (15,085 | ) |
| Loss  from discontinued operation, net of income taxes                                                                                           |   | —                             |   | —                            |   | — |   | (16,358 | ) |
| Net  income (loss)                                                                                                                               |   | $                                  | 2,127  |                              | $      | 2,415 |   | $ | 5,432 |   | $ | (10,295 | ) |
|                                                                                                                                             |   |                               |   |                              |   |   |   |   |   |
| Income  from continuing operations, net of income taxes:                                                                                         |   |                               |   |                              |   |   |   |   |   |
| Per  basic share                                                                                                                                 |   | $                                  | 0.11   |                              | $      | 0.13 |   | $ | 0.29 |   | $ | 0.36 |   |
| Per  diluted share                                                                                                                               |   | $                                  | 0.11   |                              | $      | 0.12 |   | $ | 0.28 |   | $ | 0.34 |   |
|                                                                                                                                             |   |                               |   |                              |   |   |   |   |   |
| Loss  from discontinued operation, net of income taxes:                                                                                          |   |                               |   |                              |   |   |   |   |   |
| Per  basic share                                                                                                                                 |   | $                                  | — |                              | $      | — |   | $ | — |   | $ | (0.98 | ) |
| Per  diluted share                                                                                                                               |   | $                                  | — |                              | $      | — |   | $ | — |   | $ | (0.91 | ) |
|                                                                                                                                             |   |                               |   |                              |   |   |   |   |   |
| Net  income (loss):                                                                                                                              |   |                               |   |                              |   |   |   |   |   |
| Per  basic share                                                                                                                                 |   | $                                  | 0.11   |                              | $      | 0.13 |   | $ | 0.29 |   | $ | (0.62 | ) |
| Per  diluted share                                                                                                                               |   | $                                  | 0.11   |                              | $      | 0.12 |   | $ | 0.28 |   | $ | (0.57 | ) |
|                                                                                                                                             |   |                               |   |                              |   |   |   |   |   |
| Shares  used in computing basic income (loss) per share                                                                                          |   | 18,600                             |   | 18,386                            |   | 18,829 |   | 16,705 |   |
| Shares  used in computing diluted income (loss) per share                                                                                        |   | 18,821                             |   | 19,367                            |   | 19,343 |   | 17,944 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

4

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**TIER TECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(unaudited)**

**(in thousands)**

 
|                                                                                                                                                       |   | **Nine  Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                                       |   | **2003**                         |   | **2002** |   |
| **Operating  activities**                                                                                                                                  |   |                             |   |   |   |
| Income  from continuing operations, net of income taxes                                                                                                    |   | $                                | 5,432  |   | $ | 6,063 |   |
| Adjustments  to reconcile income from continuing operations, net of income taxes to net  cash from continuing operations provided by operating activities: |   |                             |   |   |   |
| Depreciation  and amortization                                                                                                                             |   | 5,879                            |   | 5,800 |   |
| Provision  for doubtful accounts                                                                                                                           |   | 185                              |   | 357 |   |
| Tax  benefit of stock options exercised                                                                                                                    |   | 200                              |   | 4,293 |   |
| Forgiveness  of notes receivable from employees                                                                                                            |   | 40                               |   | 47 |   |
| Change  in operating assets and liabilities, net of effects of business combinations:                                                                      |   |                             |   |   |   |
| Accounts  receivable                                                                                                                                       |   | (3,983                           | )      | (2,194 | ) |
| Prepaid  expenses and other assets                                                                                                                         |   | 19                               |   | (1,352 | ) |
| Accounts  payable and accrued liabilities                                                                                                                  |   | (393                             | )      | (554 | ) |
| Deferred  income                                                                                                                                           |   | (219                             | )      | (904 | ) |
| Net  cash from continuing operations provided by operating activities                                                                                      |   | 7,160                            |   | 11,556 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Investing  activities**                                                                                                                                  |   |                             |   |   |   |
| Purchase  of equipment and software                                                                                                                        |   | (1,417                           | )      | (1,938 | ) |
| Notes  and accrued interest receivable from related parties                                                                                                |   | (201                             | )      | (272 | ) |
| Repayments  on notes and accrued interest receivable from related parties                                                                                  |   | 15                               |   | 398 |   |
| Business  combinations, net of cash acquired                                                                                                               |   | (3,016                           | )      | (12,554 | ) |
| Restricted  cash                                                                                                                                           |   | —                           |   | (4,071 | ) |
| Purchases  of available-for-sale securities                                                                                                                |   | (24,803                          | )      | (46,205 | ) |
| Sales  of available-for-sale securities                                                                                                                    |   | 5,989                            |   | — |   |
| Maturities  of available-for-sale securities                                                                                                               |   | 17,431                           |   | 10,443 |   |
| Other  assets                                                                                                                                              |   | —                           |   | (225 | ) |
| Net  cash from continuing operations used in investing activities                                                                                          |   | (6,002                           | )      | (54,424 | ) |
|                                                                                                                                                       |   |                             |   |   |   |
| **Financing  activities**                                                                                                                                  |   |                             |   |   |   |
| Repayments  under bank lines of credit                                                                                                                     |   | —                           |   | (7,500 | ) |
| Net  proceeds from issuance of Class A and Class B common stock                                                                                       |   | 1,400                            |   | 85,943 |   |
| Repurchase  of Class B common stock                                                                                                                        |   | (6,665                           | )      | — |   |
| Payments  on capital lease obligations and other financing arrangements                                                                                    |   | (412                             | )      | (1,173 | ) |
| Net  cash from continuing operations provided by (used in) financing activities                                                                            |   | (5,677                           | )      | 77,270 |   |
| Effect  of exchange rate changes on cash                                                                                                                   |   | (83                              | )      | (80 | ) |
| Net  cash provided by (used in) continuing operations                                                                                                      |   | (4,602                           | )      | 34,322 |   |
| Net  cash used in discontinued operation                                                                                                                   |   | —                           |   | (1,471 | ) |
| Net  increase (decrease) in cash and cash equivalents                                                                                                      |   | (4,602                           | )      | 32,851 |   |
| Cash  and cash equivalents at beginning of period                                                                                                          |   | 41,750                           |   | 13,174 |   |
| Cash  and cash equivalents at end of period                                                                                                                |   | $                                | 37,148 |   | $ | 46,025 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Supplemental disclosures of cash flow information**                                                                                                      |   |                             |   |   |   |
| Cash  paid during the period for:                                                                                                                          |   |                             |   |   |   |
| Interest                                                                                                                                                   |   | $                                | 44     |   | $ | 267 |   |
| Income  taxes paid (refunded), net                                                                                                                         |   | $                                | 2,680  |   | $ | 1,167 |   |
|                                                                                                                                                       |   |                             |   |   |   |
| **Supplemental disclosures of non-cash transactions**                                                                                                      |   |                             |   |   |   |
| Equipment  acquired under capital lease obligations and other financing arrangements                                                                       |   | $                                | 68     |   | $ | 1,692 |   |
| Assumed  liabilities related to business combinations                                                                                                      |   | $                                | — |   | $ | 2,951 |   |
| Class  B common stock issued in business combinations                                                                                                      |   | $                                | — |   | $ | 2,604 |   |
| 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 accompanyingcondensed consolidated financial statements of Tier Technologies, Inc.(‘‘Tier’’ or the ‘‘Company’’) include the accounts of the Company and itswholly owned subsidiaries. All significant intercompany transactions andbalances have been eliminated in consolidation. In the opinion of management,the condensed consolidated financial statements reflect all normal andrecurring adjustments which are necessary for a fair presentation of theCompany’s financial position, results of operations and cash flows as of thedates and for the periods presented. The condensed consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information. Consequently, these statements donot include all the disclosures normally required by generally acceptedaccounting principles for annual financial statements nor those normally madein the Company’s Annual Report on Form 10-K. Accordingly, reference should bemade to the Company’s Form 10-K filed on December 11, 2002 and other reportsthe Company has filed with the Securities and Exchange Commission foradditional disclosures, including a summary of the Company’s accountingpolicies, which have not materially changed since the date of the Company’slast Annual Report on Form 10-K. The consolidated results of operations for thethree and nine months ended June 30, 2003 are not necessarily indicative ofresults that may be expected for the fiscal year ending September 30, 2003 orany future period, and the Company makes no representations related thereto.

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make certain estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosures ofcontingent assets and liabilities and the results of operations during thereporting period. Actual results could differ materially from those estimates.

 

Certain reclassificationshave been made to the prior period financial statements to conform to thecurrent period presentation.

 

**NOTE 2—REVENUERECOGNITION**

 

TheCompany derives net revenues from transaction processing services, softwaredevelopment services, software license and maintenance fees,  IT consulting and  professional consulting. The Company generally bills clients on a per-transaction basis, a fixedprice basis or a time and materials basis. Net revenues from transaction-based contracts are generallyrecognized based on fees charged on a per-transaction basis or fees charged asa percentage of dollars processed.  Netrevenues pursuant to professional consulting services under fixed-fee contractsand time and materials contracts are generally recognized as services areperformed and, if applicable, acceptance is obtained from clients. Net revenuespursuant to software development fixed-fee contracts are generally recognizedas services are rendered on the percentage-of-completion method of accounting(based on the ratio of costs incurred to total estimated project costs). Netrevenues from software licenses that do not include significant implementationor customization services are recognized upon delivery when the fees are fixedand determinable, collection is probable and vendor specific evidence exists todetermine the value of any undeliverable elements of the arrangement. Netrevenues from software maintenance contracts are recognized ratably over theterm of the contract, typically one year.

 

Netrevenues include reimbursements 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 estimatedlosses on 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 nine months ended June 30, 2003, revenue from oneclient totaled approximately $12,246,000 and $15,637,000, respectively, whichrepresented 26.9% and 14.1%, respectively, of total net revenues. For the threemonths ended June 30, 2002, revenue from one client totaled approximately$3,263,000, which represented 12.4% of total net revenues.  For the nine months ended June 30, 2002,revenues from two clients totaled approximately $10,590,000 and $7,345,000,which represented 14.8% and 10.3%, respectively, of total net revenues.

 

6

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Unbilled receivablesarise on a contract when the cumulative net revenue recognized exceeds thecumulative amount billed in accordance with the contractual billing terms.Unbilled receivables were $20,659,000 and $16,475,000 at June 30, 2003 andSeptember 30, 2002, respectively, of which approximately $20,158,000 and$15,258,000, respectively, related to contracts with governmental agencies.Unbilled receivables for three clients accounted for 62.1%, 14.5% and 6.9%,respectively, of total unbilled receivables at June 30, 2003. Total accountsreceivable, including unbilled receivables, for these three clients accountedfor 38.3%, 12.8% and 10.2%, respectively, of total net accounts receivable,including unbilled receivables, at June 30, 2003. Unbilled receivables for twoclients accounted for 40.2% and 25.4%, respectively, of total unbilled receivablesat September 30, 2002. Total accounts receivable, including unbilledreceivables, for these two clients accounted for 20.0% and 18.2%, respectively,of total net accounts receivable, including unbilled receivables,  at September 30, 2002.  Also included in accounts receivable andother assets at June 30, 2003 was approximately $1,413,000, which representedbalances billed but not paid by customers under retainage provisions in thecontracts, of which approximately $433,000 is expected to be collected withinone year, $423,000 is expected to be collected within two years and $557,000 isexpected to be collected within three years. Included in accounts receivable and other assets at September 30, 2002was approximately $925,000 of retainages, of which approximately $529,000 isexpected to be collected within one year and $396,000 is expected to becollected within two years.

 

Net revenues derived fromsales to governmental agencies, including convenience fees earned by theCompany’s subsidiary, Official Payments Corporation (“OPAY”), on payments madeby citizens to government agencies, were approximately $101,974,000 and$57,021,000 for the nine months ended June 30, 2003 and 2002, respectively.

 

**NOTE3—LONG-TERM INVESTMENTS**

 

Investments withmaturities greater than twelve months as of the balance sheet date areclassified as long-term investments. These long-term investments are categorized by the Company asavailable-for-sale and are recorded at amounts that approximate fair valuebased on quoted market prices and are primarily comprised of state and localmunicipalities’ debt readily traded on over-the-counter markets.

 

Included in long-terminvestments at June 30, 2003 and September 30, 2002 is approximately $7,706,000that is pledged in connection with performance bonds and real estate operatingleases and will be restricted for the terms of the project performance periodsand lease periods, the latest of which is estimated to be through May 2005.

 

**NOTE4—BANK LINES OF CREDIT**

 

At June 30, 2003, the Companyhad a $15.0 million revolving credit facility, all of which may be used forletters of credit.  The credit facilityhas 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 June 30, 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 June30, 2003, the Company was in compliance with all financial ratios.

 

At June 30, 2003, theCompany also had a $2.5 million non-revolving line of credit for financingcapital expenditures that may be drawn upon until January 29, 2004.  Principal payments must be made in 36 equalmonthly payments commencing February 29, 2004. This credit facility has a maturity date of January 31, 2007.  Interest is based on either the LIBOR rateplus 2.75% or the lender’s announced prime rate plus 0.5%, at the Company’soption and is payable monthly.  As ofJune 30, 2003, the Company 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 June 30, 2003.  Also, OPAY had a letter of credit outstandingin the amount of approximately $138,000 secured by a

 

7

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certificate of deposit.  Theseletters of credit were issued to secure performance bonds and to meet variousfacility lease requirements.

 

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

 

InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and OtherIntangible Assets.”  As of October 1,2002, the Company adopted SFAS 142 and no longer amortizes goodwill.  Under SFAS 142, the Company will evaluategoodwill for impairment annually during the fourth quarter of its fiscal year,or more frequently if impairment indicators arise.  Identifiable intangible assets that have finite lives willcontinue to be amortized over their estimated useful lives.

 

TheCompany completed initial impairment tests in accordance with SFAS 142 in thefirst quarter of fiscal year 2003. Results of the initial impairment tests did not indicate any impairmentloss.  Impairment tests involve the useof estimates 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.  In the fourth quarter of fiscal year 2003, the Company willperform its annual impairment test to determine if goodwill associated with oursegments is impaired.  Any resultingimpairment loss could have a material adverse impact on the Company’s financialcondition and results of operations.

 

Goodwilland other acquired intangible assets, net, consisted of the following at June30, 2003 and September 30, 2002:

 
|                                  |   | **June 30,****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        |   | (3,317               | )      | (789                    | )      |
| Other acquired intangible assets, net |   | 25,673               |   | 28,201                  |   |
| Goodwill                              |   | 47,596               |   | 47,917                  |   |
| Total                                 |   | $                    | 73,269 |                    | $      | 76,118 |   |

 

Thechanges in the carrying amount of goodwill for the nine months ended June30, 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                             | )      | (106                     | )      | —                            |   | (321      | )      |
| Balance as of June 30,  2003     |   | $                              | 17,924 |                             | $      | 14,895                   |   | $                                 | 14,739 |      | $      | 38 |   | $ | 47,596 |   |

 

8

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Hadthe Company been accounting for goodwill under SFAS 142 for the three and ninemonths ended June 30, 2002, theCompany’s net income (loss) and net income (loss) per share would have been asfollows:

 
|                                         |   | **Three  Months  Ended  June 30, 2002**   |   | **Nine  Months  Ended  June 30, 2002** |   |
|----------------------------------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|
|                                         |   | **(in thousands, except per share data)** |   |
|                                         |   |                                      |   |                                   |   |
| Reported net income (loss)                   |   | $                                         | 2,415  |                                   | $      | (10,295 | ) |
| Add back goodwill amortization, net of tax   |   | 571                                       |   | 1,715                                  |   |
| Adjusted net income (loss)                   |   | $                                         | 2,986  |                                   | $      | (8,580 | ) |
|                                         |   |                                      |   |                                   |   |
| Net income (loss) per basic share:           |   |                                      |   |                                   |   |
| As reported                                  |   | $                                         | 0.13   |                                   | $      | (0.62 | ) |
| Goodwill amortization, net of tax            |   | 0.03                                      |   | 0.10                                   |   |
| Adjusted net income (loss) per basic share   |   | $                                         | 0.16   |                                   | $      | (0.52 | ) |
|                                         |   |                                      |   |                                   |   |
| Net income (loss) per diluted share:         |   |                                      |   |                                   |   |
| As reported                                  |   | $                                         | 0.12   |                                   | $      | (0.57 | ) |
| Goodwill amortization, net of tax            |   | 0.03                                      |   | 0.09                                   |   |
| Adjusted net income (loss) per diluted share |   | $                                         | 0.15   |                                   | $      | (0.48 | ) |

 

**NOTE 6 —SHAREHOLDERS’ EQUITY**

 

**CommonStock Repurchase Program**

 

Duringthe nine months ended June 30, 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.  Of the 2.0 million shares authorized forrepurchase under this program, a total of approximately 884,000 shares havebeen repurchased as of June 30, 2003, at a total cost of approximately $8.7 million.

 

**ProForma Impact of Employee Stock Options**

 

In December 2002, FASBissued Statement of Financial Accounting Standards No. 148 (“SFAS 148”),“Accounting for Stock-Based Compensation – Transition and Disclosure” – anamendment of Statement of Financial Accounting Standards No. 123 (“SFAS 123”)“Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS 148amends the disclosure requirements of SFAS 123 to require prominent disclosurein both annual and interim financial statements about the method of accountingfor stock-based compensation and the effect of the method used on reportedresults.

 

9

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The Company elected toaccount for its employee stock options under Accounting Principles BoardOpinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”  No compensation expense was recognized foroptions granted under the Company’s employee stock option plan in all periodspresented.  Had compensation cost forthe Company’s employee stock option plan been determined based on fair value atthe grant date consistent with SFAS 123, the Company’s net income (loss) andearnings (loss) per share would have been reduced to the pro forma amountsindicated below:

 
|                                                                                     |   | **Three  Months Ended  June 30,**         |   | **Nine  Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|----------------------------------|--------|
|                                                                                     |   | **2003**                                  |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                                     |   | **(in thousands, except per share data)** |   |
| Net income (loss), as reported                                                           |   | $                                         | 2,127  |                             | $      | 2,415 |   | $ | 5,432 |   | $ | (10,295 | ) |
| Deduct:  Pro forma employee compensation cost  related to stock options, net of tax |   | (596                                      | )      | (672                             | )      | (2,193 | ) | (2,386 | ) |
| Pro forma net  income (loss)                                                             |   | $                                         | 1,531  |                             | $      | 1,743 |   | $ | 3,239 |   | $ | (12,681 | ) |
|                                                                                     |   |                                      |   |                             |   |   |   |   |   |
| Net income  (loss) per basic share:                                                      |   |                                      |   |                             |   |   |   |   |   |
| As reported                                                                              |   | $                                         | 0.11   |                             | $      | 0.13 |   | $ | 0.29 |   | $ | (0.62 | ) |
| Pro forma                                                                                |   | $                                         | 0.08   |                             | $      | 0.09 |   | $ | 0.17 |   | $ | (0.76 | ) |
|                                                                                     |   |                                      |   |                             |   |   |   |   |   |
| Net income  (loss) per diluted share:                                                    |   |                                      |   |                             |   |   |   |   |   |
| As reported                                                                              |   | $                                         | 0.11   |                             | $      | 0.12 |   | $ | 0.28 |   | $ | (0.57 | ) |
| Pro forma                                                                                |   | $                                         | 0.08   |                             | $      | 0.09 |   | $ | 0.17 |   | $ | (0.71 | ) |

 

**NOTE 7—  COMMITMENTS AND CONTINGENCIES**

 

In May 2003, we receiveda notice of demand for arbitration in connection with a dispute over paymentsrelated to an acquisition.  The claim isfor an amount not less than $700,000 plus interest, attorneys’ fees andassociated costs.  As of the date ofthis report, we have not evaluated the merits, if any, of the claim.

 

In June 2003, the Companyannounced that it had received a subpoena from a grand jury in the SouthernDistrict of New York to produce certain documents pursuant to an investigationinvolving the child support payment processing industry by the United StatesDepartment of Justice, Antitrust Division. The Company is cooperating fully with the subpoena.  Other charges reported on the condensedconsolidated statements of operations consist primarily of legal expensesincurred in complying with the grand jury subpoena.

 

10

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**NOTE 8 — NET INCOME (LOSS) PER SHARE**

 

The following table setsforth the computation of basic and diluted net income (loss) per share:

 
|                                                                                                             |   | **Three Months Ended****June 30,**         |       | **Nine Months Ended****June 30,** |       |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-----------------------------------|------------|
|                                                                                                             |   | **2003**                                   |       | **2002**                          |       | **2003** |   | **2002** |   |
|                                                                                                             |   | **(in  thousands, except per share data)** |       |
| Numerator:                                                                                                       |   |                                       | ** ** |                              | ** ** |   | ** ** |   | ** ** |
| Income from continuing operations, net of  income taxes                                                          |   | $                                          | 2,127      |                              | $          | 2,415 |   | $ | 5,432 |   | $ | 6,063 |   |
| Loss from discontinued operation, net of income taxes                                                            |   | —                                     |       | —                            |       | — |   | (16,358 | ) |
| Net income (loss)                                                                                                |   | $                                          | 2,127      |                              | $          | 2,415 |   | $ | 5,432 |   | $ | (10,295 | ) |
| Denominator for basic income (loss) per share-weighted average common  shares outstanding                        |   | 18,600                                     |       | 18,386                            |       | 18,829 |   | 16,705 |   |
| Effects of dilutive securities:                                                                                  |   |                                       |       |                              |       |   |   |   |   |
| Common stock options                                                                                             |   | 221                                        |       | 954                               |       | 514 |   | 1,198 |   |
| Contingently issuable shares                                                                                     |   | —                                     |       | 27                                |       | — |   | 41 |   |
| Denominator for diluted income (loss) per share-adjusted weighted  average common shares and assumed conversions |   | 18,821                                     |       | 19,367                            |       | 19,343 |   | 17,944 |   |
| Income from continuing operations, net of income taxes:                                                          |   |                                       |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                          | 0.11       |                              | $          | 0.13 |   | $ | 0.29 |   | $ | 0.36 |   |
| Per diluted share                                                                                                |   | $                                          | 0.11       |                              | $          | 0.12 |   | $ | 0.28 |   | $ | 0.34 |   |
| Loss from discontinued operation, net of income taxes:                                                           |   |                                       |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                          | —     |                              | $          | — |   | $ | — |   | $ | (0.98 | ) |
| Per diluted share                                                                                                |   | $                                          | —     |                              | $          | — |   | $ | — |   | $ | (0.91 | ) |
| Net income (loss):                                                                                               |   |                                       |       |                              |       |   |   |   |   |
| Per basic share                                                                                                  |   | $                                          | 0.11       |                              | $          | 0.13 |   | $ | 0.29 |   | $ | (0.62 | ) |
| Per diluted share                                                                                                |   | $                                          | 0.11       |                              | $          | 0.12 |   | $ | 0.28 |   | $ | (0.57 | ) |

 

For the three and ninemonths ended June 30, 2003, options to purchase approximately 1,801,000 and1,331,000 shares of Class B common stock, respectively, at prices rangingfrom $8.53 to $20.70 per share and $13.75 to $20.70 per share, respectively,were outstanding but were not included in the computation of diluted income pershare because the options’ exercise prices were greater than the average marketprice of the shares for these periods. For the three and nine months ended June 30, 2002, options to purchaseapproximately 375,000 and 198,000 shares of Class B common stock, respectively,at prices ranging from $17.00 to $20.70 per share and $17.75 to $20.70 pershare, respectively, were outstanding but were not included in the computationof diluted income (loss) per share because the options’ exercise prices weregreater than the average market price of the shares for this period.

 

11

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**NOTE9—COMPREHENSIVE INCOME (LOSS)**

 

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

 
|                                                             |   | **Three  Months Ended  June 30,** |   | **Nine  Months Ended  June 30,** |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                             |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                             |   | **(in thousands)**                |   |
| Net income  (loss)                                               |   | $                                 | 2,127  |                             | $      | 2,415 |   | $ | 5,432 |   | $ | (10,295 | ) |
| Net change in  unrealized gain on available-for-sale investments |   | (33                               | )      | 106                              |   | (17 | ) | 106 |   |
| Foreign currency  translation adjustments                        |   | 102                               |   | 112                              |   | (34 | ) | 955 |   |
| Comprehensive  income (loss)                                     |   | $                                 | 2,196  |                             | $      | 2,633 |   | $ | 5,381 |   | $ | (9,234 | ) |

 

**NOTE10—SEGMENT INFORMATION**

 

The Company is managedthrough four reportable segments: U.S. Commercial Services, U.S. GovernmentServices, Official Payments and United Kingdom Operations.  The Company evaluates the performance of itsoperating segments based on net revenue and gross profit (net revenue lessdirect costs), while other operating costs are evaluated on a geographicalbasis.  Accordingly, the Company doesnot include selling and marketing expenses, general and administrative expenses,depreciation and amortization expense not attributable to state childsupport  payment processing centers,interest income (expense), other income (expense) and income tax expense insegment profitability.  The table belowpresents financial information for the four reportable segments:

 
|                                  |   | **U.S.  Commercial  Services** |   | **U.S.  Government  Services** |   | **Official  Payments** |   | **United  Kingdom  Operations** |   | **Total** |   |
|---------------------------------------|--------|--------------------------------|--------|--------------------------------|--------|------------------------|--------|---------------------------------|--------|-----------|--------|
|                                  |   | **(in  thousands)**            |   |
| **Three Months Ended June 30, 2003:** |   |                           |   |                           |   |                   |   |                            |   |      |   |
| Net revenues                          |   | $                              | 2,490  |                           | $      | 24,494                 |   | $                               | 18,225 |      | $      | 317 |   | $ | 45,526 |   |
| Gross profit                          |   | 962                            |   | 7,602                          |   | 4,153                  |   | 132                             |   | 12,849    |   |
|                                  |   |                           |   |                           |   |                   |   |                            |   |      |   |
| **Three Months Ended June 30, 2002:** |   |                           |   |                           |   |                   |   |                            |   |      |   |
| Net revenues                          |   | $                              | 3,811  |                           | $      | 21,978                 |   | $                               | — |      | $      | 541 |   | $ | 26,330 |   |
| Gross Profit                          |   | 1,798                          |   | 8,472                          |   | —                 |   | 130                             |   | 10,400    |   |
|                                  |   |                           |   |                           |   |                   |   |                            |   |      |   |
| **Nine  Months Ended June 30, 2003:** |   |                           |   |                           |   |                   |   |                            |   |      |   |
| Net revenues                          |   | $                              | 7,600  |                           | $      | 71,048                 |   | $                               | 30,927 |      | $      | 1,374 |   | $ | 110,949 |   |
| Gross profit                          |   | 3,251                          |   | 24,007                         |   | 8,362                  |   | 559                             |   | 36,179    |   |
|                                  |   |                           |   |                           |   |                   |   |                            |   |      |   |
| **Nine  Months Ended June 30, 2002:** |   |                           |   |                           |   |                   |   |                            |   |      |   |
| Net revenues                          |   | $                              | 13,378 |                           | $      | 56,165                 |   | $                               | — |      | $      | 1,861 |   | $ | 71,404 |   |
| Gross profit                          |   | 6,425                          |   | 21,665                         |   | —                 |   | 563                             |   | 28,653    |   |

 

**NOTE11—NEW ACCOUNTING PRONOUNCEMENTS**

 

In November 2002, FASBissued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers.” FIN 45 elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under theguarantees it has issued. The disclosure requirements are effective forfinancial 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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TheCompany has various agreements pursuant to 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 lossesarising from a breach of representations related to such matters as title toassets sold 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 June 30, 2003,management was not aware of any indemnification agreements that would requirematerial payments.

 

Asdisclosed in Note 8 to the consolidated financial statements for the fiscalyear ended September 30, 2002, the Company may be required to make contingentpayments related to the achievement of future performance targets by certainacquisitions.  As of June 30, 2003,contingent payments of approximately $8.2 million may be made over the next 23months upon the achievement of certain performance targets.  These amounts are not included in liabilitiesat June 30, 2003.  If it is determinedthat these contingent payments are earned in the future, the Company willrecord the liability at that time.

 

FIN45 also requires that a guarantor recognize a liability at the inception ofcertain guarantees. The initial recognition and measurement provisions of FIN45 are applicable 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.

 

InJanuary 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidationof Variable Interest Entities.” An entity is subject to the consolidation rulesof FIN 46 and is referred to as a variable interest entity (“VIE”) if theentity’s equity investors lack the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsoperations without additional subordinated financial support. FIN 46 appliesimmediately to VIEs created after January 31, 2003. For VIEs created prior toFebruary 1, 2003, the Company is required to apply the provisions beginningJuly 1, 2003. Additionally, FIN 46 requires disclosure of VIEs in financialstatements issued after January 31, 2003 if it is reasonably possible that asof the transition date: 1) the enterprise will be the primary beneficiary of anexisting VIE that will require consolidation or 2) the enterprise will hold asignificant variable interest in, or have significant involvement with, anexisting VIE. The Company does not currently have any VIEs that it will need toconsolidate or disclose.

 

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.  The Company has decided not to elect toapply the provisions of Issue 00-21 to existing arrangements and record theincome statement impact as the cumulative effect of a change in accounting principle.  The adoption of Issue 00-21 is notanticipated to have a material impact on the Company’s operating results.

 

13

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS****OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**PrivateSecurities Litigation Reform Act Safe Harbor Statement**

 

Certainstatements contained in this report, including statements regarding thedevelopment of and demand for our services and our markets and other statementsthat are not historical facts, are forward-looking statements within themeaning of the federal securities laws. These forward-looking statementsrelate to future events or our future financial and/or operating performanceand can generally be identified as such because the context of the statementwill include words such as “may”, “will”, “intends”, “plans”, “believes”,“anticipates”, “expects”, “estimates”, “shows”, “predicts”, “potential”,“continue”, or “opportunity”, the negative of these words or words of similarimport. These forward-looking statements are subject to risks anduncertainties, including the risks and uncertainties described and referred tounder “Factors That May Affect Future Results” beginning on page 23, that couldcause actual results to differ materially from those anticipated as of the dateof this report.

 

**Overview**

 

Weare a vertically focused provider of end-to-end business solutions to publicsector, national and multinational clients. We formulate, evaluate andimplement solutions that allow clients to rapidly channel emerging technologiesinto their business operations. We combine our understanding of enterprise-widesystems with domain knowledge in four primary vertical markets—government,healthcare, insurance and utilities. We focus on markets that are driven byforces that create demand for our services and are anticipated to provide uswith recurring long-term revenue streams. Our net revenues increased to $110.9million in the nine months ended June 30, 2003 from $71.4 million in the ninemonths ended June 30, 2002. A significant portion of our net revenue is derivedfrom sales to government agencies. For the nine months ended June 30, 2003,approximately 91.9% of our net revenues were derived from sales to governmentagencies, including convenience fees earned by the Company’s subsidiary,Official Payments Corporation (“OPAY”), on payments made by citizens togovernment agencies, as compared to 79.9% for the nine months ended June 30,2002.  In addition, we have a teamingagreement with ACS State and Local Solutions, Inc. (“ACS”) pursuant to which wejointly pursue child support payment processing contracts and currently performservices for three state governments as a subcontractor to ACS.  For the nine months ended June 30, 2003,work performed under these three subcontracts accounted for 8.3% of total netrevenues.  Our workforce, composed ofemployees, independent contractors and subcontractors, increased to 804 on June30, 2003 from 763 on June 30, 2002, excluding our Australian discontinuedoperation

 

Wederive net revenues primarily from transaction processing services, softwaredevelopment services, software license and maintenance fees, IT consulting andprofessional consulting.  We billclients on a per-transaction basis, a fixed price basis or a time and materialsbasis.  We recognize net revenues fromtransaction-based contracts based on fees charged on a per-transactionbasis or fees charged as a percentage of dollars processed.  We recognize fixed price net revenues forsoftware development, implementation, and customization using thepercentage-of-completion method, based upon the ratio of costs incurred tototal estimated project costs. We recognize net revenues from software licensesthat do not include significant implementation or customization services upondelivery to the licensee when the fees are fixed and determinable, collectionis probable and vendor specific evidence exists to determine the value of anyundelivered elements of the arrangement. We recognize time and materials netrevenues and professional consulting services under fixed fee arrangements aswe perform services and incur expenses and, if applicable, obtain acceptancefrom our clients. We recognize revenues from software maintenance contractsratably over the term of the contract, typically one year. The percentage ofour net revenues generated on a fixed price basis was 30.8% for the nine monthsended June 30, 2003 and 48.1% for the nine months ended June 30, 2002. Thepercentage of our net revenues generated on a per-transaction basis was 52.3%for the nine months ended June 30, 2003 and 31.8% for the nine months endedJune 30, 2002.  We believe that thepercentage of total net revenues attributable to fixed price andper-transaction based contracts will continue to be significant.  Substantially all of our contracts areterminable by the client following limited notice and without significantpenalty to the client. From time to time, in the regular course of ourbusiness, we negotiate the modification, termination, renewal or transition oftime and materials, fixed price and per-transaction based contracts that mayinvolve an adjustment to the scope, duration or nature of the project, billingrates or price.  If we significantlyoverestimate the volume for transaction-based contracts or underestimate theresources, costs or time required for fixed price or per-transaction basedcontracts, our financial condition and results of operations would bematerially and adversely affected. Unsatisfactory performance of services or proprietary software, orunanticipated difficulties or delays in completing projects may result inclient dissatisfaction and a reduction in payment to us, termination of acontract, a claim against a performance bond posted by us, or payment ofdamages or penalties by us as a result of litigation or otherwise, which couldhave a material adverse effect upon our business, financial condition andresults of operations.

 

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Wehave derived a significant portion of our net revenues from a small number oflarge clients. For some of these clients, we perform a number of differentprojects pursuant to multiple contracts or purchase orders. For the nine monthsended June 30, 2003, the Internal Revenue Service accounted for 14.1%of our net revenues.  We anticipate thata substantial portion of our net revenues will continue to be derived from asmall number of large clients. The completion, cancellation or significantreduction in the scope of a large project would have a material adverse effecton our business, financial condition and results of operations.

 

As our clients facepressure to control costs under continuing uncertain economic and politicalconditions, we face increasing pricing pressures.  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.

 

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. In addition, to the extent that we are unable to hireand retain salaried employees to staff new or existing client engagements orretain hourly employees or  contractors,our business, financial condition and results of operations would be materiallyand adversely affected.

 

From December 1996through June 30, 2003, we made 19 acquisitions for a total cost ofapproximately $140.6 million using cash, shares of Class B common stock anddebt. We also incurred $3.1 million in cumulative compensation charges relatedto business combinations and $1.2 million in cumulative business combinationintegration charges resulting from these acquisitions. Generally, we recordcontingent payments as additional goodwill at the time the payment can bedetermined beyond a reasonable doubt. If a contingent payment is based, inpart, on a seller’s continuing employment with us, the payments are recorded ascompensation expense under U.S. generally accepted accounting principles overthe vesting period when the amount is deemed probable.  Business combination integration costs arecomprised of transitional salaries and benefits, travel, consulting andallocated facility costs related to the acquisition of OPAY and are expensed asincurred.  These acquisitions helped usto expand our operations, to broaden our client base, delivery offerings andtechnical expertise and to supplement our human resources.

 

In June 2003, weannounced that we had received a subpoena from a grand jury in the SouthernDistrict of New York to produce certain documents pursuant to an investigationinvolving the child support payment processing industry by United StatesDepartment of Justice, Antitrust Division. We continue to cooperate fully with the investigation. Due to thepreliminary nature of the government’s inquiry, we are not able to assess itsimpact on our financial condition or results of operations. Any proceedingsthat may be brought against us, even if we are ultimately successful indefending ourselves, could have a material adverse effect on our business. Overthe near term, we anticipate that we will incur additional expenses as weundertake to comply with the subpoena.

 

International operations,primarily from European contracts, accounted for 1.2% of our net revenues forthe nine months ended June 30, 2003 and 2.6% of our net revenues for the ninemonths ended June 30, 2002, excluding our Australian discontinuedoperation.  We believe that thepercentage of total net revenues attributable to international operations willbe insignificant due to the sale of substantially all of the assets of ourAustralian operation in September 2002. International operations subject us toforeign currency translation adjustments and transaction gains and losses foramounts denominated in foreign currencies.

 

# **Critical Accounting Policies and Estimates**

 

The discussion andanalysis of our financial condition and results of operations are based uponconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to makeestimates and judgments that affect our reported assets, liabilities, netrevenues and expenses, and our related disclosure of contingent assets andliabilities.  On an ongoing basis, weevaluate our estimates, including those related to revenue recognition, cost ofrevenues, collectibility of receivables, goodwill and intangible assets, incometaxes, restructuring obligations and discontinued operations.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Suchexperience and assumptions form the basis of judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.

 

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We believe the followingcritical accounting policies and the related judgments and estimatessignificantly affect the preparation of our 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 futurecosts and the estimate of transaction volume over the life of thecontract.  Any significant variance fromthe estimated number of transactions or average transaction dollars processedcould significantly impact the resulting gross profit.  Net revenues from fixed price softwaredevelopment, 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 and accepted by our clients, ifapplicable.  Any significant differencebetween the timing of revenues recognized and costs incurred has a significant impacton the gross profit.  For OPAY’selectronic credit card payment transactions, we estimate sales returns andallowances attributable to credit card reversals and chargebacks in determiningnet revenues. The amount and timing of our net revenue is difficult to predict,and any shortfall in net revenue or delay in recognizing net revenue couldcause our operating results to vary significantly from quarter to quarter andcould result in future operating losses.

 

Revenue recognition rulesfor software contracts are very complex. Software license net revenue is recognized when there is persuasiveevidence of an arrangement, the fee is fixed or determinable, collectibility isprobable and delivery to the client has occurred, provided the arrangement doesnot require significant implementation or customization of the software.  When significant implementation orcustomization services are included, software license net revenue is recognizedon the percentage-of-completion method of accounting.  Net revenues from software maintenance contracts are recognizedratably over the term of the contract, typically one year.  Implementation services are periodicallyperformed under fixed-fee arrangements and, in such cases, net revenues arerecognized on a percentage-of-completion basis.

 

Generally our governmentcontracts are subject to “fiscal funding” clauses, which entitle the client, inthe event of budgetary constraints, to reduce or eliminate the services we areto provide, with a corresponding reduction in the fee the client must pay.  Net revenues are recognized under suchcontracts only when we consider the likelihood of cancellation of funding to beremote.

 

*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 recordincreases to these balances in the future. We have several large

 

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accounts receivable and unbilled receivable balances, and any dispute,early contract termination or other collection issues could have a materialadverse impact on our financial condition and results of operations.

 

As of June 30, 2003, oneclient accounted for 62.1%, or $12.8 million, of total unbilledreceivables.  We are in negotiation withthe client to obtain a contract change order that we believe we need to be ableto invoice the client for the unbilled receivable amount and to complete theoriginal contract.  As of June 30, 2003,we also had recorded $532,000 of costs associated with the change order inother current assets. Should all negotiation options fail to reach an amicablesolution, we might not be able to collect up to the entire unbilled receivableamount which could have a material adverse impact on our financial conditionand results of operations.  During thethree and nine months ended June 30, 2003, approximately 6.2% and 8.5% of ournet revenues were derived from this client. We are in negotiation with the client to reach an amicable solution, butshould this contract be terminated by the client, the loss of additionalrevenues from this project would have a material adverse impact on the resultsof our operations.

 

We are currently pursuingfurther legal action against a former client against which we have receivedcourt judgments.  The total outstandingreceivable is approximately $709,000. We believe we have adequate reserves against this balance.  However, if we are unsuccessful in collecting on thesejudgments, the write-off of this receivable could have a material adverseimpact on our results 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 impairment indicators are basedon market conditions, operational performance of our acquired businesses andidentification of reporting units. Future events could cause us to conclude that impairment indicatorsexist and that goodwill and other intangible assets associated with ouracquired businesses are impaired. Beginning October 1, 2002, we adopted Statement of FinancialAccounting Standards No. 142 (“SFAS 142”) “Goodwill and Other IntangibleAssets.”  Accordingly, our goodwill andother intangible assets that have an indefinite useful life are no longeramortized but instead are reviewed at least annually for impairment.  During the quarter ended December 31, 2002,we completed the initial impairment test and the results did not indicate anyimpairment loss.  Impairment testsinvolve the use of estimates related to the fair market value of the businessoperations with which goodwill is associated. If we do not meet our long-term forecasts, or if the trading price ofour Class B common stock does not sufficiently improve, we could be required torecord impairment charges related to goodwill and other intangible assets,which could adversely affect our financial results.  In the fourth quarter of fiscal year 2003, we will perform ourannual impairment test to determine if goodwill associated with our segments isimpaired. Any resulting impairment loss could have a material adverse impact onour 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 involvesestimating our actual current tax liability, including assessing temporarydifferences resulting from differing tax treatment of items, such as the differencein amortizable lives for intangible assets for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities.  Wemust then assess the likelihood that our netdeferred tax assets will be recovered from future taxable income and, to theextent we believe that recovery is not likely, we must establish a valuationallowance.

 

*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 net obligationpayable 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  June 30,** |       | **Nine  Months Ended  June 30,** |       |
|---------------------------------------------------------|--------|-----------------------------------|------------|----------------------------------|------------|
|                                                    |   | **2003**                          |       | **2002**                         |       | **2003** |   | **2002** |   |
|                                                    |   |                              | ** ** |                             | ** ** |   | ** ** |   | ** ** |
| Net revenues                                            |   | 100.0                             | %          | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                        |   | 71.8                              |       | 60.5                             |       | 67.4 |   | 59.9 |   |
| Gross profit                                            |   | 28.2                              |       | 39.5                             |       | 32.6 |   | 40.1 |   |
| Costs and  expenses:                                    |   |                              |       |                             |       |   |   |   |   |
| Selling and  marketing                                  |   | 4.3                               |       | 5.2                              |       | 5.2 |   | 5.6 |   |
| General and  administrative                             |   | 13.1                              |       | 16.3                             |       | 15.7 |   | 16.9 |   |
| Other charges                                           |   | 0.6                               |       | —                           |       | 0.2 |   | — |   |
| Business  combination integration                       |   | 0.4                               |       | —                           |       | 0.8 |   | — |   |
| Depreciation and  amortization                          |   | 2.8                               |       | 5.2                              |       | 3.7 |   | 5.7 |   |
| Income from  continuing operations                      |   | 7.0                               |       | 12.8                             |       | 7.0 |   | 11.9 |   |
| Interest income  (expense), net                         |   | 0.6                               |       | 1.8                              |       | 0.9 |   | 1.6 |   |
| Income from  continuing operations before income taxes  |   | 7.6                               |       | 14.6                             |       | 7.9 |   | 13.5 |   |
| Provision for  income taxes                             |   | 2.9                               |       | 5.4                              |       | 3.0 |   | 5.0 |   |
| Income from  continuing operations, net of income taxes |   | 4.7                               | %          | 9.2                              | %          | 4.9 | % | 8.5 | % |

 

**ThreeMonths Ended June 30, 2003 and June 30, 2002**

 

*Net Revenues.*  We generate netrevenues 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 72.9% to $45.5 million for the three months ended June 30, 2003 from$26.3 million in the three months ended June 30, 2002. This increaseresulted primarily from net revenues of approximately $18.2 millionattributable to OPAY, which we acquired in late July 2002, and an increase inU.S. Government Services net revenues of approximately $2.5 million, partiallyoffset by a decrease in U.S. Commercial Services net revenues of approximately$1.3 million.  The increase in netrevenues from U.S. Government Services operations resulted primarily from thenew public pension software systems projects and new child support paymentprocessing contracts under our agreement with ACS. The decrease in net revenuesfrom U.S. Commercial Services operations resulted primarily from the completionof several large projects in prior periods, reduced net revenues in the currentyear from a large commercial customer and the reduction in corporate ITspending resulting from the general weakness in the U.S. Commercial Servicessector.

 

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.

 

*Gross Profit.*   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, out-of-pocket expenses, employee benefits, payroll taxes,travel-related expenditures, amortization of certain intellectual property andcosts of project-related equipment, hardware or software purchases. For statechild support payment processing center operations, cost of revenues alsoincludes facility, depreciation and amortization expenses and direct overheadcosts.  Cost of revenues includes$607,000 of depreciation and amortization for the three months ended June 30,2003 and $600,000 for the months ended June 30, 2002.  Gross profit increased 23.5% to $12.8 million for the threemonths ended June 30, 2003 from $10.4 million for the three months ended June30, 2002. Gross profit margin decreased to 28.2% for the three months endedJune 30, 2003 from 39.5% for the three months ended June 30, 2002. The decreasein the gross profit margin resulted primarily from the addition of OPAY’s netrevenues in the current fiscal year and an increase in net revenues from U.S.Government operations, both of which historically have had lower

 

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gross profit margins than our average gross profit margin, and adecrease in the percentage of our net revenues derived from U.S. CommercialServices operations, which has historically had higher gross profit margins than our average gross profitmargin.  Additionally, the gross profitmargin was negatively affected by unexpected project costs on a large systemsintegration project.  Our gross profitmargin has also decreased due to lower gross profit margins on contracts wherewe are a subcontractor or where we have an increased use of subcontractors forservices or technology.

* *

*Selling and Marketing.  *Selling and marketing expenses consist primarily ofpersonnel costs, sales commissions, advertising and marketing expenditures, andtravel-related expenditures. Selling and marketing expenses increased 45.1% to$2.0 million for the three months ended June 30, 2003 from $1.4 million for thethree months ended June 30, 2002.  As apercentage of net revenues, selling and marketing expenses decreased to 4.3%for the three months ended June 30, 2003 from 5.2% for the three months endedJune 30, 2002.  The increase in sellingand marketing expenses in total dollars was primarily attributable to theaddition of OPAY’s sales and marketing costs in the current fiscal year.  We expect sales and marketing expenses tofluctuate from quarter to quarter due to items such as seasonal advertising andmarketing expense for OPAY during the April 15th tax season andincreased FICA tax expense at the beginning of a new calendar year. We expectselling and marketing expenses in the fourth quarter to decrease slightly fromthe third quarter.

 

*General and Administrative.*   Generaland administrative expenses consist primarily of personnel costs related togeneral management and administrative functions, human resources, resourcemanagement, 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 increased39.1% to $6.0 million for the three months ended June 30, 2003 from$4.3 million for the three months ended June 30, 2002. As a percentage ofnet revenues, general and administrative expenses decreased to 13.1% for thethree months ended June 30, 2003 from 16.3% for the three months ended June 30,2002. The increase in general and administrative expenses in total dollars wasprimarily attributable to the addition of OPAY’s general and administrativecosts in the current fiscal year. General and administrative expenses includecompensation charges related to business combinations of approximately $167,000for the three months ended June 30, 2003 resulting from contingent paymentsearned in accordance with the acquisition agreement for Chayet CommunicationsGroup, Inc. (“Chayet”).  We expectgeneral and administrative expenses will increase in absolute dollars forfiscal year 2003 as we will have a full year of general and administrativeexpenses from the OPAY and Government Solutions Center (“GSC”) operations, aswell as increased business insurance costs, increased employee benefit costs,increased rent expense due to expansion of our facilities and anticipated coststo comply with the requirements of the Sarbanes-Oxley Act of 2002.

 

*Other Charges.*  Other charges consistprimarily of legal expenses incurred in complying with the grand jury subpoenaannounced in June 2003.  Other chargeswere $260,000 for the three months ended June 30, 2003, which represented 0.6%of net revenues.  We expect to incur additional expenses in future quarters to comply with the subpoena.

 

*Business Combination Integration.* Business combination integration costs consist of expensesattributable to employees and consultants of OPAY who were retained on ashort-term basis following our acquisition of OPAY, solely for the purpose ofproviding training and completing other transition tasks in connection with theintegration of OPAY into our operations. These costs consist of compensation,employee benefits, travel, consulting and allocated facilities costs and areexpensed in the period in which they are incurred.  Business combination integration costs were $192,000 for the three monthsended June 30, 2003 which was 0.4% of net revenues and consisted primarily ofcompensation, benefits and consulting costs. We expect business combination integration costs attributable to OPAY todecrease in the fourth quarter.

 

*Depreciation and Amortization.*   Depreciation and amortization consistsprimarily of expenses associated with depreciation of equipment andimprovements and amortization of intangible assets resulting from acquisitionsand intellectual property not directly attributable to client projects.  Project-related depreciation andamortization is included in cost of revenues. Depreciation and amortization was $1.3 million for the three monthsended June 30, 2003 and $1.4 million for the three months endedJune 30, 2002. As a percentage of net revenues, depreciation andamortization decreased to 2.8% for the three months ended June 30, 2003 from5.2% for the three months ended June30, 2002.  The decrease in amortizationexpense resulting from the adoption of SFAS 142 was offset by increasedamortization of acquired intangibles from the OPAY acquisition.

 

*Interest Income (Expense), Net.*  Net interest income decreased 44.3% to $263,000 for the three monthsended June 30, 2003 compared to net interest income of $472,000 forthe three months ended June 30, 2002. This decrease was primarily attributable to interest earned on a lower averageinvestment balance and lower investment yields.

 

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*Provision for Income Taxes.* The provisionfor income taxes was $1.3 million for the three months ended June 30, 2003 and$1.4 million for the three months ended June 30, 2002.  Our effective tax rate was 38.0% for thethree months ended June 30, 2003 and 37.0% for the three months endedJune 30, 2002.  The future tax rate mayvary due to a variety of factors, including, but not limited to, the relativeincome contribution by tax jurisdiction, the amount of tax exempt interestincome generated during the year, changes in statutory tax rates, the abilityto utilize foreign tax credits and foreign net operating losses, and anynon-deductible items related to acquisitions or other nonrecurring charges. Wewill continue to monitor the effective tax rate on a quarterly basis.

 

**NineMonths Ended June 30, 2003 and June 30, 2002**

 

*Net Revenues.  *Net revenues increased 55.4% to$110.9 million for the nine months ended June 30, 2003 from $71.4 million inthe nine months ended June 30, 2002. This increase resulted primarily from net revenues attributable to theacquisition of OPAY of approximately $30.9 million and an increase in U.S.Government operations of approximately $14.9 million, partially offset by a decreasein U.S. Commercial Services net revenues of approximately $5.8 million.  The increase in net revenues from U.S.Government Services operations resulted primarily from the new public pensionsoftware systems projects, new child support payment processing contracts underthe ACS teaming agreement and the acquisition of certain assets of GSC.  The decrease in net revenues from U.S.Commercial Services operations resulted primarily from the completion ofseveral large projects in the prior year, reduced net revenues in the currentyear from a large commercial customer and the reduction in corporate ITspending resulting from the general weakness in the U.S. Commercial Servicessector.

 

*Gross Profit.  *Grossprofit increased 26.3% to $36.2 million for the nine months ended June 30, 2003from $28.7 million in the nine months ended June 30, 2002. The gross profitmargin decreased to 32.6% for the nine months ended June 30, 2003 from 40.1% inthe nine months ended June 30, 2002. The decrease in gross margin was primarily attributable to the additionof OPAY’s net revenues in the current fiscal year period and an increase in netrevenues from U.S. Government Services operations, both of which historicallyhave had lower gross profit margins than our average, and a decrease in netrevenues derived from U.S. Commercial Services operations, which havehistorically had higher gross profit margins than our average. Cost of revenuesincludes $1.8 million of depreciation and amortization for the nine monthsended June 30, 2003 and $1.7 million for the nine months ended June 30, 2002.

 

*Selling and Marketing.  *Selling and marketingexpenses increased 43.9% to $5.8 million for the nine months endedJune 30, 2003 from $4.0 million in the nine months ended June 30,2002. As a percentage of net revenues, selling and marketing expenses decreasedto 5.2% for the nine months ended June 30, 2003 from 5.6% in the nine monthsended June 30, 2002.  The increase inselling and marketing expenses in total dollars was primarily attributable tothe addition of OPAY’s sales and marketing costs in the current fiscal yearperiod.

 

*General and Administrative.  *General and administrative expenses increased44.6% to $17.4 million for the nine months ended June 30, 2003 from$12.0 million in the nine months ended June 30, 2002. As a percentage of netrevenues, general and administrative expenses decreased to 15.7% for the ninemonths ended June 30, 2003 from 16.9% in the nine months ended June 30,2002.  General and administrativeexpenses include compensation charges related to business combinations ofapproximately $167,000 for the nine months ended June 30, 2003 resulting fromcontingent payments earned in accordance with the acquisition agreement forChayet.  The increase in general andadministrative expenses in total dollars was primarily attributable to theacquisitions of OPAY and GSC, as well as increases in business insurance costs,increased employee benefit costs and increased rent expense due to theexpansion of our facilities.

 

*OtherCharges. * Other charges were $260,000 for the ninemonths ended June 30, 2003, which represented 0.2% of net revenues.  Weexpect to incur additional expenses in future quarters to comply with thesubpoena.

 

*Business Combination Integration.*  Businesscombination integration costs were approximately $872,000 for the nine monthsended June 30, 2003, which was 0.8% of net revenues.

 

*Depreciation and Amortization*.   Depreciation and amortization was $4.1million for the nine months ended June 30, 2003 and 2002. As a percentage ofnet revenues, depreciation and amortization decreased to 3.7% for the ninemonths ended June 30, 2003 from 5.7% in the nine months ended June30, 2002.  The decrease in amortization resultingfrom the adoption of SFAS 142 was offset by increased amortization of otherintangible assets acquired in the OPAY and GSC acquisitions.

 

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*Interest Income (Expense), Net.  *We had net interest income of $956,000 for thenine months ended June 30, 2003 compared to net interest income of $1.1 millionfor the nine months ended June 30, 2002. This decrease was primarily attributable to interest earned on loweraverage investment balances and lower investment yields.

 

*Provision for Income Taxes*.   Provision for income taxes decreased 6.5%to $3.3 million for the nine months ended June 30, 2003 from $3.6million in the nine months ended June 30, 2002.  For the nine months ended June 30, 2003, our effective tax ratewas 38.0% and for the nine months ended June 30, 2002, our effective tax ratewas 37.0%. The future tax rate may vary due to a variety of factors, including,but not limited to, the amount of tax exempt interest income generated duringthe year, the relative income contribution by tax jurisdiction, 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 continueto closely monitor our effective tax rate on a quarterly basis.

 

*Discontinuedoperation.*  The lossfrom operations of discontinued operation represents the historical operatinglosses incurred by our Australian operation. The loss from operations ofdiscontinued operation was $1.3 million for the nine months ended June 30,2002.  The loss on disposal ofdiscontinued operation represented the estimated loss on the disposal of ourAustralian operations and the estimated future operating losses through the disposalperiod. The loss on disposal of discontinued operation was $15.1 million forthe nine months ended June 30, 2002.

 

**Liquidityand Capital Resources**

 

Our principal capitalrequirement is to fund working capital to support our growth, includingpotential future acquisitions and potential contingent payments due to prioracquisitions.  We maintain a $15.0million revolving credit facility that expires on January 31, 2005, ofwhich $15.0 million may be used for letters of credit.  The credit facility bears interest at theadjusted LIBOR rate plus 2.5% or the lender’s announced prime rate plus 0.25%,at our option. The credit facility is collateralized by first priority liensand security interests in our assets. The credit facility contains certain restrictive covenants including,but not limited to, limitations on the amount of loans we may extend toofficers and employees and the incurrence of additional debt.  The credit facility requires the maintenanceof certain financial covenants, including a minimum quarterly net incomerequirement, minimum tangible net worth, a minimum ratio of debt to tangiblenet worth and a minimum ratio of liquid assets to current liabilities.  As of June 30, 2003, we were in compliancewith the covenants of the credit facility. There were no outstanding borrowingsor standby letters of credit under this facility as of June 30, 2003.

 

At June 30, 2003, we alsohad a $2.5 million non-revolving line of credit for financing capitalexpenditures that may be drawn upon until January 29, 2004.  Principal payments must be made in 36 equalmonthly payments commencing February 29, 2004.  This credit facility has a maturity date ofJanuary 31, 2007.  Interest is based oneither the LIBOR rate plus 2.75% or the lender’s announced prime rate plus0.5%, at our option and is payable monthly. As of June 30, 2003, we had no borrowings under this line of credit.

 

In addition to the creditfacilities mentioned above, we had letters of credit totaling approximately$3,346,000, which were collateralized by certain securities in our long-terminvestment portfolio at June 30, 2003. Furthermore, our subsidiary, OPAY, had a letter of credit outstanding inthe amount of approximately $138,000 secured by a certificate of deposit.  These letters of credit were issued tosecure performance bonds and to meet various facility lease requirements.

 

During the nine monthsended June 30, 2003, we repurchased 568,000 shares of Class B common stock at atotal cost of approximately $6.7 million under the stock repurchase programauthorized by our Board of Directors in October 1998.  These purchases were funded through current holdings of cash andinvestments.  In April 2003, the Boardincreased the number of shares authorized for repurchase to a total of 2.0million shares.  Of the 2.0 millionshares authorized for repurchase under this program, a total of approximately884,000 shares have been repurchased as of June 30, 2003. The timing and volumeof our future purchases under this program will depend on market conditions.

 

Net cash from continuingoperations provided by operating activities was $7.2 million in the nine monthsended June 30, 2003 as compared to $11.6 million in the nine monthsended June 30, 2002.  The decrease innet cash from continuing operations provided by operating activities is largelyattributable to the increase in unbilled receivables balance resulting fromwork performed on contracts with milestone based billings and payments of OPAYrestructuring liabilities in the current year.

 

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Net cash from continuing operations used in investingactivities was $6.0 million in the nine months ended June 30, 2003 as comparedto $54.4 million in the nine months ended June 30, 2002. The net cash fromcontinuing operations used in investing activities for the nine months endedJune 30, 2003 was primarily attributable to contingent earnout payments relatedto business combinations, net purchases of securities available for sale andcapital expenditures.   The net cashfrom continuing operations used in investing activities for the nine monthsended June 30, 2002 was primarily attributable to increased net investments inmarketable securities resulting from the investment of the proceeds of ourfollow-on stock offering, payments related to business combinations and capitalexpenditures.

 

Capitalexpenditures, including equipment and software acquired under financingarrangements but excluding assets acquired or leased through businesscombinations, were approximately $1.5 million in the nine months ended June 30,2003 and $3.6 million in the nine months ended June 30, 2002.  We anticipate that in fiscal year 2003, ourcapital expenditures will be less than in fiscal year 2002 and relate to, amongother things, purchases of computer equipment to enhance our operations andsupport our growth, as well as potential expenditures related to new officeleases and the establishment or expansion of child support payment processingand OPAY transaction processing centers.

 

Netcash from continuing operations used in financing activities totaled $5.7million in the nine months ended June 30, 2003 as compared to net cash fromcontinuing operations provided by financing activities of $77.3 million in thenine months ended June 30, 2002.  Thenet cash from continuing operations used in financing activities for the ninemonths ended June 30, 2003 resulted primarily from the repurchase of Class Bcommon stock under our stock repurchase program.  The net cash from continuing operations provided by financingactivities for the nine months ended June 30, 2002 resulted primarily from theproceeds of our follow-on stock offering and the exercise of employee stockoptions.

 

As of June 30, 2003, oneclient accounted for 62.1%, or $12.8 million, of total unbilledreceivables.  We are in negotiation withthe client to obtain a contract change order that we believe we need to be ableto invoice the client for the unbilled receivable amount and to complete theoriginal contract.  As of June 30, 2003,we also had recorded $532,000 of costs associated with the change order inother current assets. Should all negotiation options fail to reach an amicablesolution, we might not be able to collect up to the entire unbilled receivableamount which could have a material adverse impact on our financial conditionand results of operations.  During thethree and nine months ended June 30, 2003, approximately 6.2% and 8.5% of ournet revenues were derived from this client. We are in negotiation with the client to reach an amicable solution, butshould this contract be terminated by the client, the loss of additionalrevenues from this project would have a material adverse impact on the resultsof our operations.

 

We expect to generatecash flows from operating activities over the long-term; however, we mayexperience significant fluctuations from quarter to quarter resulting from thetiming of the billing and collection of large project milestones, particularlyfor our pensionsoftware systems projects.  Weanticipate that our existing capital resources, including our cash balances,cash that we anticipate will be provided by operating activities and ouravailable credit facilities, will be adequate to fund our operations for atleast the next 12 months. There can be no assurance that changes will not occurthat would consume available capital resources before such time.  Our capital requirements and capitalresources depend on numerous factors, including potential acquisitions;contingent payments earned; new and existing contract requirements; the timingof the receipt of accounts receivable, including unbilled receivables; ourability to draw on our bank facility and employee growth.  To the extent that our existing capitalresources are insufficient to meet our capital requirements, we will have toraise additional funds. There can be no assurance that additional funding, ifnecessary, will be available on favorable terms, if at all.  The raising of additional capital may diluteour shareholders’ ownership in us.

 

Due to the currenteconomic climate, the performance bond market has substantially changed,resulting in reduced availability of bonds, increased cash collateralrequirements and increased premiums. Some of our government contracts require a performance bond and futurerequests for proposal may also require a performance bond.  Our inability to obtain performance bonds,increased costs to obtain such bonds or a requirement to pledge significantcash collateral in order to obtain such bonds would adversely affect ourbusiness and our capacity to obtain additional contracts.  Increased premiums or a claim made against aperformance bond could adversely affect our earnings and cash flow and impairour ability to bid for future contracts.

 

**Disclosures About ContractualObligations And Commercial Commitments as of June 30, 2003**

 

As of June 30, 2003, wehad the following obligations and commitments to make future payments undercontracts, contractual obligations and commercial commitments (in thousands):

 

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|                              |   | **Payments due by period** |   |
|-----------------------------------|--------|----------------------------|--------|
| **Contractual  Cash Obligations** |   | **Total**                  |   | **Less than  1 year** |   | **2 – 3 years** |   | **4 – 5 years** |   | **After 5 years** |   |
| Debt, including interest          |   | $                          | 477    |   | $ | 223 |   | $ | 236 |   | $ | 18 |   | $ | — |   |
| Operating leases                  |   | 11,101                     |   | 3,884 |   | 4,927 |   | 2,241 |   | 49 |   |
| Restructuring liability           |   | 1,555                      |   | 720 |   | 701 |   | 134 |   | — |   |
|                                   |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                             |   | **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       |   | $                                              | 3,484  |   | $ | 3,000 |   | $ | 289 |   | $ | — |   | $ | 195 |   |
| Performance  bonds               |   | 36,550                                         |   | 29,819 |   | 6,731 |   | — |   | — |   |
|                                  |        |                                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

###### **NewAccounting Pronouncements**

 

In November 2002, theEmerging Issues Task Force issued a final consensus on Issue 00-21:  “Accounting for Revenue Arrangements with MultipleDeliverables.”  Issue 00-21 providesguidance on how and when to recognize revenues on arrangements requiringdelivery of more than one product or service. Issue 00-21 is effective prospectively for arrangements entered into infiscal periods beginning after June 15, 2003. We have decided not to elect to apply the provisions of Issue 00-21 toexisting arrangements and record the income statement impact as the cumulativeeffect of a change in accounting principle. The adoption of Issue 00-21 is not anticipated to have a material impacton our operating results.

 

**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 to forecast, which may cause the market priceof our Class B common stock to decline.**

 

Our net revenues, operating results and cashflows are subject to significant variation from quarter to quarter due to anumber of factors, many of which are outside our control.  Among other things, these factors include:

 

•                  the number, sizeand scope of projects in which we are engaged;

 

•                  the accuracy ofestimated resources and costs required to complete our fixed price contracts;

 

•                  dependence onour technology partners;

 

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

 

•                  economicconditions in the vertical and geographic markets we serve;

 

•                  demand for ourservices generated by strategic partnerships and certain prime contractors;

 

•                  revenuesrecognized and costs incurred on projects before we have the right to invoiceand ultimately collect cash from our clients;

 

•                  the accuracy ofestimated transaction volume and transaction dollars processed in computingtransaction net revenues from our child support payment processing centeroperations and OPAY’s payment processing center operations;

 

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•                  our consultantutilization rates and the number of billable days in a particular quarter whichmay be significantly impacted by increased vacations and public holidays;

 

•                  the seasonalityof OPAY’s business, due primarily to the fact that the majority of federal andstate personal income tax payments are made in March and April and real estateand personal property tax payments may be made annually or semi-annually inmany jurisdictions;

 

•                  the contractualterms and degree of completion of projects;

 

•                  any delays orcosts incurred in connection with, or early termination of, a project;

 

•                  our ability tostaff projects with salaried employees versus hourly employees, hourlyindependent contractors and sub-contractors;

 

•                  the amount andtiming of costs related to our sales and marketing and other initiatives;

 

•                  legal expensesincurred in complying with the grand jury subpoena;

 

•                  variability ofsoftware license fee revenue in a particular quarter;

 

•                  start-up costsincurred in connection with the initiation of large projects; and

 

•                  any assessmentof potential penalties or contingent obligations in connection with a project.

 

The timing and realization of opportunities in oursales pipeline make the timing and variability of net revenues difficult toforecast. A high percentage of our operating expenses, particularly personnel,facility and depreciation and amortization, are fixed in advance. We alsotypically reach the annual limitation on FICA contributions for many of ourU.S. employees before the end of the calendar year. As a result, U.S. employerpayroll taxes will vary significantly from quarter to quarter during the fiscalyear and will generally be higher at the beginning of the calendar year and netrevenues will vary from quarter to quarter during the fiscal year.  Because of the variability of our quarterlyoperating results, we believe that period-to-period comparisons of our operatingresults are not necessarily meaningful, should not be relied upon asindications of future performance and may result in volatility and declines inthe price of our Class B common stock. In addition, our operating results mayfrom time to time be below the expectations of analysts and investors.  If so, the market price of our Class Bcommon stock may decline significantly.

 

As discussed in Note 5 toour Condensed Consolidated Financial Statements, we adopted SFAS 142 as ofOctober 1, 2002.  This standard requiresthat goodwill no longer be amortized, and instead, be tested for impairment ona periodic basis.  Impairment testsinvolve the use of estimates related to the fair market value of the businessoperations with which goodwill is associated. If we do not meet our long-term forecasts, or if the trading price ofour Class B common stock does not improve, we could be required to recordimpairment charges related to goodwill and other intangible assets, which couldadversely affect our financial results.  In the fourth quarter of fiscal year 2003, we will perform our annualimpairment test to determine if goodwill associated with our segments isimpaired. This analysis may result in a non-cash impairment charge of up toapproximately $47.6 million, which represents the balance of goodwill atJune 30, 2003.  The impairment charge,if any, would depend on the estimated value of the business units to which thegoodwill relates and the value of other assets and liabilities at thattime.  In addition, other acquiredintangible assets are tested for impairment as a result of an event orcircumstance that may indicate the carrying value of other acquired intangibleassets may not be recoverable.  If wewere required to test other acquired intangible assets for impairment, this mayresult in an additional non-cash impairment charge of up to $25.7 million,which represents the net balance of other acquired intangible assets at June30, 2003.  Any resulting impairment losscould have a material adverse impact on our financial condition and results ofoperations.

 

**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 clientsreduce or defer their expenditures or defer the start of work alreadycontracted.  Some of our competitors arecapable of operating at significant losses for extended periods of time,increasing pricing pressure on our products and services.  If we do not maintain competitive pricing,the demand for our products and services, as well as our market share, maydecline, having an adverseeffect on our business.  From time totime, in responding to competitive pressures,

 

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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 and the prevailing tax rates.  A continued decline in economic conditionscould reduce the per capita income of citizens, and thus reduce the amount ofincome tax payments consumers remit to government entities, which may reduce OPAY’s revenues fromconvenience fees.  A reduction in incometax rates may also reduce the amount of income tax payments consumers remit togovernment entities, which may reduce OPAY’s revenues from convenience fees. Inaddition, continued decline in the economy may result in a reduction inconsumer spending, particularly for non-essential goods and services, which mayresult in a reduction in consumers’ use of OPAY’s services.  If the economy continues to decline, ourresults of operations and cash flows could be adversely 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 nine months endedJune 30, 2003, approximately 91.9% 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. Thesegovernment agencies may terminate most of these contracts at any time withoutcause. In addition, revisions to or repeals of mandated statutes andregulations, including changes to the timing of required compliance, may causegovernment agencies to divert funds. A significant reduction in funds availablefor government 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, governmentcontracts are generally subject to audits and investigations by governmentagencies.  If the results of theseaudits or investigations are negative, our reputation could be damaged,contracts could be terminated or significant penalties could be assessed.  If a contract is terminated for any reason,our ability to fully recover certain amounts may be impaired resulting in amaterial adverse impact on our financial condition and results of operations.

 

**We rely on small numbers of projects,clients and target markets for significant portions of our net revenues, andour operating results and cash flows may decline significantly if we cannotkeep or replace these projects or clients or if conditions in our targetmarkets deteriorate.**

 

The completion, cancellation or significantreduction in the scope or imposition of significant penalties for our failure tomeet scheduled delivery requirements of a large project would significantlyreduce our net revenues and cash flows. Most of our contracts are terminable by the client following limitednotice and without significant penalty to the client. We have derived, andbelieve that we will continue to derive, a significant portion of our netrevenues from a limited number of clients. For the nine months endedJune 30, 2003, the Internal Revenue Service accounted for 14.1% of our netrevenues.  Under our agreement with ACS,we currently perform services for three different state governments as asubcontractor to ACS.  For the ninemonths ended June 30, 2003, work performed under these three subcontractsaccounted for 8.3% of total net revenues. The volume of work performed for specific clients or prime contractorsis likely to vary from period to period, and a major client in one period maynot use our services in a subsequent period. If any of our large clients or prime contractors terminates itsrelationship with us, we will lose a significant portion of our net revenuesand cash flows.  Many of our contractswith clients and prime contractors can be terminated at any time without cause.In addition, as a result of our focus in specific vertical markets, economic andother conditions that affect the companies and government agencies in thesemarkets could also result in a reduction in our net revenues and cashflows.   Because we derive a significantportion of our net revenues from a limited number of clients, we have severallarge accounts receivable and unbilled receivable balances. At June 30, 2003,unbilled receivables for three clients accounted for 62.1%, 14.5% and 6.9% oftotal unbilled receivables.  At June 30,2003, total accounts receivable, including unbilled receivables, for thesethree clients accounted for 38.3%, 12.8% and 10.2%, respectively of total netaccounts receivable, including unbilled receivables.  Any dispute, early contract termination or other collectionissues could have a material adverse impact on our financial condition andresults of operations.

 

With respect to the oneclient that accounted for 62.1% or $12.8 million of total unbilled receivablesas of June 30, 2003, we are in negotiation with the client to obtain a contractchange order that we believe we need to be able to invoice the client for theunbilled receivable amount and to complete the original contract.  As of June 30, 2003, we also had recorded$532,000 of costs associated with the change order in other current assets. Shouldall negotiation options fail to reach an amicable solution, we might not beable to collect up to the entire unbilled receivable amount which could have amaterial adverse impact on our financial condition and results of operations.  During the three and nine months ended June30, 2003, approximately 6.2% and 8.5% of our net revenues were derived fromthis client.  We are in negotiation withthe client to reach an amicable solution, but should this contract be terminatedby the client, the loss of additional revenues from this project would have amaterial adverse impact on the results of our operations. 

 

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For the nine months endedJune 30, 2003, the IRS accounted for 50.6% 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.

 

**An investigation involving the childsupport payment processing industry may negatively affect our business andoperating results.**

 

In June 2003, weannounced that we had received a subpoena from a grand jury in the SouthernDistrict of New York to produce certain documents pursuant to an investigationinvolving the child support payment processing industry by the United StatesDepartment of Justice, Antitrust Division. We continue to cooperate fully with the investigation. Due to thepreliminary nature of the government’s inquiry, we are not able to assess itsimpact on our financial condition and results of operations.  Any proceedings that may be brought againstus, even if we are ultimately successful in defending ourselves, could have amaterial adverse effect on our business. Over the near term, we anticipate thatwe will incur additional expenses as we undertake to comply with the subpoena.

 

**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 the discontinuanceor termination by the client or prime contractor of our services or theservices of a key subcontractor, would harm our operating results and thecompetitiveness of our products and services. If we are unable to meet our contractual requirements with our clients,we could be subjected to claims by our clients.

 

**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.  A failure by a client toadequately disclose in their request for proposal their existing systems,current interfaces and complete functional requirements could result in ourunderestimating the work required to complete a project.  If we fail to estimate accurately thefactors upon which we base our contract pricing, or we are unable tosuccessfully obtain change orders, we may incur losses on those contracts or beunable to complete our performance obligations.  During the nine months ended June 30, 2003, 30.8% of our netrevenues were generated on a fixed price basis and 52.3% of our net

 

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revenues were generated from transaction-based contracts. We believethat the percentage of net revenues attributable to fixed price andtransaction-based contracts will continue to be significant for the foreseeablefuture.

 

**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 June 30, 2003,we acquired 19 businesses using cash, equity and debt, with some of thoseacquisitions also involving assumed liabilities and contingent payments.Acquisitions involve a number of special risks, including:

 

•                     failure to realize the value ofthe acquired assets, businesses or projects;

 

•                     diversion of management’sattention;

 

•                     failure to retain key personnel;

 

•                     entrance into markets in which wehave limited or no prior experience;

 

•                     increased general andadministrative expenses;

 

•                     client dissatisfaction or performanceproblems with acquired assets, businesses or projects;

 

•                     write-offs due to impairment ofgoodwill and other intangible assets and other charges against earnings;

 

•                     assumption of unknown liabilities;

 

•                     the potentially dilutive issuanceof our common stock, the use of significant amounts of cash or the incurrenceof substantial amounts of debt; and

 

•                     other unanticipated events orcircumstances.

 

We may not be able toidentify, acquire or profitably manage additional businesses or integratesuccessfully any acquired businesses without substantial expense, delay orother operational or financial problems. Without additional acquisitions, weare unlikely to maintain 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 their requiredgovernment 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 financialcondition.  In addition, if consumersare not receptive to paying a convenience fee, if credit card associationschange their rules and do not allow us to charge the convenience fees or, ifcredit card issuers eliminate or reduce the value of rewards obtained undertheir respective rewards programs, demand for OPAY’s services may decline orfail to grow, which would have a material and adverse effect on our business,operating results and financial condition. Demand for OPAY’s services would also be adversely impacted by a declinein the use of the Internet.  Factorsthat could reduce the level of Internet usage or electronic commerce includethe actual or perceived lack of security or privacy of information, trafficcongestion or other Internet access delays, excessive governmental regulation,increases in access costs, or the unavailability of cost-effective high speedservice.

 

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**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 aredesigned to provide payment management functions and to limit our clients’ riskof fraud or loss in effecting transactions with their constituents.  As electronic services become more criticalto our clients, we may be subjected to claims regarding our alleged liabilityfor the processing of fraudulent or erroneous transactions.  In addition, defects or programming errorsin the software we use could cause service interruptions.  Our services depend on hardware, softwareand supporting infrastructure that is internally developed, purchased and/orlicensed from third parties.  Althoughwe conduct extensive testing, software may contain defects or programmingerrors, or may not properly interface with third party systems, particularlywhen first introduced or when new versions are released.  In addition, we may experience disruptionsin service from third-party providers. To the extent that defects or errors are undetected in the future and cannotbe resolved satisfactorily or in a timely manner, our business could suffer.  If one or more claims were brought againstus, even if unsuccessful, their defense would likely be time consuming, costlyand potentially damaging to our reputation. Any such liability or claim could have a material and adverse effect onour business, operating results and financial condition.

 

**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 including, but not limited to,errors and omissions, directors and officers, general liability and workers’compensation policies.  There can be noassurance that we can maintain the same scope and amount of insurance coverageon reasonable terms or obtain such insurance at all.  Our inability to renew policies or maintain the same level ofcoverage would adversely affect our business and increase our riskexposure.  Any claims against ourpolicies may impact our ability to obtain such insurance on reasonable terms,if at all.  Increased premiums or aclaim made against a policy could adversely affect our earnings and cash flowand impair our ability to bid for future contracts.

 

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 suchperformance bonds will continue to be available on reasonable terms, if at all.  Our inability to obtain performance bonds ora reduction in our bonding capacity would adversely affect our business and ourcapacity to obtain additional contracts. Increased premiums or a claim madeagainst a performance bond could adversely affect our earnings and cash flowand impair our ability to bid for future 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. Inparticular, qualified project managers and senior technical and professionalstaff are in great demand worldwide. In addition, we require that many of ouremployees travel to client sites to perform services on our behalf, which maymake a position with us less attractive to potential employees. We may not be ableto identify and successfully recruit and integrate a sufficient number ofskilled employees into our operations, which would harm our business and itsgrowth. Our success also depends upon the

 

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continued services of a number of key employees, including our chiefexecutive officer and the leaders of our strategic business units. Any of ouremployees may terminate their employment at any time. The loss of the servicesof any key employee could significantly disrupt our operations. In addition, ifone or more of our key employees resigns to join a competitor or to form acompeting company, the loss of such personnel and any resulting loss ofexisting or potential clients to any such competitor could adversely affect ourcompetitive position and operating results.

 

**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 technology companiesand outsourcing companies. Many of these competitors have significantly greaterfinancial, technical and marketing resources, generate greater net revenues andhave greater name recognition than we do. In addition, there are relatively lowbarriers to entry into the information technology and consulting servicesmarkets, and we have faced, and expect to continue to face, additionalcompetition from new entrants into the information technology and consultingservices markets.

 

We believe that theprincipal competitive factors in the information technology and consultingservices markets include:

 

•                     reputation;

 

•                     project management expertise;

 

•                     industry expertise;

 

•                     speed of development andimplementations;

 

•                     technical expertise;

 

•                     competitive pricing; and

 

•                     the ability to deliver results ona fixed price and 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 orcompetitors to hire, retain and motivate project managers and other seniortechnical staff;

 

•                     the ownership by competitors ofsoftware used by potential clients;

 

•                     the price at which others offercomparable services;

 

•                     the ability of our clients toperform the services themselves; and

 

•                     the extent of our competitors’responsiveness to client 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 operatingresults;

 

•                     announcements of technologicalinnovations or new products or services by us or our competitors;

 

•                     general conditions in theinformation technology industry or the industries in which our clients compete;

 

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•                     changes in earnings estimates bysecurities analysts or us; and

 

•                     general economic and politicalconditions such as recessions 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.

 

**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 of warranty,limitations of liability and other provisions set forth in our contracts willbe enforceable or will otherwise protect us from liability for damages. Anyclaim by a shareholder or derivative action brought by a shareholder couldresult in a material liability to us. Our insurance, which includes coverage for errors or omissions anddirectors and officers liability, may not continue to be available onreasonable terms or in sufficient amounts to cover one or more claims, and theinsurer may disclaim coverage as to any future claim. The successful assertionof one or more claims against us that exceed available insurance coverage orchanges in insurance policies, including premium increases or the imposition oflarge deductible or co-insurance requirements, would adversely affect ourbusiness.

 

**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 first introducedor 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 fail to adapt our business tochanges in economic or business conditions, our business may be adverselyaffected.**

 

Personnel, facility anddepreciation and amortization expenses represent a significant percentage ofour operating expenses and are relatively fixed in advance of any particular quarter.We manage our personnel utilization rates by carefully monitoring our needs andanticipating personnel increases based on specific project requirements. To theextent net revenues do not increase at a rate commensurate with theseadditional expenses, our results of operations could be materially andadversely affected.  If we fail to alignour operating expenses with

 

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prevailing economic orbusiness conditions, our operating results and financial condition could beadversely 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.  Although we believe thatOPAY has sufficiently expanded its system capacity to accommodate anticipatedfuture growth, there are no assurances that OPAY will not suffer capacityconstraints caused by a sharp increase in the use of its services.  Due to the large number of tax payments madein March and April, there is an increased risk that OPAY will suffer a capacityconstraint during that period, which could have an adverse effect on ourbusiness, 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 on the 2002 forms (i.e., filing due dateof April 15, 2003), 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.

 

**Compliance with changing regulationof corporate governance and public disclosure may result in additionalexpenses.**

 

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,

 

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are creating uncertainty for companies such as ours. To maintain highstandards of corporate governance and public disclosure, we intend to investall reasonably necessary resources to comply with evolving standards. Thisinvestment may result in increased general and administrative expenses and adiversion of management time and attention from revenue-generating activities.

 

**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 of our Class B common stock.  The voting power held by Mr. James L. Bildner,our chief executive officer, in Class A and Class B common stock owned byMr. Bildner and vested options to acquire Class B common stock heldby Mr. Bildner, represented 34.5% of our total common stock voting poweroutstanding at June 30, 2003. As a result, Mr. Bildner may be able tocontrol the outcome of all corporate actions requiring shareholder approval,including changes in our equity incentive plan, the election of a majority ofour directors, proxy contests, mergers, tender offers or other transactionsthat could give holders of our Class B common stock the opportunity torealize a premium over the then-prevailing market price for their shares ofClass 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 offoreign currencies;

 

•                     difficulties in building andmanaging foreign operations;

 

•                     difficulties in enforcingagreements and collecting 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 QUALITATIVE****DISCLOSURESABOUT 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 1.2% of ourtotal net revenues for the nine months ended June 30, 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 ninemonths ended June 30, 2003.

 

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There can be no assurance that a sudden and significant decline in thevalue of the British Pound or Euro would not have a material adverse effect onour financial condition and results of operations.

 

**Interest ratesensitivity**

 

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 decline in value if market interest rates increase. If marketinterest rates increase immediately and uniformly by 10 percentage points fromlevels at June 30, 2003, the fair value of the portfolio would decline by $2.1million. We anticipate having the ability to hold our fixed income investmentsuntil maturity and, therefore, do not expect our operating results or cashflows to be affected to any significant degree by the effect of a sudden changein market 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 ofthe end of the period covered by this report. Based on the evaluation, thechief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were effective and sufficient as of the endof the period covered by this report to ensure that the information required tobe disclosed in the reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms.

 

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**PARTII.   OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

In May 2003, we receiveda notice of demand for arbitration in connection with a dispute over paymentsrelated to an acquisition.  The claim isfor an amount not less than $700,000 plus interest, attorneys’ fees andassociated costs.  As of the date ofthis report, we have not evaluated the merits, if any, of the claim.

 

In June 2003, weannounced that we had received a subpoena from a grand jury in the SouthernDistrict of New York to produce certain documents pursuant to an investigationinvolving the child support payment processing industry by the United StatesDepartment of Justice, Antitrust Division.  We are cooperating fully withthe subpoena and the investigation. Due to the preliminary nature of thegovernment’s inquiry, we are not able to assess its impact on our financialcondition and results of operations.

 

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

 

(a)*Exhibits.*

* *
| **Exhibit  Number** |   | **Description**                                                                                                                                         |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 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 |
| 32.2                |   | 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 |

 

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

 

CurrentReport on Form 8-K, filed April 24, 2003, reporting under Item 12, Results ofOperation and Financial Condition. Reference is made to the press release ofRegistrant, issued on April 24, 2003, announcing the Company’s second quarterfiscal 2003 results. *

 

CurrentReport on Form 8-K, filed June 23, 2003, reporting under Item 5 the receipt ofa subpoena from a grand jury in the Southern District of New York.

 

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* Designates Form 8-K was furnished rather than filed.

 

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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: August 1, 2003 |                    |   |
|                  |                    |   |
|                  |                    |   |
|                  | By:                     | /s/ JEFFREY A.  McCANDLESS |   |
|                  |                    | **Jeffrey  A. McCandless  Chief Financial Officer  (Principal Financial and Accounting Officer)** |   |

 

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