**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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| **(Mark  One)**                                       |
|-------------------------------------------------------|
|                                                  |
| ý                                                |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                  |   |   |
| **For the quarterly period ended  December 31, 2002** |
|                                                  |   |   |
| **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)

 

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

 

**2001 N. Main Street, Suite 500Walnut Creek, California 94596**

(Addressof principal executive offices)(Zip Code)

 

**(925) 937-3950**

(Registrant’stelephone 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 January 31, 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 18,208,958.

 

 

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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 December 31, 2002 and September 30, 2002 |
|                                   |   |
|                                   | Condensed Consolidated  Statements of Operations for the three months ended December 31, 2002 and  2001 |
|                                   |   |
|                                   | Condensed Consolidated  Statements of Cash Flows for the three months ended December 31, 2002 and  2001 |
|                                   |   |
|                                   | 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 5.                                | Other Information |
|                                   |   |
| Item 6.                                | Exhibits and Reports  on Form 8-K |
|                                   |   |
| Signatures                             |
|                                   |
| Certifications                         |

 

**PrivateSecurities Litigation Reform Act Safe Harbor Statement**

 

Certain statements contained in this report, including statementsregarding the development of and demand for our services and our markets andother statements that are not historical facts, are forward–lookingstatements within the meaning of the federal securities laws. These forward–lookingstatements relate to future events or our future financial and/or operatingperformance and can generally be identified as such because the context of thestatement will include words such as “may”, “will”, “intends”, “plans”,“believes”, “anticipates”, “expects”, “estimates”, “shows”, “predicts”,“potential”, “continue”, or “opportunity”, the negative of these words or wordsof similar import. These forward–looking statements are subject to risksand uncertainties, including the risks and uncertainties described and referredto under “Factors That May Affect Future Results” beginning on page 19, thatcould cause actual results to differ materially from those anticipated as ofthe date of this report.

 

2

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**PARTI.   FINANCIAL INFORMATION**

 

**ITEM1.   FINANCIALSTATEMENTS**

 

**TIER TECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

**(in thousands)**

** **
|                                                                              |   | **December  31,  2002** |       | **September  30,  2002** |       |
|-----------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                        |   |                    | ** ** |                     | ** ** |
|                                                                              |   |                    |       |                     |       |
| **Current assets:**                                                               |   |                    | ** ** |                     | ** ** |
| Cash and cash  equivalents                                                        |   | $                       | 33,584     |                     | $          | 41,750 |   |
| Short-term  investments                                                           |   | 16,087                  |       | 18,571                   |       |
| Accounts  receivable, net                                                         |   | 36,637                  |       | 32,686                   |       |
| Prepaid expenses  and other current assets                                        |   | 10,296                  |       | 7,908                    |       |
| Total current  assets                                                             |   | 96,604                  |       | 100,915                  |       |
| Equipment and software, net                                                       |   | 8,524                   |       | 8,751                    |       |
| Notes and accrued interest receivable from related  parties, less current portion |   | 1,999                   |       | 1,967                    |       |
| Goodwill and other acquired intangible assets, net                                |   | 75,179                  |       | 76,118                   |       |
| Long-term investments                                                             |   | 19,647                  |       | 11,906                   |       |
| Other assets                                                                      |   | 1,485                   |       | 1,462                    |       |
| Total assets                                                                      |   | $                       | 203,438    |                     | $          | 201,119 |   |
|                                                                              |   |                    |       |                     |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                    |   |                    | ** ** |                     | ** ** |
|                                                                              |   |                    |       |                     |       |
| **Current  liabilities:**                                                         |   |                    | ** ** |                     | ** ** |
| Accounts payable                                                                  |   | $                       | 1,632      |                     | $          | 959 |   |
| Accrued  liabilities                                                              |   | 8,603                   |       | 11,184                   |       |
| Accrued  subcontractor expenses                                                   |   | 4,762                   |       | 3,257                    |       |
| Accrued  compensation and related liabilities                                     |   | 4,039                   |       | 3,979                    |       |
| Purchase price  payable and accrued contingent earnouts                           |   | 2,663                   |       | 3,387                    |       |
| Deferred income                                                                   |   | 4,003                   |       | 3,231                    |       |
| Other current  liabilities                                                        |   | 2,500                   |       | 2,226                    |       |
| Total current  liabilities                                                        |   | 28,202                  |       | 28,223                   |       |
| Long-term debt, less current portion                                              |   | 285                     |       | 288                      |       |
| Deferred taxes payable                                                            |   | 4,458                   |       | 4,458                    |       |
| Other liabilities                                                                 |   | 1,064                   |       | 1,129                    |       |
| Total  liabilities                                                                |   | 34,009                  |       | 34,098                   |       |
|                                                                              |   |                    |       |                     |       |
| Commitments and contingencies                                                     |   |                    |       |                     |       |
|                                                                              |   |                    |       |                     |       |
| **Shareholders’  equity:**                                                   |   |                    | ** ** |                     | ** ** |
| Common stock, no  par value                                                       |   | 170,499                 |       | 169,772                  |       |
| Notes receivable  from shareholders                                               |   | (1,773                  | )          | (1,773                   | )          |
| Accumulated  other comprehensive loss                                             |   | (334                    | )          | (291                     | )          |
| Retained  earnings (accumulated deficit)                                          |   | 1,037                   |       | (687                     | )          |
| Total  shareholders’ equity                                                  |   | 169,429                 |       | 167,021                  |       |
| Total  liabilities and shareholders’ equity                                  |   | $                       | 203,438    |                     | $          | 201,119 |   |

 

See Notes to Condensed ConsolidatedFinancial Statements

 

3

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**TIER TECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(unaudited)**

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

** **
|                                                                  |   | **Three  Months Ended  December 31,** |   |
|-----------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                  |   | **2002**                              |   | **2001** |   |
| Net revenues                                                          |   | $                                     | 32,195 |   | $ | 23,010 |   |
| Cost of revenues                                                      |   | 20,315                                |   | 13,992 |   |
| Gross profit                                                          |   | 11,880                                |   | 9,018 |   |
| Costs and expenses:                                                   |   |                                  |   |   |   |
| Selling and  marketing                                                |   | 1,919                                 |   | 1,351 |   |
| General and  administrative                                           |   | 5,804                                 |   | 4,091 |   |
| Business  combination integration                                     |   | 405                                   |   | — |   |
| Depreciation and  amortization                                        |   | 1,402                                 |   | 1,376 |   |
| Income from continuing operations                                     |   | 2,350                                 |   | 2,200 |   |
| Interest income (expense), net                                        |   | 386                                   |   | 111 |   |
| Income from continuing operations before income  taxes                |   | 2,736                                 |   | 2,311 |   |
| Provision for income taxes                                            |   | 1,012                                 |   | 855 |   |
| Income from continuing operations, net of income  taxes               |   | 1,724                                 |   | 1,456 |   |
| Loss from operations of discontinued operation, net  of income taxes  |   | —                                |   | (258 | ) |
| Net income                                                            |   | $                                     | 1,724  |   | $ | 1,198 |   |
|                                                                  |   |                                  |   |   |   |
| Income from continuing operations, net of income  taxes:              |   |                                  |   |   |   |
| Per basic share                                                       |   | $                                     | 0.09   |   | $ | 0.11 |   |
| Per diluted  share                                                    |   | $                                     | 0.09   |   | $ | 0.10 |   |
|                                                                  |   |                                  |   |   |   |
| Loss from operations of discontinued operation, net  of income taxes: |   |                                  |   |   |   |
| Per basic share                                                       |   | $                                     | — |   | $ | (0.02 | ) |
| Per diluted  share                                                    |   | $                                     | — |   | $ | (0.02 | ) |
|                                                                  |   |                                  |   |   |   |
| Net income:                                                           |   |                                  |   |   |   |
| Per basic share                                                       |   | $                                     | 0.09   |   | $ | 0.09 |   |
| Per diluted  share                                                    |   | $                                     | 0.09   |   | $ | 0.08 |   |
|                                                                  |   |                                  |   |   |   |
| Shares used in computing basic income (loss) per  share               |   | 19,052                                |   | 13,728 |   |
| Shares used in computing diluted income (loss) per  share             |   | 19,815                                |   | 15,144 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**TIER TECHNOLOGIES, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

**(in thousands)**

 
|                                                                                                                                                                 |   | **Three  Months Ended   December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                                                                 |   | **2002**                               |   | **2001** |   |
| **Operating  activities**                                                                                                                                            |   |                                   |   |   |   |
| Income from continuing operations, net of income  taxes                                                                                                              |   | $                                      | 1,724  |   | $ | 1,456 |   |
| Adjustments to  reconcile income from continuing operations, net of income taxes to net cash  from continuing operations provided by (used in) operating activities: |   |                                   |   |   |   |
| Depreciation and  amortization                                                                                                                                       |   | 1,971                                  |   | 1,941 |   |
| Provision for  doubtful accounts                                                                                                                                     |   | 25                                     |   | 41 |   |
| Tax benefit of  stock options exercised                                                                                                                              |   | 135                                    |   | 2,688 |   |
| Forgiveness of  notes receivable from employees                                                                                                                      |   | 14                                     |   | 26 |   |
| Change in  operating assets and liabilities, net of effects of business combinations:                                                                                |   |                                   |   |   |   |
| Accounts  receivable                                                                                                                                                 |   | (4,084                                 | )      | 2,197 |   |
| Prepaid expenses  and other assets                                                                                                                                   |   | (892                                   | )      | (779 | ) |
| Accounts payable  and accrued liabilities                                                                                                                            |   | (1,419                                 | )      | (1,393 | ) |
| Deferred income                                                                                                                                                      |   | 772                                    |   | 312 |   |
| Net cash from continuing operations provided by  (used in) operating activities                                                                                      |   | (1,754                                 | )      | 6,489 |   |
|                                                                                                                                                                 |   |                                   |   |   |   |
| **Investing  activities**                                                                                                                                            |   |                                   |   |   |   |
| Purchase of equipment and software                                                                                                                                   |   | (804                                   | )      | (538 | ) |
| Notes and accrued interest receivable from related  parties                                                                                                          |   | (64                                    | )      | (100 | ) |
| Repayments on notes and accrued interest receivable  from related parties                                                                                            |   | 13                                     |   | 257 |   |
| Business combinations, net of cash acquired                                                                                                                          |   | (670                                   | )      | (473 | ) |
| Purchases of available-for-sale securities                                                                                                                           |   | (17,297                                | )      | (5,449 | ) |
| Maturities of available-for-sale securities                                                                                                                          |   | 12,089                                 |   | 2,103 |   |
| Other assets                                                                                                                                                         |   | —                                 |   | 85 |   |
| Net cash from continuing operations used in  investing activities                                                                                                    |   | (6,733                                 | )      | (4,115 | ) |
|                                                                                                                                                                 |   |                                   |   |   |   |
| **Financing  activities**                                                                                                                                            |   |                                   |   |   |   |
| Net proceeds from issuance of Class B common  stock                                                                                                             |   | 592                                    |   | 71,818 |   |
| Payments on  capital lease obligations and other financing arrangements                                                                                              |   | (165                                   | )      | (297 | ) |
| Net cash from continuing operations provided by  financing activities                                                                                                |   | 427                                    |   | 71,521 |   |
| Effect of exchange rate changes on cash                                                                                                                              |   | (106                                   | )      | 30 |   |
| Net cash provided by (used in) continuing operations                                                                                                                 |   | (8,166                                 | )      | 73,925 |   |
| Net cash used in discontinued operation                                                                                                                              |   | —                                 |   | (1,580 | ) |
| Net increase (decrease) in cash and cash equivalents                                                                                                                 |   | (8,166                                 | )      | 72,345 |   |
| Cash and cash equivalents at beginning of period                                                                                                                     |   | 41,750                                 |   | 13,174 |   |
| Cash and cash equivalents at end of period                                                                                                                           |   | $                                      | 33,584 |   | $ | 85,519 |   |
|                                                                                                                                                                 |   |                                   |   |   |   |
| **Supplemental disclosures of cash  flow information**                                                                                                               |   |                                   |   |   |   |
| Cash paid during the period for:                                                                                                                                     |   |                                   |   |   |   |
| Interest                                                                                                                                                             |   | $                                      | 19     |   | $ | 129 |   |
| Income taxes  paid (refunded), net                                                                                                                                   |   | $                                      | 1,858  |   | $ | 991 |   |
| **Supplemental disclosures of  non-cash transactions**                                                                                                               |   |                                   |   |   |   |
| Equipment acquired under capital lease obligations  and other financing arrangements                                                                                 |   | $                                      | 58     |   | $ | 1,626 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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**TIER TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL 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. The consolidated results ofoperations for the three months ended December 31, 2002 are not necessarilyindicative of results that may be expected for the fiscal year ending September30, 2003 or any future period, and the Company makes no representations relatedthereto.

 

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, including the presentation of discontinuedoperations.

 

 

**NOTE2—REVENUE RECOGNITION**

 

TheCompany derives net revenues from software development services, softwarelicense and maintenance fees, transaction processing services, IT consultingand professional consulting.  TheCompany generally bills clientson either a time and materials basis, a fixed price basis or a per-transactionbasis. Net revenues pursuant to professional consulting services underfixed-fee contracts and time and materials contracts are generally recognizedas services are performed. Net revenues pursuant to software developmentfixed-fee contracts are generally recognized as services are rendered on thepercentage-of-completion method of accounting (based on the ratio of costsincurred to total estimated project costs). Net revenues from transaction–basedcontracts are generally recognized based on fees charged on a per-transactionbasis or fees charged as a percentage of dollars processed.  Net revenues from software licenses that donot include significant implementation or customization services are recognizedupon delivery when the fees are fixed and determinable, collection is probableand vendor specific evidence exists to determine the value of any undeliverableelements of the arrangement. Net revenues from software maintenance contractsare recognized ratably over the term 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.

 

Provisionsfor estimated losses on uncompleted contracts are recognized in the period suchlosses become probable and can be reasonably estimated. To date, such losseshave been insignificant. Most of the Company’s contracts are terminable by the client following limited notice andwithout significant penalty to the client. The completion, cancellation orsignificant reduction in the scope of a large project would have a materialadverse impact on the Company’s business, financial condition and results ofoperations.  For the three monthsended December 31, 2002, revenue from one client totaled approximately$3,234,000 which represented 10.0% of total net revenues.  For the three months ended December 31,2001, revenue from three clients totaled approximately $4,297,000, $2,834,000and $2,714,000 which represented 18.7%, 12.3% and 11.8%, respectively, of totalrevenues.

 

6

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Unbilled receivables arise on a contract when the cumulative netrevenue recognized exceeds the cumulative amount billed in accordance with thecontractual billing terms. Unbilled receivables were $18,652,000 and$16,475,000 at December 31, 2002 and September 30, 2002, respectively, of whichapproximately $ 17,987,000 and $15,258,000, respectively, relate to contractswith governmental agencies. Unbilled receivable balances are included inaccounts receivables.  Unbilledreceivables for two clients accounted for 26.9% and 10.7%, respectively, oftotal net accounts receivable at December 31, 2002.  Unbilled receivables for two clients accounted for 20.3% and12.8%, respectively, of total net accounts receivable at September 30, 2002.

 

Net revenues derived fromsales to governmental agencies were approximately $29,091,000 and $18,156,000for the three months ended December 31, 2002 and 2001, 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 December 31, 2002 and September 30, 2002 is approximately$7,705,000 that is pledged in connection with performance bonds and real estateoperating leases and will be restricted for the terms of the projectperformance periods and lease periods, the latest of which is estimated to bethrough May 2005.

 

**NOTE4—BANK LINES OF CREDIT**

 

At December 31, 2002, theCompany had a $15.0 million revolving credit facility, all of which may be usedfor letters of credit.  The creditfacility has a maturity date of February 28, 2004.  The credit facility is collateralized by first priority liens andsecurity interests in the Company’s assets (excluding assets owned by TierTechnologies (Australia) Pty Ltd., GC Simsion, GR Bowles & Associates PtyLimited (“Simsion Bowles”) and ADC Consultants Pty Ltd.), including a pledge of65% of the stock of the Company’s subsidiaries, excluding Simsion Bowles.  Interest is based on either the adjustedLIBOR rate plus 2.5% or the lender’s announced prime rate plus 0.25%, at theCompany’s option, and is payable monthly. As of December 31, 2002, there were no outstanding borrowings or standbyletters of credit.  Among otherprovisions, the credit facility requires the Company to maintain certainminimum financial ratios. As of December 31, 2002, due to the historical lossfrom the Australian discontinued operations, the Company was not in compliancewith one of the financial ratios; however, the bank waived such noncompliance.

 

In addition to the creditfacility noted above, the Company had letters of credit totaling approximately$3,346,000, which were collateralized by certain securities in the Company’slong-term investment portfolio at December 31, 2002.  Also, the Company’s subsidiary, Official Payments Corporation(“OPAY”), had a letter of credit outstanding in the amount of approximately $138,000secured by a certificate of deposit. These letters of credit were issued to secure performance bonds and tomeet various facility lease requirements.

 

At December 31, 2002, theCompany’s Australian subsidiary had letters of credit outstanding totalingapproximately $57,000 (based on the December 31, 2002 exchange rate of AU$1.78to U.S.$1.00) to meet certain facility lease requirements. These letters ofcredit were secured by term deposits with an Australian bank.

 

**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 nolonger amortizes goodwill.  Under SFAS142, the Company will evaluate goodwill for

 

7

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impairment annually, or more frequently ifimpairment indicators arise. Identifiable intangible assets that have finite lives will continue tobe amortized over their estimated useful lives.

 

TheCompany completed initial impairment tests in accordance with SFAS 142 in thefirst quarter of fiscal 2003.  Resultsof the initial impairment tests did not indicate any impairment loss.  Impairment tests involve the use ofestimates related to the fair market values of the business operations withwhich goodwill is associated.  Losses,if any, resulting from the annual impairment tests will be reflected inoperating income in our statement of operations.

 

Goodwilland other acquired intangible assets, net, consisted of the following atDecember 31, 2002 and September 30, 2002:

 
|                                  |   | **December 31,  2002** |   | **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       |   | (1,674                 | )      | (789                    | )      |
| Other acquired intangible assets, net |   | 27,316                 |   | 28,201                  |   |
| Goodwill                              |   | 47,863                 |   | 47,917                  |   |
| Total                                 |   | $                      | 75,179 |                    | $      | 76,118 |   |

 

The changes in thecarrying amount of goodwill for the three months ended December 31, 2002 are asfollows (in thousands):

 
|                              |   | **U.S.**       |   | **U.S.**       |   |         |   | **United**     |   |      |   |
|-----------------------------------|--------|----------------|--------|----------------|--------|--------------|--------|----------------|--------|-----------|--------|
|                              |   | **Commercial** |   | **Government** |   | **Official** |   | **Kingdom**    |   |      |   |
|                              |   | **Services**   |   | **Services**   |   | **Payments** |   | **Operations** |   | **Total** |   |
|                              |   |           |   |           |   |         |   |           |   |      |   |
| Balance as of  September 30, 2002 |   | $              | 17,924 |           | $      | 15,110       |   | $              | 14,845 |      | $      | 38 |   | $ | 47,917 |   |
| Goodwill  activity                |   | —         |   | —         |   | (54          | )      | —         |   | (54       | )      |
| Balance as of  December 31, 2002  |   | $              | 17,924 |           | $      | 15,110       |   | $              | 14,791 |      | $      | 38 |   | $ | 47,863 |   |

 

 

Hadthe Company been accounting forits goodwill under SFAS 142 for the three months ended December 31, 2001, theCompany’s net income and earnings per share would have been as follows:

 
|                                        |   | **Three Months Ended  December 31, 2001**    |   |
|---------------------------------------------|--------|----------------------------------------------|--------|
|                                        |   | **(in  thousands, except per   share data)** |   |
|                                        |   |                                         |   |
| Reported net income                         |   | $                                            | 1,198  |   |
| Add back goodwill  amortization, net of tax |   | 572                                          |   |
| Adjusted net income                         |   | $                                            | 1,770  |   |
|                                        |   |                                         |   |
| Basic earnings per share:                   |   |                                         |   |
| As reported                                 |   | $                                            | 0.09   |   |
| Goodwill amortization, net of tax           |   | 0.04                                         |   |
| Adjusted basic earnings per share           |   | $                                            | 0.13   |   |
|                                        |   |                                         |   |
| Diluted earnings per  share:                |   |                                         |   |
| As reported                                 |   | $                                            | 0.08   |   |
| Goodwill amortization, net of tax           |   | 0.04                                         |   |
| Adjusted diluted earnings per share         |   | $                                            | 0.12   |   |

 

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**NOTE 6 — INCOME PER SHARE**

 

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

 
|                                                                                                              |   | **Three  Months Ended  December 31,**      |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                              |   | **2002**                                   |   | **2001** |   |
|                                                                                                              |   | **(in  thousands, except per share data)** |   |
| Numerator:                                                                                                        |   |                                       |   |   |   |
| Income from  continuing operations, net of income taxes                                                           |   | $                                          | 1,724  |   | $ | 1,456 |   |
| Loss from  operations of discontinued operation, net of income taxes                                              |   | —                                     |   | (258 | ) |
| Net income                                                                                                        |   | $                                          | 1,724  |   | $ | 1,198 |   |
| Denominator for  basic income (loss) per share-weighted average common shares outstanding                         |   | 19,052                                     |   | 13,728 |   |
| Effects of dilutive securities:                                                                                   |   |                                       |   |   |   |
| Common stock  options                                                                                             |   | 763                                        |   | 1,371 |   |
| Contingently  issuable shares                                                                                     |   | —                                     |   | 45 |   |
| Denominator for  diluted income (loss) per share-adjusted weighted average common shares and  assumed conversions |   | 19,815                                     |   | 15,144 |   |
| Income from continuing operations, net of income  taxes:                                                          |   |                                       |   |   |   |
| Per basic share                                                                                                   |   | $                                          | 0.09   |   | $ | 0.11 |   |
| Per diluted  share                                                                                                |   | $                                          | 0.09   |   | $ | 0.10 |   |
| Loss from operations of discontinued operation, net  of income taxes:                                             |   |                                       |   |   |   |
| Per basic share                                                                                                   |   | $                                          | — |   | $ | (0.02 | ) |
| Per diluted share                                                                                                 |   | $                                          | — |   | $ | (0.02 | ) |
| Net income:                                                                                                       |   |                                       |   |   |   |
| Per basic share                                                                                                   |   | $                                          | 0.09   |   | $ | 0.09 |   |
| Per diluted  share                                                                                                |   | $                                          | 0.09   |   | $ | 0.08 |   |

 

Options to purchaseapproximately 598,000 shares of Class B common stock at prices ranging from$16.90 to $20.70 per share were outstanding at December 31, 2002, but were notincluded in the computation of diluted income (loss) per share for the threemonths ended December 31, 2002 because the options’ exercise prices weregreater than the average market price of the shares for this period.  Options to purchase approximately 46,000shares of Class B common stock at prices ranging from $17.00 to $17.81 pershare were outstanding at December 31, 2001, but were not included in thecomputation of diluted income (loss) per share for the three months endedDecember 31, 2001 because the options’ exercise prices were greater than theaverage market price of the shares for this period.

 

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**NOTE7—COMPREHENSIVE INCOME**

 

The Company’scomprehensive income was as follows: 

 
|                                                             |   | **Three  Months Ended  December 31,** |       |
|------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                             |   | **2002**                              |       | **2001** |   |
|                                                             |   | **(in  thousands)**                   | ** ** |
| Net income.                                                      |   | $                                     | 1,724      |   | $ | 1,198 |   |
| Net change in  unrealized gain on available-for-sale investments |   | 48                                    |       | — |   |
| Foreign currency translation adjustment.                         |   | (91                                   | )          | 532 |   |
| Comprehensive income.                                            |   | $                                     | 1,681      |   | $ | 1,730 |   |

 

**NOTE8—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 administrativeexpenses, depreciation and amortization expense not attributable to state childsupport  payment processing centers,interest income (expense), other income (expense) and income tax expense in segmentprofitability.  The table below presentsfinancial 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 December 31,  2002:** |   |                           |       |                           |       |                   |       |                            |       |      |       |
| Net revenues                               |   | $                              | 2,543      |                           | $          | 22,966                 |       | $                               | 6,125      |      | $          | 561 |   | $ | 32,195 |   |
| Gross profit                               |   | 1,297                          |       | 8,105                          |       | 2,155                  |       | 323                             |       | 11,880    |       |
|                                       |   |                           | ** ** |                           | ** ** |                   | ** ** |                            | ** ** |      | ** ** |
| **Three Months Ended December 31,  2001:** |   |                           | ** ** |                           | ** ** |                   | ** ** |                            | ** ** |      | ** ** |
| Net revenues                               |   | $                              | 4,844      |                           | $          | 17,641                 |       | $                               | —     |      | $          | 525 |   | $ | 23,010 |   |
| Gross profit                               |   | 2,210                          |       | 6,644                          |       | —                 |       | 164                             |       | 9,018     |       |

 

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**NOTE9—RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

InDecember 2002, the FASB issued Statement of Financial Accounting Standards No.148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition andDisclosure.”  SFAS 148 amends the transition and disclosure requirements of Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation.”  Certain ofthe disclosure requirements are required for all companies, regardless ofwhether the fair value method or intrinsic value method is used to account forstock-based employee compensation arrangements.  The Company continues to account for its incentive stock optionplan under the intrinsic value method in accordance with the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees.”  The amendments to SFAS 123will be effective for financial statements for fiscal years ended afterDecember 15, 2002 and for interim periods beginning after December 15, 2002.  The Company is currently assessing theimpact of the adoption of  SFAS 148 onits consolidated financial statements.

 

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**ITEM 2.    MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

We are a verticallyfocused provider of end-to-end business solutions to public sector, nationaland multinational clients. We formulate, evaluate and implement solutions that allow clients torapidly channel emerging technologies into their business operations. Wecombine our understanding of enterprise–wide systems with domainknowledge in four primary vertical markets—government, healthcare, insuranceand utilities. We focus on markets that are driven by forces that make demandfor our services relatively non-discretionary and are likely to provide us withrecurring long-term revenue streams. Our net revenues increased to $32.2million in the three months ended December 31, 2002 from $23.0 million in thethree months ended December 31, 2001. A significant portion of our net revenuesare derived from sales to government agencies. For the three months endedDecember 31, 2002, approximately 90.4% of our net revenues were derived fromsales to government agencies, as compared to 78.9% for the three months endedDecember 31, 2001. Excluding our Australian discontinued operation, ourworkforce, composed of employees, independent contractors and subcontractors,increased to 835 on December 31, 2002 from 654 on December 31, 2001.

 

Wederive net revenues primarily from software development services, softwarelicense and maintenance fees, transaction processing services, IT consulting  and  professional consulting.  We bill clients on a time and materialsbasis, a fixed price basis or a per-transaction basis.  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 transaction–basedcontracts based on fees charged on a per-transaction basis or fees charged as apercentage of dollars processed.  Werecognize net revenues from software licenses that do not include significantimplementation or customization services upon delivery to the licensee when thefees are fixed and determinable, collection is probable and vendor specificevidence exists to determine the value of any undelivered elements of thearrangement. We recognize time and materials net revenues and professionalconsulting services under fixed fee arrangements as we perform services andincur expenses. We recognize revenues from software maintenance contractsratably over the term of the contract, typically one year. Thepercentage of our net revenues generated on a fixed price basis was 37.3% forthe three months ended December 31, 2002 and 52.5% for the three months endedDecember 31, 2001. The percentage of our net revenues generated on aper-transaction basis was 43.3% for the three months ended December 31, 2002and 33.3% for the three months ended December 31, 2001.  We believe that the percentage of total netrevenues attributable to fixed price and per-transaction based contracts willcontinue to be significant. Substantially all of our contracts are terminable by the clientfollowing limited notice and without significant penalty to the client. Fromtime to time, in the regular course of our business, we negotiate themodification, termination, renewal or transition of time and materials, fixedprice and per-transaction based contracts that may involve an adjustment to thescope, duration or nature of the project, billing rates or price.  If we significantly overestimate the volumefor transaction-based contracts or underestimate the resources, costs or timerequired for fixed price or per-transaction based contracts, our financialcondition and results of operations would be materially and adverselyaffected.  Unsatisfactory performance ofservices or proprietary software, or unanticipated difficulties or delays incompleting projects may result in client dissatisfaction and a reduction inpayment to us, termination of a contract, or payment of damages or penalties byus as a result of litigation or otherwise, which could have a material adverseeffect upon our business, financial condition and results of operations.

 

We have derived asignificant portion of our net revenues from a small number of large clients.For some of these clients, we perform a number of different projects pursuantto multiple contracts or purchase orders. For the three months ended December31, 2002, the California Public Employees’ Retirement System (“CalPERS”)accounted for 10.0% of our net revenues. We anticipate that a substantialportion of our net revenues will continue to be derived from a small number oflarge clients. The completion, cancellation or significant reduction in thescope of a large project would have a material adverse effect on our business,financial condition and results of operations.

 

Personnel,facility and depreciation and amortization expenses represent a significantpercentage of our operating expenses and are relatively fixed in advance of anyparticular quarter. We manage our personnel utilization rates by carefullymonitoring our needs and anticipating personnel increases based on specificproject requirements. To the extent net revenues do not increase at a ratecommensurate with these additional expenses, our results of operations could bematerially and adversely affected. In addition, to the extent that we areunable to hire and retain salaried employees to staff new or existing clientengagements or retain hourly employees or contractors, our business, financial condition and results of operationswould be materially and adversely affected.

 

From December 1996through December 31, 2002, we made 19 acquisitions for a total cost ofapproximately $140.8 million using cash, shares of Class B common stock anddebt. We also incurred $2.9 million in cumulative

 

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compensation charges related to business combinations resulting and $742,000 in cumulative businesscombination integration charges 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. These acquisitionshelped us to expand our domestic operations, to broaden our client base,delivery offerings and technical expertise and to supplement our humanresources.

 

International operations,primarily from European contracts, accounted for 1.7% of our net revenues forthe three months ended December 31, 2002 and 2.3% for the three months endedDecember 31, 2001. We believe that the percentage of total net revenuesattributable to international operations will decrease due to the sale ofsubstantially all of the assets of our Australian operation and expectedcontinued growth of our U.S. operations. International operations subject us toforeign currency translation adjustments and transaction gains and losses foramounts denominated in foreign currencies.

 

**Critical Accounting Policies andEstimates**

 

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 carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.

 

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 recognized based on fees charged on a per-transaction basis orfees charged as a percentage of total dollars processed.  We establish the per-transaction fee ortransaction fee percentage in our clients’ contracts based on estimated  future costs and the estimate of transactionvolume over the life of the contract. Any significant variance from the estimated number of transactions oraverage transaction dollars processed could significantly impact the resultinggross profit.  Net revenues from fixedprice software development, implementation and customization contracts aregenerally recognized using the percentage-of-completion method of accountingbased upon the ratio of costs incurred to total estimated project costs.  The total estimated cost is calculated basedon historical experience.  Anysignificant changes in total estimated costs could significantly impact therecognition of net revenue.  Netrevenues from professional consulting services under fixed price contracts arerecognized as services are provided. Any significant difference between the timing of revenues recognized andcosts incurred has a significant impact on the gross profit.  For Official Payment Corporation’s  electronic credit card payment transactions,we estimate sales returns and allowances attributable to credit card reversalsand chargebacks in determining net revenues. The amount and timing of our netrevenue is difficult to predict, and any shortfall in net revenue or delay inrecognizing net revenue could cause our operating results to vary significantlyfrom quarter to quarter and could 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.

 

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Implementation services are periodically performed under fixed-feearrangements and, in such cases, net revenues are recognized on apercentage-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  such contracts only when we consider thelikelihood of cancellation to be remote.

 

*Costand Transaction Volume Estimates.*  We establish the per-transaction fee or transaction feepercentage in our client contracts based on estimated future costs andestimated transaction volume over the life of the contract.  Included in our cost estimates for certain childsupport 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 these estimates couldsignificantly impact our gross profit and gross profit margin.  We recognize fixed price net revenues forsoftware developments; implementation and customization projects using thepercentage-of-completion method, based upon the ratio of costs incurred tototal estimated project costs.  Anysignificant changes in total project costs could significantly affect our grossprofit and gross profit margin.

 

*Collectibilityof Receivables.*  Aconsiderable amount of judgment is required to assess the ultimate realizationof receivables, including assessing the probability of collection and thecurrent credit worthiness of our clients. Probability of collection is based upon the assessment of the client’sfinancial condition through the review of its current financial statements orcredit reports.  For follow-on sales toexisting clients, prior payment history is also used to evaluate probability ofcollection. We maintain an allowance for doubtful accounts for accountsreceivable balances and a sales return and allowance provision for reversalsand chargebacks from consumers who use our credit card payment services. Wehave not experienced significant credit losses historically, except for thewrite-off of approximately $2,020,000 due to a contract dispute during thefiscal year ended September 30, 1999. However, there is no assurance that we will not need to record increasesto these balances in the future.  Wehave several large accounts receivable and unbilled receivable balances, andalthough these balances may individually be less than 10% of our total netaccounts receivable and unbilled receivable balances, any dispute, earlycontract termination or other collection issues could have a material adverseimpact on our financial condition and results of operations.

 

We are currently pursuinglegal action against a former client for which we have received a courtjudgment.  The total outstandingreceivable is approximately $709,000. We believe we have adequate reserves against this balance.  If we were to be unsuccessful in collectingon this judgment, the write-off of this receivable could have a materialadverse impact 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 indicators existand that goodwill and other intangible assets associated with our acquiredbusinesses are impaired.  BeginningOctober 1, 2002, we adopted Statement of Financial Accounting Standards No. 142(“SFAS 142”) “Goodwill and Other Intangible Assets” and no longer amortizegoodwill.  SFAS 142 also changed themethodology for assessing potential impairments of goodwill.  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. We will perform an analysis at least annually to determine if goodwillassociated with our segments is impaired. Any resulting impairment loss couldhave a material adverse impact on our financial condition and results ofoperations.

 

*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 financial statements.  This process involves us estimating ouractual current tax liability including assessing temporary differencesresulting from differing tax treatment of items, such as the difference inamortizable lives for intangible assets for tax and accounting purposes.  These differences result in deferred taxassets and liabilities.  We must thenassess the likelihood that our net deferred tax assets will be recovered fromfuture taxable income and, to the extent we believe that recovery is notlikely, we must establish a valuation allowance.

 

*Determinationof Restructuring Obligations*.  As a result of our acquisition of Official Payments Corporation(“OPAY”), we assumed certain liabilities for restructuring costs that OPAY hadpreviously recognized in connection with the involuntary termination ofemployees and the consolidation of facilities.  The restructuringliability for involuntary terminations consists of compensation and benefitscosts incurred under severance agreements. To the

 

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extent that employees scheduled for involuntarily termination are infact retained, or severance agreements are modified, adjustments to theestablished restructuring liability may be required.  The restructuring liability for consolidation of facilities isthe estimated net obligation payable on office facilities scheduled forabandonment.  The estimated netobligation includes the gross obligation payable under existing leaseagreements through estimated disposition dates, estimated costs of abandonmentor lease transfer, as offset by estimated sublease income.  To the extentwe are unable to sublease or otherwise dispose of the facilities on the datesestimated, or the estimated sublease income or estimated costs differ from ourestimates, the restructuring liability may require adjustment.

 

**Resultsof Operations**

 

The following tablesummarizes our operating results as a percentage of net revenues for each ofthe periods indicated:

 
|                                                    |   | **Three  Months  Ended December 31,** |       |
|---------------------------------------------------------|--------|---------------------------------------|------------|
|                                                    |   | **2002**                              |       | **2001** |   |
|                                                    |   |                                  | ** ** |   | ** ** |
| Net revenues                                            |   | 100.0                                 | %          | 100.0 | % |
| Cost of revenues                                        |   | 63.1                                  |       | 60.8 |   |
| Gross profit                                            |   | 36.9                                  |       | 39.2 |   |
| Costs and expenses:                                     |   |                                  |       |   |   |
| Selling and  marketing                                  |   | 6.0                                   |       | 5.9 |   |
| General and  administrative                             |   | 18.0                                  |       | 17.8 |   |
| Business  combination integration                       |   | 1.3                                   |       | — |   |
| Depreciation and  amortization                          |   | 4.3                                   |       | 6.0 |   |
| Income from continuing operations                       |   | 7.3                                   |       | 9.5 |   |
| Interest income (expense), net                          |   | 1.2                                   |       | 0.5 |   |
| Income from continuing operations before income  taxes  |   | 8.5                                   |       | 10.0 |   |
| Provision for income taxes                              |   | 3.1                                   |       | 3.7 |   |
| Income from continuing operations, net of income  taxes |   | 5.4                                   | %          | 6.3 | % |

 

**ThreeMonths Ended December 31, 2002 and December 31, 2001**

 

*Net Revenues.*  We generate net revenues primarily by providing softwaredevelopment services, transaction processing services and professionalconsulting on client engagements and from software license and maintenancefees. Net revenues increased 39.9% to $32.2 million for the three months endedDecember 31, 2002 from $23.0 million in the three months ended December 31,2001. This increase resulted primarily from an increase in U.S. GovernmentServices net revenues of approximately $5.3 million and net revenuesattributable to the acquisition of OPAY of approximately $6.1 million,partially offset by a decrease in U.S. Commercial Services net revenues ofapproximately $2.3 million.  Theincrease in net revenues from U.S. Government Services operations resultedprimarily from the new public pension software systems projects, increasedtransaction processing net revenues and the acquisition of certain assets ofthe Government Solutions Center (“GSC”) of KPMG Consulting, Inc. (nowBearingPoint, Inc.).  The decrease innet revenues from U.S. Commercial Services operations resulted primarily fromthe completion of several large projects in the prior year and general weaknessin the U.S. Commercial Services sector.

 

Net revenues includereimbursements from clients for out-of-pocket expenses.  Reimbursement revenues for each periodrepresented were less than 10% of total net revenues for the respectiveperiod.  We expect reimbursementrevenues to increase in absolute dollars in future periods primarily due to newcontracts and future anticipated contracts primarily in our child supportpayment processing operations.

 

*Gross Profit.*  Gross profit represents net revenues less cost of revenues.  Cost of revenues consists primarily of thosecosts directly attributable to providing service to a client, includingemployee salaries and incentive compensation, independent contractor andsubcontractor costs, credit card discount fees,  employee benefits, payroll taxes, travel-related expenditures,amortization of intellectual property and any project-related equipment,hardware or software purchases. For state child support payment processingcenter operations, cost of revenues also includes facility, depreciation andamortization expense and direct overhead costs.  Cost of revenues includes $569,000 of depreciation andamortization for the three months ended December 31, 2002 and $565,000 for thethree months

 

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ended December 31, 2001.  Grossprofit increased 31.7% to $11.9 million for the three months ended December 31,2002 from $9.0 million for the three months ended December 31, 2001. Grossprofit margin decreased to 36.9% for the three months ended December 31, 2002from 39.2% for the three months ended December 31, 2001. This decrease resultedprimarily from the addition of OPAY’s net revenues in the current year, and anincrease in net revenues from U.S. Government operations, both of whichhistorically have had lower gross profits margins than our average, and adecrease in the percentage of our net revenues derived from U.S. CommercialServices operations, which has historically had higher gross profit marginsthan our average*.*

 

*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 to $1.9million for the three months ended December 31, 2002 from $1.4 million for thethree months ended December 31, 2001. As a percentage of net revenues, selling and marketing expensesincreased to 6.0% for the three months ended December 31, 2002 from 5.9% forthe three months ended December 31, 2001. We expect selling and marketing expenses to increase in absolute dollarsfor fiscal year 2003 as we will have a full year of sales and marketingexpenses from OPAY and as we continue to make investments in our marketing andbranding initiatives and our business development efforts.  We expect sales and marketing expenses tofluctuate from quarter to quarter due to items such as increased advertisingand marketing expense as OPAY prepares for the April 15th tax seasonand increased FICA tax expense at the beginning of a new calendar year.

 

*General and Administrative.*   General and administrative expenses consistprimarily of personnel costs related to general management and administrativefunctions, human resources, resource management, OPAY’s engineering, clientservice and customer service departments, staffing, accounting and finance,legal, facilities and information systems, as well as business insurance costs,facility costs and professional fees related to legal, audit, tax, externalfinancial reporting and investor relations matters. General and administrativeexpenses increased 41.9% to $5.8 million for the three months ended December31, 2002 from $4.1 million for the three months ended December 31, 2001. As apercentage of net revenues, general and administrative expenses increased to18.0% for the three months ended December 31, 2002 from 17.8% for the threemonths ended December 31, 2001. We expect general and administrative expenseswill increase in absolute dollars for fiscal year 2003 as we will have a fullyear of general and administrative expenses from the OPAY and GSC operations,as well as increases in business insurance costs, increased employee benefitcosts and increased rent expense due to expansion of our facilities.

 

*Business combination integration.* Business combination integration costs consist of expensesattributable to employees and consultants of OPAY who were retained on ashort-term basis following ouracquisition of OPAY, solely for the purpose of providing training andcompleting other transition tasks in connection with the integration of OPAYinto our operations. These expenses consist of compensation, employee benefits,travel, consulting and allocated facilities costs.

 

*Depreciation and Amortization.*   Depreciation and amortization consistsprimarily of expenses associated with depreciation of equipment andimprovements and amortization of other intangible assets resulting fromacquisitions and other intellectual property not directly attributable toclient projects.  Project-relateddepreciation and amortization is included in cost of revenues.  Depreciation and amortization was $1.4million for the three months ended December 31, 2002 and 2001. As a percentageof net revenues, depreciation and amortization decreased to 4.3% for the threemonths ended December 31, 2002 from 6.0% for the three months ended December31, 2001.  The decrease in depreciationand amortization resulting from the adoption of SFAS 142 was completely offsetby increased amortization of other acquired intangibles resulting from theother intangible assets acquired in the OPAY and GSC acquisitions.

 

*Interest Income (Expense), Net.*  Net interest income increased 247.7% to $386,000 for the three monthsended December 31, 2002 compared to net interest income of $111,000 for thethree months ended December 31, 2001. This increase was primarily attributable to interest earned on a higheraverage investment balance, and a decrease in interest expense as a result of the repayment of the line ofcredit in the prior year.

 

*Provision  for IncomeTaxes.* The provision for income taxes was $1.0million for the three months ended December 31, 2002 and $855,000 for the threemonths ended December 31, 2001.  Our effective tax rate was 37.0% for the three months endedDecember 31, 2002 and 2001.  Theeffective tax rate in the upcoming quarters and for the year ending September30, 2003 may vary due to a variety of factors, including, but not limited to,the relative income contribution by tax jurisdiction, changes in statutory taxrates, the amount of tax exempt interest income generated during the year, theability to utilize foreign tax credits and foreign net operating losses, andany non-deductible items related to acquisitions or other nonrecurring charges.We will continue to monitor the effective tax rate on a quarterly basis.

 

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*Discontinued operation.*   Theloss from operations of discontinued operation represents the historical operating losses incurred by our Australianoperation.  The loss for the threemonths ended December 31, 2001 was $258,000.

 

**Liquidityand Capital Resources**

 

Our principal capitalrequirement is to fund working capital to support our growth, includingpotential future acquisitions, remaining purchase price installments andpotential contingent payments due to prior acquisitions.  We maintain a $15.0 million revolving creditfacility that expires on February 28, 2004 of which $15.0 million may be usedfor letters of credit.  The creditfacility bears interest at the adjusted LIBOR rate plus 2.5% or the lender’sannounced prime rate plus 0.25%, at our option. The credit facility iscollateralized by first priority liens and security interests in our assetsexcluding assets owned by Tier Technologies (Australia) Pty Ltd., GC Simsion,GR Bowles & Associates (“Simsion Bowles”) and ADC Consultants Pty Ltd., including a pledge of 65% of the stock ofour subsidiaries, excluding Simsion Bowles. The credit facility containscertain restrictive covenants including, but not limited to, limitations on theamount of loans we may extend to officers and employees and the incurrence ofadditional debt.  The credit facilityrequires the  maintenance of certainfinancial covenants, including a minimum quarterly net income requirement,minimum tangible net worth, a minimum ratio of debt to tangible net worth and aminimum ratio of liquid assets to current liabilities.  As of December 31, 2002, we were not incompliance with one of the covenants of the credit facility; however, the bankwaived such non-compliance.  There wereno outstanding borrowings or standby letters of credit as of December 31, 2002.

 

We intend to purchaseshares of our Class B common stock in accordance with the terms of the stockrepurchase program authorized by our Board of Directors in October 1998.  The timing and volume of purchases willdepend on market conditions.  Thesepurchases will be funded throughcurrent holdings of cash and short-term investments.

 

In addition to the creditfacility mentioned above, we had letters of credit totaling approximately$3,346,000, which were collateralized by certain securities in our long-terminvestment portfolio at December 31, 2002. Furthermore, our subsidiary, OPAY, had a letter of credit outstanding inthe amount of approximately $138,000secured by a certificate of deposit. These letters of credit  wereissued to secure performance bonds and to meet various facility leaserequirements.

 

Our Australian subsidiaryhas letters of credit totaling approximately $57,000 (based on the December 31,2002 exchange rate of AU$1.78 to U.S. $1.00) outstanding at December 31, 2002to meet certain remaining facility lease requirements.  These letters of credit were secured by termdeposits with an Australian bank.

 

Net cash from continuingoperations used in operating activities was $1.8 million in the three monthsended December 31, 2002 as compared to net cash from continuing operationsprovided by operating activities of $6.5 million in the three months endedDecember 31, 2001.  The decrease in netcash from continuing operations provided by operating activities is largelyattributable to the collection of several large receivable balances in theprior year quarter, the billing of several large project milestones at the endof the current quarter resulting in an increase in net accounts receivable andthe increase in unbilled receivables balance resulting from work performed oncontracts with milestone based billings.

 

Net cash from continuing operations used ininvesting activities was $6.7 million and $4.1 million in the three monthsended December 31, 2002 and December 31, 2001, respectively. The increase innet cash from continuing operations used in investing activities is primarilyattributable to increased investments in marketable securities.

 

Capitalexpenditures, including equipment and software acquired under financingarrangements but excluding assets acquired or leased through business combinations,were approximately $862,000 in the three months ended December 31, 2002 and$2.2 million in the three months ended December 31, 2001.  We anticipate that in fiscal year 2003, wewill have capital expenditures similar to fiscal year 2002 related 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 other transaction processing centers.

 

Net cash from continuing operations providedby financing activities totaled $427,000 in the three months ended December 31,2002 and $71.5 million in the three months ended December 31, 2001.  The net cash from continuing operations providedby financing activities for the three months ended December 31, 2001 resultedprimarily from the proceeds of our follow-on stock offering and the exercise ofemployee stock options.

 

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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  particularly for our pension softwaresystems projects.  We anticipate thatour existing capital resources, including our cash balances, cash that weanticipate will be provided by operating activities and our available creditfacilities, will be adequate to fund our operations for at least the next 12months. There can be no assurance that changes will not occur that would consume available capital resources beforesuch time.  Our capital requirements andcapital resources depend on numerous factors, including potential acquisitions,contingent payments earned, new and existing contract requirements, the timingof the receipt of accounts receivable, our ability to draw on our bank facilityand employee growth.  To the extent thatour existing capital resources are insufficient to meet our capitalrequirements, we will have to raise additional funds. There can be no assurancethat additional funding, if necessary, will be available on favorable terms, ifat all.

 

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 performancebond.  Our inability to obtainperformance bonds or a requirement to pledge significant cash collateral inorder to obtain such bonds would adversely affect our business and our capacityto obtain additional contracts. Increased premiums or a claim made against a performance bond couldadversely affect our earnings and cash flow and impair our ability to bid forfuture contracts.

 

**Disclosures About ContractualObligations And Commercial Commitments as of December 31, 2002**

 

As of December 31, 2002,we had the following obligations and commitments to make future payments undercontracts, contractual obligations and commercial commitments (in thousands):

 
|                                                    |   | **Payments due by period** |   |
|---------------------------------------------------------|--------|----------------------------|--------|
| **Contractual Cash Obligations**                        |   | **Total**                  |   | **Less than  1 year** |   | **2 – 3  years** |   | **4 –5 years** |   | **After 5  years** |   |
|                                                    |   | **(in thousands)**         |   |
| Debt, including interest                                |   | $                          | 742    |   | $ | 410 |   | $ | 265 |   | $ | 67 |   | $ | — |   |
| Operating leases                                        |   | 10,546                     |   | 3,055 |   | 4,773 |   | 2,152 |   | 566 |   |
| Purchase price payable and accrued contingent  earnouts |   | 2,663                      |   | 2,663 |   | — |   | — |   | — |   |
| Restructuring liability                                 |   | 2,189                      |   | 1,212 |   | 730 |   | 247 |   | — |   |
|                                                         |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
|                             |   | **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** |   |
|                             |   | **(in thousands)**                             |   |
| Standby letters  of credit       |   |                                           | 3,541  |   |   | 3,057 |   |   | 289 |   |   | — |   | $ | 195 |   |
| Performance  bonds               |   | 36,550                                         |   | 18,319 |   | 18,231 |   | — |   | — |   |
|                                  |        |                                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**Recent Accounting Standards**

 

InNovember 2002, the Emerging IssuesTask 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. Companies may also 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. We are evaluating Issue 00-21 to determine the impact on our results ofoperations.

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accountingfor Stock-Based Compensation-Transition and Disclosure.”  SFAS 148 amends the transition anddisclosure requirements of Statement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.”  Certain of the disclosure requirements arerequired for all companies, regardless of whether the fair value method orintrinsic value method is used to account for stock-based employee compensationarrangements.  We continue to accountfor our incentive stock option plan under the intrinsic value method inaccordance with the recognition and measurement principles of APB Opinion No.25, “Accounting for Stock Issued to Employees.”  The amendments to SFAS 123 will be effective for financialstatements for fiscal years ended after December 15, 2002 and for interimperiods beginning after December 15, 2002. We are currently assessing the impact of the adoption of the SFAS 148 onour consolidated financial statements.

 

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**FactorsThat May Affect Future Results**

 

The following factors and other risk factorscould cause our actual results to differ materially from those contained inforward-looking statements in this Form 10-Q.

 

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

 

Our net revenues and operating results are subject to significantvariation from quarter to quarterdue to a number of factors, many of which are outside our control.  Among other things, these factors include:

 

**•**                  the number, size and scope ofprojects in which we are engaged;

 

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

 

•                  dependence onour technology partners;

 

•                  economicconditions in the vertical and geographic markets we serve;

 

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

 

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

 

•                  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, which is due primarily to the fact that the majority offederal and state personal income tax payments are made in March and April andreal estate and personal property tax payments are made annually, semi-annuallyor quarterly in most jurisdictions;

 

•                  the contractualterms and degree of completion of projects;

 

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

 

•                  the accuracy ofestimates of resources and costs required to complete ongoing projects;

 

•                  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;

 

•                  start-up costsincluding software license fees incurred in connection with the initiation oflarge projects;

 

•                  the adequacy ofprovisions for losses; and

 

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

 

The timing andrealization of opportunities in our sales pipeline make the timing andvariability of net revenues difficult to forecast. A high percentage of ouroperating expenses, particularly personnel, facility and depreciation andamortization, are fixed in advance. We also typically reach the annuallimitation on FICA contributions for many of our U.S. employees before the endof the calendar year. As a result, U.S. employer payroll taxes will varysignificantly from quarter to quarter during the fiscal year and will generallybe higher at the beginning of the calendar year and net revenues will vary fromquarter to quarter during the fiscal year. Because of the variability of our quarterly operating results, webelieve that period-to-period comparisons of our operating results are notnecessarily meaningful, should not be relied upon as indications of futureperformance and may result in volatility and declines in the price of our Class B common stock. In addition, ouroperating results may from time to time be below the expectations of analystsand investors.  If so, the market priceof our Class B common stock may decline significantly.

 

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**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 three monthsended December 31, 2002, approximately 90.4% of our net revenues were derivedfrom services provided to government agencies. These government agencies may be subject to budget cuts, budgetaryconstraints, a reduction or discontinuation of funding or changes in thepolitical or regulatory environment that may cause government agencies toterminate projects, divert funds or delay implementation. These governmentagencies may terminate most of these contracts at any time without cause. Inaddition, revisions to or repeals of mandated statutes and regulations, including changes to the timing ofrequired compliance, may cause government agencies to divert funds. Asignificant reduction in funds available for government agencies to purchaseprofessional services or business solutions would significantly reduce our netrevenues and cash flows.  The loss of amajor government client, or any significant reduction or delay in orders bythat client, would also significantly reduce our net revenues and cash flows.  Additionally, government contracts aregenerally subject to audits and investigations by government agencies.  If the results of these audits orinvestigations are negative, our reputation could be damaged, the  contract could be terminated or significantpenalties could be assessed.  If acontract is terminated for any reason, our ability to fully recover certainamounts may be impaired and this could have a material adverse impact on ourfinancial 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 significant reduction in the scope or imposition of significantpenalties for our failure to meet scheduled delivery requirements of a largeproject would significantly reduce our net revenues and cash flows.  Most of our contracts are terminable by theclient following limited notice and without significant penalty to the client.We have derived, and believe that we will continue to derive, a significantportion of our net revenues from a limited number of clients. For the threemonths ended December 31, 2002, CalPERS accounted for 10.0% of our netrevenues.  The volume of work performedfor specific clients is likely to vary from period to period, and a majorclient in one period may not use our services in a subsequent period.  If any of our large clients terminates itsrelationship with us, we will lose a significant portion of our net revenuesand cash flows.  In addition, as aresult of our focus in specific vertical markets, economic and other conditionsthat affect the companies and government agencies in these markets could alsoresult in a reduction in our net revenues and cash flows.   Because we derive a significant portion ofour net revenues from a limited number of clients, we have several largeaccounts receivable and unbilled receivable balances. Although those balancesmay individually be less than 10% of our total net accounts receivable andunbilled receivable balances, any dispute, early contract termination or othercollection issues could have a material adverse impact on our financialcondition and results of operations.

 

The IRS accounts for asignificant portion of OPAY’s net revenues. The existing contract with the IRS allows the IRS to terminate ourservices at any time for IRS convenience. The loss of the IRS as a client, or a decrease in IRS-related transactionsbecause of increased competition from another IRS-authorized service provider,could result in a reduction in our net revenues and cash flows.  For the three months ended December 31,2002, the IRS accounted for 20.2% of OPAY’s net revenues.

 

**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.**

 

Manyof our engagements involve projects that are critical to the operations of ourclients’ businesses and provide benefits that may be difficult to quantify. Thefailure by us, or of the prime contractor on an engagement in which we are asubcontractor, to meet a client’s expectations in the performance of theengagement could damage our reputation and adversely affect our ability toattract new business. We have undertaken, and may in the future undertake,projects in which we guarantee performance based upon defined operatingspecifications or guaranteed delivery dates. We also have undertaken, and mayin the future undertake, projects that require us to obtain a performance bondfrom a licensed surety and to post the performance 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.

 

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OPAY’selectronic credit card payment services and our child support paymentprocessing services  are designed toprovide payment management functions and to limit our clients’ risk of fraud orloss in effecting transactions withtheir constituents.  As electronicservices become more critical to our clients, there is the potential forsignificant liability claims for the processing of fraudulent or erroneoustransactions.  In addition, defects orprogramming errors in the software we use could cause serviceinterruptions.  Our services depend onhardware, software and supporting infrastructure that is internally developed,purchased and/or licensed from third parties. Although we conduct extensive testing, software may contain defects orprogramming errors, or may not properly interface with third party systems,particularly when 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 cannot be resolvedsatisfactorily or in a timely manner, our business could suffer.  If a liability claim or claims were broughtagainst us, even if not successful, their defense would likely be timeconsuming and costly and could damage our reputation.  Any such liability or claim could have a material and adverseeffect on our business, operating results and financial condition.

 

**Because we sometimes work with third parties and use softwareof third parties in providing our products and services to clients, ourreputation, operating results and competitiveness could be adversely affectedby actions that those third parties take.**

 

Wesometimes perform client engagements using third parties. We often 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 some ofour clients depends to a large extent on our use of various software programsthat we license from a small number of primary software vendors. In thesesituations, we depend on the software, resources and technology of these thirdparties in order to perform the engagement. Actions or failures attributable tothese third parties or their products or to the prime contractor orsubcontractor could adversely impact a project, damage our reputation andadversely affect our ability to attract new business. In addition, the refusalor inability of these third parties to permit continued use of their software,resources or technology by us, our inability to gain access to software thathas been placed in escrow by third parties, or the discontinuance or terminationby the prime contractor of our services or the services of a key subcontractor,would harm our operating results and the competitiveness of our products andservices.  If we are unable to meet ourcontractual requirements with our clients, we could be subjected to claims byour clients.

 

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

 

Acomponent of our business strategy is to expand our presence in new or existingmarkets by acquiring additional businesses. From December 1996 throughDecember 31, 2002, we acquired 19 businesses using cash, equity and debt, with some of those acquisitions alsoinvolving assumed liabilities and contingent payments. Acquisitions involve anumber of special risks, including:

 

•                  failureto realize the value of the acquired assets, businesses or projects;

 

•                  diversionof management’s attention;

 

•                  failureto retain key personnel;

 

•                  entranceinto markets in which we have limited or no prior experience;

 

•                  increasedgeneral and administrative expenses;

 

•                  clientdissatisfaction or performance problems with acquired assets, businesses or projects;

 

•                  write-offsof goodwill and other intangible assets and other charges against earnings;

 

•                  assumptionof unknown liabilities;

 

•                  thepotentially dilutive issuance our common stock, the use of significant amounts of cash or the

 

•                  incurrenceof substantial amounts of debt; and

 

•                  otherunanticipated events or circumstances.

 

Weacquired OPAY at the end of July 2002. OPAY has a history of losses. Although OPAY initiated a restructuringplan in November 2001 to reduce certain operating expenses and we intend tofurther reduce operating

 

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expenses for OPAY as we integrate thisacquisition and complete the restructuring, there can be no assurance that OPAYoperations will attain profitability.

 

The use of credit cardsto make payments to government agencies is still relatively new andevolving.  To date, OPAY’s business hasconsisted primarily of providing credit card payment options for the payment ofbalance due federal and state personal income taxes, real estate and personalproperty taxes and fines for traffic violations and parking citations.  Because OPAY has only a limited operatinghistory, it is difficult to evaluate its business and prospects and the risks,expenses and difficulties that we may face in implementing OPAY’s businessmodel.  OPAY’s business model is basedon consumers’ willingness to pay a convenience fee (in addition to theirrequired government or other payment) for the use of OPAY’s credit card paymentoption.  Our success will depend onmaintaining OPAY’s relationship with the IRS and on maintaining existing, anddeveloping additional, relationships with state and local government agencies,especially state taxing authorities, and their respective constituents.  There can be no assurances that we will beable to develop new OPAY relationships or maintain existing OPAY relationships,and the failure to do so could have a material and adverse effect on ourbusiness,  operating results andfinancial condition.  In addition, ifconsumers are not receptive to paying a convenience fee, if credit cardassociations change their rules and do not allow us to charge the conveniencefees, if credit card issuers eliminate or reduce the value of rewards obtainedunder their respective rewards programs, or if the use of the internetdeclines, demand for OPAY’s services will decline or fail to grow, which wouldhave a material and adverse effect on our business, operating results andfinancial condition.

 

We may not be able toidentify, acquire or profitably manage additionalbusinesses or integrate successfully any acquired businesses withoutsubstantial expense, delay or other operational or financial problems. Withoutadditional acquisitions, we are unlikely to maintain historical growth rates.

 

**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.**

 

Underestimatingthe resources, 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. For transaction–basedcontracts, we receive our fee on a per-transaction basis or as a percentage ofdollars processed, such as the number of child support payments processed orincome tax dollars processed. To earn a profit on these contracts, we rely uponaccurately estimating costs involved and assessing the probability of meetingthe specified objectives or realizing the expected number or average dollaramounts of transactions within the contracted time period. If we fail toestimate accurately the factors upon which we base our contract pricing, we mayincur losses on those contracts. During the three months ended December 31,2002, 37.3% of our net revenues were generated on a fixed price basis and 43.3%of our net revenues were generated from transaction–based contracts. Webelieve that the percentage of net revenues attributable to fixed price andtransaction–based contracts will continue to be significant for theforeseeable future.

 

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

 

Ifwe are unable to attract, retain, train, manage and motivate skilled employees,particularly project managers and other senior technical personnel, our abilityto adequately manage and staff our existing projects and to bid for or obtainnew projects could be impaired, which would adversely affect our business andits growth. The failure of our employees to achieve expected levels ofperformance could adversely affect our business. There is significantcompetition for employees with the skills required to perform the services weoffer. In particular, qualified project managers and senior technical andprofessional staff are in great demand worldwide. In addition, we require thatmany of our employees travel to client sites to perform services on our behalf,which may make a position with us less attractive to potential employees. Wemay not be able to identify and successfully recruit and integrate a sufficientnumber of skilled employees into our operations, which would harm our businessand its growth. Our success also depends upon the continued services of anumber of key employees, including our chief executive officer and the leadersof our strategic business units. Any of our employees may terminate theiremployment at any time. The loss of the services of any key employee couldsignificantly disrupt our operations. In addition, if one or more of our keyemployees resigns to join a competitor or to form a competing company, theloss of such personnel and any resulting loss of existing or potential clientsto any such competitor could adversely affect our competitive position andoperating results.

 

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**Our software products compete in markets that are rapidlychanging and we must develop, acquire and introduce new products andtechnologies  to grow our net revenuesand remain competitive.**

 

Themarkets for our products are characterized by rapid technological change,changes in client demands and evolving industry standards.  As a result, our future success willcontinue to depend upon our ability to develop new products or productenhancements that address the future needs of our target markets and to respondto these changing standards and practices. We may not be successful in developing, introducing and marketing newproducts or product enhancements on a timely and cost effective basis, or atall, and our new products and product enhancements may not adequately meet therequirements of the marketplace or achieve market acceptance.  If we are unable, for technological or otherreasons, to develop and introduce new products or enhancements of existingproducts in a timely manner in response to changing market conditions or clientrequirements, or if new products or new versions of existing products do notachieve market acceptance, our business would be seriously harmed.  In addition, our ability to develop newproducts and product enhancements is dependant upon the products of othersoftware vendors.  If the products ofsuch vendors have design defects or flaws, or if such products are unexpectedlydelayed in their introduction, our business could be seriously harmed.  Software products as complex as those weoffer may contain undetected defects or errors when first introduced or as newversions are released.  Although we havenot experienced significant adverse effects resulting from software errors, wecannot be certain that, despite testing by us and our clients, defects orerrors will not be found in new products after general release, resulting inloss of or delay in market acceptance, which could seriously harm our business.

 

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

 

Theinformation technology, transaction processing and consulting services marketsare highly competitive and are served by numerous international, national andlocal firms. We may not be able to compete effectively in these markets. Marketparticipants include systems consulting and integration firms, includinginternational consulting firms and related entities, the internal informationsystems groups of our prospective clients, professional services companies,hardware and application software vendors, and divisions of large integratedtechnology companies and outsourcing companies. Many of these competitors havesignificantly greater financial, technical and marketing resources, generategreater net revenues and have greater name recognition than we do. In addition,there are relatively low barriers to entry into the information technology andconsulting services markets, and we have faced, and expect to continue to face,additional competition from new entrants into the information technology andconsulting services markets.

 

Webelieve that the principal competitive factors in the information technologyand consulting services markets include:

 

•                  reputation;

 

•                  projectmanagement expertise;

 

•                  industryexpertise;

 

•                  speedof development and implementations;

 

•                  technicalexpertise;

 

•                  competitivepricing; and

 

•                  theability to deliver results on a fixed price and transaction basis as well as atime and materials basis.

 

We believe that our ability to compete alsodepends in part on a number of competitive factors outside our control,including:

 

•                  theability of our clients or competitors to hire, retain and motivate projectmanagers and other senior technical staff;

 

•                  theownership by competitors of software used by potential clients;

 

•                  theprice at which others offer comparable services;

 

•                  theability of our clients to perform the services themselves; and

 

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•                  theextent of our competitors’ responsiveness to client needs.

 

Ifwe do not compete effectively on one or more of these competitive factors, ourbusiness and our ability to execute our business strategy will be impaired.

 

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

 

Wemaintain insurance to cover a variety of different business risks.  There can be no assurance that we canmaintain the same scope and amount of insurance coverage on reasonable terms orobtain such insurance at all.  Ourinability to renew policies or maintain the same level of coverage wouldadversely affect our business and increase our risk exposure.

 

Wehave undertaken, and may in the future undertake, projects that require us toobtain a performance bond from a licensed surety and post the performance bondwith the client.  There can be noassurance that such performance bonds will continue to be available onreasonable terms, if at all.  Ourinability to obtain performance bonds would adversely affect our business andour capacity 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.

 

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

 

Anyfailure in a client’s system or failure to meet a material deliverable couldresult in a claim against us for substantial damages, regardless of ourresponsibility for such failure. We cannot guarantee that the disclaimers,limitations of warranty,  limitations ofliability and other provisions set forth in our contracts will be enforceableor will otherwise protect us from liability for damages. Our liabilityinsurance coverage, which includes coverage for errors or omissions, may notcontinue to be available on reasonable terms or in sufficient amounts to coverone or more claims, and the insurer may disclaim coverage as to any futureclaim. The successful assertion of one or more claims against us that exceedavailable insurance coverage or changes in insurance policies, includingpremium increases or the imposition of large deductible or co-insurancerequirements, would adversely affect our business.

 

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

 

Thesteps we take to protect our intellectual property rights may be inadequate toavoid the loss or misappropriation of that information, or to detectunauthorized use of such information. We rely on a combination of tradesecrets, nondisclosure agreements, licensing agreements and other contractualarrangements, and copyright and trademark laws to protect our intellectualproperty rights. We also enter into nondisclosure agreements with ouremployees, subcontractors and the parties we team with for contracts andgenerally require that our clients enter into such agreements. We also controland limit access to our proprietary information.

 

Wehave proprietary software that is licensed to clients pursuant to licensingagreements and other contractual arrangements. We utilize intellectual propertylaws, including copyright and trademark laws, to protect our proprietaryrights. Issues relating to the ownership of, and rights to use, software andapplication frameworks can be complicated, and there can be no assurance thatdisputes will not arise that affect our ability to resell or reuse suchsoftware and application frameworks. A portion of our business also involvesthe development of software applications for specific client engagements.Ownership of such software is the subject of negotiation with each particularclient and is typically assigned to the client. We also develop softwareapplication frameworks and may retain ownership or marketing rights to theseapplication frameworks, which may be adapted through further customization forfuture client projects. Some of our clients have prohibited us from marketingthe software 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.

 

Infringementclaims may be asserted against us in the future that may not be successfullydefended. The loss or misappropriation of our intellectual property or theunsuccessful defense of any claim of infringement could prevent or delay ourproviding our products and services, cause us to become liable for substantialdamages, or force us to enter into royalty or licensing agreements.

 

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**If OPAY’sclients and credit card issuers cease to publicize OPAY’s services or adverselychange the manner in which they promote OPAY’s services, consumer use of itsservices may slow, and we may suffer a large increase in advertising costs.**

 

Currently, OPAY’sgovernment clients and credit card issuers provide a significant portion of thepublicity for its services, without any charge to OPAY.  If clients cease to publicize OPAY’sservices, or charge OPAY for this publicity, advertising costs will increasesubstantially, which could have a material and adverse effect on our business,operating results and financial condition.  While OPAY endeavors in its agreements with its clients to require suchclients to undertake such advertising activities, many of the clients andcredit card issuers have no obligation to continue to provide this publicity,and there are no assurances that they will continue to do so.  In addition, the clients may publicize otherservices, including those of its competitors. For example, the IRS’s 2001 Form 1040 instruction booklet and Forms1040ES and 4868 listed a competitor’s name before OPAY’s name in regard toproviders of electronic credit card payment services, whereas in the 2000 forms(i.e.,  payments made in 2001), OPAY’sname was listed first.

 

**Our growth may slow or stop if wefail to effectively manage our expansion.**

 

Ifwe are unable to manage our growth effectively, the quality of our services,our ability to retain key personnel and our growth will decline. Our growth hasplaced, and is expected to continue to place, significant demands on ourmanagement, financial, staffing and other resources. We have expanded byopening new offices and may open additional offices. Our ability to managegrowth effectively will require us to continue to develop and improve ouroperational, financial and other internal systems or acquire new systems, aswell as business development capabilities, and to train, motivate and manageour employees. In addition, as the average size and number of our projectscontinues to increase, we must be able to manage such projects effectively. Wemay not be able to sustain our rate of growth or successfully manage any futuregrowth.

 

Aconstraint in OPAY’s capacity to process transactions could impair the qualityand availability of OPAY’s service. Capacity constraints may cause unanticipated system disruptions, impairquality and lower the level of service. Although we believe that OPAY has sufficiently expanded its systemcapacity to accommodate anticipated future growth, there are no assurances thatOPAY will not suffer capacity constraints caused by a sharp increase in the useof its services.  Due to the largenumber of tax payments made in March and April, there is an increased risk thatOPAY will suffer a capacity constraint during that period, which could have anadverse effect on our business, operating results and financial condition.

 

**We could suffermaterial losses if our systems or operations fail or are disrupted.**

 

Any system failure,including network, software or hardware failure, whether caused by us, a thirdparty service provider, unauthorized intruders or hackers, computer viruses,natural disasters, power shortage, capacity constraints or terrorist attacks,could cause interruptions, delays in our business, loss of data or damage toour reputation. In addition, if our mail, communications or utilities aredisrupted or fail, our operations, including our transaction processing, couldbe suspended or interrupted and our business could be harmed. Our propertyinsurance and business interruption insurance may not be adequate to compensateus for all losses that may occur as a result of any system or operationalfailure or disruption.

 

**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, are creatinguncertainty for companies such as ours. To maintain high standards of corporategovernance and public disclosure, we intend to invest all reasonably necessaryresources to comply with evolving standards. This investment may result inincreased general and administrative expenses and a diversion of managementtime and attention from revenue-generating activities.

 

**Pro forma financial information thatwe disclose concerning our operations does not conform to generally acceptedaccounting principles and may not comply with final SEC regulations.**

 

We prepare and releasefinancial statements prepared in accordance with generally accepted accountingprinciples (“GAAP”). We also disclose and discuss certain pro forma financialinformation in our related earningsreleases and investor conference calls. We believe the pro forma financialinformation disclosed helps investors evaluate the results of our ongoingoperations. We encourage investors to carefully review the GAAP financial

 

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information included in our quarterly earnings releases and periodicSEC reports. In January 2003, pursuant to the Sarbanes-Oxley Act, the SECissued final rules regulating the publication of pro forma financialinformation. These rules may significantly limit our ability to disclose proforma financial information, making it more difficult for us to communicate theresults of our ongoing operations, which could have an adverse effect on thetrading price of our common stock*.*

 

**Control of ourcompany by our chief executive officer could make it difficult for anothercompany to acquire us and could depress the price of our Class B commonstock.**

 

Concentrationof voting control could have the effect of delaying or preventing a change incontrol of us and  may affect the marketprice 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 33.9% of our total common stock voting poweroutstanding at December 31, 2002. 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, which could depress the price of ourClass B common 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 of preferredstock may delay or prevent a change in control of us, discourage bids for theClass B common stock at a premium over the market price and adverselyaffect the market price and the voting and other rights of the holders of ourClass B common stock.

 

**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.**

 

OurClass B common stock price has been and could continue to be volatile. Theseprice fluctuations may be rapid and severe and may leave investors little timeto react. Factors that affect the market price of our Class B common stockinclude:

 

•                  quarterlyvariations in operating results;

 

•                  announcementsof technological innovations or new products or services by us or ourcompetitors;

 

•                  generalconditions in the information technology industry or the industries in whichour clients compete;

 

•                  changesin earnings estimates by securities analysts or us; and

 

•                  generaleconomic and political conditions such as recessions and acts of war orterrorism.

 

Fluctuationsin the price of our Class B common stock could contribute to investorslosing all or part of their investment.

 

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

 

Ourinternational business operations are subject to a number of risks, including,but not limited to:

 

•                  fluctuationsin the value of foreign currencies;

 

•                  difficultiesin building and managing foreign operations;

 

•                  difficultiesin enforcing agreements and collecting receivables through foreign legalsystems;

 

•                  longerpayment cycles; and

 

•                  unexpectedregulatory, economic or political changes in foreign markets.

 

Our operations could beadversely affected by any of these risks.

 

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**ITEM3.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**Foreign currency exchange rate risk**

 

We conduct operations inthe United Kingdom through a U.S.-incorporated subsidiary. Net revenues fromthese operations are typically denominated in British Pounds and Euros, therebypotentially affecting our financial position, results of operations and cashflows due to fluctuations in exchange rates. Net revenues from United Kingdom operations represented 1.7% of ourtotal net revenues for the three months ended December 31, 2002. Near-termchanges in exchange rates may have a material impact on our future netrevenues, earnings, fair values or cash flows. We have not engaged in foreign currency hedging transactions during thethree months ended December 31, 2002. There can be no assurance that a suddenand significant decline in the value of the British Pound or Euro would nothave a material adverse effect on our financial condition and results ofoperations.

 

**Interestrate sensitivity**

 

We maintain a portfolioof cash equivalents and investments in a variety of securities, includingcertificates of deposit, money market funds and government and non-governmentdebt securities. These available-for-sale securities are subject to interestrate risk and may fall in value if market interest rates increase. If marketinterest rates increase immediately and uniformly by 10 percentage points fromlevels at December 31, 2002, the fair value of the portfolio would decline by$1,975,000. We anticipate having the ability to hold our fixed incomeinvestments until maturity, and therefore do not expect our operating resultsor cash flows to be affected to any significant degree by the effect of asudden change in market interest rates on our securities portfolio.

 

**ITEM4.   CONTROLSAND PROCEDURES**

 

Ourchief executive officer and chief financial officer performed an evaluation ofour disclosure controls and procedures (as defined in Exchange Act Rule 13a-14and 15d-14) as of December 31, 2002 (the “Evaluation Date”).  Based on the evaluation, the chief executiveofficer and chief financial officer concluded that our disclosure controls andprocedures were effective and sufficient to ensure that the informationrequired to be disclosed in the reports that we file under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

 

Therehave been no significant changes in our internal controls since the EvaluationDate.  We are not aware of anysignificant change in any other factors that can significantly affect our internal controls subsequent tothe Evaluation Date.

 

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**PARTII.  OTHER INFORMATION**

 

**ITEM5.   OTHERINFORMATION**

 

Thisreport, when filed with the SEC, was accompanied by written statements by JamesL. Bildner, our chief executive officer, and Laura B. DePole, our chieffinancial officer, as required by Section 906 of the Sarbanes-Oxley Act of2002.

 

**ITEM6.   EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)*Exhibits.*

* *
| **Exhibit****Number** |   | **Description**                                                                                     |
|-----------------------|--------|-----------------------------------------------------------------------------------------------------|
| 10.47                 |   | Employment Agreement by and between the Registrant  and Martin V. Joyce, Jr., dated October 7, 2002 |

 

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

 

Current Report on Form8-K/A, filed October 7, 2002, pursuant to Item 7 attaching financial statementsand pro forma information related to the acquisition of all the issued andoutstanding capital stock of Official Payments Corporation.

 

Current Report on Form8-K/A, filed October 8, 2002, amending in its entirety, the Form 8-K/A filedOctober 7, 2002, pursuant to Item 7 attaching financial statements and proforma information related to the acquisition of all the issued and outstandingcapital stock of Official Payments Corporation.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                     | Tier Technologies, Inc. |
|--------------------------|-------------------------|
|                     |                    |
| Dated: February 12, 2003 |                    |
|                     |                    |
|                     | By:                     | /s/ LAURA B. DEPOLE |
|                     |                    |   |
|                     |                    | **Laura  B. DePole** |
|                     |                    | **Chief Financial Officer** |
|                     |                    | **(Principal Financial and Accounting  Officer)** |

 

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**CERTIFICATION**

 

I,James L. Bildner, certify that:

 

1.      I have reviewed this quarterly report onForm 10-Q of Tier Technologies, Inc.;

 

2.      Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.      Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for the periodspresented in this quarterly report;

 

4.      The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)  designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)  evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.      The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)  all significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.      The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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

 

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**CERTIFICATION**

 

I,Laura B. DePole, certify that:

 

1.      I have reviewed this quarterly report onForm 10-Q of Tier Technologies, Inc.;

 

2.      Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.      Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for the periodspresented in this quarterly report;

 

4.      The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

d)  designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

e)  evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

f)  presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.      The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent function):

 

c) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

d) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6.      The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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

 

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