NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—NATURE OF OPERATIONS
Official Payments Holdings, Inc., or Official Payments, (formerly known as Tier Technologies, Inc.) primarily provides electronic payment solutions ("Payment Solutions"), which are provided by our wholly owned subsidiary Official Payments Corporation, or OPC. We provide payment solutions to the following types of Clients:
·
|
Federal, State and Local governments—which includes federal and state income and business tax payments, and local real property tax payments;
|
·
|
Higher Education—which consists of payments to post-secondary educational institutions;
|
·
|
Utility—which includes payments to private and public utilities;
|
·
|
Charitable organizations; and
|
·
|
Other—which includes rent, insurance, and K-12 education meal payments and fee payments.
|
We also operate in one other business area, our Voice and Systems Automation, or VSA, business. We expect to wind down our VSA business during fiscal year 2014, because we do not believe the services are compatible with our long-term strategic direction. VSA
provides call center interactive voice response systems and support services, including customization, installation and maintenance.
For additional information about our Payment Solutions and VSA operations, see Note 11—Segment Information.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
These financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles, and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended.
Principles of Consolidation.
The financial statements include the accounts of Official Payments Holdings, Inc. and its subsidiary. Intercompany transactions and balances have been eliminated.
Use of Estimates.
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported on our Consolidated Financial Statements and accompanying notes. We believe that near-term changes could reasonably affect the following estimates: collectability of receivables; share-based compensation; valuation of goodwill, intangibles and investments; contingent liabilities; effective tax rates; and deferred taxes and the associated valuation allowance. Although we believe the estimates and assumptions used in preparing our Consolidated Financial Statements and notes thereto are reasonable in light of known facts and circumstances, actual results could differ materially.
Cash and Cash Equivalents.
Cash is federally insured funds maintained in demand deposit accounts. Cash equivalents are highly liquid investments with maturities of three months or less at the date of purchase and are stated at amounts that approximate fair value, based on quoted market prices. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts with financial institutions and U.S. Treasury bills.
Revenue Recognition and Credit Risk.
Payment Solutions revenues are primarily attributable to fees for processing incoming payment obligations electronically. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is
reasonably assured. We assess collectability based upon our Clients' financial condition and prior payment history, as well as our performance under the arrangement.
Our Payment Solutions operations offer services that allow our Clients to offer their Constituents (individuals or businesses) the ability to pay certain financial obligations with credit or debit cards, electronic check, cash or money order, depending on the terms of the arrangement. Our revenue is generated in the form of the convenience fee we are permitted to charge for the electronic payment solutions service provided. Depending on the agreement with the Client, the convenience fee can be a fixed fee or a percentage of the payment processed. In over 90% of our arrangements, this fee is charged directly to the Constituent and is added to their payment obligation when it is processed. In the remainder of arrangements, our Clients pay the convenience fees we receive. We recognize the revenue in the month in which the service is provided.
During fiscal 2012, our VSA operations included software maintenance and support and non-essential training and consulting support. When we provide ongoing maintenance and support services, the associated revenue is deferred and recognized on a straight-line basis over the life of the related contract—typically one year. Generally, we recognize the revenues earned for non-essential training and consulting support when the services are performed.
Allowance for Doubtful Accounts.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance for doubtful accounts based on known troubled accounts, historical experience and other currently available evidence. Additions to the allowance for doubtful accounts are included in
General and administrative
on our Consolidated Statements of Operations.
Settlements receivable.
Individuals and businesses settle their obligations to our various Clients, primarily utility and other public sector Clients, using credit or debit cards or via ACH payments. We create a receivable for the amount due from the credit or debit card company or bank and an offsetting payable to the Client. Once we receive confirmation the funds have been received, we settle the obligation to the Client. Convenience fees are charged to cardholders on a per transaction basis and are reinstated to cardholders upon an approved payment reversal.
Accrued Discount Fees.
Our direct costs for our Payment Solutions operations primarily consist of credit card discount fees, in addition to assessments and other costs passed onto us by our processors. Collectively, these fees and costs are considered to be discount fees. Discount fees are charged to us as a percentage of the dollar volume we transact plus a fixed fee, and for expense purposes, are incurred during the month that the related transaction is authorized for payment. Accrued discount fees represent the total amount of discount fees that have been incurred by us on authorized transactions, but have yet to be remitted by us as of the reporting date. Discount fees are typically remitted by us in the calendar month which follows the date of transaction authorization.
Fair Value of Financial Instruments.
The carrying amounts of certain financial instruments, including cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities.
Advertising Expense.
We expense advertising costs, net of cooperative advertising cash contributions received from partners, during the period the advertising takes place. We incurred net advertising expenses from Continuing Operations of $1.6 million during fiscal 2012, $1.3 million during fiscal year 2011, and $0.7 million during fiscal year 2010.
Property, Equipment and Software.
Property, equipment and software are stated at cost and depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease terms, ranging from two to seven years. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
We expense the costs incurred for software that we expect to use internally until the preliminary project stage has been completed. Subsequently, we capitalize direct service and material costs, as well as direct payroll
and payroll‑related costs and interest costs incurred during development. Once the software is ready for its intended use in accordance with ASC 350-40, we amortize it on a straight-line basis over its estimated useful life.
Goodwill
.
Goodwill is not amortized, but instead is tested for impairment at least annually at the reporting unit level. We perform this impairment test by first comparing the fair value of our Payment Solutions reporting units to their carrying amount. If an indicator of impairment exists, we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any. We determine fair value of our reporting units using various methodologies including: 1) comparable public companies; 2) merger and acquisitions precedents; and 3) discounted cash flows No impairment existed during fiscal 2012.
Intangible Assets.
We amortize intangible assets with finite lives over their estimated benefit period, ranging from five to ten years, in a manner consistent with the estimated pattern in which the asset is consumed. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairment existed during fiscal 2012.
Loss Per Share.
Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock to the extent such securities or other contracts are not anti-dilutive.
Share-Based Compensation.
Share-based compensation cost for an option award is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the award (typically three to five years) using the ratable method. We also issue restricted stock units and performance stock units. For the restricted stock units and performance stock units payable in cash, we record expense based on the fair value of the awards at the end of each financial reporting period, consistent with the recognition of awards classified as liabilities under US GAAP.
Income Taxes.
Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The liability method is used to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid or the differences are reversed. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We recognize the tax benefit or liability of an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Accumulated Comprehensive (Loss) Income.
Our accumulated comprehensive (loss) income is composed of net (loss) income and unrealized (losses) gains on marketable investment securities, net of related taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB ASU 2011-04
. In May 2011, the FASB issued FASB ASU 2011-04, which clarifies some existing concepts, eliminates wording differences between US GAAP and International Financial Reporting Standards, or IFRS, and changes some of the principles and disclosures of fair value measurement to achieve convergence between US GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. We adopted this ASU effective January 1, 2012. The initial adoption of this ASU did not have a material impact on our financial position or results of operations.
FASB ASU 2011-08
. In September 2011, the FASB issued FASB ASU 2011-08, which allows entities testing for impairment of goodwill the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its
carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. We will adopt this ASU effective October 1, 2012. We do not believe the adoption of this ASU will have a material impact on our financial position or results of operations.
FASB ASU 2011-11
. In December 2011, the FASB issued FASB ASU 2011-11, which requires entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. The amendments require enhanced disclosures about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. This standard will become effective for us beginning October 2013. The disclosures required by ASU 2011-11 will be applied retrospectively for all comparative periods presented. We are currently evaluating the impact of ASU 2011-11.
FASB ASU 2012-02.
In July 2012 the FASB issued FASB ASU 2012-02 regarding the testing of indefinite-lived intangible assets for impairment. An entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance. This is effective
for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not believe the adoption of this standard will have any impact on our financial statements or results of operations.
NOTE 3—INVESTMENTS
At September 30, 2012 all of our investments are classified as cash equivalents and are included in
Cash and Cash Equivalents
on our Consolidated Balance Sheets. Unrestricted investments with original maturities of 90 days or less (as of the date that we purchased the securities) are classified as cash equivalents.
NOTE 4—FAIR VALUE MEASUREMENTS
Fair value is defined under US GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value as follows:
Level 1—
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2—
|
Inputs other than quoted prices in active markets, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3—
|
Unobservable inputs, for which there is little or no market data for the assets or liabilities.
|
The following table represents the fair value hierarchy for our financial assets, comprised of cash equivalents and investments, measured at fair value on a recurring basis as of September 30, 2012 and September 30, 2011:
Fair value measurements as of September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
8,256
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
8,256
|
|
Fair value measurements as of September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury bills
|
|
$
|
7,200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,200
|
|
Money market
|
|
|
1,045
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,245
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,245
|
|
The carrying amounts of certain financial instruments, including cash equivalents, restricted cash, accounts receivable, settlements receivable, accounts payable, settlements payable, and accrued liabilities, approximate fair value due to their short maturities.
NOTE 5—CUSTOMER CONCENTRATION AND RISK
We derive a significant portion of our revenue from a limited number of government Clients. Typically, our contracts with these Clients allow them to terminate all or part of the contract for convenience or cause. We have one Client, the Internal Revenue Service, or IRS, which is the source of more than 10% of our revenues from Payment Solutions operations.
The following table shows the revenues specific to our contract with the IRS:
|
|
Year ended September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenue
|
|
$
|
22,381
|
|
|
$
|
22,951
|
|
|
$
|
21,763
|
|
Percentage of Payment Solutions revenue
|
|
|
16.7
|
%
|
|
|
17.8
|
%
|
|
|
17.1
|
%
|
Accounts receivable, net.
As of September 30, 2012 and 2011, we reported $5.3 million and $4.5 million, respectively, in
Accounts receivable, net
on our Consolidated Balance Sheets. This item represents receivables from our Clients that we expect to receive, offset by an allowance for doubtful accounts. Approximately 3.0% and 7.0% of the balances reported at September 30, 2012 and 2011, respectively, represent accounts receivable attributable to operations that we intend to wind down during fiscal 2013 and fiscal 2014. The remainder of the
Accounts receivable, net
balance is composed of receivables from certain of our Payment Solutions Clients. None of our Payment Solutions Clients have receivables that exceed 10% of our total receivable balance. As of September 30, 2012 and 2011,
Accounts receivable, net
included an allowance for doubtful accounts of $0.2 million and $0.4 million, respectively, representing the balance of receivables for which we believe collectability is not reasonably assured.
Settlements receivable.
As of September 30, 2012 and 2011, we reported $15.3 million and $7.6 million in
Settlements receivable
on our Consolidated Balance Sheets, which represents amounts due from credit or debit card companies or banks. Individuals and businesses settle their obligations to our various Clients, using credit or debit cards or via ACH payments. We record a receivable for the amount due from the credit or debit card company or bank and an offsetting payable to the Client. Once we receive confirmation the funds have been received, we settle the obligation to the Client. See Note 9—Commitments and Contingencies for information about the settlements payable to our Clients.
NOTE 6—PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software, net
consist of the following:
|
|
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Software (a)
|
|
$
|
15,487
|
|
|
$
|
10,780
|
|
Computer equipment
|
|
|
11,558
|
|
|
|
12,973
|
|
Furniture and equipment
|
|
|
1,022
|
|
|
|
995
|
|
Land and building
|
|
|
2,718
|
|
|
|
2,718
|
|
Leasehold improvements
|
|
|
238
|
|
|
|
1,375
|
|
Total property, equipment and software, gross
|
|
|
31,023
|
|
|
|
28,841
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,655
|
)
|
|
|
(10,652
|
)
|
Total property, equipment and software, net
|
|
$
|
17,368
|
|
|
$
|
18,189
|
|
a.
|
The September 30, 2012 amount includes $1.8 million of internally developed software in the development phase, expected to be ready for production during fiscal 2013. The September 30, 2011 amount included $1.7 million of internally developed software in the development phase.
|
We depreciate fixed assets on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized over the lesser of the estimated remaining life of the leasehold or the remaining term of the lease. Depreciation and amortization expense associated with property, equipment and software that we held and used for our Continuing Operations is reported on the following lines on our Consolidated Statements of Operations:
|
|
Year ended September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Included in
Depreciation and amortization
:
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
3,176
|
|
|
$
|
2,329
|
|
|
$
|
767
|
|
Property and equipment
|
|
|
1,248
|
|
|
|
1,545
|
|
|
|
1,384
|
|
Total included in
Depreciation and amortization
|
|
|
4,424
|
|
|
|
3,874
|
|
|
|
2,151
|
|
Total depreciation and amortization expense for property, equipment and software
|
|
$
|
4,424
|
|
|
$
|
3,874
|
|
|
$
|
2,151
|
|
The cost of assets acquired under capital leases for our Continuing Operations was approximately $152,000 at September 30, 2012 and $152,000 at September 30, 2011. The related accumulated depreciation and amortization was $128,000 at September 30, 2012 and $94,000 at September 30, 2011.
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
As a result of our acquisition of substantially all of the assets of ChoicePay, Inc. in January 2009, we may be required to pay up to $2.0 million through December 31, 2013, based on a percentage of the gross profits generated by specific Client contracts. Any payment is recorded as additional goodwill associated with the asset acquisition. As of September 30, 2012, we have paid ChoicePay approximately $285,000. We expect the potential payments will not exceed $200,000 over the remaining life of the agreement. The following table summarizes changes in the carrying amount of goodwill during fiscal 2012.
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Discontinued Operations
|
|
|
Total
|
|
Goodwill
|
|
$
|
17,460
|
|
|
$
|
—
|
|
|
$
|
23,041
|
|
|
$
|
40,501
|
|
Accumulated impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,041
|
)
|
|
|
(23,041
|
)
|
Balance at September 30, 2011
|
|
|
17,460
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,460
|
|
ChoicePay, Inc. earn-out payments
|
|
|
122
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122
|
|
Goodwill
|
|
|
17,582
|
|
|
|
—
|
|
|
|
23,041
|
|
|
|
40,623
|
|
Accumulated impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,041
|
)
|
|
|
(23,041
|
)
|
Balance at September 30, 2012
|
|
$
|
17,582
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
17,582
|
|
We test goodwill for impairment during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, we would evaluate goodwill for impairment between annual tests. No such event occurred during fiscal year 2012.
OTHER INTANGIBLE ASSETS, NET
All of our other intangible assets are finite lived and included in Continuing Operations. We test our other intangible assets for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of the assets below the carrying value. No such events occurred during fiscal 2012 or 2011. The following table summarizes
Other intangible assets, net
, for our Continuing Operations:
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
(in thousands)
|
Amortization period
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Net
|
|
Client relationships
|
8-15 years
|
|
$
|
26,059
|
|
|
$
|
(25,362
|
)
|
|
$
|
697
|
|
|
$
|
26,059
|
|
|
$
|
(23,083
|
)
|
|
$
|
2,976
|
|
Technology and research and development
|
5 years
|
|
|
1,842
|
|
|
|
(1,488
|
)
|
|
|
354
|
|
|
|
1,842
|
|
|
|
(1,160
|
)
|
|
|
682
|
|
Trademarks
|
6-10 years
|
|
|
3,463
|
|
|
|
(3,407
|
)
|
|
|
56
|
|
|
|
3,463
|
|
|
|
(3,084
|
)
|
|
|
379
|
|
Other intangible assets, net
|
|
|
$
|
31,364
|
|
|
$
|
(30,257
|
)
|
|
$
|
1,107
|
|
|
$
|
31,364
|
|
|
$
|
(27,327
|
)
|
|
$
|
4,037
|
|
For fiscal 2012, 2011 and 2010, amortization expense for other intangible assets was $2.9 million, $3.4 million, and $4.6 million, respectively. As of September 30, 2012, we expect to recognize the following amortization expense on other intangible assets over the next five years:
(in thousands)
|
|
Future
expense
|
|
Years ending September 30,
|
|
|
|
2013
|
|
$
|
638
|
|
2014
|
|
|
206
|
|
2015
|
|
|
145
|
|
2016
|
|
|
79
|
|
2017
|
|
|
31
|
|
Thereafter
|
|
|
8
|
|
Total future amortization expense
|
|
$
|
1,107
|
|
NOTE 8—INCOME TAXES
Significant components of the provision for income taxes at the consolidated level, which includes Continuing and Discontinued Operations, are as follows:
|
|
Year ended September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current income tax (benefit) provision:
|
|
|
|
|
|
|
|
|
|
State – Continuing Operations
|
|
$
|
54
|
|
|
$
|
24
|
|
|
$
|
30
|
|
Federal – Continuing Operations
|
|
|
—
|
|
|
|
21
|
|
|
|
—
|
|
Total provision for Continuing Operations
|
|
|
54
|
|
|
|
45
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State – Discontinued Operations
|
|
|
—
|
|
|
|
(124
|
)
|
|
|
—
|
|
Federal – Discontinued Operations
|
|
|
—
|
|
|
|
124
|
|
|
|
—
|
|
Total provision for Discontinued Operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total provision for taxes
|
|
$
|
54
|
|
|
$
|
45
|
|
|
$
|
30
|
|
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:
|
|
Year ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
U.S. statutory federal tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
(0.6
|
)%
|
|
|
3.3
|
%
|
|
|
4.4
|
%
|
Non-deductible expenses
|
|
|
(0.7
|
)%
|
|
|
(0.4
|
)%
|
|
|
(0.7
|
)%
|
Valuation allowance
|
|
|
(28.7
|
)%
|
|
|
(34.7
|
)%
|
|
|
(34.7
|
)%
|
Stock-based compensation
|
|
|
(4.3
|
)%
|
|
|
(2.8
|
)%
|
|
|
(3.7
|
)%
|
Other
|
|
|
(0.5
|
)%
|
|
|
0.1
|
%
|
|
|
—
|
|
Effective tax rate
|
|
|
(0.8
|
)%
|
|
|
(0.6
|
)%
|
|
|
(0.7
|
)%
|
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities are as follows:
|
|
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
817
|
|
|
$
|
1,177
|
|
Depreciation
|
|
|
458
|
|
|
|
262
|
|
Accounts receivable allowance
|
|
|
65
|
|
|
|
143
|
|
Intangibles
|
|
|
2,703
|
|
|
|
1,951
|
|
Other deferred tax assets
|
|
|
1,133
|
|
|
|
936
|
|
Net operating loss carryforward
|
|
|
49,104
|
|
|
|
44,449
|
|
Valuation allowance
|
|
|
(52,195
|
)
|
|
|
(46,965
|
)
|
Total deferred tax assets
|
|
|
2,085
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other deferred tax liabilities
|
|
$
|
2,085
|
|
|
$
|
1,953
|
|
Total deferred tax liabilities
|
|
|
2,085
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
At September 30, 2012, we had $125.7 million of federal net operating loss carryforwards, which begin to expire in fiscal 2018 through 2032. At September 30, 2012, we had $109.0 million of state net operating loss carryforwards, most of which begin to expire after fiscal 2018 through 2032.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating our ability to realize deferred tax assets, we considered all available positive and negative evidence. As of September 30, 2012, we maintained a full valuation allowance against the net deferred tax assets due to the uncertainty regarding utilization. As of September 30, 2012, a total of $20.0 million of the valuation allowance related to deferred tax assets for which any subsequently recognized tax benefits would be subject to FASB ASC 805. Therefore adjustments to the valuation allowances will be recorded as a component of income tax expense, and $2.6 million of the valuation allowance related to deferred tax assets for which any subsequent recognized tax benefits would increase common stock.
We have completed a detailed study regarding the application of Section 382 of the Internal Revenue Code of 1986 (Section 382) which imposes an annual limitation on the utilization of net operating loss carryforwards following an ownership change. Application of the findings of this study resulted in a limitation of net operating loss carryforward amounts. Of the $125.7 million of federal net operating loss carryforward and $109.0 million on the state net operating loss carryforward, $48.6 million and $28.1 million, respectively, were acquired with the purchase of Official Payments Corporation in 2002 and have restrictions. As of September 30, 2012 approximately $108.3 million of our federal net operating loss carryforwards do not have any restrictions. Our acquired federal net operating loss carryforward is limited to $3.4 million per year pursuant to Internal Revenue Code Section 382, and approximately $11.2 million is still limited to this annual amount. If future ownership changes occur, there could be further limitations to our federal net operating loss carryforwards.
As of September 30, 2012 there is an AMT tax credit carryover of $38,000 and a Research and Development tax credit carryover of $18,000. The AMT tax credit has no expiration date and the Research and Development tax credit begins to expire in 2025. Both credit carryovers have a valuation allowance associated with them, as it is deemed more likely than not that these credits will not be realized in the future.
Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations, extraordinary items, other comprehensive income and items charged or credited to shareholders' equity. However, an exception to the general rule is provided when there is a pre-tax loss from continuing operations and pre-tax income from other categories in the current year. In such instances, income from other categories must be considered in allocating the aggregate tax provision for the period among the various categories. The intra-period tax allocation rules in ASC 740-20 related to items charged directly to other categories of income or loss can result in deferred tax assets or liabilities that remain until certain events occur. Income tax benefit related to Continuing Operations for fiscal year ended September 30, 2011 includes a benefit of nearly $124,000 due to the required intra-period tax allocation. Conversely, Discontinued Operations for fiscal 2011 includes a charge of nearly $124,000 related to a gain on disposal of discontinued operations.
UNRECOGNIZED TAX BENEFITS
We have examined our current and past tax positions taken, and have concluded that it is more likely than not these tax positions will be sustained in the event of an examination and that there would be no material impact to our effective tax rate. In the event interest or penalties had been accrued, our policy is to include these amounts related to unrecognized tax benefits in income tax expense. As of September 30, 2012 we had no accrued interest or penalties related to uncertain tax positions. We file tax returns with the IRS and in various states in which the statute of limitations may go back to the tax year ended September 30, 2008. As of September 30, 2012, we were not engaged in a federal income tax audit. Currently, we are in the process of providing information for a Virginia state income tax audit covering November 1, 2007 through October 31, 2010.
As of September 30, 2012 and 2011, we had no unrecognized tax benefits.
NOTE 9—COMMITMENTS AND CONTINGENCIES
LEGAL ISSUES
From time to time during the normal course of business, we are a party to litigation and/or other claims. At September 30, 2012, none of these matters was expected to have a material impact on our financial position, results of operations or cash flows. At September 30, 2012 and September 30, 2011, we had legal accruals of $0.5 million and $0.8 million, respectively, based upon estimates of key legal matters.
SETTLEMENTS PAYABLE
Settlements payable
on our Consolidated Balance Sheets consists of payments due primarily to utilities, higher education, and public sector Clients. As individuals and businesses settle their obligations to our various Clients, we generate a receivable from the credit or debit card company and a payable to the Client. Once we receive confirmation the funds have been received by the card company, we settle the liabilities to the Client. This process may take several business days to complete and can result in unsettled funds at the end of a reporting period. We had $17.0 million and $9.8 million, respectively, of settlements payable at September 30, 2012 and September 30, 2011.
CREDIT RISK
We maintain our cash and cash equivalents in bank deposit accounts and money market accounts. Typically, the balance in a number of these accounts significantly exceeds federally insured limits. We have not experienced any losses in such accounts and believe that any associated credit risk is
de minimis
. At September 30, 2012, our investment portfolio is composed of money market funds. The reported value of our investment portfolio and cash and cash equivalents approximates fair value.
PERFORMANCE, BID AND GUARANTEE PAYMENT BONDS
Pursuant to the terms of money transmitter licenses we hold with individual states, we are required to provide guarantee payment bonds from a licensed surety. At September 30, 2012, we had $12.9 million of bonds posted in connection with state money transmitter licenses. There were no claims pending against any of these bonds.
Under certain contracts or bids, we are required to obtain performance or bid bonds from a licensed surety and to post the performance bonds with our customers. Fees for obtaining the bonds are expensed over the life of each bond. At September 30, 2012, we had $4.1 million of bonds posted with Clients. There were no claims pending against any of these bonds.
In February 2009, we completed the sale of our Unemployment Insurance, or UI, business as part of our divestment of several business units. Our sale of the UI business was completed pursuant to an Asset Purchase Agreement dated February 6, 2009 and included the State of Indiana Unemployment Insurance contract as an asset. We retain certain contractual liabilities in connection with completion of the project, and we continue as the indemnitor under a $2.4 million performance bond on the continuing contract with the State of Indiana. Completion of the project has been delayed and additional funding has been required to continue the project. In 2009, as part of a contractually required mediation we offered a $420,000 contribution towards project completion; however the matter was not resolved. An additional mediation is expected to take place promptly after the project is finished, however there is no projected date for completion of the project. We anticipate the performance bond remaining in place until final resolution of the matter.
Amounts accrued for such contingencies are included in other accrued liabilities within our consolidated balance sheets.
EMPLOYMENT AGREEMENTS
As of September 30, 2012, we had employment and change of control agreements with several key employees. If certain termination or change of control events were to occur under these contracts as of September 30, 2012, we could be required to pay up to $3.9 million.
In September 2012, we accrued $0.3 million of severance associated with the departure on September 30, 2012 of our former Senior Vice President of Marketing, in accordance with the Employment Agreement signed on June 30, 2008 and the Separation Agreement and Release executed by the former executive. The severance payment is expected to be made in fiscal 2013.
In March 2011, we accrued $0.3 million of severance expense associated with the departure on March 3, 2011, of our former CFO, in accordance with the Employment Agreement signed on July 1, 2008, amendment signed on August 31, 2010 and the Severance Agreement and Release of Claims dated March 4, 2011. Pursuant to the terms of the employment agreement, the severance was paid in September 2011.
In February 2011, we paid $0.3 million to our former COO in accordance with the Employment Agreement signed on October 1, 2008 and the Severance Agreement and Release of Claims dated August 17, 2010. The severance payment was accrued in August 2010.
During the three months ended December 31, 2010, we paid $1.2 million to a former executive pursuant to the terms of the Employment Agreement and the Separation Agreement and Release executed by the former executive. The severance payment was accrued in June 2010.
OPERATING AND CAPITAL LEASE OBLIGATIONS
We lease our principal facilities and certain equipment under non-cancelable operating and capital leases, which expire at various dates through fiscal year 2018. Future minimum lease payments for non-cancelable leases with terms of one year or more as of September 30, 2012 are as follows:
(in thousands)
|
|
Operating leases
|
|
|
Capital
Leases (1)(2)
|
|
|
Total
|
|
Twelve months ending September 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
1,062
|
|
|
$
|
23
|
|
|
$
|
1,085
|
|
2014
|
|
|
906
|
|
|
|
5
|
|
|
|
911
|
|
2015
|
|
|
809
|
|
|
|
1
|
|
|
|
810
|
|
2016
|
|
|
713
|
|
|
|
—
|
|
|
|
713
|
|
2017
|
|
|
732
|
|
|
|
—
|
|
|
|
732
|
|
Thereafter
|
|
|
435
|
|
|
|
—
|
|
|
|
435
|
|
Total minimum lease payments
|
|
$
|
4,657
|
|
|
$
|
29
|
|
|
$
|
4,686
|
|
(1)
|
On our Consolidated Balance Sheets, the amount due within twelve months is included in
Other accrued liabilities
. The remainder is included in
Other liabilities
.
|
(2)
|
Total amount includes interest payments of $3.
|
In addition to fixed rentals, certain leases contain provisions for rental options and rent escalations based on scheduled increases, as well as increases resulting from a rise in certain costs incurred by the lessor. Rent expense under these agreements was approximately $0.5 million during fiscal 2012, $0.6 million during fiscal 2011, and $1.1 million during fiscal 2010.
INDEMNIFICATION AGREEMENTS
Our Certificate of Incorporation obligates us to indemnify our directors and officers against all expenses, judgments, fines and amounts paid in settlement for which such persons become liable as a result of acting in any capacity on behalf of Official Payments, if the director or officer meets the standard of conduct specified in the Certificate, and subject to the limitations specified in the Certificate. In addition, we have indemnification agreements with certain of our directors and officers, which supplement the indemnification obligations in our Certificate. These agreements generally obligate us to indemnify the indemnitees against
expenses incurred because of their status as a director or officer, if the indemnitee meets the standard of conduct specified in the agreement, and subject to the limitations specified in the agreement.
NOTE 10—RESTRUCTURING
During the quarter ended December 31, 2011, we moved our principal executive offices from Reston, Virginia to Norcross, Georgia to reduce general and administrative costs and take advantage of the electronic payments industry employee resources in the Atlanta area. We incurred total expenses of approximately $1.6 million, including $0.1 million of employee relocation cost and $1.5 million of facilities related restructuring cost during the year ended September 30, 2012. We have vacated and sublet our Reston, Virginia facility as of December 31, 2011. In connection with vacating and subletting our Reston, Virginia facility in December 2011 we wrote off certain balances associated with our original lease agreement including net leasehold improvements of $1.0 million, and deferred rent. We also recorded an obligation for the remaining lease payments less sublease income. Our Reston, Virginia facility lease ends in April 2018. For fiscal 2012 we received $0.2 million in sublease payments. We expect to receive $3.1 million in future sublease payments over the remaining terms of the subleases. The restructuring charge is included in General and administrative expense in the accompanying Consolidated Statements of Operations and is within the Payment Solutions reporting segment.
The following table summarizes restructuring liabilities activity associated with Continuing Operations for fiscal 2012:
(in thousands)
|
|
Severance
|
|
|
Relocation
|
|
|
Facilities closures
|
|
|
Total
|
|
Balance at September 30, 2011
|
|
$
|
178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
178
|
|
Additions
|
|
|
—
|
|
|
|
106
|
|
|
|
1,493
|
|
|
|
1,599
|
|
Reversal of deferred rent, net
|
|
|
—
|
|
|
|
—
|
|
|
|
502
|
|
|
|
502
|
|
Cash payments
|
|
|
(178
|
)
|
|
|
(106
|
)
|
|
|
(776
|
)
|
|
|
(1,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,219
|
|
|
$
|
1,219
|
|
NOTE 11—SEGMENT INFORMATION
Our two reportable segments are Payment Solutions and Voice Systems Automation, (VSA). These reportable segments represent components of the business for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM) in assessing performance and allocating resources. The following table presents the results of operations for our Continuing Operations which consist of, Payment Solutions and VSA for fiscal 2012, 2011, and 2010:
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Total
|
|
Year ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
134,406
|
|
|
$
|
1,335
|
|
|
$
|
135,741
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
94,716
|
|
|
|
657
|
|
|
|
95,373
|
|
General and administrative
|
|
|
30,261
|
|
|
|
196
|
|
|
|
30,457
|
|
Selling and marketing
|
|
|
8,468
|
|
|
|
—
|
|
|
|
8,468
|
|
Depreciation and amortization
|
|
|
7,354
|
|
|
|
—
|
|
|
|
7,354
|
|
Total costs and expenses
|
|
|
140,799
|
|
|
|
853
|
|
|
|
141,652
|
|
(Loss) income from continuing operations before
other income and income taxes
|
|
|
(6,393
|
)
|
|
|
482
|
|
|
|
(5,911
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Total other income
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
(Loss) income from continuing operations before taxes
|
|
|
(6,394
|
)
|
|
|
482
|
|
|
|
(5,912
|
)
|
Income tax provision
|
|
|
54
|
|
|
|
—
|
|
|
|
54
|
|
(Loss) income from continuing operations
|
|
$
|
(6,448
|
)
|
|
$
|
482
|
|
|
$
|
(5,966
|
)
|
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Total
|
|
Year ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
128,644
|
|
|
$
|
1,526
|
|
|
$
|
130,170
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
100,508
|
|
|
|
256
|
|
|
|
100,764
|
|
General and administrative
|
|
|
22,761
|
|
|
|
5
|
|
|
|
22,766
|
|
Selling and marketing
|
|
|
6,940
|
|
|
|
—
|
|
|
|
6,940
|
|
Depreciation and amortization
|
|
|
7,314
|
|
|
|
—
|
|
|
|
7,314
|
|
Total costs and expenses
|
|
|
137,523
|
|
|
|
261
|
|
|
|
137,784
|
|
(Loss) income from continuing operations before
other income and income taxes
|
|
|
(8,879
|
)
|
|
|
1,265
|
|
|
|
(7,614
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
82
|
|
|
|
—
|
|
|
|
82
|
|
Total other income
|
|
|
82
|
|
|
|
—
|
|
|
|
82
|
|
(Loss) income from continuing operations before taxes
|
|
|
(8,797
|
)
|
|
|
1,265
|
|
|
|
(7,532
|
)
|
Income tax benefit
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
(100
|
)
|
(Loss) income from continuing operations
|
|
$
|
(8,697
|
)
|
|
$
|
1,265
|
|
|
$
|
(7,432
|
)
|
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Total
|
|
Year ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
127,223
|
|
|
$
|
3,001
|
|
|
$
|
130,224
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
97,050
|
|
|
|
1,278
|
|
|
|
98,328
|
|
General and administrative
|
|
|
24,821
|
|
|
|
378
|
|
|
|
25,199
|
|
Selling and marketing
|
|
|
6,355
|
|
|
|
—
|
|
|
|
6,355
|
|
Depreciation and amortization
|
|
|
5,625
|
|
|
|
1,086
|
|
|
|
6,711
|
|
Total costs and expenses
|
|
|
133,851
|
|
|
|
2,742
|
|
|
|
136,593
|
|
(Loss) income from continuing operations before
other income and income taxes
|
|
|
(6,628
|
)
|
|
|
259
|
|
|
|
(6,369
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense)
|
|
|
414
|
|
|
|
—
|
|
|
|
414
|
|
Gain on investment
|
|
|
31
|
|
|
|
—
|
|
|
|
31
|
|
Gain on sale of asset
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Total other income
|
|
|
451
|
|
|
|
—
|
|
|
|
451
|
|
(Loss) income from continuing operations before taxes
|
|
|
(6,177
|
)
|
|
|
259
|
|
|
|
(5,918
|
)
|
Income tax provision
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
(Loss) income from continuing operations
|
|
$
|
(6,207
|
)
|
|
$
|
259
|
|
|
$
|
(5,948
|
)
|
Our total assets for each of these businesses are shown in the following table:
|
|
As of September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Continuing Operations:
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
97,756
|
|
|
$
|
93,834
|
|
VSA
|
|
|
168
|
|
|
|
333
|
|
Total assets
|
|
$
|
97,924
|
|
|
$
|
94,167
|
|
Expenditures for long-lived assets
|
|
$
|
4,622
|
|
|
$
|
10,540
|
|
NOTE 12—SHARE-BASED PAYMENT
Stock options are issued under the Amended and Restated 2004 Stock Incentive Plan, or the Plan. The Plan provides our Board of Directors discretion in creating employee equity incentives, including incentive and non-statutory stock options. Options granted in and after August 2010 typically vest over four years, with 25% of the shares subject to each grant vesting on the first anniversary of the grant date and an additional 1/48
th
of the shares vesting each month thereafter until the fourth anniversary of the grant date, and expire ten years from the grant date. Options granted prior to August 2010 typically vest over five years, with 20% of the shares subject to each grant vesting on each of the first five anniversaries of the grant date, and expire ten years from the grant date. At September 30, 2012, there were 1,272,474 shares of common stock available for future issuance under the Plan.
STOCK OPTIONS—AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
The following table shows the weighted-average assumptions we used to calculate the fair value of share-based options using the Black-Scholes model, as well as the weighted-average fair value of options granted and the weighted-average intrinsic value of options exercised. We granted 482,250 options from the Plan during fiscal 2012.
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Weighted-average assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
Expected period that options will be outstanding
(in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
Interest rate
(based on U.S. Treasury yields at time of grant)
|
|
|
0.89
|
%
|
|
|
1.75
|
%
|
|
|
1.40
|
%
|
Volatility
|
|
|
48.77
|
%
|
|
|
46.80
|
%
|
|
|
45.50
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average fair value of options granted
|
|
$
|
1.57
|
|
|
$
|
2.22
|
|
|
$
|
2.08
|
|
Weighted-average intrinsic value of options exercised
(in thousands)
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
24
|
|
Expected volatilities are based on historical volatility of our stock. In addition, we used historical data to estimate option exercise and employee forfeitures within the valuation model.
STOCK OPTIONS—INDUCEMENT GRANTS
On August 16, 2010, we granted our current CEO the option to purchase 100,000 shares of common stock as an inducement grant outside of the Plan. These options vest as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 1/48
th
of the original number of shares on the same date in each succeeding month following the first anniversary of the grant date until the fourth anniversary of the grant date and expire ten years from the grant date.
On June 13, 2011, we granted our current CFO the option to purchase 250,000 shares of common stock as an inducement grant outside of the Plan. These options vest as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 1/48
th
of the original number of shares on the same date in each succeeding month following the first anniversary of the grant date until the fourth anniversary of the grant date and expire ten years from the grant date.
The following table shows the assumptions used to calculate the fair value of these awards:
|
|
CFO award
|
|
|
CEO award
|
|
Assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
Expected period that options will be outstanding
(in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Interest rate
(based on U.S. Treasury yields at time of grant)
|
|
|
1.59
|
%
|
|
|
1.40
|
%
|
Volatility
|
|
|
46.21
|
%
|
|
|
45.50
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Fair value of options granted
|
|
$
|
1.95
|
|
|
$
|
2.08
|
|
STOCK OPTIONS
Stock option activity for all option grants for fiscal 2012 is as follows:
|
|
|
|
|
Weighted-average
|
|
|
|
(in thousands, except per share data)
|
|
Shares under option
|
|
|
Exercise price
|
|
Remaining contractual term
|
|
Aggregate intrinsic value
|
|
Options outstanding at September 30, 2011
|
|
|
3,083
|
|
|
$
|
6.42
|
|
|
|
|
|
Granted
|
|
|
482
|
|
|
|
3.67
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeitures or expirations
|
|
|
(405
|
)
|
|
|
6.92
|
|
|
|
|
|
Options outstanding at September 30, 2012
|
|
|
3,160
|
|
|
$
|
5.94
|
|
7.43 years
|
|
$
|
—
|
|
Options vested and expected to vest at September 30, 2012
|
|
|
2,658
|
|
|
$
|
5.96
|
|
7.36 years
|
|
$
|
—
|
|
Options exercisable at September 30, 2012
|
|
|
1,471
|
|
|
$
|
7.07
|
|
6.21 years
|
|
$
|
—
|
|
Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value using the Black-Scholes model. We recognize compensation expense for stock option awards on a ratable basis over the requisite service period of the award. Stock option based compensation expense was $1.4 million for fiscal 2012, $1.0 million for fiscal 2011 and $0.9 million for fiscal 2010.
As of September 30, 2012 a total of $2.4 million of unrecognized compensation cost related to stock options, net of estimated forfeitures, was expected to be recognized over a 2.55 year weighted-average period.
RESTRICTED STOCK UNITS
In March 2011, we reversed $1.5 million in expense related to restricted stock units awarded to our former CEO which did not vest.
BOARD OF DIRECTOR RESTRICTED STOCK UNITS
Our non-employee Board members are awarded 9,000 restricted stock units upon their election to our Board at our annual meeting. These are liability based awards. The following awards are outstanding as of September 30, 2012:
|
|
Total restricted stock units awarded
|
|
Vesting date
|
Balance at September 30, 2011
|
|
|
135,000
|
|
|
Vested
|
|
|
(135,000
|
)
|
|
Granted
|
|
|
63,000
|
|
April 13, 2013
|
Balance at September 30, 2012
|
|
|
63,000
|
|
|
The amount payable to each member at the vesting date will be the equivalent of 9,000 restricted stock units multiplied by the closing price of our stock on the vesting date. During February 2010 we entered into an agreement in which two of our board members not standing for re-election at our 2010 annual meeting of stockholders were each entitled to the accelerated vesting on April 8, 2010 of the restricted stock units that they were awarded in March 2009. Amounts paid for vested restricted stock units were $715,000 and $280,000 during fiscal 2012 and fiscal 2011, respectively. There was no payment for vested restricted stock units during fiscal 2010.
The following table provides information on the expense related to the restricted stock unit awards to the Board of Directors:
|
|
Annual meeting
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Expense recognized for fiscal 2012
|
|
$
|
142
|
|
|
$
|
93
|
|
|
$
|
—
|
|
|
$
|
111
|
|
Expense recognized through September 30, 2012
|
|
|
142
|
|
|
|
299
|
|
|
|
280
|
|
|
|
416
|
(a)
|
Expense recognized through vesting date
|
|
(b)
|
|
|
|
299
|
|
|
|
280
|
|
|
|
416
|
|
(a)
|
This amount includes the $0.1 million recognized related to the acceleration for the two board members not standing for re-election at our 2010 annual meeting.
|
(b)
|
Liability awards are revalued at the end of every quarter based on the closing price of our stock on the last day of the quarter. We are unable to estimate the expense expected to be recognized for these awards.
|
PERFORMANCE STOCK UNITS
In December 2008 our Board of Directors adopted an Executive Performance Stock Unit Plan, (PSU Plan). Under the PSU Plan, up to 800,000 Performance Stock Units, (PSUs), were approved for issuance. Because the performance targets were not met as of the expiration of the plan on December 4, 2011, the PSUs expired unawarded.
NOTE 13—SHAREHOLDERS' EQUITY
As of September 30, 2012, a total of 44,259,762 shares of $0.01 par value common stock were authorized, of which 16,641,621 shares were outstanding, and a total of 4,579,047 shares of preferred stock were authorized, of which none were outstanding. We did not declare any dividends during fiscal year ended September 30, 2012.
COMMON STOCK REPURCHASE PROGRAM
Our Board of Directors authorized the repurchase of our common stock in the open market in January 2009 and October 2003. Under these plans we repurchased 2,536,298 shares of our common stock for $21.0 million. The shares are recorded as
Treasury stock
on our Consolidated Balance Sheets. The authority to make purchases under these plans has terminated.
TENDER OFFER
On December 17, 2010, we commenced a tender offer to purchase up to $10.0 million of our common stock within a price range of $5.80 per share to $6.20 per share.
Pursuant to the tender offer, we accepted for payment on January 20, 2011, and repurchased 1,639,344 shares of our common stock for a price of $6.10 per share, for a total cost of approximately $10.0 million, excluding fees and expenses related to the offer. We have recorded the cost of this transaction as
Treasury stock
on our Consolidated Balance Sheets.
EQUITY INCENTIVE PLANS AND INDUCEMENT GRANTS
Under our Amended and Restated 2004 Stock Incentive Plan, options for 2,666,232 shares of common stock were outstanding at September 30, 2012. A further 143,500 options for shares of common stock were outstanding under plans which existed prior to the Amended and Restated Stock 2004 Incentive Plan, and 350,000 options for shares of common stock were outstanding under executive inducement grants.
NOTE 14—LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
|
|
Year ended September 30,
|
|
(in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator:
(Loss) earnings from:
|
|
|
|
|
|
|
|
|
|
Continuing operations, net of income taxes
|
|
$
|
(5,966
|
)
|
|
$
|
(7,432
|
)
|
|
$
|
(5,948
|
)
|
Discontinued operations, net of income taxes
|
|
|
(14
|
)
|
|
|
219
|
|
|
|
(245
|
)
|
Net loss
|
|
$
|
(5,980
|
)
|
|
$
|
(7,213
|
)
|
|
$
|
(6,193
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
16,642
|
|
|
|
17,112
|
|
|
|
18,153
|
|
Effects of dilutive common stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Adjusted weighted-average shares
|
|
|
16,642
|
|
|
|
17,112
|
|
|
|
18,153
|
|
(Loss) earnings per basic and diluted share
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.36
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.33
|
)
|
From discontinued operations
|
|
$
|
—
|
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
Loss per basic and diluted share
|
|
$
|
(0.36
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.34
|
)
|
The following options were not included in the computation of diluted loss per share because the exercise price was greater than the average market price of our common stock for the periods stated and, therefore, the effect would be anti-dilutive:
|
|
Year ended September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Weighted-average options excluded from computation of diluted loss per share
|
|
|
2,446
|
|
|
|
2,099
|
|
|
|
1,274
|
|
Due to net losses from Continuing operations, we have excluded an additional 27,241 shares at September 30, 2012, 624 shares at September 30, 2011, and 204,292 shares at September 30, 2010, of common stock equivalents from the calculation of diluted loss per share since their effect would have been anti-dilutive.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain unaudited consolidated condensed quarterly statements of operations data for each of the eight fiscal quarters ended September 30, 2012. In our opinion, this information has been prepared on the same basis as the audited Consolidated Financial Statements contained herein. This information should be read in conjunction with our Consolidated Financial Statements and the notes thereto appearing elsewhere in this report. Our operating results for any one quarter are not necessarily indicative of results for any future period.
|
|
2012 fiscal quarters
|
|
|
2011 fiscal quarters
|
|
(In thousands, except per share data
)
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,921
|
|
|
$
|
39,163
|
|
|
$
|
32,820
|
|
|
$
|
34,837
|
|
|
$
|
28,491
|
|
|
$
|
38,443
|
|
|
$
|
30,266
|
|
|
$
|
32,970
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
19,675
|
|
|
|
28,922
|
|
|
|
22,900
|
|
|
|
23,876
|
|
|
|
21,866
|
|
|
|
30,696
|
|
|
|
23,332
|
|
|
|
24,870
|
|
General and administrative
|
|
|
7,361
|
|
|
|
6,601
|
|
|
|
7,309
|
|
|
|
9,186
|
|
|
|
6,427
|
|
|
|
5,530
|
|
|
|
4,884
|
|
|
|
5,925
|
|
Selling and marketing
|
|
|
2,173
|
|
|
|
2,635
|
|
|
|
2,152
|
|
|
|
1,508
|
|
|
|
1,878
|
|
|
|
1,690
|
|
|
|
1,822
|
|
|
|
1,550
|
|
Depreciation and amortization
|
|
|
1,733
|
|
|
|
1,851
|
|
|
|
1,867
|
|
|
|
1,903
|
|
|
|
1,894
|
|
|
|
1,856
|
|
|
|
1,806
|
|
|
|
1,758
|
|
(Loss) from continuing operations
|
|
|
(2,021
|
)
|
|
|
(846
|
)
|
|
|
(1,408
|
)
|
|
|
(1,636
|
)
|
|
|
(3,574
|
)
|
|
|
(1,329
|
)
|
|
|
(1,578
|
)
|
|
|
(1,133
|
)
|
Total other (loss) income
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
6
|
|
|
|
19
|
|
|
|
20
|
|
|
|
37
|
|
Loss from continuing operations before income taxes
|
|
|
(2,022
|
)
|
|
|
(847
|
)
|
|
|
(1,408
|
)
|
|
|
(1,635
|
)
|
|
|
(3,568
|
)
|
|
|
(1,310
|
)
|
|
|
(1,558
|
)
|
|
|
(1,096
|
)
|
Income tax provision (benefit)
|
|
|
49
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
46
|
|
|
|
(186
|
)
|
|
|
1
|
|
Loss from continuing operations
|
|
|
(2,071
|
)
|
|
|
(852
|
)
|
|
|
(1,408
|
)
|
|
|
(1,635
|
)
|
|
|
(3,607
|
)
|
|
|
(1,356
|
)
|
|
|
(1,372
|
)
|
|
|
(1,097
|
)
|
(Loss) income from discontinued operations, net
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(76
|
)
|
|
|
300
|
|
|
|
2
|
|
Net loss
|
|
$
|
(2,073
|
)
|
|
$
|
(853
|
)
|
|
$
|
(1,411
|
)
|
|
$
|
(1,643
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(1,432
|
)
|
|
$
|
(1,072
|
)
|
|
$
|
(1,095
|
)
|
Weighted average shares issued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
16,642
|
|
|
|
16,642
|
|
|
|
16,642
|
|
|
|
16,642
|
|
|
|
17,112
|
|
|
|
16,951
|
|
|
|
16,928
|
|
|
|
18,200
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
(2.13
|
)%
|
|
|
(0.87
|
)%
|
|
|
(1.31
|
)%
|
|
|
(1.56
|
)%
|
|
|
(3.75
|
)%
|
|
|
(1.44
|
)%
|
|
|
(0.94
|
)%
|
|
|
(0.91
|
)%
|
Return on average shareholders' equity
|
|
|
(3.14
|
)%
|
|
|
(1.27
|
)%
|
|
|
(2.08
|
)%
|
|
|
(2.38
|
)%
|
|
|
(5.06
|
)%
|
|
|
(1.95
|
)%
|
|
|
(1.33
|
)%
|
|
|
(1.26
|
)%
|
Total ending equity to total ending assets
|
|
|
66.57
|
%
|
|
|
69.16
|
%
|
|
|
68.15
|
%
|
|
|
58.65
|
%
|
|
|
74.09
|
%
|
|
|
74.20
|
%
|
|
|
73.75
|
%
|
|
|
67.86
|
%
|
Total average equity to total average assets
|
|
|
67.86
|
%
|
|
|
68.65
|
%
|
|
|
63.01
|
%
|
|
|
65.55
|
%
|
|
|
74.15
|
%
|
|
|
73.97
|
%
|
|
|
70.45
|
%
|
|
|
72.23
|
%
|
Per share of common stock data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share—Basic & Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
(1)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
Discontinued operations
(1)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
Loss per share—Basic & Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
Book value per share
|
|
$
|
3.92
|
|
|
$
|
4.02
|
|
|
$
|
4.05
|
|
|
$
|
4.11
|
|
|
$
|
4.08
|
|
|
$
|
4.31
|
|
|
$
|
4.37
|
|
|
$
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
97,308
|
|
|
$
|
97,799
|
|
|
$
|
107,815
|
|
|
$
|
105,446
|
|
|
$
|
96,305
|
|
|
$
|
99,414
|
|
|
$
|
114,147
|
|
|
$
|
120,467
|
|
Total liabilities
|
|
$
|
31,278
|
|
|
$
|
30,662
|
|
|
$
|
39,884
|
|
|
$
|
36,328
|
|
|
$
|
24,896
|
|
|
$
|
25,874
|
|
|
$
|
33,729
|
|
|
$
|
33,448
|
|
Total shareholders' equity
|
|
$
|
66,031
|
|
|
$
|
67,137
|
|
|
$
|
67,932
|
|
|
$
|
69,119
|
|
|
$
|
71,409
|
|
|
$
|
73,540
|
|
|
$
|
80,418
|
|
|
$
|
87,019
|
|
Market price per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
4.93
|
|
|
$
|
5.13
|
|
|
$
|
5.36
|
|
|
$
|
4.36
|
|
|
$
|
5.63
|
|
|
$
|
6.00
|
|
|
$
|
6.34
|
|
|
$
|
6.05
|
|
Low
|
|
$
|
3.88
|
|
|
$
|
3.90
|
|
|
$
|
3.99
|
|
|
$
|
3.42
|
|
|
$
|
3.26
|
|
|
$
|
4.50
|
|
|
$
|
5.06
|
|
|
$
|
4.81
|
|
(1)
The sum of quarterly per share amounts may not equal annual per share amounts as the quarterly calculations are based on varying number of shares of common stock.
|
|