Tier Technologies, Inc. Q4 2007 Earnings Conference Call Transcript

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 |  About: Official Payments Holdings, Inc. (OPAY)
by: SA Transcripts

Tier Technologies, Inc. (NYSE:TIER)

Q4 2007 Earnings Call

December 13, 2007 5:00 PM ET

Executives

Monica Bowman – Deputy Project Director

Ronald L. Rossetti – Chairman of the Board & Chief Executive Officer

David E. Fountain – Chief Financial Officer, Senior Vice President & T

Analysts

Gary Prestopino – Barrington Research Associates

Jason Harris

Michael Ogborn

Beth Lilly

Shane Kim

Ross Berner – Weintraub Capital

Daniel Weston

Operator

Good evening. My name is Tekay and I will be your conference operator today. At this time I’d like to welcome everyone to the Tier Technologies Year End Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you Ms. Bowman, you may begin your conference.

Monica Bowman

Thank you and good afternoon everyone. After the market closed today we issued a press release announcing Tier’s financial results for this fiscal year 2007 fourth quarter and year ended September 30, 2007. A copy of this press release can be found in the news section of our website atwww.Tier.com. With me on the call this afternoon are Ron Rossetti, Chairman and Chief Executive Officer and David Fountain, Chief Financial Officer. A taped replay of this call will be available on the company’s website from approximately two hours after the end of the call until 11:59 pm eastern time on December 20, 2007. Alternatively, you can hear a reply by dialing 800-642-1687 and entering the conference ID 27123028.

I want to remind you that various remarks that we make about the company’s future expectations, plans and prospects constitute forward looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. The forward looking statements discussed on this call represents management’s current expectations about the company’s future financial performance based on the information available to us today. This information may change and our actual results may differ materially from these forward looking statements. We undertake no obligation to update any such forward looking statements. There are numerous risks and uncertainties that affect our business and may affect these statements including, but not limited too, the potential lost of funding by clients, failure to achieve anticipated growth margin levels with respect to the individual projects due to unanticipated cost incurred and fixed priced and transaction based projects, timing, initiation, completion, renewals and extensions or earlier termination of client projects. The company’s ability to realize revenues from a business development opportunity and other risk factors that are set forth in our SEC filings.

Now, I’d like to turn the call over to Ron Rossetti.

Ronald L. Rossetti

Thank you and good afternoon. We’re pleased to be here with you to discuss our fiscal fourth quarter and year end financial results and to update you on the company’s future direction. Let me outline the agenda for the call today. First, I will provide a brief update on several matters we have discussed on previous earnings call. Second, I will provide an update on the much anticipated Internal Revenue contract renewal. Third, I will provide an update on our process to monetize our non core assets. Fourth, I will discuss at a high level financial and operational highlights for the quarter and full year and close on an update on the implementation on our long term growth strategy for our electronic payment business. David will then walk you through our financial results for the quarter and year end detail. After David’s comments we will be happy to answer as many of your questions as we can.

With respect to the shareholder lawsuit pending in the US District Court for the Eastern District of Virginia, as we discussed on our last call, the court entered an order denying the plaintiff’s motion for class certification. The plaintiff has not appealed that decision and that order was finalized. With respect to our motion to dismiss the entire lawsuit, the judge dismissed the counter complaint for insufficient pleading but, gave the plaintiff and opportunity to amend. We are very pleased with the progress on this front. With respect to the SEC and the Department of Justice investigations, there is nothing new to add since our last update. We continue to cooperate fully with both agencies.

With respect to the IRS contract renewal, we have entered into a one year contract extension with the agency which will run through November 30, 2008 and are well underway with the planning process for next year’s tax season. We are not expecting the agency to add any additional tax spikes in the next season due to the pending RFP process. Our understanding from the IRS is that an RFP for new contract is planned for release sometime between now and the end of the year. However, if that does not occur the agency has been granted the right from procurement to issue another extension of the existing contract for an additional year which will take it through November 30, 2009. We continue to monitor this process very closely and look forward to updating you on this and on future calls.

Now, I want to update you on our process to divest non core assets. As we discussed on the last call this process is moving slower than we had anticipated for several factors. First, our assumption going in was that these assets could be sold to one or two strategic buyers and that has not turned out to be the case. Both the BPO and PSSI segments contain multiple smaller business units and we have found so far that buyer interest has been more focused at this level than at the segment level. This has expanded and slowed the process. Second, since summer we have seen a significant slow down in M&A activity relative to when we started out process. This slow down has impacted a number of interested buyers. Having said that, we have made significant progress since our last call and are in discussion with potential buyers at this time on most of the units. Our object remains, not to maximize sales proceeds but to speed up the process. At this point we have written down the held for sale assets to their projected net realizable value and feel comfortable that for the ones we close their proceeds will equal or exceed this value. We are on schedule to complete this stage of the process by March 21st, the end of our second fiscal quarter.

As we discussed in our last call, we have been working at providing better visibility around the financial performance of our core EPT business. Given all our moving parts, that has been a challenge. In the fourth quarter we met the accounting requirements to classify the held for sale assets as discontinued operations and have reclassed all current and prior year results on this basis. We have also added some additional segment information in our 10K which will provide additional break outs of our business. David will touch on all of this in a moment.

We are pleased to end the fiscal year with $85.9 million in cash and cash equivalence, marketable securities and restricted investments which translates into $4.40 per share on a fully diluted basis. The $85.9 million represents $18.2 million or a 27% increase from our September 30, 2006 fiscal year end. We continue to have no short term or long term debt. We generated approximately $400,000 of cash flow from continuing operations during fiscal 2007 as compared to fiscal 2006 when our continuing operations used $10 million in cash. In the upcoming months, we expect to generate additional cash through the sale of non core assets. The primary use of that cash will be the fund growth initiatives in our current core electronic payment business.

Revenues from our EPP business which are detailed in our segment information were $18.3 million for the quarter, up 30% for the fiscal year, excuse me, up 30% and for the fiscal year they were $99.4 million up 27% as compared to last year. We experienced double digit revenue growth for the year in each of our EPP verticals with significant growth in income and property tax payments as well as our newer verticals including education and utility. Those revenues were up for the year 64% and 37% respectively.

For the fiscal year EPP’s income before corporate overhead increased over 50% from the prior year. As I stated on the last call, this has been a consistent trend for EPP. That is we have increased our operating income before corporate overhead at a greater rate than sales for the last three years. We feel very strongly that we can continue to do this in the foreseeable future while maintaining a mid 20% top line growth rate. We expect to see continued strong fundamentals in our EPP business driven not only by new revenue growth initiatives but also by increasing adoption by customers of electronic payment methods. Increasingly, we believe we are becoming the payment partner of choice in each of our verticals.

Let me know give you an update on our EPP growth strategy. As we have discussed in prior calls, we have three major strategy initiatives on the way. Divesting off non core assets, implementing top and bottom line growth strategies for our EPP business and lastly, right sizing our corporate class structure. The strategy for growing our EPP business has become clear and this process is well under way. We will focus our efforts on expanding our existing government centric business model into the commercial bill and direct payment processing space and we feel we can become a dominate player in a number of verticals in this area.

On the last call I outlined the major initiatives we are implementing to build our top line sales and marketing strategy including, increasing client acquisition by expanding our footprint in existing verticals, increasing customer adoption, increasing selling, cross selling programs through easier and simpler front end technology, new products and new verticals. As an example of some of our successes we signed over 100 new accounts in Q4. 16 of which were in higher education. Some of the larger ones were De Cal County, in Georgia, the City of Memphis in Tennessee and the State of New Jersey’s Department of Motor Vehicles. The satisfaction of our client offerings were reconfirmed in that we renewed a number of major accounts such as Turbo Tax, the states of Minnesota, Pennsylvania and New Jersey, the District of Columbia and the City of New York.

We also discussed on the last call, several operating initiatives. First, we are conducted an evaluation of our existing technologies and capabilities from the perspective of their abilities to support the sales and marketing initiatives outlined above. Second, we are reviewing opportunities for cost efficiencies by eliminating operational redundancies. We are currently in the process of analyzing our back office processing platforms and infrastructure to determine what investments are needed to fully execute on both the growth initiatives and to rationalize back office operational efficiencies. Based on our preliminary conclusions, in order to achieve these objectives we believe that we will first need to make a significant investment in our current technology to accelerate our growth strategy and enable cost efficiencies. We’ve also begun the analysis of right sizing corporate overhead which we expect to occur once the disposition of non core assets is complete.

Due to the nature of the strategic initiatives that I discussed with you today and on prior calls, fiscal 2008 will be a significant restructuring year for the company. Our PSSI and BPO businesses account for a significant portion of our corporate overhead costs and until the disposition process is completed, we cannot realize the full savings from rationalizing these costs. And, while we expect to have continued strong growth on the top line, we expect the timing of the divestiture process, the investments we have to make in our growth initiatives and other restructuring activities to result in a total company net loss for fiscal 2008. Having said that, we do believe that by the last quarter of fiscal 2008, or the first quarter of fiscal 2009 we will have accomplished the bulk of this restructuring. We also expect fiscal 2008 EPP revenues to continue to grow in the mid 20% range with a corresponding higher growth rate in operating profits. One potential macro risk to our revenue growth that we are monitoring very closely is the impact of the sub prime mortgage lending issues could have on our property tax business. So far, we have not experienced anything material from this. But, we will continue to keep an eye on this.

In summary, I believe that the overriding themes for fiscal 2008 are: that this year is going to be a significant transition year for the company as we complete the divestiture process around the non core assets; execute and regrowth strategies in our core business including, the implementation of a new top line growth strategy; make a significant investment in technology; fill out our EPP organizational needs; begin to consolidate back office operations; and rationalize our corporate overhead cost structure. We are very confident that we have very valuable asset as pure pay biller pay business.

The primary variable is timing. How long will it take to dispose of the non EPP units, right size corporate overhead, make technology investments and complete the consolidation of EPP? Now, I’d like to turn the call over to David to discuss the financial quarter, the financial results in greater detail and then we’ll open the call for Q&A.

David E. Fountain

Thanks Ron. Let me start by highlighting, as most of you have already figured out, we’ve made some significant changes to the presentation of our financial statements to reflect continuing and discontinuing operations consistent with the strategic direction of the company. As we discussed in our last earnings call in Q3 we determined that the business for which we were seeking buyers met the criteria to be classified as held for sale on our balance sheet under Financial Accounting Standard No. 144 Accounting for Impairment or Disposal of Long Lived Assets. At that time however, we did not have sufficient insight into the eventual form of the transactions to determine whether we might have continuing involvement in or cash flows from these businesses after we divested them. Therefore, in accordance with FAS 144 we reported the revenues and expenses as continuing on our P&L during Q3. During Q4 however, we concluded that it was unlikely we would have continuing involvement in or cash flows from these businesses after the divestitures. Therefore, beginning in Q4 we reported these businesses as discontinued on our P&L for our reporting periods.

During Q4 we also added supplemental financial tables to our 10K and our earnings press release that detailed the revenues and expenses of each of the three components of our continuing operations which are: EPP, our electronic payment processing business; wind down business; and our corporate overhead. The majority of our BPO and PSII segments are now classified as discontinued operations. Also, included in our fiscal year 2007 discontinued operations line is the reversal of a $7.6 million reserve for a tax refund and about half a million dollars of other close out costs both associated with our former Australian operations. The two items collectively benefited our net income from discontinued operations by $8.1 million. We believe this presentation provides better visibility into the strategic direction of the company.

One point I would like to make is that accounting rules do not allow us to allocate general corporate overhead to discontinued operations unless those costs can be contributed directly to a specific business. Therefore, our continuing operations include a significant amount of general core corporate overhead even though we expect corporate overhead to diminish after the divestitures. As Ron just mentioned it’s challenging to make significant progress now towards the right side of corporate overhead until the divestiture process is completed.

Having said all of that, let me hit some of the financial highlights for fiscal 2007 starting with the quarter. Current quarter revenues from continuing operations were $20.9 million, up 12% from the same quarter last year. The primary driver here was growth in our electronic payment processing business whose revenues were up 30% due to both increased transactions and dollar volume. During Q4, our electronic payment business processed 2 million transactions and nearly $800 million of payments which represents a respective 39% and 38% quarter-over-quarter increase. As we have mentioned in previous calls, the number of transactions and dollar volume processed by EPP is very seasonal. As is typical, the volume of dollars processed by EPP declined in Q4 relative to Q3 but, we expect to see significant increases during the federal income tax season consistent with past years. The 31% quarter-over-quarter revenue growth of our EPP business was led by increases in property tax revenues which were up 41%, federal and state income tax revenues which were up 16% and education revenues which were up 63%.

It should be noted that our wind down operations contributed $6.1 million of revenues from continuing operations during Q4 of this year compared to $6.8 million during the fourth quarter last year which represents an 11.2% quarter-over-quarter decline. As we continue to wind down these operations over the next five year we expect that these revenues will continue to decline.

On the expense side, during the quarter direct costs from continuing operations were $15.3 million, up 12.3% versus the same quarter a year ago. Consistent with it’s revenue growth EPP’s direct cost increased 31% primarily due to $3.3 million of additional interchange fees that resulted from the 38% increase in dollar volumes processed through this business. It should be noted that the continued operations results from the fourth quarter of fiscal 2007 included an impairment loss of $.6 million to write down the carrying value of the assets in our wind down operations to fair value. Consolidated revenues for our continuing operations for the quarter exceeded direct cost by 27% during the fourth quarters of both fiscal 2007 and 2006.

Q4 general administrative expenses from continuing operations declined $3.3 million or 36% from last year. This decrease is primarily attributable to the absence of one time legal and accounting cost incurred during Q4 last year associated with last years restatement of our financial statements. Selling and marketing expenses from our continuing operations were $1.8 million for the quarter, up 11% primarily due to growth initiatives in our EPP business.

Now, I’d like to provide a brief overview of the quarter-over-quarter results of our discontinued operations. During the fourth quarter of fiscal 2007, our discontinued operations reported a loss of $800,000 compared to income of $1.8 million during the same quarter last year. One of the largest drivers of this variance was the recognition of a $2.6 million impairment loss during the fourth quarter of fiscal 2007 to write down the carrying value of our held for sale assets to fair value. In addition, the expiration of two BPO contracts and the completion of a number of PSSI contracts in fiscal 2007, also contributed to the quarter-over-quarter reduction.

Moving on now to our fiscal full year 2007 operating results. For fiscal 2007 we reported a net loss of $3 million, or $0.16 per fully diluted share which represent a $6.4 million or 68% improvement over fiscal 2006. Our continuing operations reported a loss of $18.3 million or $0.94 per fully diluted share while our discontinued operations reported net income of $15.2 million or $0.78 per fully diluted share. On a stand alone basis and excluding any allocation of corporate costs, our EPP business reported income of $8.4 million or $0.43 per fully diluted share during fiscal 2007. This represents a $2.8 million or 51% increase over fiscal 2006 resulting from a 37% increase from a number of transactions and a 31% increase in dollars processed by EPP in fiscal 2007.

We believe that the positive performance of our EPP business reflects rising consumer demand for electronic payment alternatives as well as an increase in the number of client contracts for electronic payment services. Although EPP provides electronic payment processing services to over 3,000 clients, approximately 28% of EPP’s revenues are generated by transactions processed under our contract with the Internal Revenue Service. The positive performance of our EPP business was more than offset by a loss of $11.2 million or $0.58 per fully diluted share from operations that we were winding down, including a non [inaudible] $2 million impairment charge to right down the assets and liabilities of these operations to fair value.

During fiscal 2008 we expect to wind down two business that generated losses. Another business that reported positive earnings is expected to be wound down over a five year period. Our income from continuing operations also include corporate overhead costs of $15.4 million or $0.79 per fully diluted share which represents cost for shared services that could not be directly assigned to any business unit. We expect that the need for and the costs of the shared services and other corporate cost will diminish after we sell or wind down our BPO and PSSI businesses.

For fiscal 2007 our discontinued operations reported income of $15.2 million or $0.78 per fully diluted share, an increase of $5.8 million from fiscal 2006 results. As I mentioned a minute ago, included in the $15.2 million income number is a benefit of approximately $8.1 million or $0.41 per fully diluted share related to the reversal of a reserve for 2003 tax refund for our former Australian operations which received final approval from the Internal Revenue Service in March, 2007 and other adjustments associated with the final close out of our Australian operations. The remaining $7.1 million or $0.37 per fully diluted share of income reported in fiscal 2007 was generated by the BPO and the PSSI operations that are held for sale. The fiscal 2007 earnings for BPO and PSSI also include the previously described $2.6 million impairment loss recorded in the fourth quarter 2007. Although the BPO and PSSI operations generated income in fiscal 2007 on a standalone basis, excluding an allocation of corporate costs, the expiration of two BPO contracts and the completion of a number of PSSI contracts for fiscal 2007 are expected to result in lower earnings in future years.

Turning to the balance sheet, our cash balance at June 30, 2007, including cash and cash equivalents, investments and marketable securities was $74.3 million. In addition, we had restricted investments of $17.6 million with $5.5 million pledged in connection with the performance bonds primarily tied to our PSSI segment and $6 million pledged as compensating balance for an ACH banking service relationship in our EPP business.

As we discussed, we have multiple strategic initiatives under way including, the potential sale of several of our operations, reengineering of and investment in EPP’s back office operations, the expansion of our EPP client base in the commercial biller direct processing space and the right sizing of our corporate overhead. Although a number of these initiatives are under way, other initiatives are still in the planning stages. Because it is difficult to forecast when these initiatives will be complete, as well as the cost and ultimate economic benefit from these initiatives it is difficult to project costs and expense on a go forward basis until such time as we have additional information. While certain of these initiatives will produce some costs savings during fiscal 2008, we believe that the cost of implementing these initiatives will outweigh those savings during fiscal 2008 and that we expect to incur a net loss in fiscal 2008 as a result. Because of the uncertainties involved, however, around these initiatives we do not believe it is prudent to provide more specific guidance at this point in time. As always, we will continue to report on our progress in a timely manner.

Lastly, I want to mention that our 10K will be filed sometime either this evening or in the morning and, I also want to encourage all of you to go out and take a look at that because we’ve completed reengineered the MG&A to reflect the outline of the business that I just discussed with you. Now, I’d like to turn it back over to Ron.

Ronald L. Rossetti

Thanks David. In closing, again, I believe that the overriding themes for fiscal 2008 are: this is going to be a significant transitional year for the company as we complete the divestiture process around the non core assets and execute our new growth strategies in our core business and right size our corporate overhead structure. We are very confident that we have a very valuable asset as a pure play bill pay business that will continue to show rapid growth in sales and profits. The primary variable here is timing. Operator, we would like to open up the line to questions.

Question-and-Answer Session

Operator

At this time I would like to remind everyone, in order to ask a question press star and then the number one on your telephone key pad. We’ll pause for just a moment to compile the Q&A roster. Again, if you would like to ask a question, press star one. Our first question comes from the line of Gary Prestopino – Barrington Research Associates.

Gary Prestopino – Barrington Research Associates

Could you just run through the quarter and the year, the transaction growth and the proceeds growth for EPP?

David E. Fountain

Hey, Gary, I missed the first part of your question.

Gary Prestopino – Barrington Research Associates

I’m trying to get, I couldn’t write fast enough, I’m trying to get what the transaction growth, the processing growth, the processing volume growth was for Q4 and year-over-year for EPP.

David E. Fountain

Okay. The transaction growth for the quarter was 39%.

Gary Prestopino – Barrington Research Associates

39% transaction growth and then, did you give a number?

David E. Fountain

And for the year, it was 37%.

Gary Prestopino – Barrington Research Associates

37% for the year. And the dollar volume?

David E. Fountain

The dollar volume for the quarter was 38% and for the year it was 31%.

Gary Prestopino – Barrington Research Associates

Okay. And, did you give a number of transactions and the absolute dollar volume?

David E. Fountain

Yeah. The number of transactions was 2 million for the quarter.

Gary Prestopino – Barrington Research Associates

Okay.

David E. Fountain

8.1 million for the year. And, the dollar processed, the volume processed was for the quarter $768 million, we said, you know close to $800 million for the quarter and about $4.7 billion for the year.

Gary Prestopino – Barrington Research Associates

Okay. Alright. Then, just a couple of other questions. As I look at how you’ve broken this out in terms of, you know, the EPP business on standalone basis, if I’m looking at a y year-over-year, at least for the last two years, it looks like the G&A is up about 30% in this year and 31% the year before and, you know, the selling and marketing is up close to 20% or a little over 20% each year. Could you possible explain because, you don’t have any overhead costs in that G&A number, correct?

David E. Fountain

No. Those costs are directly supporting the EPP business. That has nothing to do with our corporate overhead.

Gary Prestopino – Barrington Research Associates

So, what would be involved in those costs to have them grow, you know, as dramatically as they have? Because, I was always under the assumption the leverage would be on the G&A and the selling and marketing line for you company. But, it seems like, based on how you’ve broken this out, obviously, it’s not the case. So, what expense are involved in there because, there’s no corporate overhead? So, I’m just trying to get an idea of what kind of expense you have in there that would grow 30%, you know, [inaudible] annually for two years?

David E. Fountain

Well, we basically have costs for our sales organization. We’ve got IT costs in there that support the operation. We’ve got some of our back office support areas like customer service, client relations, things like that so, that’s the majority of what’s in there.

Gary Prestopino – Barrington Research Associates

And then, selling and marketing, you’re saying sales is in G&A, what’s in selling and marketing then? Is that just?

David E. Fountain

Oh, I’m sorry. Gary, you were separating the two?

Gary Prestopino – Barrington Research Associates

Yeah. So, selling and marketing is what it is. But, I’m just trying to get an idea, why the absolute level of growth in G&A? We’re not seeing any leverage there.

David E. Fountain

Well, I think we’ve made investments this year to, you know, build out some of the growth strategy that we talked about, you know, going after some of the new verticals so you’re going to see some increasing expenses there. And, I think you’ll continue to see some of those costs go up as we continue to deploy these strategies.

Gary Prestopino – Barrington Research Associates

Okay. Thanks.

Operator

Your next questions comes from the line of Jason Harris.

Jason Harris

Yeah, hi. I wondered a little bit at the commercial initiatives for next year. You mentioned that there’s a couple of commercial verticals that you feel like you could be the dominate player. Can you give, you know, any color into what kind of verticals those might be?

Ronald L. Rossetti

Well, obviously, it’s education. We think that we can be a big player in the education area. We’re looking at certain segments of the utility market. We’re looking at insurance. We’re looking at rents.

Jason Harris

Okay. And, do you have any commercial business at all right now?

Ronald L. Rossetti

Yeah, we do. Yes, we do.

Jason Harris

What percentage is commercial today?

Ronald L. Rossetti

We don’t break that out in detail.

David E. Fountain

It’s relatively small today.

Ronald L. Rossetti

Yeah. Yeah.

Jason Harris

And so, what are the investments required in the EPP back office to, you know, what is it that you need to invest in, in order to go after those growth verticals?

Ronald L. Rossetti

Our investment has to be basically in technology which will allow us to better service the different verticals and also the technology will allow us to flatten out a lot of the costs in our customer service and our implementation and it really is primarily a technology investment.

Jason Harris

Okay.

Ronald L. Rossetti

Along with some boost underground in sales and marketing.

Jason Harris

Because you have, you have more than enough capacity, correct?

Ronald L. Rossetti

Yes. We have a tremendous amount of capacity. It’s really, it’s really not the payment processing capacity that’s the problem. It’s the front end interconnect and service with the various verticals.

Jason Harris

So, is it a case where sort of for certain government applications you don’t need that robust a front end but, to get into commercial it has to be more robust?

Ronald L. Rossetti

That’s correct. You know, the government basically is a blind pay and a lot of the issues that we have around commercial are different types of services that the commercial biller wants in terms of service of the client.

Jason Harris

And so, these verticals, these commercial verticals like education, are we talking about college tuition, that sort of thing?

Ronald L. Rossetti

We’re talking about college tuition, bookstore type things, anything that the students can pay. We’re also talking about some meal pay that we do at the high school and elementary level.

Jason Harris

Okay. And, are you, would those verticals, I mean, be up displace people there, or are those just kind of not automated right now?

Ronald L. Rossetti

In many of the cases, they’re not automated. There may be some form displacement but, in most cases you’re dealing with very, very fragmented verticals that have a lot of smaller players sitting in them ad no one really has any significant market share.

Jason Harris

And when do you think you’d have the products ready for, you know, to really ramp up commercial? I mean, is that going to take a year? Is that going to take six months?

Ronald L. Rossetti

Well, it will start, because of the way in which we’re going to do the technology, it will start sometime in fiscal 2008 and be completed in probably 18 months from today. But, we are going to be looking at this by being able to bring on certain new clients before the entire platform is completed and before we’ve migrated some of our existing customers on to the new technology. We’re really doing this more as driving market share rather than even satisfying the existing tax pace.

Jason Harris

Okay. And then, just one last question and then I’ll turn it over to someone else. I think, from what I’m understanding you’re saying you have assets of continued operations for sale of $36 million on the balance sheet? And then the liability.

Ronald L. Rossetti

That’s the gross assets, yes. To get the net you’ve got to subtract the liabilities.

Jason Harris

Which is $11 million, right?

Ronald L. Rossetti

Yeah, those two lines.

Jason Harris

So, you’re comments were saying that you expect to get at least $25 million for these businesses, is that correct?

Ronald L. Rossetti

Well, that’s what we, based upon the and, David has to go through a very difficult and time consuming valuation process by taking, you know, probability of sale and cash flow projections on a weighted average and determine and, he can get into in some more detail if you want to get into it. But, it really is a very technical area where he comes up and values the assets on a, and it’s not, on a book basis.

David E. Fountain

That’s our current estimate.

Jason Harris

Okay. So, right now you expect to get $25 million by March of 08?

David E. Fountain

That’s our current estimate.

Ronald L. Rossetti

That’s our current estimate.

Jason Harris

And, you don’t have to pay taxes on that because you’re selling them at a loss? Is that right?

Ronald L. Rossetti

That’s the carrying value.

Jason Harris

You wouldn’t have to pay taxes?

Ronald L. Rossetti

We think any gains would be sheltered.

Jason Harris

Okay.

Ronald L. Rossetti

I believe so, right David?

David E. Fountain

Yes.

Jason Harris

Okay. And then, just one, I’m sorry, one last one, the restricted investments, is the restricted investment number says $11 million on the balance sheet then you said $18, I was confused between the two. Are the restricted investments $11 or $18?

David E. Fountain

They are $18.

Jason Harris

Okay. So, your total cash and restricted investments and everything is like $92 million?

Ronald L. Rossetti

$85.

David E. Fountain

Yeah, it’s about $85. I think $85.9, I think is what we said.

Ronald L. Rossetti

And, the restricted investments are restricted for two things. One, is bonding primarily in the BPO and PSSI side of the business and, did we disclose the number of the EPP end, David?

David E. Fountain

Yeah, we did.

Ronald L. Rossetti

Okay. I’ll tell you about $6 million.

David E. Fountain

Let me correct what I just said. It’s $11.5 million. I picked up the line above that which is other intangibles.

Jason Harris

Okay.

David E. Fountain

It’s $11.5 million.

Jason Harris

Right. That makes sense.

David E. Fountain

Okay.

Jason Harris

Alright. And then, just one last thing. I know, with all that cash to $85, if you got $25 in cash you’d have $110 million, you know, of cash on the balance sheet. You know, would you look at buying back stock? Or, a one time dividend? What kind of uses of the cash would you have?

Ronald L. Rossetti

Well, we’ve answered this question a couple of times and at this stage we really want to look at using that cash for driving growth of the EPP business. However, there is no question that getting the type of returns we’re getting on that cash, if we can’t drive the business significantly harder and faster by using investing that cash, we really feel that some way some how it has to be returned to the share holders. Now, one time dividends to a great degree, in my mind, do not add value to the company. So that, more than likely, we would probably consider some form of buy back if we were to do that but, at this stage we’re really a long way off from deciding it. David did recommend some executive bonuses but the board wasn’t too happy about that.

Jason Harris

Alright. I agree with you on the one time dividend. I think a buy back is a better use of the cash. So anyway, thanks a lot.

David E. Fountain

Let me make one other comment before you take off because, I think we may have left the expectation that we’re going to generate $25 million of cash from these sales which now forces me to go into a little bit of description about how the process works. At the end of each period and before we file our quarterly filings or annual filings, whatever the case might be, we have to make an assessment of where we think this is going to be and it’s an estimate based on a lot of input. And, as we’ve mentioned, we are in letter of intent stages around most of these assets so they are held for sale. That doesn’t mean that we are actually going to close on all of these because, there’s still a ways to go before we can make that call. So, what we have to do is adopt a probalistic model where we have to get, we have to assign the probability that it is going to close and, if it doesn’t close whatever the remainder of that is, what’s the probability of us having to wind it down. And so, based on all of those assessments or probabilities we compile a weighted average of what we think that value of the business is and then we compare that to the current carrying value and if we have a delta we have to write it down. So, if those probabilities shift to once side or the other, or if the prices change between now and when we close, all of those factors will go into how much cash we will actually net out of the process.

Jason Harris

No, I understand that’s an estimate. But, when you say that you’re in letter of intent stage with most of these assets, what is generally holding things up? Is it the people who are buying them and need to get their financing in order?

Ronald L. Rossetti

It’s a combination of things. What really happened, as I said in my notes, our original expectations were to try to sell these to one or two strategic buyers. But, we found within the existing units of PSSI and BPO, there really are a number of sub units that are going to much smaller buyers, many of who do not have a lot of experience in acquisitions. Some of which have certain capital constraints. So, it’s really instead of being one or two transactions, it’s going to be five or six transactions and we’re even finding within some of the sub units we’re selling even smaller units in this. And, their asset transactions which take a lot longer than sales. One thing you can be, and it goes a lot to David’s comment, and I want to reinforce the expectations of the cash coming in, our objective here is really not to maximize sales proceeds.

Jason Harris

Right.

Ronald L. Rossetti

Our objective here is to get the company right sized, get corporate overhead right sized, there is a lot of corporate overhead that we’re carrying in continuing operations which is really there to support the PSSI and BPO businesses. And, we think, that it’s a better use of management time and a better use of the direction of the company to shed these units as quickly as possible and drive the growth of EPP. And, so proceeds is not the underlying issues here. Time and speed to conclusion is and, it really is, because, you know, there is a difficulty in selling a bunch of small units.

Jason Harris

Okay. Thank you.

Operator

Your next question comes from the line of Mike Ogborn.

Michael Ogborn

With all the commercial, the investments you’re making to go after the commercial market in technology, are those sort of horizontal investments that once made can be applied to lots of different markets?

Ronald L. Rossetti

Absolutely.

Michael Ogborn

Or, do you have to attack each vertical separately?

Ronald L. Rossetti

Absolutely. What you have, you have to think of it as a big payment machine that will be able to process any type of payment that you can think of and the only difference is by vertical what unique things we tag into the front end connectivity basically, on a web basis to individual verticals and maybe individual clients within the verticals. So, we should be able to attack any biller payment vertical out there. With the marketing and sales efforts will determine where we focus, not necessarily the technology efforts. We hope that when we get through with this process we will not be restricted to go after any vertical we want to.

Michael Ogborn

And what’s, did you talk about the magnitude of the cap ex, what it’s going to cost to build these capabilities?

Ronald L. Rossetti

No. We have not.

David E. Fountain

No. We have not disclosed that. That is one of the initiatives that is in the way and we do hope to be able to come back to you on the next quarter call and give you some more color around that.

Ronald L. Rossetti

And, it will be a, you know, a spread out investment over more than just one year.

Michael Ogborn

Okay.

Ronald L. Rossetti

At least, that’s the way it looks today.

Michael Ogborn

Okay. But, I mean, I assume from your content, it’s fairly significant. And so, you don’t have as much commercial business [inaudible] from what do you drive confidence that you’ll be able to penetrate that commercial market, you know, once you’ve made those investments?

Ronald L. Rossetti

Well, I think, the best example would be the education market where we did no business in the education market, you know, 30 months ago. And, we moved into that area thinking it was a good vertical, our technology could handle it fairly well and we had, we’ve had, I think, we’re close to 90%, 80% in that vertical last year? 68% today. It is going to wind up by the end of this year being either the third or fourth largest vertical that we have and we think by applying the same methodology that we applied in the education area to a few other verticals where we think there is some real opportunity because of the fragmentation of the nature of those verticals and the fact that we think we have an extremely strong sales group that we can focus in on those verticals and get significant market share fairly quickly.

Michael Ogborn

Okay. Thank you.

Ronald L. Rossetti

I mean, we’ve got a track record in that regard.

Michael Ogborn

Okay. Great. Thank you.

Operator

Your next question comes from the line of Beth Lilly.

Beth Lilly

Good afternoon.

Ronald L. Rossetti

Hi Beth, how are you?

Beth Lilly

I’m doing well Ron, how are you?

Ronald L. Rossetti

Good.

Beth Lilly

I had a couple of follow up questions. I wanted to, wanted to ask in terms of the assets held for sale and then you’ve got the wind down. So, can you, are there three divisions in essence in the wind down segment? Did I understand that correctly?

David E. Fountain

I wouldn’t call them divisions. I would call them units. They were basically carve outs from BPO and PSSI that were already, one either already in a wind down mode like our pension practice which we had, we’ve got a couple of contracts that we’re still finishing up there but, that has already been in a wind down mode. There was a smaller piece of the BPO business that was really a collection of a handful of contracts that were doing some consulting work and really, they didn’t fit into the, you know, payment processing that we’re doing in that business. And then, we’ve got our voice automation business which is also in that as well. So, those are the three units that are in there. That’s the way to think of it.

Beth Lilly

Alright. So, and how many then would you say are in the assets held for sale? The two, the BPO and the PSSI?

David E. Fountain

Well, in BPO you’ve got primarily that, what we call our child support payment processing business which is a handful of contract that we had with states to do their consolidated child support payment processing for court ordered cases. And, we also have the [Fenom?] business which goes hand and hand with that, which is an asset location service business that we have that searches for delinquent child support payers. That’s the BPO, that’s what’s in BPO. What’s in PSSI is our financial management system business as well as the unemployment insurance business practice that we have that produces large scale unemployment insurance system integration work.

Ronald L. Rossetti

The Missouri system integration.

David E. Fountain

Our state’s systems integration.

Ronald L. Rossetti

State systems integration. We also have in BPO, we have a, some call center businesses that are in there and some, and a few drips and drabs which really aren’t businesses of themselves but their contracts which, you know, we had chased. There’s a few, IV&V things, so you know, to a great degree they are somewhat semi related to what the core of those business are but, they’re more contracts than they are anything else.

Beth Lilly

So when we think about you selling those businesses and you originally thought it was one to two buyers and now it’s maybe five to six, as I think about then you selling those businesses, those are the pieces that you’re disposing of. Is that correct?

Ronald L. Rossetti

Absolutely.

Beth Lilly

Okay. Yeah. I mean, so when you.

Ronald L. Rossetti

If you look at the definition, the difference between wind down and the difference between discontinued is discontinued we’re going to sell and eliminate the assets and liabilities. Wind down we feel that we can generate more cash flow by running those businesses as a cash cow and running out the contracts. So, basically, we will do minimal sales efforts in the wind down operations and really turn them into a significant cash flow generators. Now, we may have a situation where we’ve got a couple of contracts because the nature of government contracting, you know, the liability to walk away from that contract is more significant or greater than the losses you’d incur to run it out for six or twelve months.

Beth Lilly

Yep. So, when you’re saying.

Ronald L. Rossetti

Our issue here is liability mitigation as well as speed to sale.

Beth Lilly

Yep. And so, when you say you have letter of intents to sell these units or divisions or whatever in those two businesses, is that the first time you’ve been able to say that? I mean, did you have letter of intents last quarter or not?

Ronald L. Rossetti

No. We did not. These, you know, we’ve done, there’s an extensive, what happened is we have a very extensive process going after one or two major buyers when we found out that that really wasn’t practical for a couple of reasons we had to literally restart the process on a unit by unit basis. So, it’s been, so the time problem here as been really, and I don’t fault the strategy that we did, it was easier, it was better, if we’d have found a strategic buyer for all or one or two of the pieces of the business that would have been the best way to go. But, what you really have seen are really two sales processes, one that failed and we turned around and went into a second one and that’s part of the reason why it’s taken so long. And, secondarily, the buyers that we’re dealing with are not sophisticated buyers. I mean, they have not done a lot of transactions.

Beth Lilly

Yeah. Yeah. Okay. Alright. The other thing I wanted to just get clarification on is, you know, if we look at, if we look at the EPP on an ongoing basis, what I’m trying to get a sense of, if you take the wind down out of it, what are the ongoing expenses to run the business? Right now G&A runs at $7.8 million and selling and marketing is $7.1, okay? And then, under the corporate and eliminations, you know, at year end 07 it was $15.9 million. So, as you think about going forward what kind of overhead structure you’re going to need, what kind of corporate expense on top of the $7.8 and $7.1, what do you think that numbers going to be?

Ronald L. Rossetti

I’m not going to get into detailing the exact number but, I will tell you that EPP, I can’t really say it’s fully loaded but, it really covers a substantial portion of the SG&A that EPP needs. What is really the corporate overhead with the exception maybe some small executive costs really are the costs of being a public company. And so, what you really have to add to EPP, 95% of the costs that would be added to it is the costs of, the public company costs.

Beth Lilly

So we maybe could add $5 million to that?

Ronald L. Rossetti

I’m not going to go there. You can do whatever analysis and estimates you want and I’ll happily smile but, we’re not giving guidance at this point on that.

Beth Lilly

Alright. So, just so we can understand really what the profitability of that EPP business is, we just need to add the public company costs to that EPP, you know, income statement that you broke it out and say, “Okay, we’ll add public company costs and that should be the profitability of that business.” Correct?

David E. Fountain

No. We’re not providing guidance on that. Unfortunately, we’re not in a position to do that yet. So, I wouldn’t recommend looking at it that way.

Beth Lilly

So, at what point do you think we’ll get a sense of what EPP can earn?

David E. Fountain

Well, I think we’ve given you a rough idea of what it can earn before corporate, what it can earn before corporate overhead. Now, we’ve shown you exactly what it has earned in the past.

Beth Lilly

Yeah.

David E. Fountain

Again, as I mentioned, we’re not providing guidance on what the corporate overhead going to look like going forward. That’s all a work in process now.

Beth Lilly

Yeah. Okay. Great. Those are all my questions. Thank you.

Operator

Your next question comes from the line of Gary Prestopino

Gary Prestopino – Barrington Research Associates

A follow up. On the share based comp that’s on the cash flow, could you maybe give us a, you know, figure of what would be just attributed to the EPP business?

David E. Fountain

Oh, I don’t think I can break that out right now on the call for you Gary. I’d be happy to try to pull that component out of it, you know, later if you’d like.

Gary Prestopino – Barrington Research Associates

Yeah. And then, the other thing is, you say from continuing operations you generated $400,000 worth of cash but, the reality is that, correct me if I’m wrong, if you just did the cash flow just based on the EPP business, alright, wouldn’t that be substantially higher? There’s not a lot of working capital tied up in this business. Is that a correct assumption?

David E. Fountain

In the EPP business?

Gary Prestopino – Barrington Research Associates

Yeah.

David E. Fountain

No. Not really because, you know, we don’t have a lot of receivables that you would think of traditional receivables that, you know, we send bills our and then wait to collect the money. It’s typically we collect the money when we process the transaction.

Gary Prestopino – Barrington Research Associates

Okay. And then, as you go through this process, I mean, will you be needing your existing headquarters in Reston in terms of that large of space? You know, would there be maybe some movement to maybe sublease and look for smaller quarters as you rationalize the company?

Ronald L. Rossetti

That’s part of the whole right sizing of corporate overhead and is also had some affect in the consolidation of some of the EPP operations. So, obviously, space costs are one of the areas that, have a significant reduction once we’re able to work our way through some of the existing leases.

Gary Prestopino – Barrington Research Associates

And then just one last question, in terms of, you know, the growth in these new sectors like utility, education and all that, what’s really been the time frame, the average time frame for closing on a new relationship? Because, I would assume that these new verticals that you’re entering into, you’re not really taking market share from an entity that is out there doing it already, you’re really convincing these entities that they should accept credit cards and use your system. Is that correct?

Ronald L. Rossetti

It’s really mixed. You’re probably a little heavier on the convincing them to adopt than taking market share. Taking market share many cases, they’re really from smaller, competitors who are doing, you know, localized type businesses and they don’t have the full suite of offerings that we’re able to even given now.

Gary Prestopino – Barrington Research Associates

Okay. Alright. Thank you.

Ronald L. Rossetti

It’s not really, it’s not really head-to-head competition with any of what you would now as the major companies in the biller direct area. They’re really, to a great degree, what we’re seeing in the areas that we’re going into is that they may have someone doing something for them, not able to provide the whole suite, their smaller, there’s a lot of things they can’t do and so it’s partial adoption and partially enhancing what they’ve got on an existing basis.

Gary Prestopino – Barrington Research Associates

Okay. So, as I look at your entire market and your potential market, is it fair to say for what you’re doing in the current verticals that you’re in that we’re probably at a 3-5% penetration for the use of credit cards as payment mechanisms?

Ronald L. Rossetti

I would say, in some of the verticals it could be even more. But, you know, there are other parts of the payment processing that we’re able to do that are not credit cards. You know ACH and things of that sort. So, that there will be other payments, other than credit and debit cards.

David E. Fountain

I think based on some of the analysis we’ve done in our existing verticals, primarily government payment space, we’re touching, you know, a very small percentage of their total payments coming in. So, when you look at how much of their volume is coming through us, it’s definitely below the 3-5% range. So, there’s a lot of opportunity to improve utilization there.

Ronald L. Rossetti

Yeah. We feel, and we have been doing that. Our growth in, even in the tax space, has been, as I’ve said before, it’s not only signing up new customers but, it is getting increasing adoption within the existing customer base and some of our tax people, we may be only touching 1-2% of their business. So, to get adoption of 3-4% which is not an unreasonable jump, it doubles our volume with them.

Gary Prestopino – Barrington Research Associates

Thank you.

Operator

Your next question comes from the line of Shane Kim.

Shane Kim

In the wind down portion of your business, it appears that selling and marketing expenses are no longer a variable expense as related to sales. I mean, going forward, considering the massive reduction in revenues are we going to see a reduction in expense on the selling and marketing expense line?

Ronald L. Rossetti

In continuing operations?

Shane Kim

Yes.

Ronald L. Rossetti

Are in the wind down?

Shane Kim

It’s within your continuing operations within your wind down.

David E. Fountain

We’ll see it come down in the wind down category of continue ops significantly but, in terms of EPP you’ll probably see it go up.

Ronald L. Rossetti

Yes.

David E. Fountain

As we make investments.

Shane Kim

Understood. Understood. But.

Ronald L. Rossetti

And remember, one of the things that you will see and, especially in the tax side of EPP is there is a really long lead time between when we make our investment in sales and marketing and we actually see revenues. Now, most of the taxes, as you’re well aware are really event driven so that your property taxes come once or twice a year, depending on where you are and if we sell somebody, if we sell somebody in February and their tax year isn’t until December, you know, we’ve incurred all of the expenses implementing them, setting them up, all of the sales costs and we’ll not see revenue for eight or nine months. And, in many cases, we know pretty much who should be out there in the pipeline and it may take more than one year to try and make a sale on some of the areas. So, there are some long lead times with them. The lead times in commercial are not nearly as extensive as they are in the tax area.

Shane Kim

Okay. I’m sort of more referring to the wind down portion of the business. Now, you’re talking about winding it down over five years. Is it possible to even run this business on a break even basis until you’re completely out of it?

David E. Fountain

Absolutely. That’s what we’re doing. And what I said was, two, there’s three units in the wind down category of continuing, two of them are going to be gone by the middle to end of next year. The third one is a business that provides, you know, ongoing maintenance around existing product sets so, as long as we can continue to provide that maintenance, you know, we’re going to do that because it makes sense to do that. So, that’s the one business that could, you know, that could most likely go beyond next year. When I say next year I’m talking about fiscal 08 which is this year. There’s only one of those three units that’s going to go beyond fiscal 08 and we’ll continue to renew maintenance contracts in that business as they come up but, we’re not going to actively go out and market new ones.

Shane Kim

Thank you. Can you characterize, I’m struggling with your characterization of the reduction in corporate overhead as significant because, that could be 20%, is it half? Can you characterize the type of reductions like, are we talking about, do we have issues with rent expense, or what are the sort of, these things tend to be a little bit sticky. So, what type of reductions are we talking about?

David E. Fountain

All of the above.

Ronald L. Rossetti

And then some. If you look at the three business units BPO, PSSI and EPP a substantial portion of the corporate overhead is, should be born by or is being utilized by BPO and PSSI, a substantial portion of it.

Shane Kim

But, the ultimate buyer isn’t going to take on those responsibilities and these are, as you’ve sort of outlined, I understand that they’re smaller buyers now, right? Because, they’re smaller ones, they’re not sophisticated. Then, why either, you know, if they’re not going to pick up the expense of running those businesses why couldn’t you eliminate them for tier today? There seems to be a little bit of a disconnect there.

David E. Fountain

Not really because, we’re in a, you know, we have LOIs on most of them, an LOI is a letter of intent it’s not binding, it doesn’t mean that we have absolute certainty around what’s going to happen to that business. So, there’s still uncertainty and I talked a little bit about it earlier, how you account for businesses in this situation. You have to assign, you know, probability weightings to different scenarios and compute a weighted average. So, again, there is no certainty that these are sold at this point in time. We believe they will sell and based on that belief that’s how we’ve kind of accounted for them this quarter like the accounting rules say we have to.

Shane Kim

But, David, I understand the probability weighting and that sort of thing but, are there expenses in the corporate overhead, if you got a deal consummated with one of the businesses, would some of that expense actually go with the business? Or, would you be able to then reduce it just at corporate?

David E. Fountain

No. I think we’ve had, I think the bottom line is it would go away. Once we have, you know, firm commitment and visibility around exactly what’s going to happen, it will go away either in the form of a transfer to the, you know, a potential transfer to the buyer, if they don’t have those services themselves and most of the ones we’re talking to now have not had those types of services, they’ve been, you know, private equity type buyers who did not have corporate structure to run a business. So, it’s most likely that some of these employees and functions would be able to go with the buyer. If not, they would be eliminated.

Ronald L. Rossetti

And those buyers who are really strategic in nature, in many cases have the existing corporate overheads and so we would be redundant and that would just drop off the table. So, it really depends on the buyer and what the buyer’s needs are.

Shane Kim

Okay.

David E. Fountain

Does that answer your question?

Shane Kim

Yes.

David E. Fountain

Okay.

Shane Kim

Could I make a suggestion, is that as you get these, any transaction done and you have a handle on what the elimination may be on each particular transaction that you, you know, announce to us, you know, what the annualized run rate of expense reduction is expected so that we have a gage as to measurement of how quickly we’re getting a $16 million number down to a more reasonable expense. Because, if you can’t, the one thing as you look at this is you have, you know, a payment processing business that, you know, I imagine you could sell on its own and, you know, you wouldn’t need a lot of corporate overhead to do that either. So, you know, you’re simplifying the business over the next 12 months and if you can’t get this down to truly the, you’ve got to be able to match it and, I know that’s what you guys are working on. But, there’s a big delta between $16 million and what you guys should be spending for both an executive management team to run this type of business and, you know, finance and accounting. I’m not trying to over simplify it but, it should be pretty basic stuff and you guys are already looking at investitures is great but, there’s a huge delta there. So, the more you can do to, you know, give us some more details around that as we go, it’s going to be very important for your stock price.

David E. Fountain

We’ll be more than happy to provide that detail.

Ronald L. Rossetti

One of the things you have to understand. We recognize that delta and have recognized that which is the major reason, or one of the significant drivers in making these dispositions and repositioning the company. One of the problems you have is because these are shared services, even if you eliminate 25 or 30% of the businesses you may not be able to eliminate 25 or 30% of the corporate overhead, you know. It’s like the whole idea of do we cut the baby in half? And you know, if you’ve got to have a baby, it’s there until everything goes. So, it’s going to be extremely difficult for us to be able to give you visibility until we have done enough of the dispositions where whole segments can go. And, do you understand? Because, they are shared services, if we have 50% of the businesses we may not be able to unload 50% of the corporate overhead.

Shane Kim

Alright. I have a hard time.

Ronald L. Rossetti

Because, it’s not, remember the dollars aren’t, this is people we’re talking about, this is space we’re talking about.

Shane Kim

I understand.

Ronald L. Rossetti

The dollars aren’t fungible.

Shane Kim

Yeah, I understand that. But, it’s not like this company was built up on doing a lot of integration and, you know, leveraging their people. You know the G&A got built up to an awfully high level so, the flip side is it should be easier to un wind it, you know. So, I understand what you’re saying. It is what it is but, you know, we’ll see.

Ronald L. Rossetti

Okay.

Operator

You’re next question comes from the line of Ross Burner.

Ross Berner – Weintraub Capital

Hey guys. A couple of quick questions for you. Can you talk a little bit about interchange pricing pressure? Is that going to be an issue for you guys going forward?

Ronald L. Rossetti

You know, interchange pricing pressure is always a problem, it’s the nature of the beast in this business. We haven’t seen significant pressure at this stage and, you know, there’s a lot of political issues out there industry wise which is trying to keep a lid on this but, we haven’t seen significant pressure. We also feel that by moving into different types of payment types we may be able to offset some of that pressure with the card companies at the same time going from gold to platinum and increasing more expensive cards. So, there’s, you know, a give and take. But, I don’t think we’re any different than anybody else in the industry, in the electronic payment processing industry, looking at pricing pressure.

David E. Fountain

Yeah, we pay the same, you know, basic interchange rates that everybody else pays. Where we see variability Ross, is in the mix of our payment types, as Ron just said. If we happen to get a higher mix of premium based cards, they do carry a higher rate with them so, that could change our interchange. But, we have a pretty good mix right now so, I don’t think we’ll see a major, you know, increase or decrease because of mix. But, we could see one depending on what promotions are run, you know, the card issuers do run promotions. They could swing it slightly there. To offset that though, the other initiative worth mentioning is our debit cards. If we can control the mix of our business towards, more towards debit cards than we do realize a much lower interchange rate under that type of product.

Ronald L. Rossetti

And it’s a, you know, it’s a constant battle but, one in which, with the exception of changing mix, we are attempting to do mix, we don’t have much control over. The flip side of increasing more expensive cards are that they offsetting the drive volume. Because, they add more, more rewards and people use those cards to get the rewards and it drives volume so, there’s a give and take on the percentage increase may go up but, they dollars generated may also go up significantly.

David E. Fountain

Yeah.

Ross Berner – Weintraub Capital

Thanks for that. I missed some of the Q&A so, I apologize if this has been asked. Is there any, it sounds like some of the question are obviously, focused on eliminating the corporate overhead and downsizing it as quickly as possible. Is there any that’s underway now or could be undertake now prior to actual divestitures or wind downs?

Ronald L. Rossetti

You’re talking about reduction in corporate overhead?

Ross Berner – Weintraub Capital

Yeah.

Ronald L. Rossetti

We have been making those moves throughout the year and, we will continue to get far more aggressive with them as we come closer and closer to being able to consummate these transactions.

Ross Berner – Weintraub Capital

Okay. Okay. And, let me see if there’s anything else.

Ronald L. Rossetti

The head count in the company alone is down, what 10-15% this year David?

David E. Fountain

Yeah.

Ross Berner – Weintraub Capital

The divestitures will take you from what to what? And then, how much actually needs to get eliminate to get you to the target?

Ronald L. Rossetti

I don’t understand the question.

Ross Berner – Weintraub Capital

Well, how many, you’re at 950 employees now?

David E. Fountain

A little over 800.

Ross Berner – Weintraub Capital

Oh, 800? Okay. And, with the divestitures and wind down, that will take you down to how many?

David E. Fountain

We’ve got about 100, about 200 roughly, approximately 200 between corporate and EPP.

Ronald L. Rossetti

And wind down.

Ross Berner – Weintraub Capital

Okay. So then, what would be your target number of those 200 to get to? Or, is that tough to talk about in this forum? I mean.

Ronald L. Rossetti

It’s tough to talk about it in this forum and although we’ve given some general guidance in the past, one of the things that I think you’re going to see is that because of the growth we’re driving in EPP, that although we could bring the dollars of some of our costs down to match today’s revenues by the time we start to get them down we would be driving the revenue at a higher rate so that costs may stay flat or go down somewhat but, the percentage of costs to revenue will go down dramatically. It’s just a matter of the two curves matching.

Ross Berner – Weintraub Capital

But, you, but, you’re embarking on that process of taking that 200 down.

Ronald L. Rossetti

We’re embarking on that process and at this point in time, we’re very, very comfortable with knowing what the disposition process is going to be. You know, we can’t tell whether something’s going to close or not close because, we’re still in the LOI process. But, we really have a good handle on where we have to move in corporate overhead and how quickly we can do it.

Ross Berner – Weintraub Capital

And, how are you handling the integration of the two EPP businesses? Is there someone at corporate that’s doing that? Or, do you assign someone, how’s that process going to take place?

Ronald L. Rossetti

That’s being done, that’s being done at the EPP level. We’ve already put someone in charge of operations on the entire EPP business and they are currently doing as much consolidation as they can without, without technology investments. You know, we have a couple of different technologies are running different segments of the business therefore, in order to support those you’ve got to have duplicate efforts across the board and that’s one of the reasons that, why the technology investment is so important. Not only will it assist us in driving new business, it will also assist us in taking out a lot of redundancies that currently exist in the EPP business.

Ross Berner – Weintraub Capital

My last question is, just focuses on, if you continue to grow at this rate, you’ll be at $120 or $125 million of revenues in 08, how do you look at normalized EBITDA margins and I know, that’s what a lot of people are trying to get to but, I mean, should this be, you know, a 12% plus EBITDA type of business?

Ronald L. Rossetti

We really don’t provide that and, the issues are that the contribution from the tax verticals and other verticals that we enter into are significantly different so, blend of mix and how successful we are in driving that blend of mix is going to have a significant effect on what the percentage of EBITDA or operating revenues out of sales. And, it’s really, really dependent upon how affective we are in blending our mix of business. One of the things that we’re focusing on when we look at verticals is exactly what you’re talking about, what verticals can we move into that [inaudible] fragment that we think we can take over but, also, provide us with what we would feel the best opportunity to get that margin percentage increase and operating percentage increases contributing to the bottom line. So [inaudible] factors and decision because, these verticals are different.

Ross Berner – Weintraub Capital

Okay. Then, we’ll talk more off line but, has anyone asked about the use of all the cash? Because, you did say that you expect another $25 million after tax by March?

Ronald L. Rossetti

Well, we didn’t say we expected another $25 million. David went through it and, you really, I’m looking at him right now and he does not want to go through repeating the, how you get to that number but, I don’t think it’s very fair, I don’t think it’s a good assumption to walk away and say that we’re going to have $25 million in cash. But, if you want to get offline with him, he’ll be happy to explain to you what he did on the call earlier and how that number gets derived. It’s just a very, very complicate formula.

Ross Berner – Weintraub Capital

But, the use of cash between, in terms of, you’re going to make some investment in the integrating the platform but that’s a finite amount of investment.

Ronald L. Rossetti

I mean, it’s certainly not going to put a big dent in the cash. What I answered before and I sort of answered it on every call because, this subject obviously comes up because of the size of the cash amount that the company has in relation to it’s valuation. We feel very strongly that we would like to use the cash to drive business in the EPP area. If we find that we cannot judiciously be able to invest it to get a greater return than we’re getting from the AAA cash investments, we have an obligation to return that cash back to the shareholders.

Ross Berner – Weintraub Capital

But, what you’ve got, is you’re investing and you’re going to integrate the platform but, you’ve still got something that’s growing organically in the high, you know the double digit numbers that starts with a two at this time. It seems like at some point, do you even need, why do you need to even accelerate upon that growth? I mean, if you’re growing organically and the business doesn’t require a lot of capital to run, you know, it seems like you could probably do something constructive with the cash even without [inaudible].

Ronald L. Rossetti

Why do you want to grow, we want to grow at that speed because, our objective is to try to, and I don’t want to make any guidance other than the mid 20s growth but, our objective would be to try to grow as fast as we can because, we feel very, very strongly that the market is there, it’s fragmented, this is a land grab and therefore we have a window of opportunity to take advantage of that which, if we go on a slower process, that opportunity may not be here. But, to finish what I’m say is, once we get through the right sizing of the company and looking at opportunities for growth, I personally feel and I’ve expressed this to my board that the company has an obligation not to keep this cash in the balance sheet and collect 3 and 4% returns. We have an obligation to return it to the shareholders and if we can’t invest it at a substantially greater return to them, and I would probably do it in a share buy back because, one time dividends don’t add value to the company.

Ross Berner – Weintraub Capital

And, your reason for wanting, the potential reason for wanting to return that cash to shareholders because, given the unfollowed, undiscovered nature of the company and a normalized margin for the remaining business once the business has been rationalized. You obviously have the view the stock is undervalued?

Ronald L. Rossetti

I’m not going to enter into valuation estimates with you, and you all are much sharper analyst than I am but, I would be a buyer of the stock.

Ross Berner – Weintraub Capital

Okay. Hey Ron, David thanks for the time.

David E. Fountain

Okay Ross, thanks.

Ronald L. Rossetti

Thanks.

Operator

Your next question comes from the line of Dan Weston.

Daniel Weston

I’m glad [inaudible].

Ronald L. Rossetti

Hey Dan.

David E. Fountain

Dan, are you there?

Daniel Weston

[Inaudible]

David E. Fountain

Are you there?

Daniel Weston

Hello?

David E. Fountain

Are you there?

Daniel Weston

Hello?

Ronald L. Rossetti

Dan?

Daniel Weston

Are you there?

Ronald L. Rossetti

Yes, we’re here.

Daniel Weston

Can you hear me?

Ronald L. Rossetti

Yes.

Daniel Weston

Good. Okay, a couple of quick questions. The total revenue for the quarter, all in was what?

David E. Fountain

All in total revenues were, hold on just a second, for continuing ops were $111.2 million.

Ronald L. Rossetti

That’s the year.

Daniel Weston

I want just quarterly.

David E. Fountain

Okay. Hold on.

Ronald L. Rossetti

You want continuing?

Daniel Weston

I want all in.

Ronald L. Rossetti

Okay.

David E. Fountain

I should be able to get that for you, hold on.

Daniel Weston

Alright. And, if you have the, I think I missed, it was going kind of fast, just the EPP revenue for the quarter only.

David E. Fountain

Okay. All in it was $177.4 million.

Ronald L. Rossetti

That’s for the year.

Daniel Weston

Just looking for the quarter.

David E. Fountain

Okay. I don’t have the quarter.

Daniel Weston

Alright. Do you have the quarterly just for EPP?

David E. Fountain

Hold on just a second, I can look it up.

Ronald L. Rossetti

Quarterly for EPP, do we have the quarterly?

David E. Fountain

Yeah, quarter for EPP was $20.9 million. And, I’m going to have to get back to you because I just have everything pushed into discontinued ops right now.

Daniel Weston

Okay. Yeah. No worries. No worries, we can talk off line. A couple of quick questions in regards to the EPP stuff. How much of your revenue in total on an annual basis is pure out of IRS?

Ronald L. Rossetti

Is it to the EPP that you want it?

Daniel Weston

Yes. EPP total IRS revenue?

David E. Fountain

Just a little over 28%.

Daniel Weston

28%. Okay. And, the last time you guys renewed your contract with the IRS, what term was that for? Was it a?

Ronald L. Rossetti

It was a four year term but with annual renewals. So, what they do is they give you a four, you enter into a four year contract and they renew it on an annual basis.

Daniel Weston

Got you. And then, when would we expect to see an announcement, or when would we have to seen an announcement if an RFP was in the mix in terms of time of year? In other words, their decision is going to have to be made by what if they issue an RFP?

Ronald L. Rossetti

I really don’t know. You know, they need a significant lead time.

Daniel Weston

Yeah.

Ronald L. Rossetti

Between the time they accept, let’s talk about finalizing and RFP and a selection process because I’m not sure if they’ll be somewhere between two to four months in the FRP process. So that if they issue an RFP it would take them somewhere in the neighborhood I would imagine of two to four months to review the RFP submissions and make a decision. And then, they need a significant period of time to ensure, you know, everybody is up and ready and is able to perform based upon the new RFP.

Daniel Weston

Understood.

Ronald L. Rossetti

That’s why I said to you initially we were under the understanding, and it’s getting pretty late in the month, that they were going to issue, or are attempting to issue an RFP before the end of the year. And, what they did was they issued an extension for 2008 and they also had procurement give them, the agency the right to extend through the year 2009 if they don’t get the RFP process done in a sufficient amount of time to be able to get somebody for 2009. And, that’s really all we know. You know, we stay in contact with them and we really don’t have any more information on this.

Daniel Weston

Very good. And then, lastly, out of the EPP how much, what percentage is property tax related?

David E. Fountain

Hold on just one second.

Daniel Weston

Ball park is fine too.

David E. Fountain

Yeah, let me, I can give that to you, hold on just a second. In terms of a percentage, let me give it to you Dan on a annual basis.

Daniel Weston

Yeah.

David E. Fountain

Okay. Do you want, let me just give you revenues. Let’s see. 33.1%

Daniel Weston

33.1% of total annual EPP is property taxes?

David E. Fountain

Yeah.

Daniel Weston

Understood. Okay. Good stuff. Guys, thanks very much. I know this is a long call so we appreciate you hanging in there.

David E. Fountain

Sure.

Ronald L. Rossetti

Okay. Great.

Daniel Weston

Speak to you soon.

Ronald L. Rossetti

Are there any other questions?

David E. Fountain

One more.

Ronald L. Rossetti

We’ll take one more question.

Operator

Okay. You’re next question, follow up question comes from Gary Prestopino.

David E. Fountain

Hey Gary.

Gary Prestopino – Barrington Research Associates

Yeah, I’m through. No more.

David E. Fountain

Thanks Gary, appreciate it.

Ronald L. Rossetti

Alright. Then I guess we’ll end the call operator.

Operator

Yes, sir.

Ronald L. Rossetti

Thank you very much everybody.

Operator

This concludes today’s conference call. You may now disconnect.

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