CONTINGENCIES AND COMMITMENTS

6 Months Ended

Mar. 31, 2013

CONTINGENCIES AND COMMITMENTS [Abstract]

CONTINGENCIES AND COMMITMENTS

NOTE 8—CONTINGENCIES AND COMMITMENTS

LEGAL ISSUES

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business.

In March 2013 a complaint was filed by Haverstick Incorporated against Official Payments in the US District Court in the Southern District of Indiana.  The lawsuit arises out of a 2005 system implementation project for the State of Indiana unemployment insurance system, or Indiana UI Project.  Haverstick, the prime contractor, alleges Official Payments (which was then operating under the name Tier Technologies, Inc.), a subcontractor, breached its subcontract by assigning the subcontract to a third party without Haverstick’s consent and also alleges that Official Payments failed to perform the services contemplated by the subcontract.  The complaint alleges damages of approximately $8.7 million and seeks recovery of these damages plus attorney fees, interest and costs.

At both March 31, 2013 and September 30, 2012, we had legal accruals of $0.5 million in connection with our legal matters.  The Company intends to file a response to the complaint and vigorously contest the lawsuit.  Due to the preliminary stage of this matter, the fact that discovery has not commenced, and the uncertainty inherent in the overall litigation process, the amount or range of reasonably possible loss, if any, is not reasonably estimable above the amount recorded.

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 $34,948 million and $17,019 million, respectively, of settlements payable at March 31, 2013 and September 30, 2012.

CREDIT RISK

We maintain our cash 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 March 31, 2013, our investments were comprised of money market funds. Our investments, and cash and cash equivalents approximate 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 March 31, 2013, we had $14.3 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 clients. Fees for obtaining the bonds are expensed over the life of each bond. At March 31, 2013, we had $4.1 million of bonds posted with clients inclusive of a $2.4 million performance bond with the State of Indiana related to the Indiana UI Project. There were no claims pending against any of these bonds.

EMPLOYMENT AGREEMENTS

As of March 31, 2013, 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 March 31, 2013, we would have been required to pay up to $5.0 million.

OPERATING AND CAPITAL LEASE OBLIGATIONS

As of March 31, 2013, our principal lease commitments consisted of obligations outstanding under operating leases. We lease most of our facilities under operating leases that expire at various dates through 2018. There have been no material changes in our principal lease commitments compared to those discussed in our financial statements for the year ended September 30, 2012.

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 met 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 met the standard of conduct specified in the agreement, and subject to the limitations specified in the agreement.