<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. AUDIOTEX CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 7374 52-2190781
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
(925) 838-7996
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Thomas R. Evans
Chief Executive Officer
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
(925) 838-7996
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Dennis J. Block, Esq. Daniel Clivner, Esq.
Cadwalader, Wickersham & Taft Simpson Thacher & Bartlett
100 Maiden Lane 10 University City Plaza, Suite 852
New York, New York 10038 Universal City, California 91608
(212) 504-6000 (818) 755-7000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$0.01 per share........ shares $ . $60,000,000 $16,680
</TABLE>
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(1) Includes shares subject to an over-allotment option granted to
the underwriters by us. See "Underwriting."
(2) Estimated solely for purposes of computing the registration fee pursuant
to Rule 457(f).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-- , 1999
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Prospectus
, 1999
U.S. AUDIOTEX CORPORATION
Shares of Common Stock
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The Company: The Offering:
. We are the leading . We are offering
provider of shares of our common
electronic payment stock.
options to
government entities . We have granted the
enabling consumers underwriters an
to use their credit option to purchase
cards to pay, by up to an additional
telephone or through shares from us
the Internet, to cover over-
personal federal and allotments.
state income taxes,
sales and use taxes, . This is our initial
property taxes and public offering, and
fines for traffic no public market
violations and currently exists for
parking citations. our shares. We
anticipate that the
. U.S. Audiotex initial public
Corporation offering price will
2333 San Ramon Valley be between $ and
Boulevard $ per share.
Suite 450
San Ramon, California
94583
(925) 838-7996
www.8882paytax.com
Symbol & Market:
. /Nasdaq National
Market
<TABLE>
<CAPTION>
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Per Share Total
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<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to us:
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</TABLE>
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 5.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette CIBC World Markets
The undersigned is facilitating Internet distribution:
DLJdirect Inc.
<PAGE>
[Inside Front Cover Artwork]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 31
Management.......................... 45
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Certain Relationships and Related
Transactions...................... 50
Principal Stockholders............. 51
Description of Capital Stock....... 52
Shares Eligible for Future Sale.... 54
Underwriting....................... 56
Legal Matters...................... 58
Experts............................ 58
Where You Can Find Additional
Information....................... 58
Index to Consolidated Financial
Statements ....................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. You should read this prospectus together
with the additional information described in the "Where You Can Find Additional
Information" section of this prospectus. The information on our
www.8882paytax.com Web site is not part of this prospectus.
8882paytax.com/SM/, 1-888-2PAY-TAX/SM/ and US Audiotex/SM/ are registered
service marks of U.S. Audiotex Corporation. All other brand names, trademarks
and service marks appearing in this prospectus are the property of their
respective holders.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in this offering. We
urge you to read the entire prospectus carefully.
SUMMARY
Our Business
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our interactive voice response (IVR) toll-free telephone number, 1-888-2PAY-
TAX/SM/, allows consumers to make payments and receive certain customer service
information. Our 8882paytax.com Web site allows consumers to make certain
payments, and we are working with our existing government clients, including
the Internal Revenue Service (IRS), to enable consumers to make additional tax
and other payments through the Internet. We are also enhancing our Web site so
that consumers will be able to print receipts, save their personal data to
facilitate future payments, obtain information regarding our services and
access additional tax and other information.
Our government clients include the IRS, the States of California and New
Jersey, the District of Columbia and over 400 municipalities. Our pilot program
for personal federal income taxes processed over 45,000 tax filings totaling
more than $174 million in payments to the IRS from January 15, 1999 to April
15, 1999. Based on IRS data, we had a 95% market share (based on dollar volume)
for credit card payments of personal federal income taxes in the first six
months of 1999. We also processed over 187,000 payments for our state and
municipal government clients totaling $55 million in the first six months of
1999.
We combine expertise in facilitating credit card transactions, an Internet
focus and targeted marketing techniques to attract both government clients and
consumers to our services. Our services allow our government clients to provide
their constituents with user-friendly electronic payment options at no charge
to the government entity. Consumers who use our payment services pay us a
convenience fee that is added to their payment. We believe that consumers use
our services for the convenience, the payment flexibility and the perquisites
associated with paying by credit card.
Our Market Opportunity and Solution
In addition to payments made automatically on a taxpayer's behalf, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. Based
on IRS data, federal balance-due, estimated and extension payments for personal
income taxes are estimated to be $414 billion for the 1999 tax year. At the
state level, we estimate such taxes to be approximately $73 billion for the
1999 tax year. Based on U.S. Census data, 1998 state sales and use taxes were
approximately $155 billion, a portion of which is currently paid by small
businesses using checks or money orders. Based on U.S. Census data, local real
estate taxes were approximately $209 billion in 1996. Based on our experience,
approximately 50% of such taxes are not already included with mortgage
payments. We estimate fines for traffic violations and parking citations to be
in excess of $5 billion annually.
We believe our electronic payment solutions are attractive to government
entities because they provide an added service to consumers while reducing
paperwork and encouraging the electronic filing of tax forms. Our services
address the IRS' publicly-stated goal to substantially increase taxpayer access
to electronic filing, payment, and communication products and services. Many
government entities lack the expertise, technical
1
<PAGE>
personnel and economies of scale to cost-effectively implement and maintain the
hardware and software necessary to accept credit card payments from consumers
by telephone or through the Internet. Our services are designed to work with
their existing information systems, require minimal implementation and are
provided at no cost to government entities.
Individuals and small businesses who utilize a particular payment service
can be grouped into user communities distinguished by specific demographics and
psychographics. Because these customers are active online consumers, they
represent a valuable opportunity to cross-sell other related products and
services. For example, we may be able to facilitate the sale of consulting or
other related services to small businesses that use our services to pay sales
taxes, or the sale of automobile insurance or online driving school services to
consumers paying fines for moving traffic violations.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy:
. Expand and enhance our service offerings for personal federal income tax
payments. For the 1998 tax year, we processed only balance-due personal
federal income tax payments. By early 2000, we expect to also process
personal estimated and extension tax payments.
. Obtain additional state and municipal clients. We currently provide our
credit card payment services to the States of California and New Jersey,
the District of Columbia and over 400 municipal clients. We are focusing
on establishing relationships with additional states and municipalities
by leveraging our existing relationships with the IRS and other clients.
. Continue the roll-out of our Internet services. Within the next 6 to 12
months, we expect to offer our existing government clients the option to
add Internet payments services while new clients will have the option to
sign up for both Internet and IVR payment services.
. Broaden our payment service offerings. We expect to expand our services
to include payment solutions for state estimated and extension personal
income tax payments, corporate taxes and fees, public university tuition
and building permit fees.
. Cross-sell related services to small business and individual users. By
grouping consumers according to the type of payments they make, we
intend to target distinct groups of users to cross-sell related products
and services.
. Increase brand awareness and consumer usage. We have relied on our
government clients and credit card issuers, and will continue to work
with them, to publicize our services through government publications and
credit card billing and promotional inserts. In addition, we intend to
advertise directly in order to publicize our services.
. Pursue strategic relationships and acquisitions to reach additional
consumers and provide related services.
2
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General Information
We are located on the Internet at www.8882paytax.com. Our executive offices
are located at 2333 San Ramon Valley Boulevard, Suite 450, San Ramon,
California 94583 and our telephone number is 925-838-7996.
----------------
References in this prospectus to a particular income tax year mean taxes for
that calendar year due in April of the next calendar year.
Unless otherwise indicated, all share and per share information in this
prospectus:
. Assumes that the underwriters will not exercise their over-allotment
option; and
. Reflects the merger of U.S. Audiotex, LLC into us which we expect to
effect as of September 30, 1999.
The Offering
<TABLE>
<S> <C>
Common stock offered............. shares
Common stock to be outstanding
after this offering............. shares(/1/)
Use of proceeds.................. We intend to use the net proceeds of this offering,
which are estimated to be approximately $ million,
(i) to repay the outstanding balance of promissory
notes, evidencing advances made to us by our
stockholders and (ii) for working capital and general
corporate purposes. For a more detailed discussion of
the advances made to us by our stockholders, please see
the "Use of Proceeds" and "Certain Relationships and
Related Transactions" sections of this prospectus.
Proposed Nasdaq National Market
symbol..........................
</TABLE>
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(1) The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of , 1999, and excludes:
. 535,714 shares of common stock issuable upon exercise of options that
have been granted under our 1999 Stock Incentive Plan at an exercise
price of $4.00 per share;
. 1,764,286 shares of common stock reserved for issuance as of ,
1999 under our 1999 Stock Incentive Plan.
For a more detailed description of our capitalization, please see the
"Capitalization" section of this prospectus.
3
<PAGE>
Summary Financial Data
You should read the following summary financial data in conjunction with the
"Selected Financial Data" and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections of this prospectus and
our audited financial statements and the related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
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1996(1) 1997 1998 1998(2) 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Total revenues............... $ 786 $1,202 $2,369 $ 899 $ 6,113
Total cost of revenues....... 305 696 1,080 372 4,839
------ ------ ------ ------- -------
Gross profit................. 481 506 1,289 527 1,274
Operating expenses........... 766 1,002 1,559 705 1,304
------ ------ ------ ------- -------
Income (loss) from
operations.................. (285) (496) (270) (178) (30)
------ ------ ------ ------- -------
Net income (loss)............ $ (323) $ (502) $ (325) $ (200) $ (59)
====== ====== ====== ======= =======
Basic and diluted net income
(loss) per share:........... $(0.03)/(3)/ $(0.10) $(0.07) $ (0.04) $ (0.01)
====== ====== ====== ======= =======
Shares used in computing
basic and diluted
net income (loss) per
share:...................... 5,000 5,000 5,000 5,000 5,000
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
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Actual As Adjusted(4)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 249 $
Working capital........................................... 55
Total assets.............................................. 2,028
Total debt including current portion...................... 1,283
Stockholders' equity ..................................... 125
</TABLE>
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(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) June 30, 1998 information is derived from our unaudited financial
statements.
(3) Basic and diluted net income (loss) per share excludes net income (loss) of
$(156,000) of the predecessor company.
(4) Reflects (a) the issuance and sale of shares of common stock in this
offering at an assumed initial offering price of $ per share (the
midpoint of the range set forth on the cover page of this prospectus), and
(b) the use of the net proceeds from this offering as described in the "Use
of Proceeds" section of this prospectus. See the "Certain Relationships and
Related Transactions" section of this prospectus and Note 4 to our
financial statements.
4
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware of various risks,
including those risks described in the risk factors below. You should carefully
consider these risk factors, together with all of the other information
included in this prospectus, before you decide whether to purchase shares of
our common stock. The risks described below may not be exhaustive. There may be
additional risks that we do not know of or that we deem immaterial based on the
information currently available to us. You should keep these risk factors in
mind when you read forward-looking statements elsewhere in this prospectus. Any
or all of these risks could have a material adverse effect on our business,
operating results and financial condition.
Risks Related to Our Business
We have a history of losses and expect to continue to incur losses.
We have incurred net losses of approximately $1,053,000 for the period from
June 26, 1996 (inception) to June 30, 1999. We expect to incur losses from
operations for the foreseeable future. We cannot assure you that we will become
or remain profitable. See the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus.
In addition, in the third quarter of 1999 we will record on our balance
sheet a deferred stock compensation expense totaling $12.9 million. This
expense consists of an amount of $10 million, representing the guaranteed value
of the options granted to Thomas R. Evans, our Chairman and Chief Executive
Officer, and an amount of $2.9 million, representing the difference between the
estimated value of the common stock underlying options we granted to certain of
our other officers and employees in August 1999 and the exercise price of those
options. The total amount of this expense will increase as a result of
additional options that we will grant prior to the completion of this offering.
The $10 million expense related to Mr. Evans' options will be amortized, using
a straight-line method, over a three-year period, starting in the third quarter
of 1999. The $2.9 million expense related to options granted to our other
officers will be expensed upon completion of this offering. See the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview," "Management--1999 Stock Incentive Plan" and
"Management--Employment Agreements" sections of this prospectus and Note 8 to
our financial statements.
We intend to expend significant resources on increasing our sales and
marketing staff and capabilities and systems development. As a result, we will
need to significantly increase our revenues to achieve and maintain
profitability. We cannot assure you that we will be able to achieve the
necessary revenue growth. If our revenues do not increase sufficiently, our
operating results and financial condition could be materially and adversely
affected.
Because our business model is unproven and evolving, it is difficult to
evaluate our business.
The use of credit cards to make payments to government agencies is
relatively new and evolving. To date, our business has consisted primarily of
providing credit card payment options for the payment of balance-due federal
and state personal income taxes, property taxes, and fines for traffic
violations and parking citations. Because we have only a limited operating
history, it is difficult to evaluate our business and prospects and the risks,
expenses and difficulties that we may face in implementing our business model.
Our success will depend on maintaining our relationship with the IRS and on
developing additional relationships with state and local government agencies,
especially state taxing authorities, and their respective constituents. We
cannot assure you that we will be able to develop new relationships or maintain
existing relationships, and our failure to do so could have a material and
adverse effect on our business, operating results and financial condition.
Our success depends on the acceptance of our payment system as a method for
making payments to government entities.
We work with government entities to allow us to provide credit card payment
services to their constituents. While many government entities have initiatives
or legislative mandates in place to foster the
5
<PAGE>
growth of electronic payments, our business, operating results and financial
condition would suffer if there were a reduction in these initiatives.
Traditionally, individuals and small businesses have made substantially all
payments to government entities by check or money order. We are providing our
payment services through our IVR telephone conduit and have developed and will
continue to expand the availability of our Internet conduit. However, we cannot
assure you that we will be successful in attracting additional consumers to use
our IVR and Internet conduits to make their payments to our government clients.
The lack of meaningful growth in the market for credit card payments to
government entities could have a material adverse effect on our business,
operating results and financial condition.
If consumers are unwilling to pay convenience fees for our services, or we are
unable to charge such fees, our business model will fail.
Our business model is based on our ability to charge convenience fees in
connection with our credit card payment processing services. Consumers pay a
convenience fee in addition to their required government payment in order to
use our credit card payment option. If consumers are not receptive to paying a
convenience fee, demand for our services will decline or fail to grow, which
could jeopardize the implementation of our business plan and would have a
material and adverse effect on our business, operating results and financial
condition.
Credit card association rules governing the use of Visa/(R)/ and
MasterCard/(R)/ at merchant locations generally prohibit merchants from charging
a convenience fee for cardholder purchases. We and Imperial Bank, our majority
stockholder, have worked with these credit card associations to permit
convenience fees for credit card payments for government services and taxes. We
cannot assure you that credit card association rules will continue to allow us
to charge convenience fees. To date, Visa/(R)/ permits a convenience fee but
only if it is a flat amount for a particular government service and will not
allow fees that are variable in amount depending on the kind of service provided
or the amount involved. If our ability to charge convenience fees is limited or
eliminated, our business, operating results and financial condition would be
materially and adversely affected.
The IRS currently accounts for 71% of our revenues, and the loss of the IRS as
a client would harm our business.
In the first six months of 1999, convenience fees from payments to the IRS
accounted for approximately 71% of our total revenues. We are currently in
negotiations with the IRS regarding the renewal of our contract for the 1999
tax year. For the 2000 tax year, we will be required to respond to an IRS
request for proposal for electronic payment services for us to continue to
provide our services. We expect that the IRS will select one or more electronic
payment service providers for the 2000 tax year within the next several months.
If the IRS does not renew our contract or accept our proposal, our business,
operating results and financial condition would be materially and adversely
affected.
Most of our contracts with government clients are not exclusive or long-term
contracts and, as a result, large government clients may terminate their
relationships with us on short notice.
Most of our agreements with government clients are non-exclusive, short-term
contracts or memoranda of understanding and can be terminated without cause on
short notice (generally 30 to 90 days). In addition, a government client may
choose not to renew its contract with us or may not choose our proposal in
response to a government request for proposal. If one of our larger existing
government clients chooses to terminate its contract or memorandum of
understanding with us, or does not choose our proposal, our business, operating
results and financial condition could be materially and adversely affected.
Increased competition in the market for payment services to government entities
could materially and adversely affect our business.
Our credit card payment services face competitive pressures from various
card issuing banks for Visa/(R)/ and MasterCard/(R)/, which send out checks that
function as cash advances and can be used for payments to government entities.
In addition, a number of data and bill processing companies have the technical
capability and other resources to commence providing credit card payment
services, and have indicated an intent to do so.
6
<PAGE>
Increased competition from other providers of payment options to government
entities could have a material and adverse effect on our business, operating
results and financial condition.
Many of our current and potential competitors have significantly greater
financial, marketing, technical, sales, and customer support and other
resources than we do. In addition, some of these competitors may be able to
devote greater resources to the development, promotion and sale of their
services, adopt more aggressive pricing strategies and devote substantially
more resources to the development of technology and systems than we will be
able to devote or adopt. Increased competition may result in lower operating
margins and loss of market share. We may not be able to compete successfully
against current and future competitors, and competitive pressures could have a
material and adverse effect on our business, operating results and financial
condition.
If our services do not function as designed, we may incur significant
liability.
Our electronic payment services are designed to provide payment management
functions and to limit our government clients' risk of fraud or loss in
effecting transactions with their constituents. As electronic services become
more critical to our government clients, there is the potential for significant
liability claims for the processing of fraudulent or erroneous transactions. In
addition, defects or programming errors in the software we use could cause
service interruptions. Our services depend on complex software that is both
internally developed and licensed from third parties. Although we conduct
extensive testing, complex software may contain defects or programming errors,
or may not properly interface with third party systems, particularly when first
introduced or when new versions are released. We encountered an incident where
a date coding error in a newly introduced program resulted in certain
transactions being posted incorrectly. The incident has been resolved to the
satisfaction of all parties concerned. However, to the extent that defects or
errors are undetected before introduction or release, and cannot be resolved
satisfactorily or in a timely manner, our business could suffer. If a liability
claim or claims were brought against us, even if not successful, their defense
would likely be time-consuming and costly and could damage our reputation. Any
such liability or claim could have a material and adverse effect on our
business, operating results and financial condition.
If our system security is breached, our business and reputation could suffer.
Our failure to prevent system security breaches could have a material and
adverse effect on our business, operating results and financial condition. A
fundamental requirement for electronic payment services is the secure
transmission of confidential information over public communication networks.
Third parties may attempt to breach our system security or that of our
government clients or consumer users. If they are successful, we may be liable
to our government clients or consumer users for any damages resulting from a
breach in our system security, and any breach could harm our reputation. We may
be required to expend significant capital and other resources to license
additional encryption and other technologies to protect against system security
breaches or to alleviate problems caused by any such breaches.
If our systems fail, we may not be able to provide adequate service, and our
business could be damaged.
Our success depends on the efficient and uninterrupted operation of our
computer and communications systems. The majority of our computer and
communications systems are located in San Ramon and San Francisco, California.
Our systems and operations are vulnerable to damage or interruption from:
. telecommunication failures;
. power loss;
. earthquakes, fires or floods;
. computer viruses;
. physical and electronic break-ins; and
. acts of sabotage, vandalism and similar events.
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Any failure of our systems could impede the timely processing of consumer
user payments and other data and the day-to-day management of our business.
Despite any precautions we take, a natural disaster or other unanticipated
problem that leads to the corruption or loss of data at our facilities could
result in an interruption of our services. Service interruptions could have a
material and adverse effect on our reputation, business, operating results and
financial condition and would have a significant adverse effect if they
occurred on or near April 15.
A constraint in our capacity to process transactions would materially and
adversely affect our business.
Capacity constraints may cause unanticipated system disruptions, impair
quality and lower the level of our service, all of which could have a material
and adverse effect on our business, operating results and financial condition.
Although we believe that we have sufficiently expanded our system capacity to
accommodate expected additional personal federal income tax payments and our
other anticipated growth, we cannot assure you that we will not suffer capacity
constraints caused by a sharp increase in the use of our services. Due to the
large number of tax payments made in March and early April, there is an
increased risk that we will suffer a capacity constraint during that period,
which would have an adverse effect on our business, operating results and
financial condition.
If we fail to respond to rapid technological change, our business will suffer.
The electronic payment industry is characterized by rapid technological
change. If we cannot adapt or respond in a cost-effective and timely manner to
technological changes, our business, operating results and financial condition
will be materially and adversely affected, and our technology and systems, and
thus our services, could be rendered obsolete. The development of our
technologies and necessary service enhancements entails significant technical
and business risks and requires substantial lead-time and expenditures. We may
not be able to keep pace with the latest technological developments,
successfully identify and meet the demands of our government clients and
consumer users, use new technologies effectively, or adapt our services to
emerging industry standards or to our government clients' or consumer users'
requirements.
Our operating results may fluctuate significantly from quarter to quarter,
which may negatively impact our stock price.
We believe our quarterly operating results will fluctuate significantly in
the future as a result of a variety of factors, many of which are outside of
our control. These factors include:
. the seasonality of our business, which is due primarily to the fact that
the majority of federal and state personal income tax payments is being
made on or near April 15 and to the fact that property tax payments are
made only once or twice per year in most jurisdictions;
. the amount and timing of costs related to our sales and marketing
efforts and other initiatives; and
. our ability to upgrade, enhance and maintain our systems and
infrastructure in a timely and cost-effective manner.
Because of these factors, we believe that comparisons of our quarterly
operating results are not necessarily meaningful. In addition, it is possible
that in some future quarters our operating results will be below the
expectations of research analysts and investors, in which case the price of our
common stock is likely to decline. See the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality and
Fluctuation of Quarterly Results" section of this prospectus.
If government clients and credit card issuers cease to publicize our services,
consumer use of our services may slow, and we would suffer a large increase in
advertising costs.
Currently, our government clients and credit card issuers provide most of
the publicity for our services, without any cost to us. If these entities cease
to publicize our services, or charge us for this publicity, our
8
<PAGE>
advertising costs will increase substantially, which could have a material and
adverse effect on our business, operating results and financial condition. Our
government clients and credit card issuers have no obligation to continue to
provide this publicity, and we cannot assure you that they will continue to do
so. In addition, the government clients may publicize other services, including
those of our competitors.
To grow our business, we must successfully expand our sales and marketing and
other staff and capabilities, but if we fail to effectively manage our internal
growth our business will be materially and adversely affected.
We are currently experiencing a period of rapid expansion. In order to
manage our expected growth, accommodate our needs and take advantage of new
opportunities in our market, we will need to attract additional key personnel
in the near future. We also will need to expand our sales and marketing,
technical, finance, administrative, systems and operations staff. This
expansion involves a number of risks, including:
. our ability to hire and retain qualified personnel in a competitive
environment; and
. our ability to successfully integrate new personnel with our existing
personnel.
We cannot assure you that our current and planned personnel levels, systems,
procedures and controls will be adequate to support our future operations. If
inadequate, we may not be able to exploit existing and potential strategic
relationships and market opportunities. Any delays or difficulties we encounter
could impair our ability to attract new, and enhance our relationships with
existing government clients and consumer users. If we are unsuccessful in
hiring, integrating and retaining new personnel, or unable to effectively
manage our internal growth, our business, operating results and financial
condition could be materially and adversely affected.
A number of members of our management team have little experience working
together; we depend on a few key employees.
Our future success will depend upon the continued service of key management
and technical personnel. Thomas Evans, our Chairman and Chief Executive
Officer, joined us in August 1999. Given his limited experience with our
business and other members of management, it is possible that Mr. Evans may not
integrate well into our business. The failure of key personnel to integrate
well would have a material and adverse effect on our business, operating
results and financial condition.
We currently do not maintain key man life insurance policies on any of our
employees. We do not have employment agreements with any of our employees,
other than Thomas Evans and Kenneth Stern. The loss of the services of any of
our key employees or our inability to hire and retain additional key employees
would have a material and adverse effect on our business, operating results and
financial condition.
If we do not adequately address year 2000 issues, we may incur significant
costs and our business could suffer.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many of these computer systems and software products may need to be
upgraded or replaced in order to correctly process dates beginning in 2000. The
failure to correct any year 2000 issues in the software and computer systems
used for our services could materially and adversely affect our business,
operating results and financial condition.
We rely on interfacing with computer hardware and software provided by third
parties that may not be year 2000 compliant. Currently, these third parties
primarily consist of our government clients. For many of these government
clients, we have installed our systems onto their computer networks. As our
Internet roll-out continues, these third parties will include our consumer
users, who will access our services through their own computer systems. The
failure of third party hardware or software to properly process dates for the
year 2000
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<PAGE>
and any failure by these third parties to resolve any year 2000 issues they may
have could cause us to incur unanticipated expenses. These expenses could have
a material adverse effect on our business, operating results and financial
condition.
We believe that we have identified substantially all local installations at
our government clients' sites that require remediation to be year 2000
compliant. We are currently remediating those identified local installations.
If we are unable to properly remediate all local installations requiring
remediation, or complete such remediation in a timely manner, our government
clients will experience year 2000 problems, which could expose us to liability
and damage our reputation and result in a material and adverse effect on our
business, operating results and financial condition.
Additionally, to the extent that year 2000 issues have a negative impact on
consumer users and undermine the public's faith in the Internet as a medium for
the exchange of information and commerce, growth of Internet commerce could
slow, which in turn could materially and adversely affect our business. See the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness" section of this prospectus.
We may not be able to protect our intellectual property rights, or we may
infringe on the rights of others.
We protect our intellectual property rights through a combination of
trademark, service mark, copyright and trade secrets laws. We cannot assure
you, however, that the steps we have taken to protect our intellectual property
rights will be adequate to deter misappropriation of those rights. We do not
have any proprietary technology or patent protections. In addition, we cannot
be certain that our services do not infringe on valid patents, copyrights and
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the intellectual property
rights of third parties. Intellectual property litigation is expensive and
time-consuming and could divert our management's attention away from running
our business.
We may not be able to license technologies from third parties on favorable
terms, and we may not be able to utilize these technologies successfully.
We intend to continue to license technology from third parties, including
our Web server and encryption technology. Our business is evolving, and we may
need to license additional technologies to remain competitive or adequately
protect the security of our systems. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services. These
third party licenses may fail to generate revenues sufficient to offset
associated acquisition and maintenance costs, or may divert our resources from
the development of our own proprietary technology. Our inability to obtain any
of these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. Any such delays in
services could cause our business and operating results to suffer.
If our relationship with credit card issuers or associations changes or
terminates, our business could be materially and adversely affected.
Termination of our member service provider registrations or our status as a
certified processor of credit cards, or any changes in the rules of the credit
card associations that limit our ability to provide processing and marketing
services, could have a material adverse effect on our business, operating
results and financial condition. As a nonbank processor, in order to process
credit card transactions, we must be sponsored by a financial institution that
is a principal member of a credit card association. Through Imperial Bank, our
majority stockholder, we are registered with Visa(R) and MasterCard(R) as a
certified processor and member service provider. See the "Certain Relationships
and Related Transactions" section of this prospectus. We are a merchant agent
for American Express(R). Our status in each association and with American
Express(R) depends on
10
<PAGE>
our compliance with their standards, which may change and may vary from
association to association, and could be suspended or terminated if we are
unable to comply. We cannot assure you that the credit card associations will
maintain our registrations or keep their current rules in effect. Additionally,
some of the member financial institutions that set the rules for each credit
card association are our or Imperial Bank's competitors, and may help effect
rules that are less favorable to us.
Our failure to successfully integrate any future acquisitions could strain our
managerial, operational and financial resources.
As part of our business strategy, we intend to pursue opportunistic
acquisitions that would provide additional technologies, products, services or
experienced personnel. Acquisitions present a number of potential risks that
could have a material and adverse effect on our business, operating results and
financial condition, including:
. difficulty in assimilating the acquired company's personnel, operations
and technologies;
. entrance into markets in which we have limited or no prior experience;
. the potential loss of key employees of the acquired company;
. the distraction of our management's attention from other business
concerns; and
. the potentially dilutive issuance of our common stock, the use of
significant amounts of cash or the incurrence of substantial amounts of
debt.
Risks Related to Our Industry
If the growth in the use and capacity of the Internet does not continue, or the
Internet is not secure, our business could suffer.
The growth of our business would be materially and adversely affected if
Internet usage does not continue to grow rapidly. Internet usage may be
inhibited for a number of reasons, including:
. concerns about the security of confidential information;
. lack of reliability and ease of access;
. lack of cost-effective, high-speed service;
. inconsistent quality and interruption of service;
. inadequate network infrastructure; and
. adoption of onerous laws or governmental regulations.
The Internet infrastructure may not be able to support the demands placed on
it by increased usage and its performance and reliability may decline. Internet
Web sites have experienced interruptions and delays in their service as a
result of outages occurring throughout the Internet network infrastructure. If
these outages or delays occur frequently in the future, Internet usage, as well
as the use of our Internet payment service, could grow more slowly than
projected or decline. In addition, because a number of our services involve the
transfer of confidential information, our business, operating results and
financial condition could be materially and adversely affected if Internet
users significantly reduce their use of the Internet due to security concerns.
Government regulation could cause our business to suffer.
Our management believes that we are not required to be licensed by the
Federal Reserve Board, or other federal or state agencies that regulate or
monitor banks or other types of providers of electronic commerce services. We
cannot assure you that a federal or state agency will not attempt, either now
or in the future, to
11
<PAGE>
require that providers of services like ours be licensed. This would impede our
ability to do business in the areas within the regulator's jurisdiction.
In conducting several aspects of our business, we are subject to various
laws and regulations relating to commercial transactions generally, such as the
Uniform Commercial Code. We are also subject to the electronic fund transfer
rules embodied in Regulation E issued by the Federal Reserve Board. Given the
expansion of the electronic commerce market, it is possible that the Federal
Reserve Board might revise Regulation E or adopt new rules for electronic fund
transfers affecting users other than consumers. It is possible that Congress or
individual states could enact laws regulating the electronic commerce market.
If enacted, these laws, rules and regulations could be imposed on our business
and industry and could have a material and adverse effect on our business,
operating results and financial condition.
We are subject to federal and state banking laws and regulations because of
Imperial Bank's ownership of our stock. In order to allow Imperial Bank to
comply with applicable laws and regulations, we are restricted from entering
into certain business activities. These restrictions limit our discretion in
operating our business. We cannot assure you that the banking laws and
regulations will not be amended, replaced or construed differently, the effect
of which could materially and adversely affect our business, operating results
and financial condition. See the "Business--Regulatory Matters" and "Certain
Relationships and Related Transactions" sections of this prospectus.
If there are changes in tax laws, our revenues could decrease and our business
could suffer.
Congress, as well as individual states and municipalities, regularly
consider a wide array of tax proposals. Certain of these tax proposals may
result in a reduction of federal, state or local tax rates, collection of a
greater percentage of taxes through withholding or other changes that could
result in a decrease in the number and amount of payments that consumer users
have to make directly to a government entity. In addition, some of these
proposals may result in taxation of credit card perquisites, such as frequent
flyer miles. If any of these proposals were to be passed, it may reduce the
number and amount of tax payments effected through our services and the dollar
amount of our revenue derived from the convenience fees charged to consumer
users. If enacted, these laws could have a material and adverse effect on our
business, operating results and financial condition.
If there is a general economic downturn, the amount of income tax paid could
decrease and, as a result, our business could suffer.
Income taxes are dependent on the amount of income earned by tax paying
citizens. A significant economic downturn could reduce the per capita income of
citizens, and thus reduce the amount of income tax payments consumer users have
to make to a government entity, which may reduce our revenues from convenience
fees. If the United States experiences an economic downturn, it could have a
material and adverse effect on our business, operating results and financial
condition.
Risks Related to This Offering
Our directors, executive officers and principal stockholders will be able to
exert significant influence over us.
After this offering, our directors, executive officers and our current
stockholders, Imperial Bank and Beranson Holdings, Inc., will beneficially own
approximately % of our outstanding common stock (or % if the underwriters
exercise their over-allotment option in full). These stockholders, if they vote
together, will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also delay or prevent a change in control of us or discourage a potential
acquirer from attempting to obtain control of us, any of which could have an
adverse effect on the market price of our common stock. See the "Management"
and "Principal Stockholders" sections of this prospectus.
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<PAGE>
The tangible book value of our common stock is substantially lower than the
offering price, resulting in immediate and substantial dilution to you.
The initial public offering price will be substantially higher than the
tangible book value per share of our outstanding common stock. If you purchase
our common stock in this offering, the shares you buy will experience an
immediate and substantial dilution in tangible book value per share. The shares
of common stock owned by the existing stockholders will experience a material
increase in the tangible book value per share. The dilution to investors in
this offering will be approximately $ per share. As a result, if we were to
distribute our tangible assets to our stockholders immediately following this
offering, purchasers of shares of common stock in this offering would receive
less than the amount paid for such shares. See the "Dilution" section of this
prospectus.
Anti-takeover provisions in our charter and Delaware law could inhibit others
from acquiring us, which could adversely affect the market price of our common
stock.
Some of the provisions of our certificate of incorporation, bylaws and
Delaware law could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. limit the price that investors may be willing to pay in the future for
shares of our common stock.
In particular, our certificate of incorporation and bylaws provide, among
other things, that stockholders may not take actions by written consent, that
special meetings of stockholders may only be called by a majority of our board
of directors or by our Chairman and that a supermajority vote (80%) of our
stockholders is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws and the consummation of certain business
combinations with any related person. We are also subject to Section 203 of the
Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any interested stockholder (as defined in the statute) for a period of three
years following the date on which the stockholder became an interested
stockholder.
Our stock has not been publicly traded before and there may be volatility in
our stock price.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market. The initial public offering
price for the shares will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of the market
price of the common stock that will prevail in the trading market. See the
"Underwriting" section of this prospectus. The market price of the common stock
may decline below the initial public offering price. In recent years, the
securities markets have experienced substantial volatility in prevailing price
levels that is unrelated or disproportionate to the operating performance of
individual companies. The market prices of the securities of Internet-related
companies have been especially volatile. Some companies that have had volatile
stock prices have been subject to securities class action suits filed against
them. If a suit were to be filed against us, regardless of the outcome, it
could result in substantial costs and a diversion of our management's attention
and resources. This could have a material adverse effect on our business,
operating results and financial condition.
Management has broad discretion as to the use of proceeds from this offering.
Our management will have broad discretion with respect to the use of
proceeds from this offering. Most of the proceeds from this offering will be
used for expenses of the business, such as hiring sales and marketing
personnel, repayment of stockholder loans and general working capital. You will
be relying on the judgment of our management about these uses. See the "Use of
Proceeds" section of this prospectus. If we do not use the proceeds of this
offering beneficially, our business, operating results and financial condition
could be materially and adversely affected.
13
<PAGE>
There may be an adverse effect on the market price of our stock as a result of
shares being available for sale in the future.
Sales of a substantial amount of our common stock in the public market, or
the perception that these sales may occur, could adversely affect the
prevailing market price of our common stock. This could also impair our ability
to raise additional capital through the sale of our equity securities. After
this offering, we will have shares of common stock outstanding, or
shares if the underwriters exercise their over-allotment option in full. Of
these shares, the shares sold in this offering will be freely tradable, except
for shares purchased by any of our affiliates, which will be subject to the
limitations of Rule 144 under the Securities Act. The remaining shares are
"restricted securities," and will become eligible for sale in the public market
at various times after days after the date of this prospectus, subject to
the limitations and other conditions of Rule 144 under the Securities Act. In
addition, in connection with this offering, holders of all shares of restricted
securities and options to purchase our common stock have agreed not to sell the
shares of common stock they now own or acquire upon exercise of such options
without the prior written consent of Donaldson, Lufkin & Jenrette for a period
of 180 days from the date of this prospectus. See the "Shares Eligible for
Future Sale" section of this prospectus.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "estimate" and
"continue" or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial condition
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections entitled "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" section and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section and
elsewhere in this prospectus could have a material adverse effect on our
business, operating results and financial condition.
15
<PAGE>
USE OF PROCEEDS
We will receive approximately $ million in net proceeds from the sale of
the shares of common stock we are offering. If the underwriters exercise their
over-allotment option in full, our net proceeds will be approximately $
million. Net proceeds is what we expect to receive after paying underwriting
discounts and commissions and estimated offering expenses. For the purpose of
estimating net proceeds, we are assuming that the initial public offering price
will be $ per share (the midpoint of the range set forth on the cover page
of this prospectus).
We expect to use approximately $2.8 million of the net proceeds to repay the
outstanding balance of the advances available to us by our stockholders to fund
our operations through December 31, 2000. These advances are evidenced by
promissory notes bearing interest at a floating rate equal to Imperial Bank's
prime rate plus 2% per year. We expect that the outstanding balance of the
promissory notes will increase as a result of additional advances made to us by
our stockholders during the period from September 1, 1999 to the closing of
this offering. For a more detailed discussion, please see the "Certain
Relationships and Related Transactions" section of this prospectus.
We intend to use the balance of the net proceeds for working capital and
general corporate purposes, including developing new payment and Internet
services, increasing our sales and marketing staff and capabilities and making
acquisitions. While we expect to evaluate potential acquisitions from time to
time, we have no present understandings, commitments or agreements with respect
to any acquisitions.
DIVIDEND POLICY
We have neither declared nor paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends for the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion
of our board of directors.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. the sale of shares of common stock in this offering at an assumed
offering price of $ per share (the midpoint of the range set forth on
the cover page of this prospectus), less underwriting discounts and
commissions and estimated offering expenses.
You should read the following table in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and our financial statements and related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------
Actual As Adjusted
(In thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 249 $
========= =========
Debt:
Notes payable and capital lease obligations........... $ 238 $
Notes payable to related party........................ 500
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 5,000,000 shares issued and outstanding,
as of June 30, 1999; shares issued and
outstanding, as adjusted ............................ 50
Additional paid-in capital............................ 1,128
Retained earnings (deficit)........................... (1,053)
--------- ---------
Total stockholders' equity ......................... 125
--------- ---------
Total capitalization.............................. $ 863 $
========= =========
</TABLE>
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<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was $125,000, or less than
$0.03 per share, based on 5,000,000 shares of common stock outstanding. Net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the total number of shares of common
stock outstanding at June 30, 1999.
Our net tangible book value as of June 30, 1999 would have been $
million, or $ . per share, after giving effect to the sale of the shares of
common stock in this offering at an assumed initial public offering price of
$ per share (the midpoint of the range set forth on the cover page of this
prospectus), less the underwriting discounts and commissions and estimated
offering expenses payable by us. This represents an immediate increase in the
net tangible book value of $ . per share to our existing stockholders and an
immediate dilution of $ . per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $
Net tangible book value per share as of June 30, 1999...... $0.025
Increase in net tangible book value per share attributable
to new stockholders.......................................
------
Net tangible book value after this offering..................
----
Dilution per share to new stockholders....................... $
====
</TABLE>
The following table summarizes, as of June 30, 1999, the number of shares of
common stock we have sold, the total consideration paid to us and the average
price per share paid to us by existing stockholders and by the investors
purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- -------
Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 5,000 % $1,600 % $0.32
New stockholders...........................
----- ------ ------ ------ -----
Total.................................. 100.0% $ 100.0% $
===== ====== ====== ====== =====
</TABLE>
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution.
The tables above assume no exercise of stock options outstanding on ,
1999. Options to purchase shares of common stock, having a weighted
average exercise price of $ per share, were outstanding as of ,
1999. When and if these options are exercised, new stockholders will experience
further dilution.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data for each of the years in
the three year period ended December 31, 1998 and the six-month period ended
June 30, 1999 and as of December 31, 1996, 1997, 1998 and June 30, 1999 have
been derived from our financial statements, which have been audited by KPMG
LLP, our independent auditors and are included elsewhere in this prospectus.
The results of operations for the year ended December 31, 1995 and 1996
includes the results of operations of our predecessor company for the period
from January 1, 1995 to June 26, 1996. The selected financial data as of
December 31, 1995 and June 30, 1998 and for the year ended December 31, 1995
and the six months ended June 30, 1998 have been derived from our unaudited
financial statements, which include, in the opinion of our management, all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of financial position and results of
operations for that period and at that date. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of results to be
expected for any future period. The information set forth below should be read
along with the financial statements and the related notes included elsewhere in
this prospectus and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
----------------------------------- ----------------
1995 1996(1) 1997 1998 1998 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues:
Transaction fees........ $ 102 $ 351 $ 935 $2,076 $ 794 $ 5,975
Other revenues.......... 559 435 267 293 105 138
----- ------ ------ ------ ------- -------
Total revenues...... 661 786 1,202 2,369 899 6,113
Total cost of revenues:
Cost of transaction
fees................... 24 221 412 1,009 361 4,818
Cost of other
revenues............... 63 84 284 71 11 21
----- ------ ------ ------ ------- -------
Total cost of
revenues........... 87 305 696 1,080 372 4,839
----- ------ ------ ------ ------- -------
Gross profit............. 574 481 506 1,289 527 1,274
Operating expenses:
Sales and marketing..... 236 222 330 356 198 435
Development costs....... 113 238 206 608 282 320
General and
administrative......... 673 306 466 595 225 549
----- ------ ------ ------ ------- -------
Total operating
expenses........... 1,022 766 1,002 1,559 705 1,304
----- ------ ------ ------ ------- -------
Income (loss) from
operations.............. (448) (285) (496) (270) (178) (30)
Other income (expense),
net..................... (8) (38) (6) (55) (22) (29)
----- ------ ------ ------ ------- -------
Net income (loss)........ $(456) $ (323) $ (502) $ (325) $ (200) $ (59)
===== ====== ====== ====== ======= =======
Basic and diluted net
income (loss) per
share................... $ -- $(0.03)(2) $(0.10) $(0.07) $(0.04) $ (0.01)
===== ====== ====== ====== ======= =======
Shares used in computing
basic and diluted net
income (loss) per
share................... -- 5,000 5,000 5,000 5,000 5,000
===== ====== ====== ====== ======= =======
Balance Sheet Data:
Cash and cash
equivalents............. $ 44 $ 221 $ 182 $ 631 $ 440 $ 249
Working capital
(deficit)............... 64 (60) (221) 392 111 55
Total assets............. 584 695 764 1,747 1,173 2,028
Total debt including
current portion......... 383 476 389 810 739 1,283
Stockholders' equity
(deficit)............... 141 (11) (91) 184 (291) 125
</TABLE>
- --------
(1) Includes the results of operations of the predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) Basic and diluted net income (loss) per share excludes the net income
(loss) of $(156,000) of the predecessor company for the period from January
1, 1996 to June 26, 1996.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or our future financial performance which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under the "Risk Factors" and
"Business" sections of this prospectus.
Overview
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
The use of credit cards to make payments to government entities is relatively
new and evolving. We commenced our current operations on June 26, 1996,
initially offering our credit card payment services for the payment of fines
for traffic violations, parking citations and property taxes. We currently
offer these services to over 400 municipalities. In January 1999, we signed a
credit card payment contract with the IRS and we began providing our services
for the balance-due payment of personal federal income taxes. We started
providing services for the payment of personal state income taxes in California
in January 1999, in New Jersey in March 1999 and in the District of Columbia in
July 1999. Consumers can make payments through our toll-free IVR system. Since
August 1999, consumers have also been able to make certain payments through our
Web site, www.8882paytax.com.
Our predecessor company was originally founded in 1986 as a provider of
interactive voice response applications for the classified advertising
industry. In July 1996, our predecessor company made the decision to
discontinue those operations to focus on our current business. In April 1997,
our predecessor company sold those operations.
Our revenues consist primarily of transaction revenues derived from
convenience fees paid by consumers for using our credit card payment services.
Our convenience fees ranged from 2.4% to 9.0% of the amount paid to government
entities in the first six months of 1999, depending on the type and size of the
payment. We also derive a small amount of other revenues from sales of our
systems to government entities and other miscellaneous fees such as for
maintenance and consulting. Revenues are recognized as the services are
performed and upon installation of the software and system sales.
Our primary cost of revenues is merchant discount fees paid to our credit
card processors, which, in the first six months of 1999, ranged from 2.1% to
2.6% of the total amount paid by the consumer, depending on the credit card
used and the type of transaction. We also incur telecommunications costs of
approximately $0.50 per completed transaction through our IVR conduit. Although
there are no telecommunications costs associated with payments made through our
Internet conduit, we pay a third party license fee of $0.15 per completed
transaction for certain technology used in our Internet conduit. We may also
pay referral fees for transactions completed as a result of referrals by third
parties.
Operating expenses include sales and marketing expenses, development costs,
and general and administrative expenses. Sales and marketing expenses consist
primarily of salaries and commissions for sales and marketing personnel. We
expect to significantly increase our sales, marketing, advertising, customer
service and new customer implementation expenditures during the next twelve
months. We believe these expenditures will enable us to increase the number of
consumers that use our electronic payment services and grow our government
client base. Development costs consist primarily of salaries for engineering
personnel and depreciation of computer equipment used to enhance our IVR system
and develop our Internet services. We expense our development costs as they are
incurred. We expect to significantly increase our development costs in the
future as we enhance our Internet conduit and develop new service offerings.
This increase will primarily relate to the hiring of additional employees
performing technical support and computer programming functions.
20
<PAGE>
General and administrative expenses consist primarily of salaries for
executive, accounting and administrative personnel. We also expect general and
administrative expenses to increase significantly as we continue to hire
additional members of our management team.
We have incurred significant losses since our inception and we expect to
continue to incur losses for the foreseeable future. As of June 30, 1999, we
had an accumulated deficit of approximately $1.1 million. We will record on our
balance sheet a deferred stock compensation expense totaling $12.9 million in
the third quarter of 1999. This expense consists of an amount of $10 million,
representing the guaranteed value of the options granted to Thomas R. Evans,
our Chairman and Chief Executive Officer, and an amount of $2.9 million,
representing the estimated value of the common stock underlying options we
granted to certain of our other officers and employees in August 1999 and the
exercise price of those options. The total amount of this expense will increase
as a result of additional options that we will grant prior to the completion of
this offering. The $10 million expense related to Mr. Evans' options will be
amortized, using a straight-line method, over a three-year period, starting in
the third quarter of 1999. The $2.9 million expense related to options granted
to our other officers will be expensed over 12 months upon completion of this
offering or sooner. See the "Management--1999 Stock Incentive Plan" and
"Management--Employment Agreements" sections of this prospectus and Note 8 to
our financial statements.
Significant Government Contracts
Our agreements with our government clients are non-exclusive and short-term,
and can generally be terminated without cause on short notice (in most cases 30
to 90 days). Under these agreements, we provide our services at no charge to
our government clients and we pay the credit card discount and transaction
fees.
In January 1999, we entered into an agreement with the IRS to provide credit
card payment services for the balance-due payment of personal federal income
taxes. The initial agreement will expire in October 1999, and we are currently
in negotiations with the IRS to renew our contract. Under the draft renewal
agreement we would provide:
. access to our services for balance-due payments from January 14, 2000 to
October 16, 2000;
. access to our services for extension payments from January 14, 2000 to
April 17, 2000; and
. access to our services for estimated payments from March 1, 2000 to
January 31, 2001.
Under the terms of the agreement and the draft renewal agreement, we must
comply with certain availability, access and reporting requirements.
In November 1998, we entered into an agreement with Novus Services, Inc. by
which we assumed Novus' obligations under its contract with the California
Franchise Tax Board to provide credit card payment services for balance-due
personal state income taxes. The term of the agreement is indefinite.
In January 1999, we entered into a contract with the Division of Purchase
and Property of the State of New Jersey to provide credit card payment services
for balance-due and estimated personal state income taxes. The initial term of
the contract is two years, expiring in February 2001.
In December 1998, we entered into a contract with the Office of the Chief
Financial Officer of the District of Columbia to provide credit card payment
services for balance-due personal income taxes. The contract includes
provisions relating to the convenience fees we may charge, and any changes to
our fees must be approved by the District of Columbia. The initial term of the
contract is one year, expiring in December 1999, and the District of Columbia
has the option to extend the contract for periods of up to four additional
years.
21
<PAGE>
Results of Operations
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
As a Percentage of Revenues
---------------------------------------
Year Ended Six Months
December 31, Ended June 30,
------------------ ------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Revenues:
Transaction fees................... 45 % 78 % 88 % 88 % 98 %
Other revenues..................... 55 22 12 12 2
--- --- --- ------- -------
Total revenues................... 100 100 100 100 100
Cost of revenues:
Cost of transaction fees........... 28 34 43 40 79
Cost of other revenues............. 11 24 3 1 0
--- --- --- ------- -------
Total cost of revenues........... 39 58 46 41 79
--- --- --- ------- -------
Gross profit......................... 61 42 54 59 21
Operating expenses:
Sales and marketing................ 28 27 15 22 7
Development costs.................. 30 17 26 31 5
General and administrative......... 39 39 25 25 9
--- --- --- ------- -------
Total operating expenses......... 97 83 66 78 21
--- --- --- ------- -------
Income (loss) from operations........ (36) (41) (12) (19) 0
Other income (expense), net.......... (5) (1) (2) (2) 0
--- --- --- ------- -------
Net income (loss).................... (41)% (42)% (14)% (21)% 0 %
=== === === ======= =======
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
Total Revenues. Total revenues increased $5.2 million to $6.1 million for
the six months ended June 30, 1999 from $899,000 for the six months ended June
30, 1998, an increase of 580%. This increase is primarily attributable to
revenues generated from processing personal federal income tax payments as well
as increases in revenues from processing personal state income and property
taxes and fines for traffic violations and parking citations.
Personal federal income tax. Revenues from processing personal federal
income tax payments, a service we introduced on January 15, 1999, were $4.3
million for the six months ended June 30, 1999, representing 71% of our total
revenues. We processed approximately 45,100 transactions totaling $174 million
during this period.
Personal state income tax. Revenues from processing personal state income
tax payments, a service we introduced in January 1999 for California and in
March 1999 for New Jersey, were $173,000 for the six months ended June 30,
1999, representing 3% of our total revenues. We processed approximately 13,300
transactions totaling $6.0 million during this period.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $222,000 to $574,000 for the six months ended June 30,
1999 from $352,000 for the six months ended June 30, 1998, an increase of 63%.
For the six months ended June 30, 1999, we processed approximately 53,000
transactions totaling $7.8 million, compared to 33,700 transactions totaling
$4.7 million for the six months ended June 30, 1998. This increase is primarily
attributable to higher utilization rates and new local jurisdictions added
22
<PAGE>
subsequent to June 30, 1998. As of June 30, 1999, we had 152 local government
clients for traffic violation payment services, compared to 91 as of June 30,
1998. Revenues from processing fines for traffic violations represented 9% of
total revenues for the six months ended June 30, 1999 compared to 39% for the
six months ended June 30, 1998.
Property taxes. Revenues from processing property tax payments increased
$333,000 to $557,000 for the six months ended June 30, 1999 from $224,000 for
the six months ended June 30, 1998, an increase of 149%. For the six months
ended June 30, 1999, we processed approximately 39,400 transactions totaling
$30.2 million, compared to 16,000 transactions totaling $14.8 million for the
six months ended June 30, 1998. This increase is primarily attributable to new
local jurisdictions added subsequent to June 30, 1998. As of June 30, 1999, we
had 112 local government clients for property tax payment services, compared to
32 as of June 30, 1998. Revenues from processing property tax payments
represented 9% of total revenues for the six months ended June 30, 1999
compared to 25% for the six months ended June 30, 1998.
Fines for parking citations. Revenues from processing fines for parking
citations increased $70,000 to $138,000 for the six months ended June 30, 1999
from $68,000 for the six months ended June 30, 1998, an increase of 103%. For
the six months ended June 30, 1999, we processed approximately 44,000
transactions totaling $1.5 million, compared to approximately 20,000
transactions totaling $638,000 for the six months ended June 30, 1998. This
increase is primarily attributable to one local jurisdiction being added in
July of 1998 and an increase in utilization rates. Revenues from processing
fines for parking citations represented 2% of total revenues for the six months
ended June 30, 1999 compared to 8% percent for the six months ended June 30,
1998.
Other transaction fees. Other transaction fees, which include revenues from
fax filing and processing payments to utilities, increased $50,000 to $200,000
for the six months ended June 30, 1999 from $150,000 for the six months ended
June 30, 1998, an increase of 33%.
Other revenues. Other revenues increased $33,000 to $138,000 for the six
months ended June 30, 1999 from $105,000 for the six months ended June 30,
1998, an increase of 31%.
Expenses
Cost of revenues. Cost of revenues increased $4.5 million to $4.8 million
for the six months ended June 30, 1999 from $372,000 for the six months ended
June 30, 1998, an increase of 1201%. The largest component of cost of revenues,
interchange fees, increased by $4.3 to $4.6 million for the six months ended
June 30, 1999 from $278,000 for the six months ended June 30, 1998, an increase
of 1546%. The cost of telephone charges for our toll-free IVR system increased
by $109,000 to $136,000 for the six months ended June 30, 1999 from $27,000 for
the six months ended June 30, 1998, an increase of 403%. Cost of revenues was
79% of total revenues for the six months ended June 30, 1999 compared to 41%
for the six months ended June 30, 1998. The increase is due to the lower gross
margins for federal income tax payment services as compared to other payment
services.
Sales and marketing expenses. Sales and marketing expenses increased
$237,000 to $435,000 for the six months ended June 30, 1999 compared to
$198,000 for the six months ended June 30, 1998. This increase was primarily
attributable to an increase in the number of sales and marketing personnel to
handle additional growth in business and in anticipation of future growth and
an increase in commission payments. Sales and marketing expenses represented 7%
of total revenues for the six months ended June 30, 1999 compared to 22% for
the six months ended June 30, 1998.
Development costs. Development costs increased $38,000 to $320,000 for the
six months ended June 30, 1999 compared to $282,000 for the six months ended
June 30, 1998. This increase was primarily attributable to an increase in the
number of engineering personnel. Development costs represented 5% of total
revenues for the six months ended June 30, 1999 compared to 31% for the six
months ended June 30, 1998.
23
<PAGE>
General and administrative expenses. General and administrative expenses
increased $324,000 to $549,000 for the six months ended June 30, 1999 compared
to $225,000 for the six months ended June 30, 1998. This increase was primarily
attributable to an increase in the number of general and administrative
personnel. General and administrative expenses represented 9% of total revenues
for the six months ended June 30, 1999 compared to 25% for the six months ended
June 30, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total Revenues. Total revenues increased $1.2 million to $2.4 million for
the year ended December 31, 1998, from $1.2 million for the year ended December
31, 1997, an increase of 97%. This increase is primarily attributable to higher
revenues generated from processing a greater number of property tax payments
for existing and new clients.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $381,000 to $827,000 for the year ended December 31, 1998
from $446,000 for the year ended December 31, 1997, an increase of 85%. For the
year ended December 31, 1998, we processed 80,200 transactions totaling $11.4
million, compared to 36,400 transactions totaling $5.6 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates and new local jurisdictions being added throughout 1997 and
1998. As of December 31, 1998, we had 114 local government clients for traffic
violation payment services, compared to 52 as of December 31, 1997. Revenues
from processing fines for traffic violations represented 35% of total revenues
for the year ended December 31, 1998 compared to 37% for the year ended
December 31, 1997.
Property taxes. Revenues from processing property tax payments increased
$587,000 to $765,000 for the year ended December 31, 1998 from $178,000 for the
year ended December 31, 1997, an increase of 330%. For the year ended December
31, 1998, we processed 47,900 transactions totaling $46.2 million, compared to
14,400 transactions totaling $15.9 million for the year ended December 31,
1997. This increase is primarily attributable to higher utilization rates and
new local jurisdictions being added throughout 1997 and 1998. As of December
31, 1998, we had 73 local government clients for property tax payment services,
compared to 10 as of December 31, 1997. Revenues from processing property tax
payments represented 32% of total revenues for the year ended December 31, 1998
compared to 15% for the year ended December 31, 1997.
Fines for parking citations. Revenues from processing fines for parking
citations increased $52,000 to $157,000 for the year ended December 31, 1998
from $105,000 for the year ended December 31, 1997, an increase of 50%. For the
year ended December 31, 1998, we processed 48,800 transactions totaling $1.6
million, compared to 32,000 transactions totaling $1.1 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates at existing government clients in 1998 and one new local
government entity added in July 1998. Revenues from processing fines for
parking citations represented 7% of total revenues for the year ended December
31, 1998 compared to 9% for the year ended December 31, 1997.
Other transaction fees. Other transaction fees increased $121,000 to
$327,000 for the year ended December 31, 1998 from $206,000 for the year ended
December 31, 1997, an increase of 59%. This increase is primarily attributable
to additional utility and fax filing clients added during 1998. These revenues
represented 14% of total revenues for the year ended December 31, 1998 compared
to 17% for the year ended December 31, 1997.
Other revenues. Other revenues increased $27,000 to $293,000 for the year
ended December 31, 1998 from $267,000 for the year ended December 31, 1997, an
increase of 10%.
24
<PAGE>
Expenses
Cost of revenues. Cost of revenues increased $384,000 to $1.1 million for
the year ended December 31, 1998 from $696,000 for the year ended December 31,
1997, an increase of 55%. Interchange fees increased by $554,000 to $825,000
for the year ended December 31, 1998 from $271,000 for the year ended December
31, 1997, an increase of 204%. Cost of telephone charges increased $43,000 to
$99,000 for the year ended December 31, 1998 from $56,000 for the year ended
December 31, 1997, an increase of 77%. These increases were primarily
attributable to the corresponding increase in revenue. Cost of revenues was 46%
of total revenues for the year ended December 31, 1998 compared to 58% for the
year ended December 31, 1997.
Sales and marketing expenses. Sales and marketing expenses increased $26,000
to $356,000 for the year ended December 31, 1998 compared to $330,000 for the
year ended December 31, 1997. Sales and marketing expenses represented 15% of
total revenues for the year ended December 31, 1998 compared to 27% for the
year ended December 31, 1997.
Development costs. Development costs increased $402,000 to $608,000 for the
year ended December 31, 1998 compared to $206,000 for the year ended December
31, 1997. This increase was primarily attributable to an increase in the number
of engineering personnel. Development costs represented 26% of total revenues
for the year ended December 31, 1998 compared to 17% for the year ended
December 31, 1997.
General and administrative expenses. General and administrative expenses
increased $129,000 to $595,000 for the year ended December 31, 1998 compared to
$466,000 for the year ended December 31, 1997. This increase was primarily due
to an increase in audit fees, higher depreciation expenses due to additional
capital expenditures and higher salary expenses from hiring additional support
staff. General and administrative expenses represented 25% of total revenues
for the year ended December 31, 1998 compared to 39% for the year ended
December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total Revenues. Total revenues increased $416,000 to $1.2 million for the
year ended December 31, 1997 from $786,000 for the year ended December 31,
1996, an increase of 53%. This increase is primarily attributable to revenues
generated from processing property tax payments as well as increases in
revenues from processing fines for traffic violations and parking citations.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $181,000 to $446,000 for the year ended December 31, 1997
from $265,000 for the year ended December 31, 1996, an increase of 68%. For the
year ended December 31, 1997, we processed 36,400 transactions totaling $5.6
million, compared to 19,500 transactions totaling $2.9 million for the year
ended December 31, 1996. This increase is primarily attributable to higher
utilization rates and new local jurisdictions being added throughout 1996 and
1997. As of December 31, 1997 we had 52 local government clients, compared to
15 as of December 31, 1996. Revenues from processing fines for traffic
violations represented 37% of total revenues for the year ended December 31,
1997 compared to 34% for the year ended December 31, 1996.
Property taxes. Revenue from processing property tax payments increased
$172,000 to $178,000 for the year ended December 31, 1997 from $6,000 for the
year ended December 31, 1996, an increase of 2867%. For the year ended December
31, 1997, we processed 14,400 transactions totaling $15.9 million, compared to
123 transactions totaling $100,000 for the year ended December 31, 1996.
Revenues from processing property tax payments represented 15% of total
revenues for the year ended December 31, 1997, compared to 1% for the year
ended December 31, 1996.
Fines for parking citations. Revenues from processing fines for parking
citations increased $92,000 to $105,000 for the year ended December 31, 1997
from $13,000 for the year ended December 31, 1996, an increase of 708%. For the
year ended December 31, 1997, we processed 32,000 transactions totaling $1.1
25
<PAGE>
million, compared to 1,250 transactions totaling $232,000 for the year ended
December 31, 1996. This increase is primarily attributable to additional
government clients added during 1997. Revenues from processing fines for
parking citations represented 9% of total revenues for the year ended December
31, 1997 compared to 2% for the year ended December 31, 1996.
Other transaction fees. Other transaction fees increased $139,000 to
$206,000 for the year ended December 31, 1997 from $67,000 for the year ended
December 31, 1996, an increase of 207%. This increase is primarily attributable
to additional utility and fax filing clients added during 1997. These revenues
represented 17% of total revenues for the year ended December 31, 1997 compared
to 9% for the year ended December 31, 1996.
Expenses
Other revenues. Other revenues decreased $168,000 to $267,000 for the year
ended December 31, 1997 from $435,000 for the year ended December 31, 1996, a
decrease of 39%.
Cost of revenues. Cost of revenues increased $391,0000 to $696,000 for the
year ended December 31, 1997 from $305,000 for the year ended December 31,
1996, an increase of 128%. Interchange fees increased by $202,000 to $271,000
for the year ended December 31, 1997 from $69,000 for the year ended December
31, 1996, an increase of 293%. Cost of other revenues increased $200,000 to
$284,000 for the year ended December 31, 1997 from $84,000 for the year ended
December 31, 1996, an increase of 238%. This increase was primarily
attributable to costs associated with system sales that occurred in 1997. Cost
of revenues was 58% of total revenues for the year ended December 31, 1997
compared to 39% for the year ended December 31, 1996.
Sales and marketing expenses. Sales and marketing expenses increased
$108,000 to $330,000 for the year ended December 31, 1997 compared to $222,000
for the year ended December 31, 1996. Sales and marketing expenses represented
27% of total revenues for the year ended December 31, 1997 compared to 28% for
the year ended December 31, 1996.
Development costs. Development costs decreased $32,000 to $206,000 for the
year ended December 31, 1997 compared to $238,000 for the year ended December
31, 1996. The decrease in development costs was primarily attributable to
capitalization of $200,000 in development costs in 1997 as a result of
establishing technological feasibility upon completion of a working model for
our software systems. Development costs represented 17% of total revenues for
the year ended December 31, 1997 compared to 30% for the year ended December
31, 1996.
General and administrative expenses. General and administrative expenses
increased $160,000 to $466,000 for the year ended December 31, 1997 compared to
$306,000 for the year ended December 31, 1996. This increase was primarily due
to an increase in salary expenses from hiring additional personnel. General and
administrative expenses represented 39% of total revenues for the years ended
December 31, 1997 and 1996.
26
<PAGE>
Selected Unaudited Quarterly Results of Operations
The following tables set forth certain unaudited quarterly results of
operations data for the six quarters ended June 30, 1999, as well as the
percentage of our revenues represented by each item. We believe this data has
been prepared on substantially the same basis as the audited financial
statements contained in this prospectus, and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below for the fair presentation of the quarterly results of
operations. The quarterly results of operations data should be read along with
our audited financial statements and the related notes appearing elsewhere in
this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for future periods.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction fees...... $ 287 $ 507 $ 492 $ 790 $ 728 $5,247
Other revenues........ 34 71 43 145 102 36
----- ----- ----- ----- ----- ------
Total revenues...... 321 578 535 935 830 5,283
Cost of revenues:
Cost of transaction
fees................. 108 253 232 416 421 4,397
Cost of other
revenues............. 7 4 2 58 19 2
----- ----- ----- ----- ----- ------
Total cost of
revenues........... 115 257 234 474 440 4,399
----- ----- ----- ----- ----- ------
Gross profit............ 206 321 301 461 390 884
Operating expenses:
Sales and marketing... 102 96 89 69 175 260
Development costs..... 119 163 193 133 140 180
General and
administrative....... 112 113 112 258 199 350
----- ----- ----- ----- ----- ------
Total operating
expenses........... 333 372 394 460 514 790
----- ----- ----- ----- ----- ------
Income (loss) from
operations............. (127) (51) (93) 1 (124) 94
Other income (expense),
net.................... (5) (17) (15) (18) 3 (32)
----- ----- ----- ----- ----- ------
Net income (loss)....... $(132) $ (68) $(108) $ (17) $(121) $ 62
===== ===== ===== ===== ===== ======
Revenues:
Transaction fees...... 89 % 88 % 92 % 84 % 88 % 99 %
Other revenues........ 11 12 8 16 12 1
----- ----- ----- ----- ----- ------
Total revenues...... 100 100 100 100 100 100
Cost of revenues:
Cost of transaction
fees................. 34 44 44 45 51 83
Other revenues........ 2 1 0 6 2 0
----- ----- ----- ----- ----- ------
Total cost of
revenues........... 36 45 44 51 53 83
----- ----- ----- ----- ----- ------
Gross profit............ 64 55 56 49 47 17
Operating expenses:
Sales and marketing... 32 17 17 7 21 5
Development costs..... 37 28 36 14 17 3
General and
administrative....... 35 19 21 28 24 7
----- ----- ----- ----- ----- ------
Total operating
expenses........... 104 64 74 49 62 15
----- ----- ----- ----- ----- ------
Income (loss) from
operations............. (40) (9) (18) 0 (15) 2
Other income (expense),
net.................... (1) (3) (3) (2) 0 (1)
----- ----- ----- ----- ----- ------
Net income (loss)....... (41)% (12)% (21)% (2)% (15)% 1 %
===== ===== ===== ===== ===== ======
</TABLE>
27
<PAGE>
Seasonality and Fluctuation of Quarterly Results
We have experienced quarter-to-quarter revenue growth with some seasonal
fluctuations in the second and fourth quarters of 1998 and the second quarter
of 1999. The quarter-to-quarter revenue growth is due to an increase in the
number of government clients and payment services and an increase in
utilization rates. The fluctuations in the second and fourth quarter of 1998
relate primarily to an increase in convenience fees from processing California
property tax payments, which are collected twice a year -- in April and
December. The sharp increase in revenues in the second quarter of 1999 is due
to processing personal federal income tax payments in April 1999. We expect
that results for the second quarter of future years will continue to be
impacted by the April 15 deadline for paying personal federal and state income
taxes.
Cost of revenues as a percentage of total revenues was significantly higher
in the second quarter of 1999 than in previous quarters as a result of
processing federal income tax payments, which have significantly lower margins
than other payment services. This is due to the fact that our convenience fee
is generally lower as a percentage of large government payments, such as income
taxes, while our primary cost of sales (merchant discount fees) are relatively
constant as a percentage of the government payment amount.
We anticipate that our operating expenses will continue to increase
significantly due to the anticipated expansion of our sales force in order to
obtain additional state and municipal clients, the marketing campaign to make
consumer users aware of our electronic payment option, and development and
implementation costs associated with our Internet service. If revenues in any
quarter do not increase correspondingly with increases in expenses, our results
for that quarter would be materially and adversely affected.
For the foregoing reasons, we believe that comparisons of our quarterly
operating results are not necessarily meaningful and that our operating results
in any particular quarter should not be relied upon as necessarily indicative
of future performance. In addition, it is possible that in some future quarters
our operating results will be below the expectations of research analysts and
investors, and in that case, the price of our common stock is likely to
decline.
Liquidity and Capital Resources
Historically, we have experienced operating losses during most periods. We
expect to continue to incur losses from operations for the foreseeable future.
Our working capital deficit was $60,000 at December 31, 1996. We had a working
capital deficit of $221,000 at December 31, 1997. In December 1998, there was a
capital contribution of $600,000 and our working capital was $392,000 at
December 31, 1998. At June 30, 1999, our working capital was $55,000.
Net cash used in operating activities was $509,000 for the six months ended
June 30, 1999. For the six months ended June 30, 1998, our operating activities
generated cash of $111,000. For the year ended December 31, 1998, 1997 and
1996, net cash used in operating activities were $245,000, $323,000 and
$425,000, respectively.
The cash used in operating activities for the six months ended June 30, 1999
was primarily due to an increase in accounts receivable and a decrease in
accounts payable. For the six months ended June 30, 1998, the cash provided by
operating activities was primarily attributable to a decrease in accounts
receivable. Cash used for operating activities for the years ended December 31,
1998, 1997 and 1996 were primarily the result of our net loss and an increase
in accounts receivable.
Net cash used in investing activities was $252,000 and $58,000 for the six
months ended June 30, 1999 and 1998 and $298,000 and $139,000 for the years
ended December 31, 1998 and 1997. This cash was used primarily for the purchase
of computer equipment and software.
28
<PAGE>
Net cash provided by financing activities was $379,000 and $205,000 for the
six months ended June 30, 1999 and 1998 and $992,000, $423,000 and $581,000 for
the years ended December 31, 1998, 1997 and 1996. The cash generated in the six
months ended June 30, 1999 resulted from an advance we received from Imperial
Bank. The net cash generated in the six months ended June 30, 1998 was
primarily due to a loan we received from Beranson Holdings, Inc. The cash
generated in 1998, 1997 and 1996 was due to capital contributions by our
stockholders. As of June 30, 1999, we have the ability to borrow an additional
$1 million from our stockholders.
We believe that, based on our current business plan, the net proceeds from
this offering and existing cash equivalents will be sufficient to meet our
operating activities, capital expenditures and other obligations for at least
the next two years.
Year 2000 Readiness
Many currently installed computer systems and software products were coded
to accept and recognize only two-digit rather than four-digit entries to define
the applicable year. These systems may recognize a date using "00" as the year
1900 rather than the year 2000. As a result, computer systems and/or software
used by many companies, including our government clients and financial
institutions upon which we rely to perform our services, may need to be
upgraded to comply with year 2000 requirements. Those companies that do not
upgrade risk system failure and/or miscalculations that can cause disruptions
of normal business activities.
State of Readiness. We have completed our assessment of our service and
information technology systems. We believe that all of our mission critical
systems and a majority of our non-mission critical systems are year 2000
compliant. We have also completed our initial survey of the information systems
of our principal system vendors and service providers. Based on the oral
representations of these vendors and service providers, we believe that the
information technology systems of these third parties, as they relate to us, do
not pose significant operational issues. We have replaced those principal
vendors that have been unable to certify to us that their products are year
2000 compliant. Our assessment is on-going and will continue with respect to
all principal vendors and service providers with which we do business. In
addition, we do not believe that our embedded systems pose year 2000 concerns
because we believe that we have identified all of our software and hardware
that require year 2000 updates or modifications.
Costs. We currently anticipate that our total expenses for year 2000
compliance will be less than $100,000. As of June 30, 1999, we have spent
approximately $60,000 in personnel and other costs related to our year 2000
risk assessment and remediation efforts.
Risks. All of our installed systems have customized programming code, many
with date specific routines required by our government clients. If the host
system/database supporting the customized system changes due to year 2000
upgrades, we may incur a failure to our operating system. Based upon tests
conducted by our government clients, we believe these problems can be promptly
remedied. However, we cannot guarantee that the test cases represent all of the
possible year 2000 problems and that longer remedial periods will not be
required.
If a system failure occurs unrelated to coding, we believe we would be able
to rebuild the failed system in a timely manner. Should such a system failure
occur, we may need to rely on a large client to provide appropriate client
representation for customer relations and technology support services to assist
in fixing the problem. We cannot guarantee that our government clients will
provide this assistance or that we would be able to rebuild our system in the
anticipated time frame.
Contingency Plans. We have developed a contingency plan based on the use of
backup computer systems in the event a year 2000 problem occurs. We house both
our IVR and Internet processing systems in dual locations to provide complete
system redundancy. These facilities contain emergency power generators and
backup computer systems, which would be used in the event of failure due to a
year 2000 problem. Because each system has interchangeable power supplies and
hard drives, if we experience system failure, the redundant system is expected
to immediately assume the functions of the failed system without interruption
of service.
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Our contingency plan is periodically reviewed for adequacy with respect to
our client base as well as to determine whether any new products or services we
offer are consistent with our plan. Due to incremental increases in the use of
our services, we cannot guarantee that at any given time our contingency plan
adequately provides for the latest increase in use. Although our contingency
plan has been tested against various year 2000 problem scenarios, we cannot be
certain that we have provided for all contingencies, or that in the event of an
actual year 2000 problem, our backup system will operate as planned.
New Accounting Pronouncement
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We must adopt SFAS No. 133 by July 1, 2001.
Our management does not believe the adoption of SFAS No. 133 will have a
material effect on our financial position.
In March 1998, the American Institute of Certified Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use, or SOP 98-1. SOP 98-1 provides guidance
on accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specified costs and amortization of
such costs. We adopted SOP 98-1 in January 1999. The adoption did not have a
material effect on our financial position or results of operations.
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BUSINESS
Company Overview
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our IVR toll-free telephone number, 1-888-2PAY-TAXSM, allows consumers to make
payments and receive certain customer service information. Our 8882paytax.com
Web site allows consumers to make certain payments, and we are working with our
existing government clients, including the IRS, to enable consumers to make
additional tax and other payments through the Internet. We are also enhancing
our Web site so that consumers will be able to print receipts, save their
personal data to facilitate future payments, obtain information regarding our
services and access additional tax and other information.
Our government clients include the IRS, the States of California and New
Jersey, the District of Columbia and over 400 municipalities. Our pilot program
for personal federal income taxes processed over 45,000 tax filings totaling
more than $174 million in payments to the IRS from January 15, 1999 to April
15, 1999. Based on IRS data, we had a 95% market share (based on dollar volume)
for credit card payments of personal federal income taxes in the first six
months of 1999. We also processed over 187,000 payments for our state and
municipal clients totaling $55 million in the first six months of 1999.
We combine expertise in facilitating credit card transactions, an Internet
focus and targeted marketing techniques to attract both government clients and
consumers to our services. Our services allow our government clients to provide
their constituents with user-friendly electronic payment options at no charge
to the government entity. Consumers who use our payment services pay us a
convenience fee that is added to their payment. We believe that consumers use
our services for the convenience, the payment flexibility and the perquisites
associated with paying by credit card.
Industry Background
Growth of Electronic Commerce and the Internet
Increased use of credit cards, automated teller machines, electronic fund
transfers and direct payroll deposits have automated, simplified and reduced
the costs of financial transactions for financial institutions and businesses
and their customers. Electronic commerce offers the potential to complete
financial transactions more quickly, with greater accuracy and at a lower cost
than traditional paper-based methods, and provides consumer users with added
convenience. Consumers now routinely perform financial transactions by
telephone, using an IVR system, and through the Internet.
The Internet has experienced rapid growth and has become an important tool
for global communications and commerce. International Data Corporation
estimates that there were 97 million Web users worldwide at the end of 1998 and
projects this number will increase to approximately 320 million by the end of
2002. Internet-based financial services, such as electronic brokerage and
banking, represent a significant portion of the electronic commerce market. The
attractiveness of Internet-based financial services stems in large part from
the speed and ease of conducting financial transactions over the Internet, as
well as the ability of the Internet user to access additional information. The
number of U.S. households using online banking is projected to grow from 7
million at the end of 1998 to more than 24 million by 2004, according to
Dataquest, Inc., a unit of Gartner Group, Inc. Dataquest, Inc. estimates that
approximately 57%, or about 13.7 million, of these households will be paying
their bills online by 2004.
Online communities on the Internet provide businesses an attractive means of
promoting and selling their products and services. As we facilitate Web-based
payments to government entities, we believe there are opportunities to offer
and cross-sell contextually compatible services with our payment services.
International
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Data Corporation estimates that commerce over the Internet will increase from
approximately $32 billion worldwide in 1998 to approximately $133 billion in
2000 and to $1 trillion by 2003. Online communities that allow businesses to
identify and reach specific audiences within a personalized context provide the
opportunity to increase advertising efficiency and improve the likelihood of
success for these businesses' advertising campaigns.
The Market for Payments to Government Entities
In addition to payments made automatically on behalf of consumers, such as
payroll withholding taxes, individuals and small businesses make a variety of
payments to government entities at the federal, state and local levels. These
payments have traditionally been made by mailing checks, obtaining money orders
or making payments in person.
. Federal Level. The IRS estimates that for the 1999 tax year, there will
be 128 million personal federal income tax filers making payments
totaling approximately $920 billion, a portion of which is remitted
through payroll withholding. Of these income tax filers, the IRS
estimates that there are approximately 21 million individuals who will
make full balance-due tax payments when filing their tax return and 8
million individuals who pay taxes when filing for extensions. Further,
there are expected to be an additional 41 million estimated tax payment
transactions made by individuals for the 1999 tax year. Based on IRS
data, we believe that payments for balance-due filers for the 1999 tax
year will be approximately $45 billion. For extension filers this amount
is approximately $206 billion and for estimated filers it is
approximately $162 billion. Accordingly, total payments for the 1999 tax
year are estimated to be approximately $414 billion.
. State Level. Based on U.S. Census data, personal state income tax
payments were approximately $160 billion for the 1998 tax year. Based on
our experience with respect to personal federal income tax payments, we
believe that approximately 45%, or $73 billion, of this total
constitutes balance-due, estimated and extension tax payments. Based on
U.S. Census data, state sales and use taxes paid by businesses totaled
approximately $155 billion for 1998, a portion of which is paid by small
businesses using checks or money orders. Fees collected by states for
motor vehicle licenses and registrations are estimated to have been
approximately $14 billion in 1998. Other state payments that could
potentially be made electronically include corporate fees and taxes,
professional license fees, employment withholding taxes and state
disability insurance payments made by individuals and businesses.
. Local Level. Based on U.S. Census data, local property taxes were
approximately $209 billion in 1996. Based on our experience in the
states where we accept credit card payments for such taxes, we estimate
approximately 50% of that amount is not already included with mortgage
payments. There are a substantial number of other payments to local
government entities that could be paid electronically. For example, we
estimate fines for traffic violations and parking citations to be in
excess of $5 billion annually.
Outsourcing Opportunity
Providing electronic payment options is an attractive goal for government
entities. Part of the IRS's stated strategy is to make electronic filing,
payment and communication so simple, inexpensive and trusted that taxpayers
will prefer these methods. Further, the IRS has stated that its goal is to
substantially increase taxpayer access to electronic filing, payment, and
communication products and services, and have 80% of all taxpayers file their
returns electronically by the year 2007. Electronic payments provide
significant benefits for government entities, including improved service, cost
savings, reduced paperwork and faster transaction processing.
Government entities may prefer to outsource electronic payment options
rather than provide such options themselves because they lack the expertise,
technical personnel and economies of scale necessary to implement and maintain
the required software and hardware systems. In addition, legislation prohibits
certain government entities from paying credit card payment processing fees
associated with accepting credit cards.
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In selecting a provider of outsourced credit card payment services, we
believe government entities consider the following:
. a provider's ability to offer these services at no cost to the
government entity;
. referrals from other government entities currently using a provider's
services;
. proven technology systems and implementation know-how;
. consumer usage of the provider's services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. a provider's relationships with financial institutions and credit card
companies; and
. flexibility in adapting to unique government procedures.
Our Solution
We are the leading provider of electronic payment options to government
entities enabling consumers to use their credit cards to pay, by telephone or
through the Internet, personal federal and state income taxes, sales and use
taxes, property taxes and fines for traffic violations and parking citations.
Our IVR toll-free number, 1-888-2PAY-TAX SM, allows consumers to make payments
and receive certain customer service information. Our 8882paytax.com Web site
allows consumers to make certain payments, and we are working with our existing
government clients, including the IRS, to allow consumers to make additional
payments, print receipts, save their personal data to facilitate future
payments, obtain information regarding our services and access additional tax
and other information.
Our pilot program for personal federal income taxes processed over 45,000
tax filings totaling more than $174 million in payments to the IRS from January
15, 1999 to April 15, 1999. Based on IRS data, we captured a 95% market share
(based on dollar volume) for credit card payments of personal federal income
taxes during the first six months of 1999. We also processed over 187,000
payments totaling $55 million during the first half of 1999 for our state and
municipal government clients.
Benefits to Consumer Users
. Convenience. Consumers can utilize our IVR telephone or Internet system
to make payments to government entities by credit card, eliminating the
need to mail checks, obtain money orders or make payments in person. As
we integrate the federal and our state clients' income tax payment
processes, consumers in those states will be able to pay their personal
federal and state income taxes in a single session. For some fines for
traffic violations and parking citations, consumers can also obtain
information about outstanding balances.
. Flexibility. By paying with credit cards, consumers gain the flexibility
to pay their credit card balances over time rather than when a
government obligation is due. This is an especially attractive option
for consumers who do not have sufficient funds when the government
payment is due.
. Perquisites. Consumers can take advantage of frequent flyer programs,
cash back arrangements or other benefits offered by credit card issuers.
Payments for government obligations can be substantial, allowing
consumer users to earn significant rewards.
Benefits to Government Clients
. Electronic Payment Option. Our services allow our government clients to
provide consumers with an electronic payment option, furthering their
goal of improving customer service, reducing paperwork and encouraging
the electronic filing of tax forms.
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. No Cost. We provide our electronic payment options to our government
clients at no charge.
. Electronic Posting. Credit card payments allow information to be posted
electronically to our government clients' existing systems, with real-
time authorizations and posting, including fraud checking, credit
availability and address verification.
. Ease of Implementation. Our services are designed to work with the
information system in place at our government clients and to require
minimal adaptation. For example, government entities do not have to be
Web-enabled to offer our Internet payment solutions to their
constituents.
Proven Track Record
We have successfully provided a secure credit card payment option to the
IRS, the states of California and New Jersey and the District of Columbia, as
well as over 400 municipalities. In the six months ended June 30, 1999, we
processed approximately $230 million in credit card payments to our government
clients.
Recognized and Trusted Brand Name
Most of our government clients list our IVR telephone number, 1-888-2PAY-
TAX SM, as a payment option on their billing statements, tax publications and
citations. The IRS has informed us that it plans to include our 1-888-2PAY-
TAX SM number on instruction booklets for Form 1040 for the 1999 tax year and
on the IRS Web site. We believe that by featuring us on their billing
statements and instruction booklets, government entities increase consumer
awareness of and confidence in our services. We intend to further increase our
brand awareness through advertising targeted towards consumer users. We believe
that once a consumer successfully uses our services to make a payment, the
consumer is more likely to use our service for future payments. According to a
study conducted for us by MSI International, a market research firm, among
consumers who had used our services, 89% of respondents stated that they plan
to use our services again.
Existing Relationships with Credit Card Issuers and Associations
We believe our existing relationships with the major credit card issuers and
associations will enable us to continue to provide electronic payment options
for a broadening array of payments to government entities. We currently process
payments using American Express(R), Visa(R), MasterCard(R) and the Discover(R)
card. Imperial Bank, our majority stockholder, is a long-standing member of the
Visa(R) and MasterCard(R) associations and processes transactions utilizing
those credit cards for us. We are a merchant agent for American Express(R),
eliminating the need for government entities to separately enter into contracts
with American Express.
Our Strategy
Our goal is to continue to be the leading provider of, and further develop
the market for, electronic payment services using credit cards to pay
government obligations. The following are key elements of our strategy.
Expand and Enhance Services for Personal Federal Income Tax Payments
In January 1999, we signed a credit card payment contract with the IRS to
provide our services for the balance-due payment of personal federal income
taxes. This has significantly increased our profile and greatly expanded
awareness of our 1-888-2PAY-TAX SM brand. The IRS has informed us that it plans
to add our 1-888-2PAY-TAX SM number on instruction booklets for Form 1040 for
the 1999 tax year and on the IRS Web site which, we believe, will further
expand consumers' awareness of our products and services. For the 1998 tax
year, we processed only balance-due income tax payments. By early 2000, we
expect to also process estimated and extension tax payments. We have a working
relationship with the IRS's Electronic Tax Administration division (ETA). In
1998, the ETA published A Strategy For Growth, a document detailing its
strategies through the year 2007, which features us as one of the ETA's
industry partners and describes our electronic payment options. Further, we are
working with the ETA to develop a series of additional products that are
consistent with their stated strategic objectives. The majority of these
products focus on electronic filing and payment integration of personal federal
and state income taxes.
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Leverage Our IRS Relationship to Obtain Additional State Government Clients
We are leveraging our IRS relationship to provide our services to additional
state government entities. Our efforts have been bolstered by the
recommendation of IRS officials of our services to state tax authorities. In
addition, IRS officials have encouraged states to use our existing IRS
agreement to expedite the contract approval process. We currently provide our
electronic payment conduit for income tax payments to the States of California
and New Jersey and the District of Columbia, which together accounted for 21%
of the personal state income tax market in the 1998 tax year. We are focusing
on establishing relationships with other states, the 9 largest of which
represented another 43% of the personal state income tax market in the 1998 tax
year. We are hiring new regional sales managers and sales account executives to
extend our coverage of state governments. A key element of our strategy for
obtaining personal state income tax accounts is the integration of the personal
federal and state income tax payment processes. According to a research study
conducted for us by MSI International among consumers who had used our personal
federal income tax payment services, 75% indicated that they would use our
services to make personal state income tax payments. Our integrated solution
allows consumers to pay their personal federal and state income taxes in a
single session, which should enhance consumer convenience and usage.
Competitors who do not currently provide services to the IRS will be unable to
offer this integrated service. Once we are providing personal income tax
payment services to a particular state, we will look for opportunities to
provide additional services covering sales and use tax payments, fees collected
by departments of motor vehicles and other payments for that state. For
example, we are currently providing services that allow small businesses in
California to remit their sales and use tax payments by credit card.
Leverage Our IRS and State Government Client Relationships to Obtain
Additional Municipal Clients
We currently provide services to over 400 municipal clients. We believe our
relationships with the IRS and state government entities provide an advantage
in helping us establish relationships with additional municipal clients. To
further our strategic marketing position, we are creating a geo-demographic
database of consumers who have already used our services. This database will be
used in the selling process to municipalities to show an existing base of
potential consumers in those municipalities. We are targeting municipal clients
through direct sales, telemarketing and targeted newsletters and other
mailings.
Internet Services Roll-out
In August 1999, we began providing our payment services through the
Internet. We intend to offer our Internet payment services to all of our
existing government clients within the next 6 to 12 months. In addition, all
new government clients will have the option to sign up for both our Internet
and IVR payment services.
Introduce New Services and Service Enhancements
In August 1999, we began processing credit card payments of sales and use
taxes for the State of California. By early 2000, we expect to begin processing
credit card payments of estimated and extension personal federal and state
income taxes. We seek to remain at the forefront of our industry by continuing
to develop additional and complementary services. We are exploring
opportunities to process other payments, such as motor vehicle registration
fees, state corporate fees and taxes, professional license fees, employment
withholding taxes and state disability insurance. We are also exploring
opportunities to provide direct debiting and other electronic fund transfer
features to consumers in the future.
Cross-Sell Related Services to Targeted Audiences
Individuals and small businesses who utilize our payment services can be
grouped into user communities distinguished by specific demographics and
psychographics. Because these customers are active online consumers, they
represent a valuable opportunity to expand our business by cross-selling other
related services.
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For example, we may be able to facilitate the sale of consulting or other
related services to small businesses that use our services to pay sales taxes,
or the sale of automobile insurance or online driving school services to
consumers paying fines for moving violations.
Increase Brand Awareness and Consumer Use
We have relied on our government clients and credit card issuers, and will
continue to work with them, to publicize our services through government
publications and credit card billing inserts. In order to increase the number
of transactions we process, we intend to increase consumer awareness of our
credit card payment services through an advertising campaign. We expect to
increase our advertising spending with the proceeds of this offering. The
advertising campaign will focus on promoting our services for personal federal
and state income tax payments in March and early April. In addition, we plan to
advertise throughout the year at the local level to promote our payment
services for property taxes and fines for traffic violations and parking
citations.
Our marketing is also focused on promoting additional payment opportunities
to our existing consumers. We believe that once a consumer uses our system, he
or she is more likely to use our services to make other types of payments to
government entities. Our Web site will promote different types of payments that
can be made using our services. In addition, our Web site will invite consumer
users to save their personal data on our secured site to facilitate future
payments. We will use this data to identify and promote additional payment and
cross-selling opportunities.
Pursue Strategic Relationships and Acquisitions
We intend to pursue strategic relationships with electronic income tax
filing providers to offer our payment services to their customers, which would
allow their customers to file returns and pay taxes electronically. We also
plan to investigate and pursue relationships with Internet portals and other
Internet financial service providers in order to reach additional Internet
users. In addition, we may pursue opportunistic acquisitions that will enhance
our product offering and technical capabilities, including companies that
provide government client or consumer user products or services closely related
to ours.
Government Clients
As of September 1, 1999, we provide services to the IRS, the States of
California and New Jersey, the District of Columbia and over 400 municipal
government clients. The table below lists, as of September 1, 1999, our
existing government clients and the types of payments we process for those
clients.
<TABLE>
<CAPTION>
Government Clients Payment Type
<C> <S>
IRS Balance-due personal federal income taxes
California Balance-due personal state income taxes
Sales and use taxes
New Jersey Balance-due and estimated personal state income
taxes
District of Columbia Balance-due personal state income taxes
137 municipalities Property taxes
157 municipalities Fines for traffic violations
115 municipalities Fines for parking citations
81 municipalities Other services
</TABLE>
Our Services
Our Telephone and Internet Conduits
Our consumers can choose to make certain payments by telephone, using our 1-
888-2PAY-TAX SM number, or over our 8882paytax.com Web site. We currently
provide a telephone conduit for payments to all of our government clients.
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We work with our government clients to develop the script for our fully
automated telephone conduits, which gather the necessary information in an
efficient, user-friendly manner. We continually update our IVR systems to
increase the ease of use of our services.
Our 8882paytax.com Web site allows consumers to make certain payments, and
we are working with our existing government clients, including the IRS, to
enable consumers to make additional payments. We are also enhancing our Web
site so that consumers will be able to obtain information regarding our
services, access additional information, print receipts and save their personal
data to facilitate future payments. With the growing acceptance of the Internet
and its use for effecting financial transactions traditionally conducted by
mail, telephone or in person, we believe many users will prefer to make
payments to our government clients through the Internet.
Credit Card Payment Services
For each payment type listed below, the following table sets forth the
payments we currently process and those we plan to begin processing within the
next 6 to 12 months.
<TABLE>
<CAPTION>
Payment Type Current Services Planned Services
<S> <C> <C>
Personal federal income
taxes................... Balance-due payments Estimated taxes
Extension payments
Integrated payment of
personal
federal and state
income taxes
Personal state income
taxes................... Balance-due payments Extension payments
Estimated tax payments Integrated payment of
personal
federal and state
income taxes
Other state payments..... Sales and use taxes Business and professional
license fees
Property taxes........... Real estate and personal property
taxes and school district taxes
Fines for traffic
violations.............. Fines for speeding and other
traffic rule violations
Fines for parking
citations............... Fines for parking rule violations
Utilities/miscellaneous.. Water, electricity and gas bills
Other payments........... Corporate taxes and fees
Motor vehicle registration
fees
Public university tuition
and other fees
Building permit fees
</TABLE>
Customized Systems
In addition to our electronic payment services, we design, install and
implement individual systems for municipal government clients. These systems
incorporate our electronic payment conduits and also provide connections
between databases to transfer information simultaneously. These products
include:
Property Tax System.... Provides information about real estate taxes,
including secured and unsecured taxes,
supplemental taxes, asset valuation and
exemptions, tax rates, special assessments and
redemptions.
Citation Processing
System................. Provides information about traffic violations,
including bail, due dates, traffic school, proof
of corrections, warrants and drivers license
holds.
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Parking System......... Provides information about parking citations,
including fines, tow-aways, restricted zones and
other infractions.
Automated Fax Filing... Allows attorneys and paralegals to fax documents
to courts and pay filing fees by credit card.
We also build and sell custom applications, such as a polling place locator
application, county social service inquiry system and additional government-
related applications. These systems are generally sold to the government entity
for a flat fee that covers our costs and provides significant margin.
Fee Structure
We charge consumer users a convenience fee to use our credit card services
for payments to government entities. For large payments, such as personal
federal and state income tax payments, we charge a convenience fee based on the
amount of the payment, which in the first six months of 1999 averaged
approximately 2.5% of the payment amount. For smaller payments, such as fines
for traffic violations and parking citations, we charge a fixed convenience fee
which in the first six months of 1999 averaged 8% of the amount due. The same
convenience fee is charged for payments made by telephone or through the
Internet. We currently accept American Express/(R)/, Visa/(R)/, MasterCard/(R)/
and the Discover/(R)/ card for most local payments. We currently accept American
Express/(R)/, MasterCard/(R)/ and the Discover/(R)/ card for federal and state
payments.
Sales and Marketing
Focus on Signing Additional Government Clients
We are leveraging our IRS relationship and our ability to offer the
integration of personal federal and state income tax payments to attract new
state government clients. Similarly, we will use our relationship with state
governments to obtain new municipal clients. We intend to make significant
additions to our sales and marketing staff and customer service infrastructure.
Specific account executives are dedicated to the IRS and each state government
client. We are targeting municipal clients through direct sales, telemarketing
and targeted newsletters and other mailings. In addition, we publish a
quarterly newsletter that announces our new services and government clients,
which is distributed to our existing and potential government clients. We will
continue to make presentations and operate booths at IRS tax conferences and
other government entity gatherings.
Focus on Increasing Utilization and Awareness
To date, our services have been publicized primarily by our government
clients and credit card issuers. Government publications and instruction
booklets have been used to present the payment option to potential consumer
users. For example, the IRS and state tax agencies have included our 1-888-2PAY-
TAX/SM/ phone number in selected tax publications distributed to individuals and
tax preparation professionals, and, in the first half of April 1999, the IRS
dedicated half of the home page on its Web site to promote the ability to pay
taxes by credit card using our services. The IRS has informed us that it plans
to include our 1-888-2PAY-TAX/SM/ number on instruction booklets for Form 1040
for the 1999 tax year. A significant number of municipalities have provided our
phone number as a payment alternative for fines for traffic violations and
parking citations. In addition, major credit card issuers have also promoted our
services because the government market represents an under-tapped market for
credit card utilization. Our systems have been promoted through mailing inserts
to all American Express/(R)/ and Discover/(R)/ cardholders, and a significant
number of MasterCard/(R)/ holders.
We intend to launch an advertising campaign targeted at consumer users to
broaden awareness of our electronic payment options. We will focus our campaign
on promoting use of our personal federal and state income tax payment services
during March and early April. In addition to increasing awareness for new
consumer users, we will also focus on promoting additional payment
opportunities to existing consumer users who have already used our services. We
believe these existing consumer users are more likely to use our services to
make other payments, and we will use our Web site to bring those services to
the attention of our customers.
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Leverage Existing Relationships
We have relationships with Bank of America, American National Bank
(Illinois), Union Bank of California, Sun Trust and Novus Services implement
systems for their government clients. For example, Novus Services was awarded
the contract to provide personal income tax payment services for the State of
California and subcontracted the implementation of the system to us. Our
product implementation model and revenues as a subcontractor are identical to a
directly contracted account. We will look for strategic opportunities to
provide services to government entities in conjunction with these and other
partners.
Our Operations and Technology
We provide complete electronic credit card payment services to government
entities. Our electronic payment conduits can perform all of the following
functions for our government clients:
. Capture unique identifiers for each transaction, such as citation
number, social security number, the consumer's identity and related
payment information.
. Perform real-time authorizations and postings, including fraud checking,
credit availability and address verification.
. Electronically create daily transaction files from all remote and local
systems.
. Compare the daily transaction files to credit card authorization
processor files ("mirror balancing system"). This validation process
assures credible data and reliable funds flow to government clients.
. Create a daily payment transaction activity report that is automatically
e-mailed or sent by facsimile to government clients.
. Create upload files from the mirror balancing system that are sent
electronically to government clients. These files are used by clients to
post payments to their internal systems.
[Graphic displaying transaction process for the payment of property tax]
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Our technological solutions and operations are focused on producing four
integrated results for our government clients and consumers: reliability,
security, audit capability and customer service/operational support. We
designed our technology and resulting operations around these core concepts.
Reliability
Our foremost service goal is reliability, which we seek to accomplish
through redundant hardware that provides disaster recovery and allows us to
implement seamless real-time backup and 100% system availability. Our Internet
payment servers are housed at Digex, Inc. facilities in Cupertino, California,
and in Beltsville, Maryland. The Cupertino site is our primary processing
location, containing a 72-hour capacity diesel generator. The Beltsville site
is expected to be able to instantly assume processing and provide 100% system
availability in the event the primary site is rendered inoperative.
Additionally, should we experience overloads due to unexpected volume
increases, our backup servers are designed to come into service without
interruption.
Our IVR systems have the same dual facility scheme as our Internet systems.
Our primary IVR authorization and processing facility is located in San Ramon,
California, where our computers have interchangeable power supplies and hard
drives so that if a system fails, the redundant systems should assume the
workload. We also maintain a backup facility in San Francisco, California, used
for disaster recovery and transaction overflows.
Transaction Security
We place a high priority on transaction security and fraud prevention. Our
goal is to maintain the confidentiality of all consumer credit card and related
information. For our Internet conduit delivery vehicle, we employ secured
socket layers for user security from the consumer's browser to our
8882paytax.com Web site. Taxpayer identity validations for credit card payments
are transmitted in an encrypted manner and are performed in accordance with
existing industry procedures.
We have several system functions that are designed to combat fraud. For
example, credit card authorizations are performed on-line and in real time. Our
system captures the cardholder's credit card account number, card expiration
date and billing statement mailing address and zip code, and requires the
cardholder to enter a three or four digit card verification code or card
verification value if it is present on the back of the card. Credit card
information is transmitted exclusively to the credit card processor. No one
outside of our system and the credit card processor's system receives the
information, including the IRS and other government clients.
Audit Capability
Our internally-developed mirror balancing system and reporting systems
provide us and our government clients with electronic audit capability. These
applications enable us to account for all transactions, to assure that data
transmissions to government clients are complete and reporting and update files
are accurate.
Customer Service
We provide automated customer service systems, such as the transaction
verification system, which allows consumers to confirm their transaction
posting. In addition, we employ customer service representatives who are
available to assist consumers with individual needs. We also provide a
"Frequently Asked Questions" feature on our Web site to answer common questions
that consumer users have. We intend to increase the number of customer service
representatives so that calls from consumers to our government clients or to
our credit card issuer partners relating to our services can be routed to us.
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Competition
Alternative Payment Options
In addition to using our credit card payment services, consumer users have
the following payment options when making payments to government entities:
. Checks, money orders or cash. Payment by mailing checks, obtaining money
orders and paying in person are the traditional and currently the most
widely used methods for making payments to government entities.
. Credit card checks. Many of the issuing banks for Visa(R) and
MasterCard(R) distribute cash advance checks to their cardholders. In
March and early April, issuing banks generally promote the use of these
checks to pay taxes. Because these checks are treated as a cash advance,
they are generally a more expensive solution than our services. The
typical terms for a cash advance include a fee, and the advance starts
to accrue interest immediately at the issuing bank's applicable rate. In
addition, many issuing banks apply the consumer's payments to other less
expensive balances first. Moreover, cash advances typically do not
qualify for frequent flyer mileage programs or any other perquisites. In
contrast, payments made through our systems require a convenience fee,
but are treated as purchases subject to generally lower interest rates,
may not immediately accrue interest, and may qualify for various award
programs.
. Direct debit. Consumer users can arrange through their bank or otherwise
to have payments to government entities directly debited from their
checking or savings account. If arranged through the bank in which a
consumer user's checking or savings account is maintained, this service
is often provided free of charge.
Competing Providers of Credit Card Services for Payments to Government
Entities
In selecting a provider of outsourced electronic payment services, we
believe government entities consider the following:
. our ability to offer these services at no cost to the government entity;
. existing relationships and referrals from other government entities
currently using our services;
. our proven technology systems and implementation know-how;
. consumer usage of our services;
. the greatest possible consumer reach through both Internet and telephone
conduits;
. our relationships with financial institutions and credit card companies;
. our flexibility in adapting to unique government procedures;
. quality and convenience of our service;
. marketing and brand name recognition; and
. price of our services to consumers.
A limited number of competitors are currently involved in the market for
credit card payments to government entities. We believe we have a substantially
larger government client base, and have greater name recognition than our
primary competitors. There are, however, a number of larger credit card payment
and electronic commerce companies with similar technological capabilities, some
of which have greater resources than we do. We believe that the peculiarities
of the government market create barriers to entry and expansion that favor the
market leader. Our current competitors include the following:
. For personal federal income tax payments by credit card, we currently
have 100% market share for American Express(R) and MasterCard(R)
payments. The only current competitor is a joint development
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effort by Intuit (TurboTax/(R)/) and Discover/(R)/ card, for which
Discover/(R)/ card (which had approximately 5% of the overall credit card
market, based on total payment volume in 1998) is the only credit card
accepted.
. Bank of America is the processing bank for a number of government
entities, which allows them to add processing services such as ours
without submitting to the standard request for proposal process. Bank of
America works with technology providers such as us to implement payment
systems. Bank of America also partners with Electronic Data
Systems/Phone Charge and Lockheed-IMS.
. National Information Consortium, Inc. provides Internet services for
government entities, and has indicated it intends to provide services to
government entities with respect to the payment of sales and use taxes.
Intellectual Property
We have registered the service marks 8882paytax.com/SM/, 1-888-2PAY-TAX/SM/
and US Audiotex/SM/. We protect our intellectual property rights through a
combination of trademark, service mark, copyright and trade secrets laws. We
cannot assure you that the steps we have taken to protect our intellectual
property rights, however, will be adequate to deter misappropriation of those
rights. We may not be able to detect unauthorized use of and take appropriate
steps to enforce our intellectual property rights. It may also be possible for
unauthorized third parties to copy certain portions of our proprietary
information or reverse engineer the proprietary information used in our
services.
In order to limit access to and disclosure of our proprietary information,
all of our employees are subject to confidentiality and invention assignment
arrangements, and we enter into nondisclosure agreements with third parties
that are material to our business.
Furthermore, we cannot assure you that third parties will not claim that we
have infringed upon their patents or other proprietary rights. We have been,
and from time to time we expect to be, subject to claims by third parties in
the ordinary course of business, including claims of alleged infringement of
service marks, trademarks, copyrights, patents and other intellectual property
rights of third parties. Although there has not been any litigation relating
to such claims to date, these claims and any resultant litigation would
subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, the
litigation could be time-consuming and expensive to defend and could result in
a diversion of our time and attention from our business, any of which could
materially and adversely affect our business, operating results and financial
condition. Any claims or litigation from third parties may also result in
limitations on our ability to use the service marks, trademarks and other
intellectual property subject to these claims or litigation, unless we enter
into agreements with the third parties. However, these agreements may be
unavailable on commercially reasonable terms, or not available at all.
We also intend to continue to license technology from third parties,
including our Web server and encryption technology. We cannot be certain that
these third-party content licenses will be available to us on commercially
reasonable terms or that we will be able to integrate the technology into our
products and services. These licenses may expose us to increased risks. See
the "Risk Factors" section of this prospectus.
Regulatory Matters
By virtue of Imperial Bank's ownership interest in us, and owing to the
nature of our business, we are subject to various regulatory requirements.
Imperial Bank is a California State chartered bank whose deposits are insured
by the Federal Deposit Insurance Corporation (FDIC). It is not a member bank
of the Federal Reserve System. Imperial Bank is subject to regulation and
supervision by the FDIC, as its primary federal regulator, as well as by the
California Department of Financial Institutions (the Department). Imperial
Bank, in turn, is a wholly owned subsidiary of Imperial Bancorp, a registered
bank holding company, which is subject to the provisions of the federal Bank
Holding Company Act of 1956, as amended (the BHC Act) and which is regulated
and supervised by the Board of Governors of the Federal Reserve System (the
Federal Reserve).
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As long as Imperial Bank maintains a "controlling interest" in us (in
general, 25% or more common stock ownership), we will be subject to examination
and supervision by the FDIC as well as by the Department.
Section 24 of the Federal Deposit Insurance Act generally restricts and
prohibits insured state banks, such as Imperial Bank, and their subsidiaries
from engaging in activities and making types of investments that are not
permissible for national banks and their subsidiaries. The FDIC's regulations
under this statute define "activity permissible for a national bank" to include
any activity authorized for national banks under any statute, as well as
activities recognized as permissible for a national bank in regulations,
official circulars, bulletins, orders or written interpretations issued by the
Office of the Comptroller of the Currency (the OCC).
Our business involves processing payments by individuals to federal, state
and local governments pursuant to telephonic or electronic instruction. This
activity has long been recognized as part of or incidental to the business of
banking, and is permissible for a national bank and for majority owned
subsidiaries of national banks. The OCC has also broadly allowed national banks
to perform, provide, or deliver through electronic means and facilities any
activity, function, product or service that it is otherwise authorized to
perform, provide or deliver, and, in connection with such services, provide
certain amounts of unrelated services arising from excess capacity acquired or
developed in good faith for banking purposes. Such activities may be conducted
by national banks directly, as well as through majority owned subsidiaries of
national banks. Such activities may also be conducted through subsidiaries in
which the national bank holds less than 50% of the voting stock, provided,
among other things, the bank is able to prevent the subsidiary from engaging in
impermissible activities or may readily divest its ownership interest if the
subsidiary engages in such impermissible activities. Because we believe that
all of our current activities are permissible for national banks, we believe
this limitation has no effect on our business and upon Imperial Bank's
ownership interest in us at the present time.
For as long as Imperial Bank owns a voting equity interest in us which
equals 25% or more, or may otherwise be deemed by the regulatory authorities to
constitute "control", we will also be subject to certain California State and
federal statutes and regulations that apply to Imperial Bank. For example, we
will be required to limit any transactions we may have with "affiliates" of
Imperial Bank in the same manner as Imperial Bank must limit its transactions
with its affiliates. Among other things, all such dealings with affiliates must
be at arms' length.
We cannot guarantee that the banking laws will not be amended or construed
differently, or that new laws or regulations will not be adopted, the effect of
which could materially and adversely affect our business, operating results and
financial condition.
We are also subject to the laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and to the
electronic fund transfer rules embodied in Regulation E issued by the Federal
Reserve. The Federal Reserve's Regulation E implements the Electronic Fund
Transfer Act, which was enacted in 1978. Regulation E protects consumers
engaging in electronic transfers, and sets forth basic rights, liabilities and
responsibilities of consumers who use electronic money services and of
financial institutions that offer these services. For us, Regulation E sets
forth disclosure and investigative procedures. For consumers, Regulation E
establishes procedures and time periods for reporting unauthorized use of
electronic money transfer services and limitations on the consumer's liability
if the notification procedures are followed within prescribed periods. Such
limitations on the consumer's liability may result in liability to us.
Given the expansion of the Internet commerce market, it is possible that the
Federal Reserve might revise Regulation E or adopt new rules for electronic
funds transfer affecting users other than consumers. Because of growth in the
Internet commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the Internet commerce market. It is
possible that Congress or individual states could enact laws regulating the
Internet commerce market. Initiatives are also pending in Congress which are
intended to protect individual privacy and would, among other things, regulate
the ability of financial institutions to use and share with affiliates and
unrelated third parties information concerning individuals developed in the
course of dealings with their customers, which is not currently subject to
regulation. If enacted, these laws, rules, and regulations could be imposed on
our business and industry and could have a
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material adverse effect on our business, operating results and financial
condition. Federal, local and state laws and regulations may be adopted in the
future to address issues such as user privacy, pricing, online content
regulation, taxation and the characteristics and quality of online products and
services.
Any new law or regulation relating to the Internet could have a material and
adverse effect on our business, operating results and financial condition.
Legal Proceedings
We are currently not involved in any material legal proceedings.
Employees
As of September 1, 1999, we had 26 employees. None of our employees are
covered by collective bargaining agreements. We believe that our relations with
our employees are good.
Facilities
Our corporate headquarters are located in San Ramon, California, in a 7,500
square feet leased facility. Our annual rent is approximately $192,000. Our
lease expires in August 2005. In addition, we lease two facilities where our
back-up systems are located. We believe that our existing facilities are
adequate for our current needs and that suitable additional space will be
available, on acceptable terms, when needed.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our executive officers,
directors and director nominees as of September 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas R. Evans.............. 45 Chairman and Chief Executive Officer
Kenneth Stern................ 51 President and Director
Steve Johnson................ 55 Senior Vice President, National Sales Manager
Debbie Soleta................ 36 Vice President, Finance
Brad Belton.................. 34 Vice President, Engineering
George L. Graziadio, Jr. .... 80 Director Nominee
Lee E. Mikles................ 43 Director Nominee
</TABLE>
Thomas R. Evans has served as our Chairman and Chief Executive Officer since
August 1999. From April 1998 to May 1999, Mr. Evans was the president and chief
executive officer of Geocities, Inc., which was acquired by Yahoo! Inc. in May
1999. From 1991 to April 1998, Mr. Evans served as president and publisher of
U.S. News and World Report, a magazine that reports on domestic and
international current events. From January 1997 to April 1998, Mr. Evans also
served as president and publisher of The Atlantic Monthly, a magazine that
features articles on art, literature, politics and technology. In addition,
from May 1995 to April 1998, Mr. Evans served as president and publisher of
Fast Company, a magazine that showcases business people and ideas. From 1990 to
1991, Mr. Evans served as vice president, advertising director of U.S. News &
World Report. Mr. Evans received his B.S. degree in Business Administration
from Arizona State University.
Kenneth Stern, our founder, has served as President and Director since 1986,
and is responsible for our operations, product designs and sales support. From
1984 to 1986, Mr. Stern held a senior management position in software
development at Integral Systems. From 1976 to 1984, Mr. Stern was a programmer
at Tesseract Corporation. Mr. Stern received his B.S. degree in Human Relations
and Organizational Behavior from the University of San Francisco.
Steve Johnson has served as Senior Vice President, National Sales Manager
since 1998, and is responsible for our sales organization. Prior to joining us,
Mr. Johnson was the regional director of client relationships and business
development at Electronic Data Systems. Mr. Johnson received his B.S. degree in
Business Administration from the University of California, Berkeley and his
M.B.A. from San Jose State University.
Debbie Soleta has served as Vice President, Finance since 1992, and is
responsible for our accounting and overseeing our administrative staff. Ms.
Soleta also served as a director from January 1998 to August 1999. Prior to
joining us, Ms. Soleta was an accountant with a firm in Fremont, California,
from 1989 to 1991. Ms. Soleta received her B.A. degree in Commerce from Far
Eastern University in the Philippines.
Brad Belton joined us in November 1992 as Senior Software Engineer. Since
January 1994, he has served as Vice President, Engineering, and is responsible
for our database systems development. From 1988 to November 1992, Mr. Belton
held various positions with Zendex Corporation, a manufacturer of micro
controllers and computer equipment, including the position of senior software
engineer and manager. Mr. Belton received his B.S. degree in Software
Engineering from Oregon Institute of Technology.
George L. Graziadio, Jr. will join our board of directors upon completion of
this offering. Mr. Graziadio has been the chairman of the board, president and
chief executive officer of Imperial Bancorp. (NYSE-IMP), a bank holding
company, since 1969. Mr Graziadio is engaged as an owner or partner in many
other business activities, primarily in the real estate industry. He also
serves on the board of directors of various subsidiaries of Imperial Bancorp.,
including the board of directors of Imperial Bank, our majority stockholder. He
serves on the board of directors of Coastcast Corp. (NYSE-PAR), a manufacturer
of golf clubheads, orthopedic implants and surgical tools. Mr Graziadio is the
uncle of Lee E. Mikles, one of our director nominees.
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Lee E. Mikles will join our board of directors upon completion of this
offering. Mr. Mikles is an investment advisor with Mikles/Miller Management
Inc., an investment management company. Mr. Mikles has been a director of
Imperial Bancorp. and its wholly-owned subsidiary, Imperial Bank, since 1996.
He also serves on the board of directors of Coastcast Corp., and Boss Holdings,
Inc., a diversified holding company with subsidiaries conducting operations in
the work glove and protective wear business and the pet supplies business. Mr.
Mikles is the nephew of George L. Graziadio, Jr., one of our director nominees.
Board of Directors and Committees
Our board of directors is composed of 7 members. Currently there are 5
vacancies. Within 30 days following the consummation of this offering, we
intend to fill those vacancies with individuals, including one individual
designated by Kenneth Stern, who will be neither our officers nor employees.
Within 30 days following the completion of this offering, our board of
directors will establish an Audit Committee and a Compensation Committee.
Effective upon their joining our board of directors, certain of our independent
directors will serve as the members of the Audit Committee and the Compensation
Committee. The Audit Committee's principal functions will include making
recommendations to our board of directors regarding the annual selection of our
independent auditors, reviewing the proposed scope of each annual audit and
reviewing the recommendations of our independent auditors resulting from the
audit of our consolidated financial statements. The Compensation Committee's
principal function will be to establish the compensation of our Chief Executive
Officer and other senior officers and to establish and administer our
compensation programs, including the grant of awards under our stock incentive
plan. See the "--1999 Stock Incentive Plan" section of this prospectus. Our
board of directors may at various times establish other committees to
facilitate the management of our company.
Director Compensation
Prior to this offering, directors received no compensation for their service
on our board of directors. Upon completion of this offering, directors who are
not our employees will receive an annual retainer of $ . Directors will
be reimbursed for out-of-pocket expenses incurred in connection with their
service as directors. In addition, each non-employee director is eligible to
receive awards pursuant to our 1999 Stock Incentive Plan. Directors who are our
officers or employees will not receive any additional compensation for their
services as directors. See the "--1999 Stock Incentive Plan" section of this
prospectus.
Executive Compensation
The following table sets forth information with respect to the compensation
earned during the year ended December 31, 1998 by our Chief Executive Officer
and our two other most highly compensated executive officers (collectively, the
Named Executive Officers):
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Other
Position Salary(1) Compensation
<S> <C> <C>
Thomas Evans(2)......... $ -- $ --
Chairman and Chief
Executive Officer
144,000(/3/)
Kenneth Stern........... --
President
Steve Johnson........... 87,500(/4/) 3,700(/5/)
Senior Vice President,
National Sales Manager
</TABLE>
- --------
(1) We did not pay any bonuses in 1998. Perquisites and other personal
benefits, securities and property did not exceed the lesser of $50,000 or
10% of the total annual salary and bonus reported for each of the Named
Executive Officers.
(2) Mr. Evans became our Chairman and Chief Executive Officer in August 1999.
His annual base salary is $200,000. Please see the "--Employment
Agreements" section of this prospectus for a detailed description of
Mr. Evans' employment agreement.
(3) Effective August 1999, Mr. Stern's annual base salary is $215,000. Please
see the "--Employment Agreements" section of this prospectus for a detailed
description of Mr. Stern's employment agreement.
(4) Mr. Johnson joined us in February 1998. His annual salary is $100,000.
(5) Represents commissions.
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1999 Stock Incentive Plan
In August 1999, our board of directors adopted the 1999 Stock Incentive
Plan. We have reserved an aggregate of 2,300,000 shares of common stock for
issuance under the plan. The purpose of the plan is to promote our long-term
growth and profitability by providing individuals with incentives to improve
stockholder value and contribute to our growth and financial success, and by
enabling us to attract, retain and reward the best available persons for
positions of substantial responsibility. The plan provides for the grant of
both:
. non-qualified stock options; and
. incentive stock options within the meaning of Section 422 of the
Internal Revenue Code.
Participation in the plan is open to our key employees, officers and
directors. Key employees and officers may be granted incentive stock options
and non-qualified stock options. Directors who are not our employees may only
receive non-qualified stock options.
In August 1999, we granted a non-qualified stock option to Thomas Evans to
purchase up to 357,143 shares of our common stock at an exercise price of $4.00
per share. This option was granted to Mr. Evans pursuant to the terms of his
employment agreement. This option is exercisable immediately. However, all
shares issued to Mr. Evans will be non-transferable and subject to our right to
repurchase those shares at a price of $4.00 per share. We may exercise this
right at any time during the 30-day period following Mr. Evans' termination of
employment for reasons other than death, disability or a change in control. Our
repurchase right will expire with respect to one-third of the 357,143 option
shares on the first anniversary of the grant date. Thereafter, our right will
expire on a cumulative basis with respect to 9,921 shares per month on the last
day of each of the next 24 consecutive months. Further, upon completion of this
offering, we will grant Mr. Evans an additional option to acquire shares of our
common stock at an exercise price of $4.00 per share so that, when combined
with the option described above, Mr. Evans will have options to acquire such
number of shares of our common stock as is equal to an aggregate of five
percent (5%) of our common stock outstanding at that time, on a fully diluted
basis (including the options granted to Mr. Evans).
We have also granted non-qualified stock options to purchase 178,571 shares
of our common stock to the following individuals and groups:
<TABLE>
<CAPTION>
Name Number of Shares
<S> <C>
Kenneth Stern............................................
Steve Johnson............................................
All executive officers as a group (4 persons)............
All others (3 persons)...................................
</TABLE>
All of the foregoing options are non-qualified stock options and have a term
of ten years. All options have an exercise price of $4.00 per share and will
vest on the date of this offering. Kenneth Stern has been delegated the
authority to grant, upon completion of this offering, these 7 and any other
employees selected by him additional options to acquire shares of our common
stock at an exercise price of $4.00 per share so that, when combined with the
options already granted, these 7 and any other employees selected by Mr. Stern
to receive options will have options to acquire such number of shares of our
common stock as is equal to an aggregate of two and one-half percent (2.5%) of
our common stock outstanding at that time, on a fully diluted basis (including
the options granted to these employees).
In addition, Mr. Stern has also been delegated the authority to grant, upon
completion of this offering, non-qualified stock options to any of our
employees to purchase shares of our common stock at an exercise price equal to
the initial public offering price so that they will have options to acquire
such number of shares of common stock as is equal to an aggregate of two and
one-half percent (2.5%) of our common stock outstanding at that time, on a
fully diluted basis (including the options granted to these employees).
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The plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to:
. determine whether and to what extent incentive stock options and/or non-
qualified stock options will be granted to eligible key employees;
. select key employees and outside directors to whom options will be
granted;
. determine the number of shares of common stock to be covered by each
option granted;
. determine the exercise price, vesting schedule and all other terms and
conditions of stock options granted;
. determine the fair market value of a share of common stock on a given
date;
. provide that all shares of common stock received by an optionee upon the
exercise of a stock option prior to the consummation of this offering
shall be subject to a right of first refusal, which requires the option
holder to offer to us any shares that the option holder wishes to sell;
and
. amend the terms of any option, prospectively or retroactively, provided
that no amendment will impair the rights of the option holder without
his or her written consent.
For incentive stock options to qualify under Section 422 of the Internal
Revenue Code, they:
. must have an exercise price at least equal to fair market value on the
date of grant; and
. may not be exercisable more than ten years from the date of grant.
If any of our employees or any employee of our subsidiaries owns over 10% of
the combined voting power of all classes of our stock on the date of grant, the
incentive stock options granted to such employee:
. must have an exercise price not less than 110% of the fair market value;
and
. may not be exercisable more than five years from the date of grant.
The exercise price of any option may be paid:
. in cash;
. through a "cashless exercise";
. by tendering of shares of common stock;
. by a combination of cash and shares; or
. by any other means approved by the compensation committee.
Our board of directors may terminate, amend or modify the plan at any time,
except that all awards made prior to termination of the plan will remain in
effect until such awards have been satisfied or terminated in accordance with
the terms of the plan and such awards.
Employment Agreements
We have entered into an employment agreement with Thomas Evans, our Chairman
and Chief Executive Officer. The employment agreement provides for an annual
base salary of $200,000. In addition, under the terms of his agreement, Mr.
Evans will receive a one-time bonus of $500,000, $250,000 of which has been
paid to date, and $250,000 of which will be paid no later than the first
anniversary of the commencement of his employment with us. Mr. Evans was also
granted options to purchase 357,143 shares of our common stock at $4.00 per
share under the 1999 Stock Incentive Plan. We agreed to grant Mr. Evans
additional options under our 1999 Stock Incentive Plan at an exercise price of
$4.00 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase 357,143
shares, to purchase shares of our common stock equal to an aggregate of 5% of
our common stock outstanding, on a fully diluted basis (including the options
granted to Mr. Evans). Under the terms of the employment agreement,
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Imperial Bank has guaranteed that the value (as defined in the agreement) of
Mr. Evans' vested options will be worth $10,000,000 on or before the third
anniversary of the date of the agreement, or Imperial Bank will pay Mr. Evans
an amount equal to the difference between $10,000,000 and the highest value of
the vested options on or before the third anniversary. If Mr. Evans' employment
is terminated by us without "cause" or if he terminates his employment for
"good reason," including a "change in control" (as such terms are defined in
the agreement), we will be required to pay him his base salary and benefits for
one year, and all of his options will vest immediately. If Mr. Evans'
employment is terminated by us with cause, we will be required to pay him any
compensation, benefits or reimbursements accrued through the date of
termination. Mr. Evans' employment under the agreement may be terminated by us
on 30 days' notice without cause, or immediately upon notice with cause, and
may be terminated by Mr. Evans on 60 days' notice without good reason, or
immediately for good reason.
We have entered into an employment agreement with Kenneth Stern, pursuant to
which Mr. Stern has agreed to serve as our President and a member of our board
of directors until August 23, 2006. The employment agreement provides for an
annual base salary of $215,000 and a minimum annual bonus of $100,000. Mr.
Stern has the right to take early retirement at any time after the third
anniversary of thedate of the agreement, upon which we would be required to pay
him his base salary and bonus through August 23, 2006. If Mr. Stern's
employment is terminated by us without "cause" or if he terminates his
employment for "good reason" (as such terms are defined in the agreement), we
will be required to pay him his base salary and bonus through August 23, 2006,
and provide benefits through December 31, 2002 or for one year from the date of
termination, whichever is later. Additionally, Mr. Stern would be entitled to
retain his position as a director through August 23, 2006, provided that he and
Beranson Holdings, Inc. own or control an aggregate of 10% of our outstanding
common stock. If Mr. Stern's employment is terminated by us with cause, we will
be required to pay him any compensation, benefits or reimbursements accrued
through the date of termination. Mr. Stern's employment under the agreement may
be terminated by us on 30 days' notice without cause, or immediately upon
notice with cause, and may be terminated by Mr. Stern on 120 days' notice
without good reason, or immediately for good reason.
The employment agreements generally contain confidentiality provisions and
covenants not to compete during the term of employment and for one year after
termination of employment.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, we have had no separate compensation committee or
other board committee performing equivalent functions. Upon filling the
vacancies on our board of directors, our board of directors will create a
Compensation Committee composed solely of outside directors. During the year
ended December 31, 1998, none of our executive officers served (i) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on our
board of directors, (ii) as a director of another entity, one of whose
executive officers served on our board of directors, or (iii) as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
director of our company.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our stockholders, Imperial Bank and Beranson Holdings, Inc., a company
affiliated with Kenneth Stern, our President, have from time to time made
advances to us to bridge temporary cash shortages and fund certain capital
expenditures, particularly purchases of equipment and other technology required
to support the expansion of our IRS and state income tax relationships. These
advances are evidenced by promissory notes bearing interest at a floating rate
equal to Imperial Bank's prime rate plus 2% per annum. The notes mature on the
earlier of December 31, 2000 or the date that is 30 days after the date of the
completion of our initial public offering. As of August 31, 1999, the aggregate
principal and interest accrued on these notes was $2.0 million. We expect to
repay the balance of the promissory notes, together with any further advances
made from September 1, 1999 to the closing of this offering and the interest
accrued thereon, from the net proceeds of this offering. We do not believe we
would have been able to obtain financing from an unaffiliated third party on
similar or more favorable terms.
In January 1998, in conjunction with Imperial Bank's purchase of 75% of
Beranson Holdings, Inc.'s interest in us, the stockholders loaned $500,000 to
us. This loan, together with $82,000 of accrued interest, was repaid in full on
August 24, 1999 with the financing discussed above.
Imperial Bank is one of 3 merchant banks we use to process credit card
transactions and perform traditional merchant credit card settlement services.
During the six months ended June 30, 1999, we paid Imperial Bank approximately
$1.3 million for performing these processing and settlement services. We
believe Imperial Bank is providing these services on terms no less favorable to
us than could be obtained from unaffiliated third parties. We expect that
Imperial Bank will continue to provide these services to us following this
offering.
Imperial Bank has provided human resource services and other assistance to
us. Such services and assistance include payroll processing and benefits
administration, including the administration of our 401(k) plan and other
benefit programs, and employee recruiting. During the six months ended June 30,
1999, we paid Imperial Bank a fee of $42,000 for these services. We believe
Imperial Bank is providing these services on terms no less favorable to us than
could be obtained from unaffiliated third parties. Upon completion of this
offering, Imperial Bank will no longer provide these services to us.
Imperial Bank and Beranson Holdings, Inc. have guaranteed the performance of
our obligations under two equipment leases. Upon completion of this offering,
we expect that Imperial Bank and U.S. Audiotex, Inc. will be released as the
guarantors of our lease obligations.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of September 1, 1999 by:
. each person known to us to own beneficially more than 5% of our
outstanding common stock;
. each of our directors;
. each of our executive officers listed in the summary compensation table
in the "Management" section of this prospectus; and
. all of our directors and executive officers as a group.
The calculations of the percentages in the following table are based on
5,000,000 shares of our common stock outstanding prior to the closing of this
offering, and shares outstanding immediately following the completion of
this offering. Unless otherwise noted, each of the persons listed below has
sole voting and investment power with respect to their shares.
<TABLE>
<CAPTION>
Stockholder Name and Shares Beneficially Shares Beneficially
Address(/1/) Owned Prior to Offering Owned After Offering
- -------------------- --------------------------------- --------------------
Number Percentage Number Percentage
<S> <C> <C> <C> <C>
Imperial Bank........... 4,000,000 80.0% 4,000,000 %
Beranson Holdings,
Inc.(2)................ 1,000,000 20.0 1,000,000
Thomas R. Evans......... 357,143(3) 6.7
Kenneth Stern(2)........ 1,000,000 20.0
Steve Johnson...........
George L. Graziadio,
Jr. ...................
Lee E. Mikles...........
All executive officers
and directors as a
group..................
( persons)
</TABLE>
- --------
(1) The address of Imperial Bank and Messrs. Graziadio and Mikles is c/o
Imperial Bank Building, 9920 South La Cienega Boulevard, Inglewood, CA
90301 and the address of Beranson Holdings, Inc. andMessrs. Evans, Stern
and Johnson is c/o U.S. Audiotex Corporation, 2333 San Ramon Valley
Boulevard, Suite 450 San Ramon, California 94583. Beranson Holdings, Inc.
is a company controlled by Mr. Stern's family. Accordingly, he is deemed to
beneficially own the shares of our common stock owned by Beranson Holdings,
Inc.
(2) Beranson Holdings, Inc. is a company controlled by Mr. Stern's family.
Accordingly, he is deemed to beneficially own the shares of our common
stock owned by Beranson Holdings, Inc.
(3) Consists of 357,143 shares of our common stock underlying presently
exercisable options.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 50,000,000 shares of common stock,
5,000,000 shares of which are issued and outstanding, held by two stockholders
of record. An additional 2,300,000 shares of common stock are issuable upon
exercise of outstanding stock options under our 1999 Stock Incentive Plan.
The following description provides a summary of the material rights and
limitations relating to ownership of our capital stock. For a complete legal
description of our capital stock, you should refer to our certificate of
incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Upon completion of this offering, there will be no preemptive, conversion,
subscription, redemption or repurchase rights associated with the shares of
common stock. Each holder of common stock is entitled to one vote for each
share owned of record on matters submitted to a vote of the stockholders.
Holders of common stock are not entitled to cumulative voting rights in the
election of directors. If we are liquidated, the holders of common stock are
entitled to participate ratably in the assets available for distribution after
satisfaction of all claims of our creditors.
The holders of common stock are entitled to receive ratably such dividends
as our board of directors, in its discretion, may declare out of funds legally
available therefor. Under the Delaware General Corporation Law (the DGCL),
dividends may be paid out of either (i) surplus as defined in the DGCL, or (ii)
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. See the "Dividend Policy" section of this prospectus.
Certain Bylaw Provisions
Our bylaws provide that our board of directors will consist of not less than
3 nor more than 9 members. The exact number of directors constituting our board
can be fixed and changed from time to time by our board. The directors will be
elected at the annual meeting of stockholders or any special meeting of
stockholders and each director so elected will hold office until the next
annual meeting or until his successor is elected and qualified or until his
earlier resignation or removal. Our bylaws may be amended by the affirmative
vote of 80% of our stockholders or the affirmative vote of two-thirds of our
board of directors. See the "Risk Factors" section of this prospectus. The
foregoing summary of material provisions is qualified in its entirety by
reference to our bylaws, which are filed as an exhibit to the registration
statement of which this prospectus is a part.
Anti-Takeover Matters
Certain Provisions of the DGCL
Section 203 of the DGCL generally restricts a corporation from entering into
certain business combinations with an interested stockholder (defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock) or its affiliates, unless (i) the transaction is
approved by the board of directors of the corporation prior to the date such
person or entity became an interested stockholder; (ii) the interested
stockholder acquired 85% of the corporation's stock, excluding voting stock
owned by directors and officers and certain employee stock plans of the
corporation, in the same transaction in which the interested stockholder
exceeds 15%; or (iii) the business combination is approved by the board of
directors and by a vote of two-thirds of the outstanding voting stock not owned
by the interested stockholder. The DGCL provides that a corporation may elect
not to be governed by Section 203. At present, we do not intend to make such an
election and we intend to avail ourselves of the rights afforded by Section
203. The effect of Section 203 may be to render more difficult a change in
control of our company.
52
<PAGE>
Certain Charter Provisions
Our certificate of incorporation provides that stockholders may not take
action by written consent, but only at a duly called annual or special meeting
of stockholders. Special meetings of our stockholders may be called only by
our Chairman or a majority of our directors. Our certificate of incorporation
also includes supermajority voting provisions. The affirmative vote of 80% of
our stockholders is required for the removal of our directors, the adoption,
amendment or repeal of our bylaws, and the consummation of certain business
combinations with any related person (defined as any person or entity who,
together with its affiliates, owns 10% of our voting stock). However, the
supermajority requirement will not apply to business combinations with related
persons if the combinations are approved by a majority of our directors, or if
our stockholders receive the requisite type and amount of consideration.
Limitation of Director and Officer Liability
Our certificate of incorporation and bylaws provide that, to the extent not
prohibited by law, we will indemnify any person who is or was made, or
threatened to be made, party to any threatened, pending or completed action,
suit or proceeding, by reason of the fact that such person is or was our
director or officer, or is or was serving in any capacity at our request for
any other corporation, partnership or other enterprise, against judgments,
fines, penalties, excise taxes, amounts paid in settlement costs, charges and
expenses (including attorneys' fees). Persons who are not directors or
officers of our company may be similarly indemnified in respect of service to
our company to the extent our board of directors at any time specifies such
persons are entitled to the benefits of the indemnification provisions
contained in our certificate of incorporation or bylaws. Our certificate of
incorporation provides for the elimination of personal liability to our
company or our stockholders for monetary damages for breach of fiduciary duty
as a director, except for (i) any breach of the director's duty of loyalty to
our company or our stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
certain unlawful dividends or redemptions as provided under Section 174 of the
DGCL; or (iv) any transaction from which the director derived an improper
personal benefit.
Transfer Agent
American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of this offering, there will be shares of our common stock
outstanding (assuming no exercise of the Underwriters' over-allotment option or
options outstanding under our stock option plans). Of these shares, the
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (Affiliates), may generally only be sold in compliance with the
limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining shares of common stock are deemed "restricted securities"
under Rule 144. Upon expiration of the Lock-Up Agreements described below,
these shares of common stock will be available for sale in the public market,
subject to the provisions of Rule 144 under the Securities Act.
The Lock-Up Agreements provide that, for a period of 180 days after the date
of this prospectus, our stockholders prior to this offering will not sell,
offer, contract or grant any option to sell, pledge, transfer, establish an
open put equivalent position or otherwise dispose of any shares of common
stock, any options to purchase shares of common stock or any shares convertible
into or exchangeable for shares of common stock, owned directly by such persons
or with respect to which they have the power of disposition, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from us or (if applicable) the date they were acquired from one of our
Affiliates is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
common stock ( shares immediately after this offering) or the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from us or (if applicable) the date
they were acquired from one of our Affiliates, a stockholder who is not an
Affiliate of us at the time of sale and has not been an Affiliate of us for at
least three months prior to the sale is entitled to sell the shares immediately
without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of common stock
acquired pursuant to the exercise of certain options granted under our stock
option plan) are also restricted securities and, beginning 90 days after the
effective date of the registration statement of which this prospectus is a
part, may be sold by stockholders, other than our Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its one-year holding period requirement.
Registration Rights
We have granted Imperial Bank and Beranson Holdings, Inc. the right to
demand, on four occasions and one occasion, respectively, that we register
their shares of our common stock. In addition, under the terms of the
registration rights agreements, if we propose to register any of our
securities, either for our own account or for the account of another
stockholder exercising registration rights, Imperial Bank and Beranson
Holdings, Inc. are entitled to notice of such registration and are entitled to
include their shares in such registration. Both the demand and the "piggy-back"
registration rights are subject to a number of conditions and limitations,
among them the right of the underwriters of any such registration to limit the
number of shares included in such
54
<PAGE>
registration. We have agreed to pay the expenses associated with the
registration of Imperial Bank's and Beranson Holdings, Inc.'s shares of our
common stock, including the reasonable cost of legal counsel, not to exceed
$75,000 for each registration.
Options
We intend to file registration statements on Form S-8 under the Securities
Act to register all shares of common stock issuable under our 1999 Stock
Incentive Plan. Shares issued upon the exercise of stock options after the
effective date of the registration statements on Form S-8 will be eligible for
resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above, if
applicable.
Effect of Sales of Shares
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in the
public market could adversely affect the market price of our common stock and
could impair our future ability to raise capital through an offering of our
equity securities.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation and CIBC World Markets
Corp., have severally agreed to purchase from us the respective number of
shares of common stock set forth opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
CIBC World Markets Corp.........................................
-----
Total.........................................................
=====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The underwriters initially propose to offer the shares of our common stock
in part directly to the public at the initial public offering price set forth
on the cover page of this prospectus and in part to certain dealers (including
the underwriters) at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to
brokerage account holders. DLJdirect Inc. will receive the same selling
concession that other dealers will receive in connection with sales of shares
over the Internet.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
certain conditions, to purchase its pro rata portion of such additional shares
based on such underwriter's percentage underwriting commitment as indicated in
the preceding table.
56
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof.
We and each of our executive officers, directors, stockholders and option
holders have agreed, subject to certain exceptions, not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock;
for a period of 180 days after the date of this prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, during such 180-day period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and certain of our stockholders has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion, release all or any portion
of the securities subject to the lock-up agreements. We have determined that if
the lock-up with respect to a significant number of shares has been waived,
whether with respect to a single stockholder or a number of stockholders, we
will review applicable securities laws and, if public disclosure would be
appropriate, disclose the waiver.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price of the shares of our common
stock offered hereby was determined by negotiation among us and the
representatives of the underwriters. The factors considered in determining the
initial public offering price included the history of and the prospects for the
industry in which we compete, our past and present operations, our historical
results of operations, our prospects for future earnings, the recent market
prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered hereby in any jurisdiction where action for that purpose is required.
The shares of common stock offered hereby may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any shares of common
stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons with this prospectus should inform
themselves about and observe any restrictions relating to the offering and the
distribution of this prospectus. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any shares of common stock offered
hereby in any jurisdiction in which such an offer or a solicitation is
unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and stabilize the price of our
common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members and selected dealers if they repurchase
previously distributed common stock in syndicate covering transactions, in
stabilizing transactions or otherwise. These activities may stabilize or
maintain the market price of our common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end
any of these activities at any time.
57
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Cadwalader, Wickersham & Taft, New
York, New York. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Simpson Thacher & Bartlett, New York, New
York.
EXPERTS
The financial statements of U.S. Audiotex Corporation as of December 31,
1997, 1998, for the period from January 1, 1996 to June 26, 1996 of the
predecessor company and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998 and for the six-month period ended June 30, 1999 have been
included herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information about us and the shares
offered by this prospectus, you should refer to the registration statement,
including the exhibits and schedules filed thereto. Statements contained in
this prospectus as to the contents of any agreement, contract or other document
referred to are qualified by and subject to the copy of such contract or other
document filed as an exhibit to the registration statement or such other
document. You may inspect a copy of the registration statement without charge
at the SEC's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of certain fees from the Public Reference Section
of the SEC at the SEC's principal office, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Commission's Regional Offices in New York, located at 7
World Trade Center, Suite 1300, New York, New York 10048, or in Chicago,
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The SEC's World Wide Web address is www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as we may determine or as
may be required by law.
58
<PAGE>
U.S. AUDIOTEX CORPORATION
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1997, 1998 and June 30, 1999............ F-3
Statements of Operations for the period from January 1, 1996 to June 26,
1996 (predecessor company) and for the period from June 26, 1996
(inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the six-month periods ended June 30, 1998
(unaudited) and 1999..................................................... F-4
Statements of Stockholders' Equity (Deficit) for the period from January
1, 1996 to June 26, 1996 (predecessor company) and for the period from
June 26, 1996 (inception) to December 31, 1996 and for the years ended
December 31, 1997 and 1998 and for the six-month period ended June 30,
1999..................................................................... F-5
Statements of Cash Flows for the period from January 1, 1996 to June 26,
1996 (predecessor company) and for the period from June 26, 1996
(inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998 and for the six-month periods ended June 30, 1998
(unaudited) and 1999..................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
The Board of Directors
U.S. Audiotex Corporation:
When the recapitalization, which includes the merger of U.S. Audiotex LLC
into U.S. Audiotex Corporation, referred to in Note 8 to the financial
statements has been consummated, we will be in a position to issue the
following report.
KPMG LLP
San Francisco, California
September 17, 1999
FORM OF INDEPENDENT AUDITORS' REPORT
The Board of Directors
U.S. Audiotex Corporation:
We have audited the accompanying balance sheets of U.S. Audiotex Corporation
as of December 31, 1997 and 1998 and June 30, 1999, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the period
from January 1, 1996 to June 26, 1996 (predecessor company) and for the period
from June 26, 1996 (inception) to December 31, 1996 and for each of the years
in the two-year period ended December 31, 1998 and the six-month period ended
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Audiotex Corporation
as of December 31, 1997, 1998 and June 30, 1999, and the results of its
operations and cash flows for the period from January 1, 1996 to June 26, 1996
(predecessor company) and for the period from June 26, 1996 (inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998 and the six-month period ended June 30, 1999, in conformity
with generally accepted accounting principles.
San Francisco, California
August 12, 1999, except note
which is as of September , 1999
F-2
<PAGE>
U.S. AUDIOTEX CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
------------- --------
1997 1998 1999
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 182 $ 631 $ 249
Accounts receivable................................... 265 554 505
Receivable from related parties....................... 12 -- --
Prepaid expenses and other current assets............. 54 29 26
Receivable from U.S. Treasury......................... -- -- 440
----- ------ -------
Total current assets............................... 513 1,214 1,220
Property and equipment, net............................ 251 533 797
Other assets........................................... -- -- 11
----- ------ -------
Total assets....................................... $ 764 $1,747 $ 2,028
===== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................. $ 404 $ 654 $ 487
Deferred revenue...................................... 62 99 133
Current portion of notes payable and capital lease
obligations.......................................... 268 69 105
Advance from related party............................ -- -- 440
----- ------ -------
Total current liabilities.......................... 734 822 1,165
Notes payable and capital lease obligations............ 121 241 238
Notes payable to related party......................... -- 500 500
----- ------ -------
Total liabilities.................................. 855 1,563 1,903
----- ------ -------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $0.01 par value; 50,000,000 shares
authorized; 5,000,000, shares issued and outstanding
as of December 31, 1997, 1998 and June 30, 1999,
respectively........................................ 50 50 50
Additional paid-in capital........................... 528 1,128 1,128
Accumulated earnings (deficit)....................... (669) (994) (1,053)
----- ------ -------
Stockholders' equity (deficit)..................... (91) 184 125
----- ------ -------
Total liabilities and stockholders' equity
(deficit)......................................... $ 764 $1,747 $ 2,028
===== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
U.S. AUDIOTEX CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period
Period from
from June 26,
January 1, 1996
1996 (inception) Year ended Six months ended
to to December 31, June 30,
June 26, December 31, -------------- ------------------
1996 1996 1997 1998 1998 1999
(the Predecessor) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction fees...................................... $ 111 $ 240 $ 935 $2,076 $ 794 $5,975
Other revenues ....................................... 201 234 267 293 105 138
----- ------ ------ ------ ------ ------
Total revenues...................................... 312 474 1,202 2,369 899 6,113
Cost of revenues:
Cost of transaction fees.............................. 28 193 412 1,009 361 4,818
Cost of other revenues................................ 40 44 284 71 11 21
----- ------ ------ ------ ------ ------
Total cost of revenues.............................. 68 237 696 1,080 372 4,839
----- ------ ------ ------ ------ ------
Gross profit............................................ 244 237 506 1,289 527 1,274
Operating expenses:
Sales and marketing................................... 107 115 330 356 198 435
Development costs..................................... 114 124 206 608 282 320
General and administrative............................ 148 158 466 595 225 549
----- ------ ------ ------ ------ ------
Total operating expenses............................ 369 397 1,002 1,559 705 1,304
----- ------ ------ ------ ------ ------
Income (loss) from operations........................... (125) (160) (496) (270) (178) (30)
Other income (expense), net............................. (31) (7) (6) (55) (22) (29)
----- ------ ------ ------ ------ ------
Net income (loss)................................... $(156) $ (167) $ (502) $ (325) $ (200) $ (59)
===== ====== ====== ====== ====== ======
Basic and diluted net income (loss) per share........... $ -- $(0.03) $(0.10) $(0.07) $(0.04) $(0.01)
===== ====== ====== ====== ====== ======
Shares used in basic and diluted net income (loss) per
share.................................................. -- 5,000 5,000 5,000 5,000 5,000
===== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
U.S. AUDIOTEX CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from June 26, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the six-month period ended June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Note Total
Common stock Additional receivable Retained stockholders'
------------ paid-in from equity equity
Shares Amount capital stockholder (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 26,
1996................... -- $-- $ -- $ -- $ -- $--
Issuance of common stock
for cash and assets and
liabilities assumed.... 5,000 50 606 (500) -- 156
Net income (loss)....... -- -- -- -- (167) (167)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1996............... 5,000 50 606 (500) (167) (11)
Distribution of note
receivable to
stockholder............ -- -- (98) -- -- (98)
Collection of note
receivable............. -- -- -- 500 -- 500
Services performed by
stockholders........... -- -- 20 -- -- 20
Net income (loss) ...... -- -- -- -- (502) (502)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1997............... 5,000 50 528 -- (669) (91)
Capital contribution.... -- -- 600 -- -- 600
Net income (loss) ...... -- -- -- -- (325) (325)
----- ---- ------ ----- ------- ----
Balance as of December
31, 1998............... 5,000 50 1,128 -- (994) 184
Net income (loss) ...... -- -- -- -- (59) (59)
----- ---- ------ ----- ------- ----
Balance as of June 30,
1999................... 5,000 $ 50 $1,128 $ -- $(1,053) $125
===== ==== ====== ===== ======= ====
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
U.S. AUDIOTEX CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
Period from June 26, 1996 Year ended
January 1, (Inception) December Six months ended
1996 to June to 31, June 30,
26, December 31, ------------ -----------------
1996 1996 1997 1998 1998 1999
(Predecessor (unaudited)
Company)
<S> <C> <C> <C> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)............................................. $(156) $(167) $(502) $(325) $(200) $ (59)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 3 14 29 57 22 82
Changes in operating assets and liabilities:
Accounts receivable......................................... (51) (76) (101) (289) 115 49
Prepaid expenses and other current assets................... 40 12 (35) 25 15 (8)
Receivable from U.S. Treasury............................... -- -- -- -- -- (440)
Accounts payable and accrued expenses....................... 4 90 255 250 140 (167)
Deferred revenue............................................ (74) (64) 31 37 19 34
----- ----- ----- ----- ----- -----
Net cash provided by (used in) operating activities........ (234) (191) (323) (245) 111 (509)
----- ----- ----- ----- ----- -----
Cash flows provided by (used in) investing activities--capital
expenditures.................................................. (43) (63) (139) (298) (58) (252)
----- ----- ----- ----- ----- -----
Cash flows provided by (used in) financing activities:
Capital contribution ......................................... -- 500 -- 600 -- --
Repayment of bank loans....................................... 119 (38) (77) (108) (295) (61)
Collection of note receivable from stockholder................ -- -- 500 -- -- --
Related party payable......................................... -- -- -- 500 500 440
----- ----- ----- ----- ----- -----
Net cash provided by (used in) financing activities........ 119 462 423 992 205 379
----- ----- ----- ----- ----- -----
(Decrease) increase in cash and cash equivalents............... (158) 208 (39) 449 258 (382)
Cash and cash equivalents at beginning of period............... 171 13 221 182 182 631
----- ----- ----- ----- ----- -----
Cash and cash equivalents at end of period..................... $ 13 $ 221 $ 182 $ 631 $ 440 $ 249
===== ===== ===== ===== ===== =====
Supplemental disclosure of noncash activity:
Assets acquired through capital leases........................ $ -- $ -- $ -- $ 41 $ 3 $ 94
===== ===== ===== ===== ===== =====
Services performed by stockholders............................ $ -- $ -- $ 20 $ -- $ -- $ --
===== ===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and June 30, 1999
(1) Description of Business and Summary of Significant Accounting Policies
(a) The Company
U.S. Audiotex Corporation (the Company) was formed on June 26, 1996 as a
California limited liability company. The Company provides credit card payment
options for consumers to pay personal federal and state income taxes, sales and
use taxes, property taxes and fines for traffic violations and parking
citations.
On June 26, 1996, Beranson Holdings, Inc., (the Predecessor) a company
wholly owned by the Company's president, contributed net liabilities of
$344,000 to the Company in exchange for an 80% interest in the Company. These
assets and liabilities were recorded at the historical basis of the
Predecessor..The Predecessor also had a business which collected revenues from
interactive voice response classified advertisements. The formation of the
Company excluded this operation of the Predecessor so revenues and net loss
from this business activity totaling $752,000 and $14,000, respectively for the
year ended December 31, 1996 have not been included in the financial statements
of the Company. The activities of Beranson Holdings, Inc. for the first six
months of 1996 related to the credit card payment business have been presented
in the financial statements of the Company.
(b) Unaudited Interim Financial Information
The financial information for six months ended June 30, 1998 is unaudited,
but includes all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for the fair presentation of the
financial position at such dates and the operations and cash flows for the
periods then ended. Operating results for the six months ended June 30, 1999
are audited, but are not necessarily indicative of results which may be
expected for the entire year.
(c) Cash and Cash Equivalents
The company considers cash on hand, deposits in bank, certificates of
deposits, and short-term marketable securities with original maturities of less
than 90 days to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
(e) Revenue Recognition
The Company recognizes the revenues from transaction fees in the month the
services are rendered. Other revenues consist of the sale of software licenses,
and maintenance and consulting revenues related to these software sales.
Revenues from software license sales and consulting fees charged on
installation arrangements are recognized upon customer acceptance of the
systems. Maintenance revenues are deferred and recognized ratably over the
contractual period of the license agreement, generally one year.
(f) Development Costs
Development costs associated with new products and enhancements to existing
software products are expensed as incurred until technological feasibility is
established upon completion of a working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility, and, accordingly, $200,000 has been capitalized. The
Company amortizes this cost over the estimated useful life of three years.
F-7
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
(g) Concentration of Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its clients and generally does
not require collateral. Uncollectible accounts have been insignificant to date.
The Company had one customer that accounted for 22% of accounts receivable at
December 31, 1997 and none that account for greater than 10% of accounts
receivable at December 31, 1998 and June 30, 1999.
In the six-month period ended June 30, 1999 transaction fees from IRS
payments accounted for 71% of total revenues. The Company's agreement with the
IRS covers credit card payments for 1998 tax returns filed during the 1999
filing season. The agreement is in effect through October 14, 1999 and is
renewable for an additional one-year period by mutual consent of both parties.
In 1999 certain payments to the U.S. Treasury were duplicated which resulted
in an overpayment totaling $440,000. The Internal Revenue Service has
acknowledged this overpayment and has agreed to reimburse the Company.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, accounts
receivable, accounts payable approximate their carrying values due to their
short maturity. The fair value of amounts due to related parties is not readily
determinable.
(j) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.
(k) Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method. Diluted net income (loss) per share is computed using the
weighted-average number of shares of common stock and, when dilutive, potential
shares of options and warrants to purchase common stock using the treasury
stock method outstanding.
F-8
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
(l) Comprehensive Income (Loss)
The Company has no components of other comprehensive income (loss), and
accordingly, the comprehensive income (loss) is the same as net income (loss)
for all periods presented.
(m) Recent Accounting Pronouncements
The FASB recently issued Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by July
1, 2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position of the Company.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98--1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use or SOP 98-1. SOP 98-1 establishes the accounting for
costs of software products developed or purchased for internal use, including
when such costs should be capitalized. The adoption of SOP 98-1 in 1998 did not
have a material affect on our financial position or results of operations.
(n) Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totaled approximately $6,000, $28,000,
$28,000 and $52,000 for the years ended December 31, 1996, 1997, 1998 and the
six-month period ended June 30, 1999.
(2) Related Party Transactions
Notes receivable (payable) from/to related parties is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
-------------- --------
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Advances to an officer........................... $ 11 $ -- $ --
Amount due from Beranson Holdings, Inc........... 1 -- --
Advances from Imperial Bank...................... -- -- (440)
Note payable to stockholders..................... -- (500) (500)
----- ------- -----
$ 12 $ (500) $(940)
===== ======= =====
</TABLE>
On June 26 1996 the net liabilities (see footnote 1) contributed by the
Predecessor included a note receivable of $98,000 from Kenneth Stern, the sole
shareholder of the Predecessor. In 1997 the note was distributed to Kenneth
Stern and the Company recorded a distribution to stockholders of $98,000.
During the period from June 26, 1996 to December 31, 1996 the Company
allocated approximately $16,000 of its general and administrative expenses to
Beranson Holdings, Inc.
Imperial Bank and Beranson Holdings, Inc., a company affiliated with our
President, have from time to time made advances to fund certain capital
expenditures. These advances are evidenced by promissory notes bearing interest
at a floating rate equal to Imperial Bank's prime rate (7.75% as of June 30,
1999) plus 2% per annum. As of June 30, 1999, the principal and interest
accrued on such notes was $500,000 and approximately $50,000, respectively.
Principal and accrued interest of approximately $558,000 was paid on August 24,
1998 and was refinanced with new notes to stockholder due December 31, 2000
(see note 8).
F-9
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
Imperial Bank is one of 3 merchant banks used to process credit card
transactions and perform traditional merchant credit card settlement services.
During the six months ended June 30, 1999, the Company paid Imperial Bank
approximately $1.3 million for performing these processing and settlement
services.
Imperial Bank assisted the Company in recruiting a member of the Company's
senior management team during the year ended December 31, 1997. These services
were valued at $20,000 and recorded as a capital contribution in the financial
statements for the year ended December 31, 1997. Imperial Bank provides human
resource services including payroll processing and benefits administration.
During the six months ended June 30, 1999, the Company paid Imperial Bank a
fee of $42,000 for these services.
In April 1999, the Company borrowed $440,000 from Imperial Bank to assist
in its working capital needs.
(3) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Computer equipment................................. $ 456 $ 768 $1,020
Furniture and fixtures............................. 38 66 160
------ ------ ------
494 834 1,180
Less accumulated depreciation and amortization..... 243 301 383
------ ------ ------
$ 251 $ 533 $ 797
====== ====== ======
</TABLE>
Property and equipment recorded under capital leases was approximately $24,000
and $64,000 and $127,000 as of December 31, 1997, 1998 and June 30, 1999,
respectively, with related accumulated amortization of approximately $11,000,
$20,000 and $30,000, respectively.
(4) Debt and other commitments
The Company has a credit facility with a third party bank which consists of
a $500,000 line of credit and a term loan due May 2001 with an original
principal amount of $250,000. The borrowings bear interest at the bank's prime
rate of 7.75% as of December 31, 1998 plus 1.50%. The Company also leases
certain equipment under capital leases, extending through 2000.
Notes payable were as follows:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Line of credit..................................... $ 208 $ 151 $ 127
Term loan.......................................... 171 121 96
Capital lease obligation........................... 10 38 120
------ ------ ------
389 310 343
Less current portion............................... 268 69 105
------ ------ ------
Long-term notes payable............................ $ 121 $ 241 $ 238
====== ====== ======
</TABLE>
The Company leases its facility and certain equipment under operating
leases, extending through 1999.
The Company is in compliance with all financial covenants under this debt
and other commitments as of June 30, 1999.
F-10
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
Future minimum debt and capital leases payments as of June 30, 1999 were as
follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $105
2000................................................................ 112
2001................................................................ 100
2002 and thereafter................................................. 26
----
Total future minimum debt and capital leases payments............. $343
====
</TABLE>
Future minimum lease payments under noncancelable operating leases as of
June 30, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999................................................................. $19
2000 and thereafter.................................................. 26
---
Total future minimum lease payments under operating leases......... $45
===
</TABLE>
Rental expense under operating leases for the years ended December 31, 1997
and 1998 was $64,000 and $75,000, respectively.
(5) Stockholders' Equity (Deficit)
On January 23, 1998, Imperial Bank purchased 3 million shares of common
stock or 75% of the Predecessor's 4 million shares of common stock in the
Company for $3,010,000. In addition, Imperial Ventures, a wholly owned
subsidiary of Imperial Bank, transferred its 1 million shares of common stock
in the Company to Imperial Bank.
As of December 31, 1998, Imperial Bank and the Predecessor are the holders
of 80% and 20% of the Company's common stock, respectively.
(6) Income Taxes
As of December 31, 1998 the Company had no federal or Californian net
operating loss carryforwards. As of December 31, 1998 the Company has no
federal or Californian research and development credit carryforwards for tax
purposes. All tax operating losses to date have been used by the members of
U.S. Audiotex, LLC on their personal tax returns. As of June 30, 1999 the
Company has deferred tax assets of $19,000. The Company has recorded a
valuation allowance on its deferred tax assets due to the uncertainty of
future realization of such amounts.
(7) Segment Information
The Company has adopted the provisions of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining which information to report is based on
the way that management organizes the operating segments within the Company
for making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company's President. The President reviews financial information by
disaggregated information about revenues by product for purposes of making
operating decisions and assessing financial performance. The financial
information reviewed by the President is consistent with the information
presented in the accompanying statements of operations. Therefore, the Company
operates in a single operating segment.
F-11
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
<TABLE>
<CAPTION>
Six Months
Ended June
Year ended 30,
------------------- ------------
1996 1997 1998 1998 1999
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues by product are:
Transaction fees:
Federal income tax.......................... $ -- $ -- $ -- $ -- $4,333
Moving violations........................... 265 446 827 352 574
Parking citations........................... 13 105 157 68 138
Property taxes.............................. 6 178 765 224 557
State income taxes.......................... -- -- -- -- 173
Fax filing.................................. 40 120 192 93 105
Service bureau-utilities.................... 27 86 135 57 95
Other revenues:
System sales................................ 363 166 115 16 83
Maintenance & consulting.................... 72 101 178 89 55
----- ------ ------ ----- ------
Total revenues............................... $ 786 $1,202 $2,369 $ 899 $6,113
===== ====== ====== ===== ======
</TABLE>
No single customer accounted for greater than 10% of revenues in any period
reported.
(8) Subsequent Events
(a) Recapitalization
On August 24, 1999, the Company issued 800 shares of common stock to
Imperial Bank for an aggregate consideration of $8.00 and 200 shares of common
stock to Beranson Holdings, Inc. for an aggregate consideration of $2.00. In
connection with the merger of U.S. Audiotex, LLC into U.S. Audiotex
Corporation, a Delaware Corporation, the limited liability company interests of
Imperial Bank and Beranson Holdings in U.S. Audiotex, LLC will be exchanged for
3,999,200 and 999,200 shares of the Company's common stock, respectively.
(b) Initial Public Offering (Unaudited)
On September 15, 1999, our Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
us to sell shares of our common stock in connection with a proposed IPO.
(c) Stock Incentive Plan
The Board of Directors adopted the 1999 Stock Incentive Plan (the Incentive
Plan) on August 24, 1999. The Incentive Plan provides for the grant of
nonstatutory stock options to employees or outside directors. A total of
2,3000,000 shares of our common stock are reserved for issuance under the
Incentive Plan, 300,000 of which are available for grants to outside directors.
Options granted under the Incentive Plan may be designated as qualified or
nonqualified at the discretion of our Board of Directors, with exercise prices
for incentive stock options of not less than the fair value of the underlying
stock at the date of grant. Options granted under the plan vest annually over a
maximum five year period and expire ten years from the date of grant.
F-12
<PAGE>
U.S. AUDIOTEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1998 and June 30, 1999
The Company will use the intrinsic value method to account for the Incentive
Plan. Accordingly, compensation cost will be recognized for stock options when,
on the date of grant, the current market value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. In August
1999, the Company recorded deferred compensation expense of approximately $13
million for options granted to employees to purchase 535,714 shares of our
common stock at an exercise price of $4.00 per share.
(d) Stock Split
On , 1999 our Board of Directors authorized a for split of all
of the outstanding shares of the Company's common stock which will be effective
prior to the completion of the Company's initial public offering.
(e) Stockholder Guarantees
In June 1999, the stockholders of the Company agreed to loan the Company
$2.8 million in working capital which will be payable on the earlier of the
date that is 30 days following the IPO date or December 31, 2000. On August 24,
1999, the Company received advances of approximately $1.3 million from the
stockholders which bears interest at 2% above prime and which will be repaid
from the proceeds of the Company's initial public offering.
(f) Employment Agreements
In August 1999, the Company entered into an employment agreement with Thomas
R. Evans, the Chairman and Chief Executive Officer. The employment agreement as
amended as of September 14, 1999 provides for an annual base salary of $200,000
and a one-time bonus of $500,000. Mr. Evans was granted options to purchase
357,143 shares of common stock at $4.00 per share. The Company may exercise
this right at any time during the 30-day period following Mr. Evans'
termination of employment for reasons other than death, disability or a change
in control. The Company's repurchase right will expire with respect to one-
third of the 357,143 option shares on the first anniversary of the grant date.
Thereafter, the Company's right will expire on a cumulative basis with respect
to 9,921 shares per month on the last day of each of the next 24 consecutive
months. Further, upon completion of this offering, the Company will grant Mr.
Evans an additional option to acquire shares of the Company's common stock at
an exercise price of $4.00 per share so that, when combined with the option
described above, Mr. Evans will have options to acquire such number of shares
of the Company's common stock as is equal to an aggregate of five percent (5%)
of the Company's common stock outstanding at that time, on a fully diluted
basis (including the options granted to Mr. Evans). Under the terms of the
employment agreement, Imperial Bank has guaranteed that the value (as defined
in the agreement) of Mr. Evans' vested options will be worth $10,000,000 on or
before the third anniversary of the date of the agreement, or Imperial Bank
will pay Mr. Evans an amount equal to the difference between $10,000,000 and
the highest value of the vested options on or before the third anniversary.
In August 1999, the Company entered into an employment agreement with
Kenneth Stern, pursuant to which Mr. Stern has agreed to serve as the Company's
President and a member of the board of directors until August 23, 2006. The
employment agreement provides for an annual base salary of $215,000 and a
minimum annual bonus of $100,000. Mr. Stern has the right to take early
retirement at any time after the third anniversary of the date of the
agreement, upon which the Company would be required to pay him his base salary
and bonus through August 23, 2006.
F-13
<PAGE>
[U.S. AUDIOTEX Logo]
Shares of common stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
CIBC World Markets
----------------------
The undersigned is facilitating Internet distribution:
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of U.S.
Audiotex Corporation have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with this
Registration Statement. The Company will pay all expenses of the offering. All
of such expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission, National Association of Securities Dealers,
Inc. ("NASD") and the Nasdaq National Market.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee................... $16,680
NASD Filing Fee................................................. 6,500
Nasdaq National Market Listing Fee.............................. *
Printing Fees and Expenses...................................... *
Legal Fees and Expenses......................................... *
Directors' and Officers' Insurance Premium...................... *
Accounting Fees and Expenses.................................... *
Blue Sky Fees and Expenses...................................... *
Miscellaneous................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- --------
* To be completed in an amendment.
Item 14. Indemnification of Directors and Officers
Subsection (a) of Section 145 of the General Corporation Law of Delaware
(the "DGCL") empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any
II-1
<PAGE>
other rights to which the indemnified party may be entitled; and empowers the
corporation to purchase and maintain insurance on behalf of a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Our certificate of incorporation provides that no director, or person
serving on a committee of the board of directors, shall be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the DGCL; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we must indemnify our directors, officers and
employees against any liability incurred in connection with any proceeding in
which they may be involved as a party or otherwise, by reason of the fact that
he or she is or was a director, officer, employee, or agent of us, or is or
was serving at our request as a director, officer, employee, agent, fiduciary
or trustee of another corporation, partnership, joint venture, trust, employee
benefit plan, or other entity or enterprise, except:
. to the extent that such indemnification against a particular liability
is expressly prohibited by applicable law;
. for a breach of such person's duty of loyalty to us or our stockholders;
. for acts or omission not in good faith;
. for intentional misconduct or a knowing violation of law; or
. for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding.
Item 15. Recent Sales of Unregistered Securities
On August 24, 1999, we issued 800 shares of our common stock to Imperial
Bank for an aggregate consideration of $8.00 and 200 shares of common stock to
Beranson Holdings, Inc. for an aggregate consideration of $2.00. In connection
with the merger of U.S. Audiotex, LLC into us, which merger we expect to
effect as of September 30, 1999, the limited liability company interests of
Imperial Bank and Beranson Holdings, Inc. in U.S. Audiotex, LLC will be
exchanged for 3,999,200 and 999,200 shares of our common stock, respectively.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.*
3.1 --Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.
4.1 --Common Stock Specimen.*
5.1 --Opinion of Cadwalader, Wickersham & Taft.*
10.1 --Amended Employment Agreement, dated as of September 14, 1999, by and
among U.S. Audiotex Corporation, Imperial Bank and Thomas R. Evans.
10.2 --Employment Agreement, dated August 24, 1999, between U.S. Audiotex
Corporation and Kenneth Stern.
10.3 --1999 Stock Incentive Plan.
10.4 --Stockholders Agreement, dated August 24, 1999, by and among U.S.
Audiotex Corporation, U.S. Audiotex, Inc. and Imperial Bank.
10.5 --Electronic Tax Administration Memorandum of Agreement between the
Internal Revenue Service and U.S. Audiotex, LLC.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the Chief
Financial Officer of the District of Columbia with an award date of
December 22, 1998.*
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related Response to
Request for Proposal.*
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).*
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Ramon, State of
California, on September 17, 1999.
U.S. AUDIOTEX CORPORATION
By: /s/ Thomas R. Evans
----------------------------------
Thomas R. Evans
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Evans and Kenneth Stern, and each of
them, such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform such and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on September , 1999
Signature Title
/s/ Thomas R. Evans
- ------------------------------------- Chairman and Chief Executive Officer
Thomas R. Evans
/s/ Kenneth Stern
- ------------------------------------- President and a director
Kenneth Stern
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<C> <S> <C>
1.1 --Form of Underwriting Agreement.*
3.1 --Certificate of Incorporation of the Registrant.
3.2 --Bylaws of the Registrant.
4.1 --Common Stock Specimen.*
5.1 --Opinion of Cadwalader, Wickersham & Taft.*
10.1 --Amended Employment Agreement, dated as of September 14, 1999,
by and among U.S. Audiotex Corporation, Imperial Bank and
Thomas R. Evans.
10.2 --Employment Agreement, dated August 24, 1999, between U.S.
Audiotex Corporation and Kenneth Stern.
10.3 --1999 Stock Incentive Plan.
10.4 --Stockholders Agreement, dated August 24, 1999, by and among
U.S. Audiotex Corporation, U.S. Audiotex, Inc. and Imperial
Bank.
10.5 --Electronic Tax Administration Memorandum of Agreement between
the Internal Revenue Service and U.S. Audiotex, LLC.
10.6 --Contract between U.S. Audiotex, LLC and the Office of the
Chief Financial Officer of the District of Columbia with an
award date of December 22, 1998.*
10.7 --Term contract between the New Jersey Division of Purchase and
Property and U.S. Audiotex, LLC, together with related
Response to Request for Proposal.*
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.1).*
23.2 --Consent of KPMG LLP.
24.1 --Power of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
U.S. AUDIOTEX CORPORATION
ARTICLE I
NAME
The name of the corporation is U.S. Audiotex Corporation (the "Corporation").
ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT
The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
that address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law (the "Corporation Law").
ARTICLE IV
POWERS
The Corporation shall have all powers that may now or hereafter be
lawful for a corporation to exercise under the Corporation Law.
<PAGE>
ARTICLE V
CAPITAL STOCK
Section 1. Authorization. The aggregate number of shares of stock which the
Corporation shall have authority to issue is fifty million (50,000,000) shares
of common stock having a par value of $.01 per share (the "Common Stock"). For
purposes of this Article V, references to "the Certificate of Incorporation of
the Corporation" shall refer to this Certificate of Incorporation as the same
may be amended from time to time.
Section 2. Common Stock. The shares of Common Stock of the Corporation shall
be of one and the same class. The holders of Common Stock shall have one vote
per share of Common Stock on all matters on which holders of Common Stock are
entitled to vote. Except as otherwise provided by law, the entire voting power
of the stockholders of the Corporation shall be vested in the holders of Common
Stock of the Corporation, who shall be entitled to vote on any matter on which
the holders of stock of the Corporation shall, by law or by the provisions of
the Certificate of Incorporation or bylaws of the Corporation, be entitled to
vote.
ARTICLE VI
NAME AND ADDRESS OF INCORPORATOR
The name and address of the incorporator is Dennis J. Block, Esq., 100
Maiden Lane, New York, New York 10038.
ARTICLE VII
BOARD OF DIRECTORS
Section 1. Number of Directors. The number of Directors shall be fixed
by the bylaws of the Corporation, but shall not be less than three nor more than
nine.
Section 2. Powers of the Board of Directors. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors selected as provided by law and the Certificate of Incorporation and
the bylaws of the Corporation. In furtherance, and not in limitation, of the
powers conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized to:
2
<PAGE>
(a) adopt, amend, alter, change or repeal bylaws of the Corporation; provided,
however, that no bylaw hereafter adopted shall invalidate any prior act of
the Corporation that would have been valid if such new bylaws had not been
adopted;
(b) subject to the bylaws as from time to time in effect, determine the rules
and procedures for the conduct of the business of the Board of Directors
and the management and direction by the Board of Directors of the business
and affairs of the Corporation, including the power to designate and
empower committees of the Board of Directors, to elect, or authorize the
appointment of, and empower officers and other agents of the Corporation,
and to determine the time and place of, the notice requirements for, and
the manner of conducting, Board of Directors meetings, as well as other
notice requirements for, and the manner of taking, Board of Directors
action; and
(c) exercise all such powers and do all such acts as may be exercised or done
by the Corporation, subject to the provisions of the Corporation Law and
the Certificate of Incorporation and bylaws of the Corporation.
Section 3. Vacancies. Except as otherwise required by law, any vacancy
in the Board of Directors for any reason and any newly created directorship
resulting by reason of any increase in the number of directors may be filled
only by the Board of Directors (and not by the stockholders), by resolution
adopted by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum (or by a sole remaining director);
provided, however, that if not so filled, any such vacancy shall be filled by
the stockholders at the next annual meeting or at a special meeting called for
that purpose. Any director so appointed shall hold office until the next meeting
of stockholders at which such director would be elected and until his or her
successor is elected and qualified.
Section 4. Removal of Directors. Any director (including all members of
the Board of Directors) may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 80% of the
voting power of all of the shares of capital stock of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class. For the purposes of this Section 4, "cause" shall mean the willful
and continuous failure of a director to substantially perform such director's
duties to the Corporation (other than any such failure resulting from incapacity
due to physical or mental illness) or the willful engaging by a director in
gross misconduct materially and demonstrably injurious to the Corporation.
3
<PAGE>
ARTICLE VIII
STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS
Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
such holders and may not be effected by written consent in lieu of a meeting of
such holders; provided, however, that this sentence shall only be applicable if
a class of equity securities of the Corporation is registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended. Special meetings
of stockholders of the Corporation may be called only by the Chairman of the
Board of Directors of the Corporation or the Board of Directors pursuant to a
resolution adopted by a majority of the members of the Board of Directors then
in office. Elections of directors need not be by written ballot, unless
otherwise provided in the bylaws. For purposes of all meetings of stockholders,
a quorum shall consist of a majority of the shares entitled to vote at such
meeting of stockholders, unless otherwise required by law.
ARTICLE IX
LIMITATION ON LIABILITY OF DIRECTORS
No person shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
including, without limitation, for serving on a committee of the Board of
Directors; provided, however, that the foregoing shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. Any
amendment, repeal or modification of this Article IX shall not adversely affect
any right or protection of a director of the Corporation existing hereunder with
respect to any act or omission occurring prior to such amendment, repeal or
modification.
ARTICLE X
CERTAIN BUSINESS COMBINATIONS
Section 1. Vote Required for Certain Business Combinations. Except as
otherwise expressly provided in Section 2 of this Article, in addition to any
affirmative vote required by law or by any other provision of the Certificate of
Incorporation of the Corporation,
4
<PAGE>
the affirmative vote of the holders of at least 80% of the outstanding shares of
Voting Stock (as defined below) of the Corporation voting together as a single
class shall be required for the approval or authorization of any Business
Combination (as defined below) of the Corporation with any Related Person (as
defined below). For the purpose of this Article:
(a) The term "Business Combination" shall mean (i) any merger or
consolidation of the Corporation or a Subsidiary (as defined below) of the
Corporation with or into a Related Person or of a Related Person with or into
the Corporation or a Subsidiary of the Corporation; (ii) any sale, lease,
exchange, transfer, or other disposition, including, without limitation, a
mortgage or any other hypothecation or transfer as collateral, of all or any
Substantial Part (as defined below) of the assets either of the Corporation
(including, without limitation, any voting securities of a Subsidiary) or of a
Subsidiary of the Corporation to a Related Person; (iii) the issuance of any
securities (other than by way of a distribution to stockholders made pro rata to
all holders of the class of stock to receive the distribution) of the
Corporation or a Subsidiary of the Corporation to a Related Person; (iv) the
acquisition by the Corporation or a Subsidiary of the Corporation of any
securities of a Related Person; (v) any recapitalization that would have the
effect, directly or indirectly, of increasing the voting power of a Related
Person; (vi) any merger of the Corporation into a Subsidiary of the Corporation;
or (vii) any agreement, contract, or other arrangement providing for any of the
transactions described in this definition of Business Combination.
(b) The term "Continuing Director" shall mean any member of the Board of
Directors who is neither Affiliated (as defined below) nor Associated (as
defined below) with the Related Person and who was a member of the Board of
Directors prior to the time that the Related Person became a Related Person, and
any successor of a Continuing Director who is recommended to succeed a
Continuing Director by a majority of Continuing Directors then members of the
Board of Directors.
(c) The term "Related Person" shall mean and include any individual,
corporation, partnership, or other person or entity which, together with its
Affiliates (as defined below) and Associates (as defined below), Beneficially
Owns (as defined below), in the aggregate 10% or more of the outstanding Voting
Stock (as defined below) of the Corporation, and any Affiliate or Associate of
any such individual, corporation, partnership, or other person or entity.
(d) The term "Substantial Part" shall mean more than 80% of the book
value of the total consolidated assets of the Corporation as reported in the
consolidated financial statements of the Corporation and its Subsidiaries as of
the end of its most recent fiscal year ending prior to the time as of which a
Substantial Part is to be determined.
5
<PAGE>
(e) The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
of the Corporation and each reference to a percentage of shares of Voting Stock
shall refer to such percentage of the votes entitled to be cast by such shares.
(f) The terms "Affiliate" and "Associate" shall have the meanings set
forth in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
(g) The term "Beneficially Owns" shall have the meaning set forth in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended; provided,
however, that, any shares of Voting Stock of the Corporation that any Related
Person has the right to acquire pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise, shall be deemed
Beneficially Owned by the Related Person whether immediately exercisable or
exercisable within ten years of the date as of which Beneficial Ownership is to
be determined.
(h) The term "Subsidiary" with respect to the Corporation shall mean any
corporation, partnership, limited liability company, business trust or similar
entity in which a majority of any class of any equity security is owned directly
or indirectly by the Corporation.
Section 2. When Higher Vote is Not Required. The provisions of Section 1
of this Article shall not be applicable to any particular Business Combination
and such Business Combination shall require only such affirmative vote as may be
required by law or by any other provision of the Certificate of Incorporation of
the Corporation, if all of the conditions specified in either of the following
paragraphs (a) or (b) are met:
(a) the Business Combination shall have been approved by a vote of not
less than a majority of the Continuing Directors; or
(b) all of the following conditions shall have been met:
(i) The aggregate amount of cash and the Fair Market Value (as defined
below) as of the date of the consummation of the Business Combination of the
consideration, other than cash, to be received per share by holders of Common
Stock in such Business Combination shall be at least equal to the highest of the
following:
(A) if applicable, the highest price per share (including
any brokerage commissions, transfer taxes, and soliciting
dealers' fees) paid by the Related Person for any shares of
Common Stock acquired by it (1) within the two year period
immediately prior to the first public announcement of the
proposal of the
6
<PAGE>
Business Combination (the "Announcement Date") or (2) in the
transaction in which it became a Related Person; or
(B) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Related Person
became a Related Person (such latter date is referred to in this
Article as the "Determination Date"), whichever is higher; and
(ii) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of the consideration,
other than cash, to be received per share by holders of shares of any class or
series of outstanding Voting Stock, other than Common Stock, shall be at least
equal to the highest of the following (it being intended that the requirements
of this subparagraph (b)(ii) shall be required to be met with respect to every
class or series of outstanding capital stock of the Corporation other than
Common Stock, whether or not the Related Person has previously acquired any
shares of such class or series of Voting Stock):
(A) if applicable, the highest per share price (including
any brokerage commission, transfer taxes, and soliciting
dealers' fees) paid by the Related Person for any shares of such
class or series of Voting Stock acquired by it (1) within the
two year period immediately prior to the Announcement Date or
(2) in the transaction in which it became a Related Person,
whichever is higher; or
(B) if applicable, the redemption price of the shares of
such class or series, or if such shares have no redemption
price, the highest amount per share which such class or series
would be entitled to receive upon liquidation of the Corporation
on the Announcement Date or the Determination Date, whichever is
higher; or
(C) the Fair Market Value per share of such class or
series of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher; and
(iii) the consideration to be received in such Business Combination by
holders of each class or series of outstanding Voting Stock (including Common
stock) shall be in cash or in the same form as the Related Person has previously
paid for shares of such class or series of Voting Stock; provided, however, that
if the Related Person has paid for shares of any class or series of Voting Stock
with varying forms of consideration, the form of consideration for such class or
series of Voting Stock shall be either cash or the
7
<PAGE>
form used to acquire the largest number of shares of such class or series of
Voting Stock previously acquired by it; and
(iv) a proxy statement responsive to the requirements of the Securities
Exchange Act of 1934, as amended, shall have been mailed to public stockholders
of the Corporation for the purpose of soliciting stockholder approval of the
Business Combination and shall have contained at the front thereof, in a
prominent place, any recommendations as to the advisability (or inadvisability)
of the Business Combination that the Continuing Directors, or any of them, may
choose to state and, if deemed advisable by a majority of the Continuing
Directors, an opinion of a reputable investment banking firm as to the fairness
(or not) of the terms of the Business Combination, from the point of view of the
remaining public stockholders of the Corporation (such investment banking firm
to be selected by a majority of the Continuing Directors and to be paid a
reasonable fee for their services by the Corporation upon receipt of the
opinion); provided, however, that this clause (iv) shall only be applicable if a
class of equity securities of the Corporation is registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended.
Section 3. Certain Definitions and Additional Provisions. For the
purposes of this Article:
(a) "Fair Market Value" shall mean:
(i) in the case of stock, the highest closing bid quotation with respect
to a share of such stock during the 30-day period preceding the date in question
on the Nasdaq National Market or any quotations system then generally in use,
or, if no such quotations are available, the highest closing sale price during
the 30-day period immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if
such stock is not quoted on the Composite Tape, on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934, as
amended, on which such stock is listed, or, if such stock is not listed on any
such exchange, the fair market value on the date in question of a share of such
stock as determined by the Continuing Directors in good faith, which
determination shall be final; and
(ii) in the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by the Continuing
Directors in good faith, which determination shall be final.
8
<PAGE>
(b) The Board of Directors, with the approval of a majority of the total
number of Continuing Directors, shall have the power and duty to determine, on
the basis of information known to it after reasonable inquiry, all facts
necessary to determine compliance with this Article, including, without
limitation, (i) whether a person is a Related Person, (ii) the number of shares
of Voting Stock Beneficially Owned by any person, (iii) whether a person is an
Affiliate or Associate of another person, (iv) whether the applicable conditions
set forth in paragraph (b) of Section 2 of this Article have been met with
respect to any Business Combination, and (v) whether the proposed transaction is
a Business Combination. Any such determinations shall be final.
Section 4. Amendment of this Article. This Article may be amended,
altered, changed, or repealed only by the affirmative vote of the holders of at
least 80% of the outstanding shares of Voting Stock voting together as a single
class unless the proposed amendment, alteration, change, or repeal has been
recommended to the stockholders by the Board of Directors with the approval of
at least two-thirds of the Continuing Directors, in which event the proposed
amendment, alteration, change, or repeal shall require for approval the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
Voting Stock, voting as a single class.
ARTICLE XI
BYLAWS
The Board of Directors shall have the power to adopt, amend, alter,
change or repeal bylaws of and for the Corporation by the affirmative vote of 66
2/3% of the members then in office. The affirmative vote of the holders of at
least 80% of the voting power of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors, voting
together as a single class shall be required to adopt, amend, alter, change or
repeal bylaws of the Corporation (notwithstanding the fact that approval by a
lesser percentage may be permitted by the Corporation Law).
ARTICLE XII
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right from time to time to amend,
alter, change or repeal any provision contained in the Certificate of
Incorporation of the Corporation in any manner permitted by the Corporation Law
and all rights and powers conferred upon
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stockholders, directors and officers herein are granted subject to this
reservation. In addition to any vote otherwise required by law, and except as
may otherwise be provided in Article V or X hereof, any such amendment,
alteration, change or repeal shall require approval of both (i) the Board of
Directors by the affirmative vote of a majority of the members then in office
and (ii) the holders of a majority of the voting power of all of the shares of
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, except that any proposal to amend,
alter, change or repeal the provisions of Section 4 of Article VII, Article
VIII, Article XI and this Article XII shall require the affirmative vote of the
holders of at least 80% of the voting power of all of the shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
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In Witness Whereof, the undersigned has signed this Certificate of
Incorporation on August 24, 1999.
By: /s/ Dennis J. Block
-------------------------------------------
Dennis J. Block, Esq.
Sole Incorporator
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
U.S. AUDIOTEX CORPORATION
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of U.S. Audiotex
Corporation (the "Corporation") in the State of Delaware shall be at 1209 Orange
Street, in the City of Wilmington, County of New Castle, 19801 and its
registered agent at such address shall be The Corporation Trust Company, or such
other office or agent as the Board of Directors of the Corporation (the "Board")
shall from time to time select.
Section 2. Other Offices. The Corporation may also have an office or offices,
and keep the books and records of the Corporation, except as may otherwise be
required by law, at such other place or places, either within or without the
State of Delaware, as the Board may from time to time determine or the business
of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meeting. All meetings of the stockholders of the
Corporation shall be held at the office of the Corporation or at such other
places, within or without the State of Delaware, as may from time to time be
fixed by the Board.
Section 2. Annual Meetings. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date and at such hour as
shall from time to time be fixed by the Board. Any previously scheduled annual
meeting of the stockholders may be postponed by action of the Board taken prior
to the time previously scheduled for such annual meeting of stockholders.
Section 3. Special Meetings. Except as otherwise required by law or the
Certificate of Incorporation of the Corporation (the "Certificate"), special
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the Chief Executive Officer or a majority of the entire
Board. Only such business as is specified in the notice of any special meeting
of the stockholders shall come before such meeting.
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Section 4. Notice of Meetings. Except as otherwise provided by law, written
notice of each meeting of the stockholders, whether annual or special, shall be
given, either by personal delivery or by mail, not less than 10 nor more than 60
days before the date of the meeting to each stockholder of record entitled to
notice of the meeting. If mailed, such notice shall be deemed given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, prior to
or at the commencement of the meeting, the lack of proper notice to such
stockholder, or who shall sign a written waiver of notice thereof, whether
before or after such meeting. Notice of adjournment of a meeting of stockholders
need not be given if the time and place to which it is adjourned are announced
at such meeting, unless the adjournment is for more than 30 days or, after
adjournment, a new record date is fixed for the adjourned meeting.
Section 5. Quorum. Except as otherwise provided by law or by the Certificate,
the holders of a majority of the votes entitled to be cast by the stockholders
entitled to vote generally, present in person or by proxy, shall constitute a
quorum for the transaction of business at any meeting of the stockholders;
provided, however, that in the case of any vote to be taken by classes, the
holders of a majority of the votes entitled to be cast by the stockholders of a
particular class shall constitute a quorum for the transaction of business by
such class.
Section 6. Adjournments. The chairman of the meeting or the holders of a
majority of the votes entitled to be cast by the stockholders who are present in
person or by proxy may adjourn the meeting from time to time whether or not a
quorum is present. In the event that a quorum does not exist with respect to any
vote to be taken by a particular class, the chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders of
such class who are present in person or by proxy may adjourn the meeting with
respect to the vote(s) to be taken by such class. At such adjourned meeting at
which a quorum may be present, any business may be transacted which might have
been transacted at the meeting as originally called.
Section 7. Order of Business.
(a) At each meeting of the stockholders, the Chairman of the Board or, in the
absence of the Chairman of the Board, the Chief Executive Officer or, in
the absence of the Chief Executive Officer, such person as shall be
selected by the Board shall act as chairman of the meeting. The order of
business at each such meeting shall be as determined by the chairman of the
meeting. The chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts
and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for
the maintenance of order and safety, limitations on the time allotted to
questions or comments on the affairs of the Corporation, restrictions on
entry to such meeting after the time prescribed for the commencement
thereof, and the opening and closing of the voting polls.
(b) At any annual meeting of stockholders, only such business shall be
conducted as shall have been brought before the annual meeting (i) by or at
the direction of the
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chairman of the meeting, (ii) pursuant to the notice provided for in
Section 4 of this Article II or (iii) by any stockholder who is a holder of
record at the time of the giving of such notice provided for in this
Section 7, who is entitled to vote at the meeting and who complies with the
procedures set forth in this Section 7.
(c) For business properly to be brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation (the "Secretary").
To be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation not less
than 90 days prior to the date of an annual meeting of stockholders. To be
in proper written form, a stockholder's notice to the Secretary shall set
forth in writing as to each matter the stockholder proposes to bring before
the annual meeting: (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address of the
stockholder proposing such business and all persons or entities acting in
concert with the stockholder; (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder and all persons
or entities acting in concert with such stockholder; and (iv) any material
interest of the stockholder in such business. The foregoing notice
requirements shall be deemed satisfied by a stockholder if the stockholder
has notified the Corporation of his or her intention to present a proposal
at an annual meeting and such stockholder's proposal has been included in a
proxy statement that has been prepared by management of the Corporation to
solicit proxies for such annual meeting; provided, however, that if such
stockholder does not appear or send a qualified representative to present
such proposal at such annual meeting, the Corporation need not present such
proposal for a vote at such meeting, notwithstanding that proxies in
respect of such vote may have been received by the Corporation.
Notwithstanding anything in the bylaws to the contrary, no business shall
be conducted at any annual meeting except in accordance with the procedures
set forth in this Section 7. The chairman of an annual meeting shall, if
the facts warrant, determine that business was not properly brought before
the annual meeting in accordance with the provisions of this Section 7,
and, if the chairman should so determine, the chairman shall so declare to
the annual meeting and any such business not properly brought before the
annual meeting shall not be transacted.
Section 8. List of Stockholders. It shall be the duty of the Secretary or other
officer who has charge of the stock ledger to prepare and make, at least 10 days
before each meeting of the stockholders, a complete list of the stockholders
entitled to vote thereat, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in such
stockholder's name. Such list shall be produced and kept available at the times
and places required by law.
Section 9. Voting.
(a) Except as otherwise provided by law or by the Certificate, each stockholder
of record of any class or series of capital stock of the Corporation shall
be entitled at each meeting of stockholders to such number of votes for
each share of such stock as may be fixed in the Certificate or in the
resolution or resolutions adopted by the Board providing for the issuance
of such stock, registered in such stockholder's name on the books of the
Corporation:
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(i) on the date fixed pursuant to Section 6 of Article VII of these bylaws
as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then at the close of
business on the day next preceding the day on which notice of such
meeting is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held.
(b) Each stockholder entitled to vote at any meeting of stockholders may
authorize not in excess of three persons to act for such stockholder by
proxy. Any such proxy shall be delivered to the secretary of such meeting
at or prior to the time designated for holding such meeting. No such proxy
shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period.
(c) At each meeting of the stockholders, all corporate actions to be taken by
vote of the stockholders (except as otherwise required by law and except as
otherwise provided in the Certificate or these bylaws) shall be authorized
by a majority of the votes cast by the stockholders entitled to vote
thereon who are present in person or represented by proxy, and where a
separate vote by class is required, a majority of the votes cast by the
stockholders of such class who are present in person or represented by
proxy shall be the act of such class.
(d) Unless required by law or determined by the chairman of the meeting to be
advisable, the vote on any matter, including the election of directors,
need not be by written ballot. In the case of a vote by written ballot,
each ballot shall be signed by the stockholder voting, or by such
stockholder' s proxy.
Section 10. Inspectors. The chairman of the meeting shall appoint one or more
inspectors to act at any meeting of stockholders. Such inspectors shall perform
such duties as shall be specified by the chairman of the meeting. Inspectors
need not be stockholders. No director or nominee for the office of director
shall be appointed such inspector.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Certificate directed or required to be exercised or done by the
stockholders.
Section 2. Number, Qualification and Election.
(a) Except as otherwise fixed by or pursuant to the provisions of Article V of
the Certificate relating to the rights of the holders of any class or
series of stock having preference over the common stock of the corporation
as to dividends or upon liquidation, the number of directors of the
Corporation shall be determined from time to time by the Board by
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the affirmative vote of directors constituting at least a majority of the
entire Board; provided, however, that the number thereof may not be less
than three nor more than nine and shall be fixed initially by the sole
incorporator of the Corporation.
(b) Each director shall be at least 21 years of age. Directors need not be
stockholders of the Corporation.
(c) In any election of directors held at a meeting of stockholders, the persons
receiving a plurality of the votes cast by the stockholders entitled to
vote thereon at such meeting who are present or represented by proxy, up to
the number of directors to be elected in such election, shall be deemed
elected.
Section 3. Notification of Nomination. Subject to the rights of the holders of
any class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for the election of directors may be
made by the Board or by any stockholder who is a stockholder of record at the
time of giving of the notice of nomination provided for in this Section 3 of
this Article III and who is entitled to vote for the election of directors. Any
stockholder of record entitled to vote for the election of directors at a
meeting may nominate persons for election as directors only if timely written
notice of such stockholder's intent to make such nomination is given, either by
personal delivery or by United States mail, postage prepaid, to the Secretary.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation (i) with respect to an
election to be held at an annual meeting of stockholders, not less than 90 days
prior to the date of such annual meeting and (ii) with respect to an election to
be held at a special meeting of stockholders for the election of directors,
within 15 days following the public announcement of the date of such special
meeting. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination, of all persons or entities
acting in concert with the stockholder, and of the person or persons to be
nominated; (b) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or entities acting in
concert with the stockholder (naming such person or entities) pursuant to which
the nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by the stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board, whether or not the Corporation is
then subject to Section 14 of the Securities Exchange Act of 1934, as amended;
(e) the class and number of shares of the Corporation that are beneficially
owned by the stockholder and all persons or entities acting in concert with the
stockholder; and (f) the consent of each nominee to being named in a proxy
statement as nominee and to serve as a director of the Corporation if so
elected. The chairman of the meeting may refuse to acknowledge the nomination of
any person not made after compliance with the foregoing procedure. Only such
persons who are nominated in accordance with the procedures set forth in this
Section 3 of this Article III shall be eligible to serve as directors of the
Corporation.
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Section 4. Quorum and Manner of Acting. Except as otherwise provided by law,
the Certificate or these bylaws, a majority of the entire Board shall constitute
a quorum for the transaction of business at any meeting of the Board, and,
except as so provided, the vote of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. The chairman
of the meeting or a majority of the directors present may adjourn the meeting to
another time and place whether or not a quorum is present. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called.
Section 5. Place of Meeting. The Board may hold its meetings at such place or
places within or without the State of Delaware as the Board may from time to
time determine or as shall be specified or fixed in the respective notice or
waivers of notice thereof.
Section 6. Regular Meetings. Regular meetings of the Board shall be held at
such times and places as the Chairman of the Board or the Board shall from time
to time by resolution determine. If any day fixed for a regular meeting shall be
a legal holiday under the laws of the place where the meeting is to be held, the
meeting which would otherwise be held on that day shall be held at the same hour
on the next succeeding business day.
Section 7. Special Meetings. Special meetings of the Board shall be held
whenever called by the Chairman of the Board or by a majority of the directors.
Section 8. Notice of Meetings. Notice of regular meetings of the Board or of
any adjourned meeting thereof need not be given. Notice of each special meeting
of the Board shall be given by overnight delivery service or mailed to each
director, in either case addressed to such director at such director's residence
or usual place of business, at least two days before the day on which the
meeting is to be held or shall be sent to such director at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of such notice or who shall attend such meeting without protesting, prior to or
at its commencement, the lack of notice to such director. Every such notice
shall state the time and place but need not state the purpose of the meeting.
Section 9. Rules and Regulations. The Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate or
these bylaws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
Section 10. Participation in Meeting by Means of Communication Equipment. Any
one or more members of the Board or any committee thereof may participate in any
meeting of the Board or of any such committee by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 11. Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board or any committee thereof may be taken without
a meeting if
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all of the members of the Board or of any such committee consent thereto in
writing and the writing or writings are filed with the minutes or proceedings of
the Board or of such committee.
Section 12. Resignations. Any director of the Corporation may at any time
resign by giving written notice to the Board, the Chairman of the Board, the
Chief Executive Officer, the President or the Secretary. Such resignation shall
take effect at the time specified therein or, if the time be not specified
therein, upon receipt thereof; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 13. Removal of Directors. Directors may be removed only as provided in
Section 4 of Article VII of the Certificate.
Section 14. Vacancies. Subject to the rights of the holders of any class or
series of stock having a preference over the common stock of the Corporation as
to dividends or upon liquidation, any vacancies on the Board resulting from
death, resignation, removal or other cause shall only be filled by the Board by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board, or by a sole remaining director,
and newly created directorships resulting from any increase in the number of
directors shall be filled by the Board, or if not so filled, by the stockholders
at the next annual meeting thereof or at a special meeting called for that
purpose in accordance with Section 3 of Article II of these bylaws. Any director
elected in accordance with the preceding sentence of this Section 14 of this
Article III shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified.
Section 15. Compensation. Each director, in consideration of such person
serving as a director, shall be entitled to receive from the Corporation such
amount per annum and such fees for attendance at meetings of the Board or of
committees of the Board, or both, as the Board shall from time to time
determine. In addition, each director shall be entitled to receive from the
Corporation reimbursement for the reasonable expenses incurred by such person in
connection with the performance of such person's duties as a director. Nothing
contained in this Section 15 of this Article III shall preclude any director
from serving the Corporation or any of its subsidiaries in any other capacity
and receiving proper compensation therefor.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. Establishment of Committees of the Board of Directors; Election of
Members of Committees of the Board of Directors; Functions of Committees of the
Board of Directors. The Board may, in accordance with and subject to the General
Corporation Law of the State of Delaware, from time to time establish committees
of the Board to exercise such powers and authorities of the Board, and to
perform such other functions, as the Board may from time to time determine.
Section 2. Procedure; Meetings; Quorum. Regular meetings of committees of the
Board, of which no notice shall be necessary, may be held at such times and
places as shall
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be fixed by resolution adopted by a majority of the members thereof. Special
meetings of any committee of the Board shall be called at the request of a
majority of the members thereof. Notice of each special meeting of any committee
of the Board shall be given by overnight delivery service or mailed to each
member, in either case addressed to such member at such member's residence or
normal place of business, at least two days before the day on which the meeting
is to be held or shall be sent to such members at such place by telegraph or
telecopy or be given personally or by telephone, not later than the day before
the meeting is to be held, but notice need not be given to any member who shall,
either before or after the meeting, submit a signed waiver of such notice or who
shall attend such meeting without protesting, prior to it or at its
commencement, the lack of such notice to such member. Any special meeting of any
committee of the Board shall be a legal meeting without any notice thereof
having been given, if all the members thereof shall be present thereat. Notice
of any adjourned meeting of any committee of the Board need not be given. Any
committee of the Board may adopt such rules and regulations not inconsistent
with the provisions of law, the Certificate or these bylaws for the conduct of
its meetings as such committee of the Board may deem proper. A majority of the
members of any committee of the Board shall constitute a quorum for the
transaction of business at any meeting, and the vote of a majority of the
members thereof present at any meeting at which a quorum is present shall be the
act of such committee. Each committee of the Board shall keep written minutes of
its proceedings and shall report on such proceedings to the Board.
ARTICLE V
OFFICERS
Section 1. Number; Term of Office. The officers of the Corporation shall be
such officers as the Board may from time to time determine, which may include a
Chairman of the Board, Chief Executive Officer, President, Chief Financial
Officer, General Counsel and one or more Vice Presidents (including, without
limitation, Assistant, Executive and Senior Vice Presidents) and a Treasurer,
Secretary and Controller and such other officers or agents with such titles and
such duties as the Board may from time to time determine, each to have such
authority, functions or duties as provided in these bylaws or as the Board may
from time to time determine, and each to hold office for such term as may be
prescribed by the Board and until such person's successor shall have been chosen
and shall qualify, or until such person's death or resignation, or until such
person's removal in the manner hereinafter provided. One person may hold the
offices and perform the duties of any two or more of said officers; provided,
however, that no officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required by law, the Certificate or
these bylaws to be executed, acknowledged or verified by two or more officers.
The Board may from time to time authorize any officer to appoint and remove any
such other officers and agents and to prescribe their powers and duties. The
Board may require any officer or agent to give security for the faithful
performance of such person's duties.
Section 2. Removal. Any officer may be removed, either with or without cause,
by the Board at any meeting thereof or, except in the case of any officer
elected by the Board, by any superior officer upon whom such power may be
conferred by the Board.
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Section 3. Resignation. Any officer may resign at any time by giving notice to
the Board, the Chief Executive Officer or the Secretary. Any such resignation
shall take effect at the date of receipt of such notice or at any later date
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 4. Vacancies. A vacancy in any office because of death, resignation,
removal or any other cause may be filled for the unexpired portion of the term
in the manner prescribed in these bylaws for election to such office.
Section 5. Chairman of the Board; Powers and Duties. The Chairman of the Board
shall preside at all meetings of the stockholders and the Board at which he or
she is present. Unless otherwise precluded from doing so by these bylaws, the
Chairman of the Board may be a member of the committees of the Board. The
Chairman of the Board shall act as chairman at all meetings of the stockholders
at which he or she is present unless he or she elects that the Chief Executive
Officer shall so preside. The Chairman of the Board may be designated by the
Board as an officer of the Company and may be elected by the Board as the Chief
Executive Officer. The Chairman of the Board shall perform all duties as may be
assigned to him or her by the Board of Directors. In case of the absence or
disability of the Chairman of the Board or a vacancy in the office, the Chief
Executive Officer or, if none, the President shall exercise all the powers and
perform all the duties of the Chairman of the Board.
Section 6. Chief Executive Officer; Powers and Duties. Subject to the control
of the Board, the Chief Executive Officer shall supervise and direct generally
all the business and affairs of the Corporation. Any document may be signed by
the Chief Executive Officer or any other person who may be thereunto authorized
by the Board or the Chief Executive Officer. The Chief Executive Officer may
appoint such assistant officers as are deemed necessary.
Section 7. President, Executive Vice Presidents, Senior Vice Presidents and
Vice Presidents; Powers and Duties. The President shall be the chief operating
officer of the Corporation. The President and each Executive Vice President,
each Senior Vice President, and each Vice President shall have such powers and
perform such duties as may be assigned by the Board of Directors or the Chief
Executive Officer.
Section 8. Secretary and Assistant Secretaries; Powers and Duties. The
Secretary shall attend all meetings of the stockholders and the Board and shall
keep the minutes for such meetings in one or more books provided for that
purpose. The Secretary shall be custodian of the corporate records, except those
required to be in the custody of the Treasurer or the Controller, shall keep the
seal of the Corporation, and shall execute and affix the seal of the Corporation
to all documents duly authorized for execution under seal on behalf of the
Corporation, and shall perform all of the duties incident to the office of
Secretary, as well as such other duties as may be assigned by the Chief
Executive Officer or the Board.
The Assistant Secretaries shall perform such of the Secretary's duties
as the Secretary shall from time to time direct. In case of the absence or
disability of the Secretary or a vacancy in the office, an Assistant Secretary
designated by the Chief Executive Officer or by the Secretary, if the office is
not vacant, shall perform the duties of the Secretary.
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Section 9. Chief Financial Officer; Powers and Duties. The Chief Financial
Officer shall be responsible for maintaining the financial integrity of the
Corporation, shall prepare the financial plans for the Corporation, and shall
monitor the financial performance of the Corporation and its subsidiaries, as
well as performing such other duties as may be assigned by the Chief Executive
Officer or the Board.
Section 10. Treasurer and Assistant Treasurers; Powers and Duties. The
Treasurer shall have care and custody of the funds and securities of the
Corporation, shall deposit such funds in the name and to the credit of the
Corporation with such depositories as the Treasurer shall approve, shall
disburse the funds of the Corporation for proper expenses and dividends, and as
may be ordered by the Board, taking proper vouchers for such disbursements. The
Treasurer shall perform all of the duties incident to the office of Treasurer,
as well as such other duties as may be assigned by the Chief Executive Officer
or the Board.
The Assistant Treasurers shall perform such of the Treasurer's duties
as the Treasurer shall from time to time direct. In case of the absence or
disability of the Treasurer or a vacancy in the office, an Assistant Treasurer
designated by the Chief Executive Officer or by the Treasurer, if the office is
not vacant, shall perform the duties of the Treasurer.
Section 11. General Counsel; Powers and Duties. The General Counsel shall be a
licensed attorney at law and shall be the chief legal officer of the
Corporation. The General Counsel shall have such power and exercise such
authority and provide such counsel to the Corporation as deemed necessary or
desirable to enforce the rights and protect the property and integrity of the
Corporation, shall also have the power, authority, and responsibility for
securing for the Corporation all legal advice, service, and counseling, and
shall perform all of the duties incident to the office of General Counsel, as
well as such other duties as may be assigned by the Chief Executive Officer or
the Board.
Section 12. Controller and Assistant Controllers; Powers and Duties. The
Controller shall be the chief accounting officer of the Corporation and shall
keep and maintain in good and lawful order all accounts required by law and
shall have sole control over, and ultimate responsibility for, the accounts and
accounting methods of the Corporation and the compliance of the Corporation with
all systems of accounts and accounting regulations prescribed by law. The
Controller shall audit, to such extent and at such times as may be required by
law or as the Controller may think necessary, all accounts and records of
corporate funds or property, by whomsoever kept, and for such purposes shall
have access to all such accounts and records. The Controller shall make and sign
all necessary and proper accounting statements and financial reports of the
Corporation, and shall perform all of the duties incident to the office of
Controller, as well as such other duties as may be assigned by the Chief
Executive Officer or the Board.
The Assistant Controllers shall perform such of the Controller's
duties as the Controller shall from time to time direct. In case of the absence
or disability of the Controller or a vacancy in the office, an Assistant
Controller designated by the Chief Executive Officer or the Controller, if the
office is not vacant, shall perform the duties of the Controller.
Section 13. Salaries. The salaries of all officers of the Corporation shall be
fixed by or in the manner provided by the Board. If authorized by a resolution
of the Board, the
10
<PAGE>
salary of any officer other than the Chief Executive Officer may be fixed by the
Chief Executive Officer or a Committee of the Board. No officer shall be
disqualified from receiving a salary by reason of also being a director of the
Corporation.
ARTICLE VI
INDEMNIFICATION
Section 1. Scope of Indemnification.
(a) The Corporation shall indemnify an indemnified representative against any
liability incurred in connection with any proceeding in which the
indemnified representative may be involved as a party or otherwise, by
reason of the fact that such person is or was serving in an indemnified
capacity, except to the extent that any such indemnification against a
particular liability is expressly prohibited by applicable law or where a
judgment or other final adjudication adverse to the indemnified
representative establishes, or where the Corporation determines, that his
or her acts or omissions (i) were in breach of such person's duty of
loyalty to the Corporation or its stockholders, (ii) were not in good faith
or involved intentional misconduct or a knowing violation of law, or (iii)
resulted in receipt by such person of an improper personal benefit. The
rights granted by this Article shall not be deemed exclusive of any other
rights to which those seeking indemnification, contribution, or advancement
of expenses may be entitled under any statute, certificate of
incorporation, agreement, contract of insurance, vote of stockholders or
disinterested directors, or otherwise. The rights of indemnification and
advancement of expenses provided by or granted pursuant to this Article VI
shall continue as to a person who has ceased to be an indemnified
representative in respect of matters arising prior to such time and shall
inure to the benefit of the heirs, executors, administrators and personal
representatives of such a person.
(b) If an indemnified representative is not entitled to indemnification with
respect to a portion of any liabilities to which such person may be
subject, the Corporation shall nonetheless indemnify such indemnified
representative to the maximum extent for the remaining portion of the
liabilities.
(c) The termination of a proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent shall not, of itself,
create a presumption that the indemnified representative is not entitled to
indemnification.
(d) To the extent permitted by law, the payment of indemnification provided for
by this Article VI, including the advancement of expenses pursuant to
Section 2 of this Article VI, with respect to proceedings other than those
brought by or in the right of the Corporation, shall be subject to the
conditions that the indemnified representative shall give the Corporation
prompt notice of any proceeding, that the Corporation shall have complete
charge of the defense of such proceeding and the right to select counsel
for the indemnified representative, and that the indemnified representative
shall assist and cooperate fully in all matters respecting the proceeding
and its defense or settlement. The Corporation may waive any or all of the
conditions set forth in the preceding sentence. Any such waiver shall be
applicable only to the specific payment for which the waiver is made and
shall not in any way obligate the Corporation to grant such waiver at any
future time. In the event of a conflict of interest between the
11
<PAGE>
indemnified representative and the Corporation that would disqualify the
Corporation's counsel from representing the indemnified representative
under the rules of professional conduct applicable to attorneys, it shall
be the policy of the Corporation to waive any or all of the foregoing
conditions subject to such limitations or conditions as the Corporation
shall deem to be reasonable in the circumstances.
(e) For purposes of this Article:
(i) "indemnified capacity" means any and all past, present, or future
services by an indemnified representative in one or more capacities as
a director, officer, employee, or agent of the Corporation or, at the
request of the Corporation, as a director, partner, member, officer,
employee, agent, fiduciary, or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan, or other
entity or enterprise; any indemnified representative serving an
affiliate of the Corporation in any capacity shall be deemed to be
doing so at the request of the Corporation;
(ii) an "affiliate of the Corporation" means an entity that directly or
indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Corporation;
(iii) "indemnified representative" means any and all directors, officers,
and employees of the Corporation and any other person designated as an
indemnified representative by the Board;
(iv) "liability" means any damage, judgment, amount paid in settlement,
fine, penalty, punitive damage, excise tax assessed with respect to an
employee benefit plan, or cost or expense of any nature (including,
without limitation, expert witness fees, costs of investigation,
litigation and appeal costs, attorneys' fees, and disbursements); and
(v) "proceeding" means any threatened, pending, or completed action, suit,
appeal, or other proceeding at any nature, whether civil, criminal,
administrative, or investigative, whether formal or informal, whether
external or internal to the Corporation, and whether brought by or in
the right of the Corporation, a class of its security holders or
otherwise.
Section 2. Advancing Expenses. All reasonable expenses incurred in good faith
by an indemnified representative in advance of the final disposition of a
proceeding described in Section 1 of this Article VI shall be advanced to the
indemnified representative by the Corporation. Before making any such advance
payment of expenses, the Corporation shall receive an undertaking by or on
behalf of the indemnified representative to repay such amount if it shall
ultimately be determined that such indemnified representative is not entitled to
be indemnified by the Corporation pursuant to this Article VI. No advance shall
be made by the Corporation if a determination is reasonably and promptly made by
a majority vote of disinterested directors, even if the disinterested directors
constitute less than a quorum, or (if such a quorum is not obtainable or, even
if obtainable, a quorum of disinterested directors so directs) by independent
legal counsel in a written opinion, that, based upon the facts known to the
Board or counsel at the time such determination is made, the indemnified
representative has
12
<PAGE>
acted in such a manner as to permit or require the denial of indemnification
pursuant to the provisions of Section 1 of this Article VI.
ARTICLE VII
CAPITAL STOCK
Section 1. Share Ownership.
(a) Holders of shares of stock of each class of the Corporation shall be
recorded on the books of the Corporation and ownership of such stock shall
be evidenced by a certificate or other form as shall be approved by the
Board. Certificates representing shares of stock of each class, if any,
shall be signed by, or in the name of, the Corporation by the Chairman of
the Board or the President, any Vice President and by the Secretary or any
Assistant Secretary or the Treasurer or any Assistant Treasurer of the
Corporation, and sealed with the seal of the Corporation, which may be a
facsimile thereof. Any or all such signatures may be facsimiles if
countersigned by a transfer agent or registrar. Although any officer,
transfer agent or registrar whose manual or facsimile signature is affixed
to such a certificate ceases to be such officer, transfer agent or
registrar before such certificate has been issued, it may nevertheless be
issued by the Corporation with the same effect as if such officer, transfer
agent or registrar were still such at the date of its issue.
(b) The stock ledger and blank share certificates shall be kept by the
Secretary or by a transfer agent or by a registrar or by any other officer
or agent designated by the Board.
Section 2. Transfer of Shares. Transfers of shares of stock of each class of
the Corporation shall be made only on the books of the Corporation by the holder
thereof, or by such holder's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary or a transfer agent for such
stock, if any, and on surrender of the certificate or certificates, if any, for
such shares properly endorsed or accompanied by a duly executed stock transfer
power (or by proper evidence of succession, assignment or authority to transfer)
and the payment of any taxes thereon; provided, however, that the Corporation
shall be entitled to recognize and enforce any lawful restriction on transfer.
The person in whose name shares are registered on the books of the Corporation
shall be deemed the owner thereof for all purposes as regards the Corporation;
provided, however, that whenever any transfer of shares shall be made for
collateral security and not absolutely, and written notice thereof shall be
given to the Secretary or to such transfer agent, such fact shall be stated in
the entry of the transfer. No transfer of shares shall be valid as against the
Corporation, its stockholders and creditors for any purpose, except to render
the transferee liable for the debts of the Corporation to the extent provided by
law, until it shall have been entered in the stock records of the Corporation by
an entry showing from and to whom transferred.
Section 3. Registered Stockholders and Addresses of Stockholders.
(a) The Corporation shall be entitled to recognize the exclusive right of a
person registered on its records as the owner of shares of stock to receive
dividends and to vote as such owner, shall be entitled to hold liable for
calls and assessments a person registered on its
13
<PAGE>
records as the owner of shares of stock, and shall not be bound to
recognize any equitable or other claim to or interest in such share or
shares of stock on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the
laws of Delaware.
(b) Each stockholder shall designate to the Secretary or transfer agent of the
Corporation an address at which notices of meetings and all other corporate
notices may be delivered or mailed to such person, and, if any stockholder
shall fail to designate such address, corporate notices may be delivered to
such person by mail directed to such person at such person's post office
address, if any, as the same appears on the stock record books of the
Corporation or at such person's last known post office address.
Section 4. Lost, Destroyed and Mutilated Certificates. The Corporation may
issue to any holder of shares of stock the certificate for which has been lost,
stolen, destroyed or mutilated a new certificate or certificates for shares,
upon the surrender of the mutilated certificate or, in the case of loss, theft
or destruction of the certificate, upon satisfactory proof of such loss, theft
or destruction. The Board, or a committee designated thereby, or the transfer
agents and registrars for the stock, may, in their discretion, require the owner
of the lost, stolen or destroyed certificate, or such person's legal
representative, to give the Corporation a bond in such sum and with such surety
or sureties as they may direct to indemnify the Corporation and said transfer
agents and registrars against any claim that may be made on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 5. Regulations. The Board may make such additional rules and
regulations as it may deem expedient concerning the issue and transfer of shares
of stock of each class of the Corporation and may make such rules and take such
action as it may deem expedient concerning the issue of certificates in lieu of
certificates claimed to have been lost, destroyed, stolen or mutilated.
Section 6. Fixing Date for Determination of Stockholders of Record. In order
that the Corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or entitled to
receive payment of any dividend or other distribution or allotment or any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
Section 7. Transfer Agents and Registrars. The Board may appoint, or authorize
any officer or officers to appoint, one or more transfer agents and one or more
registrars.
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<PAGE>
ARTICLE VIII
SEAL
The Board shall provide a corporate seal, which shall be in the form of a circle
and shall bear the full name of the Corporation and the words and figures of
"Corporate Seal Delaware," or such other words or figures as the Board may
approve and adopt. The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December in each
year.
ARTICLE X
AMENDMENTS
Any bylaw may be adopted, repealed, altered or amended by two-thirds of the
entire Board at any meeting thereof. The stockholders of the Corporation shall
have the power to amend, alter or repeal any provision of these bylaws only to
the extent and in the manner provided in the Certificate.
15
<PAGE>
EXHIBIT 10.1
AMENDED EMPLOYMENT AGREEMENT
----------------------------
This Amended Employment Agreement (this "Agreement") is made as of
---------
September 14, 1999 by and among U.S. Audiotex Corporation, a Delaware
corporation (the "Company"), Imperial Bank ("Imperial") and Thomas R. Evans
------- --------
("Executive").
---------
RECITALS
--------
WHEREAS, the Company desires to continue to employ Executive to serve
as Chief Executive Officer and Chairman of the Board of Directors (the "Board")
-----
of the Company on the terms and conditions herein provided;
WHEREAS, Executive desires to become an employee of the Company on the
terms and conditions herein provided;
WHEREAS, Imperial owns eighty percent (80%) of the shares of common
stock of the Company and desires that the Company and Executive enter into this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Executive, subject to the
----------
terms and conditions herein provided. During the Employment Period (as defined
below), Executive shall faithfully and diligently perform his duties under this
Agreement and shall use his best efforts to promote the interests of the
Company.
Executive shall be appointed to the Board and elected as the Chairman
("Chairman") of the Board for the duration of the Employment Period.
--------
The Company's corporate headquarters shall be located in or around New
York City.
2. Term. Subject to the terms and conditions hereof, the initial
----
term of employment of Executive by the Company under this Agreement shall be
for the period commencing on August 26, 1999 (the "Commencement Date") and
-----------------
expiring when terminated as provided in Section 8 hereof (the "Expiration
----------
Date"). For purposes hereof, such period is referred to herein as the
- ----
"Employment Period."
-----------------
3. Executive's Obligations.
-----------------------
Executive shall serve as Chairman and Chief Executive Officer of the
Company with such powers and responsibilities as are customarily accorded to a
chairman and chief executive officer in companies of comparable size within the
same or similar industry. In his
<PAGE>
capacity as Chief Executive Officer of the Company, Executive shall report
directly to the Board of the Company. Executive shall at all times comply with
and be subject to the Company's policies, procedures, directives and regulations
as established by the Company from time to time. Executive accepts such
employment, responsibility and authority and agrees to perform the services of
Chairman and Chief Executive Officer of the Company and such other services as
shall from time to time be reasonably assigned to him by or pursuant to
authorization of the Board, and agrees to devote all of his working time, skill
and attention to such services.
Notwithstanding the foregoing, the parties agree that the Executive
may continue the educational, charitable and community activities (including
membership on the board of educational, charitable or community organizations)
in which he is engaged on the date hereof and may engage in other educational,
charitable and community activities (including membership on the board of
educational, charitable or community organizations) and serve on boards of
directors of other companies provided such activities do not materially
interfere with the performance of his duties to the Company.
4. Executive's Compensation and Benefits. During the Employment
-------------------------------------
Period, as full compensation to the Executive for his performance of the
services hereunder and for his acceptance of the responsibilities described
herein, the Company agrees to pay the Executive, and the Executive agrees to
accept, the following salary and other benefits:
4.1 Base Salary. The Company shall pay the Executive a salary at
-----------
the annual rate of $200,000. The Board or the compensation committee of the
Board (the "Compensation Committee") shall periodically review Executive's base
----------------------
salary on an annual basis beginning on or before the first anniversary of the
date on which the Company's initial public offering is consummated (the "IPO
---
Date"), and may increase but not decrease such base salary, from time to time,
- ----
in their sole discretion. The base salary due the Executive hereunder (the "Base
----
Salary") shall be payable in accordance with the Company's standard payment
- ------
policy, less any amounts required to be withheld by the Company from such Base
Salary pursuant to the benefit plans in which Executive participates pursuant to
Section 4.5 and applicable laws and regulations.
4.2 Bonus. (a) The Executive shall be eligible to receive annual
-----
bonuses (each a "Bonus") at the discretion of, and in the amounts and at the
-----
times determined by, the Compensation Committee. Executive agrees that there
can be no assurance that the Compensation Committee will grant a Bonus in any
year.
(b) In addition, the Company shall pay a one-time bonus to the
Executive in the amount of $500,000, $250,000 of which was paid on the
Commencement Date and $250,000 of which shall be payable no later than the
first anniversary of the Commencement Date, less any amounts required to be
withheld by the Company from such bonus pursuant to applicable laws and
regulations.
4.3 Long Term Incentives. On the Commencement Date, the Company will
--------------------
grant Executive options to acquire 250,000 shares of its common stock, which
represents 5% of the Company's Fully Diluted Common Stock on the Commencement
Date (inclusive of the 250,000 share option grant to Executive). On the IPO
Date, the Company will grant executive
-2-
<PAGE>
additional options to acquire such number of shares of its common stock so that,
when combined with the options granted in the immediately preceding sentence,
Executive will have received pursuant to this Section 4.3 options to acquire
shares of common stock equal to an aggregate of five percent (5%) of the Fully
Diluted Common Stock of the Company outstanding as of the IPO Date (inclusive of
the option grant to Executive). For purposes of this Section 4.3, "Fully Diluted
-------------
Common Stock" shall mean the aggregate of (i) the number of shares of Company
- ------------
common stock authorized and outstanding determined on an as-converted basis and
(ii) the number of shares of Company common stock subject to outstanding
options, warrants and other rights to acquire Company common stock determined on
an as-converted basis. Such options will be non-transferable and shall be
exercisable at any time for a ten year period after the date of grant. The
exercise price of such options shall be equal to $4.00 per share. All of the
option shares shall initially be unvested and subject to repurchase by the
Company at the exercise price paid per share. Subject to Section 8 hereof,
Executive shall acquire a vested interest in, and the Company's repurchase right
shall accordingly lapse with respect to one-third of the option shares granted
pursuant to this Section 4.3 on the first anniversary of the Commencement Date
and the remaining option shares in a series of twenty four (24) successive equal
monthly installments during the Employment Period. Following termination of the
Employment Period, Executive shall acquire a vested interest in, and the
Company's repurchase right shall accordingly terminate with respect to, all of
any unvested option shares for which the Company did not exercise its repurchase
right within thirty (30) days following such termination. Executive shall be
entitled to pay the exercise price of such options in the same manner and on the
same terms as the Company offers to members of its senior management who receive
similar options.
4.4 On the third anniversary of the Commencement Date, Imperial
and/or a guarantor reasonably acceptable to Executive and Imperial shall pay to
Executive, in cash, the amount, if any, by which the Guaranteed Amount (as
defined below) exceeds the aggregate Value (as defined below) of the option
shares which have vested pursuant to Section 4.3 (whether or not the options
have been exercised) (the "Guarantee Payment"); provided, however, that if at
----------------- -----------------
any time prior to such third anniversary, the Value exceeds $10,000,000, all
obligations under this Section 4.4 shall terminate and be of no further force
and effect. In the event that, on or prior to the third anniversary of the
Commencement Date, the Company has not consummated an initial public offering or
been sold to any Person (as defined in Section 7.1) other than an affiliate of
the Company, Imperial shall purchase from Executive, within five days of his
request, Executive's interest in all, but not less than all, options or shares
received under this Agreement for the amount equal to $10,000,000 less (i) the
option exercise price of any unexercised options, and (ii) any net profit
received by Executive in connection with any sale or transfer of any shares or
options received under this Agreement (i.e., after netting out the option
exercise price paid by Executive for the transferred shares); provided, that any
options or shares sold or transferred shall be treated as if they were sold at
the higher of the price received or fair market value at the time of sale.
Executive shall have one week from the date of the third anniversary of the
Commencement Date to request such payment. Thereafter, any rights to such
payment shall terminate. For purposes of this Section 4.4, "Value" shall mean
-----
(i) the product of (A) the highest average price of the common stock of the
Company calculated over a period of any 10 consecutive Business Days (as defined
below) from the Commencement Date until the third anniversary thereof,
multiplied by (B) the number of option
-3-
<PAGE>
shares which have vested pursuant to Section 4.3 (whether or not the options
have been exercised), less (ii) the product of (A) the weighted average exercise
price of such vested options, multiplied by (B) the number of option shares
which have vested pursuant to Section 4.3 (whether or not such options have been
exercised). The value of the Company's common stock shall be based on the
trading price, or other fair market value as mutually agreed by the Board and
Executive if the common stock is not traded on a national stock exchange or
quotation system. In the event that the Board and Executive are unable to agree
upon the fair market value of the Company's common stock for purposes of
determining Value under this Section 4.4, then the fair market value shall be
determined by an investment banking firm mutually acceptable to the Board and
Executive, provided that if the Board and Executive are unable to agree upon a
mutually acceptable investment banking firm, each of the Board and Executive
shall choose an investment banking firm, and the fair market value for purposes
of this Section 4.4 shall be deemed to be the average of the fair market values
determined by each investment banking firm. The "Guaranteed Amount" shall be
-----------------
$10,000,000, reduced by the amount of the Value of the option shares which have
vested on the first or second anniversary of the Commencement Date, whichever is
greater, calculated based on the last 10 Business Days prior to such
anniversary. "Business Days" shall mean, if the Company's common stock is traded
-------------
on a national stock exchange or quotation system, any days on which such
exchange or quotation system is open for trading or, if the Company's common
stock is not traded on a national stock exchange or quotation system, any days
other than a Saturday, Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close; provided, however, that "Business Days" shall not include any day on
-------- -------
which Executive is prohibited from selling the option shares which have vested
pursuant to Section 4.3, as a result of securities laws restrictions or an
agreement between Executive and the Company or an underwriter relating to
restrictions on resale of the common stock, or as a result of any Company-
imposed "black-out" period to comply with securities laws.
4.5 Other Benefit Plans. Subject to all eligibility requirements, and
-------------------
to the extent permitted by law, the Executive shall be entitled to participate
in any and all employee benefit plans (including, but not limited to,
retirement, life insurance, medical, dental, disability, and savings plans)
established or maintained by the Company from time to time for the benefit of
their employees (or executives) in general.
4.6 Vacation. The Executive shall be entitled to four weeks paid
--------
vacation per annum.
4.7 Shareholder Rights. If, at any time, Imperial is granted "piggy-
------------------
back" registration rights with respect to its shares of the Company's common
stock, Executive shall, at such time, be granted "piggy-back" registration
rights similar to those granted to Imperial, subject to customary underwriters
carve-backs and a carve-back in proportion to such shares sold by Imperial, if
any. Executive shall have "tag-along" rights, on a proportionate basis, on any
sales of Company shares by Imperial prior to consummation of an initial public
offering by the Company.
5. Reasonable Expenses. The Company will reimburse the Executive for
-------------------
all reasonable business expenses, including travel and lodging, which are
properly incurred by him in the performance of his duties hereunder, upon
presentation of proper vouchers therefor and in accordance with written policies
established from time to time by the Company for such reimbursements.
-4-
<PAGE>
6. Assistance. Executive shall make himself reasonably available,
----------
upon the request of the Company, to testify or otherwise assist in litigation,
arbitration, or other disputes involving the Company, or any of its officers,
directors, employees, subsidiaries or affiliates, during the Employment Period
and at reasonable times and locations following the termination of this
Agreement.
7. Covenant Not to Compete.
-----------------------
7.1 General Covenant. During the Employment Period and for a period
----------------
of one year after the termination of this Agreement pursuant to Sections 8.3,
8.4 or 8.5.1 (the "Non-Compete Period"), except in pursuit of his services as an
------------------
officer and employee of the Company, Executive shall not, either individually or
as a partner, joint venturer, consultant, shareholder, member or Representative
(as defined below) of another Person (as defined below) or otherwise, directly
or indirectly, participate in, engage in, or have a financial or management
interest in, promote, or assist any other Person in any business operation or
any enterprise if such business operation or enterprise engages, or would
engage, in a Restricted Business in a Restricted Area; provided, however, the
-------- -------
Executive may own up to one percent of the outstanding equity securities of any
Person.
For purposes of this Section 7.1: "Person" means an individual, a
------
partnership, a limited liability company, a joint venture, a corporation, a
trust, an unincorporated organization, a division or operating group of any of
the foregoing, a government or any department or agency thereof or any other
entity.
"Representative" means any officer, director, principal, agent,
--------------
employee, consultant or other representative of a Person.
"Restricted Business" means any business involved in the processing of
-------------------
payments to government entities or any other business in which the Company is
actively engaged on the date of termination of the Employment Period.
"Restricted Area" means any country in which the Company or its
---------------
subsidiaries conducts a Restricted Business on the date of termination of the
Employment Period.
7.2 Nonsolicitation. During the Non-Compete Period and for a period
---------------
of one year following termination of this Agreement, Executive shall not,
directly or indirectly (i) employ or seek to employ any person who is at the
date of termination of this Agreement, or was at any time within the six-month
period preceding the date of termination of this Agreement, an officer, general
manager or director or equivalent or more senior level employee of the Company,
their subsidiaries or affiliates or otherwise solicit, encourage, cause or
induce any such employee of the Company, its subsidiaries or affiliates to
terminate such employee's employment with the Company, its subsidiaries or
affiliates for the employment of another company (including for this purpose the
contracting with any person who was an independent contractor (excluding
consultant) of the Company during such period), except for persons who are
recruited by Executive to the Company within ninety (90) days after the
Commencement Date and are identified in writing by Executive to the Company
after the end of such period, or (ii) take any action that would interfere with
the relationship of the Company, its subsidiaries and
-5-
<PAGE>
affiliates with their respective suppliers and franchisees, except to the extent
permitted by the Board.
7.3 Enforcement. Executive agrees that all restrictions and
-----------
agreements contained in this Section 7, including, without limitation, those
relating to duration and restricted territory, are necessary and fundamental to
the protection of the business of the Company, and are reasonable and valid, and
all defenses to the strict enforcement thereof by Executive are hereby waived.
Executive agrees that the remedy at law for any breach of this Agreement will be
inadequate, and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, Executive agrees
that upon breach of this Section 7, the Company shall be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
further breach. Nothing in this Agreement shall be deemed to limit the
Company's remedies at law or in equity for any breach by Executive of any of the
provisions of this Agreement that may be pursued or availed of by the Company.
Nothing contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages from the Executive.
Although the restrictions contained in Sections 7.1 and 7.2 are
considered by the parties to be fair and reasonable in the circumstances, it is
recognized that restrictions of such nature may fail for technical reasons, and
accordingly it is hereby agreed that if any of such restrictions shall be
adjudged to be void or unenforceable for whatever reason, but would be valid if
part of the wording thereof were deleted, or the period thereof reduced or the
area dealt with thereby reduced in scope, the restrictions contained in Sections
7.1 and 7.2 shall be enforced to the maximum extent permitted by law, and the
parties consent and agree that such scope or wording may be accordingly
judicially modified in any proceeding brought to enforce such restrictions.
Notwithstanding that the Executive's employment hereunder may be
terminated as provided in Section 8, this Agreement shall continue in full force
and effect insofar as is necessary to enforce the covenants and agreements of
the Executive contained in this Section 7.
8. Termination.
-----------
8.1 Termination by the Company Without Cause. The Company may
----------------------------------------
terminate the Employment Period upon thirty (30) days' prior written notice to
Executive for any reason other than the reasons specified in Sections 8.2, 8.3
and 8.4. Upon termination of the Employment Period pursuant to this Section
8.1, neither the Company on the one hand, nor Executive, on the other hand, will
have any liability or obligations to the other in respect of this Agreement,
except that (A) for the one-year period following the date of such notice,
Executive shall be entitled to continue to (i) receive the Base Salary then in
effect and (ii) to the extent permitted by such plans, participate in the
employee benefit plans maintained by the Company in which Executive participated
as of the date of such notice, or, to the extent not permitted by such plans,
receive equivalent benefits or cash payments on an individual basis, (B) in
addition to options or shares that are vested through the date of termination of
the Employment Period, all of the remaining unvested options or shares as of the
date of termination of the Employment Period (such number of options or shares
hereinafter referred to as the "Severance Shares") shall immediately vest,
----------------
notwithstanding anything to the contrary in any other agreement between
-6-
<PAGE>
Executive and the Company and (C) Executive shall continue to be entitled to the
Guarantee Payment set forth in Section 4.4. Executive agrees that the right to
receive the benefits described in this Section 8.1 shall be full and adequate
compensation to Executive for all damages Executive may suffer as a result of
termination of his employment by the Company pursuant to this Section 8.1.
Notwithstanding anything contained herein to the contrary: (A) the Company's
obligations under this Section 8.1 shall be subject to Executive having executed
and delivered an instrument to the Company irrevocably waiving and releasing the
Company from any and all obligations or liabilities to Executive arising from or
in connection with Executive's employment with the Company or the termination
and claims Executive may have under federal, state or local statutes,
regulations or ordinances or under any common law principles or breach of
contract or the covenant of good faith and fair dealing, defamation, wrongful
discharge, intentional infliction of emotional distress or promissory estoppel
(the "Release and Waiver"); and (B) if the Company does not make the payment
------------------
described in this Section 8.1, Executive shall be released from Executive's
obligations under Sections 7.1 and 7.2 to the Company; provided, however, that
-------- -------
Executive shall not be so released if the sole reason for the Company's failure
to make such payment is Executive's failure to execute and deliver to the
Company the Release and Waiver.
8.2 Death. If Executive dies during the Employment Period, the
-----
Employment Period applicable to the Company shall automatically terminate and
all obligations of the parties shall terminate effective the date of death.
However, the Severance Shares shall immediately vest, notwithstanding anything
to the contrary in any other agreement between the Executive and the Company.
8.3 Disability. If Executive becomes Disabled (as hereinafter
----------
defined) during the Employment Period, the Company shall be entitled to
terminate his employment and the Employment Period upon written notice to
Executive or a person acting on his behalf. In the event of such termination,
Executive shall be released from any duties hereunder, and for the one year
period following such termination the Company shall be required to pay Executive
the Base Salary then in effect. In such event, to the extent permitted by such
plans, Executive shall also continue to participate in the employee benefit
plans maintained by the Company in which Executive participates as of the date
of termination for the balance of the term of this Agreement. In addition, the
Severance Shares shall immediately vest, notwithstanding anything to the
contrary in any other agreement between the Executive and the Company.
For purposes of this Agreement, "Disabled" shall mean mental or
--------
physical impairment or incapacity rendering Executive substantially unable to
perform his duties under this Agreement for a period of longer than 120 days out
of any 360 day period during the Employment Period. A determination of whether
Executive is Disabled shall be made by the Company in its sole discretion upon
its own initiative after obtaining certification from a duly licensed physician
or upon request of Executive or a person acting on his behalf.
8.4 Termination by the Company for Cause. The Company may terminate
------------------------------------
the Employment Period effective immediately upon written notice to Executive in
the event of any of the following:
(i) Executive's material breach of any material term
or condition of this Agreement, such breach
-7-
<PAGE>
continuing unremedied for 30 days after written notice
thereof from the Company specifying the acts constituting
the breach and requesting that they be remedied, it being
understood that issues with respect to the quality of
Executive's performance or results thereof shall not be
grounds for termination under this Section 8.4;
(ii) Executive's
(A) personal dishonesty, fraud,
misappropriation, willful misconduct or breach of fiduciary
duty, in each such case materially harmful to the Company's
property, personnel or business operations, or materially
damaging to the Company's relationships with its customers,
clients or employees or materially detrimental to the
goodwill of the Company; or
(B) intentional failure to perform the duties of
his employment or his other obligations hereunder, or any
continuing action by Executive materially detrimental to the
goodwill of the Company or materially damaging to the
Company's relationships with its customers, clients or
employees, which non-performance or actions remain
unremedied for 30 days after written notice thereof from the
Company specifying in detail the non-performance or actions
and requesting that they be remedied, it being understood
that issues with respect to the quality of Executive's
performance or results thereof shall not be grounds for
termination under this Section 8.4;
(iii) Executive's pleading guilty or no-contest to, or
conviction of, a felony or a crime involving moral turpitude
or fraud;
(iv) misappropriation (or attempted misappropriation)
of any of the Company's funds or property or of a business
opportunity of the Company, including attempting to secure
or securing any personal profit in connection with any
transaction entered into on behalf of the Company;
(v) Executive's conviction of any criminal offense
involving dishonesty or breach of trust or money laundering,
or Executive's agreement to enter into a pretrial diversion
or similar program in connection with a prosecution for such
offense;
-8-
<PAGE>
(vi) Executive's excessive drunkenness, use of
illegal drugs or abuse of any controlled substance; or
(vii) Executive's excessive absenteeism not related to
Executive's illness, which absenteeism remains unremedied
for 30 days after written notice thereof requesting that it
be remedied.
Upon termination of the Employment Period pursuant to this Section
8.4, the Executive will be bound by the provisions of Section 7 and the Company
will not have any liability to Executive in respect of this Agreement,
including, without limitation, claims for damages or liability to the Company by
Executive for compensation, severance payments and other benefits which would
have accrued to Executive hereunder after termination; provided, however, that
-------- -------
all compensation, benefits and reimbursements accrued through the date of
termination shall be paid to Executive at the times normally paid by the
Company. Upon termination of the Employment Period pursuant to this Section
8.4, all of Executive's unvested options to acquire shares of common stock of
the Company shall be cancelled.
8.5 Termination by Executive.
------------------------
8.5.1 Voluntary Termination. Executive may terminate the Employment
---------------------
Period upon sixty (60) days' written notice to the Company and, upon such
termination, the provisions of the last paragraph of Section 8.4 shall apply,
except in the event that Executive terminates this Agreement pursuant to Section
8.5.2. Upon termination of the Employment Period pursuant to this Section 8.5.1,
all of Executive's unvested options to acquire shares of common stock of the
Company shall be cancelled. Executive agrees, in connection with the termination
of the Employment Period pursuant to this Section 8.5.1, not to publicly
disclose his intent to resign.
8.5.2 Termination for Good Reason. Executive may terminate the
---------------------------
Employment Period at any time for Good Reason. "Good Reason" shall mean (i) a
-----------
material diminution of Executive's authority, duties and responsibilities as
provided in Section 3, (ii) a reduction in or failure to pay timely Executive's
base salary, or (iii) the appointment of any person to a superior executive
position, (iv) any relocation of the Company's corporate headquarters to a place
90 miles or more outside of New York City, (v) the Company's breach of any
material term or condition of this Agreement and (vi) after expiration of the
six (6) month period following a Change in Control (as defined in Section 9.2);
provided, however, that each of the reasons set forth in (i) through (vi) of the
- -------- -------
preceding sentence shall be identified in written notice thereof delivered by
Executive to the Company specifying the nature of the reason and the Company
shall have been afforded a period of thirty (30) days to respond to such notice
and cure the condition set forth in such notice if capable of being cured. If
Executive terminates this Agreement for Good Reason, the provisions of Section
8.1 shall apply and Executive will be bound by the provisions of Section 7.
9. Change in Control.
-----------------
9.1 Acceleration of Options. If a Change in Control occurs, all of
-----------------------
Executive's options to acquire shares of common stock of the Company shall
immediately vest and shall
-9-
<PAGE>
become immediately exercisable and all of Executive's option shares shall
immediately vest and cease to be subject to repurchase rights, if any,
notwithstanding anything to the contrary in any other agreement between
Executive and the Company. In addition, if the Company terminates the Employment
Period without cause as provided in Section 8.1 and within three (3) months
thereafter the Company enters into a definitive agreement for a Change in
Control (as defined in Section 9.2) occurs, Executive shall be entitled to the
benefits set forth in this Section 9.1.
9.2 Definition of Change of Control. For purposes of this Section 9,
-------------------------------
"Change in Control" shall mean: (i) the sale, lease, transfer, conveyance or
-----------------
other disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its subsidiaries (if any), taken as a whole to any Person other than
to the Company or one of its wholly-owned subsidiaries; (ii) the Company
consolidates with or merges into another Person (other than a subsidiary) or any
Person (other than a subsidiary) consolidates with, or merges into, the Company,
in any such event pursuant to a transaction in which the outstanding shares of
common stock of the Company are changed into or exchanged for cash, securities
or other property, other than any such transaction where the holders of the
shares of common stock of the Company immediately prior to such transaction own,
directly or indirectly, not less than a controlling interest in the voting
equity of the surviving or resulting Person immediately after such transaction;
(iii) the consummation of any transaction or series of transactions (including,
without limitation, any merger or consolidation) the result of which is that any
Person (other than a subsidiary of the Company), becomes the beneficial owner
(as such term is defined in Rule 13d-3 and Rule 13d-5 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of fifty percent
(50%) or more of the voting equity of the Company; or (iv) following the
Company's initial public offering, a change in the composition of the Company's
Board of Directors, as a result of which fewer than a majority of the incumbent
directors are directors who either (A) had been directors of the Company on the
Commencement Date or the date 24 months prior to the date of the event that may
constitute a Change in Control (the "original directors") or (B) were elected,
------------------
or nominated for election, to the Company's Board of Directors with the
affirmative votes of at least a majority of the aggregate of the original
directors who were still in office at the time of the election or nomination and
the directors whose election or nomination was previously so approved.
Notwithstanding the foregoing, the term "Change in Control" shall not include
-----------------
any transaction or series of transactions with or to (A) any affiliate of the
Company, (B) any entity or successor entity in which the Company holds at least
a majority of the total voting power of such entity or successor entity (or
retains the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the members of the board of directors or
other governing body of such entity or successor entity), (C) any entity or
successor entity in which no person or entity holds a greater percentage of the
total voting power of such entity or successor entity than the Company's
percentage voting interest in such entity or successor entity or (D) any entity
formed at the direction of the Company in connection with obtaining financing
for the Company or any of its subsidiaries under an arrangement that provides
the Company with an option to reacquire its assets or other properties or other
similar financing arrangement.
10. Insurance. The Company will have the right at its own cost and
---------
expense to apply for and secure in its own name, or otherwise, life, health or
accident insurance or any or all of them covering Executive, and Executive
agrees to submit to the usual and customary
-10-
<PAGE>
medical examination and otherwise to cooperate with the Company in connection
with the procurement of any such insurance, and any claims thereunder.
11. Confidentiality; Books and Records; Company Property. Except in
----------------------------------------------------
accordance with the provisions of this Agreement, during the Employment Period
and thereafter, Executive shall keep secret and retain in strictest confidence,
and shall not use for the benefit of Executive or others, all confidential
matters and affairs relating to the Company. Upon any termination of this
Agreement, Executive shall promptly deliver to the Company all confidential
information theretofore supplied to him, and each copy thereof, whether in his
possession or otherwise available to him, and shall certify in writing to the
Company that all analysis, studies and other documents that discuss or analyze
the business of the Company have been destroyed. All papers, books and records
of every kind and description relating to the business and affairs of the
Company, whether or not prepared by Executive, and all property owned by the
Company shall be the sole and exclusive property of the Company and Executive
shall surrender them to the Company upon request, during and after the
Employment Period.
12. Miscellaneous.
-------------
12.1 Notices. All notices, requests, demands and other communications
-------
which are required to be or may be given under this Agreement to any of the
other parties shall be in writing and shall be deemed to have been duly given
when (a) delivered in person, the day following dispatch by an overnight courier
service (such as Federal Express or UPS, etc.) or (b) five days after dispatch
by certified or registered first class mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company,
addressed to:
U.S. Audiotex Corporation
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
Telephone: (925) 838-7996
Facsimile: (925) 838-4395
Attn:
If to Executive,
addressed to him at: [ ]
Telephone:
Facsimile:
12.2 Amendments. This Agreement cannot be altered or otherwise
----------
amended except pursuant to an instrument in writing signed by each of the
parties.
12.3 Assignment. Executive acknowledges that the services required of
----------
Executive hereunder are personal and that Executive may not assign this
Agreement or any rights or duties under this Agreement. The Company may not
assign or otherwise transfer this
-11-
<PAGE>
Agreement to any other entity without the prior written consent of Executive,
which consent shall not be unreasonably withheld.
12.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the transactions contemplated herein and
supersedes all previous written or oral negotiations, commitments and
understandings.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
12.6 Headings. All headings are inserted for convenience of
--------
reference only and shall not affect the meaning or interpretation of any such
provisions or of this Agreement, taken as an entirety.
12.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity or
enforceability of the remainder of this Agreement, but shall be confined in its
operation to the jurisdiction in which made and to the provisions of this
Agreement directly involved in the controversy in which such judgment shall have
been rendered.
12.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York without reference
to the conflicts of laws principles thereof.
12.9 Binding Effects. This Agreement shall be binding upon and inure
---------------
to the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
12.10 Acquisitions, Mergers, Etc. Nothing herein contained shall be
--------------------------
construed to prevent or limit any acquisition, consolidation, or merger of the
Company.
12.11 Covenants, Etc. Executive hereby covenants, warrants and
---------------
represents that (i) the execution of this Agreement and the discharge of his
obligations hereunder will not breach or conflict with any other contract,
agreement or understanding between Executive and any other party or parties;
(ii) there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering services to the Company during the
term of this Agreement; (iii) Executive has not made and will not make any
commitment to do any act in conflict with this Agreement; and (iv) the terms of
this Agreement have been fully explained to him, that he understands the nature
and extent of the rights and obligations provided under this Agreement, and that
he has been given the opportunity to be represented by legal counsel in the
negotiation and preparation of this Agreement. The Company hereby covenants,
warrants and represents that (i) the execution of this Agreement and the
discharge of its obligations hereunder will not breach or conflict with any
other contract, agreement or understanding between the Company and any other
party or parties; (ii) the execution and delivery of this Agreement have been
duly and validly authorized by the Company; and (iii) this Agreement is binding
upon and enforceable against the Company in accordance with its terms.
-12-
<PAGE>
12.12 Waiver. No consent or waiver, express or implied, by any party
------
to or of any breach or default by another party in performance by the breaching
party of its obligations under this Agreement shall be deemed or construed to be
a consent or waiver to or of any breach or default by the breaching party in the
performance by such breaching party of any other obligations of such breaching
party under this Agreement. Failure on the part of any party to object to or
complain of any act or failure to act of any of the other parties or to declare
any of the other parties in default shall not constitute a waiver of any right
or remedy or the ability to object or complain or to declare any default at any
time in the future.
12.13 Survival. The provisions of Sections 5, 6, 7, 8, 11 and 12
--------
shall survive the termination of this Agreement.
12.14 Legal Fees. Each party will be responsible for their own legal
----------
fees and costs of counsel incurred in connection with negotiation and
preparation of this Agreement.
12.15 Other Employment. Executive hereby represents and warrants to
----------------
the Company that Executive is not prohibited from accepting employment with the
Company by any non-competition or other restriction contained in any employment
agreement with any other entity. Executive understands and agrees that any
breach of this representation or warranty that results in Executive being
prohibited from performing his duties under this Agreement will constitute a
material breach for purposes of Section 8.4 (i) of this Agreement, and on or at
any time after it is determined that Executive is so prohibited, the Company
will be permitted to terminate Executive's employment pursuant to Section 8.4.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
U.S. AUDIOTEX CORPORATION
By:________________________________
Name:
Title:
IMPERIAL BANK
By:________________________________
Name:
Title:
________________________________
Thomas R. Evans
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement") is made as of August 24,
---------
1999 by and among U.S. Audiotex Corporation, a Delaware corporation (the
"Company") and Kenneth Stern ("Executive").
------- ---------
RECITALS
--------
WHEREAS, Executive has been previously employed by U.S. Audiotex, LLC
(the "LLC") pursuant to a written employment agreement dated as of July 8, 1996,
---
and subsequently amended as of January 23, 1998 (the "LLC Agreement");
-------------
WHEREAS, contemporaneously with this Agreement, the LLC and the
Company have entered into an agreement of merger;
WHEREAS, the Company desires to employ Executive to serve as President
and a member of the Board of Directors (the "Board") of the Company on the terms
-----
and conditions herein provided; and
WHEREAS, Executive desires to become an employee of the Company on the
terms and conditions herein provided:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. Employment. The Company hereby employs Executive, subject to the
----------
terms and conditions herein provided. During the Employment Period (as defined
in Section 8.1 hereof), Executive (unless he is terminated or voluntarily
retires) shall faithfully and diligently perform his duties under this Agreement
and shall use his best efforts to promote the interests of the Company.
This Agreement shall supercede and replace the LLC Agreement as of the
Commencement Date hereof, provided that, in the event that the Company does not
consummate an initial public offering within one (1) year after the Commencement
Date, this Agreement shall be deemed terminated as of that date, and
Executive's employment thereafter shall be pursuant to the terms and conditions
of the LLC Agreement, for the remainder of the term of the LLC Agreement.
Executive shall be appointed to the Board for the duration of the
Employment Period, contingent upon continued ownership or control by Executive
and U.S. Audiotex, Inc. of a combined total of at least ten percent (10%) of the
Company's authorized and outstanding common shares.
<PAGE>
The Executive's principal place of employment shall be located in or
around San Ramon, California.
2. Term. Subject to the terms and conditions hereof, the initial
----
term of employment of Executive by each Company under this Agreement shall be
for the period commencing on the date hereof (the "Commencement Date") and
-----------------
expiring when terminated as provided in Section 8 hereof (the "Expiration
----------
Date").
- ----
3. Executive's Obligations.
-----------------------
Executive shall serve as President of the Company with such powers and
responsibilities as are customarily accorded to a president in companies of
comparable size within the same or similar industry. In his capacity as
President of the Company, Executive shall report directly to the Chief Executive
Officer of the Company. Executive shall at all times comply with and be subject
to the Company's policies, procedures, directives and regulations as established
by the Company from time to time. Executive accepts such employment,
responsibility and authority and agrees to perform the services of President of
the Company and such other services as shall from time to time be reasonably
assigned to him by or pursuant to authorization of the Board, and agrees to
devote all of his working time, skill and attention to such services.
Notwithstanding the foregoing, the parties agree that the Executive
may continue the educational, charitable and community activities (including
membership on the board of educational, charitable or community organizations)
in which he is engaged on the date hereof and may engage in other educational,
charitable and community activities (including membership on the board of
educational, charitable or community organizations) and serve on boards of
directors of other companies provided such activities do not materially
interfere with the performance of his duties to the Company.
4. Executive's Compensation and Benefits. During the Employment
-------------------------------------
Period, as full compensation to the Executive for his performance of the
services hereunder and for his acceptance of the responsibilities described
herein, the Company agrees to pay the Executive, and the Executive agrees to
accept, the following salary and other benefits:
4.1 Base Salary. During the Term of this Agreement, the Company
-----------
shall pay the Executive a salary at the annual rate of $215,000. The Board or
the compensation committee of the Board (the "Compensation Committee") shall
----------------------
periodically review Executive's base salary on an annual basis beginning on the
first anniversary of this Agreement and may increase but not decrease such base
salary, from time to time, in their sole discretion. The base salary due the
Executive hereunder (the "Base Salary") shall be payable in accordance with the
-----------
Company's standard payment policy, less any amounts required to be withheld by
the Company from such Base Salary pursuant to the benefit plans in which
Executive participates pursuant to Sections 4.3 and 4.4 and applicable laws and
regulations.
4.2 Bonus. (a) The Executive shall be entitled to a minimum annual
-----
bonus of $100,000, payable annually. (b) The Executive shall also be eligible to
receive further
<PAGE>
annual bonuses at the discretion of, and in the amounts and at the times
determined by, the Compensation Committee.
4.3 Maintenance of Prior Benefits. The benefits provided to Executive
-----------------------------
by the LLC during the term of the LLC Agreement shall be continued without
modification or reduction, unless agreed to in writing by Executive and the
Company.
4.4 Other Benefit Plans. Subject to all eligibility requirements, to
-------------------
Section 4.3 hereof, and to the extent permitted by law, the Executive shall be
entitled to participate in any and all employee benefit plans (including, but
not limited to, retirement, life insurance, medical, dental, disability, and
savings plans) established or maintained by the Company from time to time for
the benefit of their employees (or executives) in general. This Section shall
not be interpreted so as to require the Company to duplicate benefits already
provided as per Section 4.3 hereof.
4.5 Vacation. The Executive shall be entitled to four weeks paid
--------
vacation per annum.
4.6 Shareholder Rights. If, at any time, Imperial is granted "piggy-
------------------
back" registration rights with respect to its shares of the Company's common
stock, Executive and U.S. Audiotex, Inc. shall, at such time, be granted "piggy-
back" registration rights similar to those granted to Imperial, subject to
customary underwriters carve-backs and a carve-back in proportion to such shares
sold by Imperial, if any. Executive and U.S. Audiotex, Inc. shall have "tag-
along" rights, on a proportionate basis, on any sales of Company shares by
Imperial prior to consummation of an initial public offering by the Company.
5. Reasonable Expenses. The Company will reimburse the Executive for
-------------------
all reasonable business expenses, including travel and lodging, which are
properly incurred by him in the performance of his duties hereunder, upon
presentation of proper vouchers therefor and in accordance with written policies
established from time to time by the Company for such reimbursements.
6. Assistance. Executive shall make himself reasonably available,
----------
upon the request of the Company, to testify or otherwise assist in litigation,
arbitration, or other disputes involving the Company, or any of its officers,
directors, employees, subsidiaries or affiliates, during the Employment Period
and at reasonable times and locations following the termination of this
Agreement.
7. Covenant Not to Compete.
-----------------------
7.1 General Covenant. During the Employment Period and for a period
----------------
of one year after the termination of this Agreement (the "Non-Compete Period"),
------------------
except in pursuit of his services as an officer and employee of the Company,
Executive shall not, either individually or as a partner, joint venturer,
consultant, shareholder, member or Representative (as defined below) of another
Person (as defined below) or otherwise, directly or indirectly, participate in,
engage in, or have a financial or management interest in, promote, or assist any
other Person in any business operation or any enterprise if such business
operation or enterprise engages, or
<PAGE>
would engage, in a Restricted Business in a Restricted Area; provided, however,
-------- -------
the Executive may own up to one percent of the outstanding equity securities of
any Person.
For purposes of this Section 7.1: "Person" means an individual, a
------
partnership, a limited liability company, a joint venture, a corporation, a
trust, an unincorporated organization, a division or operating group of any of
the foregoing, a government or any department or agency thereof or any other
entity.
"Representative" means any officer, director, principal, agent,
--------------
employee, consultant or other representative of a Person.
"Restricted Business" means any business involved in the processing of
-------------------
payments to government entities or any other business in which the Company is
actively engaged on the date of termination of the Employment Period.
"Restricted Area" means any country in which the Company or its
---------------
subsidiaries conducts a Restricted Business on the date of termination of the
Employment Period.
7.2 Nonsolicitation. During the Non-Compete Period and for a period
---------------
of one year following termination of this Agreement, Executive shall not,
directly or indirectly (i) employ or seek to employ any person who is at the
date of termination of this Agreement, or was at any time within the six-month
period preceding the date of termination of this Agreement, an officer, general
manager or director or equivalent or more senior level employee of the Company,
their subsidiaries or affiliates or otherwise solicit, encourage, cause or
induce any such employee of the Company, its subsidiaries or affiliates to
terminate such employee's employment with the Company, its subsidiaries or
affiliates for the employment of another company (including for this purpose the
contracting with any person who was an independent contractor (excluding
consultant) of the Company during such period) or (ii) take any action that
would interfere with the relationship of the Company, its subsidiaries and
affiliates with their respective suppliers and franchisees, except to the extent
permitted by the Board.
7.3 Enforcement. Executive agrees that all restrictions and
-----------
agreements contained in this Section 7, including, without limitation, those
relating to duration and restricted territory, are necessary and fundamental to
the protection of the business of the Company, and are reasonable and valid, and
all defenses to the strict enforcement thereof by Executive are hereby waived.
Executive agrees that the remedy at law for any breach of this Agreement will be
inadequate, and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, Executive agrees
that upon breach of this Section 7, the Company shall be entitled to immediate
injunctive relief and may obtain a temporary order restraining any threatened
further breach. Nothing in this Agreement shall be deemed to limit the Company's
remedies at law or in equity for any breach by Executive of any of the
provisions of this Agreement that may be pursued or availed of by the Company.
Nothing contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages from the Executive.
Although the restrictions contained in Sections 7.1 and 7.2 are
considered by the parties to be fair and reasonable in the circumstances, it is
recognized that restrictions of such
<PAGE>
nature may fail for technical reasons, and accordingly it is hereby agreed that
if any of such restrictions shall be adjudged to be void or unenforceable for
whatever reason, but would be valid if part of the wording thereof were deleted,
or the period thereof reduced or the area dealt with thereby reduced in scope,
the restrictions contained in Sections 7.1 and 7.2 shall be enforced to the
maximum extent permitted by law, and the parties consent and agree that such
scope or wording may be accordingly judicially modified in any proceeding
brought to enforce such restrictions.
Notwithstanding that the Executive's employment hereunder may be
terminated as provided in Section 8, this Agreement shall continue in full force
and effect insofar as is necessary to enforce the covenants and agreements of
the Executive contained in this Section 7.
8. Term and Termination.
--------------------
8.1 Employment Period. The term of this Agreement shall be for seven
-----------------
(7) years starting with the Commencement Date.
8.2 Early Retirement. Executive shall have the right, in his sole
----------------
discretion, to elect to take early retirement at any time after the third
anniversary of the Commencement Date. In the event that Executive makes such
election, his base salary and minimum annual bonus (see Sections 4.1 and 4.2
hereof) shall continue without reduction or modification throughout the full
term of this Agreement.
8.3 Termination by the Company Without Cause. The Company may
----------------------------------------
terminate the Employment Period upon thirty (30) days' prior written notice to
Executive for any reason. Upon termination of the Employment Period pursuant to
this Section 8.3, neither the Company on the one hand, nor Executive, on the
other hand, will have any liability or obligations to the other in respect of
this Agreement, except that Executive shall be entitled to continue to receive,
without modification or reduction (i) his full base salary and minimum annual
bonus (see Sections 4.1 and 4.2 hereof) for the balance of the seven (7) year
term of this Agreement, and (ii) his full benefits (see Sections 4.3 and 4.4
hereof) through December 31, 2002 or for a period of one (1) year from the date
of termination, whichever is later. Executive shall also be entitled to retain
his position on the Board for the balance of the Employment Period, contingent
upon the continued ownership or control by Executive and U.S. Audiotex, Inc. of
a combined total of at least ten percent (10%) of the Company's authorized and
outstanding common shares. Executive agrees that the right to receive the
benefits described in this Section 8.3 shall be full and adequate compensation
to Executive for all damages Executive may suffer as a result of termination of
his employment by the Company pursuant to this Section 8.3. Notwithstanding
anything contained herein to the contrary: (A) the Company's obligations under
this Section 8.3 shall be subject to Executive having executed and delivered an
instrument to the Company irrevocably waiving and releasing the Company from any
and all obligations or liabilities to Executive arising from or in connection
with Executive's employment with the Company or the termination and claims
Executive may have under federal, state or local statutes, regulations or
ordinances or under any common law principles or breach of contract or the
covenant of good faith and fair dealing, defamation, wrongful discharge,
intentional infliction of emotional distress or promissory estoppel (the
"Release and Waiver"); and (B) if the Company does not make the payments
------------------
described in this Section 8.3, Executive shall be released from
<PAGE>
Executive's obligations under Sections 7.1 and 7.2 to the Company; provided,
--------
however, that Executive shall not be so released if the sole reason for the
- -------
Company's failure to make such payment is Executive's failure to execute and
deliver to the Company the Release and Waiver.
8.4 Death. If Executive dies during the first three (3) years of the
-----
Employment Period, this Agreement shall automatically terminate and all
obligations of the parties shall terminate effective as of the date of death. If
Executive dies during the final four (4) years of the Employment Period, all
obligations of the parties shall terminate effective as of the date of death,
except that the Company's obligation to pay base salary and minimum bonus (see
Sections 4.1 and 4.2 hereof) shall continue for the balance of the term of the
Agreement without modification or reduction.
8.5 Disability. If Executive becomes Disabled (as hereinafter
----------
defined) at any time during the Employment Period, the Company shall be entitled
to terminate his employment upon written notice to Executive or a person acting
on his behalf. In the event of such termination, Executive shall be released
from any duties hereunder, and for the four (4) year period following such
termination (but not beyond the end of the Employment Period) the Company shall
be required to pay Executive the base salary and minimum annual bonus (see
Sections 4.1 and 4.2 hereof). In such event, to the extent permitted by such
plans, Executive shall also continue to participate in the employee benefit
plans maintained by the Company in which Executive participates as of the date
of termination for a period of one (1) year from the date of termination.
For purposes of this Agreement, "Disabled" shall mean mental or
--------
physical impairment or incapacity rendering Executive substantially unable to
perform his duties under this Agreement for a period of longer than 180 days out
of any 360 day period during the Employment Period. A determination of whether
Executive is Disabled shall be made by the Company in its sole discretion upon
its own initiative after obtaining certification from a duly licensed physician
or upon request of Executive or a person acting on his behalf.
8.6 Termination by the Company for Cause. The Company may terminate
------------------------------------
the Employment Period effective immediately upon written notice to Executive in
the event of any of the following:
(i) Executive's material breach of any material term or condition of
this Agreement, such breach continuing unremedied for 30 days after written
notice thereof from the Company specifying the acts constituting the breach and
requesting that they be remedied, it being understood that issues with respect
to the quality of Executive's performance or results thereof shall not be
grounds for termination under this Section 8.6;
(ii) Executive's
(A) personal dishonesty, fraud, misappropriation, willful
misconduct or breach of fiduciary duty, in each such case materially harmful to
the Company's property, personnel or business operations, or materially damaging
to the Company's relationships with its customers, clients or employees or
materially detrimental to the goodwill of the Company; or
<PAGE>
(B) intentional failure to perform the duties of his employment
or his other obligations hereunder, or any continuing action by Executive
materially detrimental to the goodwill of the Company or materially damaging to
the Company's relationships with its customers, clients or employees, which non-
performance or actions remain unremedied for 30 days after written notice
thereof from the Company specifying in detail the non-performance or actions and
requesting that they be remedied, it being understood that issues with respect
to the quality of Executive's performance or results thereof shall not be
grounds for termination under this Section 8.4;
(iii) Executive's pleading guilty or no-contest to, or conviction of,
a felony or a crime involving moral turpitude or fraud;
(iv) misappropriation (or attempted misappropriation) of any of the
Company's funds or property or of a business opportunity of the Company,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of the Company;
(v) Executive's conviction of any criminal offense involving
dishonesty or breach of trust or money laundering, or Executive's agreement to
enter into a pretrial diversion or similar program in connection with a
prosecution for such offense;
(vi) Executive's gross negligence in connection with the performance
of Executive's obligations hereunder;
(vii) Executive's excessive drunkenness, use of illegal drugs or
abuse of any controlled substance; or
(viii) Executive's excessive absenteeism not related to Executive's
illness.
Upon termination of the Employment Period pursuant to this Section
8.6, the Executive will be bound by the provisions of Section 7 and the Company
will not have any liability to Executive in respect of this Agreement,
including, without limitation, claims for damages or liability to the Company by
Executive for compensation, severance payments and other benefits which would
have accrued to Executive hereunder after termination; provided, however, that
-------- -------
all compensation, benefits and reimbursements accrued through the date of
termination shall be paid to Executive at the times normally paid by the
Company.
8.7 Termination by Executive.
------------------------
8.7.1 Voluntary Termination. Executive may terminate the Employment
---------------------
Period prior to the third anniversary of the Commencement Date upon one hundred
and twenty (120) days' written notice to the Company and, upon such termination,
the provisions of the last paragraph of Section 8.6 shall apply, except in the
event that Executive terminates this Agreement pursuant to Section 8.7.2.
Executive agrees, in connection with the termination of the Employment Period
pursuant to this Section 8.7.1, not to publicly disclose his intent to resign.
<PAGE>
8.7.2 Termination for Good Reason. Executive may terminate the
---------------------------
Employment Period at any time for Good Reason. "Good Reason" shall mean (i) a
-----------
material change of Executive's duties and responsibilities as would render such
duties and responsibilities inconsistent with those of a senior executive of the
Company, (ii) a reduction in or failure to pay timely Executive's base salary,
minimum annual bonus, or benefits, (iii) any relocation of the Executive's
principal place of employment to a place 90 miles or more outside of San Ramon,
California, and (iv) the Company's breach of any material term or condition of
this Agreement; provided, however, that each of the reasons set forth in (i)
-------- -------
through (iv) of the preceding sentence shall be identified in written notice
thereof delivered by Executive to the Company specifying the nature of the
reason and the Company shall have been afforded a period of thirty (30) days to
respond to such notice and cure the condition set forth in such notice if
capable of being cured. If Executive terminates this Agreement for Good Reason,
the provisions of Section 8.3 shall apply and Executive will be bound by the
provisions of Section 7.
9. Insurance. The Company will have the right at its own cost and
---------
expense to apply for and secure in its own name, or otherwise, life, health or
accident insurance or any or all of them covering Executive, and Executive
agrees to submit to the usual and customary medical examination and otherwise to
cooperate with the Company in connection with the procurement of any such
insurance, and any claims thereunder.
10. Confidentiality; Books and Records; Company Property. Except in
----------------------------------------------------
accordance with the provisions of this Agreement, during the Employment Period
and thereafter, Executive shall keep secret and retain in strictest confidence,
and shall not use for the benefit of Executive or others, all confidential
matters and affairs relating to the Company. Upon any termination of this
Agreement, Executive shall promptly deliver to the Company all confidential
information theretofore supplied to him, and each copy thereof, whether in his
possession or otherwise available to him, and shall certify in writing to the
Company that all analysis, studies and other documents that discuss or analyze
the business of the Company have been destroyed. All papers, books and records
of every kind and description relating to the business and affairs of the
Company, whether or not prepared by Executive, and all property owned by the
Company shall be the sole and exclusive property of the Company and Executive
shall surrender them to the Company upon request, during and after the
Employment Period.
11. Miscellaneous.
-------------
11.1 Notices. All notices, requests, demands and other
-------
communications which are required to be or may be given under this Agreement to
any of the other parties shall be in writing and shall be deemed to have been
duly given when (a) delivered in person, the day following dispatch by an
overnight courier service (such as Federal Express or UPS, etc.) or (b) five
days after dispatch by certified or registered first class mail, postage
prepaid, return receipt requested, to the party to whom the same is so given or
made:
If to the Company,
addressed to: U.S. Audiotex Corporation
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
<PAGE>
Attn: Chief Executive Officer
If to Executive,
addressed to him at: Kenneth Stern
2328 Saddleback Drive
Danville, CA 94506
11.2 Amendments. This Agreement cannot be altered or otherwise
----------
amended except pursuant to an instrument in writing signed by each of the
parties.
11.3 Assignment. Executive acknowledges that the services required
----------
of Executive hereunder are personal and that Executive may not assign this
Agreement or any rights or duties under this Agreement. The Company may not
assign or otherwise transfer this Agreement to any other entity without the
prior written consent of Executive, which consent shall not be unreasonably
withheld.
11.4 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the transactions contemplated herein and
supersedes all previous written or oral negotiations, commitments and
understandings.
11.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
11.6 Headings. All headings are inserted for convenience of
--------
reference only and shall not affect the meaning or interpretation of any such
provisions or of this Agreement, taken as an entirety.
11.7 Severability. If and to the extent that any court of competent
------------
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity or
enforceability of the remainder of this Agreement, but shall be confined in its
operation to the jurisdiction in which made and to the provisions of this
Agreement directly involved in the controversy in which such judgment shall have
been rendered.
11.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California without
reference to the conflicts of laws and principles thereof.
11.9 Binding Effects. This Agreement shall be binding upon and inure
---------------
to the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
11.10 Acquisitions, Mergers, Etc. Nothing herein contained shall be
---------------------------
construed to prevent or limit any acquisition, consolidation, or merger of the
Company.
11.11 Covenants, Etc. Executive hereby covenants, warrants and
---------------
represents that (i) the execution of this Agreement and the discharge of his
obligations hereunder will not breach or conflict with any other contract,
agreement or understanding between Executive and any other
<PAGE>
party or parties; (ii) there are no agreements or arrangements, whether written
or oral, in effect which would prevent Executive from rendering services to the
Company during the term of this Agreement; (iii) Executive has not made and will
not make any commitment to do any act in conflict with this Agreement; and (iv)
the terms of this Agreement have been fully explained to him, that he
understands the nature and extent of the rights and obligations provided under
this Agreement, and that he has been given the opportunity to be represented by
legal counsel in the negotiation and preparation of this Agreement. The Company
hereby covenants, warrants and represents that (i) the execution of this
Agreement and the discharge of its obligations hereunder will not breach or
conflict with any other contract, agreement or understanding between the Company
and any other party or parties; (ii) the execution and delivery of this
Agreement have been duly and validly authorized by the Company; and (iii) this
Agreement is binding upon and enforceable against the Company in accordance with
its terms.
11.12 Waiver. No consent or waiver, express or implied, by any party
------
to or of any breach or default by another party in performance by the breaching
party of its obligations under this Agreement shall be deemed or construed to be
a consent or waiver to or of any breach or default by the breaching party in the
performance by such breaching party of any other obligations of such breaching
party under this Agreement. Failure on the part of any party to object to or
complain of any act or failure to act of any of the other parties or to declare
any of the other parties in default shall not constitute a waiver of any right
or remedy or the ability to object or complain or to declare any default at any
time in the future.
11.13 Survival. The provisions of Sections 5, 6, 7, 8 and 10 shall
--------
survive the termination of this Agreement.
11.14 Legal Fees. Each party will be responsible for their own legal
----------
fees and costs of counsel incurred in connection with negotiation and
preparation of this Agreement.
11.15 Other Employment. Executive hereby represents and warrants to
----------------
the Company that Executive is not prohibited from accepting employment with the
Company by any non-competition or other restriction contained in any employment
agreement with any other entity. Executive understands and agrees that any
breach of this representation or warranty that results in Executive being
prohibited from performing his duties under this Agreement will constitute a
material breach for purposes of Section 8.6(i) this Agreement, and on or at any
time after it is determined that Executive is so prohibited, the Company will be
permitted to terminate Executive's employment pursuant to Section 8.6.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
U.S. AUDIOTEX CORPORATION
By: /s/ BRIAN NOCCO
________________________________
Name: Brian Nocco
Title: Director
/s/ KENNETH STERN
___________________________________
Kenneth Stern
<PAGE>
EXHIBIT 10.3
U.S. AUDIOTEX CORPORATION
1999 STOCK INCENTIVE PLAN
SECTION 1. Purpose.
The purpose of the U.S. Audiotex Corporation 1999 Stock Incentive Plan
(the "Plan") is to enable U.S. Audiotex Corporation (the "Company") to attract,
retain and reward key employees and directors of outstanding competence and to
strengthen the existing mutuality of interests between such individuals and the
Company's stockholders by offering to such key employees and directors an equity
interest in the Company through the grant of options ("Options" or "Stock
Options") to purchase shares of the Company's common stock, par value $.01 per
share ("Common Stock") at a specified price per share ("Exercise Price").
SECTION 2. Types of Options.
2.1 The Plan provides for the grant of Incentive Stock Options and
Non-Qualified Stock Options. An "Incentive Stock Option" is a Stock Option that
is intended to qualify as an "incentive stock option" under Section 422 of the
Internal Revenue Code of 1986 (the "Code"). A "Non-Qualified Stock Option" is a
Stock Option that that does not qualify as an "incentive stock option" under
Section 422 of the Code.
2.2 Incentive Stock Options and Non-Qualified Stock Options may be
granted to key employees of the Company. Outside Directors (as defined below)
may only be granted Non-Qualified Stock Options under this Plan. For purposes of
this Plan, the term "Outside Director" shall mean a director of the Company who
is not an officer or employee of the Company, Imperial Bank or U.S. Audiotex,
Inc., or any affiliated companies thereof; provided, however, that George L.
-------- -------
Graziadio, Jr. shall be deemed to be an Outside Director.
SECTION 3. Administration.
3.1 The Plan shall be administered by the Company's Board of
Directors ("Board" or the "Board of Directors") and a committee composed of two
or more Outside Directors of the Board as the Board shall designate (the
"Committee"); provided, however, the Plan shall be administered by the Board of
Directors with respect to all Stock Options granted to Outside Directors. The
members of the Committee shall serve at the pleasure of the Board.
3.2 For purposes of this Plan, the term "Granting Authority" shall
mean: (i) the Board of Directors, with respect to Stock Options granted to
Outside Directors and (ii) the Committee, with respect to Stock Options granted
to key employees. The Granting Authority shall have the following authority with
respect to Options granted under this Plan: to grant Stock Options to persons
eligible to receive them under the Plan; to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
deem advisable; to
<PAGE>
interpret the terms and provisions of the Plan and any Options granted by it
under the Plan; and to otherwise supervise the administration of the Plan. In
particular, and without limiting its authority and powers, the Granting
Authority shall have full authority and discretion to make the following
determinations with respect to the Options granted under this Plan:
(a) to determine whether and to what extent Incentive Stock
Options and/or Non-Qualified Stock Options will be granted to an eligible
key employee hereunder;
(b) to select the key employees and Outside Directors to whom
Options will be granted;
(c) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder (subject to the limitations
contained in the Plan);
(d) to determine the Exercise Price, vesting schedule and all
other terms and conditions of any Stock Option granted hereunder;
(e) to determine the "Fair Market Value" of a share of Common
Stock on a given date. For purposes of this Plan and all Options granted
hereunder, the term "Fair Market Value" shall mean: (i) the average of the
highest and lowest reported sales prices on the date in question (or if
there is no reported sale on such date, on the last preceding date on which
any reported sale occurred) as reported in the principal consolidated
reporting system with respect to securities listed or admitted to trading
on the principal United States securities exchange on which the shares of
Common Stock are listed or admitted to trading; or (ii) if the Common Stock
is not listed or admitted to trading on any such exchange, the average of
the bid and offered prices quoted with respect to a share of Common Stock
on such date on the National Association of Securities Dealers Automated
Quotations System, or, if no such quotation is provided, on another similar
system, selected by the Granting Authority, then in use; or (iii) if
neither Section 3.2(e)(i) or (ii) is applicable, the Fair Market Value of a
share of Common Stock shall be determined by the Granting Authority in such
manner as it shall deem appropriate;
(f) to provide that the shares of Common Stock received upon the
exercise of a Stock Option shall be subject to a Right of First Refusal
(described in Section 8 hereof) pursuant to which the option holder shall
be required to offer to the Company any shares that the option holder
wishes to sell, subject to such terms and conditions as the Granting
Authority may specify; and
(g) to amend the terms of any Option, prospectively or
retroactively; provided, however, that no amendment shall impair the rights
of the option holder without his or her written consent.
3.3 The Committee shall grant and administer all Options under the
Plan in a manner designed to preserve the deductibility of the compensation
resulting from such Options in accordance with Section 162(m) of the Code. The
Committee shall have discretion to modify the terms of an Option granted
hereunder only to the extent that the exercise of such discretion
-2-
<PAGE>
would not cause the Option to fail to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code.
3.4 All determinations made by the Granting Authority pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and all participants in the Plan.
SECTION 4. Stock Subject to Plan.
4.1 The total number of shares of Common Stock which may be issued
under the Plan shall be 2,300,000, of which 2,000,000 shall be available for the
grant of Stock Options to key employees and 300,000 shall be available for the
grant of Stock Options to Outside Directors (all subject to adjustment as
provided below). Such shares may consist of authorized but unissued shares or
treasury shares.
4.2 To the extent an Option granted under this Plan terminates
without the issuance of shares, the shares subject to such Option shall again be
available for grant pursuant to an Option under the Plan. Shares of Common Stock
equal in number to the shares withheld in payment of the Exercise Price, and
shares of Common Stock which are withheld in order to satisfy federal, state or
local tax liabilities, shall not count against the above limit, and shall again
be available for grant pursuant to an Option under this Plan.
4.3 No key employee shall be granted Stock Options with respect to
more than 650,000 shares of Common Stock in any calendar year (subject to
adjustment as provided in Section 4.4).
4.4 In the event of any merger, reorganization, consolidation, sale
of substantially all the Company's assets, recapitalization, stock dividend,
stock split, spin-off split-up, split-off distribution of assets or other change
in the Company's corporate structure affecting the shares of the Company's
Common Stock, a substitution or adjustment, as may be determined to be
appropriate by the Committee in its sole discretion, shall be made in the
aggregate number of shares of Common Stock reserved for issuance under the Plan,
the number of shares as to which Options may be granted to any individual in any
calendar year and the number and type of shares subject to outstanding Options;
provided, however, that no such adjustment shall increase the aggregate value of
any outstanding Option.
SECTION 5. Eligibility.
5.1 Key employees of the Company, including those key employees who
are officers and/or directors of the Company, are eligible to be granted Options
under the Plan. The Committee, in its sole discretion, may select the key
employees who are granted Options under this Plan.
5.2 All Outside Directors of the Company shall be eligible to be
granted Options under the Plan. The terms and conditions of the Options granted
to Outside Directors shall be determined by the Board of Directors.
-3-
<PAGE>
SECTION 6. Stock Options.
6.1 The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options within the meaning of Section 422 of the Code or any
successor provision thereto (which may be granted only to key employees); and
(ii) Non-Qualified Stock Options. To the extent that any Stock Option does not
qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock
Option.
6.2 The maximum number of shares of Common Stock that may be issued
under Options intended to be Incentive Stock Options shall be 1,000,000 shares.
6.3 All Stock Options granted under this Plan and the terms and
conditions of such Stock Option Options shall be evidenced by a written stock
option agreement ("Stock Option Agreement") between the option recipient and the
Company.
6.4 Each Stock Option shall be subject to all the applicable
provisions of the Plan, including the following terms and conditions, and to
such other terms and conditions not inconsistent therewith as the Granting
Authority shall determine.
(a) Exercise Price. The Exercise Price of each Stock Option
--------------
granted hereunder will be determined by the Granting Authority at the time
of grant and such Exercise Price will be specified in the Stock Option
Agreement. Except as provided in Section 6.5 or Section 11, the Exercise
Price of a Stock Option may be less than the Fair Market Value of a share
of Common Stock subject to the Stock Option on the date of grant.
(b) Exercisability of Stock Option. Unless otherwise provided by
------------------------------
the Granting Authority in the Stock Option Agreement, a Stock Option
granted to a key employee or Outside Director shall become exercisable as
follows:
(i) on and after the first anniversary of the date of
grant, but prior to the second anniversary, the Stock Option may be
exercised as to a maximum of 20% of the shares of Common Stock subject to
the Stock Option when granted;
(ii) on and after the second anniversary, but prior to the
third anniversary, of the date of grant, the Stock Option may be exercised
with respect to a maximum of 40% of the shares of Common Stock subject to
the Stock Option when granted, less any portion of optioned Common Stock
purchased prior to the second anniversary;
(iii) on and after the third anniversary, but prior to the
fourth anniversary, of the date of grant, the Stock Option may be exercised
with respect to a maximum of 60% of the shares of Common Stock subject to
the Stock Option when granted, less any portion of the optioned Common
Stock purchased prior to the third anniversary;
(iv) on and after the fourth anniversary, but prior to the
fifth anniversary, of the date the date of grant, the Stock Option may be
exercised with respect
-4-
<PAGE>
to a maximum of 80% of the shares of Common Stock subject to the Stock
Option when granted, less any portion of the optioned Common Stock
purchased prior to the fourth anniversary;
(v) on and after the fifth anniversary of the date of
grant, the Stock Option may be exercised with respect to 100% of the shares
of Common Stock subject to the Stock Option when granted, less any portion
of the optioned Common Stock purchased prior to the fifth anniversary;
provided, however, a Stock Option shall immediately become 100% exercisable
upon the option recipient's death or Disability (as defined below).
(c) Option Term. Subject to the provisions of Section 6.5
-----------
applicable to Options that are intended to be Incentive Stock Options, the
period during which a Stock Option granted hereunder may be exercised shall
commence on the date specified by the Granting Authority in the Stock
Option Agreement and shall expire on the date specified in the Stock Option
Agreement; provided, however, that the term of the Option shall expire on
the earliest to occur of:
(i) the close of business on the last day of the three-
month period commencing on the date of the option holder's termination of
employment or service, other than on account of death, Disability, or a
Termination for Cause (as defined below);
(ii) the close of business on the last day of the one-year
period commencing on the date of the option holder's termination of
employment or service due to death or Disability;
(iii) the date and time when the option holder's employment
or service ceases due to a Termination for Cause; and
(iv) the day immediately preceding the tenth anniversary of
the date the Stock Option was granted.
(d) Defined Terms. Unless otherwise provided by the Granting
-------------
Authority in the Stock Option Agreement, the following terms shall have the
following meanings for purposes of the Plan:
(i) "Disability" shall mean a condition of total
incapacity, mental or physical, for further performance of duty with the
Company, which the Committee shall have determined, on the basis of
competent medical evidence, is likely to be permanent.
(ii) "Termination for Cause" shall mean with respect to an
employee, that the employee's employment with the Company has been
terminated as a result of the determination by the Board of Directors that
such employee has committed an act of embezzlement, fraud, dishonesty, or
breach of fiduciary duty to the Company, or has deliberately disregarded
the rules of the Company which resulted in loss, damage,
-5-
<PAGE>
or injury to the Company, or because the employee has made an unauthorized
disclosure of any of the secrets or confidential information of the
Company, has induced any client or customer of the Company to breach any
contract with the Company, has induced any principal for whom the Company
acts as agent to terminate the agency relationship, or has engaged in any
conduct that constitutes unfair competition with the Company.
Notwithstanding the foregoing, if an employee is a party to an employment
agreement or a consulting agreement governing the terms of his employment
or consultancy and such agreement contains a definition of "termination for
cause" or a definition of an equivalent term, then for purposes hereof, the
term "termination for cause" shall have the meaning ascribed to it in such
agreement.
(iii) "Termination for Cause" shall mean with respect to an
Outside Director, that the service of such Director on the Company's Board
of Directors has been terminated due to a "removal for cause" determined in
accordance with the Company's By-Laws.
(e) Effect of Termination for Cause. No Stock Option granted
-------------------------------
hereunder, whether or not previously exercisable, shall be exercised after
the date and time on which the option holder's employment or service with
the Company is terminated in a Termination for Cause.
(f) Method of Exercise. Stock Options may be exercised in whole or in
------------------
part at any time during the Option Term by giving written notice of
exercise to the Company specifying the number of shares to be purchased,
accompanied by payment of the Exercise Price. Unless otherwise provided by
the Granting Authority in the Stock Option Agreement, payment of the
Exercise Price may be made in the following manner: (i) in United States
dollars by certified check, money order or bank draft made payable to the
order of U.S. Audiotex Corporation; (ii) delivery of shares of Common Stock
that have been owned by the optionee for at least six months; (iii) a
cashless exercise (which may be either (A) a broker-assisted cash exercise
effected in accordance with rules adopted by the Granting Authority or (B)
a direction to the Company to withhold shares of Common Stock, otherwise
deliverable to the option holder with respect to the Option, having a Fair
Market Value on the date of exercise equal to the Option's Exercise Price);
or (iv) in any combination of the foregoing.
(g) No Stockholder Rights. An optionee shall not have rights to
---------------------
dividends or any of the other rights of a stockholder with respect to
shares subject to a Stock Option until the optionee has given written
notice of exercise and has paid the Exercise Price for such shares.
(h) Non-transferability. Unless otherwise provided by the Granting
-------------------
Authority in a Stock Option Agreement, (i) Stock Options shall not be
transferable by the optionee other than by will or by the laws of descent
and distribution, and (ii) during the optionee's lifetime, all Stock
Options shall be exercisable only by the optionee or by his or her guardian
or legal representative.
-6-
<PAGE>
6.5 A Stock Option granted to a key employee hereunder that is
designated by the Granting Authority to be an Incentive Stock Option shall be
subject to the following limitations:
(a) A Stock Option granted to a key employee under this Plan will
not be considered an Incentive Stock Option to the extent that such Stock
Option, together with any earlier Stock Option granted to such employee
under this or any other plan of the Company that is intended to be
Incentive Stock Option, permits the exercise for the first time in any
calendar year of shares of Common Stock having a Fair Market Value in
excess of $100,000 (determined at the time of grant);
(b) The Exercise Price of an Incentive Stock Option granted to a
key employee who, at the time the Stock Option is granted, owns shares of
Common Stock comprising more than 10% of the total combined voting power of
all classes of stock of the Company shall not be less than 110% of the Fair
Market Value of a share, and if a Stock Option designated as an Incentive
Stock Option is granted at an Exercise Price that does not satisfy this
requirement, the designated Exercise Price shall be observed and the Option
shall be treated as a Non-Qualified Stock Option;
(c) The term of an Incentive Stock Option granted to a key
employee who, at the time the Option is granted, owns shares comprising
more than 10% of the total combined voting power of all classes of Common
Stock of the Company, shall expire no later than the fifth anniversary of
the date on which the Stock Option was granted, and if an Option designated
as an Incentive Stock Option shall be granted for an option term that does
not satisfy this requirement, the term of the Option shall be observed and
the Option shall be treated as a Non-Qualified Stock Option;
(d) An Incentive Stock Option that is exercised during its
designated term but more than:
(i) three (3) months after the termination of employment
with the Company, a parent or a subsidiary (other than on account of
disability within the meaning of Section 22(e)(3) of the Code) of the
key employee to whom it was granted; and
(ii) one (1) year after such individual's termination of
employment with the Company, a parent or a subsidiary due to
disability (within the meaning of Section 22(e)(3) of the Code);
(iii) may be exercised in accordance with the terms but shall
at the time of exercise be treated as a Non-Qualified Stock Option;
and
(e) Unless prior written notice is given to the Committee, no
individual shall dispose of shares acquired pursuant to the exercise of an
Incentive Stock Option until after the later of (i) the second anniversary
of the date on which the Incentive Stock Option was granted, or (ii) the
first anniversary of the date on which the shares of Common Stock were
acquired.
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<PAGE>
SECTION 7. Tax Withholding.
7.1 Each key employee who has been granted a Non-Qualified Stock
Option under this Plan shall be required to make arrangements satisfactory to
the Granting Authority regarding payment of, any federal, state, local or other
taxes of any kind required by law to be withheld upon the exercise of such
Option. The obligations of the Company under the Plan shall be conditioned on
such payment or arrangements, and the Company shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the employee.
7.2 To the extent permitted by the Committee, and subject to such
terms and conditions as the Committee may provide, an employee may elect to have
the withholding tax obligation, or any additional tax obligation with respect to
any Options hereunder, satisfied by (i) having the Company withhold shares of
Common Stock otherwise deliverable to such person with respect to the Option or
(ii) delivering to the Company shares of previously acquired Common Stock that
has been owned by the option holder for at least six months.
7.3 Each Outside Director shall be solely responsible for the payment
of all tax obligations resulting from the exercise of any Non-Qualified Stock
Option granted to such Outside Director under this Plan.
SECTION 8. Right Of First Refusal.
8.1 In the event that an option recipient who has received shares of
Common Stock through the exercise of a Stock Option granted under this Plan
(hereinafter, a "Selling Stockholder") proposes to sell, pledge or otherwise
transfer to a third party any of such shares, the Company shall have the Right
of First Refusal (as set forth in this Section 8) with respect to all (and not
less than all) of such shares. The Selling Stockholder shall give a written
notice to the Company describing the proposed transfer which shall include the
number of shares proposed to be transferred, the proposed transfer price, the
name and address of the proposed transferee ("the Transferee") and proof
satisfactory to the Company that the proposed sale or transfer will not violate
any applicable federal or state securities laws (hereinafter such notice shall
be referred to as the "Transfer Notice"). The Transfer Notice shall be signed by
both the Selling Stockholder and the proposed Transferee and must constitute a
binding commitment of both parties to the transfer of the shares. The Company
shall have the right to purchase all, and not less than all, of the shares of
the Company's Common Stock on the terms described in the Transfer Notice
(subject, however, to any change in such terms permitted under Section 8.2
below) by delivery of a notice of exercise of the Right of First Refusal within
30 days after the date when the Transfer Notice was received by the Company. The
Company's rights under this Section 8.1 shall be freely assignable, in whole or
in part.
8.2 If the Company fails to exercise its Right of First Refusal
within 30 days after the date when it received the Transfer Notice, the Selling
Stockholder may, not later than 90 days following receipt of the Transfer Notice
by the Company, conclude a transfer of the shares subject to the Transfer Notice
on the terms and conditions described in the Transfer Notice, provided that any
such sale is made in compliance with applicable federal and state securities
laws and not in violation of any other contractual restrictions to which the
Selling
-8-
<PAGE>
Stockholder is bound. Any proposed transfer on terms and conditions different
from those described in the Transfer Notice, as well as any subsequent proposed
transfer by the Selling Stockholder, shall again be subject to the Right of
First Refusal and shall require compliance with the procedure described in
Section 8.1 above. If the Company exercises its Right of First Refusal, the
parties shall consummate the sale of the shares on the terms set forth in the
Transfer Notice within 60 days after the date when the Company received the
Transfer Notice (or within such longer period as may have been specified in the
Transfer Notice); provided, however, that in the event the Transfer Notice
provided that payment for the shares was to be made in a form other than cash or
cash equivalents paid at the time of transfer, the Company shall have the option
of paying for the shares with cash or cash equivalents equal to the present
value of the consideration described in the Transfer Notice.
8.3 In the event of the declaration of a stock dividend, the
declaration of an extraordinary dividend payable in a form other than stock, a
spin-off, a stock split, an adjustment in conversion ratio, a recapitalization
or a similar transaction affecting the Company's outstanding securities without
receipt of consideration, any new, substituted or additional securities or other
property which are by reason of such transaction distributed with respect to any
shares subject to this Section 8 or into which such shares thereby become
convertible shall immediately be subject to this Section 8. Appropriate
adjustments to reflect the distribution of such securities or property shall be
made to the number and/or class of the shares subject to this Section 8.
8.4 In the event that the Company's Common Stock is readily tradable
on an established securities market when the Selling Stockholder desires to
transfer shares, the Company shall have no Right of First Refusal, and the
Selling Stockholder shall have no obligation to comply with the procedures
prescribed by Sections 8.1 and 8.2 above.
SECTION 9. Amendments and Termination.
The Board of Directors may discontinue the Plan at any time and may
amend it from time to time No amendment or discontinuation of the Plan shall
adversely affect any Option previously granted without the option holder's
written consent. Amendments may be made without stockholder approval except as
required to satisfy the requirements of Section 422 of the Code, with respect to
Incentive Stock Options, Section 162(m) of the Code, with respect to performance
based compensation, or the rules and regulations of any stock exchange on which
the shares of the Company's Common Stock are then currently traded or listed.
SECTION 10. Change of Control.
10.1 Unless otherwise specified by the Granting Authority in the Stock
Option Agreement, in the event of a Change of Control (as defined below) all
outstanding Stock Options granted under the Plan shall become fully exercisable.
10.2 A "Change of Control" shall be deemed to occur on:
(a) the date on which any "person" within the meaning of Section
13(d)(3) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the Rules promulgated thereunder, other than Imperial
Bank, Imperial
-9-
<PAGE>
Bancorp, Inc., any affiliate or subsidiary thereof, acquires "beneficial
ownership" within the meaning of Rule 13d-3 of the Exchange Act, directly
or indirectly, of securities issued by the Company representing 35% or more
of the total combined voting power of all classes of the Company's then-
outstanding securities;
(b) the date of approval by the stockholders of the Company of an
agreement providing for the merger or consolidation of the Company with
another corporation where either: (i) the stockholders of the Company,
immediately prior to the merger or consolidation, would not "beneficially
own" within the meaning of Rule 13d-3 of the Exchange Act, immediately
after the merger or consolidation, 50% or more of the total combined voting
power of all classes of the Company's then-outstanding securities or (ii)
where the members of the Company's Board of Directors, immediately prior to
the merger or consolidation, would not, immediately after the merger or
consolidation, constitute a majority of the Company's Board of Directors;
or
(c) the date of approval by the stockholders of the Company of an
agreement providing for the sale or other disposition of 50% of the assets
of the Company;
provided, however, in no event shall an underwritten initial public offering of
the shares of the Company's Common Stock registered under the Securities Act of
1933, as amended, in which the gross proceeds to the Company exceed $30,000,000
constitute a "Change of Control."
SECTION 11. Special Rules Applicable to Certain Stock Options.
Prior to the date that the shares of the Company's Common Stock are
listed or traded on a national securities exchange, any grant of a Stock Option
under this Plan to a California resident shall comply with the requirements of
Section 25110 of the California Corporate Securities Law Code (the "Code") and
the regulations promulgated thereunder (or any successor statutory or regulatory
provisions), unless exempt therefrom pursuant to Section 25102 (or any successor
provision) or any other exemptions provided in the Code, as amended from time to
time.
SECTION 12. General Provisions.
12.1 Each Option under the Plan shall be subject to the requirement
that, if at any time the Granting Authority shall determine that (i) the
listing, registration or qualification of the Common Stock subject or related
thereto upon any securities exchange or under any state or federal law, or (ii)
the consent or approval of any government regulatory body or (iii) an agreement
by the recipient of an Option with respect to the disposition of Common Stock is
necessary or desirable (in connection with any requirement or interpretation of
any federal or state securities law, rule or regulation) as a condition of, or
in connection with, the granting of such Option or the issuance, purchase or
delivery of Common Stock thereunder, such Option shall not be granted or
exercised, in whole or in part, unless such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Granting Authority.
-10-
<PAGE>
12.2 Nothing set forth in this Plan shall prevent the Board from
adopting other or additional compensation arrangements. Neither the adoption of
the Plan nor any Option hereunder shall confer upon any employee of the Company
any right to continued employment, and no Option shall confer upon any Outside
Director any right to continued service as a director.
12.3 Determinations by the Granting Authority under the Plan relating
to the form, amount, and terms and conditions of Options need not be uniform,
and may be made selectively among persons who receive or are eligible to receive
Options under the Plan, whether or not such persons are similarly situated.
12.4 No member of the Board or the Committee, nor any officer or
employee of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination or interpretation taken or made
with respect to the Plan, and all members of the Board or the Committee and all
officers or employees of the Company acting on their behalf shall, to the extent
permitted by law, be fully indemnified and protected by the Company in respect
of any such action, determination or interpretation.
SECTION 13. Effective Date of Plan.
13.1 The provisions of the Plan became effective on August 24, 1999,
the date that the Plan was adopted by the Company's Board of Directors and
approved by its shareholders.
13.2 No Stock Option may be granted under this Plan after August 24,
2009.
SECTION 14. Governing Law.
The Plan shall be construed, administered and enforced according to
the laws of the State of California without giving effect to the conflict of
laws principles thereof, except to the extent that such laws are preempted by
federal law.
SECTION 15. Execution.
Execution to record the adoption of the Plan by the Board of
Directors, the Company has caused its authorized officer to execute the same.
U.S. AUDIOTEX CORPORATION
By /s/ BRIAN NOCCO
-------------------
Name: Brian Nocco
Title: Director
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<PAGE>
EXHIBIT 10.4
STOCKHOLDERS AGREEMENT
This Stockholders Agreement, dated as of August 24, 1999 (this
"Agreement"), is by and among U.S. Audiotex Corporation, a Delaware corporation
(the "Company"), and U.S. Audiotex, Inc. ("Audiotex") and Imperial Bank
("Imperial" and together with Audiotex, the "Holders").
Whereas, the Holders own, on the date hereof, the number of shares of
common stock, par value $0.01 per share (the "Common Stock"), of the Company set
forth opposite their respective names on Exhibit A hereto;
Whereas, the Holders, as the sole members of U.S. Audiotex, LLC, have
entered into an agreement dated June 30, 1999, a copy of which is attached
hereto as Exhibit B (the "June Agreement"), with respect to certain material
issues pertaining to an initial public offering of the Common Stock of the
Company, including the formation and management of the Company;
Whereas, Audiotex and Imperial each desire to enter into this
Agreement with the Company for the purpose of regulating certain aspects of the
relationships among Audiotex and Imperial with respect to the Company;
Now, Therefore, in consideration of the mutual covenants and
agreements contained herein, the parties hereto hereby agree as follows:
SECTION 1. Definitions.
"Affiliate" shall mean, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Board of Directors" shall mean the Board of Directors of the Company,
as the same may be constituted from time to time.
"Capital Stock" shall mean, as to any Person, its common stock (or
other equity interests, the holders of which are entitled, in the absence of
contingencies, to participate generally in the election of directors or other
members of such Person's governing body) and any other Capital Stock of such
Person authorized from time to time.
"Director" shall mean a member of the Board of Directors.
"Law" means any applicable statute, law, ordinance, rule, regulation,
judgment, decree, order or declaration of or by any governmental or regulatory
authority or instrumentality
<PAGE>
(including, without limitation, any court, administrative agency, commission,
tribunal, arbitrator or self-regulatory organization) domestic or foreign.
"Organizational Documents" shall mean the bylaws, certificate of
incorporation, or other constituent documents of the Company, as the same may be
amended from time to time as provided herein.
"Permitted Transferee" shall mean any corporation, partnership or
other entity all of the outstanding capital stock or other equity interests of
which are owned by the transferor; provided, however, that no Person shall be a
-------- -------
Permitted Transferee unless (i) such Person agrees in writing to be bound by all
of the provisions of this Agreement applicable to the transferor and (ii) the
transfer to such Person is in compliance with all applicable Laws.
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, limited liability company, trust, unincorporated
association, joint venture or other entity of whatever nature.
"Public Offering" means an underwritten public offering of shares of
Capital Stock by the Company to the general public pursuant to applicable Law.
"Shares" shall mean any shares of Capital Stock of the Company held at
any time by any Stockholder .
"Stockholder" shall mean any Person that is a party hereto who holds
Shares.
SECTION 2. Actions Requiring Unanimous Stockholders' Consent.
The following actions shall require the unanimous approval of the
Holders:
(a) any (i) amendment to this Agreement, (ii) recapitalization,
reorganization, liquidation or dissolution of the Company or (iii) merger or
other business combination involving the Company and any other Person;
(b) any transaction by the Company with any officer, director,
Affiliate (other than the Company) (i) outside the ordinary course of business
or (ii) other than on an arm's-length basis.
SECTION 3. Legends.
3.1. General. Each of the Stockholders agrees that substantially the
following legends shall be placed on the certificates representing any Shares
owned by them:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER STATE OR U.S. FEDERAL SECURITIES
LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
EXCHANGED, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF OR
2
<PAGE>
ENCUMBERED, NOR MAY THESE SECURITIES BE TRANSFERRED ON
THE BOOKS OF THE COMPANY IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
(b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, EXCHANGED, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR
ENCUMBERED WITHOUT COMPLIANCE WITH THE PROVISIONS OF,
AND IS OTHERWISE RESTRICTED BY THE PROVISIONS OF,
APPLICABLE LAW AND THAT CERTAIN STOCKHOLDERS AGREEMENT
DATED AS OF AUGUST 24, 1999, A COPY OF WHICH IS ON FILE
AT THE OFFICE OF THE SECRETARY OF THIS COMPANY.
3.2. Amendments to Agreement. Each of the Holders further agrees that
references in the legend set forth in Section 3.1(b) to a "Stockholders
Agreement dated as of August 24, 1999," shall refer to this Agreement as amended
pursuant to the terms hereof. Legends on any certificates issued after the date
hereof may be modified to reflect any such amendments.
3.3. Termination of Legends. The legend requirement set forth in
Section 3.1(a) shall terminate as to any Shares (i) when and so long as such
Shares shall have been registered in accordance with applicable Law or (ii) when
the Company shall have received an opinion of counsel reasonably satisfactory to
it that such legend is not required in order to ensure compliance with
applicable Law; provided, that, unless and until terminated pursuant to this
--------
Section 3.3, the legend requirement set forth in Section 3.1(a) shall survive
the termination of this Agreement. The legend requirement set forth in Section
3.1(b) shall terminate as to any Shares (i) when and so long as such Shares
shall have been registered in accordance with applicable Law or (ii) upon
termination of this Agreement. Whenever the legend requirements imposed by
Section 3 hereof shall terminate, as hereinabove provided, the holder of such
Shares shall be entitled to receive from the Company, at the expense of the
Company, a new certificate bearing no legends in place of the restrictive
legends set forth thereon.
SECTION 4. June Agreement.
The provisions of the June Agreement shall be incorporated into and
made a part of this Agreement and shall be binding upon each of the parties
hereto.
SECTION 5. Stock Incentive Plan
Referencing Sections 5, 6(c), 7 and 9 of the June Agreement, it is
agreed that:
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<PAGE>
(a) The exercise price of the options for 5% ownership of the Company
issued to the new CEO, Tom Evans, shall be the price specified in Mr. Evans'
employment agreement (the "CEO Price").
(b) The exercise price of the options for 2.5% ownership of the
Company, which the parties originally agreed would vest upon formation of the
Company, shall be the CEO Price. The parties now agree that these options will
be granted upon formation of the Company, but will not vest until the earlier of
(i) consummation of the Company's initial public offering, or (ii) one (1) year
from the date of filing of the Company's certificate of incorporation.
(c) The exercise price of the options for 10.0% ownership of the
Company allocated to attract new employees shall not be less than the CEO Price.
(d) The exercise price of options granted to Outside Directors shall
not be less than the initial public offering price of the common stock of the
Company, as of the date of such grant. The parties now agree that,
notwithstanding Section 9 of the June Agreement, "Outside Director" shall mean a
director of the Company who is not an officer or employee of the Company,
Imperial or Audiotex, or any affiliated companies thereof; provided, however,
-------- -------
that George L. Graziadio, Jr. shall be deemed to be an Outside Director.
SECTION 6. Miscellaneous.
6.1. Headings. The headings in this Agreement are for convenience of
reference only and shall not control or affect the meaning or construction of
any provisions hereof.
6.2. Entire Agreement. This Agreement constitutes the entire agreement
and understanding of the parties hereto in respect of the subject matter hereof,
and there are no restrictions, promises, representations, warranties, covenants,
or undertakings with respect to the subject matter hereof, other than those
expressly set forth or referred to herein.
6.3. Notices. Any notice, request, instruction or other document to be
given hereunder by any party hereto to another party hereto shall be in writing,
shall be delivered personally or sent by certified or registered mail or by
telecopy transmission at the addresses and numbers set forth on Exhibit A
hereto. All such notices and communications shall be deemed to have been given
or made (i) when delivered by hand, (ii) one business day after being sent by
overnight courier, or (iii) when telecopied, receipt acknowledged.
6.4. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns. Notwithstanding the foregoing, neither
this Agreement nor any right, remedy, obligation or liability arising hereunder
or by reason hereof shall (except as expressly provided in this Agreement) be
assignable by any party without the prior written consent of the other parties
hereto. Notwithstanding the foregoing, a Stockholder may assign such
Stockholder's rights, remedies, obligations and liabilities hereunder to a
Permitted Transferee without obtaining the prior written consent specified in
this Section 6.4.
4
<PAGE>
6.5. Specific Performance. Each of the parties hereto acknowledges
and agrees that in the event of any breach of this Agreement, the non-breaching
party or parties would be irreparably harmed and could not be made whole by
monetary damages. It is accordingly agreed that the parties hereto shall and do
hereby waive the defense in any action for specific performance that a remedy at
law would be adequate and that the parties hereto, in addition to any other
remedy to which they may be entitled at law or in equity, shall be entitled to
compel specific performance of this Agreement.
6.6. Amendments. This Agreement may not be amended, modified or
supplemented without the prior written consent of all the parties hereto.
6.7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same Agreement.
6.8. Recapitalization, etc. In the event that any capital stock or
other securities are issued in respect of, in exchange for, or in substitution
of, any Shares by reason of any reorganization, recapitalization,
reclassification, merger, consolidation, spin-off, partial or complete
liquidation, stock dividend, split-up, sale of assets, distribution to
Stockholders or combination of the Shares or any other change in the Company's
capital structure, appropriate adjustments shall be made in the amounts and
percentages specified in this Agreement so as to fairly and equitably preserve,
as far as practicable, the original rights and obligations of the parties hereto
under this Agreement.
6.9. Termination. This Agreement shall terminate on the date on
which a Public Offering of the Common Stock of the Company is consummated.
6.10. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without regard to the conflicts of law principles thereof.
6.11. Representations and Warranties. Each Stockholder party hereto
represents and warrants as follows:
(a) The person executing and delivering this Agreement on behalf of
such Stockholder is duly authorized to execute and deliver this Agreement on
behalf of such Stockholder. This Agreement has been duly executed and delivered
by such Stockholder and constitutes the legal, valid and binding obligation of
such Stockholder, enforceable against such Stockholder in accordance with the
terms hereof.
(b) The execution and delivery of this Agreement by such
Stockholder does not, and the performance by it of its obligations under this
Agreement will not, violate, conflict with or constitute a breach of, or a
default under, any material agreement or instrument to which such Stockholder is
a party or which is binding on such Stockholder or the assets of such
Stockholder, and will not result in the creation of any lien on, or security
interest in, any of the assets of such Stockholder.
5
<PAGE>
(c) It has good and marketable title to any Shares held by it
immediately prior to the date of this Agreement, free and clear of any claims,
liens, encumbrances or security interests whatsoever.
6
<PAGE>
In Witness Whereof, the parties hereto have executed this Agreement as
of the date first above written.
U.S. Audiotex Corporation
By: /s/ Brian Nocco
_______________________________
Name: Brian Nocco
Title: Chief Executive
Imperial Bank
By: /s/ Brian Nocco
_______________________________
Name: Brian Nocco
Title: Executive Vice President
U.S. Audiotex, Inc.
By: /s/ Kenneth Stern
_______________________________
Name: Kenneth Stern
Title: President
[EXHIBITS INTENTIONALLY OMITTED]
<PAGE>
EXHIBIT 10.5
IR-99-03
MODIFICATION #01
ELECTRONIC TAX ADMINISTRATION
MEMORANDUM OF AGREEMENT
BETWEEN THE INTERNAL REVENUE SERVICE,
US AUDIOTEX, LLC
1. INTRODUCTION:
This Electronic Tax Administration ("ETA") Memorandum of Agreement ("Agreement")
between the Internal Revenue Service ("IRS") and US Audiotex ("USA"), sets forth
the complete agreement of the parties with regard to USA's participation as an
"Industry Partner" of the IRS with respect to credit card payments for
electronically filed returns (1040 series) during the 1999 filing season which
covers the 1998 tax year. The implementation of this Agreement is consistent
with the US Treasury's regulations implementing the credit card language
included in the Taxpayer Relief Act of 1997 (TRA). The parties agree that,
except as provided below, USA agrees to comply with all relevant statutory,
regulatory, and administrative requirements relating to the electronic filing
program and to the Taxpayer Relief Act of 1997.
2. AUTHORITY:
This Agreement is entered into pursuant to the authority vested in the
Commissioner of the IRS by Treasury Order 150-10 to administer and enforce the
internal revenue laws and revenue procedures for electronic filing. Authority is
also vested in the Commissioner of IRS by the statutory authority 26 U.S.C.
6311(d)(2), to enter into contracts to obtain services related to receiving
payment by credit cards.
This Agreement is not an "acquisition" as that term is defined in the Federal
Acquisition Regulation ("FAR") 2.101; therefore, the FAR does not apply to this
Agreement.
3. BACKGROUND AND PURPOSE:
This Agreement results from the evaluation and selection by the IRS of a
proposal received in response to a solicitation or Request for Proposals ("RFP")
for ETA Partnerships. Proposals were sought for non-monetary Agreements formally
described as approach 2 in the IRS Draft RFP ("DRFP") for ETA contracts and
agreements.
The purpose of this Agreement is to engage in a Pilot Test for the 1999 filing
season which may result in either the reduction or removal of barriers to use of
the existing ETA program.
1
<PAGE>
4. DEFINITIONS:
N/A
5. APPLICABLE DOCUMENTS:
N/A
6. AUTHORIZED REPRESENTATIVES:
Communication between the Participant and the IRS shall be conducted through the
points of contact listed below unless otherwise agreed upon by the parties.
IRS TECHNICAL REPRESENTATIVE:
The IRS Authorized Technical Representative designated for this agreement is:
Linda Rickard
Telephone: (202) 283-6852
FAX: (202) 283-4786
email: [email protected]
The Technical Representative is responsible for the management of the technical
details within the scope of this agreement. This individual shall be responsible
for the overall management and coordination of this agreement and shall act as
the central point of contact with the Participant. This representative is
responsible for the inspection and acceptance of all reports, and such other
responsibilities as may be specified in the agreement.
The Technical Representative does not have authority to alter the Contractor's
obligations or to change the agreement specifications, terms or conditions. If,
as a result of technical discussions, it is desirable to modify agreement
obligations or the statement of work, changes will be issued in writing and
signed by the IRS Signatory Authority.
The Technical Representative for this agreement may be changed at any time by
the Government and without prior notice to the participant.
IRS SIGNATORY AUTHORITY:
The IRS Signatory Authority designated for this agreement is:
Stephen Holden, National Director
Electronic Program Enhancement Office
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The Signatory Authority is the only person authorized to make or approve changes
in the requirements of this agreement, and notwithstanding any clauses contained
elsewhere in this agreement, the said authority remains solely with the
Signatory Authority. In the event the Participant makes any changes at the
direction of any person other than the Signatory Authority, the change will be
considered to have been made without authority and no compensatory allowance
will be made to cover any costs incurred as a result thereof.
PARTICIPANT'S AUTHORIZED REPRESENTATIVE:
Craig White, Account Executive
US Audiotex, LLC
18 Crow Canyon Road, Suite 300
San Ramon, CA 94583
Telephone: 1-800-434-4567
Fax: 1-800-434-4913
email: [email protected]
The individual designated above as the Participant's Authorized Representative
shall have the authority to agree to changes in the agreement on behalf of the
Participant. This individual shall be responsible for the overall management and
coordination of this agreement and shall act as the central point of contact
with the Government. This individual shall have full authority to act for the
Participant in the performance of the agreement and shall meet with the IRS
Technical Representative to discuss problems as they occur. The Participant's
Authorized Representative shall respond within four work hours after
notification of the existence of a problem.
7. DUTIES AND RESPONSIBILITIES OF THE PARTICIPANT:
USA agrees for one year from the date of this agreement, at no charge to
the IRS, to provide:
A. Taxpayer access to the credit card transaction processing network employed
in the pilot exceeding 95% availability (total number of customers
accessing the Participant's credit card transaction network on the first
attempt/total number of attempts).
B. Taxpayer access to the credit card transaction processing network from
January 15, 1999, 12:01 am eastern time, through April 15, 1999, midnight
Hawaii time.
C. Documentation, upon request by the Government, of the transaction
processing networks employed in the pilot and the networks' interface
including testing certification plan and procedural guide.
3
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D. Retention of credit card authorization logs for 72 months from the date of
each transaction. The information in such logs shall include the
transaction dates, times cardmember account number and expiration date,
amount of transaction, and approval code.
E. Pay credit card discount fees and other transaction fees.
F. A merchant descriptor on the taxpayer's credit card statement indicating
the tax payment amount as a unique line item entitled "US Treasury Tax
Payment."
G. A merchant descriptor on the taxpayer's credit card statement indicating
the convenience fee amount as a unique line item.
H. A report including all daily activity settled under the participating
merchant number and sent to the settlement account at US Audiotex's
designated financial institution. Reports to the Government shall be done
on an ad hoc basis to compare and contrast market patterns and market
penetration on a state by state basis. Reports, if requested by the
Government, shall include the date that the US Treasury's financial agent
accepted each payment, the taxpayer's social security number, and the
amount of income tax charged.
I. Conversion of credit card transactions to ACH debit authorizations and
settle funds to US Treasury's Financial Agent (FA). The FA will initiate
bulk debits to the account established for this purpose. The Participant
shall adhere to EFTPS Bulk Filer Procedures and all format specifications
provided by the Government on July 29, 1998 and October 7, 1998. No
additional format changes are required.
J. Only guaranteed payments to the government for taxes owed.
K. Prior to transmitting payment settlement data, a file of Taxpayer
Identification Numbers (TINs) will be provided to the designated US
Treasury Financial Agent (FA) for entity validation. The FA will provide a
file to U.S. Audiotex identifying rejected TINs. US Audiotex will contact
the taxpayers to notify each taxpayer of rejected transactions. If the FA
is unable to validate the TINS within 48 hours of receipt of a file,
payment data for the applicable TINs will be transmitted to the IRS
through the FA without entity validation. This may require US Audiotex to
provide telephone numbers for the taxpayers to the IRS if a TIN
subsequently proves to be invalid.
L. A means for taxpayers to call at a later time to confirm payment
transaction.
M. All of the information contained in the "US Treasury General Information
to Taxpayers Regarding Credit Card Payments" upon request from taxpayers.
4
<PAGE>
N. Reports of any material network outages or work stoppages and all reports
(EDI.X.12) as stated in "bulk debit" specifications received from the
Government. No additional "bulk debit" reports are required.
O. Reasonable efforts to make any necessary modifications to software,
systems, and services in accordance with its commercial business practices
to conform to the provisions of IRS regulations promulgated under U.S.C.
6311(d)(1). This contract is considered modified automatically to conform
to the provisions of such IRS regulations.
P. Submit final VRU script related to federal taxes for approval to the IRS
by 12/03/98.
Q. Maintain the confidentiality of any information relating to credit card
transactions with absolutely no disclosure or use except to the extent
authorized by written procedures promulgated by the IRS pursuant to 26
U.S.C. 6311(e)(3). This applies to all employees and contractors
associated with US Audiotex.
R. Settle all credit card payment transactions to one account on day four of
the payment cycle (the payment cycle begins with a successful call
initiated by the taxpayer on day one). The acquiring bank will pay
interest to the Treasury's General Fund on all overnight balances to the
account at the 90-Day Treasury Bill rate.
S. Status reports (daily, weekly and monthly) containing, at a minimum, the
number of taxpayers using the system and total dollar amount of payments
sent to the IRS, and any problems encountered.
T. A Pilot Finding Report by June 30, 1999, containing the conduct and
findings of the pilot (including any problems, changes made during the
pilot, lessons learned and recommendations for improvement), client
feedback, recommendations for extended pilot options and resulting or
required IRS system procedural changes.
U. Support and facilitation of public awareness efforts related to marketing
the pilot. Submit all marketing material to IRS for pre-approval of
content.
V. Project plans in accordance with guidelines and other requirements as
specified by IRS.
8. DUTIES AND RESPONSIBILITIES OF THE IRS:
The IRS agrees, for the 1999 filing season, to provide:
A. Record specifications necessary for settlement of funds and posting of tax
records related to the credit card payments.
5
<PAGE>
B. Business requirements in compliance with the regulations governing credit
card payments.
C. No consideration to the Participant for credit card related transactions.
D. Financial agent(s) to act on the IRS's behalf for settlement of funds of
individual tax payments. The financial agent(s) will have no authority to
access accounts, use information, or place requirements on any person or
organization to use the taxpayer's credit card to collect any amount
beyond what has been authorized by the taxpayer.
E. A mechanism for returning funds received by credit card payment in order
to correct an error (as defined in the US Treasury Regulation T.D. 8795;
REG 111435-98) which can be resolved under the Truth in Lending Act, 15
U.S.C. 1666 et. seq. Return of funds received erroneously or without
-- ---
authorization will be made as authorized by section 6311(d)(3)(E) of the
Internal Revenue Code and in accordance with the implementing credit card
regulations.
F. Required information or instructions for the Participant to communicate to
taxpayers (including the "US Treasury General Information to Taxpayers
Regarding Credit Card Payments").
G. Required reporting criteria and formats.
9. PUBLIC RELEASE OF INFORMATION:
A. The Participant shall obtain the written permission of the IRS before
releasing or using any information regarding work on the Agreement.
Information including, but not limited to, product packaging,
advertisements, unclassified speeches, articles, press releases,
presentations, displays or demonstrations developed or proposed for
release to the public must be submitted in their entirety to the IRS. The
Participant shall request, in writing, permission to release information
describing the scope of the information to be released and the purpose for
its release.
B. In the event of a termination for the convenience of the Government, the
Government shall be responsible for press releases, jointly prepared with
the Participant, declaring the termination of the pilot by the Government.
Such releases shall be placed where determined by the Participant; except
that the Government reserves the right to either place such releases
itself in a reasonable number of new media or paying for the participant's
placement of such releases. The Government shall consider the
participant's reasonable request for the number of news media to receive
such releases. The Government shall also consider the participant's
reasonable request that it not issue a public release or public
announcement of the termination of the contract for the Government's
convenience.
6
<PAGE>
10. LIABILITY:
A. Each party to this agreement shall be responsible for the acts and
omissions of its own employees.
B. The IRS shall not be liable for any injury to the Participant's personnel
or damage to the Participant's property unless such injury or damage is
due to negligence on the part of the Government and is recoverable under
the Federal Tort Claims Act {28 U.S.C. 1346(b)}, or pursuant to other
statutory authority.
11. THIRD PARTY RIGHTS:
This Agreement does not confer any rights or benefits on any taxpayer or any
third party.
12. PERIOD OF PERFORMANCE AND TERMINATION:
A. This Agreement shall be in effect from the date executed by both parties
through October 14, 1999, renewable for one additional one-year option
period by mutual consent.
B. During the period beginning January 12, 1998 and ending April 17, 1999,
there shall be no opportunity for the Participant, U.S. Audiotex, to
terminate this Agreement. Otherwise, this Agreement may be terminated by
either party upon 30 days after receipt of written notice signed by either
of the signatories to this Agreement or by their successors or designees.
The Participant understands that in the event the IRS terminates this
Agreement, the Participant has no right to any claim against the
Government, including a claim for termination costs.
13. MODIFICATION OF AGREEMENT:
This Agreement is considered modified automatically to conform to any provision
of the regulations promulgated under 26 U.S.C. 6311(d)(1). Otherwise, this
Agreement may be modified by either party, but only upon mutual agreement. All
modifications must be in writing and signed by both of the signatories to this
Agreement or by their successors.
14. INSPECTION RIGHTS:
A. The IRS may inspect the work performed by the Participant upon reasonable
notice to the Participant's Authorized Representative and in a manner that
will not interfere with the Participant's performance of this Agreement.
The Participant shall provide access for this purpose to the IRS's
Authorized Representatives(s) to the location where the work is being
performed. The IRS shall also have the right to inspect the Participant's
Report of the work performed as a result of this Agreement. The IRS's
7
<PAGE>
Authorized Representative shall provide the results of any inspections to
the Participant's Authorized Representative for any necessary resolution.
B. The IRS may evaluate the Participant's performance of this Agreement and
may provide the results of this evaluation to the Participant, in writing,
on a quarterly basis for written comment and return to the IRS. The
evaluation, including the Participant's comments, may be used by the IRS
in considering the Participant for future Agreements or Contracts.
15. REMEDIES:
There are no additional remedies other than the termination rights as defined in
11(B).
16. LIMITATIONS:
The terms of this Agreement are not intended to alter, modify, or rescind any
current Agreement or provision of Federal law now in effect. Any provision of
this Agreement which conflicts with Federal law will be null and void.
17. DISPUTE RESOLUTION:
N/A
18. SIGNATURES:
/s/ Stephen H. Holden Date: 1/17/99
- --------------------------------------- -----------------
Internal Revenue Service
Stephen Holden, National Director
Electronic Program Enhancement Office
/s/ Kenneth Stern Date: 1-19-99
- --------------------------------------- -----------------
US Audiotex, LLC
Kenneth Stern, President
8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. Audiotex Corporation:
We consent to the use of the form of our report included herein and to the
reference to our firm under the headings "Selected Financial Data" and
"Experts" in the Prospectus.
KPMG LLP
San Francisco, California
September 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
condensed financial statements of U.S. Audiotex Corporation for the six months
ended June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 249
<SECURITIES> 0
<RECEIVABLES> 505
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,220
<PP&E> 1,180
<DEPRECIATION> (383)
<TOTAL-ASSETS> 2,028
<CURRENT-LIABILITIES> 1,165
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 75
<TOTAL-LIABILITY-AND-EQUITY> 2,028
<SALES> 5,975
<TOTAL-REVENUES> 5,975
<CGS> 4,839
<TOTAL-COSTS> 4,839
<OTHER-EXPENSES> 1,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (59)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
