<PAGE>
As filed with the Securities and Exchange Commission on November 18, 1999
Registration No. 333-87325
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OFFICIAL PAYMENTS 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) 855-5000
(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
445 Park Avenue, 10th Floor
New York, New York 10022
(917) 322-2540
(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 Universal 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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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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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Prospectus
, 1999
[LOGO OF OFFICIAL PAYMENTS CORP.]
5,000,000 Shares of Common Stock
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Symbol & Market: The Offering:
. OPAY/Nasdaq . We are offering
National Market 5,000,000 shares of
our common stock.
. We have granted the
underwriters an
option to purchase
up to an additional
750,000 shares from
us to cover over-
allotments.
. This is our initial
public offering, and
no public market
currently exists for
our shares. We
anticipate that the
initial public
offering price will
be between $13.00
and $15.00 per
share.
This investment involves risk. See "Risk Factors" beginning on page 5.
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<TABLE>
<CAPTION>
Per Share Total
----------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to us:
</TABLE>
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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
DLJdirect Inc.
<PAGE>
[Inside Front Cover Artwork]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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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............................ 33
Management.......................... 49
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Certain Relationships and Related
Transactions...................... 57
Principal Stockholders............. 59
Description of Capital Stock....... 61
Shares Eligible for Future Sale.... 63
Underwriting....................... 65
Legal Matters...................... 67
Experts............................ 67
About this Prospectus.............. 67
Where You Can Find Additional
Information....................... 67
Index to Financial Statements ..... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. We urge you to read the entire prospectus carefully.
SUMMARY
Our Business
We believe 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 government clients include the IRS, the States of
California, Illinois and New Jersey, the District of Columbia and approximately
425 municipalities. Our pilot program for personal federal income taxes
processed approximately 45,000 tax payments made by credit card totaling more
than $174 million in payments to the IRS from January 15, 1999 to April 15,
1999. According to IRS data, we had a 95% market share, based on dollar volume,
for credit card payments of personal federal income taxes due April 15, 1999.
We also processed over 293,000 payments made by credit card for our state and
municipal government clients totaling $82.7 million in the first nine months of
1999. We derive our revenues primarily from charging consumers a convenience
fee, which is either a fixed amount or a percentage of the payment made, for
using our credit card payment services. We use a portion of the convenience fee
to pay merchant discount fees to our credit card processors.
Our interactive toll-free telephone number, 1-888-2PAY-TAX SM, allows
consumers to make credit card payments and receive certain customer service
information. We began offering payment services through our Web site at
www.8882paytax.com in August 1999 and at www.officialpayments.com in October
1999. Our Web site currently allows consumers to make credit card payments of
property taxes, business license fees, parking citations and utility bills for
two municipalities. Pursuant to agreements with two states and eight additional
municipalities, we expect to provide the ability to make state income tax and
other payments to those government entities through the Internet by the end of
1999. We are working with our other 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.
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.
We had revenues of $2.4 million in 1998 and $7.2 million in the first nine
months of 1999. We incurred net losses of $325,000 in 1998 and $1.5 million in
the first nine months of 1999. Our accumulated deficit was $994,000 at December
31, 1998 and $2.5 million at September 30, 1999.
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 government data and our estimates, federal and state personal income taxes,
state sales and use taxes, local real estate taxes and fines for traffic
violations and parking citations total $670 billion annually.
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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 of substantially increasing taxpayer
access to electronic filing, payment, and communication products and services.
Many government entities lack the expertise, technical personnel and economies
of scale to cost-effectively implement and maintain the hardware and software
necessary to accept credit card payments from consumers. Our services are
designed to work with government entities' existing information systems,
require minimal implementation and are provided at no cost to our government
clients.
Individuals and small businesses who utilize a particular payment service
can be grouped into user communities, distinguished by specific demographics
and psychographics, that may utilize 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 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 income
tax payments. We have been awarded a contract to also process estimated
and extension tax payments for the 1999 tax year, which we expect to
begin processing by early 2000.
. 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 approximately 425 municipal government
clients. We have recently signed an agreement to provide our services to
the State of Illinois. 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 telephone payment services.
. Broaden our payment service offerings. We expect to expand our services
to include solutions for personal estimated and extension state 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 increase consumer awareness of our
services.
. Pursue strategic relationships and acquisitions to reach additional
consumers and provide related services.
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General Information
We are located on the Internet at www.8882paytax.com and
www.officialpayments.com. Our executive offices are located at 2333 San Ramon
Valley Boulevard, Suite 450, San Ramon, California 94583 and our telephone
number is 925-855-5000. We changed our name from U.S. Audiotex Corporation on
October 20, 1999.
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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:
. Reflects a 3-for-1 stock split as of October 26, 1999;
. Assumes that the underwriters will not exercise their over-allotment
option; and
. Reflects the merger of U.S. Audiotex, LLC into us, effective as of
September 30, 1999.
The Offering
<TABLE>
<C> <S>
Common stock offered............. 5,000,000 shares
Common stock to be outstanding
after this offering............. 20,512,820 shares
Use of proceeds.................. We intend to use the net proceeds of this offering
which are estimated to be approximately $63.0 million
for working capital and general corporate purposes.
Proposed Nasdaq National Market
symbol.......................... OPAY
</TABLE>
----------------
On November 5, 1999, E*TRADE Group, Inc. purchased directly from us 512,820
shares of our common stock at $9.75 per share in a private placement.
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of October 26, 1999 and shares issued to
E*TRADE Group, Inc., and excludes:
. 4,488,012 shares of common stock issuable upon exercise of options that
have been granted under our 1999 Stock Incentive Plan at an exercise
price of $1.33 per share;
. 2,411,988 shares of common stock reserved as of October 26, 1999 for
issuance under our 1999 Stock Incentive Plan.
For a more detailed description of our capitalization, please see
"Capitalization" on page 17.
3
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Summary Financial Data
You should read the following summary financial data in conjunction with
"Selected Financial Data" on page 19, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 20 and our audited
financial statements and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended September 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 $ 1,434 $ 7,208
Total cost of revenues... 305 696 1,080 606 5,427
------ ------ ------ --------- ----------
Gross profit............. 481 506 1,289 828 1,781
Operating expenses....... 766 1,002 1,559 1,099 3,292
------ ------ ------ --------- ----------
Income (loss) from
operations.............. (285) (496) (270) (271) (1,511)
------ ------ ------ --------- ----------
Net income (loss)........ $ (323) $ (502) $ (325) $ (308) $ (1,540)
====== ====== ====== ========= ==========
Basic and diluted net
income (loss) per
share:.................. $(0.01)(/3/) $(0.03) $(0.02) $ (0.02) $ (0.10)
====== ====== ====== ========= ==========
Shares used in computing
basic and diluted
net income (loss) per
share:.................. 15,000 15,000 15,000 15,000 15,000
====== ====== ====== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------
Actual As Adjusted(4)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 514 $66,681
Working capital (deficit)............................... (1,300) 66,549
Total assets............................................ 2,523 68,690
Total debt including current portion.................... 1,946 113
Stockholders' equity (deficit).......................... (722) 67,278
</TABLE>
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(1) Includes the results of operations of our predecessor company for the
period from January 1, 1996 to June 26, 1996.
(2) September 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 our predecessor company.
(4) Reflects (a) the sale of 512,820 shares of common stock at $9.75 per share
to E*TRADE Group, Inc., (b) the issuance and sale of shares of common stock
in this offering at an assumed initial public offering price of $14.00 per
share (the midpoint of the range set forth on the cover page of this
prospectus), and (c) the use of the net proceeds from this offering as
described in "Use of Proceeds" on page 16. See "Certain Relationships and
Related Transactions" on page 57 and Note 2 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. 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 $2.5 million for the period
from our inception on June 26, 1996 to September 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 20.
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.
Deferred stock compensation expenses will reduce our net income for the next
three years.
In the third quarter of 1999 we recorded on our balance sheet a deferred
stock compensation expense totaling $41.2 million. As a result, our net income
was reduced by $516,000 in the third quarter of 1999. Our net income for the
quarter in which this offering will be completed will be reduced by $7.3
million. For every subsequent quarter for the next three years, our net income
will be reduced by $3.1 million. The total amount of this expense, and the
corresponding reduction in our net income, will increase as a result of
additional options that we will grant concurrently with the completion of this
offering. For a detailed discussion of the option grants underlying this
deferred stock compensation expense and the accounting treatment of these
grants, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 20, "Management--1999 Stock Incentive Plan" on
page 52, "--Employment Agreements" on page 54 and note 8 to our financial
statements.
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 future growth depends on the acceptance of our payment systems 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
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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 interactive 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 enough additional
consumers to use our interactive telephone 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, our
business model will fail.
Our business model is based on consumers' willingness to pay a convenience
fee in addition to their required government payment for the use of 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.
If credit card associations change their rules and do not allow us to charge
convenience fees, our operating results would be materially and adversely
affected.
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 us to charge
convenience fees for credit card payments for government services and taxes. 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 60% of our revenues, and the loss of the IRS as
a client would materially and adversely impact our operating results.
In the first nine months of 1999, convenience fees from payments to the IRS
accounted for approximately 60% of our total revenues. 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 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 result in lower operating margins and decreased market share.
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
6
<PAGE>
and other resources to commence providing credit card payment services, and
have indicated an intent to do so. 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, 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
for the processing of fraudulent or erroneous transactions.
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 pilot program resulted in approximately 13,700
transactions being posted for tax year 1999 rather than 1998, which required
reposting by the IRS to the correct year. In addition, duplicate transactions
by consumers and processing errors by the Company during April 1999 resulted in
duplicate payments to the IRS. To the extent that defects or errors are
undetected in the future 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, we may be liable to government clients and
consumer users for damages resulting from the breach.
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
operations 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;
7
<PAGE>
. earthquakes, fires or floods;
. computer viruses;
. physical and electronic break-ins; and
. acts of sabotage, vandalism and similar events.
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 could impair the quality
and availability of our service.
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 systems and services
could be rendered obsolete.
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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Fluctuation of
Quarterly Results" on page 30.
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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 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.
If we do not expand our sales and marketing and other staff and capabilities or
effectively manage our internal growth, we may not be able to expand our
business.
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, and a number of other executive officers
joined us in October 1999. Given their limited experience with our business and
other members of management, it is possible that they 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. 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, which could negatively impact our operating results.
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.
9
<PAGE>
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 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness" on page 31.
We may not be able to protect our intellectual property rights, which may
result in damages to us; or we may infringe on the rights of others, which may
subject us to liability for damages caused to third parties.
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, including Web server and encryption
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.
We substantially depend on Imperial Bank's sponsorship to maintain our status
as a credit card member service provider or certified processor; and our status
in each credit card association could be suspended or terminated if we cannot
comply with standards or if the associations change their membership rules.
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
10
<PAGE>
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
"Certain Relationships and Related Transactions" on page 57. We are a merchant
agent for American Express(R). Our status in each association and with American
Express(R) depends on 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, the growth of our business will be negatively impacted.
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.
11
<PAGE>
We may become subject to Federal Reserve Board licensing laws or to expanded
electronic fund transfer rules, which could increase our operating costs and
restrict our business activities.
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 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.
Because of Imperial Bank's ownership of our shares, we are subject to federal
and state banking laws, which, if changed, could further restrict our business
activities or increase our operating cost.
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 "Business--Regulatory Matters" on page 47 and
"Certain Relationships and Related Transactions" on page 57.
If there are changes in tax laws which decrease the amount, the methods or the
frequency of our consumer tax payments, our revenues could decrease.
Congress, as well as individual states and municipalities, regularly
consider a wide array of tax proposals. 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, which would reduce our operating results.
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.
12
<PAGE>
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 75.0% of our outstanding common stock, or 72.3% 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 "Management" and
"Principal Stockholders" on page 59.
The tangible book value of our common stock is substantially lower than the
offering price, resulting in immediate and substantial dilution to you, and the
exercise of stock options could cause further dilution.
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 $10.72 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 "Dilution" on page 18.
In addition, options to purchase 4,488,012 shares of common stock, having an
exercise price of $1.33 per share, were outstanding as of September 30, 1999.
Further, we anticipate to grant additional options to purchase 173,992 shares
of common stock, having an exercise price of $1.33 per share, upon completion
of this offering. When and if these options are exercised, new stockholders
will experience further dilution.
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 approval by stockholders owning 80% of
our shares 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
"Underwriting" on page 65. 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
13
<PAGE>
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.
We do not have a preliminary quantified business plan for the use of proceeds
from this offering, and management has broad discretion as to the use of
proceeds from this offering.
We do not have a quantified business plan for the allocation of the proceeds
from this offering, and we will not have one until we have received the
proceeds from this offering. We are relying on the proceeds from this offering
to fund our operations. We intend to use the proceeds from this offering for
working capital and general corporate purposes, including developing new
payment and Internet services and increasing our sales and marketing staff and
capabilities. However, we have not performed any studies nor made any
preliminary determinations as to the allocation of proceeds. Our management
will have broad discretion with respect to the use of proceeds from this
offering. You will be relying on the judgment of our management about these
uses. If we do not allocate the proceeds of this offering effectively or use
those proceeds beneficially, our business, operating results and financial
condition could be materially and adversely affected.
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
the completion of this offering, we will have 20,512,820 shares of common stock
outstanding, or 21,262,820 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 180 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 "Shares Eligible for Future Sale" on page 63.
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" on page 5 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 20, 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, 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 $63.0 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 $72.8
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 $14.00 per share, which represents the midpoint of the range set forth
on the cover page of this prospectus.
We intend to use 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. We currently have no quantified business plan for the specific
allocation of proceeds from this offering. See "Risk Factors--We do not have a
preliminary quantified business plan for the use of proceeds from this
offering, and management has broad discretion as to the use of proceeds from
this offering."
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.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis; and
. as adjusted to reflect the sale of 512,820 shares of common stock to
E*TRADE Group, Inc. at $9.75 per share and the sale of 5,000,000 shares
of common stock in this offering at an assumed public offering price of
$14.00 per share, which represents the midpoint of the range set forth
on the cover page of this prospectus, less underwriting discounts,
commissions and other estimated offering expenses.
You should read the following table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 20 and our financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
As of September 30,
1999
---------------------
Actual As Adjusted
(In thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 514 $ 66,681
======== ========
Debt:
Notes payable and capital lease obligations............ $ 208 $ 57
Stockholders' equity:
Common stock, $0.01 par value; 150,000,000 shares
authorized; 15,000,000 shares issued and outstanding,
as of September 30, 1999; 20,512,820 shares issued and
outstanding, as adjusted ............................. 150 205
Additional paid-in capital............................. 42,373 110,318
Deferred stock compensation............................ (40,711) (40,711)
Accumulated deficit.................................... (2,534) (2,534)
-------- --------
Stockholders' equity (deficit) ...................... (722) 67,278
-------- --------
Total capitalization............................... $ (514) $ 67,335
======== ========
</TABLE>
17
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1999 was $(722,000) or
approximately $(0.05) per share, based on 15,000,000 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 September 30, 1999.
Our net tangible book value as of September 30, 1999 would have been
$67,278,000, or $3.28 per share, after giving effect to the sale of 512,820
shares of common stock to E*TRADE Group, Inc. at $9.75 per share and the sale
of the shares of common stock in this offering at an assumed initial public
offering price of $14.00 per share, which represents 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 approximately $3.33 per
share to our existing stockholders and an immediate dilution of $10.72 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................... $14.00
Net tangible book value per share as of September 30,
1999................................................... $(0.05)
Increase in net tangible book value per share
attributable to new stockholders....................... 3.33
------
Net tangible book value after this offering............... 3.28
------
Dilution per share to new stockholders.................... $10.72
======
</TABLE>
The following table summarizes, as of September 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 after giving
effect to the sale of 512,820 shares of common stock to E*TRADE Group, Inc. at
$9.75 per share 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 Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 15,512,820 75.6% $ 6,600,000 8.6% $ 0.43
New stockholders........... 5,000,000 24.4 70,000,000 91.4 14.00
---------- ----- ----------- -----
Total.................... 20,512,820 100.0% $76,600,000 100.0% $ 3.73
========== ===== =========== =====
</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
September 30, 1999. Options to purchase 4,488,012 shares of common stock,
having a weighted average exercise price of $1.33 per share, were outstanding
as of September 30, 1999. In addition, we anticipate granting options to
purchase an additional 173,992 shares of common stock, having an exercise price
of $1.33 per share, to employees on or before completion of this offering. When
and if these options are exercised, new stockholders will experience further
dilution.
18
<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 nine-month period ended
September 30, 1999 and as of December 31, 1997 and 1998 and September 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 September 30, 1998 and for the year ended December 31,
1995 and the nine months ended September 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 nine months ended September 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 20.
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended September 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 $ 1,286 $ 6,995
Other revenues......... 559 435 267 293 148 213
----- ------ ------ ------ --------- ----------
Total revenues..... 661 786 1,202 2,369 1,434 7,208
Total cost of revenues:
Cost of transaction
fees.................. 24 108 259 494 299 3,706
Cost of transaction
fees to related
party................. -- 85 153 515 294 1,600
Cost of other
revenues.............. 63 84 284 71 13 121
----- ------ ------ ------ --------- ----------
Total cost of
revenues.......... 87 305 696 1,080 606 5,427
----- ------ ------ ------ --------- ----------
Gross profit............ 574 481 506 1,289 828 1,781
Operating expenses:
Sales and marketing.... 236 222 330 356 287 736
Development costs...... 113 238 206 608 475 648
General and
administrative........ 673 306 446 595 337 1,267
Deferred stock
compensation.......... -- -- -- -- -- 516
Allocated expenses
from related party.... -- -- 20 -- -- 125
----- ------ ------ ------ --------- ----------
Total operating
expenses.......... 1,022 766 1,002 1,559 1,099 3,292
----- ------ ------ ------ --------- ----------
Income (loss) from
operations............. (448) (285) (496) (270) (271) (1,511)
Other income (expense),
net.................... (8) (38) (6) (55) (37) (29)
----- ------ ------ ------ --------- ----------
Net income (loss)....... $(456) $ (323) $ (502) $ (325) $ (308) $ (1,540)
===== ====== ====== ====== ========= ==========
Basic and diluted net
income (loss) per
share.................. $ -- $(0.01)(/2/) $(0.03) $(0.02) $ (0.02) $ (0.10)
===== ====== ====== ====== ========= ==========
Shares used in computing
basic and diluted net
income (loss) per
share.................. -- 15,000 15,000 15,000 15,000 15,000
===== ====== ====== ====== ========= ==========
Balance Sheet Data:
Cash and cash
equivalents............ $ 44 $ 221 $ 182 $ 631 $ 361 $ 514
Working capital
(deficit).............. 64 (60) (221) 392 (313) (1,300)
Total assets............ 584 645 764 1,747 1,159 2,523
Total debt including
current portion........ 383 476 389 810 318 1,946
Stockholders' equity
(deficit).............. 141 (11) (91) 184 182 (722)
</TABLE>
- --------
(1) Includes the results of operations of our 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 our predecessor company for the period from January
1, 1996 to June 26, 1996.
19
<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 various factors,
including, but not limited to, those set forth under "Risk Factors" on page 5
and "Business" on page 33.
Overview
We believe 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, since August 1999 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 approximately 425
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. We have recently
signed a contract to provide personal state income tax payment services in
Illinois. Consumers can make payments through our toll-free interactive
telephone system. Consumers have also been able to make certain payments
through our Web site at www.8882paytax.com since August 1999 and at
www.officialpayments.com since October 1999.
Our predecessor company was originally founded in 1986 as a provider of
interactive telephone 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 the interactive telephone applications for classified advertising
operations.
Our revenues consist primarily of convenience fees, which are transaction
fees paid by consumers for using our credit card payment services. In the first
nine months of 1999, our convenience fees ranged from 2.5% to 8.8% of the
amount paid per transaction. For processing personal federal and state income
tax payments and property tax payments, the convenience fee that we charge is a
percentage of the payment amount. For processing fines for traffic violations
and parking citations, we charge a fixed amount per ticket. 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. In these
cases, revenues are recognized upon installation of the software for system
sales. Our revenues have increased significantly since we started providing
services in January 1999 for personal federal income tax payments.
Our primary cost of revenues is the merchant discount fee paid to our credit
card processors, which, in the first nine months of 1999, ranged from 1.85% to
2.73% 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 telephone 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. We retained between 11.6% to 64.2% of the convenience fee
after paying the merchant discount fee and telecommunication costs for payments
processed through our telephone conduit and 12.0% to 67.0% of the convenience
fee for payments processed through the Internet for the first nine months of
1999. Our cost of revenues has increased significantly since January 1999
because of the large number of personal federal income tax payments processed.
Processing fines for traffic violations and parking citations produces a
higher gross margin than processing income tax and property tax payments
because the convenience fee as a percentage of fines processed is significantly
higher.
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Operating expenses include sales and marketing expenses, development costs,
general and administrative expenses, deferred stock compensation and allocated
expenses from related party. 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 interactive telephone
system and develop our Internet services. We expense our development costs as
they are incurred. We expect to 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. Our strategy to expand
our Internet offerings and capabilities will not significantly increase
operating expenses nor impact liquidity and capital resources during the next
24 months. 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 employees. We recorded $516,000 related to the amortization of
deferred stock compensation in the nine-month period ended September 30, 1999.
We have incurred significant losses since our inception and we expect to
continue to incur losses for the foreseeable future. As of September 30, 1999,
we had an accumulated deficit of approximately $2.5 million. We have recorded
on our balance sheet a deferred stock compensation expense totaling $41.2
million in the third quarter of 1999. This expense consists of an amount of
$10.0 million, representing the guaranteed value of options granted to Thomas
R. Evans, our Chairman and Chief Executive Officer, and an amount of $31.2
million, representing the estimated value of the common stock underlying
options we granted to certain of our other officers and employees in August and
September of 1999 in excess of the exercise price of those options. The total
amount of this expense will increase as a result of additional options that we
will grant on or prior to the completion of this offering. The $10.0 million
expense related to Mr. Evans' options and $27.0 million of expense related to
new options granted to other officers and employees will be amortized, using a
straight-line method, over a three-year period, starting in the third quarter
of 1999. The remaining $4.2 million of expenses related to options previously
granted to other officers and employees will be expensed upon completion of
this offering. See "Management--1999 Stock Incentive Plan" on page 52, "--
Employment Agreements" on page 54 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 expired in October 1999, and the IRS subsequently
renewed our contract. Under the terms of our agreement with the IRS, we will
provide:
. services for balance-due payments from January 14, 2000 to October 16,
2000;
. services for extension payments from January 14, 2000 to April 17,
2000; and
. services for estimated payments from March 1, 2000 to January 31, 2001.
Under the terms of the agreement, we must comply with availability, access
and reporting requirements specified by the IRS.
In September 1999, we entered into an agreement with the IRS to provide
services allowing taxpayers to use computer software programs both to file
personal income tax returns and to pay the balance due by credit card.
According to the agreement, we would provide these integrated filing and
payment services from
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January 14, 2000 to October 16, 2000. We intend to partner with other
electronic filing software providers such as OrrTax Software Inc. to provide
these services. Under the agreement with the IRS, the average convenience fee
we charge the consumer cannot exceed 3% of the tax payment.
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.
In October 1999, we entered into a contract with the National City Bank of
Michigan/Illinois to provide credit card payment services for balance-due
personal state income taxes in the State of Illinois. We expect to commence
offering our services in mid-January 2000 through our interactive telephone and
Internet systems. The initial term of the contract is one year and is
automatically renewable for one year.
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
-------------------------------------
Nine months
Year ended ended
December 31, September 30,
------------------ ----------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Revenues:
Transaction fees......................... 45 % 78 % 88 % 90 % 97 %
Other revenues........................... 55 22 12 10 3
--- --- --- ------ ------
Total revenues......................... 100 100 100 100 100
Cost of revenues:
Cost of transaction fees................. 10 21 21 21 51
Cost of transaction fees to related
party................................... 18 13 22 20 22
Cost of other revenues................... 11 24 3 1 2
--- --- --- ------ ------
Total cost of revenues................. 39 58 46 42 75
--- --- --- ------ ------
Gross profit............................... 61 42 54 58 25
Operating expenses:
Sales and marketing...................... 28 27 15 20 10
Development costs........................ 30 17 26 33 9
General and administrative............... 39 37 25 24 18
Deferred stock compensation.............. -- 2 -- -- 7
Allocated expenses from related party ... -- -- -- -- 2
--- --- --- ------ ------
Total operating expenses............... 97 83 66 77 46
--- --- --- ------ ------
Income (loss) from operations.............. (36) (41) (11) (19) (21)
Other income (expense), net................ (5) (1) (2) (3) --
--- --- --- ------ ------
Net income (loss).......................... (41)% (42)% (14)% (22)% (21)%
=== === === ====== ======
</TABLE>
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Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenues
Total revenues. Total revenues increased $5.8 million to $7.2 million for
the nine months ended September 30, 1999 from $1.4 million for the nine months
ended September 30, 1998, an increase of 414%. This increase is primarily
attributable to revenues generated from processing personal federal and state
income tax payments as well as increases in revenues from processing 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 nine months ended September 30, 1999, representing 60% of our
total revenues. We processed approximately 44,840 transactions totaling $174.0
million during this period. On average, we charged a 2.5% convenience fee based
upon the dollar amount of the IRS payment for processing personal federal
income taxes 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 $291,000 for the nine months ended September
30, 1999, representing 4.0% of our total revenues. We processed approximately
23,100 transactions totaling $10.0 million during this period. On average, we
charged a 2.9% convenience fee based upon the dollar amount of the payment for
processing personal state income taxes during this period.
Property taxes. Revenues from processing property tax payments increased
$597,000 to $954,000 for the nine months ended September 30, 1999 from $357,000
for the nine months ended September 30, 1998, an increase of 167%. For the nine
months ended September 30, 1999, we processed approximately 55,000 transactions
totaling $33.2 million, compared to 15,800 transactions totaling $12.6 million
for the nine months ended September 30, 1998. This increase is primarily
attributable to new municipal clients added subsequent to September 30, 1998.
As of September 30, 1999, we had 150 municipal clients for property tax payment
services, compared to 43 as of September 30, 1998. Convenience fees as a
percentage of the payment also increased for the nine months ended September
30, 1999 compared to the nine months ended September 30, 1998. Revenues from
processing property tax payments represented 13% of total revenues for the nine
months ended September 30, 1999 compared to 25% for the nine months ended
September 30, 1998.
Fines for traffic violations. Revenues from processing fines for traffic
violations increased $308,000 to $888,000 for the nine months ended September
30, 1999 from $580,000 for the nine months ended September 30, 1998, an
increase of 53%. For the nine months ended September 30, 1999, we processed
approximately 59,000 transactions totaling $8.7 million, compared to 42,500
transactions totaling $6.2 million for the nine months ended September 30,
1998. This increase is primarily attributable to higher utilization rates and
new local jurisdictions added subsequent to September 30, 1998. The convenience
fee charged remained relatively constant. The increase in revenues was driven
by an increase in the number of transactions processed. As of September 30,
1999, we had 166 local government clients for traffic violation payment
services, compared to 109 as of September 30, 1998. Revenues from processing
fines for traffic violations represented 12% of total revenues for the nine
months ended September 30, 1999 compared to 40% for the nine months ended
September 30, 1998.
Fines for parking citations. Revenues from processing fines for parking
citations increased $91,000 to $206,000 for the nine months ended September 30,
1999 from $115,000 for the nine months ended September 30, 1998, an increase of
79%. For the nine months ended September 30, 1999, we processed approximately
69,000 transactions totaling $2.4 million, compared to approximately 39,400
transactions totaling $1.3 million for the nine months ended September 30,
1998. This increase is primarily attributable to one localjurisdiction being
added in July of 1998. The convenience fee charged remained relatively
constant. The increase in revenues was driven by an increase in the number of
transactions processed. Revenues from processing fines for parking citations
represented 3% of total revenues for the nine months ended September 30, 1999
compared to 8% percent for the nine months ended September 30, 1998.
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Other transaction fees. Other transaction fees, which include revenues from
fax filing and processing payments to utilities, increased $78,000 to $314,000
for the nine months ended September 30, 1999 from $236,000 for the nine months
ended September 30, 1998, an increase of 33%.
Other revenues. Other revenues increased $66,000 to $213,000 for the nine
months ended September 30, 1999 from $147,000 for the nine months ended
September 30, 1998, an increase of 45%. The largest component of other
revenues, system sales, increased $90,000 due to two local jurisdictions
purchasing a computer system during the nine months ended September 30, 1999
compared to one local jurisdiction purchasing a computer system during the nine
months ended September 30, 1998.
Expenses
Cost of transaction fees. Cost of transaction fees increased $4.7 million to
$5.3 million for the nine months ended September 30, 1999 from $593,000 for the
nine months ended September 30, 1998, an increase of 793%. The largest
component of cost of transaction fees, merchant discount fees, increased by
$4.6 to $5.1 million for the nine months ended September 30, 1999 from $466,000
for the nine months ended September 30, 1998, an increase of 987%. The cost of
telephone charges for our toll-free interactive telephone system increased by
$132,000 to $195,000 for the nine months ended September 30, 1999 from $63,000
for the nine months ended September 30, 1998, an increase of 210%. Cost of
transaction fees was 73% of total revenues for the nine months ended September
30, 1999 compared to 41% for the nine months ended September 30, 1998. The
increase is due to the lower gross margins for federal income tax payment
services as compared to other payment services.
Cost of other revenues. Cost of other revenues increased $108,000 to
$121,000 for the nine months ended September 30, 1999 from $13,000 for the nine
months ended September 30, 1998, an increase of 831%. These costs are composed
of computer hardware costs and direct labor costs for consulting and
maintenance work performed.
Sales and marketing. Sales and marketing expenses increased $449,000 to
$736,000 for the nine months ended September 30, 1999 compared to $287,000 for
the nine months ended September 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
10% of total revenues for the nine months ended September 30, 1999 compared to
20% for the nine months ended September 30, 1998.
Development costs. Development costs increased $173,000 to $648,000 for the
nine months ended September 30, 1999 compared to $475,000 for the nine months
ended September 30, 1998. This increase was primarily attributable to an
increase in the number of engineering personnel and development of our Internet
conduit. Development costs represented 9% of total revenues for the nine months
ended September 30, 1999 compared to 33% for the nine months ended September
30, 1998.
General and administrative. General and administrative expenses increased
$963,000 to $1.3 million for the nine months ended September 30, 1999 compared
to $337,000 for the nine months ended September 30, 1998. This increase was
primarily attributable to hiring additional management personnel and a signing
bonus of $500,000 to our CEO, Thomas R. Evans. General and administrative
expenses represented 18% of total revenues for the nine months ended September
30, 1999 compared to 24% for the nine months ended September 30, 1998.
Deferred stock compensation. Deferred stock compensation was $516,000 for
the nine months ended September 30, 1999. This was the result of $41.2 million
of deferred compensation expenses recorded in August and September 1999 for
options granted to our employees to purchase approximately 4,488,000 shares of
our common stock at an exercise price of $1.33 per share. Deferred stock
compensation represented 7% of total revenues for the nine months ended
September 30, 1999. Our net income for the quarter in which this
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offering will be completed will be reduced by $7.3 million. For every
subsequent quarter for the next three years, our net income will be reduced by
$3.1 million. The total amount of this expense, and the corresponding reduction
in our net income, will increase as a result of additional options that we will
grant concurrently with the completion of this offering.
Allocated expenses from related party. Related party expense was $125,000
for the nine months ended September 30, 1999, $118,000 of which was due to
Imperial Bank employees providing consulting services to us related to this
offering. The allocated consulting expense of $118,000 for the nine-month
period ended September 30, 1999 will not be incurred in the future because
those Imperial Bank employees are directly employed by us since October 1,
1999.
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 100%. This increase is primarily attributable to
higher revenues generated from processing a greater amount of property tax
payments for existing and new clients.
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 33,900 transactions totaling $28.2 million, compared to
8,700 transactions totaling $7.1 million for the year ended December 31, 1997.
This increase is primarily attributable to higher utilization rates and new
municipal government clients being added throughout 1997 and 1998. As of
December 31, 1998, we had 73 municipal government clients for property tax
payment services compared to 11 as of December 31, 1997. We also collected a
higher average convenience fee for the year ended December 31, 1998 compared to
the year ended 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 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 59,200 transactions totaling $8.6
million, compared to 29,600 transactions totaling $4.4 million for the year
ended December 31, 1997. This increase is primarily attributable to higher
utilization rates and new municipal government clients being added throughout
1997 and 1998. The average convenience fee charged remained relatively
constant. The increase in revenues was driven by an increase in the number of
transactions processed. As of December 31, 1998, we had 141 municipal
government clients for traffic violation payment services, compared to 56 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.
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 52,700 transactions totaling $1.7
million, compared to 37,600 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. The average convenience fee charged
remained relatively constant.
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The increase in revenues was driven by an increase in the number of
transactions processed. 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 $26,000 to $293,000 for the year
ended December 31, 1998 from $267,000 for the year ended December 31, 1997, an
increase of 10%. The increase in other revenues was primarily due to additional
consulting and maintenance fees earned related to current and prior computer
system sales.
Expenses
Cost of transaction fees. Cost of transaction fees increased $588,000 to
$1.0 million for the year ended December 31, 1998 from $412,000 for the year
ended December 31, 1997, an increase of 143%. Merchant discount 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%. Telecommunications costs
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 43% of total revenues for the year ended December 31, 1998
compared to 34% for the year ended December 31, 1997.
Cost of other revenues. Cost of other revenues decreased $213,000 to $71,000
for the year ended December 31, 1998 from $284,000 for the year ended December
31, 1997, a decrease of 75%. This was due to a one-time reclassification
adjustment of $261,000 that was recorded in 1997.
Sales and marketing. 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. General and administrative expenses increased
$129,000 to $595,000 for the year ended December 31, 1998 compared to $446,000
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 37% 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 $414,000 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.
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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 2,867%. For the year ended
December 31, 1997, we processed 8,700 transactions totaling $7.1 million,
compared to 123 transactions totaling $100,000 for the year ended December 31,
1996. We collected a slightly lower average convenience fee for the year ended
December 31, 1997 compared to 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 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 29,600 transactions totaling $4.4
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 municipal governmental clients being added throughout
1996 and 1997. The average convenience fee charged remained constant. The
increase in revenues was driven by an increase in the number of transactions
processed. As of December 31, 1997 we had 56 municipal 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.
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 37,600 transactions totaling $1.1
million compared to 4,400 transactions totaling $132,000 for the year ended
December 31, 1996. This increase is primarily attributable to additional
government clients added during 1997. The average convenience fee charged was
slightly higher for the year ended December 31, 1997 compared to the year ended
December 31, 1996. The increase in revenues was driven both by an increase in
the number of transactions processed and an increase in the average convenience
fee. 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.
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%. The decrease in other revenues was primarily due to a decrease
in computer system sales of $167,000.
Expenses
Cost of transaction revenues. Cost of transaction revenues increased
$191,000 to $412,000 for the year ended December 31, 1997 from $221,000 for the
year ended December 31, 1996, an increase of 86%. Merchant discount fees
increased $189,000 to $271,000 for the year ended December 31, 1997 from
$82,000 for the year ended December 31, 1996, an increase of 230%.
Telecommunications costs increased $43,000 to $56,000 for the year ended
December 31, 1997 from $13,000 for the year ended December 31, 1996, an
increase of 331%. This increase was primarily attributable to the corresponding
increase in revenues. Cost of transaction revenues was 34% of total revenues
for the year ended December 31, 1997 compared to 28% for the year ended
December 31, 1996.
Cost of other revenues. 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 was due to a one-time
reclassification adjustment that was recorded in 1997 for $261,000.
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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 $140,000 to $446,000 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 37% of total revenues for the year ended
December 31, 1997 compared to 39% for the year ended December 31, 1996.
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Selected Unaudited Quarterly Results of Operations
The following tables set forth certain unaudited quarterly results of
operations data for the seven quarters ended September 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 and deferred stock
compensation, 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, September 30,
1998 1998 1998 1998 1999 1999 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction fees...... $ 287 $ 507 $ 492 $ 790 $ 728 $5,247 $ 1,020
Other revenues........ 34 71 43 145 102 36 75
----- ----- ----- ----- ----- ------ -------
Total revenues...... 321 578 535 935 830 5,283 1,095
Cost of other revenues:
Cost of transaction
fees................. 53 124 123 195 218 3,310 171
Cost of transaction
fees to related
party................ 55 129 109 221 203 1,087 319
Cost of other
revenues............. 7 4 2 58 19 2 100
----- ----- ----- ----- ----- ------ -------
Total cost of
revenues........... 115 257 234 474 440 4,399 588
----- ----- ----- ----- ----- ------ -------
Gross profit............ 206 321 301 461 390 884 507
Operating expenses:
Sales and marketing... 102 96 89 69 175 260 301
Development costs..... 119 163 193 133 140 180 328
General and
administrative....... 112 113 112 258 199 350 718
Deferred stock
compensation......... -- -- -- -- -- -- 516
Allocated expenses
from related party... -- -- -- -- -- -- 125
----- ----- ----- ----- ----- ------ -------
Total operating
expenses........... 333 372 394 460 514 790 1,988
----- ----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (127) (51) (93) 1 (124) 94 (1,481)
Other income (expense),
net.................... (5) (17) (15) (18) 3 (33) 1
----- ----- ----- ----- ----- ------ -------
Net income (loss)....... $(132) $ (68) $(108) $ (17) $(121) $ 61 $(1,480)
===== ===== ===== ===== ===== ====== =======
Revenues:
Transaction fees...... 89 % 88 % 92 % 84 % 88 % 99 % 93%
Other revenues........ 11 12 8 16 12 1 7
----- ----- ----- ----- ----- ------ -------
Total revenues...... 100 100 100 100 100 100 100
Cost of other revenues:
Cost of transaction
fees................. 17 21 23 21 26 63 16
Cost of transaction
fees to related
party................ 17 23 21 24 25 20 28
Cost of other
revenues............. 2 1 -- 6 2 -- 10
----- ----- ----- ----- ----- ------ -------
Total cost of
revenues........... 36 45 44 51 53 83 54
----- ----- ----- ----- ----- ------ -------
Gross profit............ 64 55 56 49 47 17 46
Cost of other
operating expenses:
Sales and marketing... 32 17 17 7 21 5 27
Development costs..... 37 28 36 14 17 3 30
General and
administrative....... 35 19 21 28 24 7 67
Deferred stock
compensation......... -- -- -- -- -- -- 47
Allocated expenses
from related party... -- -- -- -- -- -- 11
----- ----- ----- ----- ----- ------ -------
Total operating
expenses........... 104 64 74 49 62 15 182
----- ----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (40) (9) (18) -- (15) 2 (136)
Other income (expense),
net.................... (1) (3) (3) (2) -- (1) --
----- ----- ----- ----- ----- ------ -------
Net income (loss)....... (41)% (12)% (21)% (2)% (15)% 1 % (136)%
===== ===== ===== ===== ===== ====== =======
</TABLE>
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<PAGE>
Seasonality and Fluctuation of Quarterly Results
We have generally 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.
Since we did not process personal federal income tax payments in the third
quarter of 1999, revenues in that quarter were lower than in the second quarter
of 1999. However, revenues in the third quarter of 1999 increased over the
revenues in the first quarter of 1999 due to an increase in the number and
aggregate amount of transactions processed.
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, which are merchant discount fees, are
relatively constant as a percentage of the payment amount. For a discussion of
convenience fees, please see "Business--Our Services--Fee Structure" on page
41.
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. In addition, in
the third quarter of 1999, we recorded deferred stock compensation expense in
the amount of $516,000. We will continue to incur significant deferred stock
compensation expense for the next three years.
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 September 30, 1999, our working capital deficit was $1.3
million.
Net cash used in operating activities was $904,000 for the nine months ended
September 30, 1999. For the nine months ended September 30, 1998, our operating
activities used cash of $98,000. 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 nine months ended September
30, 1998 and 1999 was primarily the result of our net loss and an increase in
prepaid expenses. 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.
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<PAGE>
On November 5, 1999, we issued and sold to E*TRADE Group, Inc. 512,820
shares of our common stock for $9.75 per share pursuant to a stock purchase
agreement. Under the terms of the agreement, if we do not complete our public
offering by March 6, 2000, E*TRADE has the right to sell its shares of our
common stock to Imperial Bank any time before December 31, 2000 at $9.75 per
share. We plan to use the proceeds from E*TRADE's investment in us to repay
stockholder loans and for working capital purposes to fund our operations.
Net cash used in investing activities was $255,000 and $148,000 for the nine
months ended September 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.
Net cash provided by financing activities was $1.0 million and $425,000 for
the nine months ended September 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 nine months ended September 30, 1999 resulted from advances we
received from our stockholders. The net cash generated in the nine months ended
September 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 September 30, 1999, we have the
ability to borrow an additional $500,000 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. We currently have no quantified business plan for the
specific allocation of proceeds from this offering.
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 ongoing 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 September 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.
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<PAGE>
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 interactive telephone 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.
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.
32
<PAGE>
BUSINESS
Company Overview
We believe 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 toll-free telephone number, 1-888-2PAY-
TAXSM, allows consumers to make payments and receive certain customer service
information. Our Web site, at www.8882paytax.com and at
www.officialpayments.com, currently allows consumers to make certain payments,
and we are actively working with government clients to enable consumers to make
additional tax and other payments through the Internet.
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 using
interactive telephone systems and the Internet.
The Internet has experienced rapid growth and has become an important tool
for global communications and commerce. We estimate, based on information from
International Data Corporation, that there were 97 million Web users worldwide
at the end of 1998 and project 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 by individuals and small businesses to government entities, we believe
there are opportunities to offer and cross-sell contextually compatible
services to our consumers. We believe that, based on information from
International Data Corporation, 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
33
<PAGE>
approximately 21 million individuals who will pay the balance shown as
due on their tax return when filing their tax return on or before April
15 and 8 million individuals who pay taxes when filing for extensions of
the April 15 deadline. Further, an additional 41 million estimated tax
payment transactions are expected to be 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 $72 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 was 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 $225 billion in 1998. 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 to have 80% of all taxpayers filing
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
some government entities from paying credit card payment processing fees
associated with accepting credit cards.
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.
34
<PAGE>
Our Solution
Our pilot program for personal federal income taxes processed approximately
45,000 tax filings totaling more than $174 million in credit card payments to
the IRS from January 15, 1999 to April 15, 1999. According to IRS data, we
captured a 95% market share, based on dollar volume, for credit card payments
of personal federal income taxes due April 15, 1999. We also processed over
293,000 payments totaling $82.7 million during the first nine months of 1999
for our state and municipal government clients.
Benefits to Consumer Users
Although consumers must pay a convenience fee for our services and a breach
of our security system could allow access to personal credit card and other
information, we believe that the following benefits of our services to
consumers outweigh their detriments:
. Convenience. Consumers can utilize our interactive telephone or Internet
systems 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
consumers to earn significant rewards.
Benefits to Government Clients
Although there may be some indirect cost to the government entity to promote
our services, we believe that the following benefits of our services to
government clients outweigh their detriments:
. 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.
. No Charge. 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 approximately 425 municipalities. In the nine months ended September
30, 1999, we processed approximately $257 million in credit card payments to
our government clients.
Recognized and Trusted Brand Name
Most of our government clients list our interactive 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
35
<PAGE>
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 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.
All four credit card associations and organizations with whom we do business
allow for convenience fees to be charged as long as the cardholder receives
added convenience from the service provided. These card associations and
issuers, except for Visa(R), allow for a tiered fee schedule according to which
the fee varies depending on the amount charged. Because of Visa(R)'s rules
against tiered convenience fees, we do not accept Visa(R) cards as a means of
payment in tax-related payment programs, such as the IRS, the States of
California and New Jersey and the District of Columbia. We do, however, accept
Visa(R) as a means of payment in all non-tax-related payment programs, such as
parking citations processing, where fixed convenience fees can be charged.
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 income tax payments that were shown as due on tax
returns filed on or before April 15, 1999. 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 to develop a
series of additional products that are consistent with the stated strategic
objectives of our government clients. The majority of these products focus on
integrated electronic filing and payment of personal federal and state income
tax returns and taxes.
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 fact that the
IRS has endorsed the concept of joint federal and state payments either by
phone or through electronic filing. We currently provide our electronic payment
conduit for income
36
<PAGE>
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 a market
research firm among consumers who had used our personal federal income tax
payment services in 1999, we believe that 75% of those consumers would use our
services to also 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 approximately 425 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 credit card 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 telephone payment services.
We currently offer Internet services for business license fees, parking
citations, personal property tax, real estate tax, utility payments and other
fees only in Arlington County, Virginia and Fairfax County, Virginia. We have
verbal agreements to provide Internet services for these payments by the end of
the year to the following government entities:
. Marion County, Indiana
. Lucas County, Ohio
. Grand Blanc Township, Michigan
. Grand Blanc Department of Public Works, Michigan
. Rochester Hills, Michigan
. Allen County, Indiana
. Alexandria, Virginia
. Hanover County, Virginia
We also have agreements to provide Internet services for state income tax
payments to the States of California, Illinois and New Jersey, which we expect
to offer on our Web site within the next three months.
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<PAGE>
We expect the Internet to be an increasingly important revenue source.
However, Internet access is currently estimated to reach only 25% of the U.S.
households, including a majority of households with greater than $75,000 of
annual income, compared to 94% for telephone. Therefore, we expect that the
majority of our revenues will be generated by our interactive telephone service
in the next few years. As more U.S. households acquire Internet access, we
expect that consumers will increasingly demand both the telephone and Internet
options we offer.
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. 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, although
we currently have no quantified business plan which allocates proceeds to fund
this expense. 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, although we currently have no quantified business plan which allocates
proceeds to fund our acquisition plans.
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<PAGE>
Government Clients
As of September 30, 1999, we provide services to the IRS, the States of
California and New Jersey, the District of Columbia and approximately 425
municipal government clients in 25 states throughout the United States. We have
recently signed a contract to provide personal state income tax payment
services in the State of Illinois. The highest concentrations of municipalities
we service are in California, Texas and Virginia. The table below lists, as of
October 31, 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 Delinquent personal state income taxes
158 municipalities Property taxes
168 municipalities Fines for traffic violations
115 municipalities Fines for parking citations
87 municipalities Other services
</TABLE>
Our Services
Our Telephone and Internet Conduits
Our consumers can make credit card payments to our government clients by
using our 1-888-2PAY-TAX SM telephone number or over our Web site at
www.8882paytax.com or www.officialpayments.com. We currently provide a
telephone conduit for credit card payments to all of our government clients. 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 and inform the consumer of the applicable convenience fee
to be charged before the consumer confirms the payment. We continually update
our interactive telephone systems to increase the ease of use of our services.
Our Web site, at www.8882paytax.com or www.officialpayments.com, 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. Consumers
using our Web site will receive a prompt informing them of the applicable
convenience fee before they confirm the payment. 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.
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<PAGE>
Credit Card Payment Services
For each payment type listed below, the following table sets forth the
payments we currently process, those which we currently plan to provide
pursuant to existing agreements and future services that we plan to begin
providing within the next 6 to 12 months.
<TABLE>
<CAPTION>
Payment Type Currently Processed Currently Planned Services Future Services
<S> <C> <C> <C>
Personal federal Balance-due payments Estimated taxes
income taxes.......... Extension payments
Integrated payment
of personal
federal and state
income taxes
Personal state income Balance-due payments Extension payments
taxes................. 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 Fines for speeding and
violations............ other
traffic rule
violations
Fines for parking Fines for parking rule
citations............. 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>
All of the above services can be accessed using our interactive telephone
system. The services noted with an asterisk can also be accessed through the
Internet for Arlington County, Virginia and Fairfax County, Virginia.
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<PAGE>
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 Provides information about traffic violations,
System................. including bail, due dates, traffic school, proof
of corrections, warrants and drivers license
holds.
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 and American Express(R),
MasterCard(R) and the Discover(R) card for federal and state payments.
Cross Selling
We intend to develop cross-selling opportunities for both our telephone and
Internet systems. For example, on the telephone, after a customer executes a
traffic citation payment, they could be prompted to register and pay for
traffic school. On the Internet, the same prompts could be developed through
text links on the traffic citation payment page. We could receive referral fees
from the applicable service providers from whom our consumers purchase goods or
services.
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.
41
<PAGE>
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-TAXSM phone number in selected tax publications distributed to individuals
and tax preparation professionals, and, in the first half of April 1999, the
IRS profiled our electronic payment option on its electronic services web page.
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.
Leverage Existing Relationships
We have relationships with Bank of America, American National Bank
(Illinois), Union Bank of California, Sun Trust and Novus Services to 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 additional strategic
opportunities to provide services to government entities in conjunction with
these and other partners.
42
<PAGE>
Our Operations and Technology
We provide complete electronic credit card payment services to government
entities.
The following graph depicts how a property tax transaction would generate
earnings for us.
. Property Taxpayers. Taxpayers receive a tax bill from their local
government entity providing our telephone number and Internet Web site
address for making a credit card payment.
. Telephone/Internet. If the taxpayer decides to pay his property tax
using our services, he can use either our telephone or Internet payment
interface to transmit the required information.
. Official Payments Corporation. Our program performs 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--the "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.
. Credit Card Processor. We transmit the payment data to our credit card
processor.
. Government Entity. Funds are electronically moved through the automated
clearinghouse settlement process directly to the government entity's
financial institution.
. Cardholder's Statement. The cardholder's monthly statement from his
credit card issuer shows a line item or items reflecting the payment
transaction and the convenience fee charged.
. Official Payments Corporation. We generate revenues primarily from
charging consumers a convenience fee for using our services. In the
majority of transactions, the government entity's financial institution
forwards the convenience fee to us after receiving the tax payment and
the convenience fee from the consumer. We use a portion of the
convenience fee to pay our credit card processors for merchant discount
fees. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 20.
[FLOWCHART OF TRANSACTION PROCESS]
43
<PAGE>
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 interactive telephone systems have the same dual facility scheme as our
Internet systems. Our primary interactive telephone 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 Web site at
www.8882paytax.com and www.officialpayments.com. 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 consumers 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.
Payment Conduits
We provide two principal conduits for making credit card payments to
government clients: via the interactive toll free telephone conduit and via the
Internet.
44
<PAGE>
. Interactive Toll Free Telephone Conduit. In order to facilitate payments
through our interactive telephone system, we first create a script of
voice prompts, record the script, and program possible responses to the
voice prompts into our computer database. We then establish a network
connection to the government client's database system and program the
connection to send and retrieve information to and from the client's
database system.
Payment and other information for our interactive telephone systems is
received from consumers who respond to voice prompts on our toll free
system by depressing touch-tone buttons on their telephones. Once the
convenience fee and other necessary information is conveyed to and
confirmed by the consumer, approval is obtained from the relevant
credit card issuing bank, and the payment is processed. Upon completion
of the payment, the user is given a receipt number.
. Internet Conduit. In order to facilitate payments through our Internet
conduit, we first configure the client's profile settings and create a
screen and menu options or "links" within our Web site. Encrypted
payment data may then be sent between our server and the government
client's server. A "test mode" then follows until the client is
converted to "live" mode to enable payments to be processed.
Payment and other information for our Internet conduit is received from
consumers who retrieve the payment screen on their computer through our
secure Web site. Once their payment data is entered, approval is
obtained from the credit card issuing bank and the payment is processed
through our secure Web site. Upon completion of the payment, the user
is given a receipt number.
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;
45
<PAGE>
. 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 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 it 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 and 1-888-2PAY-
TAX 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
46
<PAGE>
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
"Risk Factors" on page 5.
We license our base interactive telephone hardware and software systems from
Alliance Systems Incorporated, which manufactures the hardware and provides the
operating system and other development tools that we use. The license fee is
included in the cost of each system. Licenses for the processor software that
enables us to receive authorizations from credit card companies are obtained
from third party vendors each time a new government client account is
established. An additional license is acquired from Artisoft Inc. to allow us
to develop our interactive telephone applications. Finally, we obtain a
separate license from CyberSource Corp. for credit card processing software
with respect to each government client that is supported on our Internet
conduit.
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).
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 those services, provide
unrelated services arising from excess capacity acquired or developed in good
faith for banking purposes. These activities may be conducted by national banks
directly, as well as through majority owned subsidiaries of national banks.
These 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.
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<PAGE>
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 consumers' liability
if the notification procedures are followed within prescribed periods. These
limitations on the consumers' 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 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 November 1, 1999, we had 37 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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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our management, directors
and director nominees as of October 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas R. Evans......... 45 Chairman, Chief Executive Officer and Director
Kenneth Stern........... 51 President and Director
Brian W. Nocco.......... 47 Chief Financial Officer and Director
Michael P. Presto....... 46 Chief Operating Officer
Michael Barrett......... 37 Chief Internet and Sales Officer
Steve Johnson........... 55 Senior Vice President, National Sales Manager
Bruce Zanca............. 39 Senior Vice President, Communications and Administration
Debbie Soleta........... 36 Vice President, Finance
Brad Belton............. 34 Vice President, Engineering
Angelica F. Carey....... 30 Vice President, Corporate Marketing
Kristen K. Gunn......... 37 Vice President, Consumer Marketing
Andrew Cohan............ 45 Director Nominee
Christos Cotsakos....... 51 Director Nominee
George L. Graziadio,
Jr. ................... 80 Director Nominee
Vernon Loucks........... 65 Director Nominee
Lee E. Mikles........... 43 Director Nominee
Bruce Nelson............ 47 Director Nominee
</TABLE>
Thomas R. Evans has served as our Chairman and Chief Executive Officer and a
Director 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 and World Report.
Kenneth Stern, our founder, has served as President and a 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 Vice
President of Systems Development at Tessereact Corporation.
Brian W. Nocco has served as our Chief Financial Officer and Director since
September 30, 1999. From May 1998 until joining us, Mr. Nocco was Executive
Vice President of Corporate Development at Imperial Bank, where he was involved
in our management and initial public offering process. From 1994 to 1998, Mr.
Nocco served as Senior Vice President and Manager of Audit and Compliance for
The Chubb Corporation, an insurance company headquartered in Warren, New
Jersey. From 1977 to 1994, Mr. Nocco served in various lending and financial
management positions, including Treasurer, at Continental Bank in Chicago,
Illinois.
Michael P. Presto has served as our Chief Operating Officer since September
1999, and is responsible for our technology, customer service and business
operations. Mr. Presto was Senior Vice President, Circulation and Business
Development at Curtis Circulation Company from April 1998 to September 1999,
where he was responsible for worldwide circulation sales and marketing
strategies. From January 1993 to April 1998,
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Mr. Presto was Vice President of Consumer Marketing and Senior Vice President
of Consumer Marketing and Distribution for The New York Daily News during which
time he also served as President of Data Comm Services Inc., an affiliate
telemarketing/fulfillment customer service business. In addition, Mr. Presto
has held executive management positions at U.S. News and World Report and
Newsweek.
Michael Barrett has served as our Chief Internet and Sales Officer since
September 1999. Mr. Barrett is responsible for marketing, sales, business
development and strategic partnerships with respect to our Internet initiative.
From May 1999 to September 1999, Mr. Barrett worked as an e-commerce consultant
for Yahoo!, Inc., and from September 1997 to May 1999, Mr. Barrett was Senior
Vice President of Sales and Strategic Partnerships at GeoCities, Inc. In
addition, from November 1995 to September 1997, Mr. Barrett was Vice President
of Advertising for Disney Online, and he served as Publisher of Family Computer
Magazine for Family PC. Previously, he held sales management positions at
Meredith Publishing, Newsweek and Family PC.
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 since 1987.
Bruce Zanca oversees our corporate communications, public relations and
investor relations efforts. He also manages our business administration
infrastructure. From September 1998 to June 1999 he was Vice President of
Communications at GeoCities, Inc., where he was responsible for public affairs,
media relations, government affairs and investor relations. From 1994 to 1998
Mr. Zanca was Vice President of Corporate Communications at the U.S. News and
World Report Magazine Group. In the past, Mr. Zanca served as a White House
press secretary under Malin Fitzwater and a public relations advisor to
President George Bush. He has held senior communications positions at the U.S.
Justice Department and U.S. Commerce Department, and has served on the staff of
the Vice President of the United States.
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.
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.
Angelica F. Carey joins us as Vice President, Corporate Marketing. Ms. Carey
is responsible for managing our corporate marketing as well as promoting our
services to our government and business partners and contributing to our sales,
public relations and strategic partnership efforts. From July 1998 to July
1999, Ms. Carey was the Director of Ad Sales Marketing at GeoCities, Inc.,
where she managed the sales marketing efforts. From 1995-1998, Ms. Carey was
the Marketing Manager of Fast Company Magazine, involved in its launch and
development.
Kristen K. Gunn joins us as Vice President, Consumer Marketing, managing our
relationships with strategic marketing partners and overseeing the development
of our brand image and consumer marketing campaign. From July 1998 to July
1999, Ms. Gunn was the Director of Visitor Marketing at GeoCities, Inc.,
responsible for non-member marketing and also worked on the company's initial
corporate branding campaign. From 1993 to 1998, Ms. Gunn served as the manager
of New Media at U.S. News and World Report.
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Andrew Cohan will join our board of directors upon completion of this
offering. Since September 1999, he has been Chairman and Chief Executive
Officer of Artist Marketing Corp., a marketing company for artists and
entertainment/celebrity figures. From August 1997 to September 1999, Mr. Cohan
was Senior Vice President, Worldwide Entertainment, Licensing and Marketing for
Sony Signature, an entertainment licensing and marketing company. From January
1996 to July 1997, Mr. Cohan was Senior Vice President, Chief Merchandising
Officer for Beverages and More, a start-up beverages retailer. Before that, Mr.
Cohan was Vice President, Merchandising for Emerson Radio Corporation from
February 1994.
Christos M. Cotsakos will join our board of directors upon completion of
this offering. Mr. Cotsakos is the Chairman of the Board of Directors and Chief
Executive Officer of E*TRADE Group, Inc., an electronic broker/dealer. Prior to
joining E*TRADE, he served as President, Co-Chief Executive Officer, Chief
Operating Officer and a Director of A.C. Nielsen, Inc. from March 1995 to
January 1996, as President and Chief Executive Officer of Nielsen International
from September 1993 to March 1995, and as President and Chief Operating Officer
of Nielsen Europe, Middle East and Africa from March 1992 to September 1993.
Mr. Cotsakos joined Nielsen after 19 years with the Federal Express
Corporation, where he held a number of senior positions. Mr. Cotsakos also
serves as a director of several technology companies in both the public and
private sector.
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, 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., a manufacturer of golf clubheads, orthopedic
implants and surgical tools. Mr Graziadio is the uncle of Lee E. Mikles, one of
our director nominees.
Vernon R. Loucks Jr. will join our board of directors upon completion of
this offering. Mr. Loucks is the Chairman of the Board of Directors of Baxter
International, Inc., a developer, distributor and manufacturer of health care
products and services, and previously served as Baxter's Chief Executive
Officer from 1980 through 1998. Mr. Loucks also serves as a director of
Affymetrix, Inc., Anhauser-Busch Companies, Inc., The Dun & Bradstreet
Corporation, Emerson Electric Company and The Quaker Oats Company.
Lee E. Mikles will join our board of directors upon completion of this
offering. Mr. Mikles is the Chairman of Mikles/Miller Management Inc., an
investment advisor, and Chairman of Mikles/Miller Securities, LLC, a registered
broker/dealer. He has has been a director of Imperial Bancorp since 1996 and
its wholly-owned subsidiary, Imperial Bank, since 1993. Mr. Mikles also serves
on the board of directors of Coastcast Corp., and Boss Holdings, Inc. Mr.
Mikles is the nephew of George L. Graziadio, Jr., one of our director nominees.
Bruce Nelson will join our board of directors upon completion of this
offering. Mr. Nelson most recently was Vice Chairman of Young & Rubicam Inc.
Prior to that position, he worked at McCann-Erickson Worldwide for 19 years in
various positions, including as Director of Worldwide Accounts, Director of
Strategy for Worldwide Accounts and Creative Director for Worldwide Accounts.
Board of Directors and Committees
Our board of directors is composed of up to nine members. Currently there
are six vacancies and six director nominees to fill these vacancies. Within 30
days following the completion 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
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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 "--1999 Stock Incentive Plan" on page 52. 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 $20,000. Directors will be
reimbursed for out-of-pocket expenses incurred in connection with their service
as directors. In addition, each non-employee director will receive, upon
consummation of this offering, options to purchase 75,000 shares of our common
stock at an exercise price per share equal to the initial public offering
price. Directors who are our officers or employees will not receive any
additional compensation for their services as directors. See "--1999 Stock
Incentive Plan" on page 52.
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 President. 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 the named executive
officer, and no other executive officer received compensation over $100,000 in
1998. Thomas Evans became our Chairman and Chief Executive Officer in August
1999. His annual base salary is $200,000. Please see "--Employment Agreements"
on page 54 for a detailed description of Mr. Evans employment agreement.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Position Salary
<S> <C>
Kenneth Stern(1)............................................. $144,000(/2/)
President
</TABLE>
- --------
(1) Mr. Stern served as our Chief Executive Officer and President at the end of
fiscal 1998.
(2) Effective August 1999, Mr. Stern's annual base salary is $215,000. Please
see "--Employment Agreements" on page 55 for a detailed description of Mr.
Stern's employment agreement.
1999 Stock Incentive Plan
In August 1999, our board of directors adopted the 1999 Stock Incentive
Plan. We have reserved a total of 6,900,000 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.
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We have granted non-qualified stock options to purchase 4,488,012 shares of
our common stock to the following individuals and groups:
<TABLE>
<CAPTION>
Name Number of Shares
<S> <C>
Thomas Evans............................................. 1,325,460
Kenneth Stern............................................ 212,073
Brian Nocco.............................................. 397,638
All executive officers as a group (11 persons)........... 4,320,999
All others (5 persons)................................... 167,013
</TABLE>
All of the above options are non-qualified stock options, have a term of ten
years and an exercise price of $1.33 per share.
We have granted stock options to Mr. Evans to purchase up to 1,325,460
shares of our common stock and to other executive officers and employees to
purchase up to 2,499,822 shares of our common stock which are exercisable
immediately. All of these shares will be non-transferable and subject to our
right to repurchase those shares at a price of $1.33 per share. We may exercise
this right at any time during the 30-day period following 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 option shares on
the first anniversary of the grant date. Thereafter, our right will expire on a
cumulative basis with respect to the remaining shares on a monthly basis 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 $1.33 per share so that, when
combined with the option described above, Mr. Evans will have options to
acquire a number of shares of our common stock as is equal to a total of five
percent (5%) of our common stock outstanding at that time, on a fully diluted
basis, including the options granted to Mr. Evans. In addition, upon completion
of this offering, we will grant the other executive officers and employees
additional options to acquire shares of our common stock at an exercise price
of $1.33 per share so that, when combined with the options described above,
these individuals will have options to acquire a number of shares of our common
stock as is equal to a total of 9.43% of our common stock outstanding at that
time, on a fully diluted basis, including the options granted to these
individuals.
We have also granted 662,730 stock options to purchase shares of our common
stock to executive officers and employees, other than Mr. Evans, which will
vest on the date of this offering. Kenneth Stern has been delegated the
authority to grant, upon completion of this offering, any employees selected by
him additional options to acquire shares of our common stock at an exercise
price of $1.33 per share so that, when combined with the options already
granted, these employees selected by Mr. Stern to receive options will have
options to acquire a number of shares of our common stock equal to a total of
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 a
number of shares of common stock equal to a total of 2.5% of our common stock
outstanding at that time, on a fully diluted basis, including the options
granted to these employees.
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;
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. 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 these employees:
. 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 they have been satisfied or terminated in accordance with the
terms of the plan and these awards.
Employment Agreements
We have entered into an employment agreement with Thomas R. 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 1,325,460 shares of our common stock at $1.33 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
$1.33 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase
1,325,460 shares, to purchase shares of our common stock equal to a total 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,
Imperial Bank has guaranteed that the "value"--as defined in the agreement--of
Mr. Evans' vested options will be $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 these 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'
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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 the date 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 these 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.
We have entered into an employment agreement with Brian Nocco, pursuant to
which Mr. Nocco will serve as our Chief Financial Officer and a member of our
board of directors. The employment agreement provides for an annual base salary
of $200,000, as well as reimbursement for relocation expenses. In addition,
under the terms of his agreement, Mr. Nocco will receive a minimum bonus of
$100,000 in 2000. Mr. Nocco was also granted options to purchase 397,638 shares
of our common stock at $1.33 per share under the 1999 Stock Incentive Plan. We
agreed to grant Mr. Nocco additional options under our 1999 Stock Incentive
Plan at an exercise price of $1.33 per share upon consummation of this offering
so that, at that time, he would hold options, including the initial grant of
options to purchase 397,638 shares, to purchase shares of our common stock
equal to a total of 1.5% of our common stock outstanding, on a fully diluted
basis, including the options granted to Mr. Nocco. In addition, we have a
verbal agreement to grant Mr. Nocco options to purchase up to 0.5% of our
common stock outstanding, on a fully diluted basis, including the options
described in the immediately preceding sentence. These additional options would
be granted to Mr. Nocco on the earliest to occur of the following future dates:
. November 1, 2000;
. the date the Chairman and CEO determines Mr. Nocco has achieved certain
pre-determined performance goals; or
. the date we sign a definitive agreement that would result in a "change
in control" of us.
One-half of these options would be granted with an exercise price of $1.33 per
share, and the balance will be granted with an exercise price equal to the
initial public offering price. These options would become fully exercisable
within three years after the date of grant. If Mr. Nocco's employment is
terminated by us without "cause" or if he terminates his employment for "good
reason," including a "change in control," as these terms are defined in the
written employment agreement, we will be required to pay him his base salary
and benefits for one year, and all of his existing options will vest
immediately. Mr. Nocco's future options will also vest upon a "change of
control." If Mr. Nocco'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. Nocco'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. Nocco on 60 days' notice
without good reason, or immediately for good reason.
We have entered into an employment agreement with Michael P. Presto, our
Chief Operating Officer. The employment agreement provides for an annual base
salary of $200,000. In addition, under the terms of his
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agreement, Mr. Presto will receive a minimum bonus of $100,000 in 2000. Mr.
Presto was also granted options to purchase 662,730 shares of our common stock
at $1.33 per share under the 1999 Stock Incentive Plan. We agreed to grant Mr.
Presto additional options under our 1999 Stock Incentive Plan at an exercise
price of $1.33 per share upon consummation of this offering so that, at that
time, he would hold options, including the initial grant of options to purchase
662,730 shares, to purchase shares of our common stock equal to a total of 2.5%
of our common stock outstanding, on a fully diluted basis, including the
options granted to Mr. Presto. If Mr. Presto's employment is terminated by us
without "cause" or if he terminates his employment for "good reason," including
a "change in control," as these 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. Presto'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. Presto'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. Presto on
60 days' notice without good reason, or immediately for good reason.
We have entered into an employment agreement with Michael Barrett, our Chief
Internet and Sales Officer. The employment agreement provides for an annual
base salary of $200,000. In addition, under the terms of his agreement, Mr.
Barrett will receive a minimum bonus of $100,000 in 2000. Mr. Barrett was also
granted options to purchase 795,276 shares of our common stock at $1.33 per
share under the 1999 Stock Incentive Plan. We agreed to grant Mr. Barrett
additional options under our 1999 Stock Incentive Plan at an exercise price of
$1.33 per share upon consummation of this offering so that, at that time, he
would hold options, including the initial grant of options to purchase 795,276
shares, to purchase shares of our common stock equal to a total of 3% of our
common stock outstanding, on a fully diluted basis, including the options
granted to Mr. Barrett. If Mr. Barrett's employment is terminated by us without
"cause" or if he terminates his employment for "good reason," including a
"change in control," as these 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. Barrett'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. Barrett'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. Barrett on 60 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:
. 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;
. as a director of another entity, one of whose executive officers served
on our board of directors; or
. 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.
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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 relationship with the IRS and state income tax
authorities. These advances are made under lines of credit from Imperial Bank
and Beranson Holdings, Inc. in the combined amount of $2.8 million and 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 October 31, 1999, the
aggregate principal and interest accrued on these notes was $2.3 million. We
expect to repay the balance of the promissory notes, together with the accrued
interest, 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.
During the past year, we have received the following advances from our
stockholders:
. August 16, 1999: $200,000 from Imperial Bank and $50,000 from Beranson
Holdings, Inc.
. August 24, 1999: $1,105,600 from Imperial Bank and $276,400 from
Beranson Holdings, Inc.
. October 1999: $560,000 from Imperial Bank and $140,000 from Beranson
Holdings, Inc.
In January 1998, Imperial Bank agreed to increase its ownership interest of
U.S. Audiotex LLC from 20% to 80% by purchasing a 60% membership interest, or
75% of Beranson Holdings, Inc.'s membership interest, from Beranson Holdings,
Inc. for $3,010,000, of which $2,510,000 was immediately payable to Beranson
Holdings, Inc. The purchase price balance of $500,000 was payable according to
the following structure:
. In order to fund our cash flow needs, Imperial Bank made a capital
contribution of $500,000 to us, bearing interest at 10% per annum, in
return for a preferred membership interest.
. Imperial Bank's preferred membership interest was subject to mandatory
redemption upon the formation of Official Payments Corporation.
. Imperial Bank was obligated to forward any redemption payments it
received from us to Beranson Holdings, Inc. as an additional payment for
its purchase of the membership interest.
For accounting purposes, Imperial Bank's preferred membership interest was
treated by us as a loan from Beranson Holdings, Inc. to us. Upon our formation
on August 24, 1999, the mandatory redemption of Imperial Bank's preferred
membership interest was triggered and this "loan," including $82,000 of accrued
interest, was repaid to Beranson Holdings, Inc. out of the proceeds of the
advances made to us on that date by Imperial Bank and Beranson Holdings, Inc.
Imperial Bank is one of three merchant banks we use to process credit card
transactions and perform traditional merchant credit card settlement services.
We have an agreement with Imperial Bank in which Imperial Bank agrees to
sponsor us as an independent service provider, and we agree to use our best
efforts to use Imperial Bank as a provider of credit card settlement services.
Under our agreement with Imperial Bank for processing and settlement services,
Imperial Bank is authorized to retain from our sales revenues customary
merchant discount fees usually charged for similar processing services, on a
product by product basis as negotiated between us and Imperial Bank. Both
parties have agreed to negotiate in good faith as to the discount per product.
During 1998 and during the nine months ended September 30, 1999, we paid
Imperial Bank approximately $515,000 and $1.6 million, respectively, for
performing these processing and settlement services, which represent 62% and
32%, respectively, of the total merchant discount fees paid by us during those
periods. During 1998 and during the nine months ended September 30, 1999, the
merchant discount fees paid by us to Imperial Bank ranged from 1.92% to 2.68%
and 1.85% to 2.73%, respectively, of the total amount paid by the consumer. We
believe Imperial Bank is providing these services on terms no less favorable to
us, and no more or less favorable to Imperial Bank than could be obtained from
unaffiliated third parties. We expect that Imperial Bank will continue to
provide these services to us following this offering.
57
<PAGE>
Imperial Bank has provided human resource services and other assistance to
us. These services and assistance include payroll processing and benefits
administration, including the administration of our 401(k) plan and other
benefit programs, and employee recruiting. Like all wholly-owned and majority-
owned subsidiaries of Imperial Bank, we pay a pass-through charge, based on the
total number of employees, for these services. During the nine months ended
September 30, 1999, we paid Imperial Bank a fee of $7,000 for these services.
We did not pay any fees to Imperial Bank for these services in 1998. 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 continue to provide these services to us for the
foreseeable future.
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 Beranson Holdings, Inc. will be released as
the guarantors of our lease obligations. In addition, if we do not complete our
public offering by March 6, 2000, E*TRADE has the right to sell its shares of
our common stock to Imperial Bank at any time before December 31, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Other Income (Expense)" on page 25.
Imperial Bank and Beranson Holdings, Inc. are parties to a stockholders
agreement which contains the terms of our reorganization from a limited
liability company to a corporation and sets forth the number and exercise price
of options to be granted to Thomas R. Evans, other employees and outside
directors under our 1999 Stock Incentive Plan. The stockholders agreement
terminates upon completion of this offering. For a description of the terms of
the stock options granted under the stockholders agreement, see "Management--
1999 Stock Incentive Plan" on page 52.
We were originally organized as a California limited liability company (the
"Predecessor"). In anticipation of our initial public offering, we merged the
Predecessor with and into a Delaware corporation, as a result of which all the
assets and liabilities of the Predecessor were transferred to the corporation.
Prior to the merger, Imperial Bank and Beranson Holdings, Inc. were the only
members of the Predecessor and owned membership interests representing 80% and
20%, respectively, in the Predecessor. Upon the merger, Imperial Bank and
Beranson Holdings, Inc. held a corresponding percentage ownership interest in
us, with Imperial Bank owning 12,000,000 shares of our common stock and
Beranson Holdings, Inc. owning 3,000,000 shares of our common stock. Upon
consummation of the sale of 512,820 shares of our common stock to E*TRADE
Group, Inc. on November 5, 1999, the percentage ownership interests of Imperial
Bank and Beranson Holdings Inc. in us were reduced to 77.4% and 19.3%,
respectively.
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<PAGE>
PRINCIPAL STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of November 5, 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 on page 52; and
. all of our directors and executive officers as a group.
The calculations of the percentages in the following table are based on
15,512,820 shares of our common stock outstanding prior to the closing of this
offering, and 20,512,820 shares outstanding immediately following the
completion of this offering, which includes 512,820 shares of common stock
issued to E*TRADE. 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.......... 12,000,000 77.4% 12,000,000 58.5%
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Beranson Holdings,
Inc.(1)............... 3,000,000 19.3 3,000,000 14.6
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Thomas R. Evans........ 1,325,460(/2/) 7.9 1,325,460 6.1
c/o Official Payments
Corporation
445 Park Avenue, 10th
Floor
New York, New York
10022
Kenneth Stern(1)....... 3,212,073(/3/) 20.4 3,212,073 15.5
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Brian Nocco............ 397,638(/4/) 2.5 397,638 1.9
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
George L. Graziadio,
Jr. .................. -- -- 75,000(/5/) *
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Lee E. Mikles.......... -- -- 75,000(/5/) *
c/o Imperial Bank
Building
9920 South La Cienega
Boulevard
Inglewood, CA 90301
Andrew Cohan........... -- -- 75,000(/5/) *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Christos Cotsakos(6)... -- -- 75,000(/5/) *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Vernon R. Loucks Jr.... -- -- 75,000(/5/) *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
Bruce Nelson........... -- -- 75,000(/5/) *
c/o Official Payments
Corporation
2333 San Ramon Valley
Boulevard, Suite 450
San Ramon, California
94583
All executive officers
and directors as a
group................. 7,320,999 36.9 7,770,999 30.7
(17 persons)
</TABLE>
59
<PAGE>
- --------
* Less than 1%.
(1) Beranson Holdings, Inc. is a company controlled by Mr. Stern and his wife,
Michaella Stern, as joint tenants. Lauren Stern, a minor, is the only other
stockholder. Accordingly, Mr. Stern is deemed to beneficially own the
shares of our common stock owned by Beranson Holdings, Inc.
(2) Consists of 1,325,460 shares of our common stock underlying presently
exercisable options, equal to 5% of our common stock outstanding after
this offering on a fully diluted basis. For a discussion of Mr. Evans's
arrangement, see "Management--Employment Agreements" on page 54.
(3) Consists of 212,073 shares of our common stock underlying presently
exercisable options. For a discussion of Mr. Stern's options, see
"Management--1999 Stock Incentive Plan" on pages 52-53.
(4) Consists of 397,638 shares of our common stock underlying presently
exercisable options. For a discussion of Mr. Nocco's options, see
"Management--1999 Stock Incentive Plan" on pages 52-53 and "--Employment
Agreements" on pages 54-55.
(5) Consists of 75,000 shares of common stock underlying options to be received
upon completion of this offering.
(6) Excludes 512,820 shares of common stock owned by E*TRADE Group, Inc., of
which Mr. Cotsakos is Chairman and Chief Executive Officer.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 150,000,000 shares of common stock,
15,512,820 shares of which are issued and outstanding, held by three
stockholders of record. An additional 6,900,000 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:
. surplus as defined in the DGCL; or
. net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year.
See "Dividend Policy" on page 16.
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 "Risk Factors" on page 5.
Anti-Takeover Matters
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:
. the transaction is approved by the board of directors of the corporation
prior to the date such person or entity became an interested
stockholder;
. 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
61
<PAGE>
. 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.
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 some business
combinations with any related person, which is 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:
. any breach of the director's duty of loyalty to our company or our
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. certain unlawful dividends or redemptions as provided under Section 174
of the DGCL; or
. 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 our common stock.
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<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 20,512,820 shares of our common
stock outstanding, assuming there is no exercise of the underwriters' over-
allotment option or options outstanding under our stock option plans. Of these
shares, the 5,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by our "Affiliates", as that term is defined in Rule
144 under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining 15,512,820 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--200,000 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 1999
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, Beranson Holdings, Inc. and E*TRADE Group,
Inc. the right to demand, on four occasions, one occasion and one occasion,
respectively, that we register their shares of our common stock. In addition,
under the terms of the registration rights agreements with Imperial Bank and
Beranson Holdings and under the stock purchase agreement with E*TRADE, if we
propose to register any of our securities, either for our own account or for
the account of another stockholder exercising registration rights, all three
parties are entitled to notice of the registration and are entitled to include
their shares in the 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 registration to limit the
number of shares included in the registration. We have agreed to pay the
expenses associated with the registration of Imperial Bank's and Beranson
Holdings,
63
<PAGE>
Inc.'s shares of our common stock, including the reasonable cost of legal
counsel, not to exceed $75,000 for each registration. E*TRADE has agreed to pay
the expenses associated with the registration of their shares upon their
demand, including the reasonable cost of legal counsel.
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.
64
<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, CIBC World Markets Corp.
and DLJdirect Inc. 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...........................................
DLJdirect Inc. ...................................................
----------
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 by this prospectus 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 by
this prospectus, 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 the initial offering price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may re-allow, to
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.
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 a total of 750,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise the option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to a
number of 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.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 7.5% of the shares included in the offering, to be
sold to some of our and our shareholders' directors, officers and employees and
friends and families of our and our shareholders' directors and executive
officers, to strategic partners, and to other persons and entities that we
believe have contributed to the development and success of our business. The
number of shares available for sale to the general public will be reduced to
the extent these persons purchase reserved shares. The persons purchasing
shares under our directed share program must commit to purchase shares at the
same time as the general public. Any reserved shares that are not orally
confirmed for
65
<PAGE>
purchase within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the shares offered in
our initial public offering.
We have agreed to indemnify the underwriters against a number of
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make.
We and each of our executive officers, directors, stockholders and option
holders have agreed, subject to some 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 the 180-day period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers,
directors, stockholders and option holders 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 by this prospectus 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 by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus 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 the particular jurisdiction. Persons with this
prospectus should inform themselves about and observe any restrictions relating
to this 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.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option described above.
<TABLE>
<CAPTION>
Total
-----------------
Per No Full
Share Exercise Exercise
<S> <C> <C> <C>
Underwriting fees paid by us............................ $ $ $
</TABLE>
66
<PAGE>
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 over-allot 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.
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 this offering will be
passed upon for the underwriters by Simpson Thacher & Bartlett, Los Angeles,
California.
EXPERTS
The financial statements of Official Payments Corporation as of December 31,
1997, 1998 and September 30, 1999, for the period from January 1, 1996 to June
26, 1996 of our predecessor company and for the period from June 26, 1996
(inception) to December 31, 1996, for each of the years in the two-year period
ended December 31, 1998 and for the nine-month period ended September 30, 1999
have been included in this prospectus 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.
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 "Where You Can Find Additional
Information" on page 66. The information on our www.8882paytax.com Web site is
not part of this prospectus.
8882paytax.com SM and 1-888-2PAY-TAX SM are registered service marks of
Official Payments Corporation. All other brand names, trademarks and service
marks appearing in this prospectus are the property of their respective
holders.
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. 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 other reports as we may determine or as may
be required by law.
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OFFICIAL PAYMENTS CORPORATION
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1997, 1998 and September 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 nine-month periods ended September 30, 1998
(unaudited) and 1999 ................................................... F-4
Statements of Stockholders' Equity (Deficit) 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 nine-month period ended September 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 nine-month periods ended September 30, 1998
(unaudited) and 1999 ................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Official Payments Corporation:
We have audited the accompanying balance sheets of Official Payments
Corporation as of December 31, 1997 and 1998 and September 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 for the nine-
month period ended September 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 Official Payments
Corporation as of December 31, 1997 and 1998 and September 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 for the nine-month period ended September
30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
San Francisco, California
October 26, 1999, except
for Note (9), which is as
of November 8, 1999
F-2
<PAGE>
OFFICIAL PAYMENTS CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 182 $ 631 $ 514
Accounts receivable.............................. 265 554 532
Receivable from related parties.................. 12 -- --
Prepaid expenses and other current assets........ 54 29 596
Receivable from U.S. Treasury.................... -- -- 95
----- ------ -------
Total current assets.......................... 513 1,214 1,737
Property and equipment, net....................... 251 533 750
Other assets...................................... -- -- 36
----- ------ -------
Total assets.................................. $ 764 $1,747 $ 2,523
===== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............ $ 404 $ 654 $ 1,192
Deferred revenue................................. 62 99 107
Current portion of notes payable and capital
lease obligations............................... 268 69 106
Notes payable to related parties................. -- -- 1,632
----- ------ -------
Total current liabilities..................... 734 822 3,037
Notes payable and capital lease obligations....... 121 241 208
Notes payable to related party.................... -- 500 --
----- ------ -------
Total liabilities............................. 855 1,563 3,245
----- ------ -------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $0.01 par value; 150,000,000
shares authorized; 15,000,000, shares issued
and outstanding as of December 31, 1997, 1998
and September 30, 1999, respectively........... 150 150 150
Additional paid-in capital...................... 428 1,028 42,373
Deferred stock compensation..................... -- -- (40,711)
Accumulated deficit............................. (669) (994) (2,534)
----- ------ -------
Stockholders' equity (deficit)................ (91) 184 (722)
----- ------ -------
Total liabilities and stockholders' equity
(deficit).................................... $ 764 $1,747 $ 2,523
===== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
Period from June 26, 1996 Year ended Nine months ended
January 1, 1996 (Inception) to December 31, September 30,
to December 31, ---------------- -------------------
June 26, 1996 1996 1997 1998 1998 1999
(Predecessor Company) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction fees............................. $ 111 $ 240 $ 935 $ 2,076 $ 1,286 $ 6,995
Other revenues .............................. 201 234 267 293 148 213
----- ------- ------- ------- ------- -------
Total revenues............................. 312 474 1,202 2,369 1,434 7,208
Cost of revenues:
Cost of transaction fees..................... 28 108 259 494 299 3,706
Cost of transaction fees to related party.... -- 85 153 515 294 1,600
Cost of other revenues....................... 40 44 284 71 13 121
----- ------- ------- ------- ------- -------
Total cost of revenues..................... 68 237 696 1,080 606 5,427
----- ------- ------- ------- ------- -------
Gross profit................................... 244 237 506 1,289 828 1,781
Operating expenses:
Sales and marketing.......................... 107 115 330 356 287 736
Development costs............................ 114 124 206 608 475 648
General and administrative................... 148 158 446 595 337 1,267
Deferred stock compensation.................. -- -- -- -- -- 516
Allocated expenses from related party........ -- -- 20 -- -- 125
----- ------- ------- ------- ------- -------
Total operating expenses................... 369 397 1,002 1,559 1,099 3,292
----- ------- ------- ------- ------- -------
Income (loss) from operations.................. (125) (160) (496) (270) (271) (1,511)
Other income (expense), net.................... (31) 21 38 (17) (10) 36
Interest (expense)............................. -- (28) (44) (38) (27) (65)
----- ------- ------- ------- ------- -------
Net income (loss).......................... $(156) $ (167) $ (502) $ (325) $ (308) $(1,540)
===== ======= ======= ======= ======= =======
Basic and diluted net income (loss) per share.. $ -- $ (0.01) $ (0.03) $ (0.02) $ (0.02) $ (0.10)
===== ======= ======= ======= ======= =======
Shares used in basic and diluted net income
(loss) per share.............................. -- 15,000 15,000 15,000 15,000 15,000
- --------------------------------------------------
===== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from January 1, 1996 to June 26, 1996 (predecessor company) and period
from June 26, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the nine-month period ended September 30,
1999
(In thousands)
<TABLE>
<CAPTION>
Common stock
-------------
Note Total
Additional Deferred receivable stockholders'
paid-in stock from Accumulated equity
Shares Amount capital compensation stockholder (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1,
1996 (Predecessor
Company)............... -- $ -- $ -- $ -- $ -- $ (174) $ (174)
Net (loss) (Predecessor
Company)............... -- -- -- -- -- (170) (170)
------ ----- ------- --------- ----- ------- ------
Balance as of June 6,
1996 (Predecessor
Company)............... -- -- -- -- -- (344) (344)
- -----------------------------------------------------------------------------------------------------
Balance as of June 26,
1996 (inception)....... -- -- -- -- -- -- --
Issuance of common stock
for liabilities
assumed................ 12,000 120 (464) -- -- -- (344)
Issuance of common stock
for cash and note
receivable............. 3,000 30 970 -- (500) -- 500
Net income (loss)....... -- -- -- -- -- (167) (167)
------ ----- ------- --------- ----- ------- ------
Balance as of December
31, 1996............... 15,000 150 506 -- (500) (167) (11)
Distribution of note
receivable to
stockholder............ -- -- (98) -- -- -- (98)
Repayment of note
receivable............. -- -- -- -- 500 -- 500
Services performed by
stockholder............ -- -- 20 -- -- -- 20
Net income (loss) ...... -- -- -- -- -- (502) (502)
------ ----- ------- --------- ----- ------- ------
Balance as of December
31, 1997............... 15,000 150 428 -- -- (669) (91)
Capital contribution.... -- -- 600 -- -- -- 600
Net income (loss) ...... -- -- -- -- -- (325) (325)
------ ----- ------- --------- ----- ------- ------
Balance as of December
31, 1998............... 15,000 150 1,028 -- -- (994) 184
Deferred stock
compensation .......... -- -- 41,227 (41,227) -- -- --
Amortization of deferred
stock compensation .... -- -- -- 516 -- -- 516
Services performed by
stockholder............ -- -- 118 -- -- -- 118
Net income (loss)....... -- -- -- -- -- (1,540) (1,540)
------ ----- ------- --------- ----- ------- ------
Balance as of September
30, 1999............... 15,000 $ 150 $42,373 $(40,711) $ -- $(2,534) $ (722)
====== ===== ======= ========= ===== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
OFFICIAL PAYMENTS CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from Year ended
Period from June 26, 1996 December Nine months
January 1, 1996 to (Inception) to 31, ended September 30,
June 26, 1996 December 31, ------------ -------------------
(Predecessor Company) 1996 1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows (used in)
operating activities:
Net income (loss)...... $(156) $(167) $(502) $(325) $(308) $(1,540)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 3 14 29 57 36 132
Deferred stock
compensation......... -- -- -- -- -- 516
Services performed by
related party........ -- -- 20 -- -- 118
Changes in operating
assets and
liabilities:
Accounts receivable.. (51) (76) (101) (289) 143 22
Prepaid expenses and
other assets........ 40 12 (35) 25 (256) (603)
Receivable from U.S.
Treasury............ -- -- -- -- -- (95)
Accounts payable and
accrued expenses.... 4 90 235 250 276 538
Deferred revenue..... (74) (64) 31 37 11 8
----- ----- ----- ----- ----- -------
Net cash (used in)
operating
activities......... (234) (191) (323) (245) (98) (904)
----- ----- ----- ----- ----- -------
Cash flows used in
investing
activities--capital
expenditures........... (43) (63) (139) (298) (148) (255)
----- ----- ----- ----- ----- -------
Cash flows provided by
financing activities:
Issuance of common
stock................. -- 500 -- -- -- --
Capital contribution .. -- -- -- 600 -- --
Advances from related
party................. -- -- -- -- -- 440
Repayment of advances
from related party.... -- -- -- -- -- (440)
Repayment of notes
payable and capital
leases................ 119 (38) (77) (108) (75) (90)
Repayment of note
receivable from
stockholder........... -- -- 500 -- -- --
Notes payable to
related party......... -- -- -- 500 500 1,132
----- ----- ----- ----- ----- -------
Net cash provided by
financing
activities......... 119 462 423 992 425 1,042
----- ----- ----- ----- ----- -------
(Decrease) increase in
cash and cash
equivalents............ (158) 208 (39) 449 179 (117)
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 $ 361 $ 514
===== ===== ===== ===== ===== =======
Supplemental disclosure
of noncash activity:
Interest paid.......... $ 28 $ -- $ 46 $ 38 $ 29 $ 66
===== ===== ===== ===== ===== =======
Net liabilities
contributed........... $ -- $ 344 $ -- $ -- $ -- $ --
===== ===== ===== ===== ===== =======
Assets acquired through
capital leases........ $ -- $ -- $ -- $ 41 $ 3 $ 94
===== ===== ===== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998 and September 30, 1999
(1) Description of Business and Summary of Significant Accounting Policies
(a) The Company
Official Payments Corporation (the Company) was formed as U.S. Audiotex, LLC
a California limited liability company (the "LLC"), on June 26, 1996. U.S.
Audiotex Corporation, a Delaware corporation (the "Corporation"), was formed on
August 24, 1999. Effective September 30, 1999, the LLC merged with and into the
Corporation. On October 20, 1999, the Company changed its name to Official
Payments Corporation. 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 the nine months ended September 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 nine months ended September 30,
1999 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. The Company has determined the estimated useful
lives of their assets to be three years for computer equipment and five years
for furniture and fixtures.
(e) Revenue Recognition
Transaction fees are derived from convenience fees paid by consumers for
credit card payment services provided by the Company. Convenience fees are
charged based on the amount of the payment processed and the type of payment.
Transaction fees are recognized in the month the services are provided.
Other revenues consist of the sale of customized systems which include
software licenses, implementation services, training and post contract support
related to these system sales. As vendor specific objective evidence does not
exist for each element of the contract, revenues are recognized, under the
completed contract method,
F-7
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
upon customer acceptance of the software which occurs after installation of the
system and the completion of training. Maintenance revenues are deferred based
on vendor specific objective evidence and recognized ratably over the
contractual term of the maintenance 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, $200,000 has been
capitalized. The Company amortizes this cost on a straight line basis over an
estimated useful life of three years, which is determined to be the greater of
the amount computed using the straight-line method and the ratio that current
gross revenues from the capitalized software bear to current and anticipated
future revenues from the capitalized software.
(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 government client 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 September 30, 1999.
In the nine-month period ended September 30, 1999 transaction fees from IRS
payments accounted for 60% 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 was renewed for an additional one-year period by
mutual consent of both parties.
In April 1999 certain payments to the U.S. Treasury were duplicated which
resulted in an overpayment totaling $440,000. In August 1999, the Internal
Revenue Service acknowledged this overpayment and has agreed to reimburse the
Company for the full overpayment. During September 1999, the Internal Revenue
Service reimbursed the Company approximately $345,000.
(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.
F-8
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
(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.
(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, $19,000 and $63,000 for the years ended December 31, 1996, 1997, 1998
and the nine-month period ended September 30, 1998 and 1999, respectively.
(o) Stock Compensation
The Company uses the intrinsic-value method to account for all of its
employee stock compensation plans. Expense associated with stock compensation
is being amortized on a straight-line basis over the vesting period of the
individual awards ranging from 12 to 36 months.
F-9
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
(2) Related Party Transactions
Notes receivable (payable) from/to related parties is as follows:
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Advances to an officer..................... $ 11 $ -- $ --
Amount due from Beranson Holdings, Inc..... 1 -- --
Note payable to stockholders............... -- (500) (1,632)
----- ------- -------
$ 12 $ (500) $(1,632)
===== ======= =======
</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. Principal and accrued interest of approximately
$558,000 was repaid by the Company on August 24, 1998 and was refinanced with
new notes to stockholders due December 31, 2000.
Imperial Bank is one of 3 merchant banks used to process credit card
transactions and perform traditional merchant credit card settlement services
for the Company. The Company's agreement with Imperial Bank does not prohibit
it from utilizing other merchants and is cancellable by the Company upon 30
days notice.
Imperial Bank provides administrative and financial services to the Company.
The Company reimburses Imperial Bank for these services to the extent they
represent ongoing activities such as human resources, payroll processing and
employee benefits administration. During the nine months ended September 30,
1999, the Company incurred approximately $7,000 for these services. To the
extent that Imperial Bank provides services for activities that are not paid
for by the Company, the Company's allocated cost is recorded as expense and as
a contribution of capital. For the year ended December 31, 1997 and for the
nine months ended September 30, 1999, the Company recorded $20,000 and $118,000
respectively for these services. No such services were received by the Company
or performed on behalf of the Company for all other periods presented.
In April 1999, the Company received an intercompany advance of $440,000 from
Imperial Bank to assist in its working capital needs. This amount was repaid by
the Company in August, 1999.
In June 1999, the stockholders of the Company agreed to loan the Company
$2.8 million in working capital which is payable on the earlier of the date
that is 30 days following the IPO date or December 31,
F-10
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
2000. Through September 30, 1999, the Company received advances of
approximately $1.6 million from the stockholders which bear interest at 2%
above prime and which will be repaid from the proceeds of the Company's initial
public offering. As of September 30, 1999 the Company has accrued approximately
$17,000 in interest on these loans.
(3) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Computer equipment........................... $ 456 $ 768 $1,019
Furniture and fixtures....................... 38 66 164
------ ------ ------
494 834 1,183
Less accumulated depreciation and
amortization................................ 243 301 433
------ ------ ------
$ 251 $ 533 $ 750
====== ====== ======
Property and equipment recorded under capital leases was approximately $24,000,
$64,000 and $158,000 as of December 31, 1997, 1998 and September 30, 1999,
respectively, with related accumulated amortization of approximately $11,000,
$20,000 and $38,000, 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:
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Line of credit............................... $ 208 $ 151 $ 119
Term loan.................................... 171 121 82
Capital lease obligation..................... 10 38 113
------ ------ ------
389 310 314
Less current portion......................... 268 69 106
------ ------ ------
Long-term notes payable...................... $ 121 $ 241 $ 208
====== ====== ======
</TABLE>
The Company is in compliance with all financial covenants under this debt
and other commitments as of September 30, 1999.
F-11
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
Future minimum debt and capital leases payments as of September 30, 1999
were as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 40
2000............................................................... 153
2001............................................................... 113
2002 and thereafter................................................ 20
----
326
Less interest...................................................... (12)
----
Total future minimum debt and capital leases payments............ $314
====
</TABLE>
Future minimum lease payments under noncancelable operating leases as of
September 30, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999................................................................ $ 98
2000................................................................ 194
2001................................................................ 199
2002................................................................ 203
2003................................................................ 207
----
Total future minimum lease payments under operating leases........ $901
====
</TABLE>
Rental expense under operating leases for the years ended December 31, 1997
and 1998 and for the nine- month periods ended September 30, 1998 and 1999 was
$64,000, $75,000, $55,000 and $80,000, respectively.
(5) Stockholders' Equity (Deficit)
In January 1998, Imperial Bank purchased 9 million shares of common stock or
75% of the Predecessor's 12 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 3 million shares of common stock in the Company
to Imperial Bank.
Imperial Bank and the Predecessor are the holders of 80% and 20% of the
Company's common stock, respectively.
In August 1999, the Company issued 2,400 shares of common stock to Imperial
Bank for an aggregate consideration of $8.00 and 600 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 were exchanged for 11,997,600 and
2,999,400 shares of the Company's common stock, respectively. Share information
has been restated for all periods presented.
On September 15, 1999, the Company's Board of Directors authorized the
filing of a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock in connection with a
proposed initial public offering.
Stock Split
In October 1999, the Company's Board of Directors authorized a 3 for 1 split
of all of the outstanding shares of the Company's common stock.
F-12
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
Shares and per share information has been restated for all periods presented
to give effect to this stock split.
The Company's Board of Directors adopted the 1999 Stock Incentive Plan (the
Incentive Plan) in August 1999. The Incentive Plan provides for the grant of
nonstatutory stock options to employees or outside directors. A total of
6,900,000 shares of our common stock are reserved for issuance under the
Incentive Plan, 900,000 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 Company's 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 Incentive
Plan vest annually over a maximum three year period and expire ten years from
the date of grant.
The Company uses the intrinsic value method to account for the Incentive
Plan. Accordingly, compensation cost is 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 the
nine-month period ended September 30, 1999, the Company recorded deferred
compensation expense of approximately $41 million for options granted to
employees to purchase approximately 4,488,000 shares of our common stock at an
exercise price of $1.33 per share.
A summary of the status of the Company's options under the Plan is as
follows:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1999
-------------------
Weighted
average
Number of exercise
options price
<S> <C> <C>
Outstanding at beginning of year............................ -- $ --
Granted at less than market value........................... 4,488,012 1.33
Exercised................................................... -- --
Cancelled................................................... -- --
---------- -----
Options at September 30, 1999............................... 4,488,012 1.33
==========
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
Options outstanding
----------------------------------------------------------------------------
Weighted-
average
remaining
contractual
Exercise life
Price Number (years) Options vested
<S> <C> <C> <C>
$1.33 4,488,012 9.9 --
--------- ---
4,488,012 --
========= ===
</TABLE>
F-13
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with the fair value approach set forth in SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net losses for the nine
months ended September 30, 1999 would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999
-----------------
<S> <C>
Net loss--as reported................................... $(1,540)
Net loss--pro forma..................................... $(1,669)
Basic and diluted net loss per share--as reported....... $ (0.10)
Basic and diluted net loss per share--pro forma......... $ (0.11)
</TABLE>
The fair value of options granted during the nine months ended September 30,
1999 is estimated on the date of grant using the minimum value method with the
following weighted-average assumptions: no dividend yield; risk-free interest
rates of 5.0% and expected lives of 4 years.
(6) Income Taxes
The types of temporary differences that give rise to significant portions of
the Company's deferred tax assets and liabilities are set out below (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999
------------------
<S> <C>
Deferred tax assets:
Accruals and reserves................................. 36
State income taxes.................................... 1
Other................................................. --
Net operating loss and credit carryforwards........... --
---
Gross deferred tax assets.............................. 37
Valuation allowance.................................... (18)
---
Total deferred tax assets.............................. 19
Deferred tax liabilities:
Plant and equipment................................... (19)
---
Total deferred tax liabilities......................... (19)
Net deferred tax assets (liabilities):................. --
===
</TABLE>
A full valuation allowance has been recorded against the deferred tax assets
as a result of uncertainties regarding their realization.
The U.S. Tax Reform Act of 1986 contains provisions that limit the net
operating loss carryforwards available to be used in any given year upon the
occurrence of certain events, including a significant change of ownership.
As of September 30, 1999 the Company had no federal or Californian net
operating loss carryforwards and no federal or Californian research and
development credit carryforwards for tax purposes. All tax operating losses to
date have been used by the stockholders on their corporate tax returns.
F-14
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998 and September 30, 1999
(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.
<TABLE>
<CAPTION>
Period from
Period from June 26, 1996 Nine months ended
January 1, 1996 to (Inception) to Year ended September 30,
June 26, 1996 December 31, ------------- ------------------
(Predecessor Company) 1996 1997 1998 1998 1999
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues by product are:
Transaction fees:
Federal income tax................................. $-- $-- $ -- $ -- $ -- $4,342
Moving violations.................................. 101 160 446 827 580 888
Parking citations.................................. -- 13 105 157 115 206
Property taxes..................................... -- 7 178 765 356 954
State income taxes................................. -- -- -- -- -- 291
Fax filing......................................... 10 33 120 192 140 165
Service bureau-utilities........................... -- 27 86 135 95 149
Other revenues:
System sales....................................... 159 204 166 115 15 105
Maintenance & consulting........................... 42 30 101 178 133 108
---- ---- ------ ------ ------ ------
Total revenues...................................... $312 $474 $1,202 $2,369 $1,434 $7,208
- --------------------------------------------------
==== ==== ====== ====== ====== ======
</TABLE>
No single consumer user accounted for greater than 10% of revenues in any
period reported.
(8) Significant 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
1,325,460 shares of common stock at $1.33 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 1,325,460 option shares on the first anniversary of the grant
date. Thereafter, the Company's right will expire on a cumulative basis with
respect to 29,763 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 $1.33 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).
F-15
<PAGE>
OFFICIAL PAYMENTS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Concluded)
December 31, 1997 and 1998 and September 30, 1999
Under the terms of the employment agreement, Imperial Bank has guaranteed
that the value (as defined in the agreement) of Mr. Evans' 1,325,460 options
will be worth $10,000,000 based upon the number of options vested 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. As part of the
$41 million in deferred stock compensation recorded by the Company in the nine-
month period ended September 30, 1999 (unaudited) the Company recorded $10
million of deferred stock compensation based upon this guarantee. This $10
million of deferred stock compensation is being amortized on a straight-line
basis over the vesting period of the options which is 36 months.
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.
(9) Subsequent Event
On November 5, 1999, the Company sold to E*TRADE Group, Inc. (E*TRADE)
512,820 shares of common stock at a price of $9.75 per share for a total
consideration of approximately $5 million. On November 8, 1999, E*TRADE, the
Company and Imperial Bank entered into an agreement whereby if the Company does
not consummate an initial public offering by March 6, 2000, E*TRADE shall have
the right any time before December 31, 2000 to require Imperial Bank to
purchase all of its shares of the Company's common stock at the $9.75 per share
price.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
5,000,000 Shares of Common Stock
--------------------
PROSPECTUS
--------------------
Donaldson, Lufkin & Jenrette
CIBC World Markets
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations 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 Official
Payments 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................ $ 23,978
NASD Filing Fee.............................................. 9,125
Nasdaq National Market Listing Fee........................... 50,000
Printing Fees and Expenses................................... 450,000
Legal Fees and Expenses...................................... 850,000
Accounting Fees and Expenses................................. 450,000
Blue Sky Fees and Expenses................................... 12,500
Miscellaneous................................................ 254,397
----------
Total...................................................... $2,100,000
==========
</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 2,400 shares of our common stock to Imperial
Bank for a total consideration of $8.00 and 600 shares of common stock to
Beranson Holdings, Inc. for a total consideration of $2.00. We relied on the
exemption under Section 4(2) of the Securities Act of 1933, as amended,
because it was an offer made by an issuer not involving a public offering. In
connection with the merger of U.S. Audiotex, LLC into us, which merger we
effected as of September 30, 1999, the limited liability company interests of
Imperial Bank and Beranson Holdings, Inc. in U.S. Audiotex, LLC were exchanged
for 11,997,600 and 2,999,400 shares of our common stock, respectively. The
merger was an internal corporate reorganization solely involving the existing
members of U.S. Audiotex, LLC in order to convert our corporate form into a C
corporation in anticipation of this initial public offering. On November 5,
1999, we issued 512,820 shares of our common stock to E*TRADE Group, Inc. for
a total consideration of $5 million. E*TRADE Group, Inc. is a sophisticated
qualified institutional buyer.
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.
2.1 --Merger Agreement, dated as of September 24, 1999, between U.S.
Audiotex, LLC and U.S. Audiotex Corporation.*
3.1 --Certificate of Incorporation of the Registrant.*
3.1.1 --Amended Certificate of Incorporation of the Registrant.*
3.2 --Bylaws of the Registrant.*
4.1 --Common Stock Specimen.
4.2 --Stock Purchase Agreement dated as of November 3, 1999 between
Official Payments Corporation and E*TRADE Group, Inc.*
4.2.2 --Amendment No. 1 to Stock Purchase Agreement dated as of November 8,
1999 among Official Payments Corporation, E*TRADE Group, Inc. and
Imperial Bank.*
4.3 --Registration Rights Agreement dated as of October 15, 1999 between
Imperial Bank and U.S. Audiotex Corporation.
4.4 --Registration Rights Agreement dated as of October 15, 1999 between
Beranson Holdings, Inc. and U.S. Audiotex Corporation.
5.1 --Form of 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.*
10.3.1 --Amendment No. 1 to 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.*
10.5.1 --Electronic Tax Administration Memorandum of Agreement Between the
Internal Revenue Service and U.S. Audiotex Corporation, dated
October 4, 1999.*
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.*
10.8 --Subcontract with Novus Services, Inc., dated November 30, 1998, of
the IVR Services Agreement with the California Franchise Tax Board.*
10.9 --Processing Agreement, dated as of July 16, 1995, by and between
Imperial Bank and U.S. Audiotex LLC.*
10.10 --Contract with the Internal Revenue Service for Integrated Electronic
Filing and Payment of Individual Income Tax by Credit Card, dated
September 30, 1999.*
10.11 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Brian Nocco.*
10.11.1 --Form of Amendatory Agreement dated as of November 1, 1999 between
Brian Nocco and Official Payments Corporation.*
10.12 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Presto.*
10.13 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Barrett.*
10.14 --Letter Agreement from Imperial Bank to E*TRADE Group, Inc.*
10.15 --Contract between National City Bank of Michigan/Illinois and U.S.
Audiotex Corporation, dated as of October 1, 1999.*
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.*
99.1 --Consent of George L. Graziadio*
99.2 --Consent of Lee E. Mikles*
99.3 --Consent of Bruce Nelson*
99.4 --Consent of Christos Cotsakos*
99.5 --Consent of Andrew Cohan*
99.6 --Consent of Vernon Loucks*
</TABLE>
- -------
* Previously Filed
II-3
<PAGE>
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-4
<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 November 18, 1999.
OFFICIAL PAYMENTS CORPORATION
By: /s/ Thomas R. Evans
----------------------------------
Thomas R. Evans
Chief Executive Officer
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 November 18, 1999
Signature Title
/s/ Thomas R. Evans
- ------------------------------------- Chairman and Chief Executive Officer
Thomas R. Evans and
a director
(principal executive officer)
/s/ Brian W. Nocco
- ------------------------------------- Chief Financial Officer and a
Brian W. Nocco director
(principal accounting officer)
*
- ------------------------------------- President and a director
Kenneth Stern
*By /s/ Brian W. Nocco
- -------------------------------------
Brian W. Nocco
Attorney-in-Fact
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<C> <S> <C>
1.1 --Form of Underwriting Agreement.
2.1 --Merger Agreement, dated as of September 24, 1999, between
U.S. Audiotex, LLC and U.S. Audiotex Corporation.*
3.1 --Certificate of Incorporation of the Registrant.*
3.1.1 --Amended Certificate of Incorporation of the Registrant.*
3.2 --Bylaws of the Registrant.*
4.1 --Common Stock Specimen.
4.2 --Stock Purchase Agreement dated as of November 3, 1999 between
Official Payments Corporation and E*TRADE Group, Inc.*
4.2.2 --Amendment No. 1 to Stock Purchase Agreement dated as of
November 8, 1999 among Official Payments Corporation, E*TRADE
Group, Inc. and Imperial Bank.*
4.3 --Registration Rights Agreement dated as of October 15, 1999
between Imperial Bank and U.S. Audiotex Corporation.
4.4 --Registration Rights Agreement dated as of October 15, 1999
between Beranson Holdings, Inc. and U.S. Audiotex Corporation.
5.1 --Form of 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.*
10.3.1 --Amendment No. 1 to 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.*
10.5.1 --Electronic Tax Administration Memorandum of Agreement Between
the Internal Revenue Service and U.S. Audiotex Corporation,
dated October 4, 1999.*
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.*
10.8 --Subcontract with Novus Services, Inc., dated November 30,
1998, of the IVR Services Agreement with the California
Franchise Tax Board.*
10.9 --Processing Agreement, dated as of July 16, 1995, by and
between Imperial Bank and U.S. Audiotex LLC.*
10.10 --Contract with the Internal Revenue Service for Integrated
Electronic Filing and Payment of Individual Income Tax by
Credit Card, dated September 30, 1999.*
10.11 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Brian Nocco.*
10.11.1 --Form of Amendatory Agreement dated as of November 1, 1999
between Brian Nocco and Official Payments Corporation.*
10.12 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Presto.*
10.13 --Employment Agreement, dated September 30, 1999, between U.S.
Audiotex Corporation and Michael Barrett.*
10.14 --Letter Agreement from Imperial Bank to E*TRADE Group, Inc.*
10.15 --Contract between National City Bank of Michigan/Illinois and
U.S. Audiotex Corporation, dated as of October 1, 1999.*
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.*
99.1 --Consent of George L. Graziadio*
99.2 --Consent of Lee E. Mikles*
99.3 --Consent of Bruce Nelson*
99.4 --Consent of Christos Cotsakos*
99.5 --Consent of Andrew Cohan*
99.6 --Consent of Vernon Loucks*
</TABLE>
- --------
* Previously Filed
<PAGE>
Draft
5,000,000 Shares
OFFICIAL PAYMENTS CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CIBC WORLD MARKETS CORP.
DLJdirect INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Official Payments Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell Five Million (5,000,000) shares of its common stock,
[par value ______] (the "Firm Shares") to the several underwriters named in
Schedule I hereto (the "Underwriters").
1
<PAGE>
The Company also proposes to issue and sell to the several Underwriters not more
than an additional Seven Hundred Fifty Thousand (750,000) shares of its common
stock, [par value _____] (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter referred to collectively as the "Shares". The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock".
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "Registration Statement";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"Rule 462(b) Registration Statement"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to Seven Hundred Fifty Thousand
(750,000) Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the Firm Shares. The Underwriters may
exercise their right to purchase Additional Shares in whole or in part from time
to time by giving written notice thereof to the Company within 30 days after the
date of this Agreement. You shall give any such notice on behalf of the
Underwriters and such notice shall specify the aggregate number of Additional
Shares to be purchased pursuant to such exercise and the date for payment and
delivery thereof,
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which date shall be a business day (i) no earlier than two business days after
such notice has been given (and, in any event, no earlier than the Closing Date
(as hereinafter defined)) and (ii) no later than ten business days after such
notice has been given. If any Additional Shares are to be purchased, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) which bears the same proportion to the total number
of Additional Shares to be purchased from the Company as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I bears to
the total number of Firm Shares.
The Company hereby agrees not to (i) 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 (ii) 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
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also
agrees not to file any registration statement with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 180 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. The Company shall, prior to or concurrently with the execution of
this Agreement, deliver an agreement executed by (i) each of the directors and
officers of the Company and (ii) each stockholder listed on Annex I hereto to
the effect that such person will not, during the period commencing on the date
such person signs such agreement and ending 180 days after the date of the
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Corporation, (A) engage in any of the transactions described in the first
sentence of this paragraph or (B) make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
Section 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as
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soon after the execution and delivery of this Agreement as in your judgment is
advisable and (ii) initially to offer the Shares upon the terms set forth in the
Prospectus.
It is understood that ___________ of the Firm Shares will initially be
reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus to certain employees, certain friends of
shareholders and employees and certain persons having business relationships
with the Company (collectively, the "Recipients") who have heretofore delivered
to the Underwriters indications of interest to purchase Firm Shares in form
satisfactory to the Underwriters, and that any allocation of such Firm Shares
among such persons will be made in accordance with timely directions received by
the Underwriters from the Company; provided, that under no circumstances will
any Underwriter be liable to the Company or to any Recipient for any action
taken or omitted in good faith in connection with such offering to Recipients.
It is further understood that any Firm Shares which are not purchased by the
Recipients will be offered by the Underwriters to the public upon the terms and
conditions set forth in the Prospectus.
Section 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the
Shares shall be made available for inspection not later than 9:30 A.M., New York
City time, on the business day prior to the Closing Date or the applicable
Option Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 1999 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and
date of delivery for the Firm Shares are hereinafter referred to as the
"Closing Date". The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery for any Additional Shares are
hereinafter referred to as an "Option
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Closing Date".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Cadwalader, Wickersham & Taft, 100 Maiden
Lane, New York, New York and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you one signed copy of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which
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you shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
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(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
September 30, 2000 that shall satisfy the provisions of Section 11(a) of the
Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel
and the Company's accountants in connection with the registration and delivery
of the Shares under the Act and all other fees and expenses in connection with
the preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares for quotation on the Nasdaq
National Market, (vii) the cost of printing certificates representing the
Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company hereunder for which provision is not otherwise
made in this Section.
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(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to
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make the statements therein not misleading and (B) will comply in all material
respects with the Act and (iv) the Prospectus does not contain and, as amended
or supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
paragraph do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Delaware and has the corporate
power and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties, and is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company. The Company has no
subsidiaries.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be
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validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(h) The Company is not in violation of its charter or by-laws or in
default in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company to which the Company is a party or
by which the Company or its property is bound.
(i) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the Company
to which the Company is a party or by which the Company or its property is
bound, (iii) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental body or
agency having jurisdiction over the Company or its property or (iv) result in
the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any other impairment of the rights of the holder of any
such Authorization.
(j) There are no legal or governmental proceedings pending or threatened
to which the Company is or could be a party or to which any of its property is
or could be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(k) The Company has not violated any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or any provisions of the
Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company.
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(l) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "Authorization") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, as are necessary to own, lease, license and operate its respective
properties and to conduct its business, except where the failure to have any
such Authorization or to make any such filing or notice would not, singly or in
the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company. Each such
Authorization is valid and in full force and effect and the Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
(m) This Agreement has been duly authorized, executed and delivered by
the Company.
(n) KPMG LLP are independent public accountants with respect to the
Company as required by the Act.
(o) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
on the basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and notes
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the supporting schedules, if any, included in the Registration
Statement present fairly in accordance with generally accepted accounting
principles the information required to be stated therein; and the other
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
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(p) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(q) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except as described in the
Registration Statement.
(r) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
debt of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(s) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
Section 7. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
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relating to any Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter who failed to deliver a Prospectus,
as then amended or supplemented, (so long as the Prospectus and any amendments
or supplements thereto was provided by the Company to the several Underwriters
in the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
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shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case
of parties indemnified pursuant to Section 7(a), and by the Company, in the case
of parties indemnified pursuant to Section 7(b). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from
all liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided
14
<PAGE>
by clause 7(d)(i) above is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause 7(d)(i) above but also the relative fault of the Company on the one hand
and the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (after deducting underwriting discounts and
commissions, but before deducting expenses) received by the Company, and the
total underwriting discounts and commissions received by the Underwriters, bear
to the total price to the public of the Shares, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any
15
<PAGE>
rights or remedies which may otherwise be available to any indemnified party at
law or in equity.
Section 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Thomas R. Evans and Brian W. Nocco, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
confirming the matters set forth in Sections 6(t), 8(a) and 8(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company, (ii) there shall not have
been any change or any development involving a prospective change in the capital
stock or in the long-term debt of the Company and (iii) the Company shall not
have incurred any liability or obligation, direct or contingent, the effect of
which, in any such case described in clause 8(d)(i), 8(d)(ii) or 8(d)(iii), in
your judgment, is material and adverse and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(e) You shall have received on the Closing Date an opinion (satisfactory
to you and
16
<PAGE>
counsel for the Underwriters), dated the Closing Date, of Cadwalader, Wickersham
& Taft, counsel for the Company, to the effect that:
(i) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of Delaware and has the
corporate power and authority to carry on its business as described in the
Prospectus and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company;
(iii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid, non-
assessable and not subject to any preemptive or similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights;
(v) this Agreement has been duly authorized, executed and delivered
by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge,
pending before or contemplated by the Commission;
(viii) the statements under the captions "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Significant Government Contracts", "Business -- Intellectual Property",
"Business -- Regulatory Matters", "Business -- Legal
17
<PAGE>
Proceedings", "Management", "Certain Relationships and Related
Transactions", "Description of Capital Stock", "Shares Eligible for Future
Sale" and "Underwriting" in the Prospectus and Items 14 and 15 of Part II
of the Registration Statement, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings;
(ix) the Company is not in violation of its respective charter or
by-laws and, to the best of such counsel's knowledge after due inquiry, the
Company is not in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company to
which the Company is a party or by which the Company or its property is
bound;
(x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (B) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company to which the Company is a party
or by which the Company or its property is bound, (C) violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree
known to such counsel of any court or any governmental body or agency
having jurisdiction over the Company or its property or (D) result in the
suspension, termination or revocation of any Authorization of the Company
or any other impairment of the rights of the holder of any such
Authorization;
(xi) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company is or
could be a party or to which any of its property is or could be subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described, or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required;
18
<PAGE>
(xii) the Company has not violated any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or any provisions of
the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate,
would not have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company;
(xiii) the Company has such Authorizations of, and has made all
filings with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals as are
necessary to own, lease, license and operate its properties and to conduct
its business, except where the failure to have any such Authorization or to
make any such filing or notice would not, singly or in the aggregate, have
a material adverse effect on the business, prospects, financial condition
or results of operations of the Company; each such Authorization is valid
and in full force and effect and the Company is in compliance with all the
terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows or, after
notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse
of time or both, would result in any other impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company; except where such failure
to be valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction would
not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company;
(xiv) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xv) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities
of the Company or to require the Company to include such
19
<PAGE>
securities with the Shares registered pursuant to the Registration
Statement, except as described in the Registration Statement; and
(xvi) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The opinion of Cadwalader, Wickersham & Taft described in Section 8(e)
above shall be rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Simpson Thacher & Bartlett, counsel for the Underwriters, as to
the matters referred to in Sections 8(e)(iv), 8(e)(v), 8(e)(viii) (but only with
respect to the statements under the caption "Description of Capital Stock" and
"Underwriting") and 8(e)(xvi).
In giving such opinions with respect to the matters covered by Section
8(e)(xvii) Cadwalader, Wickersham & Taft and Simpson Thacher & Bartlett may
state that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG LLP, independent public
accountants, containing the information and statements of the type ordinarily
included in accountants' "comfort letters" to Underwriters with
20
<PAGE>
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
Section 9. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects,
21
<PAGE>
financial condition or results of operations of the Company, (v) the declaration
of a banking moratorium by either federal or New York State authorities or (vi)
the taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii)
22
<PAGE>
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
Section 10. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Official
Payments Corporation, 445 Park Avenue, 10/th/ Floor, New York, New York 10022,
facsimile (917) _________, with a copy to Dennis J. Block, Esq., Cadwalader,
Wickersham & Taft, 100 Maiden Lane, New York, New York 10038, facsimile (212)
504-5557 and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin
& Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse
the several Underwriters, their directors and officers and any persons
controlling any of the Underwriters for any and all fees and expenses
(including, without limitation, the fees disbursements of counsel) incurred by
them in connection with enforcing their rights hereunder (including, without
limitation, pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and
23
<PAGE>
officers, any controlling persons referred to herein, the Company's directors
and the Company's officers who sign the Registration Statement and their
respective successors and assigns, all as and to the extent provided in this
Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
24
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
OFFICIAL PAYMENTS CORPORATION
By: ________________________________
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CIBC WORLD MARKETS CORP.
DLJdirect INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: _________________________
Name:
Title:
25
<PAGE>
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
OFFICIAL PAYMENTS CORPORATION
TOTAL AUTHORIZED ISSUE
5,000,000 SHARES PAR VALUE $0.01 EACH
COMMON STOCK
This is to Certify that is the owner of
______________________________________
________________________________________________________________________________
fully paid and non-assessable shares of the above Corporation
_____________
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated:
_______________________ [CORPORATE ____________________________________
CHIEF FINANCIAL OFFICER SEAL] CHAIRMAN AND CHIEF EXECUTIVE OFFICER
_______________________ ____________________________________
CONTROLLER
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM --as tenants in common UNIF GIFT MIN ACT -- Custodian...............Custodian....................
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gifts to Minors Act....................
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
</TABLE>
For value received ___________________ hereby sell, assign and transfer unto
For value received _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________________________________________________
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________________________ Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated _______________, 19___
In presence of _________________________________________________
<PAGE>
Exhibit 4.3
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of October 15, 1999, by and
between Imperial Bank, a California banking corporation (the "Stockholder"), and
-----------
U.S. Audiotex Corporation, a Delaware corporation (the "Company").
-------
WHEREAS, the Stockholder has been instrumental in the incorporation
and organization of the Company;
WHEREAS, the Stockholder owns, on the date hereof, eighty percent
(80%) of the outstanding shares of common stock, par value $0.01 per share (the
"Common Stock"), of the Company;
------------
WHEREAS, the Company and the Stockholder wish to provide for certain
demand and piggy-back registration rights under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities of the Company
--------------
owned by the Stockholder;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties to this Agreement hereby agree as
follows:
1. Definitions and Interpretation. (a) As used in this Agreement,
------------------------------
the following terms shall have the following meanings:
(i) "Affiliate" shall have the meaning ascribed to such term in
Rule 405 promulgated under the Securities Act.
(ii) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any successor statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
(iii) "Holder" shall mean any person who owns of record
Registrable Securities.
(iv) "Initial Public Offering" shall mean an initial public
offering of equity securities of the Company pursuant to a registration
statement declared effective under the Securities Act.
(v) "IPO Date" shall mean the earlier to occur of (A) the date on
which there shall have first become effective a registration statement under the
Securities Act filed by the Company relating to an underwritten Initial Public
Offering, or (B) the date on which the Company shall register a class of
securities under Section 12 of the Exchange Act.
(vi) "Majority" shall mean greater than fifty (50%) percent.
<PAGE>
(vii) "Registration Expenses" shall have the meaning ascribed to
such term in Section 4(f) hereof.
(viii) "Registrable Securities" shall mean any of the shares of
Common Stock now owned or hereafter acquired by the Stockholder; provided,
however, that Registrable Securities shall cease to be Registrable Securities
when they cease to be Restricted Securities.
(ix) "Restricted Securities" shall have the meaning ascribed to
such term in Section 1(b).
(x) "SEC" and "Commission" shall mean the Securities and Exchange
Commission.
(b) For the purposes of this Agreement, all Registrable Securities
are "Restricted Securities" until the earliest to occur of the time when (i) a
registration statement covering such Registrable Securities has been declared
effective and such Registrable Securities have been disposed of pursuant to such
effective registration statement, and (ii) such Registrable Securities may be
sold pursuant to Rule 144(k) under the Securities Act or any successor rule then
in force.
(c) In this Agreement, (A) words in the singular include the
plural and vice versa, (B) the words "include" or "including" shall mean
"including without limitation," (C) the word "person" shall mean and include an
individual, partnership, corporation, joint venture, limited liability company
or partnership, trust or other legal entity, (D) the word business day shall
mean any day other than a Saturday, Sunday or a day which is a statutory holiday
under the laws of the United States or the State of New York, and (E) when
calculating a period of time within which or following which any act is to be
done or step taken, the date which is the reference day in calculating such
period shall be excluded and, if the last day of such period is not a business
day, the period shall end on the next day that is a business day.
2. Demand Registration. (a) The Stockholder or any subsequent
-------------------
Holder of a Majority of the Registrable Securities may make a written request
for registration under the Securities Act pursuant to this Section 2 of all or
part of their Registrable Securities (the "Demand Registration"), provided,
-------------------
however, that the Company shall be required to effect no more than four (4)
Demand Registrations under this Section 2, and provided further that the Company
shall not be required to effect a Demand Registration under this Section 2 at
any time prior to the thirtieth day following the IPO Date. Upon receipt of a
request for a Demand Registration, the Company shall (i) as soon as reasonably
practicable, cause to be filed, and use all reasonable efforts to cause to be
declared effective, a registration statement (the "Demand Registration
-------------------
Statement"), on such appropriate form as the Company in its discretion shall
- ---------
determine, providing for the sale of all of such Registrable Securities by such
Stockholder or Holder, as the case may be, and (ii) promptly give written notice
to all other Holders of Registrable Securities that such Demand Registration is
to be effected and shall include in the Demand Registration Statement such
additional Registrable Securities with respect to which it
-2-
<PAGE>
has received written requests for registration from any such other Holder within
15 days after the date on which the Company gave such notice. A Holder's request
must specify the aggregate number of Registrable Securities proposed to be
registered and sold and must also specify the intended method of disposition
thereof. The Company agrees to use its best efforts to keep the Demand
Registration Statement continuously effective and usable for resale of
Registrable Securities for a period of not less than nine (9) months. The
Company will pay all Registration Expenses in connection with any Demand
Registration.
(b) A registration will not count as a Demand Registration until a
Demand Registration Statement has become effective; provided, however, that if a
Demand Registration Statement does not become effective solely by reason of any
act or omission on the part of a Holder or Holders whose Registrable Securities
are included in the Demand Registration Statement, such registration shall
nevertheless count as a Demand Registration unless the Holders of such
Registrable Securities reimburse the Company for all Registration Expenses
reasonably incurred by the Company which are attributable to such registration.
(c) If the Holder or Holders initially requesting registration so
elect, the offering of the Registrable Securities pursuant to a Demand
Registration shall be in the form of an underwritten offering. In such event,
if the managing underwriter of such offering advise the Company and the Holders
in writing that in its opinion the aggregate number of securities requested to
be included in the Demand Registration is sufficiently large to materially and
adversely affect the success or offering price of the offering, then the Company
will include in the Demand Registration only the aggregate number of securities
which in the opinion of such managing underwriter can be sold without any such
material adverse effect, and such securities shall be allocated pro rata among
the Holders of Registrable Securities based on the number of Registrable
Securities requested to be included in such Demand Registration by the
respective Holders (before any such securities are allocated to the Company or
any holder of securities other than Registrable Securities).
(d) The Company agrees (i) not to effect any public or private
sale, distribution or purchase of any of its securities which are the same as or
similar to the Registrable Securities, including a sale pursuant to Regulation D
under the Securities Act, during the 30-day period prior to, and during the 90-
day period beginning on, the closing date of an underwritten offering under a
Demand Registration Statement, and (ii) to use its reasonable best efforts to
cause each holder of its securities (other than securities purchased in a
registered public offering) to agree not to effect any public sale or
distribution of any such securities during such period, including a sale
pursuant to Rule 144 under the Securities Act.
(e) The Company may postpone for a reasonable period of time, not
to exceed 60 days, the filing or the effectiveness of any Demand Registration
Statement if the Board of Directors of the Company in good faith determines that
(A) the Demand Registration can be reasonably expected to have a material
adverse effect on any plan or proposal by the Company with respect to any
financing, acquisition, recapitalization, reorganization or other material
transaction, or (B) the Company is in possession of material non-public
information that, if publicly disclosed, could result in a material disruption
of a major corporate
-3-
<PAGE>
development or transaction then pending or in progress or in other material
adverse consequences to the Company.
(f) If at any time the Holder of a Majority of the Registrable
Securities to be covered by a Demand Registration Statement desires to sell
Registrable Securities in an underwritten offering, such Holder shall have the
right to select any nationally recognized investment banking firm to administer
the offering, subject to the approval of the Company, which approval will not be
unreasonably withheld, and the Company shall enter into an underwriting
agreement with the underwriter of such offering, which agreement shall contain
such representations and warranties by the Company, and such other terms,
conditions and indemnities, as are at the time customarily contained in
underwriting agreements for similar offerings.
3. Piggy-Back Registration. If at any time the Company proposes to
-----------------------
register (a "Piggy-Back Registration") any of its securities (the "Initially
----------------------- ---------
Proposed Shares") under the Securities Act for sale, whether or not for its own
- ---------------
account and whether or not pursuant to an underwritten offering (other than (i)
a registration statement filed in connection with an Initial Public Offering;
(ii) a registration statement on Form S-4 or S-8 or successor forms thereto; or
(iii) a registration statement filed in connection with an exchange offer or an
offering of securities solely to the Company's then existing stockholders or
employees), the Company will promptly give written notice (a "Piggy-Back
----------
Registration Notice") to the Holders of its intention to effect a Piggy-Back
- -------------------
Registration (such Piggy-Back Registration Notice to specify, where applicable,
among other things, the proposed offering price, the kind and number of
securities proposed to be registered and the distribution arrangements,
including identification of the underwriter), and the Holders shall be entitled
to include in such Piggy-Back Registration, as a part of such underwritten
offering and on the same terms and conditions as the Initially Proposed Shares,
such number of Registrable Securities to be sold for the account of the Holders
as shall be specified in a request in writing delivered to the Company within
twenty (20) days after the date of the Piggy-Back Registration Notice. The
Company will pay all Registration Expenses in connection with such Piggy-Back
Registration.
The Company's obligations to include Registrable Securities in a
Piggy-Back Registration pursuant to this Section 3 is subject to the following
limitations, conditions and qualifications:
(i) Notwithstanding anything to the contrary contained in the
provisions of this Section 3, the Company shall have the right at any time
after it shall have given a Piggy-Back Registration Notice (irrespective of
whether a written request for inclusion of any Registrable Securities shall
have been made) to elect not to effect the proposed Piggy-Back Registration
or to withdraw the same after the filing but prior to the effective date
thereof.
(ii) If, in the written opinion of the managing underwriter of a
Piggy-Back Registration, the aggregate number of securities requested to be
included in the Piggy-Back Registration is sufficiently large to materially
and adversely affect the
-4-
<PAGE>
success or offering price of the offering, then the number of shares all
prospective sellers (other than the Company and security holders exercising
demand registration rights) intended to distribute through the Piggy-Back
Registration shall be reduced pro rata based on the number of securities
requested to be included in such offering by such prospective sellers. In
no event shall the number of Initially Proposed Shares to be sold by the
Company or the number of securities to be sold by any security holder
exercising demand registration rights be reduced until all securities to be
sold by prospective sellers (other than the Company and security holders
exercising demand registration rights) have been cut back to zero as a
result of the preceding sentence. If, as a result of the cutback provisions
of the preceding sentence, any Holder is not entitled to include in such
Piggy-Back Registration all of the Registrable Securities requested to be
included therein by such Holder, such Holder may elect to withdraw its
request to be included in such Piggy-Back Registration.
4. Registration Procedures. (a) Whenever any Holder has requested
-----------------------
the registration of any Registrable Securities under the Securities Act pursuant
to the terms and conditions of Section 2(a) or 3 (such Registrable Securities
being hereinafter referred to as "Subject Shares"), the Company will, subject to
--------------
the provisions of Section 2 and 3 (to the extent applicable), use all reasonable
efforts to effect the registration of the Subject Shares in accordance with the
intended method of disposition thereof. Without limiting the generality of the
foregoing, the Company will, subject to the provisions of Section 2 and 3 (to
the extent applicable), as soon as practicable:
(i) prepare and file with the Commission a registration statement
with respect to the Subject Shares in form and substance reasonably
satisfactory to the Holders of the Subject Shares, and use all reasonable
efforts to cause such registration statement to become effective as
promptly as practicable thereafter;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine (9) months or for
such shorter period which will terminate when all of the Subject Shares
covered by such registration statement have been sold (but not before the
expiration of the applicable period referred to in Section 4(3) of the
Securities Act and Rule 174 thereunder), and comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by such registration statement during such period in accordance
with the intended methods of disposition by the sellers thereof set forth
in such registration statement;
(iii) furnish the Holders covered by such registration
statement, without charge, such number of conformed copies of such
registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such reasonable number of copies of
the prospectus included in such registration statement (including any
preliminary prospectus), such documents incorporated by reference in such
registration statement or prospectus, and such other documents as such
Holders may reasonably request;
-5-
<PAGE>
(iv) use all reasonable efforts to register or qualify the
Subject Shares covered by such registration statement under the securities
or blue sky laws of such jurisdictions as the managing underwriter shall
reasonably recommend or, in the case of an offering that is not an
underwritten offering, as the Holders may reasonably request, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable the Holders to consummate the disposition in such
jurisdictions of the Subject Shares covered by such registration statement,
except that the Company shall not for any such purpose be required to (A)
qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not otherwise required to be so qualified, (B)
subject itself to taxation in any jurisdiction wherein it is not so
subject, or (C) consent to general service of process in any such
jurisdiction or otherwise take action that would subject it to the general
jurisdiction of the courts of any jurisdiction to which it is not so
subject;
(v) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC and to cause the Subject Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the Holders thereof or the
underwriter to consummate the disposition of the Subject Shares;
(vi) furnish, at the Company's expense, unlegended certificates
representing ownership of the Subject Shares being sold in such
denominations and registered in such names as the Holders may reasonably
request and instruct the transfer agent to release any stop transfer orders
with respect to the Subject Shares being sold;
(vii) at any time when a prospectus relating to the Subject
Shares is required to be delivered under the Securities Act, notify each
Holder of the happening of any event as a result of which the prospectus
included in such registration statement contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and the Company
will, as promptly as practicable thereafter, prepare and file with the SEC
and furnish to the Holders a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of Subject Shares, such
prospectus will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
(viii) enter into customary agreements (including an
underwriting agreement in customary form in the case of an underwritten
offering) containing such representations and warranties to the Holders and
underwriters as in form and substance and scope are customarily made by
issuers to underwriters in underwritten offerings and including customary
covenants, indemnifications and conditions, and take such other actions as
the Holders or the managing underwriter or agent, if any, reasonably
require in order to expedite or facilitate the disposition of such Subject
Shares;
-6-
<PAGE>
(ix) make available for inspection by the Holders, any
underwriter or agent participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other similar
professional advisor retained by any such Holders or underwriter
(collectively, the "Inspectors"), all financial and other records,
----------
corporate documents and properties of the Company (collectively, the
"Records") as shall be reasonably necessary to enable the Inspectors to
--------
exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all Records and information
reasonably requested by any such Inspector in connection with such
registration statement. The Holders agree that Records and other
information which the Company determines, in good faith, to be confidential
and of which determination the Inspectors are so notified shall not be
disclosed by the Inspectors unless (A) the disclosure of such Records or
information is necessary to avoid or correct a misstatement or omission in
the registration statement, (B) the release of such Records is ordered
pursuant to a subpoena, court order or regulatory or agency request, or (C)
the information in such Records has been generally disseminated to the
public. Each Holder agrees that it will, upon learning that disclosure of
such Records is sought by a court of competent jurisdiction or by a
governmental agency, give notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(x) in the event of an underwritten offering, obtain for delivery
to the Company and the underwriter or agent, with copies to the Holders, a
"cold comfort" letter, dated as of the effective date of the registration
statement covering the Subject Shares, and a bring-down "cold comfort"
letter, dated as of the date of the sale of the Subject Shares to the
underwriter, from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by "cold
comfort" letters as the Holders of a Majority of the Subject Shares or the
managing underwriter reasonably request;
(xi) in the event of an underwritten offering, obtain for
delivery to the Holders and the underwriter or agent an opinion of counsel
for the Company, dated as of the date of the sale of the Subject Shares to
the underwriter, in customary form and covering matters of the type
customarily covered by such opinion and reasonably satisfactory to the
Holders and the underwriters or agent and their counsel;
(xii) make available to its security holders earnings statements
(which need not be audited) satisfying the provisions of Section 11(a) of
the Securities Act no later than 90 days after the end of the 12-month
period beginning with the first month of the Company's first quarter
commencing after the effective date of a registration statement covering
the Subject Shares, which earnings statements shall cover said 12-month
period;
(xiii) make every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of the registration statement
covering the Subject Shares or of any order preventing or suspending the
use of any related prospectus or
-7-
<PAGE>
suspending the qualification of the Subject Shares for sale in any
jurisdiction, and, if any such order is issued, to obtain its withdrawal at
the earliest possible moment;
(xiv) cooperate with the Holders and the managing underwriter,
if any, or any other interested party (including any interested broker-
dealer) in making any filings or submission required to be made, and the
furnishing of all appropriate information in connection therewith, with the
National Association of Securities Dealers, Inc. ("NASD");
----
(xv) cause its subsidiaries to take action necessary to effect
the registration of the Subject Shares, including filing any required
financial information;
(xvi) effect the listing of the Subject Shares on such national
securities exchange or quotation system on which the shares of Common Stock
shall then be traded or listed for quotation; and
(xvii) take any and all other steps reasonably necessary or
advisable to effect the registration of the Subject Shares in accordance
with this Agreement.
(b) The Holders of the Subject Shares shall provide (in writing
and signed by the Holders and stated to be specifically for use in the related
registration statement, preliminary prospectus, prospectus or other document
incident thereto) all such information and materials and take all such action as
may be reasonably required in order to permit the Company to comply with all
applicable requirements of the SEC and any applicable state securities laws and
to obtain any desired acceleration of the effective date of any registration
statement prepared and filed by the Company pursuant to this Agreement.
(c) Each Holder of the Subject Shares shall, if requested by the
Company or the managing underwriter in connection with any proposed registration
and distribution pursuant to this Agreement, (i) agree to sell the Subject
Shares on the basis provided in any underwriting arrangements entered into in
connection therewith, and (ii) complete and execute all questionnaires, powers
of attorney enabling the Company to negotiate the offering price of the Subject
Shares with the managing underwriter within a range previously agreed upon by
the Company and such Holder, indemnities (but only with respect to written
information relating to such Holder furnished by such Holder specifically in
connection with such registration) underwriting agreements and other documents
customary in similar offerings.
(d) Each Holder of Subject Shares who desires to sell and
distribute such Securities over a period of time, or from time to time, at then
prevailing market prices, shall execute and deliver to the Company such written
undertakings as the Company and its counsel may reasonably require in order to
assure full compliance with the relevant provisions of the Securities Act.
(e) Each Holder of Subject Shares agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 4(a)(vii) hereof, such Holder will forthwith discontinue the disposition
of Subject Shares held
-8-
<PAGE>
by such Holder pursuant to the registration statement covering such Subject
Shares until such Holder receives the supplemented or amended prospectus
contemplated by Section 4(a)(vii) hereof, and, if so directed by the Company,
such Holder will deliver to the Company (at the Company's expense) all copies
(other than permanent file copies) of the prospectus covering such Subject
Shares in such Holder's possession at the time of receipt of such notice. In the
event the Company shall give any such notice, the Company shall extend the
period during which the registration statement covering the Subject Shares shall
be maintained effective pursuant to this Agreement (including the period
referred to in Section 4(a)(ii)) by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
4(a)(vii) hereof to and including the date when each Holder of Subject Shares
covered by such registration statement shall have received the copies of the
supplemented or amended prospectus contemplated by Section 4(a)(vii) hereof.
(f) All reasonable expenses incident to the Company's
performance of or compliance with this Agreement, including all registration
and filing fees, all expenses incident to filing with the NASD, all fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications
of the Subject Shares), rating agency fees, printing expenses, messenger and
delivery expenses, internal expenses (including all salaries and expenses of
its officers and employees performing legal or accounting duties), the fees
and expenses incurred in connection with the listing of the Subject Shares on
such national securities exchange on which the shares of Common Stock are then
listed or, if not so listed, on the National Market of The Nasdaq Stock Market,
Inc., reasonable fees and disbursements of counsel for the Company and its
independent certified public accountants (including the expenses of any
special audit or "comfort" letters required by or incident to such
performance), premiums for securities acts liability insurance (if the Company,
in its sole discretion, elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company in connection with
such registration, the reasonable fees and expenses of other persons retained
by the Company (or the agents who manage their accounts) and the reasonable
fees and disbursements of one counsel for the Holders of the Subject Shares in
connection with the Demand Registration which fees and disbursements shall not
exceed $75,000 (all such expenses being herein called "Registration Expenses"),
---------------------
shall be borne by the Company. Registration Expenses shall not include any fees
or disbursements of counsel to the Holders of the Subject Shares except as
otherwise provided above, or any underwriting discounts or commissions that are
applicable to the Subject Shares held by such Holders that are to be registered
under the Securities Act pursuant to Section 2(a) or Section 3 hereof. The
foregoing expenses that are excluded from Registration Expenses shall be borne
by each Holder of Subject Shares on a pro rata basis, based on the number of
Subject Shares of all Holders included in a registration statement covering the
Subject Shares.
5. Rule 144 Requirements. From time to time after the IPO Date, the
---------------------
Company will use its best efforts to make publicly available and available to
the Holders of Registrable Securities such information as shall be necessary to
enable the Holders of Registrable Securities to make sales of Registrable
Securities pursuant to Rule 144 under the Securities Act. The Company shall, at
the request of any Holder of Registrable Securities,
-9-
<PAGE>
upon receipt from such Holder of a certificate certifying (i) that at least two
(2) years have elapsed since the later of the date such Registrable Securities
were acquired from the Company or an affiliate of the Company (computed in
accordance with Rule 144(d), including the provisions thereof regarding
"tacking"), and (ii) that such Holder has not been an affiliate (as defined in
Rule 144) of the Company within the 90-day period preceding the date of such
Holder's certificate, remove from the stock certificate representing such
Registrable Securities any restrictive securities law legend.
6. Notices. Any notice or other communication required or permitted
-------
to be given hereunder to any party shall be in writing and shall be effective
(a) if delivered on a business day during normal business hours where such
notice is to be received, upon hand delivery or delivery by telecopy or
facsimile to such party at the address or number designated below, (b) if
delivered other than on a business day during normal business hours where such
notice is to be received, on the first business day following hand delivery or
delivery by telecopy or facsimile to such party at the address or number
designated below, or (c) on the first business day following the date of mailing
by overnight courier service, or on the fifth (5th) business day following the
date of mailing by certified or registered mail, fully prepaid, to such party at
the address designated below, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
-10-
<PAGE>
If to the Company, to it at:
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
Attn: Thomas R. Evans
Facsimile No.: (925) 838-7996
With a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attn: Dennis J. Block
Facsimile No.: (212) 504-6666
If to the Stockholder, to it at:
9920 South La Cienega Boulevard
Inglewood, California 90301
Attn: General Counsel
Facsimile No.: (310) 417-5695
With a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attn: Dennis J. Block
Facsimile No.: (212) 504-6666
If to any other Holder, to such name and such address or number for
such Holder as appears on the Company's records or as such Holder shall have
indicated in a written notice delivered to the other parties to this Agreement.
Any party hereto may from time to time change its address or number
for notices under this Section 6 by giving at least 10 days' notice of such
changes to the other parties hereto. The Company shall notify all Holders of
Registrable Securities of any change of address or number received by it.
7. Waivers. No waiver by any party of any default with respect to
-------
any provision, condition or requirement hereof shall be deemed to be a
continuing waiver in the future thereof or a waiver of any other provision,
condition or requirement hereof; nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
-11-
<PAGE>
8. Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
9. Successors and Assigns; Amendments. This Agreement shall be
----------------------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, including and without the need for an express
assignment, each subsequent Holder of any Registrable Securities. Except for an
assignment or transfer of Registrable Securities by a Holder to a subsequent
Holder, neither the Company nor any Holder shall assign this Agreement or any
rights hereunder without the prior written consent of the other parties hereto.
The assignment by a party of this Agreement or any rights hereunder shall not
affect the obligations of such party hereunder. This Agreement may not be
amended except by a written instrument executed by the parties hereto.
10. No Third Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
11. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of laws.
12. Remedies. Each Holder of Registrable Securities, in addition to
--------
being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement and injunctions to prevent breaches of the covenants contained in this
Agreement.
13. Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
14. Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no representations, promises,
warranties or undertakings regarding such subject matter, other than those set
forth herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
15. Execution. This Agreement may be executed in two or more
---------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the date hereof.
IMPERIAL BANK
By /s/ Richard M. Baker
---------------------
Name: Richard M. Baker
Title: Senior Vice President, General Counsel
and Secretary
U.S. AUDIOTEX CORPORATION
By /s/ Thomas Evans
----------------
Name: Thomas R. Evans
Title: Chairman and Chief Executive Officer
-13-
<PAGE>
Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT, dated as of October 15, 1999, by and
between Beranson Holdings, Inc., a California corporation (the "Stockholder"),
-----------
and U.S. Audiotex Corporation, a Delaware corporation (the "Company").
-------
WHEREAS, the Stockholder has been instrumental in the incorporation
and organization of the Company;
WHEREAS, the Stockholder owns, on the date hereof, twenty percent
(20%) of the outstanding shares of common stock, par value $0.01 per share (the
"Common Stock"), of the Company;
------------
WHEREAS, the Company and the Stockholder wish to provide for certain
demand and piggy-back registration rights under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities of the Company
--------------
owned by the Stockholder;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties to this Agreement hereby agree as
follows:
1. Definitions and Interpretation. (a) As used in this Agreement,
------------------------------
the following terms shall have the following meanings:
(i) "Affiliate" shall have the meaning ascribed to such term in
Rule 405 promulgated under the Securities Act.
(ii) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any successor statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
(iii) "Holder" shall mean any person who owns of record
Registrable Securities.
(iv) "Initial Public Offering" shall mean an initial public
offering of equity securities of the Company pursuant to a registration
statement declared effective under the Securities Act.
(v) "IPO Date" shall mean the earlier to occur of (A) the date
on which there shall have first become effective a registration statement under
the Securities Act filed by the Company relating to an underwritten Initial
Public Offering, or (B) the date on which the Company shall register a class of
securities under Section 12 of the Exchange Act.
(vi) "Majority" shall mean greater than fifty (50%) percent.
<PAGE>
(vii) "Registration Expenses" shall have the meaning ascribed to
such term in Section 4(f) hereof.
(viii) "Registrable Securities" shall mean any of the shares of
Common Stock now owned or hereafter acquired by the Stockholder; provided,
however, that Registrable Securities shall cease to be Registrable Securities
when they cease to be Restricted Securities.
(ix) "Restricted Securities" shall have the meaning ascribed to
such term in Section 1(b).
(x) "SEC" and "Commission" shall mean the Securities and
Exchange Commission.
(b) For the purposes of this Agreement, all Registrable Securities are
"Restricted Securities" until the earliest to occur of the time when (i) a
registration statement covering such Registrable Securities has been declared
effective and such Registrable Securities have been disposed of pursuant to such
effective registration statement, and (ii) such Registrable Securities may be
sold pursuant to Rule 144(k) under the Securities Act or any successor rule then
in force.
(c) In this Agreement, (A) words in the singular include the plural
and vice versa, (B) the words "include" or "including" shall mean "including
without limitation," (C) the word "person" shall mean and include an individual,
partnership, corporation, joint venture, limited liability company or
partnership, trust or other legal entity, (D) the word business day shall mean
any day other than a Saturday, Sunday or a day which is a statutory holiday
under the laws of the United States or the State of New York, and (E) when
calculating a period of time within which or following which any act is to be
done or step taken, the date which is the reference day in calculating such
period shall be excluded and, if the last day of such period is not a business
day, the period shall end on the next day that is a business day.
2. Demand Registration. (a) The Stockholder or any subsequent
-------------------
Holder of a Majority of the Registrable Securities may make a written request
for registration under the Securities Act pursuant to this Section 2 of all or
part of their Registrable Securities (the "Demand Registration"), provided,
-------------------
however, that the Company shall be required to effect no more than one (1)
Demand Registration under this Section 2, and provided further that the Company
shall not be required to effect a Demand Registration under this Section 2 at
any time prior to the thirtieth day following the IPO Date. Upon receipt of a
request for a Demand Registration, the Company shall (i) as soon as reasonably
practicable, cause to be filed, and use all reasonable efforts to cause to be
declared effective, a registration statement (the "Demand Registration
-------------------
Statement") on such appropriate form as the Company in its discretion shall
- ---------
determine, providing for the sale of all of such Registrable Securities by such
Stockholder or Holder, as the case may be, and (ii) promptly give written notice
to all other Holders of Registrable Securities that such Demand Registration is
to be effected and shall include in the Demand Registration Statement such
additional Registrable Securities with respect to which it
-2-
<PAGE>
has received written requests for registration from any such other Holder within
15 days after the date on which the Company gave such notice. A Holder's request
must specify the aggregate number of Registrable Securities proposed to be
registered and sold and must also specify the intended method of disposition
thereof. The Company agrees to use its best efforts to keep the Demand
Registration Statement continuously effective and usable for resale of
Registrable Securities for a period of not less than nine (9) months. The
Company will pay all Registration Expenses in connection with any Demand
Registration.
(b) A registration will not count as a Demand Registration until a
Demand Registration Statement has become effective; provided, however, that if a
Demand Registration Statement does not become effective solely by reason of any
act or omission on the part of a Holder or Holders whose Registrable Securities
are included in the Demand Registration Statement, such registration shall
nevertheless count as a Demand Registration unless the Holders of such
Registrable Securities reimburse the Company for all Registration Expenses
reasonably incurred by the Company which are attributable to such registration.
(c) If the Holder or Holders initially requesting registration so
elect, the offering of the Registrable Securities pursuant to a Demand
Registration shall be in the form of an underwritten offering. In such event,
if the managing underwriter of such offering advise the Company and the Holders
in writing that in its opinion the aggregate number of securities requested to
be included in the Demand Registration is sufficiently large to materially and
adversely affect the success or offering price of the offering, then the Company
will include in the Demand Registration only the aggregate number of securities
which in the opinion of such managing underwriter can be sold without any such
material adverse effect, and such securities shall be allocated pro rata among
the Holders of Registrable Securities based on the number of Registrable
Securities requested to be included in such Demand Registration by the
respective Holders (before any such securities are allocated to the Company or
any holder of securities other than Registrable Securities).
(d) The Company agrees (i) not to effect any public or private sale,
distribution or purchase of any of its securities which are the same as or
similar to the Registrable Securities, including a sale pursuant to Regulation D
under the Securities Act, during the 30-day period prior to, and during the 90-
day period beginning on, the closing date of an underwritten offering under a
Demand Registration Statement, and (ii) to use its reasonable best efforts to
cause each holder of its securities (other than securities purchased in a
registered public offering) to agree not to effect any public sale or
distribution of any such securities during such period, including a sale
pursuant to Rule 144 under the Securities Act.
(e) The Company may postpone for a reasonable period of time, not to
exceed 60 days, the filing or the effectiveness of any Demand Registration
Statement if the Board of Directors of the Company in good faith determines that
(A) the Demand Registration can be reasonably expected to have a material
adverse effect on any plan or proposal by the Company with respect to any
financing, acquisition, recapitalization, reorganization or other material
transaction, or (B) the Company is in possession of material non-public
information that, if publicly disclosed, could result in a material disruption
of a major corporate
-3-
<PAGE>
development or transaction then pending or in progress or in other material
adverse consequences to the Company.
(f) If at any time the Holder of a Majority of the Registrable
Securities to be covered by a Demand Registration Statement desires to sell
Registrable Securities in an underwritten offering, such Holder shall have the
right to select any nationally recognized investment banking firm to administer
the offering, subject to the approval of the Company, which approval will not be
unreasonably withheld, and the Company shall enter into an underwriting
agreement with the underwriter of such offering, which agreement shall contain
such representations and warranties by the Company, and such other terms,
conditions and indemnities, as are at the time customarily contained in
underwriting agreements for similar offerings.
3. Piggy-Back Registration. If at any time the Company proposes to
-----------------------
register (a "Piggy-Back Registration") any of its securities (the "Initially
----------------------- ---------
Proposed Shares") under the Securities Act for sale, whether or not for its own
- ---------------
account and whether or not pursuant to an underwritten offering (other than (i)
a registration statement filed in connection with an Initial Public Offering;
(ii) a registration statement on Form S-4 or S-8 or successor forms thereto; or
(iii) a registration statement filed in connection with an exchange offer or an
offering of securities solely to the Company's then existing stockholders or
employees), the Company will promptly give written notice (a "Piggy-Back
----------
Registration Notice") to the Holders of its intention to effect a Piggy-Back
- -------------------
Registration (such Piggy-Back Registration Notice to specify, where applicable,
among other things, the proposed offering price, the kind and number of
securities proposed to be registered and the distribution arrangements,
including identification of the underwriter), and the Holders shall be entitled
to include in such Piggy-Back Registration, as a part of such underwritten
offering and on the same terms and conditions as the Initially Proposed Shares,
such number of Registrable Securities to be sold for the account of the Holders
as shall be specified in a request in writing delivered to the Company within
twenty (20) days after the date of the Piggy-Back Registration Notice. The
Company will pay all Registration Expenses in connection with such Piggy-Back
Registration.
The Company's obligations to include Registrable Securities in a
Piggy-Back Registration pursuant to this Section 3 is subject to the following
limitations, conditions and qualifications:
(i) Notwithstanding anything to the contrary contained in the
provisions of this Section 3, the Company shall have the right at any time
after it shall have given a Piggy-Back Registration Notice (irrespective of
whether a written request for inclusion of any Registrable Securities shall
have been made) to elect not to effect the proposed Piggy-Back Registration
or to withdraw the same after the filing but prior to the effective date
thereof.
(ii) If, in the written opinion of the managing underwriter of a
Piggy-Back Registration, the aggregate number of securities requested to be
included in the Piggy-Back Registration is sufficiently large to materially
and adversely affect the
-4-
<PAGE>
success or offering price of the offering, then the number of shares all
prospective sellers (other than the Company and security holders exercising
demand registration rights) intended to distribute through the Piggy-Back
Registration shall be reduced pro rata based on the number of securities
requested to be included in such offering by such prospective sellers. In
no event shall the number of Initially Proposed Shares to be sold by the
Company or the number of securities to be sold by any security holder
exercising demand registration rights be reduced until all securities to be
sold by prospective sellers (other than the Company and security holders
exercising demand registration rights) have been cut back to zero as a
result of the preceding sentence. If, as a result of the cutback provisions
of the preceding sentence, any Holder is not entitled to include in such
Piggy-Back Registration all of the Registrable Securities requested to be
included therein by such Holder, such Holder may elect to withdraw its
request to be included in such Piggy-Back Registration.
4. Registration Procedures. (a) Whenever any Holder has requested the
-----------------------
registration of any Registrable Securities under the Securities Act pursuant to
the terms and conditions of Section 2(a) or 3 (such Registrable Securities being
hereinafter referred to as "Subject Shares"), the Company will, subject to the
--------------
provisions of Section 2 and 3 (to the extent applicable), use all reasonable
efforts to effect the registration of the Subject Shares in accordance with the
intended method of disposition thereof. Without limiting the generality of the
foregoing, the Company will, subject to the provisions of Section 2 and 3 (to
the extent applicable), as soon as practicable:
(i) prepare and file with the Commission a registration statement
with respect to the Subject Shares in form and substance reasonably
satisfactory to the Holders of the Subject Shares, and use all reasonable
efforts to cause such registration statement to become effective as
promptly as practicable thereafter;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine (9) months or for
such shorter period which will terminate when all of the Subject Shares
covered by such registration statement have been sold (but not before the
expiration of the applicable period referred to in Section 4(3) of the
Securities Act and Rule 174 thereunder), and comply with the provisions of
the Securities Act with respect to the disposition of all securities
covered by such registration statement during such period in accordance
with the intended methods of disposition by the sellers thereof set forth
in such registration statement;
(iii) furnish the Holders covered by such registration
statement, without charge, such number of conformed copies of such
registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such reasonable number of copies of
the prospectus included in such registration statement (including any
preliminary prospectus), such documents incorporated by reference in such
registration statement or prospectus, and such other documents as such
Holders may reasonably request;
-5-
<PAGE>
(iv) use all reasonable efforts to register or qualify the
Subject Shares covered by such registration statement under the securities
or blue sky laws of such jurisdictions as the managing underwriter shall
reasonably recommend or, in the case of an offering that is not an
underwritten offering, as the Holders may reasonably request, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable the Holders to consummate the disposition in such
jurisdictions of the Subject Shares covered by such registration statement,
except that the Company shall not for any such purpose be required to (A)
qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not otherwise required to be so qualified, (B)
subject itself to taxation in any jurisdiction wherein it is not so
subject, or (C) consent to general service of process in any such
jurisdiction or otherwise take action that would subject it to the general
jurisdiction of the courts of any jurisdiction to which it is not so
subject;
(v) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC and to cause the Subject Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the Holders thereof or the
underwriter to consummate the disposition of the Subject Shares;
(vi) furnish, at the Company's expense, unlegended certificates
representing ownership of the Subject Shares being sold in such
denominations and registered in such names as the Holders may reasonably
request and instruct the transfer agent to release any stop transfer orders
with respect to the Subject Shares being sold;
(vii) at any time when a prospectus relating to the Subject
Shares is required to be delivered under the Securities Act, notify each
Holder of the happening of any event as a result of which the prospectus
included in such registration statement contains any untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and the Company
will, as promptly as practicable thereafter, prepare and file with the SEC
and furnish to the Holders a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of Subject Shares, such
prospectus will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
(viii) enter into customary agreements (including an
underwriting agreement in customary form in the case of an underwritten
offering) containing such representations and warranties to the Holders and
underwriters as in form and substance and scope are customarily made by
issuers to underwriters in underwritten offerings and including customary
covenants, indemnifications and conditions, and take such
-6-
<PAGE>
other actions as the Holders or the managing underwriter or agent, if any,
reasonably require in order to expedite or facilitate the disposition of
such Subject Shares;
(ix) make available for inspection by the Holders, any
underwriter or agent participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other similar
professional advisor retained by any such Holders or underwriter
(collectively, the "Inspectors"), all financial and other records,
----------
corporate documents and properties of the Company (collectively, the
"Records") as shall be reasonably necessary to enable the Inspectors to
--------
exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all Records and information
reasonably requested by any such Inspector in connection with such
registration statement. The Holders agree that Records and other
information which the Company determines, in good faith, to be confidential
and of which determination the Inspectors are so notified shall not be
disclosed by the Inspectors unless (A) the disclosure of such Records or
information is necessary to avoid or correct a misstatement or omission in
the registration statement, (B) the release of such Records is ordered
pursuant to a subpoena, court order or regulatory or agency request, or (C)
the information in such Records has been generally disseminated to the
public. Each Holder agrees that it will, upon learning that disclosure of
such Records is sought by a court of competent jurisdiction or by a
governmental agency, give notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(x) in the event of an underwritten offering, obtain for delivery
to the Company and the underwriter or agent, with copies to the Holders, a
"cold comfort" letter, dated as of the effective date of the registration
statement covering the Subject Shares, and a bring-down "cold comfort"
letter, dated as of the date of the sale of the Subject Shares to the
underwriter, from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by "cold
comfort" letters as the Holders of a Majority of the Subject Shares or the
managing underwriter reasonably request;
(xi) in the event of an underwritten offering, obtain for
delivery to the Holders and the underwriter or agent an opinion of counsel
for the Company, dated as of the date of the sale of the Subject Shares to
the underwriter, in customary form and covering matters of the type
customarily covered by such opinion and reasonably satisfactory to the
Holders and the underwriters or agent and their counsel;
(xii) make available to its security holders earnings statements
(which need not be audited) satisfying the provisions of Section 11(a) of
the Securities Act no later than 90 days after the end of the 12-month
period beginning with the first month of the Company's first quarter
commencing after the effective date of a registration statement covering
the Subject Shares, which earnings statements shall cover said 12-month
period;
(xiii) make every reasonable effort to prevent the issuance of
any stop order suspending the effectiveness of the registration statement
covering the Subject
-7-
<PAGE>
Shares or of any order preventing or suspending the use of any related
prospectus or suspending the qualification of the Subject Shares for sale
in any jurisdiction, and, if any such order is issued, to obtain its
withdrawal at the earliest possible moment;
(xiv) cooperate with the Holders and the managing underwriter,
if any, or any other interested party (including any interested broker-
dealer) in making any filings or submission required to be made, and the
furnishing of all appropriate information in connection therewith, with the
National Association of Securities Dealers, Inc. ("NASD");
----
(xv) cause its subsidiaries to take action necessary to effect
the registration of the Subject Shares, including filing any required
financial information;
(xvi) effect the listing of the Subject Shares on such national
securities exchange or quotation system on which the shares of Common Stock
shall then be traded or listed for quotation; and
(xvii) take any and all other steps reasonably necessary or
advisable to effect the registration of the Subject Shares in accordance
with this Agreement.
(b) The Holders of the Subject Shares shall provide (in writing and
signed by the Holders and stated to be specifically for use in the related
registration statement, preliminary prospectus, prospectus or other document
incident thereto) all such information and materials and take all such action as
may be reasonably required in order to permit the Company to comply with all
applicable requirements of the SEC and any applicable state securities laws and
to obtain any desired acceleration of the effective date of any registration
statement prepared and filed by the Company pursuant to this Agreement.
(c) Each Holder of the Subject Shares shall, if requested by the
Company or the managing underwriter in connection with any proposed registration
and distribution pursuant to this Agreement, (i) agree to sell the Subject
Shares on the basis provided in any underwriting arrangements entered into in
connection therewith, and (ii) complete and execute all questionnaires, powers
of attorney enabling the Company to negotiate the offering price of the Subject
Shares with the managing underwriter within a range previously agreed upon by
the Company and such Holder, indemnities (but only with respect to written
information relating to such Holder furnished by such Holder specifically in
connection with such registration) underwriting agreements and other documents
customary in similar offerings.
(d) Each Holder of Subject Shares who desires to sell and distribute
such Securities over a period of time, or from time to time, at then prevailing
market prices, shall execute and deliver to the Company such written
undertakings as the Company and its counsel may reasonably require in order to
assure full compliance with the relevant provisions of the Securities Act.
(e) Each Holder of Subject Shares agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section
-8-
<PAGE>
4(a)(vii) hereof, such Holder will forthwith discontinue the disposition
of Subject Shares held by such Holder pursuant to the registration statement
covering such Subject Shares until such Holder receives the supplemented or
amended prospectus contemplated by Section 4(a)(vii) hereof, and, if so directed
by the Company, such Holder will deliver to the Company (at the Company's
expense) all copies (other than permanent file copies) of the prospectus
covering such Subject Shares in such Holder's possession at the time of receipt
of such notice. In the event the Company shall give any such notice, the
Company shall extend the period during which the registration statement covering
the Subject Shares shall be maintained effective pursuant to this Agreement
(including the period referred to in Section 4(a)(ii)) by the number of days
during the period from and including the date of the giving of such notice
pursuant to Section 4(a)(vii) hereof to and including the date when each Holder
of Subject Shares covered by such registration statement shall have received the
copies of the supplemented or amended prospectus contemplated by Section
4(a)(vii) hereof.
(f) All reasonable expenses incident to the Company's performance of
or compliance with this Agreement, including all registration and filing fees,
all expenses incident to filing with the NASD, all fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Subject Shares), rating agency fees, printing expenses, messenger and delivery
expenses, internal expenses (including all salaries and expenses of its officers
and employees performing legal or accounting duties), the fees and expenses
incurred in connection with the listing of the Subject Shares on such national
securities exchange on which the shares of Common Stock are then listed or, if
not so listed, on the National Market of The Nasdaq Stock Market, Inc.,
reasonable fees and disbursements of counsel for the Company and its independent
certified public accountants (including the expenses of any special audit or
"comfort" letters required by or incident to such performance), premiums for
securities acts liability insurance (if the Company, in its sole discretion,
elects to obtain such insurance), the reasonable fees and expenses of any
special experts retained by the Company in connection with such registration,
the reasonable fees and expenses of other persons retained by the Company (or
the agents who manage their accounts) and the reasonable fees and disbursements
of one counsel for the Holders of the Subject Shares in connection with the
Demand Registration which fees and disbursements shall not exceed $75,000 (all
such expenses being herein called "Registration Expenses"), shall be borne by
---------------------
the Company. Registration Expenses shall not include any fees or disbursements
of counsel to the Holders of the Subject Shares except as otherwise provided
above, or any underwriting discounts or commissions that are applicable to the
Subject Shares held by such Holders that are to be registered under the
Securities Act pursuant to Section 2(a) or Section 3 hereof. The foregoing
expenses that are excluded from Registration Expenses shall be borne by each
Holder of Subject Shares on a pro rata basis, based on the number of Subject
Shares of all Holders included in a registration statement covering the Subject
Shares.
5. Rule 144 Requirements. From time to time after the IPO Date, the
---------------------
Company will use its best efforts to make publicly available and available to
the Holders of Registrable Securities such information as shall be necessary to
enable the Holders of Registrable Securities to make sales of Registrable
Securities pursuant to Rule 144 under the
-9-
<PAGE>
Securities Act. The Company shall, at the request of any Holder of Registrable
Securities, upon receipt from such Holder of a certificate certifying (i) that
at least two (2) years have elapsed since the later of the date such Registrable
Securities were acquired from the Company or an affiliate of the Company
(computed in accordance with Rule 144(d), including the provisions thereof
regarding "tacking"), and (ii) that such Holder has not been an affiliate (as
defined in Rule 144) of the Company within the 90-day period preceding the date
of such Holder's certificate, remove from the stock certificate representing
such Registrable Securities any restrictive securities law legend.
6. Notices. Any notice or other communication required or permitted to
-------
be given hereunder to any party shall be in writing and shall be effective (a)
if delivered on a business day during normal business hours where such notice is
to be received, upon hand delivery or delivery by telecopy or facsimile to such
party at the address or number designated below, (b) if delivered other than on
a business day during normal business hours where such notice is to be received,
on the first business day following hand delivery or delivery by telecopy or
facsimile to such party at the address or number designated below, or (c) on the
first business day following the date of mailing by overnight courier service,
or on the fifth (5th) business day following the date of mailing by certified or
registered mail, fully prepaid, to such party at the address designated below,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to the Company, to it at:
2333 San Ramon Valley Boulevard, Suite 450
San Ramon, California 94583
Attn: Thomas R. Evans
Facsimile No.: (925) 838-7996
With a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attn: Dennis J. Block
Facsimile No.: (212) 504-6666
If to the Stockholder, to it at:
2328 Saddleback Drive
Danville, CA 94506
Attn: Kenneth Stern
Facsimile No.: (925) 838-4395
-10-
<PAGE>
With a copy to:
Turner & Beeler
Centerpoint Building
18 Crow Canyon Court, Suite 110
Attn: Gary Brett Beeler
Facsimile No.: (925) 837-7140
If to any other Holder, to such name and such address or number for
such Holder as appears on the Company's records or as such Holder shall have
indicated in a written notice delivered to the other parties to this Agreement.
Any party hereto may from time to time change its address or number
for notices under this Section 6 by giving at least 10 days' notice of such
changes to the other parties hereto. The Company shall notify all Holders of
Registrable Securities of any change of address or number received by it.
7. Waivers. No waiver by any party of any default with respect to any
-------
provision, condition or requirement hereof shall be deemed to be a continuing
waiver in the future thereof or a waiver of any other provision, condition or
requirement hereof; nor shall any delay or omission of any party to exercise any
right hereunder in any manner impair the exercise of any such right accruing to
it thereafter.
8. Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
9. Successors and Assigns; Amendments. This Agreement shall be binding
----------------------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, including and without the need for an express
assignment, each subsequent Holder of any Registrable Securities. Except for an
assignment or transfer of Registrable Securities by a Holder to a subsequent
Holder, neither the Company nor any Holder shall assign this Agreement or any
rights hereunder without the prior written consent of the other parties hereto.
The assignment by a party of this Agreement or any rights hereunder shall not
affect the obligations of such party hereunder. This Agreement may not be
amended except by a written instrument executed by the parties hereto.
10. No Third Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of laws.
-11-
<PAGE>
12. Remedies. Each Holder of Registrable Securities, in addition to
--------
being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement and injunctions to prevent breaches of the covenants contained in this
Agreement.
13. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby.
14. Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no representations, promises,
warranties or undertakings regarding such subject matter, other than those set
forth herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
15. Execution. This Agreement may be executed in two or more
---------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the date hereof.
U.S. AUDIOTEX CORPORATION
By /s/ Thomas R. Evans
-------------------
Name: Thomas R. Evans
Title: Chairman and Chief Executive Officer
BERANSON HOLDINGS, INC.
By /s/ Kenneth Stern
-----------------
Name: Kenneth Stern
Title: President
-13-
<PAGE>
[Letterhead of Cadwalader, Wickersham & Taft]
November 17, 1999
Official Payments Corporation
2333 San Ramon Valley Boulevard
Suite 450
San Ramon, California 94583
Re: Registration Statement on Form S-1, as amended, relating to Common
Stock, par value $0.01 per share
------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel for Official Payments Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-1, as amended (the "Registration Statement"),
pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
originally filed with the Securities and Exchange Commission (the "Commission")
on September 17, 1999, and to which this opinion letter is an exhibit. The
Registration Statement relates to the Company's initial public offering of up to
5,750,000 shares of its Common Stock, par value $0.01 per share (the "Shares").
In rendering the opinions expressed below, we have examined and relied upon,
among other things, (a) the Registration Statement, including the Prospectus
constituting a part thereof, (b) the Company's Certificate of Incorporation
filed as an exhibit to the Registration Statement (c) the Company's Bylaws filed
as an exhibit to the Registration Statement and (d) originals or copies,
certified or otherwise identified to our satisfaction, of such certificates,
corporate, public or other records, and other documents as we have deemed
appropriate for the purpose of rendering this opinion letter. In connection
with such examination, we have assumed the
<PAGE>
Official Payments Corporation -2- November 17, 1999
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents and instruments of all
documents and instruments submitted to us as copies or specimens, and the
authenticity of the originals of such documents and instruments submitted to us
as copies or specimens. We have also made such investigations of law as we have
deemed appropriate.
Based upon the foregoing and subject to the qualifications set forth herein, we
are of the opinion that the Shares have been duly and validly authorized and,
when issued and delivered upon the terms and in the manner set forth in the
Registration Statement, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to this Firm in the Prospectus
constituting a part of the Registration Statement under the caption "Legal
Matters," without admitting that we are "experts" within the meaning of the
Securities Act or the rules and regulations of the Commission issued thereunder
with respect to any part of the Registration Statement, including this exhibit.
Yours very truly,
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Official Payments Corporation:
We consent to the use 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
November 18, 1999
